Rimini Street, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Rimini Street is a global provider of subscription-based enterprise software support and management services, primarily for Oracle and SAP products, with additional Application Management Services and Salesforce offerings. The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The financial statements are unaudited and prepared under U.S. GAAP.
- Over 2,550 active clients and more than 1,500 employees as of March 31, 2021.
- Annualized recurring revenue was $349 million, versus $310 million in the prior-year period.
- Revenue retention rate was 91%, compared with 92% for the twelve months ended March 31, 2020.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $87.9 million | $78.0 million | Up 12.6% |
| Gross profit | $54.1 million | $47.8 million | Up 13.0% |
| Gross margin | 61.5% | 61.3% | Up 0.2 percentage points |
| Operating income | $1.9 million | $3.7 million | Down $1.8 million |
| Net income (loss) | $(3.6) million | $2.5 million | Declined $6.1 million |
| Net loss attributable to common stockholders | $(9.8) million | $(4.1) million | Loss increased |
| Basic and diluted loss per share | $(0.13) | $(0.06) | Loss increased |
| Cash flow from operations | $24.5 million | $26.3 million | Down $1.8 million |
- International revenue increased 32% to $40.3 million and represented approximately 46% of total revenue; U.S. revenue was essentially flat at $47.6 million.
- Sales and marketing expense increased 7% to $30.4 million, while general and administrative expense increased 38% to $16.6 million.
- Litigation costs, net of recoveries, increased to $4.8 million from $3.7 million.
- The company recognized a $4.7 million loss from the change in fair value of redeemable warrants, a $0.4 million operating lease impairment charge, and $2.2 million of stock-based compensation expense.
- Cash, cash equivalents and restricted cash totaled $153.5 million at March 31, 2021, compared with $87.9 million at December 31, 2020.
- Current liabilities exceeded current assets by $11.4 million, primarily because current deferred revenue was $219.5 million. Management considers the working-capital deficit less meaningful because customers generally prepay for services.
- The company reported no outstanding contractual debt obligations, but had operating lease liabilities of $18.8 million and significant Series A Preferred Stock and related redemption obligations.
- Deferred revenue totaled $250.0 million, including $219.5 million current and $30.5 million noncurrent.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by a 15% increase in average unique clients and strong international growth, particularly in Asia-Pacific.
- Gross margin improved modestly despite a 12% increase in cost of revenue, which reflected higher employee compensation and other operating costs.
- Profitability weakened because operating expenses grew faster than gross profit and because of the $4.7 million warrant fair-value loss. The company moved from net income to net loss.
- Operating cash flow declined despite a $33.2 million favorable change in accounts receivable, as deferred revenue and accrued liabilities were unfavorable period-over-period.
- The company completed a March 2021 public offering of approximately 7.8 million common shares at $7.75 per share, generating approximately $55.6 million of net proceeds.
- The company repurchased 10,000 Series A Preferred shares for approximately $9.0 million in January 2021 and announced a further redemption of 60,000 shares for $62.3 million, completed on April 16, 2021.
- The number of common shares outstanding increased to 85.1 million from 76.4 million at December 31, 2020, primarily because of the March offering.
Guidance, Outlook, Commentary, Risks and Unusual Items
- The filing does not provide clear quantitative revenue or earnings guidance. Management expects cash, cash equivalents, restricted cash and future operating cash flow to fund anticipated needs for at least twelve months, assuming COVID-19 does not significantly impair operations.
- Management stated that COVID-19 had no significant net impact on Q1 2021 revenue or results of operations. Remote work and reduced travel and event costs partly offset pandemic-related special bonuses and other investments, but future effects remain uncertain.
- Management expects continued investment in sales, marketing, geographic expansion, new services and public-company compliance, which may increase operating expenses.
- Oracle litigation remains a major contingency. The District Court found four narrow injunction violations on March 31, 2021 and scheduled a September 2021 evidentiary hearing. The company has not accrued a loss because damages are not reasonably estimable and management does not consider sanctions probable.
- In the separate Rimini II litigation, the court found infringement of 21 Oracle PeopleSoft copyrights in specified circumstances. No damages had been awarded as of March 31, 2021, and the company stated that a trial was not expected before the first half of 2022.
- Oracle-related products represented approximately 63% of Q1 2021 revenue, making litigation outcomes particularly material to the business.
- The company has maximum potential liquidated damages of approximately $13.9 million under certain client contracts, with no accrual because no such costs have been incurred.
- The company identified a material weakness in internal control over financial reporting related to the improper classification of GP Sponsor Private Placement Warrants as equity rather than as a liability. Prior-period financial information was revised, and the company is implementing a remediation plan.
- The Series A Preferred Stock carries cash dividends of 10% annually and PIK dividends of 3% annually during the initial period, with a 13% cash rate thereafter. It has conversion, redemption and liquidation preferences senior to common stock.
- Foreign currency exposure increased with the growth in international revenue; the company reported a $2.4 million foreign currency translation loss in other comprehensive income for Q1 2021 and does not currently hedge foreign currency transactions.
Most Important Facts for Investors to Verify
- Whether the September 2021 Oracle injunction and contempt proceedings result in sanctions, operational restrictions, client losses or mandatory preferred-stock redemption obligations.
- The status and potential damages exposure in Rimini II, including the effect on services representing approximately 63% of revenue.
- Progress in remediating the material weakness concerning warrant accounting and whether additional control deficiencies are identified.
- Post-April 16, 2021 cash balances and liquidity after the $62.3 million preferred-stock redemption and ongoing preferred dividends.
- Client additions, renewal trends and revenue retention, which declined to 91% from 92% year over year.
- Whether international growth can continue without materially increasing sales, support, foreign-exchange and compliance costs.
- The dilution and future obligations associated with approximately 14.6 million common shares issuable upon conversion of Series A Preferred Stock, approximately 18.1 million outstanding warrants, and additional PIK dividends.