Rimini Street, Inc. [RMNI] Filings

10-Q 1 rmni-20230930.htm 10-Q rmni-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 001-37397


Rimini Street, Inc.
(Exact name of registrant as specified in its charter)


Delaware						36-4880301
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

1700 S. Pavilion Center Drive, Suite 330, Las Vegas, NV						89135
(Address of principal executive offices)						(Zip Code)

Registrant's telephone number, including area code:						(702) 839-9671

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol(s)	Name of each exchange on which registered:

Common Stock, par value $0.0001 per share	RMNI	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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). Yes 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 ¨			Accelerated filer þ			Non-accelerated filer ¨


Smaller reporting company ☐						Emerging growth company ☐

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 þ

The registrant had approximately 89,389,000 shares of its $0.0001 par value common stock outstanding as of October 30, 2023.

RIMINI STREET, INC.

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION		2

ITEM 1.	Financial Statements	2

	Unaudited Condensed Consolidated Balance Sheets	2

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income	3

	Unaudited Condensed Consolidated Statements of Stockholders' Deficit	4

	Unaudited Condensed Consolidated Statements of Cash Flows	5

	Notes to Unaudited Condensed Consolidated Financial Statements	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	34

ITEM 4.	Controls and Procedures	35

PART II. OTHER INFORMATION		36

ITEM 1.	Legal Proceedings	36

ITEM 1A.	Risk Factors	36

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

ITEM 3.	Defaults Upon Senior Securities	59

ITEM 4.	Mine Safety Disclosures	60

ITEM 5.	Other Information	61

ITEM 6.	Exhibits	62

SIGNATURES		63

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

RIMINI STREET, INC.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)


	September 30,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	108,233	$	109,008
Restricted cash	427		426
Accounts receivable, net of allowance of $860 and $723, respectively	61,191		116,093
Deferred contract costs, current	17,641		17,218
Short-term investments	19,914		20,115
Prepaid expenses and other	24,678		18,846
Total current assets	232,084		281,706
Long-term assets:
Property and equipment, net of accumulated depreciation and amortization of $17,320 and $15,441, respectively	8,488		6,113
Operating lease right-of-use assets	6,339		7,142
Deferred contract costs, noncurrent	22,412		23,508
Deposits and other	6,643		7,057
Deferred income taxes, net	59,009		65,515
Total assets	$	334,975	$	391,041
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current maturities of long-term debt	$	5,912	$	4,789
Accounts payable	6,139		8,040
Accrued compensation, benefits and commissions	35,782		37,459
Other accrued liabilities	22,718		32,676
Operating lease liabilities, current	4,175		4,223
Deferred revenue, current	214,073		265,840
Total current liabilities	288,799		353,027
Long-term liabilities:
Long-term debt, net of current maturities	65,671		70,003
Deferred revenue, noncurrent	24,326		34,081
Operating lease liabilities, noncurrent	7,511		9,094
Other long-term liabilities	1,718		2,006
Total liabilities	388,025		468,211
Commitments and contingencies (Note 8)
Stockholders’ deficit:

Preferred stock; $0.0001 par value. Authorized 99,820 (excluding 180 shares of Series A Preferred Stock) no other series has been designated	—		—
Common stock; $0.0001 par value. Authorized 1,000,000 shares; issued and outstanding 89,323 and 88,517 shares, respectively	9		9
Additional paid-in capital	164,522		156,401
Accumulated other comprehensive loss	(4,904)		(4,195)
Accumulated deficit	(211,561)		(228,269)
Treasury stock, at cost	(1,116)		(1,116)
Total stockholders' deficit	(53,050)		(77,170)
Total liabilities and stockholders' deficit	$	334,975	$	391,041

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

RIMINI STREET, INC.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue	$	107,453	$	101,931	$	319,386	$	301,041
Cost of revenue	40,110		39,271		118,802		113,822
Gross profit	67,343		62,660		200,584		187,219
Operating expenses:
Sales and marketing	35,593		35,934		107,356		103,840
General and administrative	18,384		18,454		55,475		57,267
Reorganization costs	—		—		59		—
Litigation costs and related recoveries:
Professional fees and other costs of litigation	2,127		6,145		5,475		12,837
Insurance costs and recoveries, net	—		92		—		(389)
Litigation costs and related recoveries, net	2,127		6,237		5,475		12,448
Total operating expenses	56,104		60,625		168,365		173,555
Operating income	11,239		2,035		32,219		13,664
Non-operating income and (expenses):
Interest expense	(1,413)		(1,167)		(4,139)		(2,974)
Other income (expenses), net	990		(1,329)		1,799		(2,696)
Income (loss) before income taxes	10,816		(461)		29,879		7,994
Income taxes	(4,015)		56		(13,171)		(5,202)
Net income (loss)	6,801		(405)		16,708		2,792
Other comprehensive income
Foreign currency translation loss	(1,061)		(1,667)		(1,011)		(3,878)
Derivative instrument and other adjustments, net of tax	140		1,220		302		1,220
Comprehensive income (loss)	$	5,880	$	(852)	$	15,999	$	134

Net income (loss) attributable to common stockholders	$	6,801	$	(405)	$	16,708	$	2,792

Net income (loss) per share attributable to common stockholders:
Basic	$	0.08	$	—	$	0.19	$	0.03
Diluted	$	0.08	$	—	$	0.19	$	0.03
Weighted average number of shares of Common Stock outstanding:
Basic	89,228		87,965		88,942		87,441
Diluted	89,357		87,965		89,322		89,054

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

RIMINI STREET, INC.

Unaudited Condensed Consolidated Statements of Stockholders' Deficit

(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Common Stock, Shares
Beginning of period	89,085		87,529		88,517		87,107
Exercise of stock options for cash	—		193		57		518
Restricted stock units vested	238		701		922		1,391
Issuance of Common Stock	—		—		75		60
Retired shares of Common Stock	—		(200)		(248)		(853)
End of period	89,323		88,223		89,323		88,223
Total Stockholders' Deficit, beginning of period	$	(62,061)	$	(76,487)	$	(77,170)	$	(80,386)
Common Stock, Amount
Beginning of period	9		9		9		9
Exercise of stock options for cash	—		—		—		—
Restricted stock units vested	—		—		—		—
Retired shares of Common Stock	—		—		—		—
End of period	9		9		9		9
Additional Paid-in Capital
Beginning of period	161,391		152,147		156,401		149,234
Stock based compensation expense	3,131		2,443		9,056		8,653
Exercise of stock options for cash	—		513		79		964
Restricted stock units vested	—		—		—		—
Retired shares of Common Stock	—		(992)		(1,014)		(4,740)
End of period	164,522		154,111		164,522		154,111
Accumulated Other Comprehensive Loss
Beginning of period	(3,983)		(4,935)		(4,195)		(2,724)
Other comprehensive loss	(921)		(447)		(709)		(2,658)
End of period	(4,904)		(5,382)		(4,904)		(5,382)
Accumulated Deficit
Beginning of period	(218,362)		(222,592)		(228,269)		(225,789)
Net income (loss)	6,801		(405)		16,708		2,792
End of period	(211,561)		(222,997)		(211,561)		(222,997)
Treasury Stock	(1,116)		(1,116)		(1,116)		(1,116)
Total Stockholders' Deficit, end of period	$	(53,050)	$	(75,375)	$	(53,050)	$	(75,375)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

RIMINI STREET, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)


	Nine Months Ended September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,708	$	2,792
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation expense	9,056		8,653
Depreciation and amortization	2,001		1,871
Accretion and amortization of debt discount and issuance costs	728		728
Deferred income taxes	6,263		327
Amortization and accretion related to operating right of use assets	3,347		4,140
Changes in operating assets and liabilities:
Accounts receivable	54,112		75,068
Prepaid expenses, deposits and other	(4,339)		(6,417)
Deferred contract costs	674		(2,412)
Accounts payable	(2,551)		2,710
Accrued compensation, benefits, commissions and other liabilities	(14,702)		(3,842)
Deferred revenue	(57,684)		(46,861)
Net cash provided by operating activities	13,613		36,757
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures	(3,654)		(3,144)
Payment for purchases of investments	(24,118)		(11,148)
Proceeds from sale of investments	23,614		—
Net cash used in investing activities	(4,158)		(14,292)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of professional fees related to March 2021 Common Stock offering	—		(27)
Principal payments on the Credit Facility	(3,938)		(8,375)
Payments to repurchase and retire Common Stock	(1,014)		(4,740)
Principal payments on capital leases	(247)		(235)
Proceeds from exercise of employee stock options	79		965
Net cash used in financing activities	(5,120)		(12,412)
Effect of foreign currency translation changes	(5,109)		(11,050)
Net change in cash, cash equivalents and restricted cash	(774)		(997)
Cash, cash equivalents and restricted cash at beginning of period	109,434		119,990
Cash, cash equivalents and restricted cash at end of period	$	108,660	$	118,993

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

RIMINI STREET, INC.

Unaudited Condensed Consolidated Statements of Cash Flows, Continued

(In thousands)


	Nine Months Ended September 30,
	2023		2022
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	3,409	$	2,195
Cash paid for income taxes	4,164		1,886
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase (decrease) in payables for capital expenditures	$	669	$	(2)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business

Rimini Street, Inc. (the “Company”) is a global provider of end-to-end enterprise software support, products and services. The Company offers a comprehensive family of unified solutions to run, manage, support, customize, configure, connect, protect, monitor, and optimize clients’ enterprise application, database, and technology software platforms.

Basis of Presentation and Consolidation

The Unaudited Condensed Consolidated Financial Statements, which include the accounts of the Company and its wholly-owned subsidiaries, are prepared in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany balances and transactions have been eliminated. The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnote disclosures required by U.S. GAAP for complete financial statements have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Unaudited Condensed Consolidated Financial Statements have been included. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2022, included in the Company’s 2022 Annual Report on Form 10-K as filed with the SEC on March 1, 2023 (the “2022 Form 10-K”).

The accompanying Unaudited Condensed Consolidated Balance Sheet and related disclosures as of December 31, 2022 have been derived from the Company’s audited financial statements. The Company’s financial condition as of September 30, 2023, and operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the year ending December 31, 2023.

NOTE 2 — LIQUIDITY AND SIGNIFICANT ACCOUNTING POLICIES

Liquidity

As of September 30, 2023, the Company’s current liabilities exceeded its current assets by $56.7 million, and the Company recorded net income of $6.8 million for the three months ended September 30, 2023. As of September 30, 2023, the Company had available cash, cash equivalents and restricted cash of $108.7 million and short-term investments of $19.9 million. As of September 30, 2023, the Company’s current liabilities included $214.1 million of deferred revenue whereby the historical costs of fulfilling the Company's commitments to provide services to its clients was approximately 37% of the related deferred revenue for the three months ended September 30, 2023.

On July 20, 2021, the Company entered into a five-year term loan of $90 million (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.

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 $5.6 million. During the third quarter of 2023, the global economy continued to experience interest rate and inflationary pressures, geopolitical conflicts, global supply chain issues, a rise in energy prices and the continuing effects of fiscal and monetary policies adopted by governments in response to and following the global outbreak of the coronavirus (“COVID-19”). Assuming the Company’s ability to operate continues not to be significantly adversely impacted by the related changes in the macroeconomic environment, geopolitical pressures, or the litigation matters described in Note 8, the Company believes that current cash, cash equivalents, restricted cash, and future cash flow from operating activities will be sufficient to meet the Company’s anticipated cash needs, including Credit Facility repayments, working capital needs, capital expenditures and other contractual obligations for at least 12 months from the issuance date of these financial statements.

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

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

accompanying notes. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s accounting estimates include, but are not necessarily limited to, valuation of accounts receivable, valuation assumptions for stock options and leases, deferred income taxes and the related valuation allowances, and the evaluation and measurement of contingencies. To the extent there are material differences between the Company’s estimates and actual results, the Company’s future consolidated results of operations may be affected.

Recent Accounting Pronouncements

Recently Adopted Standards. The following accounting standards were adopted during fiscal year 2023:

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and amended in December 2022 with ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. ASU 2020-04 provides guidance to alleviate the burden in accounting for reference rate reform by allowing certain expedients and exceptions in applying U.S. GAAP to contracts, hedging relationships and other transactions impacted by reference rate reform. The provisions apply only to those transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. Adoption of the provisions of ASU 2020-04 are optional and are effective from March 12, 2020 through December 31, 2024, as amended by ASU 2022-06. During the three months ended March 31, 2023, the Company adopted the optional relief guidance provided under ASU 2020-04 after modifying its interest rate swap agreement in connection with the amendment of the Credit Facility to implement certain changes in the reference rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”). The application of this expedient preserves the presentation of the derivative consistent with past presentation and did not have a material impact on our Unaudited Condensed Consolidated Financial Statements.

NOTE 3 - DEFERRED CONTRACT COSTS AND DEFERRED REVENUE

Activity for deferred contract costs consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Deferred contract costs, current and noncurrent, as of the beginning of period	$	40,106	$	39,709	$	40,726	$	36,509
Capitalized commissions during the period	4,913		3,817		13,630		15,620
Amortized deferred contract costs during the period	(4,966)		(4,606)		(14,303)		(13,209)
Deferred contract costs, current and noncurrent, as of the end of period	$	40,053	$	38,920	$	40,053	$	38,920

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Deferred revenue, current and noncurrent, as of the beginning of period	$	285,324	$	300,387	$	299,921	$	300,268
Billings, net	60,528		49,731		257,864		248,960
Revenue recognized	(107,453)		(101,931)		(319,386)		(301,041)
Deferred revenue, current and noncurrent, as of the end of period	$	238,399	$	248,187	$	238,399	$	248,187

The Company’s remaining performance obligations represent all future non-cancellable revenue under contract that has not yet been recognized as revenue and includes deferred revenue and unbilled amounts. As of September 30, 2023, remaining performance obligations amounted to $550.1 million, of which $238.4 million was billed and recorded as deferred revenue. As of September 30, 2022, remaining performance obligations amounted to $532.3 million, of which $248.2 million was billed and recorded as deferred revenue.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred revenue is a contract liability that consists of billings issued that are non-cancellable and payments received in advance of revenue recognition. The Company typically invoices its customers at the beginning of the contract term, in annual and multi-year installments. Deferred revenue is recognized as the Company satisfies its performance obligations over the term of the contracted service period. The Company expects to recognize revenue on approximately $214.1 million of the billed remaining performance obligations over the next 12 months, with the remaining deferred revenue balance recognized thereafter.

NOTE 4 — OTHER FINANCIAL INFORMATION

Other Accrued Liabilities

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


	September 30,		December 31,
	2023		2022
Accrued sales and other taxes	$	5,760	$	6,878
Accrued professional fees	4,078		9,184
Accrued reorganization costs	—		2,526
Current maturities of capital lease obligations	353		333
Income taxes payable	1,285		2,229
Accrued litigation settlement costs	6,982		6,979
Other accrued expenses	4,260		4,547
Total other accrued liabilities	$	22,718	$	32,676

NOTE 5 — DEBT

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


	September 30,		December 31,
	2023		2022
Credit Facility	$	71,583	$	74,792
Less current maturities	5,912		4,789
Long-term debt, net of current maturities	$	65,671	$	70,003

On February 22, 2023, the Company amended its Credit Facility. The amendment implemented, among other things, certain changes in the reference rate from LIBOR to the SOFR. Effective February 28, 2023, the Company has a choice of interest rates between (a) Adjusted Term SOFR and (b) Base Rate (as defined in the Credit Facility), in each case plus an applicable margin. The applicable margin remains the same as the existing Credit Agreement and is based on the Company’s Consolidated Leverage Ratio (as defined in the Credit Agreement) and whether the Company elects Adjusted Term SOFR (ranging from 1.75 to 2.50%) or Base Rate (ranging from 0.75 to 1.50%).

In addition, the amendment adjusted the definition of Consolidated EBITDA to provide an addback solely for the fourth fiscal quarter of 2022, and any period including such quarter, that costs and legal fees and expenses incurred by the Company in connection with its ongoing litigation with Oracle up to $10.0 million can be added back and included in the applicable calculation of Consolidated EBITDA.

Based on voluntary prepayments made to date under the Credit Facility, the Company currently has available $40.0 million in incremental borrowings available for future use, subject to the terms of the Credit Facility.

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

On September 30, 2023, June 30, 2023 and March 31, 2023, the Company made its required principal payments under the Credit Facility of $1.7 million, $1.1 million, and $1.1 million, respectively. On September 30, 2022, June 30, 2022 and March

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 originally bore interest at LIBOR, plus a margin ranging from 1.75% to 2.50% through February 28, 2023. Subsequently, the Credit Facility was amended to bear interest at SOFR as noted above. For the three months ended September 30, 2023 and 2022, the average interest rate on the Credit Facility was 7.12% and 3.94%, respectively. For the nine months ended September 30, 2023 and 2022, the average interest rate on the Credit Facility was 6.76% and 3.06%, respectively.

On May 18, 2022, the Company entered into an interest rate swap agreement with a notional value of $40.0 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 had an embedded floor rate of 0.0%. The term of the interest rate swap agreement coincides with that of the Credit Facility. See Note 11 for further information regarding the fair value accounting for the interest rate swap agreement. Effective February 28, 2023, the interest rate swap agreement was amended in connection with the amendment of the Credit Facility to implement certain changes in the reference rate from LIBOR to SOFR.

The fair value of the Credit Facility was $74.9 million (Level 2 inputs) as of September 30, 2023 compared to the carrying value of $73.9 million as of September 30, 2023. The fair value of the Credit Facility was $78.8 million (Level 2 inputs) as of December 31, 2022 compared to the carrying value of $77.8 million as of December 31, 2022.

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):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Credit Facility:
Interest expense	$	1,147	$	897	$	3,351	$	2,174
Accretion expense related to discount and issuance costs	245		245		728		728
Interest on finance leases	21		25		60		72
	$	1,413	$	1,167	$	4,139	$	2,974

For the three and nine months ended September 30, 2023, interest expense included a reduction related to interest rate swap payments received of $0.2 million and $0.6 million, respectively.

NOTE 6 — COMMON STOCK OFFERING, RESTRICTED STOCK UNITS, STOCK OPTIONS AND WARRANTS

Common Stock Retired

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 four years, subject to compliance with the Company’s Credit Facility, provided that all other applicable conditions and legal requirements are satisfied.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On February 27, 2022, the Board of Directors approved the adoption of a stock repurchase program to acquire up to $15.0 million of the Company’s Common Stock both on the open market and in privately negotiated transactions, including through Rule 10b5-1 plans, through March 4, 2024, subject to compliance with the Company's Credit Facility, which was amended effective January 14, 2022 to increase the aggregate value of the shares of Common Stock that could be acquired by the Company to no greater than $15.0 million during the term of the Credit Facility, provided that all other applicable conditions and legal requirements are satisfied.

During the three months ended September 30, 2023, the Company did not acquire any shares of its Common Stock on the open market. For the nine months ended September 30, 2023, the Company acquired 0.2 million shares of its Common Stock on the open market at a cost of $1.0 million. For the three months ended September 30, 2022, the Company acquired 0.2 million shares of its 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.

Stock Plans

The Company’s stock plans consist of the 2007 Stock Plan (the “2007 Plan”) and the 2013 Equity Incentive Plan, as amended and restated in July 2017 (the “2013 Plan”). The 2007 Plan and the 2013 Plan are collectively referred to as the “Stock Plans”. On February 23, 2023, pursuant to the “evergreen” provisions of the 2013 Plan, the Board of Directors authorized an increase of approximately 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, 2022, included in Part II, Item 8 of the 2022 Form 10-K. The information presented below provides an update for activity under the Stock Plans for the three and nine months ended September 30, 2023.

On March 31, 2023, the Company’s Board of Directors, approved the Company’s 2023 Long-Term Incentive Plan (the “2023 LTI Plan”), consisting of awards of performance units (“PSUs”), restricted stock units (“RSUs”) and stock options to purchase shares of the Company’s Common Stock under the terms of the Company’s 2013 Equity Incentive Plan (the “2013 Equity Plan”), as amended, effective as of April 3, 2023.

Performance Units

The PSUs awarded under the 2023 LTI Plan (the “Target PSUs”) will be measured over a performance period beginning on January 1, 2023 and ending on December 31, 2023 (the “Performance Period”), but will remain subject to a continued service-based vesting requirement. Half of the PSUs awarded will be eligible to vest based on the Company’s achievement against a target adjusted EBITDA goal for fiscal year 2023, and the remaining half of the PSUs awarded will be eligible to vest based on the Company’s achievement against a target total revenue goal for fiscal year 2023. The ultimate number of PSUs that may vest (as calculated, the “Earned PSUs”) range from zero to 200% of the Target PSUs. Under the terms of the 2023 LTI Plan, the Earned PSUs will vest in equal annual installments on the first, second and third anniversaries of the Date of Grant, generally subject to the awardee continuing to be a Service Provider through the applicable vesting date.

The Company granted 0.6 million PSUs on April 3, 2023 at a grant price of $3.93. The Company recognized compensation expense related to PSUs of $0.4 million and $0.7 million for the three and nine ended September 30, 2023, respectively.

Restricted Stock Units

For the nine months ended September 30, 2023, the Board of Directors granted RSUs under the 2013 Plan to employees and to non-employee members of the Board of Directors for an aggregate of approximately 1.4 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 $4.16 per share, the aggregate fair value for the shares underlying the RSUs amounted to $5.6 million as of the grant date that will be recognized as compensation cost over the vesting period. For the three months ended September 30, 2023 and 2022, the Company recognized compensation expense related to RSUs of approximately $1.8 million and $1.8 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized expense of $5.7 million and $6.6 million, respectively. As of September 30, 2023, the unrecognized expense of $7.0 million net of forfeitures is expected to be charged to expense on a straight-line basis as the RSUs vest over a weighted-average period of approximately 1.6 years.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

For the nine months ended September 30, 2023, the Board of Directors granted stock options for the purchase of an aggregate of approximately 1.9 million shares of Common Stock at exercise prices that were equal to the fair market value of the Common Stock on the date of grant. Options granted to employees generally vest as to one-third of the shares subject to the award on each anniversary of the designated vesting commencement date, which may precede the grant date of such award, and expire ten years after the grant date.

The following table sets forth a summary of stock option activity under the Stock Plans for the nine months ended September 30, 2023 (shares in thousands):


	Shares	Price (1)		Term (2)
Outstanding, December 31, 2022	6,994	$	6.17	5.5
Granted	1,912	4.20
Forfeited	(288)	5.95
Expired	(213)	6.64
Exercised	(57)	1.38
Outstanding, September 30, 2023 (3)(4)	8,348	5.75		5.8
Vested, September 30, 2023 (3)	5,106	6.22		3.8

(1)Represents the weighted average exercise price.

(2)Represents the weighted average remaining contractual term until the stock options expire in years.

(3)As of September 30, 2023, there was no aggregate intrinsic value of all stock options outstanding. As of September 30, 2023, there was no aggregate intrinsic value of vested stock options.

(4)The number of outstanding stock options that are not expected to ultimately vest due to forfeiture amounted to 0.4 million shares as of September 30, 2023.

The following table presents activity affecting the total number of shares available for grant under the Stock Plans for the nine months ended September 30, 2023 (in thousands):


Available, December 31, 2022			7,543
Newly authorized by Board of Directors			3,541
Stock options granted			(1,912)
RSUs and PSUs granted			(1,960)
Expired options under Stock Plans			213
Forfeited options under Stock Plans			288
Forfeited RSUs under Stock Plans			177
Repurchased shares of Common Stock			248
Issuance of Common Stock			(75)
Available, September 30, 2023			8,063

The aggregate fair value of approximately 1.9 million stock options granted for the nine months ended September 30, 2023 amounted to $4.5 million, or $2.33 per stock option as of the grant date utilizing the Black-Scholes-Merton (“BSM”) method. The fair valued derived under the BSM method will result in the recognition of compensation cost over the vesting period of the stock options. For the nine months ended September 30, 2023, the fair value of each stock option grant under the Stock Plans was estimated on the date of grant using the BSM option-pricing model, with the following weighted-average assumptions:

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Expected life (in years)			6.0
Volatility			55%
Dividend yield			0%
Risk-free interest rate			3.75%
Fair value per share of Common Stock on date of grant			$4.20

As of September 30, 2023 and December 31, 2022, total unrecognized compensation costs related to unvested stock options, net of estimated forfeitures, was $5.3 million and $4.1 million, respectively. As of September 30, 2023, the unrecognized costs are expected to be charged to expense on a straight-line basis over a weighted-average vesting period of approximately 2.0 years.

Stock-Based Compensation Expense

Stock-based compensation expense attributable to RSUs and stock options is classified as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cost of revenue	$	503	$	535	$	1,423	$	1,616
Sales and marketing	817		787		2,067		2,467
General and administrative	1,811		1,121		5,566		4,570
Total	$	3,131	$	2,443	$	9,056	$	8,653

Warrants

As of September 30, 2023, warrants were outstanding for an aggregate of 3.4 million shares of Common Stock exercisable at $5.64 per share. For additional information about these warrants, please refer to Note 8 to the Company’s Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of the 2022 Form 10-K.

NOTE 7 — INCOME TAXES

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law. The IRA includes a 15% corporate alternative minimum tax for companies that report over $1 billion in U.S. profits to shareholders and a 1% excise tax on stock buy backs. The Company does not expect the IRA to have a material tax impact.

For the three months ended September 30, 2023 and 2022, the Company’s effective tax rate was 37.1% and 12.1%, respectively. For the nine months ended September 30, 2023 and 2022, the Company’s effective tax rate was 44.1% and 65.1%, respectively. The Company’s income tax expense was primarily attributable to earnings in the United States and foreign jurisdictions subject to income taxes and foreign withholding taxes. The Company did not have any material changes to its conclusions regarding valuation allowances for deferred income tax assets or uncertain tax positions for the three and nine months ended September 30, 2023 and 2022.

For additional information about income taxes, please refer to Note 9 to the Company’s Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of the 2022 Form 10-K.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

Retirement Plan

The Company has defined contribution plans for both its U.S. and foreign employees. For certain of these plans, employees may contribute up to the statutory maximum, which is set by law each year. The plans also provide for employer contributions. For the three months ended September 30, 2023 and 2022, the Company’s matching contributions to these plans totaled $1.0 million and $0.8 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company’s matching contributions to these plans totaled $2.6 million and $2.7 million, respectively.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Rimini I Litigation

In January 2010, certain subsidiaries of Oracle Corporation (together with its subsidiaries individually and collectively, “Oracle”) filed a lawsuit, Oracle USA, Inc. et al. v. Rimini Street, Inc. et al. (United States District Court for the District of Nevada) (the “District Court”) (“Rimini I”), against the Company and its Chief Executive Officer, Chairman of the Board and President, Seth Ravin, alleging that certain of the Company’s processes (Process 1.0) violated Oracle’s license agreements with its customers and that the Company committed acts of copyright infringement and violated other federal and state laws. The litigation involved the Company’s business processes and the manner in which the Company provided services to its clients.

After completion of a jury trial in 2015 and subsequent appeals, the final outcome of Rimini I was that Mr. Ravin was found not liable for any claims and the Company was found liable for only 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.

Rimini I Injunction Proceedings

Since November 2018, the Company has been subject to a permanent injunction (the “Rimini I Injunction”) prohibiting it from using certain support processes that had been found in Rimini I to “innocently” infringe certain Oracle copyrights. The Rimini I Injunction does not prohibit the Company’s provision of support services for any Oracle product lines, but rather defines the manner in which the Company can provide support services for certain Oracle product lines.

In July 2020, Oracle filed a motion to show cause contending that the Company was in violation of the Rimini I Injunction, and the Company opposed this motion, disputing Oracle’s claims. In January 2022, the District Court issued its findings and order following an evidentiary hearing held in September 2021 regarding whether the Company (i) violated the Rimini I Injunction for certain accused conduct and (ii) should be held in contempt in those instances where the District Court found a violation of the Rimini I Injunction, and what sanctions, if any, were appropriate.

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

In February 2022, the Company filed a notice of appeal in the District Court, commencing an appeal of the District Court’s January 2022 decision to the Ninth Circuit Court of Appeals (“Court of Appeals”). Shortly thereafter, the District Court stayed the briefing on Oracle’s bill of attorneys’ fees and costs until the Company’s appeal was resolved.

Following oral argument on the appeal held in February 2023, on August 24, 2023, the Court of Appeals issued its decision on the Company’s appeal of the five items for which the District Court held the Company in contempt. The Court of Appeals affirmed the District Court’s contempt findings on four of the five items and reversed the District Court’s finding of contempt on the fifth item, holding that the District Court had abused its discretion in holding the Company in contempt. In addition, the Court of Appeals vacated the District Court’s order to the extent that it read the Rimini I Injunction to prohibit “de minimis” copying, as well as vacated and remanded the sanctions award to the District Court for recalculation in light of its reversal of the contempt finding on the fifth item.

On September 6, 2023, the Company filed a petition for panel rehearing and rehearing en banc of the Court of Appeals’ ruling that the District Court was permitted to use the Copyright Act’s damages framework to measure the original award of $0.6 million in sanctions to Oracle. On October 12, 2023, the Court of Appeals denied the Company’s petition. On October 25, 2023, the District Court filed an order imposing a recalculated award against the Company, reducing the sanctions originally awarded to Oracle by $0.1 million and reimposing the remaining $0.5 million sanctions award, which amount was previously paid by the Company to Oracle, as described below.

At this time, the Company believes that it is in substantial compliance with the Rimini I Injunction and has complied with the order regarding the quarantining of certain computer files. As of September 30, 2023 and December 31, 2022, the Company

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

had accrued $6.9 million, respectively, as an estimate related to Oracle’s reasonable attorneys’ fees and costs relating to this matter. During the nine months ended September 30, 2022, the Company paid $0.6 million to Oracle for the sanctions award. Regarding the Company’s estimate for reasonable attorneys’ fees and costs, significant judgment is required to determine the amount of loss related to this matter as the outcome is inherently unpredictable and subject to uncertainties. Per order of the District Court, the deadline for Oracle to file its proposed bill of reasonable fees and costs is November 24, 2023. The Company’s response is due sixty (60) days after Oracle’s filing, and Oracle’s reply is due twenty (20) days after the Company’s response. The Company reserves all rights, including appellate rights, with respect to the District Court’s rulings in the contempt matter, including any award of attorneys’ fees and costs. An adverse outcome regarding Oracle’s motion for attorneys’ fees and costs could have a material adverse impact on the Company’s financial position, results of operations and cash flows.

Rimini II Litigation

In October 2014, the Company filed a separate lawsuit, Rimini Street Inc. v. Oracle Int’l Corp., in the District Court against Oracle seeking a declaratory judgment that the Company’s revised “Process 2.0” support practices, in use since at least July 2014, did not infringe certain Oracle copyrights (“Rimini II”). The Company’s operative complaint asserted declaratory judgment, tort, and statutory claims, including a request for injunctive relief against Oracle for unfair competition in violation of the California Unfair Competition Law. Oracle asserted counterclaims including copyright infringement claims, violations of the Digital Millennium Copyright Act (“DMCA”) and Lanham Act, breach of contract and business tort violations with respect to PeopleSoft and other Oracle-branded products, including J.D. Edwards, Siebel, Oracle Database and Oracle E-Business Suite (“EBS”).

In mid-October 2022, on the eve of the Rimini II jury trial, Oracle withdrew all of its monetary damages claims against the Company and the Company’s Chief Executive Officer, Chairman of the Board and President, Mr. Ravin in Rimini II and moved to proceed with a bench trial instead of a jury trial for its claims for equitable relief.

The District Court entered an order on October 24, 2022, dismissing with prejudice Oracle’s claims in Rimini II “for monetary relief of any kind under any legal theory[,] including but not limited to claims for damages, restitution, unjust enrichment, and engorgement. . . .” In addition, Oracle’s claims for breach of contract, inducing breach of contract and an accounting, were dismissed with prejudice, meaning that the claims (including for monetary damages) have been dismissed on their merits and that the judgment rendered is final. Prior to the date of the District Court’s order dismissing with prejudice all of Oracle’s claims for monetary relief, no damages of any kind were awarded by the District Court in Rimini II. The parties each reserved the right to seek or object to any attorneys’ fees and/or costs to the extent permissible by law.

The Rimini II bench trial began in Las Vegas on November 29, 2022 and concluded on December 15, 2022. The parties submitted their proposed findings of fact and conclusions of law to the District Court in February 2023.

On July 24, 2023, the District Court issued its findings of fact and conclusions of law in Rimini II, accompanied by a permanent injunction against the Company (the “Rimini II Injunction”) which, as set forth in detail below, is subject to an administrative stay and is not currently effective. The District Court found infringement as to Oracle’s PeopleSoft and Oracle Database products but did not find infringement as to Oracle’s EBS, Siebel and J.D. Edwards products, further ordering that the Company was entitled to a declaration of non-infringement for Oracle’s EBS product. The District Court also found in favor of Oracle on its DMCA and Lanham Act claims, enjoining the Company from making certain statements and prohibiting certain actions in connection with the manner of marketing, selling and providing services to clients of the Oracle products in question as further described below, and on indirect and vicarious copyright infringement claims against the Company’s Chief Executive Officer, Chairman of the Board and President, Mr. Ravin. The District Court denied the Company’s California Unfair Competition Law claim and other declaratory judgment claims.

On July 25, 2023, the Company filed a notice of appeal in the District Court, commencing an appeal of the District Court’s July 24, 2023 Rimini II judgment and Injunction.

On July 28, 2023, the Company filed an emergency motion with the District Court to stay enforcement of the Rimini II Injunction pending the Company’s appeal of the Rimini II judgment and Injunction.

On August 15, 2023, the District Court issued an order denying the Company’s emergency motion to stay the Rimini II Injunction pending the Company’s appeal with the Court of Appeals, but it granted an administrative stay of the Rimini II Injunction pending the outcome of a motion to stay to be filed by the Company with the Court of Appeals.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On August 22, 2023, the Company filed the separate motion to stay the Rimini II Injunction with the Court of Appeals, asserting that certain provisions of the Rimini II Injunction are vague and overbroad, that the District Court committed legal error, that certain provisions would require the Company to commit criminal acts to comply with its terms, and that the Rimini II Injunction would cause the Company and third parties “irreparable harm,” among other grounds. As of the date of this Report, the Court of Appeals has not issued a decision on the Company’s motion to stay the Rimini II Injunction.

As of the date of this Report, the Rimini II Injunction, as issued by the District Court, is currently stayed by the District Court, meaning that it is not currently effective. The Rimini II Injunction is primarily directed at Oracle’s PeopleSoft software product and, if effective, would limit, but not fully prohibit, the support services the Company can provide its clients using Oracle’s PeopleSoft software product.

Among other things, the Rimini II Injunction requires the Company to immediately and permanently delete certain PeopleSoft software environments, files and updates identified in the Rimini II Injunction, as well as to delete and immediately and permanently discontinue use of certain Company-created automated tools. The Rimini II Injunction also prohibits using, distributing, copying, or making derivative works from certain files, and it prohibits the transfer or copying of PeopleSoft files, updates, and modifications, and portions of PeopleSoft software that are developed, tested, or exist in one client’s systems to the Company’s systems or another client’s systems.

The Rimini II Injunction also specifies that the Company shall not remove, alter or omit any Oracle copyright notices or other Oracle copyright management information from any file that contains an Oracle copyright notice and prohibits the Company from publicly making statements or statements substantially similar to those the District Court found to be “false and misleading,” which are listed in the Rimini II Injunction.

On August 21, 2023, Oracle filed a motion to amend the District Court’s judgment in Rimini II regarding an update, technical specification and tool related to Oracle’s EBS software product. As of the date of this Report, the District Court has not issued a decision on Oracle’s motion to amend.

On September 12, 2023, the Court of Appeals issued an order holding the Company’s appeal of the District Court’s decision in Rimini II in abeyance pending the District Court’s resolution of Oracle’s above-described motion to amend the Rimini II judgment. Accordingly, as of the date of this Report, the briefing schedule for the Company’s appeal of the Rimini II decision has been stayed.

While the Company plans to continue to vigorously pursue a stay of the Rimini II Injunction pending appeal and its appeal of the Rimini II judgment and Injunction, it is unable to predict the timing or outcome of these matters. No assurance is or can be given that the Company will succeed in its efforts to stay the Rimini II Injunction in full or in part pending appeal or prevail in all or part of its Rimini II appeal.

There were no monetary damages included in the District Court’s judgment in Rimini II. The deadline for the parties to file motions for attorneys’ fees and costs is November 6, 2023, and oppositions to such motions are due February 20, 2024. As of the date of this Report, no party has filed such a motion with the District Court. A decision about whether to award any attorneys’ fees and/or costs, and if so, the amounts, will be made by the District Court. Accordingly, at this time the Company does not believe that any award of attorneys’ fees and costs are probable or estimatable. An adverse outcome regarding any Oracle motion for attorneys’ fees and costs could have a material adverse impact on the Company’s financial position, results of operations and cash flows.

The Rimini II Injunction, if reinstated, would affect certain support services delivered by the Company to clients receiving support for Oracle’s PeopleSoft products and is expected to result in additional future period costs, among other potential impacts. However, these costs are not currently estimatable and are not required to be recorded as of September 30, 2023. Accordingly, the Company has made no associated accrual as of September 30, 2023. Any required changes to how support services are delivered to the Company’s PeopleSoft clients could have a material adverse impact on the Company’s financial position, results of operations and cash flows. The percentage of revenue derived from services the Company provides solely for Oracle’s PeopleSoft software product was approximately 8% and 9% of the Company’s total revenue for the three and nine months ended September 30, 2023, respectively.

The Company reserves all rights, including appellate rights, with respect to the District Court’s rulings in Rimini II and the Rimini II Injunction, including any award of attorneys’ fees and costs to Oracle.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Other Litigation

From time to time, the Company may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, the Company currently believes that the final outcome of these ordinary course matters will not have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of judgment, defense and settlement costs, diversion of management resources and other factors. At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimatable under ASC 450, Contingencies. Legal fees are expensed as incurred.

Liquidated Damages

The Company enters into agreements with clients that contain provisions related to liquidated damages that would be triggered in the event that the Company is no longer able to provide services to these clients. The maximum cash payments related to these liquidated damages is approximately $12.6 million and $8.1 million as of September 30, 2023 and December 31, 2022, respectively. To date, the Company has not incurred any costs as a result of such provisions and has not accrued any liabilities related to such provisions in these Unaudited Condensed Consolidated Financial Statements.

NOTE 9 — RELATED PARTY TRANSACTIONS

An affiliate of Adams Street Partners and its affiliates (collectively referred to as “ASP”) is a member of the Company’s Board of Directors. As of September 30, 2023, ASP owned approximately 26.4% of the Company’s issued and outstanding shares of Common Stock.

NOTE 10 —EARNINGS PER SHARE

The Company computes earnings per share in accordance with ASC Topic 260, Earnings per Share. Basic earnings per share of Common Stock is computed by dividing net income attributable to common stockholders by the weighted average number of shares of basic Common Stock outstanding. Diluted earnings per share of Common Stock is calculated by adjusting the basic earnings per share of Common Stock for the effects of potential dilutive Common Stock shares outstanding such as stock options, restricted stock units and warrants.

For both the three and nine months ended September 30, 2023 and 2022, basic and diluted net earnings per share of Common Stock were computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the respective periods. The following tables set forth the computation of basic and diluted net income attributable to common stockholders (in thousands, except per share amounts):

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Income (loss) attributable to common stockholders:
Net income (loss)	$	6,801	$	(405)	$	16,708	$	2,792

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Weighted average number of shares of Common Stock outstanding:
Basic	89,228		87,965		88,942		87,441
Warrants	—		—		—		—
Stock options	—		—		18		543
RSUs	129		—		362		1,070
Diluted	89,357		87,965		89,322		89,054
Net income (loss) per share attributable to common stockholders:
Basic	$	0.08	$	—	$	0.19	$	0.03
Diluted	$	0.08	$	—	$	0.19	$	0.03

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
RSUs and PSUs	2,767	1,243	1,270	460
Stock options	8,358	4,914	7,830	4,161
Warrants	3,440	18,128	3,440	18,128
Total	14,565	24,285	12,540	22,749

NOTE 11 — FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS

Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. Additional information on fair value measurements is included in Note 13 to the Company’s Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of the 2022 Form 10-K. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer.

Investments

During September 2022, the Company invested $20 million of its cash and cash equivalents into U.S. Federal agency bonds, U.S. government bonds, U.S. treasury notes and other securities. We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values.

In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Debt investments are classified as available-for-sale and gains and losses are recorded using the specific identification method. Changes in fair value are recorded in the operating statement. Fair value is calculated based on publicly available market information.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Listed below are the cash equivalent and investment balances as of September 30, 2023 (in thousands):


	Fair Value Level	Cost Basis		Unrealized Gains (Losses)		Recorded Basis		Cash Equivalents		Short-term Investments		Long-term Investments
Federal Agency Bonds	Level 2	$	14,895	$	165	$	15,060	$	195	$	14,160	$	705
US Treasury notes	Level 2	5,716		38		5,754		—		5,754		—
		$	20,611	$	203	$	20,814	$	195	$	19,914	$	705

Derivatives

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, 2023. The Company uses derivatives to manage the risk associated with changes in interest rates. The Company does not enter into derivatives for speculative purposes.

To estimate fair value for the Company's interest rate swap agreement as of September 30, 2023, the Company utilized a present value of future cash flows, leveraging a model-derived valuation that uses Level 2 observable inputs such as interest rate yield curves. The Company estimated the fair value of the interest rate swap agreement to be $1.8 million as of September 30, 2023.

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

The Company received interest swap payments of $0.2 million and $0.6 million during the three and nine months ended September 30, 2023, respectively, which were recorded as a reduction to interest expense. The Company incurred interest payments of $0.1 million and $0.2 million during the three and nine months ended September 30, 2022, respectively, which were recorded as interest expense.

The amounts recorded for the interest rate swap agreement are described below (in thousands):


Derivative Instrument	Balance Sheet Classification					September 30, 2023		December 31, 2022
Interest rate swap	Deposits and other					$	1,797	$	1,402
	Accumulated other comprehensive loss					1,408		1,107
		Three Months Ended September 30,				Nine Months Ended September 30,
Derivative Instrument	Income Statement Classification	2023		2022		2023		2022
Interest rate swap	Interest expense (benefit)	$	(235)	$	81	$	(600)	$	224

Significant Concentrations

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):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
United States of America	$	55,740	$	53,423	$	163,146	$	159,616
International	51,713		48,508		156,240		141,425
Total	$	107,453	$	101,931	$	319,386	$	301,041

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

No clients represented more than 10% of revenue for both the three and nine months ended September 30, 2023 and 2022. As of September 30, 2023 and December 31, 2022, no clients accounted for more than 10% of total net accounts receivable. The Company tracks its assets by physical location. As of September 30, 2023 and December 31, 2022, the net carrying value of the Company’s property and equipment located outside of the United States amounted to approximately $2.5 million and $1.8 million respectively. As of September 30, 2023, the Company had operating lease right-of-use assets of $3.3 million, $2.4 million and $0.7 million in the United States, India and the rest of the world, respectively. As of December 31, 2022, the Company had operating lease right-of-use assets of $2.6 million, $3.4 million and $1.2 million in the United States, India and the rest of the world, respectively.

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, restricted cash, and accounts receivable. The Company maintains its cash, cash equivalents and restricted cash at high-quality financial institutions, primarily in the United States. Deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. As of September 30, 2023 and December 31, 2022, the Company had cash, cash equivalents and restricted cash with a single financial institution for an aggregate of $32.5 million and $44.9 million, respectively. In addition, as of September 30, 2023, the Company had cash and cash equivalents with three other single financial institutions of $61.2 million. As of September 30, 2023 and December 31, 2022, 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.

NOTE 12 - LEASES

Effective at the start of fiscal 2020, the Company adopted the provisions and expanded disclosure requirements described in Accounting Standards Codification (ASC) Topic 842, Leases. The Company adopted the standard using the prospective method. The Company has operating leases for real estate and equipment with an option to renew the leases for up to one month to five years. Some of the leases include the option to terminate the leases upon 30-days’ notice with a penalty. The Company’s leases have various remaining lease terms ranging from July 2023 to December 2028. The Company’s lease agreements may include renewal or termination options for varying periods that are generally at the Company's discretion. The Company’s lease terms only include those periods related to renewal options the Company believes are reasonably certain to exercise. The Company generally does not include these renewal options as it is not reasonably certain to renew at the lease commencement date. This determination is based on consideration of certain economic, strategic and other factors that the Company evaluates at lease commencement date and reevaluates throughout the lease term. Some leases also include options to terminate the leases and the Company only includes those periods beyond the termination date if it is reasonably certain not to exercise the termination option.

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

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

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

The Company has elected to apply the short-term lease exception for all underlying asset classes. That is, leases with a term of 12 months or less are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term. The Company’s leases do not include significant restrictions or covenants, and residual value guarantees are generally not included within its operating leases. As of September 30, 2023, the Company has one additional operating lease with a net present value of $0.5 million in Tokyo, Japan that will commence on October 1, 2023.

RIMINI STREET, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating lease expense related to ROU assets and liabilities	$	1,109	$	1,360	$	3,347	$	4,140
Other lease expense	318		229		491		633
Total lease expense	$	1,427	$	1,589	$	3,838	$	4,773

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


Supplemental Balance Sheet Information	September 30, 2023		December 31, 2022
Operating lease right-of-use assets, noncurrent	$	6,339	$	7,142

	September 30, 2023		December 31, 2022
Operating lease liabilities, current	$	4,175	$	4,223
Operating lease liabilities, noncurrent	7,511		9,094
Total operating lease liabilities	$	11,686	$	13,317


Weighted Average Remaining Lease Term	Years
Operating leases	3
Weighted Average Discount Rate
Operating leases	10.0	%

Maturities of operating lease liabilities as of September 30, 2023 were as follows (in thousands):


Year Ending September 30,
2024	$	5,078
2025	3,956
2026	2,806
2027	1,187
2028	366
Thereafter	94
Total future undiscounted lease payments	13,487
Less imputed interest	(1,801)
Total	$	11,686

For the three months ended September 30, 2023 and 2022, the Company paid $1.3 million and $1.4 million, respectively, for operating lease liabilities. For the nine months ended September 30, 2023 and 2022, the Company paid $4.2 million and $4.1 million, respectively, for operating lease liabilities.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) includes forward-looking statements. All statements other than statements of historical facts contained in this Report, including statements regarding our future results of operations and financial position, business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “currently,” “estimate,” “expect,” “future,” “intend,” “may,” “might,” “outlook,” “plan,” “possible,” “potential,” “predict,” “project,” “seem,” “seek,” “should,” “will,” “would” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to, information concerning:

•the evolution of the enterprise software management and support landscape facing our clients and prospects;

•our ability to educate the market regarding the advantages of our enterprise software management and support services and products;

•costs, including attorneys’ fees, associated with defending intellectual property infringement and other claims, such as those claims discussed under “Legal Proceedings” in Part II, Item 1 of this Report, and our expectations with respect to such litigation, including the disposition of pending motions to appeal, and any new claims;

•any additional expenses to be incurred in order to comply with the Rimini II Injunction and the impact on future period revenue and costs;

•estimates of our total addressable market;

•expectations of client savings relative to use of other providers;

•the occurrence of catastrophic events, including terrorism and geopolitical actions specific to an international region, that may disrupt our business or that of our current and prospective clients;

•our ability to maintain an adequate rate of revenue growth;

•our ability to maintain sufficient cash flow and capital or raise additional capital necessary to fund our operations and invest in new services and products;

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

•our business plan and our ability to effectively manage our growth and associated investments;

•the impact of any recessionary economic trends, including inflation, rising interest rates and changes in foreign exchange rates;

•beliefs and objectives for future operations;

•our ability to expand our leadership position in independent enterprise software support and to sell our application management services (“AMS”) and Rimini ONE™ integrated services;

•our ability to attract and retain clients and our ability to further penetrate our existing client base;

•our ability to maintain our competitive technological advantages against new entrants in our industry;

•our ability to timely and effectively scale and adapt our existing technology;

•our ability to innovate new products and bring them to market in a timely manner;

•our ability to maintain, protect, and enhance our brand and intellectual property;

•our ability to capitalize on changing market conditions including a market shift to hybrid and cloud/SaaS offerings for information technology environments and retirement of certain software releases by software vendors;

•our ability to develop strategic partnerships;

•benefits associated with the use of our services;

•our ability to expand internationally;

•our need and ability to raise equity or debt financing on favorable terms and our ability to generate cash flows from operations to help fund increased investment in our growth initiatives;

•the effects of increased competition in our market and our ability to compete effectively;

•our intentions with respect to our pricing model;

•cost of revenue, including changes in costs associated with production and client support;

•changes in laws or regulations, including tax laws or unfavorable outcomes of tax positions we take, or a failure by us to establish adequate reserves for tax events;

•our ability to maintain our good standing with the United States and international governments and capture new contracts;

•economic and industry trends or trend analysis;

•our ability to prevent unauthorized access to our information technology systems and other cybersecurity threats, protect the confidential information of our employees and clients and comply with privacy and data protection regulations;

•the amount and timing of repurchases, if any, under our stock repurchase program and our ability to enhance stockholder value through such program or any other actions to provide value to stockholders;

•the attraction and retention of additional qualified personnel, including sales personnel, and the retention of key personnel;

•future acquisitions of or investments in complementary companies, products, subscriptions or technologies;

•uncertainty from the discontinuance of LIBOR and the transition to SOFR or other interest rate benchmarks;

•the effects of seasonal trends on our results of operations, including the contract renewal cycles for vendor-supplied software support and managed services;

•our ability to maintain an effective system of internal control over financial reporting and our ability to remediate any identified material weaknesses in our internal controls; and

•other risks and uncertainties, including those discussed under “Risk Factors” in Part II, Item 1A of this Report.

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

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

Overview

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and the related notes to those statements included in Part I, Item 1 of this Report, and our Audited Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of our 2022 Form 10-K.

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

Rimini Street, Inc. was formed in the State of Nevada in 2005 and, through a merger in 2017 with a public company, became Rimini Street, Inc., a Delaware corporation, trading on the Nasdaq Global Market under the ticker symbol “RMNI.”

Rimini Street, Inc. and its subsidiaries (referred to as “Rimini Street”, the “Company”, “we” and “us”) are global providers of end-to-end enterprise software support, products and services. The Company offers a comprehensive family of unified solutions to run, manage, support, customize, configure, connect, protect, monitor, and optimize clients’ enterprise application, database, and technology software platforms.

Over the years, as our reputation for technical capability, value, innovation, responsiveness and trusted reliability grew, clients and prospects began asking us to expand the scope of our support, product and service offerings to meet other current and evolving needs and opportunities related to their enterprise software. We also heard from prospects and clients that their goals include reducing the number of IT vendors to more manageable numbers from a governance perspective, with a desire to select vendors who can provide a wider scope of IT services and become true trusted partners.

To meet the needs of our clients and prospects and to service what we believe is a significantly expanded addressable market opportunity, we designed, developed and are now delivering a new, expanded solutions portfolio (our “Solutions Portfolio”) for a wider array of enterprise software – including an expanded list of supported software; managed services for Oracle, SAP, IBM, Salesforce and open-source database software; and new solutions for security, interoperability, observability and consulting. We also now offer an integrated package of our services as Rimini ONE™, a unique end-to-end, “turnkey” outsourcing option for Oracle and SAP landscapes designed to optimize our clients’ existing technologies with a minimum of 15 extended years of operating lifespan and enable our clients to focus their IT talent and budget on potentially higher-value, innovative projects that will support competitive advantage and growth.

Enterprise software support, products and services is one of the largest categories of overall global information technology (“IT”) spending. We believe enterprise resource planning (“ERP”), customer relationship management (“CRM”), product lifecycle management (“PLM”) database and technology software systems have become increasingly important in the operation of mission-critical business processes over the last 30 years. Also the costs associated with running and supporting these systems, system failure and downtime, security exposure, system integration and monitoring, and maintaining the tax, legal and regulatory compliance of these software systems have each contributed to increases in both actual spend and as a percentage of the typical full IT budget. As a result, we believe that licensees often view enterprise software support, products and services as a mandatory cost of doing business. The majority of our revenue through September 30, 2023, was generated from our support solutions.

In a traditional licensing model, the customer typically procures a perpetual software license and pays for the license in a single upfront fee (“perpetual license”), and base software support services can be optionally procured from the software vendor for an annual fee that is typically 20-23% of the total cost of the software license. In a newer subscription-based licensing model, such as software as a service (“SaaS”), the customer generally pays for the usage of the software on a monthly or annual basis (“subscription license”). Under a subscription license, the product license and a base level of software support are generally bundled together as a single purchase, and the base level of software support is not procured separately nor is it an optional purchase.

When we provide our support solutions for a perpetual software license, we generally offer our clients service for a fee that is equal to approximately 50% of the annual fees charged by the software vendor for their base support. When providing supplemental software support for a perpetual license, where the client procures our support service in addition to retaining the software vendor’s base support, we generally offer our clients service for a fee that is equal to approximately 25% of the annual fees charged by the software vendor for their base support. We also offer a special support service, Rimini Street Extra Secure Support, available to clients that require a more rigorous level of security background checks and/or government security clearance for engineers accessing a client’s system than our standard employment security background check and requirements. Clients may incur an additional fee for Rimini Street Extra Secure Support.

In addition to our support services, we also offer a breadth of enterprise software support, products and services through our full portfolio of solutions at an additional fee that is calculated based on a variety of factors and metrics. Our solutions are designed to meet specific client needs and are designed to provide what we believe is exceptional value and return for the fees charged. For more details about our Solutions Portfolio, please see Item 1 “Business” included in Part I of our 2022 Form 10-K.

As of September 30, 2023, we employed over 2,050 professionals and supported over 3,090 active clients globally, including 66 Fortune 500 companies and 15 Fortune Global 100 companies across a broad range of industries. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active clients instances where we provide support for two different products to the same entity.

Our subscription-based revenue provides a strong foundation for, and visibility into, future period results. For the three months ended September 30, 2023 and 2022, we generated revenue of $107.5 million and $101.9 million, respectively, representing an increase of 5%. During the three months ended September 30, 2023, we recorded net income of $6.8 million, and as of September 30, 2023, we had an accumulated deficit of $211.6 million. Approximately 52% of our revenue was generated in the United States for both the three months ended September 30, 2023 and 2022, respectively. Approximately 48% of our revenue was generated in foreign jurisdictions for both the three months ended September 30, 2023 and 2022, respectively.

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

Global Economic Uncertainty

We have experienced some clients not renewing our services due to the adverse impact on their businesses from current global economic uncertainty, as well as by the economic disruption continuing to be caused by the Israel-Hamas conflict, the Russian invasion of Ukraine in early fiscal 2022 and recent political and trade turmoil with China, amongst other global challenges. While we do not physically operate in Russia, the Ukraine or in mainland China, we do have operations in Israel. These global events, together with fiscal and monetary policy adopted during and after the COVID-19 pandemic, have had adverse macroeconomic impacts and increased inflationary cost pressures, causing the U.S. Federal Reserve to repeatedly raise rates. We expect additional rate increases in the future. Despite these macroeconomic and geopolitical pressures, we expect to continue to be able to market, sell and provide our current and future products and services to clients globally. We also expect to continue investing in the development and improvement of new and existing products and services to address client needs. Further, although our operations are influenced by general economic conditions, we do not believe the impacts of economic disruptions described above had a significant net impact on our revenue or results of operations during the three and nine months ended September 30, 2023.

The extent to which rising inflation, interest rate increases, continuing global economic and geopolitical uncertainty, and any lingering impacts of the COVID-19 pandemic impact our business going forward, however, will depend on numerous evolving factors we cannot reliably predict, including continued governmental and business actions in response to increasing global economic uncertainty, including the possibility of recession or financial market instability. As such, the effects of rising inflation, interest rate increases and other negative impacts on the global economy may not be fully reflected in our financial results until future periods. Refer to “Risk Factors” (Part II, Item 1A of this Report) for a discussion of these factors and other risks.

Recent Developments

Reference is made to Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for a discussion of recent developments in our litigation with Oracle.

Key Business Metrics

Number of clients

Since we founded our company, we have made the expansion of our client base a priority. We believe that our ability to expand our client base is an indicator of the growth of our business, the success of our sales and marketing activities, and the value that our services bring to our clients. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active clients when support for two different products is being provided to the same entity. As of September 30, 2023 and 2022, we had over 3,090 and 3,000 active clients, respectively.

We define a unique client as a distinct entity, such as a company, an educational or government institution or a subsidiary, division or business unit of a company that purchases one or more of our products or services. We count as two separate unique clients when two separate subsidiaries, divisions or business units of an entity purchase our products or services. As of September 30, 2023 and 2022, we had over 1,540 and 1,510 unique clients, respectively.

The increases in both our active and unique client counts have been almost exclusively from new unique clients and not from sales of new products and services to existing unique clients. However, as noted previously, we intend to focus future growth on both new and existing clients. We believe that the growth in our number of clients is an indication of the increased adoption of our enterprise software products and services.

Annualized recurring revenue

We recognize subscription revenue on a daily basis. We define annualized recurring revenue as the amount of subscription revenue recognized during a quarter and multiplied by four. This gives us an indication of the revenue that can be earned in the following 12-month period from our existing client base assuming no cancellations or price changes occur during that period. Subscription revenue excludes any non-recurring revenue, which has been insignificant to date.

Our annualized recurring revenue was $416 million and $400 million as of September 30, 2023 and 2022, respectively. We believe the sequential increase in annualized recurring revenue demonstrates a growing client base, which is an indicator of stability in future subscription revenue.

Revenue retention rate

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

We define revenue retention rate as the actual subscription revenue (dollar-based) recognized in a 12-month period from clients that existed on the day prior to the start of the 12-month period divided by our annualized recurring revenue as of the day prior to the start of the 12-month period. Our revenue retention rate was 94% for both the 12 months ended September 30, 2023 and 2022, respectively.

Gross profit margin

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

We define gross profit as the difference between revenue and the costs incurred in providing the software products and services. Gross profit margin is the ratio of gross profit divided by revenue. Our gross profit margin was approximately 62.7% and 61.5% for the three months ended September 30, 2023 and 2022, respectively. We believe the gross profit margin provides an indication of how efficiently and effectively we are operating our business and serving our clients.

Results of Operations

Comparison of Three Months Ended September 30, 2023 and 2022

Our consolidated statements of operations for the three months ended September 30, 2023 and 2022, are presented below (in thousands):


	Three Months Ended September 30,						Variance
	2023			2022			Amount		Percent
Revenue	$	107,453		$	101,931		$	5,522	5.4%
Cost of revenue:
Employee compensation and benefits	25,904			25,493			411		1.6%
Engineering consulting costs	6,192			6,252			(60)		(1.0)%
Administrative allocations (1)	3,520			3,970			(450)		(11.3)%
All other costs	4,494			3,556			938		26.4%
Total cost of revenue	40,110			39,271			839		2.1%
Gross profit	67,343			62,660			4,683		7.5%
Gross profit margin	62.7		%	61.5		%
Operating expenses:
Sales and marketing	35,593			35,934			(341)		(0.9)%
General and administrative	18,384			18,454			(70)		(0.4)%
Litigation costs and related recoveries, net	2,127			6,237			(4,110)		(65.9)%
Total operating expenses	56,104			60,625			(4,521)		(7.5)%
Operating income	11,239			2,035			9,204		452.3%
Non-operating income and (expenses):
Interest expense	(1,413)			(1,167)			(246)		21.1%
Other income (expenses), net	990			(1,329)			2,319		(174.5)%
Income (loss) before income taxes	10,816			(461)			11,277		(2,446.2)%
Income taxes	(4,015)			56			(4,071)		(7,269.6)%
Net income (loss)	$	6,801		$	(405)		$	7,206	(1,779.3)%

(1)Includes the portion of costs for IT, security services and facilities costs that are allocated to cost of revenue. In our Unaudited Condensed Consolidated Financial Statements, the total of such costs is allocated between cost of revenue, sales and marketing, and general and administrative expenses, based primarily on relative headcount, except for facilities which is based on occupancy.

Revenue. Revenue increased from $101.9 million for the three months ended September 30, 2022 to $107.5 million for the three months ended September 30, 2023, an increase of $5.5 million or 5%. The increase was driven by an 3% increase in the average number of unique clients from 1,491 for the three months ended September 30, 2022 to 1,532 for the three months ended September 30, 2023. On a geographic basis, United States revenue grew from $53.4 million for the three months ended September 30, 2022 to $55.7 million for the three months ended September 30, 2023, an increase of $2.3 million or 4%. Our international revenue grew from $48.5 million for the three months ended September 30, 2022 to $51.7 million for the three months ended September 30, 2023, an increase of $3.2 million or 7%.

Cost of revenue. Cost of revenue increased from $39.3 million for the three months ended September 30, 2022 to $40.1 million for the three months ended September 30, 2023, an increase of $0.8 million or 2%. The key drivers related to the cost of revenue increase were a $0.4 million increase in employee compensation and benefits and a $0.9 million increase in all other costs, which was driven primarily by a $0.9 million increase in outside services. These increases were offset, in part, by a decrease in administrative allocations.

As discussed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, the District Court issued its findings of fact and conclusions of law in Rimini II, accompanied by the “Rimini II Injunction” on July 24, 2023. The District Court found infringement as to Oracle’s PeopleSoft and Oracle Database products.

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

Gross profit. Gross profit increased from $62.7 million for the three months ended September 30, 2022 compared to $67.3 million for the three months ended September 30, 2023, an increase of $4.7 million or 7%. Gross profit margin for the three months ended September 30, 2022 was 61.5% compared to 62.7% for the three months ended September 30, 2023. For the three months ended September 30, 2023, the total cost of revenue increased by 2% compared to an increase in revenue of 5% for the three months ended September 30, 2023. As a result, our gross profit margin improved by 120 basis points period over period.

Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses were 33% and 35% for the three months ended September 30, 2023 and 2022, respectively. In dollar terms, sales and marketing expenses decreased from $35.9 million for the three months ended September 30, 2022 to $35.6 million for the three months ended September 30, 2023, a decrease of $0.3 million or 1%. This decrease was primarily due to a decrease in employee compensation and benefits of $0.5 million and a decrease in recruitment costs of $0.3 million offset by an increase in marketing and advertising of $0.5 million. We will continue to seek to accelerate our future revenue growth by investing in more resources.

The $0.5 million decrease in sales and marketing expense attributable to employee compensation and benefits for the three months ended September 30, 2023 was primarily due to a decrease in salaries, wages and benefits of $0.9 million offset by an increase in commissions of $0.3 million and bonuses of $0.1 million.

General and administrative expenses. General and administrative expenses decreased from $18.5 million for the three months ended September 30, 2022 to $18.4 million for the three months ended September 30, 2023, a decrease of $0.1 million. This decrease was comprised of several items, which included a decrease in professional fees of $0.6 million, a decrease in computer supplies and licenses of $0.6 million, a decrease in contract labor of $0.5 million. and a decrease in rent and facilities costs of $0.4 million. These decreases were offset, in part, by an increase bonus expense of $1.5 million, and we allocated $0.8 million less expense related to administrative costs.

Looking forward on a quarter-over-quarter basis, we are monitoring the demand for our services in light of current global economic conditions and will adjust our expenditures accordingly. However, we expect to incur higher expenses associated with supporting the growth of our business, both in terms of size and geographical diversity. Our company costs that are expected to increase in the future include costs relating to additional information systems costs, costs for additional personnel in our accounting, human resources, IT and legal functions, SEC and Nasdaq fees, and incremental professional, legal, audit and insurance costs. As a result, not taking into account temporary reductions in certain expenses resulting from the COVID-19 pandemic in prior periods, we expect our general and administrative expenses related to public company costs will continue to increase in future periods.

Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries, consist of the following (in thousands):


	Three Months Ended September 30,
	2023		2022		Change
Professional fees and other costs of litigation	$	2,127	$	6,145	$	(4,018)
Insurance costs and recoveries, net	—		92		(92)
Litigation costs and related recoveries, net	$	2,127	$	6,237	$	(4,110)

Professional fees and other costs associated with litigation decreased from $6.1 million for the three months ended September 30, 2022 to $2.1 million for the three months ended September 30, 2023, a decrease of $4.0 million. This decrease was primarily due to the timing of trial costs that occurred during the three months ended September 30, 2022.

Insurance costs and related recoveries, net decreased from $0.1 million for the three months ended September 30, 2022 compared to no activity for the three months ended September 30, 2023. We are self-insured for any costs related to any current or future intellectual property litigation. We currently believe our cash on hand, accounts receivable and contractually committed backlog provides us with sufficient liquidity to cover our ongoing attorneys’ fees and related costs, such as travel, hotels and consultants, associated with ongoing litigation, including Rimini II. However, please refer to the litigation matters as disclosed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for further information.

Interest expense. Interest expense increased from $1.2 million for the three months ended September 30, 2022 to $1.4 million for the three months ended September 30, 2023, an increase of $0.2 million. Interest expense increased primarily due to rising interest rates on our five-year Credit Facility. These rising interest rates were offset, in part, by a reduction of interest costs of $0.2 million related to payments associated with our interest rate swap, which was entered into on May 18, 2022.

Other income (expenses), net. Other income (expenses), net is primarily comprised of interest income, foreign exchange gains and losses, and other non-operating income and expenses. For the three months ended September 30, 2023, net other income of approximately $1.0 million was comprised of gains from cash equivalents and investments of $1.1 million which were offset by foreign exchange losses of approximately $0.1 million. For the three months ended September 30, 2022, net other expenses of approximately $1.3 million was comprised primarily of foreign exchange losses of approximately $1.4 million. For the three months ended September 30, 2022, we experienced a significant change in foreign currency exchange rates as the U.S. dollar strengthened against the majority of foreign currencies where our foreign entities operate.

Income tax expense. We had an income tax benefit of $0.1 million for the three months ended September 30, 2022 compared to an income tax expense of $4.0 million for the three months ended September 30, 2023. For the three months ended September 30, 2023, the primary reason for the increase in income tax expense was due to an increase of income before taxes of $11.3 million in the current year period compared to the prior year period as well as an increase in foreign withholding taxes.

Comparison of Nine Months Ended September 30, 2023 and 2022

Our consolidated statements of operations for the nine months ended September 30, 2023 and 2022, are presented below (in thousands):


	Nine Months Ended September 30,						Variance
	2023			2022			Amount		Percent
Revenue	$	319,386		$	301,041		$	18,345	6.1%
Cost of revenue:
Employee compensation and benefits	76,478			77,562			(1,084)		(1.4)%
Engineering consulting costs	19,269			16,397			2,872		17.5%
Administrative allocations (1)	10,659			11,693			(1,034)		(8.8)%
All other costs	12,396			8,170			4,226		51.7%
Total cost of revenue	118,802			113,822			4,980		4.4%
Gross profit	200,584			187,219			13,365		7.1%
Gross profit margin	62.8		%	62.2		%
Operating expenses:
Sales and marketing	107,356			103,840			3,516		3.4%
General and administrative	55,475			57,267			(1,792)		(3.1)%
Reorganization costs	59			—			59		100.0%
Litigation costs and related recoveries, net	5,475			12,448			(6,973)		(56.0)%
Total operating expenses	168,365			173,555			(5,190)		(3.0)%
Operating income	32,219			13,664			18,555		135.8%
Non-operating income and (expenses):
Interest expense	(4,139)			(2,974)			(1,165)		39.2%
Other income (expenses), net	1,799			(2,696)			4,495		(166.7)%
Income before income taxes	29,879			7,994			21,885		273.8%
Income taxes	(13,171)			(5,202)			(7,969)		153.2%
Net income	$	16,708		$	2,792		$	13,916	498.4%

Revenue. Revenue increased from $301.0 million for the nine months ended September 30, 2022 to $319.4 million for the nine months ended September 30, 2023, an increase of $18.3 million or 6%. The increase was driven by an 2% increase in the average number of unique clients from 1,483 for the nine months ended September 30, 2022 to 1,520 for the nine months ended September 30, 2023. On a geographic basis, United States revenue grew from $159.6 million for the nine months ended September 30, 2022 to $163.1 million for the nine months ended September 30, 2023, an increase of $3.5 million or 2%. Our international revenue grew from $141.4 million for the nine months ended September 30, 2022 to $156.2 million for the nine months ended September 30, 2023, an increase of $14.8 million or 10%, driven primarily by Japan and Australia, with increases of $5.5 million and $2.4 million, respectively.

Cost of revenue. Cost of revenue increased from $113.8 million for the nine months ended September 30, 2022 to $118.8 million for the nine months ended September 30, 2023, an increase of $5.0 million or 4%. The key drivers related to the cost of revenue increase were a $2.9 million increase in engineering consulting costs and a $4.2 million increase in all other costs driven primarily by a $3.3 million increase in outside services and a $1.0 million increase in computer software and licenses. These cost increases were offset, in part, by a reduction of administrative allocations of $1.0 million and a decrease of employee compensation and benefits of $1.0 million.

Gross profit. Gross profit increased from $187.2 million for the nine months ended September 30, 2022 to $200.6 million for the nine months ended September 30, 2023, an increase of $13.4 million or 7%. Gross profit margin for the nine months ended September 30, 2022 was 62.2% compared to 62.8% for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the total cost of revenue increased by 4% compared to an increase in revenue of 6% for the nine months ended September 30, 2023. As a result, our gross profit margin improved by 60 basis points period over period.

Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses were 34% for both the nine months ended September 30, 2023 and 2022, respectively. In dollar terms, sales and marketing expenses increased from $103.8 million for the nine months ended September 30, 2022 to $107.4 million for the nine months ended September 30, 2023, an increase of $3.5 million or 3%. This increase was primarily due to an increase in employee compensation and benefits of $0.9 million, an increase in advertising, trade show expenses and marketing costs of $3.8 million, an increase in travel and entertainment costs of $0.6 million and an increase in contract labor of $0.3 million. These increases were offset, in part, by a decrease in administrative allocations and all other costs of $1.3 million and a decrease in recruitment costs of $0.8 million. We will continue to seek to accelerate our future revenue growth by investing in more resources.

The $0.9 million increase in sales and marketing expense attributable to employee compensation and benefits for the nine months ended September 30, 2023 was primarily due to an increase in commissions of $1.3 million and bonuses of $0.4 million offset by a decrease in salaries, wages, and benefits of $0.8 million.

General and administrative expenses. General and administrative expenses decreased from $57.3 million for the nine months ended September 30, 2022 to $55.5 million for the nine months ended September 30, 2023, a decline of $1.8 million or 3%. This was primarily due to a decrease in computer software and licenses of $1.8 million, a decrease of contract labor of $1.5 million, a decrease in rent and facilities costs of $0.8 million and a reduction of professional services fees of $0.3 million. These decreases were offset by lower administrative costs being allocated of $2.0 million, an increase in employee compensation and benefits of $0.3 million, and an increase of travel and entertainment expenses of $0.3 million.

Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries, consist of the following (in thousands):


	Nine Months Ended September 30,
	2023		2022		Change
Professional fees and other costs of litigation	$	5,475	$	12,837	$	(7,362)
Insurance costs and recoveries, net	—		(389)		389
Litigation costs and related recoveries, net	$	5,475	$	12,448	$	(6,973)

Professional fees and other costs associated with litigation decreased from $12.8 million for the nine months ended September 30, 2022 to $5.5 million for the nine months ended September 30, 2023, a decrease of $7.4 million. This decrease was primarily due to the timing of trial costs during the nine months ended September 30, 2022.

Insurance costs and related recoveries, net increased from a net benefit of $0.4 million for the nine months ended September 30, 2022 compared to no activity for the nine months ended September 30, 2023. We are self-insured for any costs related to any current or future intellectual property litigation. We currently believe our cash on hand, accounts receivable and contractually committed backlog provides us with sufficient liquidity to cover our ongoing attorneys’ fees and related costs, such as travel, hotels and consultants, associated with ongoing litigation, including Rimini II. However, please refer to the litigation matters as disclosed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for further information.

Interest expense. Interest expense increased from $3.0 million for the nine months ended September 30, 2022 to $4.1 million for the nine months ended September 30, 2023, an increase of $1.2 million. Interest expense increased primarily due to rising interest rates on our five-year Credit Facility. These rising interest rates were offset, in part, by a reduction of interest costs of $0.6 million related to payments associated with our interest rate swap, which was entered into on May 18, 2022.

Other income (expenses), net. Other income (expenses), net is primarily comprised of interest income, foreign exchange gains and losses, and other non-operating income and expenses. For the nine months ended September 30, 2023, net other income of approximately $1.8 million was comprised of gains from cash equivalents and investments of $2.8 million which were offset, in part, by foreign exchange losses of approximately $0.7 million and other costs of $0.3 million. For the nine months ended September 30, 2022, net other expenses of approximately $2.7 million was comprised primarily of foreign exchange losses of approximately $2.4 million.

Income tax expense. We had income tax expense of $5.2 million for the nine months ended September 30, 2022 compared to an income tax expense of $13.2 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2023, the primary reason for the increase in income tax expense was due to an increase of income before taxes of $21.9 million in the current year period compared to the prior year period as well as an increase in foreign withholding taxes.

Liquidity and Capital Resources

Overview

As of September 30, 2023, we had a working capital deficit of $56.7 million and an accumulated deficit of $211.6 million. For the three months ended September 30, 2023, we recorded net income of $6.8 million. As of September 30, 2023, we had available cash, cash equivalents and restricted cash of $108.7 million and short-term investments of $19.9 million.

Effective July 20, 2021, we received $89.3 million of net proceeds from our Credit Facility, which previously bore interest at LIBOR plus a margin ranging from 1.75% to 2.50%. On February 22, 2023, we amended our Credit Facility to implement certain changes in the reference rate from LIBOR to SOFR. As of February 28, 2023, we have a choice of interest rates between (a) Adjusted Term SOFR and (b) Base Rate, in each case plus an applicable margin. The applicable margin remains the same as the existing Credit Agreement and is based on our Consolidated Leverage Ratio (as defined in the Credit Agreement) and whether we elect an Adjusted Term SOFR (ranging from 1.75 to 2.50%) or a Base Rate (ranging from 0.75 to 1.50%). Annual minimum principal payments over the five-year term for the Credit Facility are 5%, 5%, 7.5%, 7.5%, and 10%, respectively, with the remaining balance due at the end of the term.

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

A key component of our business model requires that substantially all clients prepay us annually for the services we will provide over the following year or longer. As a result, we typically collect cash from our clients in advance of when the related service costs are incurred, which resulted in deferred revenue of $214.1 million that is included in current liabilities as of September 30, 2023. Therefore, we believe that working capital deficit is not as meaningful in evaluating our liquidity since the historical costs of fulfilling our commitments to provide services to clients are currently limited to approximately 37% of the related deferred revenue based on our gross profit percentage of 63% for the three months ended September 30, 2023.

For the next year, assuming that our operations are not significantly impacted by rising inflation, interest rate increases, other global economic or geopolitical uncertainties, or the litigation matters as disclosed in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report, we believe that cash, cash equivalents and restricted cash of $108.7 million as of September 30, 2023, plus future cash flows from operating activities will be sufficient to meet our anticipated cash needs including working capital requirements, planned capital expenditures and our contractual obligations. Our future capital requirements depend on many factors, including client growth, number of employees,

expansion of sales and marketing activities, and the introduction of new and enhanced services offerings. We may also enter into arrangements to acquire or invest in complementary businesses, services, technologies, or intellectual property rights in the future. We may choose to seek additional debt or equity financing to support these long-term capital requirements. Alternatively, we may also consider reducing amounts outstanding under our Credit Facility to minimize our exposure to rising interest rates. If interest rates continue to increase as expected and adverse economic changes occur, we may not be able to access credit on terms favorable to us, impacting our ability to support these long-term capital requirements. In an economic downturn, we may also be unable to raise capital through debt or equity financings on terms acceptable to us or at all. Covenants in our Credit Facility could also have consequences on our operations, including restricting or delaying our ability to obtain additional financing, potentially limiting our ability to adjust to rapidly changing market conditions or respond to business opportunities. Additionally, in challenging and uncertain economic environments, we cannot predict when macroeconomic uncertainty may arise, whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business and our liquidity requirements.

For the nine months ended September 30, 2023, we generated cash flows from our operating activities of approximately $13.6 million, which was derived from net income of $16.7 million as well as adjustments to reconcile net income to net cash of approximately $21.4 million and an unfavorable change in operating assets and liabilities of approximately $24.5 million. We believe that our operating cash flows for the year ending December 31, 2023 will be sufficient to fund the portion of our contractual obligations that is not funded with existing capital resources.

Cash Flows Summary

Presented below is a summary of our operating, investing and financing cash flows (in thousands):


	Nine Months Ended September 30,
	2023		2022
Net cash provided by (used in):
Operating activities	$	13,613	$	36,757
Investing activities	(4,158)		(14,292)
Financing activities	(5,120)		(12,412)

The effect of foreign currency translation was unfavorable by $5.1 million and $11.1 million for the nine months ended September 30, 2023 and 2022, respectively, due to unfavorable foreign exchange impacts related to foreign cash. For the nine months ended September 30, 2023, the unfavorable foreign currency impact was primarily related to our foreign cash held in Japan as the Japanese yen weakened significantly against the U.S. dollar during the nine months ended September 30, 2023. For the nine months ended September 30, 2022, we experienced a significant change in foreign currency exchange rates as the U.S. dollar strengthened against the majority of foreign currencies where our foreign entities operate. The strengthening of the U.S. dollar reduced the reported amount of our foreign-denominated cash and cash equivalents which are translated into U.S. dollars and reported in our Unaudited Condensed Consolidated Financial Statements for the nine months ended and as of September 30, 2022.

Cash Flows Provided by Operating Activities

As clients typically prepay us annually for the services which we will provide over the following year or longer, we typically collect cash in advance of the date when the vast majority of the related services are provided.

For the nine months ended September 30, 2023, cash flows provided by operating activities amounted to approximately $13.6 million. The key drivers resulting in our cash provided by operating activities for the nine months ended September 30, 2023, included net income of $16.7 million and adjustments to reconcile net income to net cash totaling $21.4 million, as well as unfavorable changes in operating assets and liabilities of $24.5 million, resulting in net cash provided by operating activities of $13.6 million.

For the nine months ended September 30, 2023, adjustments to reconcile net income to net cash consisted primarily of stock-based compensation expense of $9.1 million, amortization and accretion related to operating lease ROU assets of $3.3 million, depreciation and amortization expense of $2.0 million and accretion, amortization of debt discount and issuance costs of $0.7 million and deferred income taxes of $6.3 million. For the nine months ended September 30, 2023, the changes in operating assets and liabilities, net consisted of favorable changes to accounts receivable of $54.1 million and deferred contract costs of $0.7 million. The favorable change to accounts receivable was a result of collecting $314.2 million during the nine

months ended September 30, 2023 which was offset by billings, net of $257.9 million during the nine months ended September 30, 2023. As a result, our days sales outstanding for accounts receivable was 101 days as of September 30, 2023. The favorable change in deferred contract costs was due to capitalizing $13.6 million of commissions and amortizing $14.3 million of deferred contract costs during the nine months ended September 30, 2023.

Offsetting these favorable changes were unfavorable changes to accrued liabilities of $14.7 million, deferred revenue of $57.7 million, accounts payable of $2.6 million and prepaid expenses, deposits and other assets of $4.3 million. The unfavorable use of cash for accrued liabilities was due to payments of $2.5 million related to our reorganization plan, incremental professional fee payments of $5.1 million and incremental compensation related primarily to bonuses and commissions of $1.7 million during the current period. Regarding the use of cash for deferred revenue, it was due to recognizing $319.4 million in revenue for the current period, which was offset by recording billings, net of $257.9 million during the current period.

For the nine months ended September 30, 2022, cash flows provided by operating activities amounted to approximately $36.8 million. The key drivers resulting in our cash provided by operating activities for the nine months ended September 30, 2022 included net income of $2.8 million, as well as adjustments to reconcile net income to net cash totaling $15.7 million and favorable changes in operating assets and liabilities of $18.2 million. These items resulted in net cash provided by operating activities of $36.8 million.

For the nine months ended September 30, 2022, adjustments to reconcile net income to net cash consisted primarily of stock-based compensation expense of $8.7 million, amortization and accretion related to operating lease ROU assets of $4.1 million, depreciation and amortization expense of $1.9 million, accretion and amortization of debt discount and issuance costs of $0.7 million and deferred income taxes of $0.3 million. For the nine months ended September 30, 2022, the changes in operating assets and liabilities, net primarily consisted of favorable changes to accounts receivable of $75.1 million and accounts payable of $2.7 million. The favorable change to accounts receivable was a result of collecting $328.1 million during the nine months ended September 30, 2022 compared to billings, net of $249.0 million during the nine months ended September 30, 2022. As a result, our days sales outstanding for accounts receivable was 120 days as of September 30, 2022.

The favorable cash sources noted above were offset by unfavorable uses of cash related to deferred revenue of $46.9 million, prepaid expenses, deposits and other assets of $6.4 million, accrued liabilities of $3.8 million, and deferred contract costs of $2.4 million. The unfavorable use of cash related deferred revenue was because we recognized $301.0 million of revenue during the period, which was offset by recording billings, net of $249.0 million during the nine months ended September 30, 2022.

Cash Flows Used in Investing Activities

Cash used in investing activities was primarily driven by investment purchases and capital expenditures for leasehold improvements, software development costs, and computer equipment. Cash used in investing activities totaled $4.2 million and $14.3 million for the nine months ended September 30, 2023 and 2022, respectively.

For the nine months ended September 30, 2023, cash used in investing activities of $4.2 million consisted of investment purchases of $24.1 million and capital expenditures of $3.7 million, which were both offset by proceeds from sales of investments of $23.6 million. The capital expenditures consisted of $2.3 million primarily for capitalized software development costs, new computer equipment, and furniture and fixtures in our U.S. entity and $1.4 million for computer equipment at our foreign locations, primarily in Brazil of $0.3 million and in India of $0.9 million.

For the nine months ended September 30, 2022, cash used in investing activities of $14.3 million consisted of investment purchases of $11.1 million and capital expenditures of $3.1 million. The capital expenditures consisted of $2.1 million primarily for new computer equipment and capitalized development costs for a new payroll system in our U.S. facilities and $1.0 million for computer equipment at our foreign locations, primarily in India of $0.5 million and Brazil of $0.3 million.

Cash Flows from Financing Activities

For the nine months ended September 30, 2023, cash utilized in financing activities of $5.1 million was attributable to principal payments related to the Credit Facility of $3.9 million, payments to repurchase shares of Common Stock totaling $1.0 million and capital lease payments of $0.2 million. These cash uses were offset by proceeds of $0.1 million received from stock option exercises.

For the nine months ended September 30, 2022, cash utilized in financing activities of $12.4 million was attributable to principal payment related to the Credit Facility of $8.4 million, payments to repurchase shares of Common Stock totaling $4.7 million, and capital lease payments of $0.2 million. These cash uses were offset by proceeds of $1.0 million received from stock option exercises.

Foreign Subsidiaries

Our foreign subsidiaries and branches are dependent on our U.S.-based parent for continued funding. We currently do not intend to repatriate any amounts that have been invested overseas back to the U.S.-based parent. However, we may still be liable for withholding taxes, state taxes, or other income taxes that might be incurred upon the repatriation of foreign earnings. We have not made any provision for additional income taxes on undistributed earnings of our foreign subsidiaries. As of September 30, 2023, we had cash and cash equivalents of $41.6 million held by our foreign subsidiaries.

Critical Accounting Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions. We describe our significant accounting policies in Note 2 to our Consolidated Financial Statements for the year ended December 31, 2022, included in Part II, Item 8 of our 2022 Form 10-K, and we discuss our critical accounting policies and estimates in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included in Part II, Item 7 of our 2022 Form 10-K. Since the filing of our 2022 Form 10-K, there have been no material changes in our critical accounting policies and estimates from those disclosed therein.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by us as of the specified effective date. For additional information on recently issued accounting standards and our plans for adoption of those standards, please refer to the section titled Recent Accounting Pronouncements under Note 2 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report.

Recently Issued Accounting Standards

The Company believes that no recently issued accounting standards will have a material impact on its Unaudited Condensed Consolidated Financial Statements or apply to its operations.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. Dollar, primarily the Euro, British Pound Sterling, Brazilian Real, Australian Dollar, Indian Rupee and Japanese Yen. For each of the three months ended September 30, 2023 and 2022, we generated approximately 48% of our revenue from our international business, respectively. Increases in the relative value of the U.S. Dollar to other currencies may negatively affect our revenue, partially offset by a positive impact to operating expenses in other currencies as expressed in U.S. Dollars. We have experienced and will continue to experience fluctuations in our net income (loss) as a result of transaction gains or losses related to revaluing certain current asset and current liability balances, including intercompany receivables and payables, which are denominated in currencies other than the functional currency of the entities in which they are recorded. While we have not engaged in the hedging of our foreign currency transactions to date, we are evaluating the costs and benefits of initiating such a program and we may in the future hedge selected significant transactions denominated in currencies other than the U.S. Dollar.

As of September 30, 2023, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have impacted our income before income taxes by a plus or minus of $2.0 million in our Consolidated

Statements of Operations and Comprehensive Income and would have impacted the effect of foreign currency changes on cash by a plus or minus $4.2 million in our Consolidated Statement of Cash Flows.

Interest Rate Risk

Risk with Respect to Investments

We hold cash and cash equivalents for working capital purposes. We do not have material exposure to market risk with respect to investments, as any investments we enter into are primarily highly liquid investments.

Variable Rate Debt

In July 2021, we entered into the Credit Facility, which originally bore interest at LIBOR plus a margin. ranging from 1.75% to 2.50% and now bears interest at SOFR plus a margin ranging from 1.75% to 2.50% as a result of the amendment to our Credit Facility described above. Accordingly, we are exposed to market risk due to variable interest rates based on SOFR. As of September 30, 2023, we had $74.3 million outstanding debt under the Credit Facility. As of this date, a hypothetical adverse change of 100 basis points in SOFR would have resulted in an increase of approximately $0.7 million in annual interest expense. On May 18, 2022, we entered into an interest rate swap for a notional value of $40.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 as well as Note 5 and Note 11 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report for more information related to the Credit Facility.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures that are designed to reasonably ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and to reasonably ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) (“Disclosure Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls will be modified as systems change and conditions warrant.

In connection with the preparation of this Report, as of September 30, 2023, an evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed. This evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this evaluation, we concluded that our disclosure controls and procedures were effective to provide reasonable assurance that

information required to be disclosed in our SEC reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and to reasonably ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

The legal proceedings described in Note 8 to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Report are incorporated herein by reference. In addition, from time to time, we may be a party to litigation and subject to claims incident to the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of judgment, defense and settlement costs, diversion of management resources and other factors.

ITEM 1A. Risk Factors.

Factors that could cause our actual results to differ materially from those in this Report are any of the risks described in this Item 1A. Any of these factors could result in a significant or material adverse effect on our business, financial condition, results of operations and cash flows. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. In addition, risk factors relating to economic uncertainties and downturns in the general economy or the industries in which our clients operate should be interpreted as heightened risks in the current macroeconomic global environment.

Our business operations are subject to a number of risk factors that may adversely affect our business, financial condition, results of operations or cash flows. If any significant adverse developments resulting from these risk factors should occur, the trading price of our securities could decline, and moreover, investors in our securities could lose all or part of their investment in our securities.

You should refer to the explanation of the qualifications and limitations on forward-looking statements under the section titled “Cautionary Note About Forward-Looking Statements” set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Report. All forward-looking statements made by us are qualified by the risk factors described below.

The following is a summary of some of the principal risk factors which are more fully described below.

Risks Related to Our Business, Operations and Industry

•Since 2010, we and our Chief Executive Officer, Chairman of the Board and President have been involved in continuing litigation with Oracle. Adverse outcomes and future adverse outcomes in the litigation could result in the payment of substantial attorneys’ fees and/or costs and/or injunctions against certain of our business practices.

•The Oracle software products that are part of our ongoing Rimini I Injunction compliance and that are the subject of the Rimini II litigation with Oracle and the Rimini II Injunction represent a significant portion of our revenue.

•Our ongoing litigation with Oracle presents challenges for growing our business.

•Oracle has a history of litigation against companies offering alternative support programs for Oracle products.

•Economic uncertainties, changes in economic conditions, including rising inflation, or downturns in the general economy or the industries in which our clients operate could disproportionately affect the demand for our products and services and may have a material adverse effect on our business.

•The market for independent software support services is relatively undeveloped and may not grow.

•We face significant competition for all components of our Solutions Portfolio.

•We have had a history of losses and may not achieve or sustain revenue growth or profitability in the future.

•If our retention rates decrease or we fail to accurately predict retention rates, our future revenue and results of operations may be harmed.

•If we are unable to attract new clients or retain and sell additional products or services to existing clients, our revenue growth will be adversely affected.

•Because we recognize revenue from subscriptions over the term of the relevant contract, downturns or upturns in sales are not immediately reflected in full in our results of operations.

•The variability of timing in our sales cycle or our failure to accurately forecast revenue could affect our results of operations and liquidity

•Our future liquidity and results of operations may be adversely affected by the timing of new orders, the level of client renewals and cash receipts from clients.

•The loss of one or more key employees could harm our business.

•The failure to attract and retain additional qualified personnel, including sales personnel, or to expand our marketing and sales capacities could prevent us from executing our business strategy.

•Our past growth is not indicative of future growth, and, if we grow rapidly, we may not be able to manage our growth effectively.

•Our failure to generate significant capital or raise additional capital necessary to fund our operations and invest in new services and products could reduce our ability to compete and could harm our business.

•Our business may suffer if it is alleged or determined that our technology infringes others’ intellectual property rights.

•Interruptions to or degraded performance of our services, including as a result of interruptions or performance problems with technologies provided by third parties, could result in client dissatisfaction, damage to our reputation, loss of clients, limited growth and reduction in revenue.

•We may experience fluctuations in our results of operations due to the sales cycles for our products and services, which makes our future results difficult to predict and could cause our results of operations to fall below expectations or our guidance.

•Our reputation and/or business could be negatively impacted by ESG matters and/or our reporting of such matters.

•We may need to change our pricing to compete successfully.

•If we are not able to scale our business quickly and grow efficiently, our results of operations could be harmed.

•Our business will be susceptible to risks associated with global operations as our growth strategy involves further expansion of our sales to clients outside the United States.

•Consolidation in our target sales markets is continuing at a rapid pace, which could harm our business.

•If there is a widespread shift by clients or potential clients to enterprise software vendors, products and releases for which we do not provide software products or services, our business would be adversely impacted.

•Cybersecurity threats continue to increase in frequency and sophistication; if our data security measures are compromised or our services are perceived as not being secure, clients may curtail or cease their use of our services, our reputation may be harmed, and we may incur significant liabilities.

•We are subject to governmental and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.

Rimini Street, Inc. [RMNI] Filings
10-Q	[2023-11-01]
10-Q	[2023-08-02]
10-Q	[2023-05-03]
10-K	[2023-03-01]
10-Q	[2022-11-02]
10-Q	[2022-08-03]
10-Q	[2022-05-04]
10-K	[2022-03-02]
10-Q	[2021-11-03]
10-Q	[2021-08-04]
10-Q	[2021-05-10]
10-K	[2021-03-03]
10-Q	[2020-11-05]
10-Q	[2020-08-05]
10-Q	[2020-05-07]
10-K	[2020-03-16]
10-Q	[2019-11-07]
10-Q	[2019-08-08]
10-Q	[2019-05-09]
10-K	[2019-03-14]
10-Q	[2018-11-08]
10-Q	[2018-08-09]
10-Q	[2018-05-10]
10-K	[2018-03-15]
S-1	[2017-11-21]
10-Q	[2017-10-18]
10-Q	[2017-07-26]
10-Q	[2017-05-11]
10-Q	[2017-05-11]
10-K	[2017-03-16]
10-Q	[2016-11-15]
10-Q	[2016-08-15]
10-Q	[2016-05-16]
10-K	[2016-03-28]
10-Q	[2015-11-03]
10-Q	[2015-08-07]
10-Q	[2015-07-02]
S-1	[2015-04-17]