# Rimini Street, Inc. (RMNI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Rimini Street, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1635282/000163528224000030/rmni-20231231.htm
Accession: 0001635282-24-000030
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RMNI/
All MD&A years: /company/RMNI/mda/
Previous year: /company/RMNI/mda/fy2022/ (FY 2022)
Next year: /company/RMNI/mda/fy2024/ (FY 2024)

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Rimini Street, Inc. was formed in the State of Nevada in 2005 (“RSI” or “predecessor”) and, through a merger in 2017 with a public company, became Rimini Street, Inc., a Delaware corporation (referred to as the “Company”, “we” and “us”), trading on the Nasdaq Global Market under the ticker symbol “RMNI”. References to “management” or “management team” refer to the officers of the Company.

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A discussion regarding our financial condition and results of operations for fiscal 2023 compared to fiscal 2022 is presented below. A discussion regarding our financial condition and results of operations for fiscal 2022 compared to fiscal 2021 that are not in this Report can be found under Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on the Form 10-K for the fiscal year ended December 31, 2022, which was filed with the SEC on March 1, 2023, and is available on the SEC’s website at sec.gov.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes to those statements included in Item 8 of this Report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” in Item 1A and elsewhere in this Report. See also “Cautionary Note Regarding Forward-Looking Statements” contained in this Report.

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 on the basis of 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 consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.

Overview

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.

We founded Rimini Street to disrupt and redefine the enterprise software support market by developing and delivering innovative new solutions that filled a then-unmet need in the enterprise software market. We became and remain the leading independent software support provider for Oracle and SAP products based on both the number of active clients supported and recognition by industry analyst firms.

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 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 a significantly expanded addressable market opportunity, we designed, developed and are now delivering a new, expanded 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 in a unique end-to-end, “turnkey” outsourcing option for Oracle and SAP landscapes that optimizes our clients’ existing technologies with a minimum of 15 extended years of operating lifespan and enables our clients to focus their IT talent and budget on higher-value, innovative projects that will support competitive advantage and growth.  

As of December 31, 2023, we employed over 2,120 professionals and supported over 3,030 active clients globally, including approximately 73 Fortune 500 companies and 20 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 support, products or services. For example, we count as two separate active client instances in circumstances where we provide support for two different products to the same entity. We market and sell our services globally, primarily through our direct sales force, and have wholly-owned subsidiaries in Australia, Brazil, Canada, UAE (Dubai), France, Germany, Hong Kong, India, Israel, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Poland, Singapore, Sweden, Taiwan, the United Kingdom and the United States. We believe our primary competitors for our support services are the enterprise software vendors whose products we service and support, including IBM, Microsoft, Oracle and SAP. We believe our primary competitors for our other solutions include systems integrators, security, interoperability and observability vendors; and IT consulting firms.

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Our subscription-based revenue provides a strong foundation for, and visibility into, future period results. We generated revenue of $431.5 million, $409.7 million and $374.4 million for the years ended December 31, 2023, 2022 and 2021, respectively, representing a year-over-year increase of 5% and 9% for 2023 and 2022, respectively. We have a history of losses, and as of December 31, 2023, we had an accumulated deficit of $202.2 million. We recorded net income of $26.1 million, net loss of $2.5 million and net income of $75.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. We generated approximately 51% of our revenue in the United States and approximately 49% of our revenue from our international business for the year ended December 31, 2023.

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

We intend to continue investing for long-term revenue growth and profitability. We have invested and expect to continue investing in expanding our ability 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 enterprise software support, products, and services to address current and evolving client needs.

Recent Developments

Reference is made to Note 10 to our consolidated financial statements included in Part II, Item 8 of this Report for a discussion of developments in our litigation with Oracle.

Additionally, reference is made to Note 5 to our consolidated financial statements included in Part II, Item 8 of this Report for a discussion of developments related to our credit facility dated July 20, 2021, as amended (as amended, the “Credit Facility”).

Our Business Model

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; failure and downtime; security exposure; integrating and monitoring; and maintaining the tax, legal and regulatory compliance of these software systems, have increased in both actual spend and as a percentage of the 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 December 31, 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 we believe 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 we believe 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 be asked to pay 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

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for the fees charged. For more details about our Solutions Portfolio, please see Item 1 “Business” included in Part I of this Report.

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 December 31, 2023, 2022 and 2021, we had approximately 3,030, 3,020 and 2,840 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 support, 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 December 31, 2023, 2022 and 2021, we had over 1,530, 1,510 and 1,470 unique clients, respectively.

The increase in both our active and unique client counts has been a combination of new unique client wins as well as cross-sales of new support, products and services to existing clients. 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 subscription revenue

We recognize subscription revenue on a daily basis. We define annualized subscription 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 subscription revenue was approximately $432 million, $420 million and $393 million as of December 31, 2023, 2022 and 2021, respectively.

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-cancelable 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 subscription revenue as of the day prior to the start of the 12-month period. Our revenue retention rate was 90% for the year ended December 31, 2023 and 92% for each of the years ended December 31, 2022 and 2021, respectively. The decline in our retention rate for the year ended December 31, 2023 was due to attrition during the fourth quarter, as certain clients did not renew specific subscriptions; however, in some cases maintained or added subscriptions for other products and services. Our net billings during the fourth quarter of 2023 were flat to the comparable period of 2022 because we were able to increase new client invoicing to offset the loss of some larger contracts.

Gross margin

We derive revenue through the sale 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 margin is the ratio of gross profit divided by revenue. Our gross margin was approximately 62.3%, 62.8% and 63.6% for the years ended December 31, 2023, 2022 and 2021, respectively. We believe the gross margin provides an indication of how efficiently and effectively we are operating our business and serving our clients.

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Factors Affecting Our Operating Performance

Litigation

The information from Item 3, Legal Proceedings and Item 1A, “Risk Factors-—Risks Related to Litigation—“We and our Chief Executive Officer and President are involved in litigation with Oracle. An adverse outcome in the ongoing litigation could result in the payment of substantial damages and/or an injunction against certain of our business practices, either of which could have a material adverse effect on our business and financial results,” is incorporated by reference herein. For claims on which Oracle has prevailed or may prevail, we have been and could be required to pay substantial damages or reimbursement of legal expenses incurred in connection with the proceedings or for our current or past business activities or be enjoined from certain business practices. Any of these outcomes could result in a material adverse effect on our business.

Adoption of enterprise software products and services

We believe the existing market for independent enterprise software support services is underserved. We are a global provider of enterprise software products and services, the leading third-party support provider for Oracle and SAP software products, and a Salesforce partner. We also believe the existing market for our other enterprise software products and services is underserved, and that we have unique products and services that can meet client needs in the marketplace. For example, we provide security, interoperability and compatibility products and services with the Rimini Protect and Rimini Connect solutions.

We also believe that our total addressable market for our enterprise software products and services is substantially larger than our current client base and the products and services we currently offer. As a result, we believe we have the opportunity to expand our global client base and to further increase adoption of our software products and services within and across existing clients. However, as the market for independent enterprise software support services as well as our other software products and services is still emerging, it is difficult for us to predict the timing of when and if widespread acceptance will occur.

Sales cycle

We sell our services to our clients primarily through our direct sales organization. Our sales cycle, depending on the product or service, typically ranges from six months to a year from when a prospective client is engaged. While we believe that there is a significant market opportunity for our enterprise software support, products and services, we often must educate prospective clients about the value of our products and services, which can result in lengthy and multiple sales cycles, particularly for larger prospective clients, as well as the incurrence of significant marketing expenses. Our typical sales cycle with a prospective client begins with the generation of a sales lead through trade shows, industry events, online marketing, media interviews and articles, inbound calls, outbound calls or client, analyst or other referral. The sales lead is followed by an assessment of the prospect’s current software license contract terms where relevant, systems environment, products and releases being used, needs and objectives.

The variability in our sales cycle for software support services is impacted by whether software vendors or other current software support providers are able to convince potential clients that they should renew their software support contract with the existing vendor or procure or renew supplemental support services from the existing vendor, respectively. Another driver of our sales cycle variability is any announcement by a software vendor of their discontinuation, reduction or limitation of support services for a particular software product or release for which we continue to offer a competing support service. In addition, our sales cycle variability for software support is impacted by vendor discounts provided by software vendors to retain existing clients or attract potential clients. Finally, our litigation with Oracle around our support service offerings can also drive sales cycle variability as clients oftentimes perform their own legal due diligence, which can lengthen the sales cycle.

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 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 inflationary pressures, have negatively impacted the global economy, causing the U.S. Federal Reserve to raise interest rates in 2022. 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 the economic

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disruptions described above had a significant net impact on our revenue or results of operations during the year ended December 31, 2023.

The extent to which rising inflation, interest rate increases and continuing global economic and geopolitical uncertainty 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 and geopolitical uncertainty. 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 I, Item 1A of this Report) for a discussion of these factors and other risks.

Key Components of Consolidated Statements of Operations

Revenue. We currently derive nearly all of our revenue from subscription-based contracts for software services. Revenue from these contracts is recognized ratably on a straight-line basis over the applicable service period.

Cost of revenue. Cost of revenue includes salaries, benefits and stock-based compensation expenses associated with our technical support and service delivery organizations, as well as allocated overhead and non-personnel expenses such as outside services, professional fees and travel-related expenses. Allocated overhead includes overhead costs for depreciation of equipment, facilities (consisting of leasehold improvements and rent) and technical operations (including costs for compensation of our personnel and costs associated with our infrastructure). We recognize expenses related to our technical support and service delivery organizations as they are incurred. All other costs include royalties paid for the use of products or services resold or licensed to clients, which were provided by other vendors.

Sales and marketing expenses. Sales and marketing expenses consist primarily of personnel costs for our sales, marketing and business development employees and executives, amortization expense associated with capitalized sales commissions, sales commissions that do not qualify for capitalization, travel related expenses, outside services and allocated overhead. Sales commissions are costs of obtaining customer contracts and are capitalized and then amortized over a period of benefit that we have determined to be 4 years.

General and administrative expenses. General and administrative expenses consist primarily of personnel costs for our administrative, legal, human resources, finance and accounting employees and executives. These expenses also include non-employee expenses, such as travel-related expenses, outside services, legal, auditing and other professional fees, and general corporate expenses, along with an allocation of our general overhead expenses.

Impairment charges related to operating lease right-of-use assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists for other long-lived assets if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. An impairment charge is recognized for the amount by which the carrying amount of the asset, or asset group, exceeds its fair value.

Reorganization costs. These costs consist primarily of severance costs associated with our reorganization plan that occurred in 2022.

Litigation costs and related recoveries, net. Litigation costs consist of legal settlements, pre-judgment interest, and third-party professional fees to defend against litigation claims. In the past, we have had liability insurance policies where a portion of our defense costs and litigation judgments or settlements have been reimbursed under the terms of the policies. Such insurance recoveries were reflected as a reduction of litigation costs upon notification of approval for reimbursement by the insurance company.

Interest expense. Interest expense is incurred under our Credit Facility and other debt obligations. The components of interest expense include the amount of interest payable in cash at the stated interest rate, interest that is payable in kind through additional borrowings, make-whole applicable premium, and accretion of debt discounts and issuance costs (“DDIC”) using the effective interest method. Interest expense also includes payments incurred or received as a result of the interest rate swap agreement.

Other income (expenses), net. Other income (expenses), net consists primarily of gains or losses on foreign currency transactions and interest income.

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Income taxes. The provision for income taxes is based on the amount of our taxable income and enacted federal, state and foreign tax rates, as adjusted for allowable credits and deductions. Our provision for income taxes consists primarily of foreign taxes for the periods presented, as our taxable income for U.S. federal and state purposes is offset by net operating losses. In assessing the realizability of deferred tax assets, we considered whether it is more likely than not that some portion or all of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We considered the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In prior years, the domestic net deferred tax assets had been fully offset by a valuation allowance because of our lack of domestic earnings history.

Results of Operations

Comparison of Years ended December 31, 2023 and 2022

Our consolidated statements of operations for the years ended December 31, 2023 and 2022 are presented below (in thousands): 

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(1)Includes the portion of costs for information technology, security services and facilities costs that are allocated to cost of revenue. In our consolidated financial statements, such costs are 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 $409.7 million for the year ended December 31, 2022 to $431.5 million for the year ended December 31, 2023, an increase of $21.8 million or 5%. In part, this increase was driven by a 2% increase in the average number of unique clients and a 3% increase in the average revenue per unique client. On a regional basis, United States revenue grew from $215.4 million for fiscal 2022 to $220.0 million for fiscal 2023, an increase of $4.6 million or 2%, while international revenue grew from $194.3 million for fiscal 2022 to $211.5 million for fiscal 2023, an increase of $17.2 million or 9%.

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Cost of revenue. Total cost of revenue increased from $152.4 million for the year ended December 31, 2022 to $162.5 million for the year ended December 31, 2023, an increase of $10.1 million or 7%. This increase was primarily due to additional client support required which resulted in an increase in employee compensation and benefits of $1.4 million, an increase in engineering consulting costs of $3.4 million and an increase in all other costs of $6.2 million, driven primarily by a $4.8 million increase in outside services and $1.3 million increase in computer software licenses. These unfavorable variances were offset by a decrease in allocated costs of $0.9 million.

The $1.4 million increase in cost of revenue attributable to employee compensation and benefits for the year ended December 31, 2023, was primarily due to an increase in salaries, wages and benefit costs due to a 16% increase in the average number of employees devoted to cost of revenue functions and annual pay increases.

As discussed in Note 10 to our consolidated financial statements included in Item 8 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 $257.3 million for the year ended December 31, 2022 to $269.0 million for the year ended December 31, 2023, an increase of $11.7 million or 5%. Gross margin for the year ended December 31, 2022 was 62.8% compared to 62.3% for the year ended December 31, 2023. Our revenue for the year ended December 31, 2023 increased by $21.8 million or 5% compared to the year ended December 31, 2022. Total cost of revenue for the year ended December 31, 2023 increased by $10.1 million, or 7%, compared to the year ended December 31, 2022. Given that the increase in the cost of revenue was 7% compared to an increase in revenue of 5%, it resulted in a decline of 50 basis points in our gross margin for the year ended December 31, 2023 compared to the year ended December 31, 2022. The lower gross margin for the year ended December 31, 2023 was primarily due to accelerating employee compensation and benefits, engineering consulting costs and all other costs more rapidly than our revenue growth.

Sales and marketing expenses. As a percentage of our revenue, sales and marketing expenses have decreased from 35% for the year ended December 31, 2022 to 33% for the year ended December 31, 2023. In dollar terms, sales and marketing expenses declined slightly from $143.0 million for the year ended December 31, 2022 to $142.3 million for the year ended December 31, 2023, a decline of $0.7 million or 0.5%. This decrease was primarily due to (i) a $2.0 million decline in travel and entertainment costs, (ii) a $1.1 million decrease in recruitment costs, (iii) a $1.2 million reduction in administrative allocated costs, and (iv) a reduction of $0.4 million of other costs. These declines were offset by (v) a $0.6 million increase in employee compensation and benefits as a result of a 1% increase in average headcount, (vi) an increase in trade show costs of $2.5 million and (vii) an increase of advertising, marketing and promotional costs of $0.9 million.

The $0.6 million increase in sales and marketing expense attributable to employee compensation and benefits for the year ended December 31, 2023 was primarily due to an increase in bonus payouts and commissions of $2.2 million due to new customer wins, which was offset by a reduction salaries, wages and benefit costs of $1.6 million.

General and administrative. General and administrative expenses decreased from $75.4 million for the year ended December 31, 2022 to $73.0 million for the year ended December 31, 2023, a decrease of $2.3 million or 3%. This decrease was primarily due to (i) a reduction of computer software costs of $1.9 million, (ii) a decline of contract labor costs of $1.6 million, (iii) a decrease in rent and facility costs of $1.3 million, (iv) a decline in travel and entertainment costs of $0.4 million and (v) a net decrease in sales and other taxes of $0.2 million. These favorable variances were offset, in part, by (v) increases in compensation and benefit costs of $0.2 million, (vi) an increase in professional fees of $0.8 million and (vii) an increase in our administrative allocations and all other costs of $2.1 million.

The $0.2 million increase in general and administrative expenses attributable to employee compensation and benefits for the year ended December 31, 2023, was primarily due to an increase in stock-based compensation expense of $2.0 million, offset by a reduction in salaries, wages and benefit costs of $1.8 million, which was primarily a result of reorganization activity that occurred during the year ended December 31, 2022.

We expect to continue to incur higher expenses associated with supporting the growth of our business, both in terms of size and geographical diversity, and to meet the increased compliance requirements associated with being a public company. Public company costs that are expected to increase in the future include additional information systems costs, costs for additional personnel in our accounting, human resources, IT and legal functions, SEC and Nasdaq fees, and incremental

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professional, legal, audit and insurance costs. As a result, we currently expect our general and administrative expenses to increase in dollar terms in future periods.

Impairment charges related to operating lease right-of-use assets. We recognized an impairment charge of $3.0 million for the year ended December 31, 2022, related to our office leases as we ceased to use portions of our office space due to increased use of remote work. In addition, we revised our estimates for sublease rent due to real estate market conditions. There was no such impairment charge for the year ended December 31, 2023.

Reorganization costs. We recognized reorganization costs of $2.5 million for the year ended December 31, 2022 compared to $0.1 million for the year ended December 31, 2023. The costs consist primarily of severance costs associated with our 2022 reorganization plan.

Litigation costs and related recoveries, net. For the years ended December 31, 2023 and 2022, litigation costs and related recoveries, net consist of the following (in thousands):

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[[/GREPCENT_TABLE]]

Litigation settlement expense of $2.7 million was recognized for the year ended December 31, 2023 as we reached an agreement with Oracle for $9.7 million for attorneys’ fees and costs in December 2023 relating to the Rimini I Injunction contempt proceedings. We had previously accrued $6.9 million as an estimate of attorney’s fees and costs during the year ended December 31, 2021, with no change to our estimate for the year ended December 31, 2022, resulting in incremental expense of $2.8 million for the year ended December 31, 2023. This expense was offset by a payment received from Oracle of $0.1 million relating to the reduced sanctions award for the Rimini I Injunction contempt proceedings.

Professional fees and other defense costs associated with litigation decreased from $25.7 million for the year ended December 31, 2022 to $7.0 million for the year ended December 31, 2023, a decrease of $18.6 million. This decrease was primarily due to costs associated with the Rimini II trial, which occurred from November 2022 to December 2022.

Insurance costs and related recoveries, net changed from a net benefit of $0.4 million for the year ended December 31, 2022 to no activity for the year ended December 31, 2023. These balances represent insurance proceeds received relating to our litigation costs incurred as part of the injunction proceedings. We are self-insured for any costs related to any current or future intellectual property litigation. We currently believe our cash on hand, accounts receivable and contractually committed backlog provides us with sufficient liquidity to cover costs related to our litigation, including Rimini II. However, please refer to the litigation matters as disclosed in Note 10 included in Part II, Item 8 of this Report for further information.

Interest expense. Interest expense increased from $4.3 million for the year ended December 31, 2022 to $5.5 million for the year ended December 31, 2023, an increase of $1.3 million. Interest expense increased primarily due to rising interest rates on our five-year Credit Facility, which increased from a LIBOR interest rate of 4.07% as of December 31, 2022 to a SOFR interest rate of 5.35% as of December 31, 2023. These rising interest rates were offset, in part, by a reduction of interest costs of $0.8 million during the year ended December 31, 2023, related to the net payment activity associated with our interest rate swap, which was entered into on May 18, 2022.

Other income (expenses), net. For the year ended December 31, 2022, we had other expenses, net of $13 thousand as compared to other income, net of $3.0 million for the year ended December 31, 2023, an increase of $3.0 million. For the year ended December 31, 2022, we experienced a significant change in foreign currency exchange rates as the U.S. Dollar initially strengthened against the majority of foreign currencies where our foreign entities operate and then weakened during the fourth quarter of 2022. As a result, we ended up experiencing a small gain of $12 thousand for the year ended December 31, 2022. The foreign exchange gain was offset by other non-operating expenses of $25 thousand for the year ended December 31, 2022. For the year ended December 31, 2023, net other income of approximately $3.0 million was comprised of gains from cash equivalents and investments of $3.7 million which were offset, in part, by foreign exchange losses of approximately $0.3 million and other costs of $0.4 million. Gains from cash and investments increased $3.5 million over the prior year because we began investing more funds in higher interest-bearing cash and investment accounts, coupled with rising interest rates.

Income taxes. Income taxes increased from $6.3 million for the year ended December 31, 2022 to $15.2 million for the year ended December 31, 2023, an increase of $8.9 million or 141%. This was primarily due to an increase of income

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before taxes of $37.4 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 December 31, 2023, we had a working capital deficit of $47.7 million and we had an accumulated deficit of $202.2 million. We recorded net income of $26.1 million for the year ended December 31, 2023 and a net loss of $2.5 million for the year ended December 31, 2022, respectively.

Credit Facility

On February 22, 2023, the Company amended its Credit Facility. The Credit Facility originally bore interest at the London Interbank Offered Rate (“LIBOR”), plus a margin ranging from 1.75% to 2.50%. The amendment implemented certain changes in the reference rate from LIBOR to the Secured Overnight Financing Rate (“SOFR”). As of February 28, 2023, the Company has 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 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%). As of December 31, 2023, the interest rate on the Credit Facility was 7.21%.

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 the Consolidated EBITDA.

Effective July 20, 2021, we received $89.3 million of net proceeds pursuant to the Credit Facility. The borrowings under the Credit Facility were discounted at 0.375%. As part of the transaction, we incurred issuance costs of $4.2 million, which were capitalized and will be amortized over the term of the Credit Facility.

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 of $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. For the year ended December 31, 2023, the Company made principal payments of $5.6 million.

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 Agreement are guaranteed by certain of our 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.

Please refer to Notes 5, 7 and 8 to the consolidated financial statements included in Part II, Item 8 of this Report for information regarding our Credit Facility.

A key component of our business model generally requires that customers prepay us annually for the services we will provide over the following year or longer. As a result, we collect cash from our customers in advance of when the related service costs are incurred, which resulted in deferred revenue of $263.1 million that is included in current liabilities as of December 31, 2023. Therefore, we believe that working capital deficit is not as meaningful in evaluating our liquidity since the costs of fulfilling our commitments to provide services to customers are currently limited to approximately 38% of the related deferred revenue based on our gross margin of 62% for the year ended December 31, 2023.

For the next 12 months, 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 described in Note 10 to the consolidated financial statements included in Part II, Item 8 of this Report, we believe that cash, cash equivalents, and restricted cash of $115.9 million as of December 31, 2023, plus future cash flow from operating activities will be sufficient to meet our anticipated cash needs including working capital requirements, planned capital expenditures, and our contractual obligations of approximately $21.7 million that are due during the 12 months ending December 31, 2024.

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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.

As discussed below in greater detail, for the year ended December 31, 2023, we generated cash flows from our operating activities of $12.5 million. We believe 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 for the years ended December 31, 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2022","","Change"],["Net cash provided by (used in):"],["Operating activities","$","12,467","","","$","34,898","","","$","(22,431)"],["Investing activities","3,077","","","(24,445)","","","27,522"],["Financing activities","(6,892)","","","(13,568)","","","6,676"]]
[[/GREPCENT_TABLE]]

The effect of foreign currency translation was unfavorable by $2.2 million and $7.4 million for the years ended December 31, 2023 and 2022, respectively, due to unfavorable foreign exchange impacts related to foreign cash. For the year ended December 31, 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. For the year ended December 31, 2022, we experienced significant changes in foreign currency exchange rates as the U.S. dollar strengthened against the majority of foreign currencies where we operate until the fourth quarter of 2022 when the U.S. dollar began to weaken against some of our foreign currencies.

Cash Flows Provided by Operating Activities

A key component of our business model generally requires that customers prepay us annually for the services we will provide over the following year or longer. As a result, we collect cash in advance of the date when the vast majority of the related services are provided. For the years ended December 31, 2023 and 2022, cash flows provided by operating activities amounted to $12.5 million and $34.9 million, respectively.

For the year ended December 31, 2023, cash flows provided by operating activities amounted to $12.5 million. We recognized net income of $26.1 million, non-cash expenses, net amounted to $27.5 million, and unfavorable changes in operating assets and liabilities, net were $41.1 million for the year ended December 31, 2023. For the year ended December 31, 2023, the non-cash expenses, net of $27.5 million were comprised of the following: stock-based compensation expense of $12.5 million, amortization and accretion related to ROU assets and liabilities of $4.5 million, depreciation and amortization expense of $2.8 million, accretion and amortization of debt discount and issuance costs of $1.0 million, and deferred tax provision expense of $6.6 million.

For the year ended December 31, 2023, changes in operating assets and liabilities were unfavorable by $41.1 million to the operating cash flows due to several items. The first item was an unfavorable change of $3.0 million for accounts receivable as we collected $421.0 million of accounts receivable during the year ended December 31, 2023 compared to billings, net of $418.5 million, for the year ended December 31, 2023. As a result, our days sales outstanding for accounts receivable was 71 days as of December 31, 2023. In addition, our deferred revenue had an unfavorable impact on our operating cash flows of $11.4 million, primarily due to recognizing revenue of $431.5 million offset by recording billings, net of $418.5 million for the year ended December 31, 2023. Also, accounts payable had an unfavorable operating cash flow impact of $2.0 million during

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the year ended December 31, 2023. Accrued compensation, benefits, commissions and other liabilities were also unfavorable to our operating cash flows for $17.8 million during the year ended December 31, 2023. This was primarily due to payments of $9.7 million for the Rimini I Injunction attorneys’ fees and costs settlement, of which we had accrued $6.9 million, $2.5 million related to our 2022 reorganization plan, and incremental professional fee payments of $5.6 million. Prepaid expenses, deposits and other assets changed unfavorably by $6.2 million and deferred contract costs of $0.8 million for the year ended December 31, 2023. The change in prepaid expenses, deposits and other assets of $6.2 million was primarily due to payments made for future sales and marketing activities, software, and insurance. The unfavorable change in deferred contract costs of $0.8 million was due to capitalizing $20.1 million of commission costs and amortizing $19.4 million of these costs during the year ended December 31, 2023.

For the year ended December 31, 2022, cash flows provided by operating activities amounted to $34.9 million. We recognized a net loss of $2.5 million, non-cash expenses, net amounted to $20.9 million, and favorable changes in operating assets and liabilities, net were $16.5 million for the year ended December 31, 2022. For the year ended December 31, 2022, the non-cash expenses, net of $20.9 million were comprised of the following: stock-based compensation expense of $10.9 million, amortization and accretion related to ROU assets and liabilities of $5.5 million, a non-cash impairment charge related to ROU assets of $3.0 million, depreciation and amortization expense of $2.5 million, and accretion and amortization of debt discount and issuance costs of $1.0 million. These expenses were offset by a benefit in our deferred tax provision of $2.1 million.

For the year ended December 31, 2022, changes in operating assets and liabilities were favorable by $16.5 million to the operating cash flows due to several items. The first item was a favorable change of $18.9 million for accounts receivable as we collected $434.5 million of accounts receivable during the year ended December 31, 2022 compared to billings, net of $409.3 million, for the year ended December 31, 2022. As a result, our days sales outstanding for accounts receivable was 72 days as of December 31, 2022. In addition, our deferred revenue had a favorable impact on our operating cash flows of $3.2 million, primarily due to changes in foreign exchange rates during the year as billings, net of $409.3 million and revenue of $409.7 million for the year ended December 31, 2022 offset each other. Also, accounts payable had a favorable operating cash flow impact of $2.4 million during the year ended December 31, 2022. This was a result of an increase in the number of our payment days by 22% over the prior year. Accrued compensation, benefits, commissions and other liabilities were also favorable to our operating cash flows for $2.8 million during the year ended December 31, 2022. This was due to having accrued for reorganization costs as of December 31, 2022. These favorable changes were offset by unfavorable changes in prepaid expenses, deposits and other assets of $6.6 million and deferred contract costs of $4.2 million for the year ended December 31, 2022. The change in prepaid expenses, deposits and other assets of $6.6 million was primarily due to making a long-term prepayment of $5.0 million in 2022. The unfavorable change in deferred costs was due to capitalizing $22.0 million of commission costs and amortizing $17.7 million of these costs during the year ended December 31, 2022.

Cash Flows Used in Investing Activities

Cash flows used in investing activities were primarily driven by investment purchases, investment sales and capital expenditures for software development costs, computer equipment and leasehold improvements as we continued to invest in our business infrastructure and geographic locations. Cash provided by investing activities totaled $3.1 million and cash used in investing activities was $24.4 million for the years ended December 31, 2023 and 2022, respectively.

For the year ended December 31, 2023, cash provided by investing activities of $3.1 million consisted of proceeds from sales of investments of $40.8 million, offset by investment purchases of $30.5 million and capital expenditures of $7.2 million. The capital expenditures of $7.2 million consisted primarily of $3.6 million for capitalized software development costs, new computer equipment, and furniture and fixtures in our U.S. entity, and $3.6 million for computer equipment at our foreign locations, primarily in India of $1.9 million, Brazil of $0.7 million, and Japan of $0.7 million.

For the year ended December 31, 2022, cash used in investing activities of $24.4 million consisted of investment purchases of $31.2 million, offset in part by investment sales of $11.1 million as we began to invest funds in September 2022, as well as capital expenditures of $4.3 million. The capital expenditures consisted of new computer equipment and capitalized development costs for new payroll and client portal systems in our U.S. entity.

Cash Flows from Financing Activities

For the year ended December 31, 2023, cash utilized in financing activities of $6.9 million was attributable to principal payments related to the Credit Facility of $5.6 million, payments to repurchase shares of Common Stock totaling $1.0 million and finance lease payments of $0.3 million. These cash uses were offset by proceeds of $0.1 million received from stock option exercises.

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For the year ended December 31, 2022, cash utilized in financing activities of $13.6 million was attributable to principal payments related to the Credit Facility of $9.5 million, payments to repurchase shares of Common Stock totaling $4.7 million and finance lease payments of $0.3 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 company for continued funding. We currently do not intend to repatriate any amounts that have been invested overseas back to the U.S.-based parent. The imposition of the Transition Tax set forth in the U.S. Tax Cuts and Jobs Act of 2017 may reduce or eliminate U.S. federal deferred taxes on the unremitted earnings of our foreign subsidiaries. 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 December 31, 2023, we had cash and cash equivalents of $65.4 million in our foreign subsidiaries.

Contractual Obligations

The following table summarizes our contractual obligations on an undiscounted basis as of December 31, 2023 and the period in which each contractual obligation is due (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ending December 31:"],["","2024","","2025","","2026","","2027","","2028","","Thereafter","","Total"],["Credit Facility"],["Principal payments plus interest at 7.2%","$","11,895","","","$","12,501","","","$","60,279","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","84,675"],["Lease obligations:"],["Operating","5,155","","","3,671","","","2,946","","","566","","","368","","","\u2014","","","12,706"],["Financing","398","","","332","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","730"],["Purchase commitments and other","4,265","","","4,000","","","3,000","","","\u2014","","","\u2014","","","\u2014","","","11,265"],["Total","$","21,713","","","$","20,504","","","$","66,225","","","$","566","","","$","368","","","$","\u2014","","","$","109,376"]]
[[/GREPCENT_TABLE]]

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.

Critical Accounting Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

With respect to our significant accounting policies that are described in Note 2 to our consolidated financial statements included in Item 8 of this Report, we believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.   

Income Taxes and Valuation of Deferred Tax Assets

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We account for income taxes in accordance with ASC 740, “Income Taxes” (“ASC 740”). Significant judgment is required in determining income tax benefit or expense and in evaluating uncertainties under ASC 740. Deferred taxes are recorded for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are established when it is determined that it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company’s deferred tax assets are primarily the result of U.S. federal net operating loss carryforwards (“NOLs”) and tax credit carryforwards.

The realization of deferred tax assets is dependent upon on our ability to generate sufficient future taxable income during the periods in which those temporary differences become deductible, prior to the expiration of the tax attributes. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and forecasting future profitability.

We assessed the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize existing deferred tax assets within the applicable expiration period. While we believe that we have utilized a reasonable method to determine our deferred tax assets and the related release of our valuation allowance, should factors and conditions differ materially from those used by us, the actual realization of deferred tax assets could differ materially from the reported amounts.

Loss Contingencies

We are subject to various loss contingencies arising in the ordinary course of business. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. If some amount within a range of probable loss appears to be a better estimate than any other amount within the range, we accrue that amount. Alternatively, when no amount within a range of probable loss appears to be a better estimate than any other amount, we accrue the lowest amount in the range. If we determine that a loss is reasonably possible and the range of the loss is estimable, then we disclose the range of the possible loss if the upper end of the range is material. If we cannot estimate the range of loss, we will disclose the reason why it cannot estimate the range of loss, if there is a reasonable possibility that the amount of loss may be material. We regularly evaluate currently available information to determine whether an accrual is required, an accrual should be adjusted and if a range of possible loss should be disclosed.

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 Consolidated Financial Statements included in Item 8 of this Report.

Recently Issued Accounting Standards

In October 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” The guidance incorporates several disclosure and presentation requirements currently residing in SEC Regulations S-X and S-K. ASU 2023-06 is effective when the SEC removes the related requirements from Regulations S-X or S-K. Any amendment the SEC does not remove from Regulations S-X or S-K by June 30, 2027 will not become effective. The amendments will be applied prospectively and early adoption is not permitted. As we are currently subject to these SEC requirements, we do not expect ASU 2023-06 to have a material impact on our Consolidated Financial Statements and related disclosures.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting - Improvements to Reportable Segment Disclosures.” The guidance expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are assessing the impact of the adoption of this guidance on our Consolidated Financial Statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes - Improvements to Income Tax Disclosures.” The guidance requires disaggregating income tax disclosures relating to the effective tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, though early adoption is permitted. We are assessing the impact of the adoption of this guidance on our Consolidated Financial Statements and related disclosures.

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