Rimini Street, Inc. annual report, FY2018

Rimini Street, Inc. — Fiscal 2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018, including fourth-quarter results. The filing was dated March 14, 2019. Rimini Street provides subscription-based independent enterprise software support, primarily for Oracle and SAP products. The 2017 business combination with GP Investments Acquisition Corp. was accounted for as a reverse recapitalization, with Rimini Street’s predecessor financial statements continuing for reporting purposes.

Business Context

Supported more than 1,800 active clients and approximately 1,050 unique clients globally at year-end, including 81 Fortune 500 companies and 20 Fortune Global 100 companies.
Employed approximately 1,080 professionals and generated approximately 65% of revenue in the United States and 35% internationally.
Subscription contracts generally provide annual or multi-year advance billings and revenue recognition over the service period.
Oracle-related product lines subject to litigation represented approximately 72% of 2018 revenue.

Financial Performance and Liquidity

Metric	2018	2017	Change
Revenue	$252.8 million	$212.6 million	+18.9%
Gross profit	$156.8 million	$129.7 million	+20.9%
Gross margin	62.0%	61.0%	+1.0 percentage point
Operating income	$25.4 million	$22.0 million	+15.4%
Net loss	$68.0 million	$53.3 million	Loss increased $14.7 million
Net loss attributable to common stockholders	$78.6 million	$53.3 million	Loss increased $25.3 million
Basic and diluted loss per share	$(1.28)	$(1.65)	Improved, but remained negative
Operating cash flow	$22.4 million	$29.2 million	Down $6.8 million

Fourth quarter: Revenue was $67.7 million versus $57.9 million in the fourth quarter of 2017, an increase of approximately 17%. Net income was $2.3 million, but net loss attributable to common stockholders was $3.6 million after preferred-stock dividends and accretion.

International revenue increased 30.5% to $89.6 million; U.S. revenue increased 13.3% to $163.2 million.
Annualized subscription revenue reached approximately $269 million, compared with $232 million at year-end 2017.
Revenue retention declined to 91% from 93% in 2017 and 94% in 2016.
Cash, cash equivalents and restricted cash totaled $25.2 million at December 31, 2018, including $24.8 million of cash and cash equivalents.
Deferred revenue was $180.4 million current and $28.9 million long-term, reflecting substantial customer prepayments.
Working capital was negative $125.6 million, largely because of deferred revenue.
Total liabilities were $270.5 million, and stockholders’ deficit was $265.6 million.

Material Changes Versus the Prior Comparable Period

Revenue growth slowed to 19% for the full year from 33% in 2017; fourth-quarter growth was approximately 17% versus 24% in the prior-year quarter.
Sales and marketing expense increased 39.6% to $93.2 million, or approximately 37% of revenue, following the relaxation and eventual elimination of former credit-facility spending restrictions.
Gross margin improved modestly because revenue grew faster than support costs, while operating income increased to $25.4 million.
Net loss worsened primarily because of $58.3 million of other debt-financing expenses, including approximately $47.9 million of debt-discount and related write-offs associated with repaying the former Credit Facility.
The former Credit Facility was repaid and terminated on July 19, 2018. The company used approximately $132.8 million of the proceeds from a $133.0 million private placement to complete the repayment.
Debt declined from $82.1 million at year-end 2017 to $2.4 million at year-end 2018, consisting primarily of a related-party GP Sponsor note due June 28, 2019.
Operating cash flow declined despite positive earnings before non-cash charges, partly because accounts receivable increased by $18.0 million and the deferred insurance settlement liability declined by $8.0 million.

Capital Structure, Outlook and Unusual Items

The July 2018 private placement issued 140,000 shares of Series A Preferred Stock and approximately 2.9 million common shares for $133.0 million of gross proceeds and approximately $128.4 million after transaction costs.
Series A Preferred Stock carries a 10% annual cash dividend and a 3% annual payment-in-kind dividend for the first five years. The company recorded $8.3 million of total preferred dividends in 2018.
Preferred stockholders may require redemption beginning July 19, 2023, and earlier redemption or conversion may be triggered by specified material adverse or litigation events. The company estimated approximately $14.4 million of 2019 cash dividends and $4.3 million of 2019 PIK dividends, assuming no conversion or redemption.
Management stated that cash, cash equivalents, restricted cash and expected operating cash flow should be sufficient for at least the next 12 months, including approximately $22.4 million of contractual obligations due during 2019.
Management does not expect near-term profitability. For 2019, it expected gross margin to decline to approximately 60%, sales and marketing expense to be 40% to 43% of revenue, and general and administrative expense to be 15% to 17% of revenue.
Management expected 2019 litigation costs of approximately $13 million to $15 million and additional labor costs of approximately 1% to 2% of revenue to comply with the Oracle injunction.
The company expected relatively lower revenue growth at least through 2019 because of prior sales and marketing restrictions, competitive discounting and the lag between sales investments and subscription revenue recognition.
After year-end, the Supreme Court ruled that Oracle must return approximately $12.8 million plus interest relating to non-taxable expenses. Rimini expected to recognize an estimated $8 million to $10 million net gain when collected, subject to sharing proceeds with an insurer.
On March 7, 2019, the company entered into an additional $6.5 million preferred-stock and common-stock private placement, with estimated net proceeds of approximately $5.5 million.

Risks, Contingencies and Other Matters

Oracle litigation: The renewed injunction remained in effect, and Rimini was appealing both the injunction and the $28.5 million attorneys’ fee award. Rimini II remained unresolved, with summary-judgment motions pending and no trial expected before 2021. The filing states that potential damages could not be estimated and no accrual was recorded.
Revenue concentration: Approximately 72% of 2018 revenue came from Oracle product lines involved in the Rimini II litigation and the Rimini I appeal.
Government inquiry: A federal grand jury subpoena received in March 2018 requested documents concerning support for certain software systems and related practices. The company was cooperating and could not predict the outcome.
Customer obligations: Agreements included potential liquidated damages of approximately $30.4 million if the company became unable to provide contracted services; no such costs had been incurred or accrued.
Liquidity and financing: Cash obligations include preferred-stock dividends, the GP Sponsor note, lease payments and potential redemption or conversion obligations under the preferred stock and related convertible notes.
Competition and retention: Enterprise software vendors may discount their support offerings, restrict access to support resources or promote migration to newer products. Revenue retention declined in 2018.
Accounting transition: Adoption of ASC 606 was expected to accelerate revenue recognition for certain contracts and result in capitalization of approximately $18.5 million of contract-acquisition costs as of January 1, 2017. The full impact was not yet finalized in the filing.
Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018. The company remained an emerging growth company and was not required to obtain an auditor attestation of internal controls.

Important Facts for Investors to Verify

Progress and ultimate outcome of the Rimini I and Rimini II Oracle proceedings, including the injunction, attorneys’ fees, potential damages and any effect on customer contracts.
Timing and amount of the approximately $12.8 million-plus-interest Oracle recovery and the portion payable to the insurer.
2019 revenue growth, renewal rates and whether increased sales and marketing spending produces sufficient new bookings.
Actual gross margin and operating expense ratios relative to management’s 2019 expectations.
Cash generation after preferred cash dividends, the June 2019 GP Sponsor note maturity and ongoing litigation costs.
Potential redemption, conversion or acceleration of the Series A Preferred Stock and related Convertible Notes.
Final ASC 606 adoption impact, including revenue timing, contract-asset treatment and capitalization and amortization of sales commissions.
Status and potential financial consequences of the federal grand jury inquiry and any related regulatory or legal proceedings.