Prospectus Filed Pursuant to Rule 424(b)(3) (424b3)

Date : 12/06/2017 @ 1:13PM
Source : Edgar (US Regulatory)
Stock : NO^RMNIU (RMNIU)
Quote : 10.16  0.0 (0.00%) @ 2:05AM
NO^RMNIU share price Chart

Prospectus Filed Pursuant to Rule 424(b)(3) (424b3)

 

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-221709

 

22,638,553 Shares

 

6,062,500 Warrants

 

 

 

This prospectus relates to shares of common stock, par value $0.0001 per share, of Rimini Street, Inc. and warrants to purchase common stock of Rimini Street, Inc. as described herein. The securities offered hereunder include (i) 4,510,629 outstanding shares of the Registrant’s common stock to be sold by selling stockholders named herein, (ii) 14,687,500 shares of the Registrant’s common stock issuable upon exercise of certain outstanding warrants at $11.50 per share (including the initial issuance of such shares upon the exercise of such warrants and the subsequent resale of 6,062,500 of such shares by the selling stockholders named herein), (iii) 3,440,424 shares of the Registrant’s common stock issuable upon exercise of certain outstanding warrants at $5.64 per share (including the initial issuance of such shares upon the exercise of such warrants and the subsequent resale of all such shares by the selling stockholders named herein) and (iv) 6,062,500 outstanding warrants to purchase shares of the Registrant’s common stock to be sold by the selling securityholders named herein.

 

We are registering the offer and sale of these securities to satisfy certain registration rights we have granted. We will not receive any of the proceeds from the sale of the securities by the selling securityholders. We will receive proceeds from warrants exercised in the event that such warrants are exercised for cash. We will pay the expenses associated with registering the sales by the selling securityholders, as described in more detail in the section titled “ Use of Proceeds .”

 

The selling securityholders may sell the securities described in this prospectus in a number of different ways and at varying prices. We provide more information about how the selling stockholders may sell their securities in the section titled “ Plan of Distribution .”

 

The selling securityholders may sell any, all or none of the securities and we do not know when or in what amount the selling securityholders may sell their securities hereunder following the effective date of this registration statement.

 

Our common stock is listed on the NASDAQ Capital Market (“NASDAQ”) under the symbol “RMNI” and our warrants are presently quoted on the OTC Pink Current Information Marketplace (“OTC Pink”) under the symbol “RMNIW”. On November 28, 2017, the last quoted sale price for our common stock as reported on NASDAQ was $7.00 per share and the last quoted sale price for our warrants as reported on OTC Pink was $0.52 per warrant.

 

We are an “emerging growth company,” as defined under the federal securities laws, and, as such, may elect to comply with certain reduced public company reporting requirements for future filings.

 

Investing in our securities involves a high degree of risk. Before buying any securities, you should carefully read the discussion of the risks of investing in our securities in “ Risk Factors ” beginning on page 5 of this prospectus.

 

You should rely only on the information contained in this prospectus or any prospectus supplement or amendment hereto. We have not authorized anyone to provide you with different information.

 

Neither the Securities Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is December 6, 2017.

 

 

 

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 5
Special Note Regarding Forward-Looking Statements 32
Background of Rimini Street 34
Use of Proceeds 36
Market Price of and Dividends on Securities and Related Stockholder Matters 37
Selected Historical Financial Data 38
Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
Business 73
Management 86
Executive Compensation 94
Certain Relationships, Related Party and Other Transactions 104
Principal and Selling Securityholders 110
Description of Securities 113
Plan of Distribution 120
Legal Matters 122
Experts 122
Where You Can Find Additional Information 123
Index To Financial Statements F-1

 

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us or on our behalf. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

The Rimini Street design logo and the Rimini Street mark appearing in this prospectus are the property of Rimini Street, Inc. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.

 

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PROSPECTUS SUMMARY

 

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

RIMINI STREET, INC.

 

Rimini Street, Inc. is a global provider of enterprise software support products and services, and the leading independent software support provider for Oracle and SAP products, based on both the number of active clients supported and recognition by industry analyst firms. We founded our company to disrupt and redefine the enterprise software support market by developing and delivering innovative new products and services that fill a then unmet need in the market. We believe we have achieved our leadership position in independent enterprise software support by recruiting and hiring experienced, skilled and proven staff; delivering outcomes-based, value-driven and award-winning enterprise software support products and services; seeking to provide an exceptional client-service, satisfaction and success experience; and continuously innovating our unique products and services by leveraging our proprietary knowledge, tools, technology and processes.

 

Enterprise software support products and services is one of the largest categories of overall global information technology (“IT”) spending. We believe core enterprise resource planning (“ERP”), customer relationship management (“CRM”), product lifecycle management (“PLM”) and technology software platforms have become increasingly important in the operation of mission-critical business processes over the last 30 years, and also that the costs associated with failure, downtime, security exposure and maintaining the tax, legal and regulatory compliance of these core software systems have also increased. As a result, we believe that licensees often view software support as a mandatory cost of doing business, resulting in recurring and highly profitable revenue streams for enterprise software vendors. For example, for fiscal year 2016, SAP reported that support revenue represented approximately 48% of its total revenue and Oracle reported a margin of 94% for software license updates and product support.

 

We believe that software vendor support is an increasingly costly model that has not evolved to offer licensees the responsiveness, quality, breadth of capabilities or value needed to meet the needs of licensees. Organizations are under increasing pressure to reduce their IT costs while also delivering improved business performance through the adoption and integration of emerging technologies, such as mobile, virtualization, internet of things (“IoT”) and cloud computing. Today, however, the majority of IT budget is spent operating and maintaining existing infrastructure and systems. As a result, we believe organizations are increasingly seeking ways to redirect budgets from maintenance to new technology investments that provide greater strategic value, and our software products and services help clients achieve these objectives by reducing the total cost of support.

 

As of September 30, 2017, we employed approximately 900 professionals and supported over 1,450 active clients globally, including 66 Fortune 500 companies and 19 Fortune Global 100 companies across a broad range of industries. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active client instances in circumstances where we provide support for two different products to the same entity. We market and sell our services globally, primarily through our direct sales force, and have wholly-owned subsidiaries in Australia, Brazil, France, Germany, Hong Kong, India, Israel, Japan, Korea, Sweden, Taiwan, the United Kingdom and the United States. We believe our primary competitors are the enterprise software vendors whose products we service and support, including IBM, Microsoft, Oracle and SAP.

 

We have experienced 47 consecutive quarters of revenue growth through September 30, 2017. In addition, our subscription-based revenue model provides a foundation for, and visibility into, future period results. We generated revenue of $85.3 million, $118.2 million and $160.2 million for the years ended December 31, 2014, 2015 and 2016, respectively, representing a year-over-year increase of 38% and 36% in 2015 and 2016, respectively, and $113.4 million and $154.7 million for the nine months ended September 30, 2016 and 2017, respectively, representing a period-over-period increase of 36%. We have a history of losses, and as of September 30, 2017, we had an accumulated deficit of $300.5 million. We had net losses of $127.8 million, $45.3 million and $12.9 million for the years ended December 31, 2014, 2015 and 2016, respectively, and $37.0 million and $49.4 million for the nine months ended September 30, 2016 and 2017, respectively. We generated approximately 68% of our net revenue in the United States and approximately 32% of our net revenue from our international business for the nine months ended September 30, 2017.

 

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CORPORATE INFORMATION

 

RSI was originally incorporated in the State of Nevada in September 2005. On October 10, 2017, GPIA, deregistered as an exempted company in the Cayman Islands and domesticated as a corporation incorporated under the laws of the State of Delaware upon the filing with and acceptance by the Secretary of State of Delaware of the certificate of domestication in accordance with Section 388 of the Delaware General Corporation Law (the “DGCL”). Also on October 10, 2017, Let’s Go merged with and into RSI, with RSI surviving the first merger, with the surviving corporation then merging with and into GPIA, with GPIA surviving the second merger. On the effective date of the Domestication, each issued and outstanding ordinary share, par value $0.0001 per share, of GPIA prior to the Domestication converted automatically by operation of law, on a one-for-one basis, into shares of our common stock, par value $0.0001 per share, after the Domestication in Delaware. Immediately after consummation of the second merger, GPIA was renamed “Rimini Street, Inc.”

 

Our principal executive offices are located at 3993 Howard Hughes Parkway, Suite 500, Las Vegas, NV 89169, and our telephone number is (702) 839-9671.

 

Our website address is www.riministreet.com. The information on, or that can be accessed through, our website is not part of this prospectus.

 

We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.07 billion in annual revenues; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and December 31, 2020 (the last day of the fiscal year ending after the fifth anniversary of our initial public offering).

 

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with certain other public companies difficult or impossible because of the potential differences in accounting standards used.

 

Unless expressly indicated or the context requires otherwise, the terms “Rimini,” “Rimini Street,” “RMNI,” the “Company,” the “Registrant,” “we,” “us” and “our” in this prospectus refer to the parent entity formerly named GP Investments Acquisition Corp., after giving effect to the business combination, and as renamed Rimini Street, Inc., and where appropriate, our wholly-owned subsidiaries.

 

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The Offering

 

Shares of Common Stock Offered Hereunder

An aggregate of 4,510,629 outstanding shares of the Registrant’s common stock held by GPIC, Ltd. (the “Sponsor”), Citigroup Global Markets Inc. (“Citigroup”), Cowen and Company LLC (“Cowen”) and certain current employees of the Registrant issued upon the exercise of options, offered pursuant to this prospectus.

 

8,625,000 shares of the Registrant’s common stock issuable upon exercise of certain warrants that were issued by GPIA in its initial public offering (the “Public Warrants”). Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $11.50 per share. Upon exercise and issuance, such shares of common stock will be freely tradeable under U.S. securities laws.

 

3,440,424 shares of the Registrant’s common stock issuable upon exercise of certain warrants (the “Origination Agent Warrants”) issued to the Registrant’s lender, CB Agent Services LLC (the “Origination Agent”). Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $5.64 per share. Upon exercise and issuance, such shares of common stock may be offered for sale by the Origination Agent pursuant to this prospectus.

 

6,062,500 shares of the Registrant’s common stock issuable upon exercise of certain private placement warrants that were issued to the Sponsor in connection with GPIA’s initial public offering (the “Sponsor Private Placement Warrants”). Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $11.50 per share. Upon exercise and issuance, such shares of common stock may be offered for sale by the Sponsor pursuant to this prospectus.

   
Warrants Offered by the Selling Securityholders Hereunder

6,062,500 warrants to purchase shares of the Registrant’s common stock that are the Sponsor Private Placement Warrants issued to the Sponsor in a private placement that closed simultaneously with the closing of GPIA’s initial public offering. Each such warrant currently is exercisable for one share of the Registrant’s common stock at a price of $11.50 per share, offered pursuant to this prospectus.

   
Use of Proceeds We will not receive any proceeds from the sale of our securities offered by the selling securityholders under this prospectus (the “Securities”).  We will receive up to an aggregate of approximately $188,310,241 from the exercise of the Sponsor Private Placement Warrants, the Public Warrants and the Origination Agent Warrants (collectively, the “Warrants”) assuming the exercise in full of all of the Warrants for cash.  We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes. See the section titled “ Use of Proceeds .”
   
Common Stock Outstanding

58,580,796 shares prior to any exercise of Warrants (including 6,167 shares underlying our units).

 

76,708,720 shares after giving effect to the exercise of all of the outstanding Warrants (including 6,167 shares underlying our units).

 

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Risk Factors See the section titled “ Risk Factors ” and other information included in this prospectus for a discussion of factors that you should consider carefully before deciding to invest in our common stock.
   
NASDAQ symbol “RMNI” for our common stock.
   
OTC Pink symbol “RMNIU” for our units and “RMNIW” for our warrants.

 

The number of shares of common stock outstanding is based on 58,580,796 shares of common stock outstanding as of October 10, 2017 and excludes the following:

 

· 13,259,442 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock outstanding as of October 10, 2017, with a weighted-average exercise price of $2.76 per share;

 

· 99,393 shares of our common stock issuable upon the exercise of options to purchase shares of our common stock granted after October 10, 2017, with an exercise price of $9.71 per share;

 

· 18,127,924 shares of our common stock issuable upon the exercise of warrants to purchase shares of our common stock outstanding as of October 10, 2017, with a weighted-average exercise price of $10.39 per share; and

 

· 2,026,104 shares of our common stock reserved for future issuance under our 2013 Equity Incentive Plan (the “2013 Plan”).

 

Our 2013 Plan provides for annual automatic increases in the number of shares of common stock reserved thereunder. See the section titled “ Executive Compensation—Employee Benefit and Stock Plans ” for additional information.

 

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RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and related notes, before deciding to invest in our securities. If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business or results of operations.

 

Risks Related to Our Business, Operations and Industry

 

Risks Related to Litigation

 

We and our Chief Executive Officer 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.

 

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) (“District Court”), against us and our Chief Executive Officer, Seth Ravin, alleging that certain of our processes violated Oracle’s license agreements with its customers and that we committed acts of copyright infringement and violated other federal and state laws (“Rimini I”). The litigation involved our business processes and the manner in which we provided our services to our clients. To provide software support and maintenance services, we request access to a separate environment for developing and testing the updates to the software programs. Prior to July 2014, PeopleSoft, J.D. Edwards and Siebel clients switching from Oracle to our enterprise software support systems were given a choice of two models for hosting the development and testing environment for their software: the environment could be hosted on the client’s servers or on our servers. In addition to other allegations, Oracle challenged the Rimini Street-hosted model for certain Oracle license agreements with its customers that contained site-based restrictions. Oracle alleged that its license agreements with these customers restrict licensees’ rights to provide third parties, such as Rimini Street, with copies of Oracle software and restrict where a licensee physically may install the software. Oracle alleged that, in the course of providing services, we violated such license agreements and illegally downloaded software and support materials without authorization. Oracle further alleged that we impaired its computer systems in the course of downloading materials for our clients. In April 2010 Oracle filed its first amended complaint, and in June 2011 Oracle filed its second amended complaint. Specifically, Oracle’s second amended complaint asserted the following causes of action: copyright infringement; violations of the Federal Computer Fraud and Abuse Act; violations of the Computer Data Access and Fraud Act; violations of Nevada Revised Statute 205.4765; breach of contract; inducing breach of contract; intentional interference with prospective economic advantage; unfair competition; trespass to chattels; unjust enrichment/restitution; unfair practices; and a demand for an accounting. Oracle’s second amended complaint sought the entry of a preliminary and permanent injunction prohibiting us from copying, distributing, using, or creating derivative works based on Oracle Software and Support Materials except as allowed by express license from Oracle; from using any software tool to access Oracle Software and Support Materials; and from engaging in other actions alleged to infringe Oracle’s copyrights or were related to its other causes of action. The parties conducted extensive fact and expert discovery from 2010 through mid-2012.

 

In March and September 2012, Oracle filed two motions seeking partial summary judgment as to, among other things, its claim of infringement of certain copyrighted works owned by Oracle. In February 2014, the District Court issued a ruling on Oracle’s March 2012 motion for partial summary judgment (i) granting summary judgment on Oracle’s claim of copyright infringement as it related to two of our PeopleSoft clients and (ii) denying summary judgment on Oracle’s claim with respect to one of our J.D. Edwards clients and one of our Siebel clients. The parties stipulated that the licenses among clients were substantially similar. In August 2014, the District Court issued a ruling on Oracle’s September 2012 motion for partial summary judgment (i) granting summary judgment on Oracle’s claim of copyright infringement as it relates to Oracle Database and (ii) dismissing our first counterclaim for defamation, business disparagement and trade libel and our third counterclaim for unfair competition. In response to the February 2014 ruling, we revised our business practices to eliminate the processes determined to be infringing, which was completed no later than July 2014.

 

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A jury trial in Rimini I commenced in September 2015. On October 13, 2015, the jury returned a verdict against us finding that (i) we were liable for innocent copyright infringement, (ii) we and Mr. Ravin were each liable for violating certain state computer access statutes, and (iii) neither we nor Mr. Ravin were liable for inducing breach of contract or intentional interference with prospective economic advantage. The jury determined that the copyright infringement did not cause Oracle to suffer lost profits, that the copyright infringement was not willful, and did not award punitive damages. Following post-trial motions, Oracle was awarded a final judgment of $124.4 million, consisting of copyright infringement damages based on the fair market value license damages theory, damages for violation of certain state computer access statutes, prejudgment interest and attorneys’ fees and costs. In addition, the District Court entered a permanent injunction prohibiting us from using certain processes – including processes adjudicated as infringing at trial – that we ceased using no later than July 2014. We paid the full judgment amount of $124.4 million to Oracle on October 31, 2016 and have appealed the case to the United States Court of Appeals for the Ninth Circuit (“Court of Appeals”) to appeal each of the above items in the final judgment as well as the injunction. With regard to the injunction entered by the District Court, we have argued on appeal that the injunction is vague and contains overly broad language that could be read to cover some of our current business practices that were not adjudicated to be infringing at trial and should not have been issued under applicable law. On December 6, 2016, the Court of Appeals granted our emergency motion for a stay of the permanent injunction pending resolution of the underlying appeal and agreed to consider the appeal on an expedited basis. The Court of Appeals heard argument on July 13, 2017. We expect a decision from the Court of Appeals by early 2018, although a decision could be announced sooner or later.

 

In October 2014, we filed a separate lawsuit, Rimini Street Inc. v. Oracle Int’l Corp. (United States District Court for the District of Nevada) (“Rimini II”), against Oracle seeking a declaratory judgment that our revised development processes, in use since at least July 2014, do not infringe certain Oracle copyrights. In February 2015, Oracle filed a counterclaim alleging copyright infringement, which included (i) the same allegations asserted in Rimini I but limited to new or existing clients for whom we provided support from the conclusion of Rimini I discovery in December 2011 until the revised support processes were fully implemented by July 2014, and (ii) new allegations that our revised support processes also infringe Oracle copyrights. Oracle’s counterclaim also included allegations of violation of the Lanham Act, intentional interference with prospective economic advantage, breach of contract and inducing breach of contract, unfair competition, and unjust enrichment/restitution. It also sought an accounting. On February 28, 2016, Oracle filed amended counterclaims adding allegations of violation of the Digital Millennium Copyright Act. On December 19, 2016, we filed an amended complaint against Oracle asking for a declaratory judgment of non-infringement of copyright and alleging intentional interference with contract, intentional interference with prospective economic advantage, violation of the Nevada Deceptive Trade Practices Act, violation of the Lanham Act, and violation of California Business & Professions Code § 17200 et seq. On January 17, 2017, Oracle filed a motion to dismiss our amended claims and filed its third amended counterclaims, adding three new claims for a declaratory judgment of no intentional interference with contractual relations, no intentional interference with prospective economic advantage, and no violation of California Business & Professions Code § 17200 et seq. On February 14, 2017, we filed our answer and motion to dismiss Oracle’s third amended counterclaim, which has been fully briefed. On March 7, 2017, Oracle filed a motion to strike our copyright misuse affirmative defense which is briefed and pending consideration by the District Court. By stipulation of the parties, the District Court granted our motion to file our third amended complaint to add claims arising from Oracle’s purported revocation of our access to its support websites on behalf of our clients, which was filed and served on May 2, 2017. By agreement of the parties, Oracle filed its motion to dismiss our third amended complaint on May 30, 2017, and our opposition was filed on June 27, 2017, and Oracle’s reply was filed on July 11, 2017. On September 22, 2017 the Court issued an order granting in part and denying in part our motion to dismiss Oracle’s third amended counterclaim. The Court granted our motion to dismiss as to count five, intentional interference with prospective economic advantage, and count eight unjust enrichment. On October 5, 2017, Oracle filed a motion for reconsideration of the Court’s September 22, 2017 Order. We filed our opposition to Oracle’s motion for reconsideration on October 19, 2017. Oracle filed its reply to its motion for reconsideration on October 26, 2017.

 

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Fact discovery with respect to the above action is scheduled to end in February 2018 and expert discovery is expected to end in July 2018. There is currently no trial date scheduled and we do not expect a trial to occur in this matter earlier than 2020, but the trial could occur earlier or later than that. Given that discovery is ongoing, we do not have sufficient information regarding possible damages exposure for the counterclaims asserted by Oracle or possible recovery by us in connection with our claims against Oracle. Both parties are seeking injunctive relief in addition to monetary damages in this matter.

 

For counterclaims in Rimini II on which Oracle may prevail, we could be required to pay substantial damages for our current or past business activities, be enjoined from certain business practices and/or be in breach of various covenants in our Financing Agreement with certain lenders listed therein, Cortland Capital Market Services as administrative agent and collateral agent, and CB Agent Services LLC as origination agent for the lenders, and the other parties named therein, dated as of June 24, 2016, as amended from time to time (the “Credit Facility”), which itself could result in an event of default, in which case the lenders could demand accelerated repayment of principal, accrued and default interest, and other fees and expenses. Any of these outcomes could result in a material adverse effect on our business and the pendency of the litigation alone could dissuade clients from purchasing or continuing to purchase our services. Our business has been and may continue to be materially harmed by this litigation and Oracle’s conduct. During the course of these cases, we anticipate there will be rulings by the District Court in Rimini II and the Court of Appeals in Rimini I in connection with hearings, motions, decisions and other matters, as well as other interim developments related to the litigations. If securities analysts or investors regard these rulings as negative, the market price of our common stock may decline.

 

While we plan to vigorously litigate the appeal in Rimini I and litigate the claims and counterclaims in Rimini II, we are unable to predict the timing or outcome of these lawsuits. No assurance is or can be given that we will prevail on any appeal, claim or counterclaim.

 

See the section titled “ Business—Legal Proceedings ” for more information related to this litigation.

 

The Oracle software products that are part of our ongoing litigation with Oracle represent a significant portion of our current revenue.

 

Subject to appeal, during 2016 we paid the Rimini I final judgment of $124.4 million in full, and recovery of any part of the judgment will depend on the outcome of the appeal. If the permanent injunction is upheld and reinstated after the appeal of Rimini I, we estimate it will cost us between 1% and 2% of net revenue to further modify our support processes to comply with the terms of the injunction as ordered by the District Court. In Rimini II, Oracle has filed counterclaims relating to our support services for Oracle’s PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database software products. For the nine months ended September 30, 2017, approximately 72.7% of our total revenue was derived from the support services that we provide for our clients using Oracle’s PeopleSoft, J.D. Edwards, Siebel, E-Business Suite and Database software products. The percentage of revenue derived from services we provide for just PeopleSoft software was approximately 19.3% of our total revenue during this same period. Although we provide support services for additional Oracle product lines that are not subject to litigation and support services for software products provided by companies other than Oracle, our current revenue depends significantly on the product lines that are the subject of the Rimini II litigation and Rimini I appeal. Should Oracle prevail on its claims in Rimini II or should the permanent injunction as currently drafted be upheld and reinstated on appeal in Rimini I to include unadjudicated and non-infringing processes, we could be required to change the way we provide support services to some of our clients, which could result in the loss of clients and revenue, and may also give rise to claims for compensation from our clients, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

We have experienced challenges growing our business as a result of our ongoing litigation with Oracle. Many of our existing and prospective clients have expressed concerns regarding our ongoing litigation and, in some cases, have been subjected to subpoenas, depositions and various negative communications by Oracle in connection with the litigation. We have experienced in the past, and may continue to experience in the future, volatility and slowness in acquiring new clients, as well as clients not renewing their agreements with us, due to these challenges relating to our ongoing litigation with Oracle. Further, certain of our prospective and existing clients may be subject to additional subpoenas, depositions and negative communications from software vendors. We have taken steps to minimize disruptions to our existing and prospective clients regarding the litigation, but we continue to face challenges growing our business while the litigation remains ongoing. In certain cases, we have agreed to reimburse our clients for their reasonable legal fees incurred in connection with any litigation-related subpoenas and depositions or to provide indemnification or termination rights if any outcome of litigation results in our inability to continue providing any of the paid-for services. In addition, we believe the length of our sales cycle is longer than it otherwise would be due to prospective client diligence on possible effects of the Oracle litigation on our business. We cannot assure you that we will continue to overcome the challenges we face as a result of the litigation and continue to renew existing clients or secure new clients.

 

Oracle has a history of litigation against companies offering alternative support programs for Oracle products, and Oracle could pursue additional litigation with us.

 

Oracle has been active in litigating against companies that have offered competing maintenance and support services for their products. For example, in March 2007, Oracle filed a lawsuit against SAP and its wholly-owned subsidiary, TomorrowNow, Inc., a company our Chief Executive Officer, Seth Ravin, joined in 2002, and which was acquired by SAP in 2005. After a jury verdict awarding Oracle $1.3 billion, the parties stipulated to a final judgment of $306 million subject to appeal. After the appeal, the parties settled the case in November 2014 for $356.7 million. In February 2012, Oracle filed suit against Service Key, Inc. and settled the case in October 2013. Oracle also filed suit against CedarCrestone Corporation in September 2012, and settled the case in July 2013. TomorrowNow and CedarCrestone offered maintenance and support for Oracle software products, and Service Key offered maintenance and support for Oracle technology products. Given Oracle’s history of litigation against companies offering alternative support programs for Oracle products, we can provide no assurance, regardless of the outcome of our current litigations with Oracle, that Oracle will not pursue additional litigation against us. Such additional litigation could be costly, distract our management team from running our business and reduce client interest and our sales revenue.

 

Risks Related to Indebtedness

 

We have substantial indebtedness, and the fact that a significant portion of our cash flow is used to make debt service payments could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments.

 

We have substantial indebtedness. As of October 10, 2017, upon the effectiveness of the sixth amendment to our Credit Facility (the “Sixth Amendment”), we had total outstanding indebtedness in the aggregate principal amount of approximately $125.0 million, consisting entirely of obligations under the Credit Facility. In addition to principal obligations of $125.0 million, there are also mandatory exit fees of $6.0 million and mandatory consulting fees of $4.0 million that result in total contractual liabilities under the Credit Facility of $135.0 million as of October 10, 2017. Additionally, we were obligated under the Credit Facility to make future payments to the lenders pursuant to the fifth amendment to the Credit Facility (the “Fifth Amendment”) for an amendment fee of $1.25 million and an equity raise delay fee of $1.25 million, and for an amendment fee of $3.75 million pursuant to the Sixth Amendment. Further, the Credit Facility has a make-whole interest provision that expires in June 2019. As a result, a significant portion of our liquidity needs are for servicing debt, including significant interest payments and significant monthly amortization. See Notes 5 and 11 to our condensed consolidated financial statements for the nine months ended September 30, 2017 included elsewhere in this prospectus for details of our outstanding indebtedness under the Credit Facility, including the related restrictive covenants. In addition, upon consummation of the business combination, an outstanding loan payable incurred by GPIA that is payable to the Sponsor for approximately $3.0 million was not repaid, and will remain as our continuing obligation. The loan is non-interest bearing and will become due and payable when the outstanding principal balance under the Credit Facility is less than $95.0 million.

 

  - 8 -  

 

 

Our level of debt could have important consequences, including:

 

· making it more difficult to satisfy our obligations with respect to indebtedness;

 

· requiring us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund acquisitions, working capital, capital expenditures, expand sales and marketing efforts and other corporate purposes;

 

· impacting our ability to grow our business as rapidly as we have in the past;

 

· restricting us from making strategic acquisitions;

 

· placing us at a competitive disadvantage relative to our competitors who are less leveraged and who therefore may be able to take advantage of opportunities that our leverage prevents us from pursuing;

 

· increasing our vulnerability to and limiting our flexibility in planning for, or reacting to, changes in the business, the industries in which we operate, the economy and governmental regulations; and

 

· restricting our ability to borrow additional funds.

 

Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our outstanding debt obligations.

 

Significant amounts of cash will be required to service our indebtedness, and we may not be able to generate sufficient cash from operations or otherwise to service all of our indebtedness when due and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.

 

A significant amount of cash will be required to make payments on the Credit Facility when due, including significant interest payments and significant monthly amortization and annual excess cash flow prepayment obligations as specified in the Credit Facility. See Notes 5 and 11 to our condensed consolidated financial statements for the nine months ended September 30, 2017 included elsewhere in this prospectus and the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations of RSI ” for details of our debt service obligations in respect of the Credit Facility.

 

Our ability to pay principal and interest on the Credit Facility will depend upon, among other things, our financial and operating performance, which will be affected by prevailing economic, industry and competitive conditions and financial, business, legislative, regulatory and other factors, many of which are beyond our control. We cannot assure you that our business will generate cash flow from operations or otherwise or that future borrowings will be available to us in an amount sufficient to fund our liquidity needs, including the payment of principal, interest and fees on the Credit Facility when due.

 

If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sales and marketing expenditures, general and administration expenses or operating expenses; sell assets; seek additional capital; or restructure or refinance our indebtedness, including the Credit Facility. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the financial and capital markets and our financial condition at such time. In addition, the terms of existing or future debt agreements, including the Credit Facility, may restrict us from adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, could result in a material adverse effect on our business, results of operations and financial condition and could negatively impact our ability to satisfy the obligations under the Credit Facility.

 

  - 9 -  

 

 

If we cannot make scheduled payments on our indebtedness when due or otherwise are unable to comply with our obligations under the Credit Facility, we will be in default, and lenders under the Credit Facility could declare all outstanding principal, interest and fees to be due and payable and could foreclose against the assets securing their loans and we could be forced into bankruptcy or liquidation.

 

The Credit Facility contains restrictions that limit our flexibility in operating our business.

 

The Credit Facility contains, and any of our future indebtedness may also contain, a number of covenants that impose significant operating and financial restrictions, including restrictions on our ability and our subsidiaries’ ability to, among other things:

 

· incur additional debt or issue certain types of equity;

 

· pay dividends or make distributions in respect of capital stock or make other restricted payments;

 

· make certain investments;

 

· limit our ability to make sales and marketing expenditures;

 

· sell certain assets;

 

· create liens on certain assets;

 

· consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

· enter into certain transactions with affiliates;

 

· make certain capital expenditures;

 

· enter into sale/leaseback transactions;

 

· change the nature of our business;

 

· enter into insurance settlements that exceed certain amounts;

 

· modify the terms of certain other indebtedness; and

 

· allow the cash and cash equivalents held by our foreign subsidiaries to exceed a certain agreed upon amount.

 

For example, we were required to enter into an amendment to the Credit Facility to address our failure to comply with certain covenants relating to restrictions on operational expenditures. As a result of these covenants, we and our subsidiaries are limited in the manner in which we conduct business, and may be unable to engage in favorable business activities or finance future operations or capital needs.

 

We have pledged substantially all of our assets, including cash balances, as collateral under the Credit Facility. If any lenders accelerate the repayment of borrowings, there can be no assurance that there will be available assets to repay indebtedness.

 

  - 10 -  

 

 

Under the Credit Facility, we are also required to comply with specified financial ratios and tests, including a leverage ratio, an asset coverage ratio, a minimum liquidity test and certain budget compliance restrictions. So long as the total principal outstanding under the Credit Facility is equal to or greater than $95.0 million, we are also required to comply with a marketing return ratio, a minimum gross margin test and a maximum churn rate test. Our ability to meet the financial ratios and the financial tests under the Credit Facility can be affected by events beyond our control, and there can be no assurance that we will be able to continue to meet those ratios and tests.

 

A failure to comply with the covenants contained in the Credit Facility could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations. In the event of any default under the Credit Facility, the lenders thereunder could:

 

· cease making monthly disbursements to us in an amount necessary to satisfy our cash disbursement needs for the coming month;

 

· elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees (including any applicable prepayment premium), to be due and payable and terminate all commitments to extend further credit;

 

· apply all of our available cash to repay such amounts; or

 

· exercise any other rights and remedies permitted under applicable law, including, the collection and sale of any assets constituting collateral.

 

In addition, upon the occurrence and during the continuance of any event of default, the principal (including payment-in-kind interest), all unpaid interest, fees and other obligations shall bear an additional post-default interest rate of 2.0% per annum from the date such event of default occurs until it is cured or waived.

 

Such actions by the lenders under the Credit Facility could cause cross defaults under our and our subsidiaries’ other future indebtedness, if any.

 

If the indebtedness under the Credit Facility or other indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full and we could be forced into bankruptcy or liquidation.

 

Other Risks Related to Our Business, Operations and Industry

 

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

 

The market for independent enterprise software support services is still relatively undeveloped, has not yet achieved widespread acceptance and may not grow quickly or at all. Our success will depend to a substantial extent on the willingness of companies to engage a third party such as us to provide software support services for their enterprise software. Many enterprise software licensees are still hesitant to use a third party to provide such support services, choosing instead to rely on support services provided by the enterprise software vendor. Other enterprise software licensees have invested substantial personnel, infrastructure and financial resources in their own organizations with respect to support of their licensed enterprise software products and may choose to self-support with their own internal resources instead of purchasing services from the enterprise software vendor or an independent provider such as ourselves. Companies may not engage us for other reasons, including concerns regarding our ongoing litigation with Oracle, the potential for future litigation, the potential negative effect our engagement could have on their relationships with their enterprise software vendor, or concerns that they could infringe third party intellectual property rights or breach one or more software license agreements if they engage us to provide support services. New concerns or considerations may also emerge in the future. Particularly because our market is relatively undeveloped, we must address our potential clients’ concerns and explain the benefits of our approach in order to convince them of the value of our services. If companies are not sufficiently convinced that we can address their concerns and that the benefits of our services are compelling, then the market for our services may not develop as we anticipate and our business will not grow.

 

  - 11 -  

 

 

We have a history of losses and may not achieve profitability in the future.

 

We incurred net losses of $127.8 million, $45.3 million and $12.9 million in 2014, 2015 and 2016, respectively, and $37.0 million and $49.4 million for the nine months ended September 30, 2016 and 2017, respectively. As of September 30, 2017, we had an accumulated deficit of $300.5 million. We will need to generate and sustain increased revenue levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. We intend to continue to expend significant funds to expand our sales and marketing operations, enhance our service offerings, expand into new markets, launch new product offerings and meet the increased compliance requirements associated with our operation as a public company. Our efforts to grow our business may be more costly than we expect, and we may not be able to increase our revenue enough to offset our higher operating expenses. We may incur significant losses in the future for a number of reasons, including, as a result of our ongoing litigation with Oracle, the potential for future litigation, other risks described herein, unforeseen expenses, difficulties, complications and delays and other unknown events. If we are unable to achieve and sustain profitability, the market price of our securities may significantly decrease.

 

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

 

To increase our revenue, we must add new clients, encourage existing clients to renew or extend their agreements with us on terms favorable to us and sell additional products and services to existing clients. As competitors introduce lower-cost and/or differentiated services that are perceived to compete with ours, or as enterprise software vendors introduce competitive pricing or additional products and services or implement other strategies to compete with us, our ability to sell to new clients and renew agreements with existing clients based on pricing, service levels, technology and functionality could be impaired. As a result, we may be unable to renew or extend our agreements with existing clients or attract new clients or new business from existing clients on terms that would be favorable or comparable to prior periods, which could have an adverse effect on our revenue and growth. In addition, certain of our existing clients may choose to license a new or different version of enterprise software from an enterprise software vendor, and such clients’ license agreements with the enterprise software vendor will typically include a minimum one-year mandatory maintenance and support services agreement. In such cases, it is unlikely that these clients would renew their maintenance and support services agreements with us, at least during the early term of the license agreement. In addition, such existing clients could move to another enterprise software vendor, product or release for which we do not offer any products or services.

 

If our retention rates decrease, or we do not accurately predict retention rates, our future revenue and results of operations may be harmed.

 

Our clients have no obligation to renew their product or service subscription agreements with us after the expiration of a non-cancellable agreement term. In addition, the majority of our multi-year, non-cancellable client agreements are not pre-paid other than the first year of the non-cancellable service period. We may not accurately predict retention rates for our clients. Our retention rates may decline or fluctuate as a result of a number of factors, including our clients’ decision to license a new product or release from an enterprise software vendor, our clients’ decision to move to another enterprise software vendor, product or release for which we do not offer products or services, client satisfaction with our products and services, the acquisition of our clients by other companies, and clients going out of business. If our clients do not renew their agreements for our products and services or if our clients decrease the amount they spend with us, our revenue will decline and our business will suffer.

 

  - 12 -  

 

 

We face significant competition from both enterprise software vendors and other companies offering independent enterprise software support services, as well as from software licensees that attempt to self-support, which may harm our ability to add new clients, retain existing clients and grow our business.

 

We face intense competition from enterprise software vendors, such as Oracle and SAP, who provide software support services for their own products. Enterprise software vendors have offered discounts to companies to whom we have marketed our services. In addition, our current and potential competitors and enterprise software vendors may develop and market new technologies that render our existing or future services less competitive or obsolete. Competition could significantly impede our ability to sell our services on terms favorable to us and we may need to decrease the prices for our services in order to remain competitive. If we are unable to maintain our current pricing due to competitive pressures, our margins will be reduced and our results of operations will be negatively affected.

 

There are also several smaller vendors in the independent enterprise software support services market with whom we compete with respect to certain of our services. We expect competition to continue to increase in the future, particularly if we prevail in Rimini II, which could harm our ability to increase sales, maintain or increase renewals and maintain our prices.

 

Our current and potential competitors may have significantly more financial, technical and other resources than we have, may be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive customer bases and broader customer relationships than we have and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies and provide more robust support offerings. In addition, certain independent enterprise software support organizations may have or may develop more cooperative relationships with enterprise software vendors, which may allow them to compete more effectively over the long term. Enterprise software vendors may also offer support services at reduced or no additional cost to their customers. In addition, enterprise software vendors may take other actions in an attempt to maintain their support service business, including changing the terms of their customer agreements, the functionality of their products or services, or their pricing terms. For example, starting in the second quarter of 2017 Oracle recently prohibited us from accessing its support websites to download software updates on behalf of our clients who are authorized to do so and permitted to authorize a third party to do so on their behalf. In addition, various support policies of Oracle and SAP may include clauses that could penalize customers that choose to use independent enterprise software support vendors or that, following a departure from the software vendor’s support program, seek to return to the software vendor to purchase new licenses or services. To the extent any of our competitors have existing relationships with potential clients for enterprise software products and support services, those potential clients may be unwilling to purchase our services because of those existing relationships. If we are unable to compete with such companies, the demand for our services could be substantially impacted.

 

Our recent rapid growth may not be indicative of our future growth and if we continue to grow rapidly, we may not be able to manage our growth effectively.

 

Our net revenue grew from $113.4 million for the nine months ended September 30, 2016 to $154.7 million for the nine months ended September 30, 2017, representing a period-over-period increase of 36%. We expect that, in the future, as our revenue increases to higher levels, our revenue growth rate may decline. You should not consider our recent growth as indicative of our future performance. We believe growth of our revenue depends on a number of factors, including our ability to:

 

· price our products and services effectively so that we are able to attract and retain clients without compromising our profitability;

 

· attract new clients, increase our existing clients’ use of our products and services and provide our clients with excellent service experience;

 

· introduce our products and services to new geographic markets;

 

  - 13 -  

 

 

· introduce new enterprise software products and services supporting additional enterprise software vendors, products and releases;

 

· satisfactorily conclude the Oracle litigation; and

 

· increase awareness of our company, products and services on a global basis.

 

We may not successfully accomplish all or any of these objectives. We plan to continue our investment in future growth. We expect to continue to expend substantial financial and other resources on, among others:

 

· sales and marketing efforts;

 

· training to optimize our opportunities to overcome litigation risk concerns of our clients;

 

· expanding in new geographical areas;

 

· growing our product and service offerings and related capabilities;

 

· adding additional product and service offerings; and

 

· general administration, including legal and accounting expenses related to being a public company.

 

In addition, our historical rapid growth has placed and may continue to place significant demands on our management and our operational and financial resources. Our organizational structure is becoming more complex as we add additional staff, and we will need to improve our operational, financial and management controls, as well as our reporting systems and procedures. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture of rapid innovation, teamwork and attention to client service that has been central to our growth so far.

 

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

 

We will need to raise additional capital and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. If we engage in debt financings, the holders of the debt securities would have priority over the holders of our common stock. We may also be required to accept terms that further restrict our ability to incur additional indebtedness, take other actions that would otherwise not be in the best interests of our stockholders, or force us to maintain specified liquidity or other ratios, any of which could harm our business, results of operations and financial condition. If we cannot raise additional capital on acceptable terms, we may not be able to, among other things:

 

· maintain our operations;

 

· develop or enhance our products and services;

 

· continue to expand our sales and marketing and research and development organizations;

 

· acquire complementary technologies, products or businesses;

 

· expand operations, in the United States or globally;

 

  - 14 -  

 

 

· hire, train and retain employees; or

 

· respond to competitive pressures or unanticipated working capital requirements.

 

Our failure to do any of these things could seriously harm our business, financial condition and results of operations.

 

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

 

The software industry is characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and other intellectual and proprietary rights. Companies in the software industry are often required to defend against claims and litigation alleging infringement or other violations of intellectual property rights. Many of our competitors and other industry participants have been issued patents and/or have filed patent applications and may assert patent or other intellectual property rights within the industry. From time to time, we may receive threatening letters or notices alleging infringement or may be the subject of claims that our services and underlying technology infringe or violate the intellectual property rights of others.

 

For example, as described further in the section titled “ Risk Factors—Risks Related to Litigation ” above, we are engaged in litigation with Oracle relating in part to copyright infringement claims. See the risk factor “ We and our Chief Executive Officer 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, financial condition and results of operatio ns” above for additional information regarding the Rimini I and Rimini II cases.

 

We rely on our management team and other key employees, including our Chief Executive Officer, and the loss of one or more key employees could harm our business.

 

Our success and future growth depend upon the continued services of our management team, including Seth Ravin, our Chief Executive Officer, and other key employees. Since 2008, Mr. Ravin has been under the regular care of a physician for kidney disease, which includes ongoing treatment. During this time, Mr. Ravin has continuously performed all of his duties as Chief Executive Officer of our company on a full-time basis. Although Mr. Ravin’s condition has not had any impact on his performance in his role as Chief Executive Officer or on the overall management of the company, we can provide no assurance that his condition will not affect his ability to perform the role of Chief Executive Officer in the future. In addition, from time to time, there may be changes in our management team resulting from the hiring or departure of executives, which could disrupt our business. We may terminate any employee’s employment at any time, with or without cause, and any employee may resign at any time, with or without cause. We do not maintain key man life insurance on any of our employees. The loss of one or more of our key employees could harm our business.

 

The failure to attract and retain additional qualified personnel could prevent us from executing our business strategy.

 

To execute our business strategy, we must attract and retain highly qualified personnel. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In particular, we have experienced a more competitive hiring environment in the San Francisco Bay Area, where we have a significant base of operations. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. If the price of our stock declines or experiences significant volatility, our ability to attract or retain qualified employees will be adversely affected. In addition, as we continue to expand into new geographic markets, there can be no assurance that we will be able to attract and retain the required management, sales, marketing and support services personnel to profitably grow our business. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.

 

  - 15 -  

 

 

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.

 

As a subscription-based business, we recognize revenue over the service period of our contracts. As a result, much of the revenue we report each quarter results from contracts entered into during previous quarters. Consequently, a shortfall in demand for our products and services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new sales, renewals or extensions of our service agreements will not be reflected in full in our results of operations until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new clients must be recognized over the applicable service term of the contracts.

 

Failure to effectively develop and expand our marketing and sales capabilities could harm our ability to increase our client base and achieve broader market acceptance of our products and services.

 

Our ability to increase our client base and achieve broader market acceptance of our products and services will depend to a significant extent on our ability to expand our marketing and sales operations. We plan to continue expanding our sales force globally. These efforts will require us to invest significant financial and other resources. Moreover, our sales personnel typically take an average of nine months before any new sales personnel can operate at the capacity typically expected of experienced sales personnel. This ramp cycle, combined with our typical six- to twelve-month sales cycle for engaged prospects, means that we will not immediately recognize a return on this investment in our sales department. In addition, the cost to acquire clients is high due to the cost of these marketing and sales efforts. Our business may be materially harmed if our efforts do not generate a correspondingly significant increase in revenue. We may not achieve anticipated revenue growth from expanding our sales force if we are unable to hire, develop and retain talented sales personnel, if our new sales personnel are unable to achieve desired productivity levels in a reasonable period of time or if our sales and marketing programs are not effective.

 

Interruptions to or degraded performance of our service could result in client dissatisfaction, damage to our reputation, loss of clients, limited growth and reduction in revenue.

 

Our software support agreements with our clients generally guarantee a 15-minute response time with respect to certain high-priority issues. To the extent that we do not meet the 15-minute guarantee, our clients may in some instances be entitled to liquidated damages, service credits or refunds. To date, no such payments have been made.

 

We also deliver tax, legal and regulatory updates to our clients and generally have done so faster than our competitors. If there are inaccuracies in these updates, or if we are not able to deliver them on a timely basis to our clients, our reputation may be damaged and we could face claims for compensation from our clients, lose clients, or both.

 

Any interruptions or delays in our service, whether as a result of third party error, our own error, natural disasters, security breaches or a result of any other issues, whether accidental or willful, could harm our relationships with clients and cause our revenue to decrease and our expenses to increase. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors, in turn, could further reduce our revenue, subject us to liability, cause us to pay liquidated damages, issue credits or cause clients not to renew their agreements with us, any of which could materially adversely affect our business.

 

  - 16 -  

 

 

We may experience quarterly fluctuations in our results of operations due to a number of factors, including 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 quarterly results of operations have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. Accordingly, the results of any one quarter should not be relied upon as an indication of future performance. Historically, our sales cycle has been tied to the renewal dates for our clients’ existing and prior vendor support agreements for the products that we support. Because our clients make support vendor selection decisions in conjunction with the renewal of their existing support agreements with Oracle and SAP, among other enterprise software vendors, we have experienced an increase in business activity during the periods in which those agreements are up for renewal. Because we have introduced and intend to continue to introduce products and services for additional software products that do not follow the same renewal timeline or pattern, our past results may not be indicative of our future performance, and comparing our results of operations on a period-to-period basis may not be meaningful. Also, if we are unable to engage a potential client before its renewal date for software support services in a particular year, it will likely be at least another year before we would have the opportunity to engage that potential client again, given that such potential client likely had to renew or extend its existing support agreement for at least an additional year’s worth of service with its existing support provider. Furthermore, our existing clients generally renew their agreements with us at or near the end of each calendar year, so we have also experienced and expect to continue to experience heavier renewal rates in the fourth quarter. In addition to the other risks described herein, factors that may affect our quarterly results of operations include the following:

 

· changes in spending on enterprise software products and services by our current or prospective clients;

 

· pricing of our products and services so that we are able to attract and retain clients;

 

· acquisition of new clients and increases of our existing clients’ use of our products and services;

 

· client renewal rates and the amounts for which agreements are renewed;

 

· budgeting cycles of our clients;

 

· changes in the competitive dynamics of our market, including consolidation among competitors or clients;

 

· the amount and timing of payment for operating expenses, particularly sales and marketing expenses and employee benefit expenses;

 

· the amount and timing of non-cash expenses, including stock-based compensation, goodwill impairments and other non-cash charges;

 

· the amount and timing of costs associated with recruiting, training and integrating new employees;

 

· the amount and timing of cash collections from our clients;

 

· unforeseen costs and expenses related to the expansion of our business, operations and infrastructure;

 

· the amount and timing of our legal costs, particularly related to our litigation with Oracle;

 

· changes in the levels of our capital expenditures;

 

· foreign currency exchange rate fluctuations; and

 

· general economic and political conditions in global markets.

 

We may not be able to accurately forecast the amount and mix of future product and service subscriptions, revenue and expenses, and as a result, our results of operations may fall below our estimates or the expectations of securities analysts and investors. If our revenue or results of operations fall below the expectations of investors or securities analysts, or below any guidance we may provide, the price of our common stock could decline.

 

  - 17 -  

 

 

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

 

Due to the collection of cash from our customers before services are provided, our net revenue is recognized over future periods when there are no corresponding cash receipts from such customers. Accordingly, our future liquidity is highly dependent upon the ability to continue to attract new customers and to enter into renewal arrangements with existing customers. If we experience a decline in orders from new customers or renewals from existing customers, our net revenue may continue to increase while our liquidity and cash levels decline. Any such decline, however, will negatively affect our revenues in future quarters. Accordingly, the effect of declines in orders from new customers or renewals from existing customers may not be fully reflected in our results of operations until future periods. Comparing our revenues and operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance or liquidity.

 

We may be subject to additional obligations to collect and remit sales tax and other taxes, and we may be subject to tax liability, interest and/or penalties for past sales, which could adversely harm our business.

 

State, local and foreign jurisdictions have differing rules and regulations governing sales, use, value-added and other taxes, and these rules and regulations can be complex and are subject to varying interpretations that may change over time. In particular, the applicability of such taxes to our products and services in various jurisdictions is unclear. Further, these jurisdictions’ rules regarding tax nexus are complex and can vary significantly. As a result, we could face the possibility of tax assessments and audits, and our liability for these taxes and associated interest and penalties could exceed our original estimates. A successful assertion that we should be collecting additional sales, use, value-added or other taxes in those jurisdictions where we have not historically done so and in which we do not accrue for such taxes could result in substantial tax liabilities and related penalties for past sales, discourage clients from purchasing our products and services or otherwise harm our business and results of operations.

 

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

 

We currently offer our customers support services for a fee that is equal to a percentage of the annual fees charged by the enterprise software vendor, so changes in such vendors’ fee structures would impact the fees we would receive from our customers. If the enterprise software vendors offer deep discounts on certain services or lower prices generally, we may need to change our pricing models or suffer adverse effect on our results of operations. In addition, we have recently begun to offer new products and services and do not have substantial experience with pricing such products and services, so we may need to change our pricing models for these new products and services over time to ensure that we remain competitive and realize a return on our investment in developing these new products and services. If we do not adapt our pricing models as necessary or appropriate, our revenue could decrease and adversely affect our results of operations.

 

We may not be able to scale our business systems quickly enough to meet our clients’ growing needs, and if we are not able to grow efficiently, our results of operations could be harmed.

 

As enterprise software products become more advanced and complex, we will need to devote additional resources to innovating, improving and expanding our offerings to provide relevant products and services to our clients using these more advanced and complex products. In addition, we will need to appropriately scale our internal business systems and our global operations and client engagement teams to serve our growing client base, particularly as our client demographics expand over time. Any failure of or delay in these efforts could adversely affect the quality or success of our services and negatively impact client satisfaction, resulting in potential decreased sales to new clients and possibly lower renewal rates by existing clients.

 

  - 18 -  

 

 

Even if we are able to upgrade our systems and expand our services organizations, any such expansion may be expensive and complex, requiring financial investments, management time and attention. For example, in 2012, we began transitioning to only client-hosted environments for improved scalability, among other reasons, and in February 2014, we announced a plan to migrate all clients using a Rimini-hosted environment to a client-hosted environment. Client reimbursement obligations related to the client environment migration project of approximately $1.2 million were recorded as accrued liabilities with a corresponding reduction in deferred revenue during the three months ended March 31, 2014. Approximately $0.9 million, $0.2 million and $0.1 million were recorded during the years ended December 31, 2014, 2015 and 2016, respectively as reductions in revenue ratably over the applicable service periods. All of the client reimbursements of $1.2 million have been paid out as of November 30, 2016.

 

We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. There can be no assurance that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented within budgets or on a timely basis, if at all. Any failure to efficiently scale our business could result in reduced revenue and adversely impact our operating margins and results of operations.

 

We have experienced significant growth resulting in changes to our organization and structure, which if not effectively managed, could have a negative impact on our business.

 

Our headcount and operations have grown substantially in recent years. We increased the number of full-time employees from 822 as of September 30, 2016 to 911 as of September 30, 2017. We believe that our corporate culture has been a critical component of our success. We have invested substantial time and resources in building our team and nurturing our culture. As we expand our business and operate as a public company, we may find it difficult to maintain our corporate culture while managing our employee growth. Any failure to manage our anticipated growth and related organizational changes in a manner that preserves our culture could negatively impact future growth and achievement of our business objectives.

 

In addition, our organizational structure has become more complex as a result of our significant growth. We have added employees and may need to continue to scale and adapt our operational, financial and management controls, as well as our reporting systems and procedures. The expansion of our systems and infrastructure may require us to commit additional financial, operational and management resources before our revenue increases and without any assurances that our revenue will increase. If we fail to successfully manage our growth, we likely will be unable to successfully execute our business strategy, which could have a negative impact on our business, financial condition and results of operations.

 

Because our long-term growth strategy involves further expansion of our sales to clients outside the United States, our business will be susceptible to risks associated with global operations.

 

A significant component of our growth strategy involves the further expansion of our operations and client base outside the United States. We currently have subsidiaries and operations outside of North America in Australia, Brazil, China, France, Germany, India, Israel, Japan, Korea, Singapore, Sweden and the United Kingdom, which focus primarily on selling our services in those regions.

 

In the future, we may expand to other locations outside of the United States. Our current global operations and future initiatives will involve a variety of risks, including:

 

· changes in a specific country’s or region’s political or economic conditions;

 

· changes in regulatory requirements, taxes or trade laws;

 

· more stringent regulations relating to data security, such as where and how data can be housed, accessed and used, and the unauthorized use of, or access to, commercial and personal information;

 

  - 19 -  

 

 

· differing labor regulations, especially in countries and geographies where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

· challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs as well as hire and retain local management, sales, marketing and support personnel;

 

· difficulties in managing a business in new markets with diverse cultures, languages, customs, legal systems, alternative dispute systems and regulatory systems;

 

· increased travel, real estate, infrastructure and legal compliance costs associated with global operations;

 

· currency exchange rate fluctuations and the resulting effect on our revenue and expenses, and the cost and risk of entering into hedging transactions if we choose to do so in the future;

 

· limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

· laws and business practices favoring local competitors or general preferences for local vendors;

 

· limited or insufficient intellectual property protection;

 

· political instability or terrorist activities;

 

· exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and

 

· adverse tax burdens and foreign exchange controls that could make it difficult to repatriate earnings and cash.

 

Our limited experience in operating our business globally and the unique challenges of each new geography increase the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our global operations and are unable to do so successfully and in a timely manner, our business and results of operations will be adversely affected.

 

If we fail to forecast our revenue accurately, or if we fail to match our expenditures with corresponding revenue, our results of operations could be adversely affected.

 

Because our recent growth has resulted in the rapid expansion of our business, we do not have a long history upon which to base forecasts of future operating revenue. In addition, the variability of the sales cycle for the evaluation and implementation of our products and services, which typically has been six to twelve months once a client is engaged, may also cause us to experience a delay between increasing operating expenses for such sales efforts, and the generation of corresponding revenue. Accordingly, we may be unable to prepare accurate internal financial forecasts or replace anticipated revenue that we do not receive as a result of delays arising from these factors. As a result, our results of operations in future reporting periods may be significantly below the expectations of the public market, securities analysts or investors, which could negatively impact the price of our common stock.

 

  - 20 -  

 

 

Consolidation in our target sales markets is continuing at a rapid pace, which could harm our business in the event that our clients are acquired and their agreements are terminated, or not renewed or extended.

 

Consolidation among companies in our target sales markets has been robust in recent years, and this trend poses a risk for us. If such consolidation continues, we expect that some of the acquiring companies will terminate, renegotiate and elect not to renew our agreements with the clients they acquire, which may have an adverse effect on our business and results of operations.

 

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.

 

Our current revenue is primarily derived from the provision of support services for Oracle and SAP enterprise software products. If other enterprise software vendors, products and releases emerge to take substantial market share from current Oracle and SAP products and releases we support, and we do not provide products or services for such vendor, products or releases, demand for our products and services may decline or our products and services may become obsolete. Developing new products and services to address different enterprise software vendors, products and releases could take a substantial investment of time and financial resources, and we cannot guarantee that we will be successful. If fewer clients use enterprise software products for which we provide products and services, and we are not able to provide services for new vendors, products or releases, our business may be adversely impacted.

 

Delayed or unsuccessful investment in new technology, products, services and markets may harm our financial condition and results of operations.

 

We plan to continue investing resources in research and development in order to enhance our current product and service offerings, and other new offerings that will appeal to clients and potential clients. The development of new product and service offerings could divert the attention of our management and our employees from the day-to-day operations of our business, the new product and service offerings may not generate sufficient revenue to offset the increased research and development expenses, and if we are not successful in implementing the new product and service offerings, we may need to write off the value of our investment. Furthermore, if our new or modified products, services or technology do not work as intended, are not responsive to client needs or industry or regulatory changes, are not appropriately timed with market opportunity, or are not effectively brought to market, we may lose existing and prospective clients or related opportunities, in which case our financial condition and results of operations may be adversely impacted.

 

If our security measures are compromised or unauthorized access to customer data is otherwise obtained, our services may be perceived as not being secure, customers may curtail or cease their use of our services, our reputation may be harmed and we may incur significant liabilities. Further, 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.

 

Our services sometimes involve access to, processing, sharing, using, storage and the transmission of proprietary information and protected data of our customers. We rely on proprietary and commercially available systems, software, tools and monitoring, as well as other processes, to provide security for accessing, processing, sharing, using, storage and transmission of such information. If our security measures are compromised as a result of third party action, employee or customer error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business and our customers may be harmed and we could incur significant liability. In particular, cyberattacks and other inter-based activity continue to increase in frequency and in magnitude generally, and these threats are being driven by a variety of sources, including nation-state sponsored espionage and hacking activities, industrial espionage, organized crime, sophisticated organizations and hacking groups and individuals. In addition, if the security measures of our customers are compromised, even without any actual compromise of our own systems, we may face negative publicity or reputational harm if our customers or anyone else incorrectly attributes the blame for such security breaches on us, our products and services, or our systems. We may also be responsible for repairing any damage caused to our customers’ systems that we support, and we may not be able to make such repairs in a timely manner or at all. We may be unable to anticipate or prevent techniques used to obtain unauthorized access or to sabotage systems because they change frequently and generally are not detected until after an incident has occurred. As we increase our customer base and our brand becomes more widely known and recognized when we are a public company, we may become more of a target for third parties seeking to compromise our security systems or gain unauthorized access to our customers’ proprietary and protected data.

 

  - 21 -  

 

 

Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise. Security compromises experienced by our customers, by our competitors or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their agreements with us, or subject us to third party lawsuits, government investigations, regulatory fines or other action or liability, all or any of which could materially and adversely affect our business, financial condition and results of operations.

 

We cannot assure you that any limitations of liability provisions in our contracts for a security breach would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of substantial deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and results of operations.

 

As a global company, we are subject to numerous jurisdictions worldwide regarding the accessing, processing, sharing, using, storing, transmitting, disclosure and protection of personal data, the scope of which are constantly changing, subject to differing interpretation, and may be inconsistent between countries or in conflict with other laws, legal obligations or industry standards. We generally comply with industry standards and strive to comply with all applicable laws and other legal obligations relating to privacy and data protection, but it is possible that these laws and legal obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with industry standards or our practices. Compliance with such laws and other legal obligations may be costly and may require us to modify our business practices, which could adversely affect our business and profitability. Any failure or perceived failure by us to comply with these laws, policies or other obligations may result in governmental enforcement actions or litigation against us, potential fines and other expenses related to such governmental actions, and could cause our customers to lose trust in us, any of which could have an adverse effect on our business.

 

If our products and services fail due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose clients, become subject to service performance or warranty claims or incur significant costs.

 

Our products and services and the systems infrastructure necessary for the successful delivery of our products and services to clients are inherently complex and may contain material defects or errors. We have from time to time found defects in our products and services and may discover additional defects in the future. In particular, we have developed our own tools and processes to deliver comprehensive tax, legal and regulatory updates tailored for each client, which we endeavor to deliver to our clients in a shorter timeframe than our competitors, which may result in an increased risk of material defects or errors. We may not be able to detect and correct defects or errors before clients begin to use our products and services. Consequently, defects or errors may be discovered after our products and services are provided and used. These defects or errors could also cause inaccuracies in the data we collect and process for our clients, or even the loss, damage or inadvertent release of such confidential data. Even if we are able to implement fixes or corrections to our tax, legal and regulatory updates in a timely manner, any history of defects or inaccuracies in the data we collect for our clients, or the loss, damage or inadvertent release of such confidential data could cause our reputation to be harmed, and clients may elect not to renew, extend or expand their agreements with us and subject us to service performance credits, warranty or other claims or increased insurance costs. The costs associated with any material defects or errors in our products and services or other performance problems may be substantial and could materially adversely affect our financial condition and results of operations.

 

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We are an emerging growth company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.

 

We are an “emerging growth company” within the meaning of the Securities Act, as modified by the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. As a result, our shareholders may not have access to certain information they may deem important. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our ordinary shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less attractive as a result of our reliance on these exemptions, the market prices of our securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the market prices of our securities may be more volatile.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with certain other public companies difficult or impossible because of the potential differences in accounting standards used.

 

If we are not able to maintain an effective system of internal control over financial reporting, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our stock price. In the years ended December 31, 2014, 2015 and 2016, material weaknesses in our internal control over financial reporting were identified. While we remediated two of these material weaknesses in the year ended December 31, 2016, we cannot provide assurance that a current material weakness or additional material weaknesses or significant deficiencies will not occur in the future.

 

Our management will be required to conduct an annual evaluation of our internal control over financial reporting and include a report of management on our internal control in our annual reports on Form 10-K starting with our annual report on Form 10-K for the year ending December 31, 2018. In addition, we will be required to have our independent public accounting firm attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting when we cease qualifying as an “emerging growth company” pursuant to the JOBS Act. If we are unable to conclude that we have effective internal control over financial reporting or, if our independent auditors are unable to provide us with an attestation and an unqualified report as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities.

 

In connection with the audit of our consolidated financial statements for the years ended December 31, 2014, 2015 and 2016, management determined that we had several material weaknesses in our internal control over financial reporting. The material weaknesses related to the following:

 

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· inadequate controls in relation to recognition of liabilities for embedded derivatives in connection with the Credit Facility (2016);

 

· inadequate controls in relation to revenue recognition from support service sales contracts whereby RSI incorrectly accounted for multi-year, non-cancelable support service sales contracts as a single delivery arrangement and incorrectly accounting for revenue for certain non-standard contract provisions (2014, 2015 and 2016);

 

· various sales tax control matters related to manual processes and determination of tax liabilities in certain states (2014 and 2015); and

 

· inadequate controls for accrual of loss contingencies related to RSI’s litigation with Oracle (2014 and 2015).

 

We have remediated the material weaknesses discussed above for sales taxes and accrual of loss contingencies. We are in the process of remediating material weaknesses for embedded derivatives and revenue recognition and cannot provide assurance that these steps will be adequate to prevent future recurrences, other material weaknesses or restatements of our financial statements in the future.

 

Economic uncertainties 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 negatively impact our results of operations.

 

General worldwide economic conditions have experienced significant fluctuations in recent years, and market volatility and uncertainty remain widespread. As a result, we and our clients find it extremely difficult to accurately forecast and plan future business activities. In addition, these conditions could cause our clients or prospective clients to reduce their IT budgets, which could decrease corporate spending on our products and services, resulting in delayed and lengthened sales cycles, a decrease in new client acquisition and loss of clients. Furthermore, during challenging economic times, our clients may face issues with their cash flows and in gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us, impact client renewal rates and adversely affect our revenue. If such conditions occur, we may be required to increase our reserves, allowances for doubtful accounts and write-offs of accounts receivable, and our results of operations would be harmed. We cannot predict the timing, strength or duration of any economic slowdown or recovery, whether global, regional or within specific markets. If the conditions of the general economy or markets in which we operate worsen, our business could be harmed. In addition, even if the overall economy improves, the market for our products and services may not experience growth. Moreover, recent events, including the United Kingdom’s 2016 vote in favor of exiting the European Union (“Brexit”) and similar geopolitical developments and uncertainty in the European Union and elsewhere have increased levels of political and economic unpredictability globally, and may increase the volatility of global financial markets and the global and regional economies.

 

If we fail to enhance our brand, our ability to expand our client base will be impaired and our financial condition may suffer.

 

We believe that our development of the Rimini Street brand is critical to achieving widespread awareness of our products and services, and as a result, is important to attracting new clients and maintaining existing clients. We also believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable products and services at competitive prices, as well as the outcome of our ongoing litigation with Oracle. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, our business could be adversely impacted.

 

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If we fail to adequately protect our proprietary rights, our competitive position could be impaired and we may lose valuable assets, experience reduced revenue and incur costly litigation to protect our rights.

 

Our success is dependent, in part, upon protecting our proprietary products, services, knowledge, software tools and processes. We rely on a combination of copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Any of our copyrights, trademarks, service marks, trade secret rights or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Furthermore, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights are uncertain. Despite our precautions, it may be possible for unauthorized third parties to copy or use information that we regard as proprietary to create products and services that compete with ours. In addition, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our global activities, our exposure to unauthorized copying and use of our processes and software tools may increase.

 

We enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with the parties with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our proprietary, intellectual property. Further, these agreements may not prevent our competitors from independently developing products and services that are substantially equivalent or superior to our products and services.

 

There can be no assurance that we will receive any patent protection for our proprietary software tools and processes. Even if we were to receive patent protection, those patent rights could be invalidated at a later date. Furthermore, any such patent rights may not adequately protect our processes, our software tools or prevent others from designing around our patent claims.

 

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our products, processes and software tools against unauthorized copying or use, as well as any costly litigation or diversion of our management’s attention and resources, could delay further sales or the implementation of our products and services, impair the functionality of our products and services, delay introductions of new products and services, result in our substituting inferior or more costly technologies into our products and services, or injure our reputation.

 

We may not be able to utilize a significant portion of our net operating loss carryforwards, which could adversely affect our profitability.

 

We have U.S. federal and state net operating loss carryforwards due to prior period losses, which could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.

 

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change”. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws in the United States. Future issuances of our stock could cause an “ownership change”. It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.

 

  - 25 -  

 

 

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.

 

As a multinational organization, we may be subject to taxation in several jurisdictions worldwide with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. In addition, the authorities in these jurisdictions could review our tax returns and impose additional tax, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.

 

Future acquisitions, strategic investments, partnerships or alliances could be difficult to identify and integrate, divert the attention of management, disrupt our business, dilute stockholder value and adversely affect our financial condition and results of operations.

 

While our current Credit Facility restricts our ability to make acquisitions, we may in the future seek to acquire or invest in businesses, products or technologies that we believe could complement or expand our services, enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not the acquisition purchases are completed. If we acquire businesses, we may not be able to integrate successfully the acquired personnel, operations and technologies, or effectively manage the combined business following the acquisition. We may not be able to find and identify desirable acquisition targets or be successful in entering into an agreement with any particular target or obtain adequate financing to complete such acquisitions. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our results of operations. In addition, if an acquired business fails to meet our expectations, our business, financial condition and results of operations may be adversely affected.

 

Failure to comply with laws and regulations could harm our business.

 

Our business is subject to regulation by various global governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. For example, transfer of certain software outside of the United States or to certain persons is regulated by export controls.

 

In certain jurisdictions, these regulatory requirements may be more stringent than those in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions and may result in our inability to provide certain products and services to prospective clients or clients. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, or if clients made claims against us for compensation, our business, financial condition and results of operations could be harmed. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees and costs. Enforcement actions and sanctions could further harm our business, financial condition and results of operations.

 

  - 26 -  

 

 

Catastrophic events may disrupt our business.

 

We rely heavily on our network infrastructure and information technology systems for our business operations. A disruption or failure of these systems in the event of online attack, earthquake, fire, terrorist attack, power loss, telecommunications failure or other catastrophic event could cause system interruptions, delays in accessing our service, reputational harm, loss of critical data or could prevent us from providing our products and services to our clients. In addition, several of our employee groups reside in areas particularly susceptible to earthquakes, such as the San Francisco Bay Area and Japan, and a major earthquake or other catastrophic event could affect our employees, who may not be able to access our systems or otherwise continue to provide our services to our clients. A catastrophic event that results in the destruction or disruption of our data centers, or our network infrastructure or information technology systems, or access to our systems, could affect our ability to conduct normal business operations and adversely affect our business, financial condition and results of operations.

 

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported results of operations.

 

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (the “SEC”) and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. Accounting for revenue from sales of subscriptions to software products and services is particularly complex, is often the subject of intense scrutiny by the SEC, and will evolve when the new standard on revenue recognition, which was issued by FASB in May 2014, is implemented. The final revenue recognition standard is currently expected to take effect for us beginning in the first quarter of the year ending December 31, 2019. Management has not completed its evaluation to determine the impact and method that adoption of this standard will have on our consolidated financial statements.

 

In addition, in February 2016, the FASB issued ASU No. 2016-02, Leases, which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with lease terms of more than twelve months. Under the new guidance, both finance and operating leases will be required to be recognized on the balance sheet. Additional quantitative and qualitative disclosures, including significant judgments made by the management, will also be required. The new lease guidance is expected to take effect for us beginning in the first quarter of the year ending December 31, 2020. Early adoption is permitted. However, the new guidance must be adopted retrospectively to each prior reporting period presented upon initial adoption. Management has not completed its evaluation to determine the impact that adoption of this standard will have on our consolidated financial statements.

 

Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our common shares.

 

Securities research analysts may establish and publish their own periodic projections for us. These projections may vary widely and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if one or more of the analysts who write reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline. If no analysts commence coverage of us, the market price and volume for our common shares could be adversely affected.

 

  - 27 -  

 

 

Risks Related to this Offering, Capitalization Matters and Corporate Governance

 

The price of our common stock, warrants and units may be volatile.

 

The price of our common stock, warrants and units may fluctuate due to a variety of factors, including:

 

· adverse developments in our continuing litigation with Oracle;

 

· our ability to effectively service our outstanding debt obligations;

 

· the announcement of new products or product enhancements by us or our competitors;

 

· developments concerning intellectual property rights;

 

· changes in legal, regulatory and enforcement frameworks impacting our products;

 

· variations in our and our competitors’ results of operations;

 

· the addition or departure of key personnel;

 

· announcements by us or our competitors of acquisitions, investments or strategic alliances;

 

· actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;

 

· the failure of securities analysts to publish research about us, or shortfalls in our results of operations compared to levels forecast by securities analysts;

 

· any delisting of our common stock from NASDAQ due to any failure to meet listing requirements;

 

· our warrants and units are quoted on OTC Pink which is a significantly more limited market than NASDAQ; and

 

· the general state of the securities market.

 

These market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.

 

As of October 10, 2017, approximately 13% of our outstanding common stock is held or beneficially owned by the Sponsor and approximately 71% is held or beneficially owned by the Lock-up Stockholders. The concentration of beneficial ownership provides the Sponsor and the Lock-up Stockholders, collectively, with substantial control over us, which could limit your ability to influence the outcome of key transactions, including a change of control, and future resales of our common stock held by these significant stockholders may cause the market price of our common stock to drop significantly.

 

As of October 10, 2017, approximately 13% of our outstanding common stock is held or beneficially owned by the Sponsor, approximately 71% of our outstanding common stock is held or beneficially owned by The SAR Trust U/A/D August 30, 2005, Thomas Shay and Adams Street Partners LLC and certain Adams Street fund limited partnerships (together, the “Lock-up Stockholders”) and approximately 72% of our outstanding common stock is held or beneficially owned by our directors and officers or persons affiliated with our directors and officers (including shares owned by the Lock-up Stockholders).

 

As a result, these stockholders, acting together, have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.

 

To the extent that the Sponsor and the Lock-up Stockholders purchase additional shares of ours, the percentage of shares that will be held by them will increase, decreasing the percentage of shares that are held by public stockholders.

 

  - 28 -  

 

 

The Lock-up Stockholders have agreed in a lock-up letter dated as of May 16, 2017 not to transfer or otherwise dispose of any shares of our common stock that they received upon consummation of the business combination for a period of twelve months through October 10, 2018, subject to certain exceptions (including an exception related to when, following the six month anniversary of the consummation of the business combination, the 20 trading day volume weighted average price of our common stock exceeds a specified price per share).

 

In addition, the shares of our common stock held by the Sponsor and its affiliates are held in an escrow account maintained in New York, New York by Continental Stock Transfer & Trust Company, acting as escrow agent. Subject to certain limited exceptions, these shares will not be transferred, assigned or sold until released from escrow until October 10, 2018, or earlier if, subsequent to our business combination, (i) the last sale price of our common stock equals or exceeds $12.00 per share (as adjusted for share splits, share dividends, reorganizations and recapitalizations) for any 20 trading days within any 30-trading day period commencing at least 150 days after October 10, 2017 or (ii) we consummate a subsequent liquidation, merger, share exchange or other similar transaction which results in all of our shareholders having the right to exchange their common stock for cash, securities or other property.

 

If any significant stockholder sells large amounts of our common stock in the open market or in privately negotiated transactions, this could have the effect of increasing the volatility in the price of our common stock or putting significant downward pressure on the price of our common stock.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We have not paid any cash dividends on our common stock to date . The payment of any cash dividends will be dependent upon our revenue, earnings and financial condition from time to time. The payment of any dividends will be within the discretion of our board of directors. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our board of directors will declare any dividends in the foreseeable future. Our ability to declare dividends is limited by restrictive covenants in the Credit Facility and may be limited by the terms of any other financing and other agreements entered into by us or our subsidiaries from time to time . Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. Consequently, investors may need to sell all or part of their holdings of our common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

Delaware law and our certificate of incorporation and bylaws contain certain provisions, including anti-takeover provisions, that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.

 

Our certificate of incorporation and bylaws, and the DGCL, contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by our board of directors and therefore depress the trading price of our common stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of our board of directors or taking other corporate actions, including effecting changes in our management. Among other things, our certificate of incorporation and bylaws include provisions regarding:

 

· a classified board of directors with three-year staggered terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

· the ability of our board of directors to issue shares of preferred stock, including “blank check” preferred stock, and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

  - 29 -  

 

 

· the limitation of the liability of, and the indemnification of our directors and officers;

 

· the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

· the requirement that directors may only be removed from our board of directors for cause;

 

· a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action, including the removal of directors;

 

· the requirement that a special meeting of stockholders may be called only by our board of directors, the chairperson of our board of directors, our chief executive officer or our president (in the absence of a chief executive officer), which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

· controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;

 

· the requirement for the affirmative vote of holders of at least 66 2/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend, alter, change or repeal any provision of our certificate of incorporation or our bylaws, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our board of directors and also may inhibit the ability of an acquirer to effect such amendments to facilitate an unsolicited takeover attempt;

 

· the ability of our board of directors to amend the bylaws, which may allow our board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and

 

· advance notice procedures with which stockholders must comply to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in our board of directors and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company.

 

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our board of directors or management.

 

In addition, as a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the DGCL, which may prohibit certain stockholders holding 15% or more of our outstanding capital stock from engaging in certain business combinations with us for a specified period of time.

 

Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or preventing a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock and could also affect the price that some investors are willing to pay for our common stock.

 

  - 30 -  

 

 

Our bylaws designate a state or federal court located within the State of Delaware as the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, stockholders, employees or agents.

 

Our bylaws provide that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for:

 

· any derivative action or proceeding brought on behalf of us;

 

· any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers or other employees;

 

· any action asserting a claim against us or any of our directors, officers or employees arising out of or relating to any provision of the DGCL, our certificate of incorporation or our bylaws; or

 

· any action asserting a claim against us or any of our directors, officers, stockholders or employees that is governed by the internal affairs doctrine of the Court of Chancery.

 

This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, results of operations and financial condition.

 

  - 31 -  

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

· the evolution of the enterprise software support landscape facing our customers and prospects;

 

· our ability to educate the market regarding the advantages of our enterprise software support products;

 

· estimates of our total addressable market;

 

· projections of customer savings;

 

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

 

· our future financial and operating results;

 

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

 

· beliefs and objectives for future operations;

 

· our ability to expand our leadership position in independent enterprise software support;

 

· our ability to attract and retain customers;

 

· our ability to further penetrate our existing customer 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 information technology environments;

 

· our ability to develop strategic partnerships;

 

· benefits associated with the use of our services;

 

· our ability to expand internationally;

 

· our ability to raise financing in the future;

 

  - 32 -  

 

 

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

 

· our intentions with respect to our pricing model;

 

· cost of revenues, including changes in costs associated with production, manufacturing, customer support and our client environment migration project;

 

· operating expenses, including changes in research and development, sales and marketing, and general administrative expenses;

 

· anticipated income tax rates;

 

· sufficiency of cash to meet cash needs for at least the next 12 months;

 

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

 

· costs associated with defending intellectual property infringement and other claims, such as those claims discussed in the section titled “ Business—Legal Proceedings ”;

 

· our expectations concerning relationships with third parties, including channel partners and logistics providers;

 

· economic and industry trends or trend analysis;

 

· the attraction and retention of qualified employees and key personnel;

 

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

 

· the effects of seasonal trends on our results of operations.

 

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 described in the section titled “ Risk Factors .” Moreover, we operate in a very competitive and rapidly changing market. 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 prospectus 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. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part 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.

 

  - 33 -  

 

 

BACKGROUND OF RIMINI STREET

 

Business Combination

 

On October 10, 2017, GPIA deregistered as an exempted company in the Cayman Islands and domesticated as a corporation incorporated under the laws of the State of Delaware. Also on October 10, 2017, Let’s Go merged with and into RSI, with RSI surviving the first merger, with the surviving corporation then merging with and into GPIA, with GPIA surviving the second merger. Immediately after consummation of the second merger, GPIA was renamed “Rimini Street, Inc.” and, as of the open of trading on October 11, 2017, the common stock, units and warrants of Rimini Street, Inc. began trading on NASDAQ as “RMNI,” “RMNIU” and “RMNIW,” respectively.

 

The merger consideration consisted of (i) 48,868,647 newly issued shares of our common stock in exchange for common shares and certain warrants of RSI, (ii) the conversion of outstanding options for the purchase of shares of common stock of RSI into an aggregate of approximately 13,260,000 newly issued options exercisable at a weighted average price per share of $2.76 for the purchase of shares of our common stock, and (iii) the conversion of certain outstanding warrants for the purchase of shares of common stock of RSI into an aggregate of 3,440,424 newly issued warrants for the purchase of shares of our common stock, exercisable at a price per share of $5.64.

 

Simultaneously with the closing of GPIA’s initial public offering on May 26, 2015, GPIA consummated the sale of 6,062,500 warrants at a price of $1.00 per warrant in a private placement to the Sponsor, generating gross proceeds of $6,062,500.

 

The table below summarizes the transition from GPIA’s ordinary shares converted to shares of our common stock as a result of the domestication, along with activity that occurred in connection with the consummation of the business combination, as of the closing date, October 10, 2017:

 

    GPIA           Shares of
Our
 
    Ordinary     Closing Activity     Common Stock  
    Shares     Public     Common Stock Purchases     Before  
    Converted in     Share     Sponsor Equity     Other     Business  
    Domestication     Redemption     Commitment     Investments     Combination  
                               
Public Shares     15,697,276   (1)     (14,286,064 ) (2)                 1,411,212  
Non-public shares:                                        
GPIC, Ltd. (the “Sponsor”)     4,252,500   (1)           3,600,000   (3)           7,852,500  
GPIA independent directors     60,000   (1)                       60,000  
Citigroup and Cowen                       388,437   (4)     388,437  
Total     20,009,776       (14,286,064 )     3,600,000       388,437       9,712,149  

 

 

(1) Represents the number of GPIA’s issued and outstanding ordinary shares that were converted to shares of our common stock upon completion of the Domestication.

 

(2) In connection with the transactions, the holders of GPIA’s public shares were permitted to elect to redeem their public shares for cash. Accordingly, holders of 14,286,064 ordinary shares elected redemption at a price of approximately $10.07 per share, resulting in aggregate redemption payments of approximately $143,904,000.

 

(3) On the effective date, but prior to the closing of the business combination, the Sponsor purchased in the aggregate 3,600,000 ordinary shares of GPIA in a private placement at an issuance price of $10.00 per share for gross proceeds of $36,000,000.

 

(4) Aggregate number of shares of our common stock issued to Citigroup and Cowen.

 

The table below summarizes the number of shares of our common stock issued after consummation of the business combination consisting of (i) the number of shares of RSI capital stock outstanding immediately before the business combination along with the impact of the exchange ratio that resulted in the issuance of 0.239412772 shares of our common stock for every one share of RSI capital stock (the “Exchange Ratio”), and (ii) the number of shares of our common stock outstanding after the Domestication but before consummation of the business combination, as of the closing date, October 10, 2017:

 

  - 34 -  

 

 

              Conversion to  
        RSI Capital Stock     Our  
Type   Series / Class   Outstanding     Warrant     Common Stock  
Preferred   A     5,499,900   (1)              
Preferred   B     38,545,560   (1)              
Preferred   C     56,441,035   (1)              
Common   A     529,329   (1)     177,751   (2)        
Common   B     102,925,500   (1)              
Total         203,941,325       177,751       48,868,647   (3)(4)
RMNI common stock immediately after Delaware Domestication         9,712,149   (5)
Total RMNI common stock outstanding upon consummation of business combination       58,580,796  

 

(1) Represents the number of shares of RSI capital stock issued and outstanding immediately prior to consummation of the business combination.

 

(2) In connection with the business combination, Adams Street Partners and its affiliates agreed to exercise on a cashless basis their warrants for 344,828 shares of RSI’s Class A common stock at an exercise price of $1.16 per share immediately prior to consummation of the business combination. This cashless exercise resulted in the issuance of 177,751 shares of RSI’s Class A common stock.

 

(3) Conversion to shares of our common stock is based on the Exchange Ratio that resulted in the issuance of 0.239412772 shares of our common stock for every one share of RSI capital stock.

 

(4) The total number of shares of our common stock issued was net of fractional shares (in an amount equal to 67 shares of our common stock in the aggregate) resulting from the application of the Exchange Ratio.

 

(5) Based on the number of shares of our common stock outstanding after the Domestication but immediately prior to consummation of the business combination.

 

Upon consummation of the business combination, the former stockholders of RSI owned approximately 84% of the issued and outstanding shares of our common stock. This percentage excludes the impact of outstanding stock options and warrants.

 

  - 35 -  

 

 

USE OF PROCEEDS

 

All of the shares of common stock and warrants offered by the selling securityholders pursuant to this prospectus will be sold by the selling securityholders for their respective accounts. We will not receive any of the proceeds from the sale of the Securities hereunder. We will receive up to an aggregate of approximately $188,310,241 from the exercise of the Warrants assuming the exercise in full of all of the Warrants for cash. We expect to use the net proceeds from the exercise of the Warrants for general corporate purposes.

 

With respect to the registration of the shares of our common stock issuable upon exercise of the Origination Agent Warrants, the selling securityholders will pay any underwriting discounts and commissions incurred by them in disposing of the Securities. We will bear all other costs, fees and expenses incurred in effecting the registration of the Securities covered by this prospectus, including, without limitation, all registration and filing fees, NASDAQ listing fees, fees of our counsel and our independent registered public accountants, and expenses incurred by the selling securityholders for brokerage, accounting, tax or legal services or any other expenses incurred by the selling securityholders in disposing of the Securities.

 

With respect to the registration of all other shares of common stock and warrants offered by the selling securityholders pursuant to this prospectus, the selling securityholders will pay any underwriting discounts and commissions and expenses incurred by them for brokerage, accounting, tax or legal services or any other expenses incurred by them in disposing of the Securities. We will bear all other costs, fees and expenses incurred in effecting the registration of the Securities covered by this prospectus, including, without limitation, all registration and filing fees, NASDAQ listing fees, and fees of our counsel and our independent registered public accountants.

 

  - 36 -  

 

 

MARKET PRICE OF AND DIVIDENDS ON SECURITIES AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

In connection with the business combination, the holders of GPIA’s public shares were permitted to elect to redeem their public shares for cash. Accordingly, holders of 14,286,064 GPIA ordinary shares elected redemption at a price of approximately $10.07 per share, resulting in aggregate redemption payments of approximately $143,904,000. See the section titled “ Background of Rimini Street ” for additional information.

 

Following the business combination, our common stock, units and warrants began trading on NASDAQ under the symbols “RMNI,” “RMNIU” and “RMNIW,” respectively. Our units and warrants are presently quoted on OTC Pink. The following tables set forth the high and low prices for our common stock and warrants as reported on NASDAQ and OTC Pink, as applicable, for the quarterly periods indicated after the consummation of the business combination on October 10, 2017. These prices do not include retail markups, markdowns or commissions. We do not believe that presenting the historic trading price of GPIA’s securities would be helpful to investors. The price of such securities traded based on cash held by GPIA as a special purpose acquisition company, and substantially all of the former public holders of GPIA securities redeemed their securities for cash upon consummation of the business combination.

 

Common Stock

 

Year ending December 31, 2017   High     Low  
Fourth Quarter (October 10, 2017 through November 28, 2017)   $ 10.40   $ 6.48  

 

Warrants

 

Year ending December 31, 2017   High     Low  
Fourth Quarter (October 10, 2017 through November 28, 2017)   $ 0.94     $ 0.40  

 

On November 14, 2017, there were approximately 80 stockholders of record of our common stock, 1 holder of record of our units and 3 holders of record of our warrants. We believe the number of beneficial owners of our common stock, units and warrants are substantially greater than the number of record holders because a large portion of our outstanding common stock, units and warrants are held of record in broker “street names” for the benefit of individual investors. As of October 10, 2017, there were 58,574,630 shares of our common stock outstanding (not including the shares underlying our units), 6,167 units outstanding and 18,124,840 warrants outstanding (not including the warrants underlying the units).

 

We have not paid any cash dividends on our common stock to date. The payment of any cash dividends will be dependent upon our revenue, earnings and financial condition from time to time. The payment of any dividends will be within the discretion of our board of directors. It is presently expected that we will retain all earnings for use in our business operations and, accordingly, it is not expected that our board of directors will declare any dividends in the foreseeable future. Our ability to declare dividends is limited by restrictive covenants in the Credit Facility and may be limited by the terms of any other financing and other agreements entered into by us or our subsidiaries from time to time .

 

  - 37 -  

 

 

SELECTED HISTORICAL FINANCIAL DATA

 

Selected Historical Financial Data of RSI

 

The Selected Historical Financial Data of RSI reflects, and is based upon, the capital structure of RSI prior to giving effect to the business combination with GPIA. Due to the change of control and the composition of GPIA’s assets, on October 10, 2017 the business combination will be accounted for as a reverse recapitalization whereby RSI is considered to be the acquirer for accounting and financial reporting purposes, and GPIA is the legal acquirer. In accounting and financial reporting for the reverse recapitalization on October 10, 2017, the historical capitalization of RSI will be adjusted to give effect for the reverse recapitalization and the Delaware Domestication, as discussed in Note 1 to the RSI’s unaudited condensed consolidated financial statements as of and for the nine months ended September 30, 2017 and 2016, contained elsewhere in this prospectus.

 

The following selected historical financial data should be read together with the consolidated financial statements and accompanying notes contained elsewhere in this prospectus and the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations of RSI .” The selected consolidated financial data in this section is not intended to replace RSI’s consolidated financial statements and the related notes. RSI’s historical results are not necessarily indicative of our future results, and its results as of and for the nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected from us for the year ending December 31, 2017.

 

We derived the selected consolidated statements of operations and cash flows data of RSI for the years ended December 31, 2016, 2015 and 2014, and the consolidated balance sheet data as of December 31, 2016 and 2015, from RSI’s audited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statements of operations and cash flows data for the nine months ended September 30, 2017 and 2016 and the selected consolidated balance sheet data as of September 30, 2017 are derived from RSI’s unaudited condensed consolidated interim financial statements appearing elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2014 is derived from RSI’s audited consolidated financial statements that are not included in this prospectus. The unaudited condensed consolidated interim financial statements were prepared on a basis consistent with RSI’s audited financial statements and include, in our opinion, all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of RSI’s unaudited condensed consolidated interim financial statements.

 

  - 38 -  

 

 

 

    Nine Months Ended        
    September 30,     Year Ended December 31,  
    2017     2016     2016     2015     2014  
    (In thousands, expect percentages and per share amounts)  
Consolidated statement of operations data:                                        
Net revenue   $ 154,729     $ 113,438     $ 160,175     $ 118,163     $ 85,348  
Cost of revenue     58,002       48,074       67,045       52,766       45,258  
Gross profit     96,727       65,364       93,130       65,397       40,090  
Gross profit percentage (1)     62.5 %     57.6 %     58.1 %     55.3 %     47.0 %
Operating expenses:                                        
Sales and marketing     47,685       53,573       72,936       50,330       37,509  
General and administrative     26,784       22,082     36,212       24,220       19,270  
Litigation costs, net of insurance recoveries     4,611       11,703       (29,949 )     32,732       103,266  
Write-off of deferred offering and financing costs     -       2,000       -       -       5,307  
Total operating expenses     79,080       89,358       79,199       107,282       165,352  
Operating income (loss)     17,647       (23,994 )     13,931       (41,885 )     (125,262 )
Interest expense     (33,629 )     (5,020 )     (13,356 )     (829 )     (742 )
Other debt financing expenses     (14,704 )     (4,278 )     (6,371 )     -       -  
Loss on embedded derivatives and redeemable warrants, net     (18,467 )     (2,145 )     (3,822 )     -       -  
Other income (expense), net     422       (665 )     (1,787 )     (1,104 )     (843)  
Loss before income taxes     (48,731 )     (36,102 )     (11,405 )     (43,818 )     (126,847 )
Income tax benefit (expense)     (643 )     (895 )     (1,532 )     (1,451 )     (981 )
Net loss   $ (49,374 )   $ (36,997 )   $ (12,937 )   $ (45,269 )   $ (127,828 )
Earnings per share attributable to common stockholders-                                        
Basic and diluted (2)   $ (0.48 )   $ (0.37 )   $ (0.23 )   $ (0.45 )   $ (1.27 )
Weighted average number of common shares outstanding-                                        
Basic and diluted (2)     102,535       101,326       101,341       101,174       100,930  
Consolidated statement of cash flows data:                                        
Net cash provided by (used in):                                        
Operating activities   $ 26,156     $ 12,048     $ (59,609 )   $ 1,573     $ 3,215  
Investing activities     (1,074 )     (630 )     (1,188 )     (1,747 )     (1,242 )
Financing activities     (38,280 )     3,487       77,088       (842)       (2,954 )
Consolidated balance sheet data (at end of period):                                        
Working capital deficit (3)   $ (152,221 )           $ (123,623 )   $ (199,731 )   $ (58,517 )
Cash and cash equivalents     6,862               9,385       12,457       13,758  
Restricted cash     8,727               18,852       102       102  
Total assets     70,076               99,378       62,741       52,336  
Current maturities of long-term debt     11,750               24,750       14,814       15,132  
Total liabilities     330,124               312,888       275,060       221,541  
Stockholders' deficit     (260,048 )             (213,510 )     (212,319 )     (169,205 )

 

 

 

(1) Gross profit percentage is computed by dividing gross profit by net revenue.

 

(2) The change in capital structure resulting from the consummation of the business combination and reverse recapitalization is not given effect until financial statements are provided for the first period that ends after the October 10, 2017 closing date. Accordingly, earnings (loss) per share is based on the capital structure of RSI that existed during the periods presented.

 

  - 39 -  

 

  

Basic net loss per share is computed by dividing our net loss attributable to common stockholders by the aggregate weighted average number of RSI Class A and Class B common shares outstanding for each period presented. Earnings (loss) per share for RSI’s Class A and Class B common stock is presented herein on a combined basis since the earnings (loss) per share applicable to each class is identical for all periods presented.

 

For the calculation of basic earnings per share for the year ended December 31, 2016, a deemed dividend of $10.0 million on RSI’s Series C preferred stock is deducted in the calculation of net income attributable to common stockholders. For purposes of the calculation of diluted earnings per share for all periods, common stock equivalents have been excluded from the weighted average number of common shares outstanding since the impact was antidilutive.

 

(3) Working capital is computed by subtracting our total current liabilities from our total current assets in our historical consolidated financial statements appearing elsewhere in this prospectus.

 

Selected Historical Financial Data of GPIA

 

On October 10, 2017, the business combination between GPIA and RSI was consummated and will be accounted for as a reverse recapitalization whereby RSI is considered to be the acquirer for accounting and financial reporting purposes, and GPIA is the legal acquirer. GPIA’s balance sheet data as of December 31, 2016 and 2015 and statement of operations data for the year ended December 31, 2016, and for the period from January 28, 2015 (inception) through December 31, 2015, are derived from GPIA’s audited financial statements included elsewhere in this prospectus. GPIA’s balance sheet data as of September 30, 2017 and statement of operations data for the nine months ended September 30, 2017 and 2016 are derived from GPIA’s unaudited financial statements included elsewhere in this prospectus.

 

This information is only a summary and should be read in conjunction with GPIA’s consolidated financial statements and related notes contained elsewhere in this prospectus and the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations of GPIA .” The selected historical financial data in this section is not intended to replace GPIA’s consolidated financial statements and the related notes. The unaudited condensed consolidated interim financial statements were prepared on a basis consistent with GPIA’s audited financial statements and include, in our opinion, all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of GPIA’s unaudited condensed consolidated interim financial statements.

   

                Period From  
    Nine Months Ended           January 28, 2015  
    September 30,     Year Ended     (Inception) Through  
    2017     2016     December 31, 2016     December 31, 2015  
    (In thousands, except per share amounts)  
Consolidated statement of operations data:                                
Net revenue   $ -     $ -     $ -     $ -  
Operating expenses     832       2,291       3,335       209  
Operating loss     (832 )     (2,291 )     (3,335 )     (209 )
Interest income and other     765       394       474       78  
Net loss   $ (67 )   $ (1,897 )   $ (2,861 )   $ (131 )
Earnings per share attributable to common stockholders-                                
Basic and diluted (1)   $ (0.01 )   $ (0.35 )   $ (0.52 )   $ (0.03 )
Weighted average number of common shares outstanding-                                
Basic and diluted (1)     5,670       5,418       5,466       4,762  
Consolidated statement of cash flows data:                                
Net cash provided by (used in):                                
Operating activities   $ (502 )   $ (2,158 )   $ (3,502 )   $ (197 )
Investing activities     15,608       -       -       -  
Financing activities     (15,106 )     1,193       2,536       173,664  
Consolidated balance sheet data (at end of period):                                
Working capital (deficit) (2)   $ (231 )           $ (479 )   $ 955  
Cash and cash equivalents     2               2       967  
Cash and securities held in trust account     158,209               173,052       172,578  
Total assets     158,224               173,271       173,554  
Total liabilities     9,264               8,636       6,057  
Shares subject to possible redemption     143,960               159,635       162,496  
Stockholders' equity     5,000               5,000       5,000  

 

 

 

(1) Basic net loss per share is computed by dividing our net loss by the weighted average number of shares outstanding for each period presented. The weighted average number of shares outstanding excludes shares subject to redemption for all periods presented. For purposes of the calculation of diluted earnings per share for all periods, common stock equivalents have been excluded from the weighted average number of common shares outstanding since the impact was antidilutive.

 

(2) Working capital is computed by subtracting our total current liabilities from our total current assets in our historical consolidated financial statements appearing elsewhere in this prospectus.

 

  - 40 -  

 

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of RSI

 

References in this section to “we,” “us” or the “Company” refer to RSI. References to “management” or “management team” refer to RSI’s officers and directors.

 

The following discussion and analysis of RSI’s financial condition and results of operations should be read in conjunction with RSI’s consolidated financial statements and the related notes to those statements included elsewhere in this prospectus. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. RSI’s 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 in the section titled “ Risk Factors ” and elsewhere in this prospectus.

 

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. is a global provider of enterprise software support products and services, and the leading independent software support provider for Oracle and SAP products, based on both the number of active clients supported and recognition by industry analyst firms. We founded our company to disrupt and redefine the enterprise software support market by developing and delivering innovative new products and services that fill a then unmet need in the market. We believe we have achieved our leadership position in independent enterprise software support by recruiting and hiring experienced, skilled and proven staff; delivering outcomes-based, value-driven and award-winning enterprise software support products and services; seeking to provide an exceptional client-service, satisfaction and success experience; and continuously innovating our unique products and services by leveraging our proprietary knowledge, tools, technology and processes.

 

Enterprise software support products and services is one of the largest categories of overall global information technology (“IT”) spending. We believe core enterprise resource planning (“ERP”), customer relationship management (“CRM”), product lifecycle management (“PLM”) and technology software platforms have become increasingly important in the operation of mission-critical business processes over the last 30 years, and also that the costs associated with failure, downtime, security exposure and maintaining the tax, legal and regulatory compliance of these core software systems have also increased. As a result, we believe that licensees often view software support as a mandatory cost of doing business, resulting in recurring and highly profitable revenue streams for enterprise software vendors. For example, for fiscal year 2016, SAP reported that support revenue represented approximately 48% of its total revenue and Oracle reported a margin of 94% for software license updates and product support.

 

We believe that software vendor support is an increasingly costly model that has not evolved to offer licensees the responsiveness, quality, breadth of capabilities or value needed to meet the needs of licensees. Organizations are under increasing pressure to reduce their IT costs while also delivering improved business performance through the adoption and integration of emerging technologies, such as mobile, virtualization, internet of things (“IoT”) and cloud computing. Today, however, the majority of IT budget is spent operating and maintaining existing infrastructure and systems. As a result, we believe organizations are increasingly seeking ways to redirect budgets from maintenance to new technology investments that provide greater strategic value, and our software products and services help clients achieve these objectives by reducing the total cost of support.

 

As of September 30, 2017, we employed approximately 900 professionals and supported over 1,450 active clients globally, including 66 Fortune 500 companies and 19 Fortune Global 100 companies across a broad range of industries. We define an active client as a distinct entity, such as a company, an educational or government institution, or a business unit of a company that purchases our services to support a specific product. For example, we count as two separate active client instances in circumstances where we provide support for two different products to the same entity. We market and sell our services globally, primarily through our direct sales force, and have wholly-owned subsidiaries in Australia, Brazil, France, Germany, Hong Kong, India, Israel, Japan, Korea, Sweden, Taiwan, the United Kingdom and the United States. We believe our primary competitors are the enterprise software vendors whose products we service and support, including IBM, Microsoft, Oracle and SAP.

 

  - 41 -  

 

  

We have experienced 47 consecutive quarters of revenue growth through September 30, 2017. In addition, our subscription-based revenue provides a strong foundation for, and visibility into, future period results. We generated net revenue of $85.3 million, $118.2 million and $160.2 million for the years ended December 31, 2014, 2015 and 2016, respectively, representing a year-over-year increase of 38% and 36% in 2015 and 2016, respectively, and $113.4 million and $154.7 million for the nine months ended September 30, 2016 and 2017, respectively, representing a period-over-period increase of 36%. We have a history of losses, and as of September 30, 2017, we had an accumulated deficit of $300.5 million. We had net losses of $127.8 million, $45.3 million and $12.9 million for the years ended December 31, 2014, 2015 and 2016, respectively, and $37.0 million and $49.4 million for the nine months ended September 30, 2016 and 2017, respectively. We generated approximately 68% of our net revenue in the United States and approximately 32% of our net revenue from our international business for the nine months ended September 30, 2017.

 

Since our inception, we have financed our operations through cash collected from clients and net proceeds from equity financings and borrowings. As of September 30, 2017, we had outstanding contractual obligations under our Credit Facility of $140.0 million and the net carrying value of those debt obligations was $80.2 million.

 

We intend to continue investing for long-term growth. 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 products and services to address client needs. We currently do not expect to be profitable in the near future.

 

Recent Developments

 

Reference is made to Note 11 to the unaudited condensed consolidated interim financial statements of RSI included elsewhere in this prospectus for a discussion of recent events consummated in October 2017.

 

Our Business Model

 

We believe most enterprise software vendors license the rights for customers to use their software. 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 averages 22% of the total cost of the software license. In a subscription-based licensing model, such as software as a service, or SaaS, the customer generally pays as it goes for 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 base software support for a Perpetual 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 25% of the annual fees charged by the software vendor for their base support. For supplemental software support on a Subscription License, we generally offer our clients services for a fee that is equal to 50% of the annual fees charged by the software vendor for their supplemental or premium support. We also offer a special support service, Rimini Street Extra Secure Support, for clients that require a higher level of security clearance for our engineers accessing their system. Rimini Street Extra Secure Support is an additional fee added to our base or supplemental support fee, and priced at approximately 1% of the software vendor’s annual fees for base maintenance for Perpetual Licenses and priced at approximately 2% of the subscription fees for Subscription Licenses. Subscriptions for additional software products and services are available, designed to meet specific client needs and provide exceptional value for the fees charged.

 

  - 42 -  

 

  

Our subscription-based software support products and services offer enterprise software licensees a choice of solutions that replace or supplement the support products and services offered by enterprise software vendors for their products. Features, service levels, service breadth, technology and pricing differentiate our software products and services. We believe clients utilize our software products and services to achieve substantial cost savings; receive more responsive and comprehensive support; obtain support for their customized software that is not generally covered under the enterprise software vendor’s service offerings; enhance their software functionality, capabilities, and data usage; and protect their systems and extend the life of their existing software releases and products. Our products and services enable our clients to keep their mission-critical systems operating smoothly and to remain in tax, legal and regulatory compliance; improve productivity; and better allocate limited budgets, labor and other resources to investments that provide competitive advantage and support growth .

 

We currently offer most of our support products and services on a subscription basis for a term that is generally 15 years in length with an average initial, non-cancellable period of two years. The negotiated fees extend for the full term of the contract and usually include modest increases (averaging approximately three percent) after the initial non-cancelable period of each contract. For the year ended December 31, 2016, approximately 78% of our invoicing was generated inside a non-cancellable period, and approximately 22% of our invoicing was generated outside of a non-cancellable period. For the nine months ended September 30, 2017, approximately 79% of our invoicing was generated inside a non-cancellable period, and approximately 21% of our invoicing was generated outside of a non-cancellable period.

 

After a non-cancellable period, our clients generally have the ability to terminate their support contracts on an annual basis upon 90 days’ notice prior to the end of the support period or renegotiate a mutually-agreeable, additional support period – including potentially an additional multi-year, non-cancellable support period. We generally invoice our clients annually in advance of the support period. We record amounts invoiced for support periods that have not yet occurred as deferred revenue on our balance sheet. We net any unpaid accounts receivable amounts relating to cancellable support periods against deferred revenue on our balance sheet.

 

Our pricing model is a key component of our marketing and sales strategy and delivers significant savings and value to our clients .

 

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, 2014, 2015 and 2016 and September 30, 2016 and 2017, we had over 650, 850 and 1200 and 1,085 and 1,459 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 December 31, 2014, 2015 and 2016 and September 30, 2016 and 2017, we had over 500, 600 and 780 and 715 and 886 unique clients, respectively.

 

The increase 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 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 .

 

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Our annualized subscription revenue was approximately $102 million, $132 million and $187 million as of December 31, 2014, 2015 and 2016, respectively, and approximately $163 million and $214 million as of September 30, 2016 and 2017, respectively. We believe the sequential increase in annualized subscription 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 subscription revenue as of the day prior to the start of the 12-month period . Our revenue retention rate was 95%, 91% and 94% for the years ended December 31, 2014, 2015 and 2016, respectively, and 95% for each of the nine months ended September 30, 2016 and 2017.

 

Gross profit percentage

 

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, and presented on our income statement. 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 net revenue and the costs incurred in providing the software products and services. Gross profit percentage is the ratio of gross profit divided by net revenue . Our gross profit percentage was 47%, 55% and 58% for the years ended December 31, 2014, 2015, and 2016 respectively, and 57.6% and 62.5% for the nine months ended September 30, 2016 and 2017, respectively. We believe the gross profit percentage provides an indication of how efficiently and effectively we are operating our business and serving our clients.

 

Factors Affecting Our Operating Performance

 

Litigation

 

The information from the sections titled “ Business—Legal Proceedings ” and “ Risk Factors-—Risks Related to Litigation “We and our Chief Executive Officer 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 for our current or past business activities, be enjoined from certain business practices, and/or be in breach of various covenants in our financing arrangements, which could result in an event of default, in which case the lenders could demand accelerated repayment of principal, accrued and default interest and other fees and expenses. Any of these outcomes could result in a material adverse effect on our business.

 

We accounted for the $124.4 million judgment in Rimini I to Oracle by recording an accrued legal settlement expense of (i) $100.0 million for the year ended December 31, 2014, (ii) $21.4 million for the year ended December 31, 2015, and (iii) pre-judgment interest of $3.0 million for the period from January 1, 2016 through October 31, 2016, which is reflected in our 2016 financial statements. There remain significant disputes between us and Oracle in Rimini II, and we do not concede any liability or damages related to any claim. After assessing the current procedural and substantive status of the Rimini II litigation, we do not believe a loss or range of reasonably possible losses can be estimated at this time .

 

Adoption of enterprise software products and services

 

We believe the existing market for independent enterprise software support services is underserved. We currently provide support services for IBM, Microsoft, SAP, Oracle and other enterprise software vendors’ products. 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 the Rimini Street Advanced Database Security product in partnership with McAfee, a global leader in cybersecurity.

 

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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 products and services, we often must educate prospective clients about the value of our products and services, which can result in lengthy 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, systems environment, products and releases being used, needs and objectives.

 

The variability in our sales cycle for replacement or supplemental software support services is impacted by whether software vendors are able to convince potential clients that they should renew their software maintenance 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 litigation with Oracle can also drive sales cycle variability as clients oftentimes perform their own legal due diligence, which can lengthen the sales cycle .

 

Key Components of Consolidated Statements of Operations

 

Net Revenue. We derive nearly all our revenue from subscription-based contracts for software services. Revenue from these contracts are 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 services organization, 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 services organization as they are incurred.

 

Sales and marketing expenses. Sales and marketing expenses consist primarily of personnel costs for our sales, marketing and business development employees and executives, including commissions earned by our sales and marketing personnel, which are expensed when a client contract is executed. We also incur other non - personnel expenses, such as outside services, professional fees, marketing programs, travel - related expenses, allocation of our general overhead expenses and the expenses associated with several key industry trade shows.

 

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.

 

Litigation costs and related insurance recoveries. Litigation costs consist of legal settlements, pre - judgment interest, and 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 are reflected as a reduction of litigation costs upon notification of approval for reimbursement by the insurance company. For legal expenses related to Rimini II litigation, the deferred settlement liability is reduced with a corresponding reduction of legal expenses when the costs are incurred.

 

  - 45 -  

 

  

Interest expense. Interest expense is incurred under our credit facilities 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 interest, and accretion of debt discounts and issuance costs using the effective interest method.

 

Other debt financing expenses. Other debt financing expenses are incurred pursuant to the Credit Facility. The components of other debt financing expenses include collateral monitoring fees, unused line fees required to ensure our availability to funding, amortization of debt issuance costs related to the unfunded portions of the Credit Facility, write-off of debt discount and issuance costs in connection with principal prepayments, penalties incurred for not achieving target dates for completing the business combination with GPIA, and fees charged for administrative agent and loan servicing fees.

 

Loss on embedded derivatives and redeemable warrants, net. The Credit Facility contains features referred to as embedded derivatives, that are required to be bifurcated and recorded at fair value. Embedded derivatives include requirements to pay default interest upon the existence of an event of default, requirements to pay certain target date fees, and to pay “make-whole” interest for certain mandatory and voluntary prepayments of the outstanding principal balance under the Credit Facility. We also had warrants outstanding that were redeemable in cash at the option of the holders at the earliest to occur of (i) termination of the Credit Facility, (ii) a change of control, or (iii) 30 days prior to the stated expiration date of the Lender warrants. Due to the existence of the cash redemption feature, the warrants were recorded as a liability at fair value through October 10, 2017 when the cash redemption feature was eliminated upon the effectiveness of the Sixth Amendment. We engaged an independent valuation specialist to perform valuations of the embedded derivatives and redeemable warrants on a quarterly basis. Changes in the fair value of embedded derivatives and redeemable warrants are reflected as a non - operating gain or loss in our consolidated statements of operations.

 

Other income (expense), net. Other income (expense), net consists primarily of gains or losses on foreign currency transactions and income earned on temporary cash investments.

 

Income tax expense. 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 only of foreign taxes for the periods presented as we had no taxable income for U.S. federal or state purposes. In addition, because of our lack of domestic earnings history and U.S. federal tax net operating losses, the domestic net deferred tax assets have been fully offset by a valuation allowance, and therefore, no tax benefit has been recognized.

 

Results of Operations

 

Our condensed consolidated statements of operations for the nine months ended September 30, 2017 and 2016, and for the years ended December 31, 2016, 2015 and 2014, are presented below (in thousands):

 

  - 46 -  

 

  

    Nine Months Ended     Years Ended  
    September 30:     December 31:  
    2017     2016     2016     2015     2014  
    (unaudited)                    
Net revenue   $ 154,729     $ 113,438     $ 160,175     $ 118,163     $ 85,348  
Cost of revenue     58,002       48,074       67,045       52,766       45,258  
Gross profit     96,727       65,364       93,130       65,397       40,090  
Operating expenses:                                        
Sales and marketing     47,685       53,573       72,936       50,330       37,509  
General and administrative     26,784       22,082       36,212       24,220       19,270  
Write-off of deferred financing costs     -       2,000       -       -       5,307  
Litigation costs, net of insurance recoveries     4,611       11,703       (29,949 )     32,732       103,266  
Total operating expenses     79,080       89,358       79,199       107,282       165,352  
Operating income (loss)     17,647       (23,994 )     13,931       (41,885 )     (125,262 )
Non-operating expenses:                                        
Interest expense     (33,629 )     (5,020 )     (13,356 )     (829)       (742 )
Other debt financing expenses     (14,704 )     (4,278 )     (6,371 )     -       -  
Loss on embedded derivatives and redeemable warrants, net     (18,467 )     (2,145 )     (3,822 )     -       -  
Other, net     422       (665 )     (1,787 )     (1,104 )     (843)  
Loss before income taxes     (48,731 )     (36,102 )     (11,405 )     (43,818 )     (126,847 )
Income tax expense     (643 )     (895 )     (1,532 )     (1,451 )     (981 )
Net loss   $ (49,374 )   $ (36,997 )   $ (12,937 )   $ (45,269 )   $ (127,828 )

 

Comparison of Nine Months ended September 30, 2017 and 2016

 

Net revenue. Net revenue increased from $113.4 million for the nine months ended September 30, 2016 to $154.7 million for the nine months ended September 30, 2017, an increase of $41.3 million or 36%. The vast majority of this increase was driven by a 27% increase in the average number of unique clients, as opposed to existing unique clients subscribing to additional services. On a regional basis, United States net revenue grew from $78.0 million for the nine months ended September 30, 2016 to $105.1 million for the nine months ended September 30, 2017, an increase of $27.0 million or 35%; and international net revenue grew from $35.5 million for the nine months ended September 30, 2016 to $49.6 million for the nine months ended September 30, 2017, an increase of $14.1 million or 40%.

 

Cost of revenue. Cost of revenue increased from $48.1 million for the nine months ended September 30, 2016 to $58.0 million for the nine months ended September 30, 2017, an increase of $9.9 million or 21%. This increase was primarily due to an increase in employee compensation and benefits of $7.2 million, and an increase in contract labor costs of $2.4 million to support the increasing number of clients. The shared support services costs grew at a lower rate than the increase in clients and net revenue as the support provided by these functions was spread out over a wider client base.

 

Gross Profit. The following table presents the key components of our net revenue, cost of revenue and gross profit for the nine months ended September 30, 2017 and 2016 (dollars in thousands):

 

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                Change  
    2017     2016     Amount     Percent  
Net revenue   $ 154,729     $ 113,438     $ 41,291       36 %
Cost of revenue:                                
Employee compensation and benefits     40,239       33,025       7,214       22 %
Engineering consulting costs     8,322       5,885       2,437       41 %
Administrative allocations (1)     6,460       6,112       348       6 %
All other costs     2,981       3,052       (71 )     -2 %
Total cost of revenue     58,002       48,074       9,928       21 %
                                 
Gross profit   $ 96,727     $ 65,364     $ 31,363       48 %
                                 
Gross profit percentage     62.5 %     57.6 %                

  

 

(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, 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.

 

As shown in the table above, our net revenue for the nine months ended September 30, 2017 increased by $41.3 million compared to the nine months ended September 30, 2016, which was driven by a 40% increase in the average number of active clients from 947 for the nine months ended September 30, 2016 to 1,326 for the nine months ended September 30, 2017. Total cost of revenue increased by $9.9 million, or 21%, compared to the increase in net revenue of 36%. The key driver of the increase in cost of revenue was an increase of 108 in the average number of engineering employees, which resulted in an increase in employee compensation and benefits costs of $7.2 million to support the growth in net revenue. In addition to hiring employees, we relied on increased use of engineering consultants, resulting in an increase in contract labor costs of $2.4 million. For the nine months ended September 30, 2017, we have been subject to budgetary compliance covenants in our Credit Facility which limit the amounts that may be incurred for costs subject to our administrative allocations shown in the table above. Accordingly, administrative cost allocations were relatively flat for the nine months ended September 30, 2016 and 2017. The increased net revenue combined with slower growth in the cost of revenue resulted in an improvement in our gross profit by $31.4 million, or 48%, as well as an improvement in our gross profit percentage from 57.6% for the nine months ended September 30, 2016 to 62.5% for the nine months ended September 30, 2017. The increased utilization of our engineering workforce continued to be a primary driver in our efforts to contain growth in cost of revenue and improve gross profit percentage for the nine months ended September 30, 2017.

 

Sales and marketing expenses. Sales and marketing expenses decreased from $53.6 million for the nine months ended September 30, 2016 to $47.7 million for the nine months ended September 30, 2017, a decrease of $5.9 million or 11%. This decrease was primarily due to a decrease in commissions expense of $2.5 million that resulted from modifications to our commission plan for 2017, as well as certain client contracts that included contingencies that delayed both revenue and the related commission expense during the third quarter of 2017, a decrease in airfare, lodging and business meeting expense of $1.9 million, and a decrease in contract labor and recruitment cost of $1.0 million. The decreased spending also reflects the requirement to adhere to a sales and marketing spending ratio covenant included in our Credit Facility.

 

General and administrative expenses. General and administrative expenses increased from $22.1 million for the nine months ended September 30, 2016 to $26.8 million for the nine months ended September 30, 2017, an increase of $4.7 million or 21%. This increase was primarily due to an increase in employee and related compensation costs of $2.0 million as a result of an increase in average general and administrative personnel headcount of 20% as we continued to support our growth and prepare to transition to become a public company, professional service costs of $1.5 million, and rent expense and computer software of $0.9 million.

 

We expect to incur incremental 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 our transition to become a public company. In addition, we will begin to incur additional expenses associated with being a public company after completion of the business combination. Those expenses include additional information systems costs, costs for additional personnel in our accounting, human resources, IT and legal functions, and incremental professional, legal, audit and insurance costs. As a result, we expect our general and administrative expenses to increase in future periods.

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Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries for the nine months ended September 30, 2017 and 2016, consist of the following (in thousands):

 

    2017     2016     Change  
Pre-judgment interest   $     $ 2,706     $ (2,706 )
Professional fees and other defense costs of litigation     11,724       15,865       (4,141 )
Insurance recoveries and reduction in deferred settlement liability     (7,113 )     (6,868 )     245  
                         
Litigation costs, net of related insurance recoveries   $ 4,611     $ 11,703     $ (7,092 )

 

Professional fees and other defense costs associated with litigation decreased from $15.9 million for the nine months ended September 30, 2016 to $11.7 million in the nine months ended September 30, 2017, a decrease of $4.2 million or 26%. Such costs in 2016 reflected incremental legal activity that occurred in the first three quarters of 2016 after the 2015 jury verdict in the “Rimini I” case. For the comparable period in 2017, we incurred professional fees related to ongoing litigation with Oracle that we refer to as “Rimini II” along with our appeal of the Rimini I judgment. Since 2010, we have been actively engaged in the Rimini I litigation with Oracle through October 2016 when we paid a judgment of $124.4 million. With respect to the judgment for the Rimini I litigation, we accrued pre-judgment interest through October 2016 of $3.0 million, for which we recognized $2.7 million as the portion that related to the nine months ended September 30, 2016. We currently expect to continue to incur legal expenses related to our appeal of the Rimini I outcome through early 2018, while the Rimini II litigation costs are expected to continue through 2020 or 2021. Litigation costs related to these matters are currently expected to range between $2.0 and $5.0 million per quarter, at least through the Rimini II trial date.

 

We had certain insurance policies in effect related to our litigation activities whereby we are entitled to recover a portion of the legal fees to defend against the litigation. For the first quarter of 2017, we received insurance reimbursements of $1.0 million. In March 2017, we entered into a settlement agreement with an insurance company that had been providing defense cost coverage related to Rimini II. Pursuant to the settlement, we received a one-time payment of $19.3 million in April 2017. The $19.3 million settlement proceeds are being accounted for as a deferred liability that is being reduced as legal expenses related to Rimini II are incurred in the future. For the period from April 1, 2017 through September 30, 2017, we incurred $6.1 million of legal fees related to Rimini II, which reduced the deferred settlement liability, with a corresponding reduction of expenses in our condensed consolidated statement of operations for the nine months ended September 30, 2017. For the period from April 1, 2017 through September 30, 2017, we did not receive any cash reimbursements from insurance companies. For the nine months ended September 30, 2016, we received cash for insurance reimbursements of $6.9 million related to the Rimini I litigation. As a result of the insurance settlement agreement, we expect limited, if any, future cash recoveries from insurance.

 

Write-off of deferred financing costs. For the nine months ended September 30, 2016, we paid two financial advisory firms an aggregate of $2.0 million to assist us in raising debt or equity financing. These firms were unsuccessful in obtaining financing and as of June 30, 2016, we recognized an expense for the amounts paid. For the nine months ended September 30, 2017, we did not incur any costs related to unsuccessful debt or equity financings.

 

Interest expense. Interest expense increased from $5.0 million for the nine months ended September 30, 2016 to $33.6 million for the nine months ended September 30, 2017, an increase of $28.6 million. The significant increase in interest expense resulted from the $125.0 million Credit Facility entered into on June 24, 2016. The Credit Facility was only in effect for 98 days of the nine months ended September 30, 2016 versus the entirety of the nine months ended September 30, 2017. Our weighted average principal balance was $20.3 million for the nine months ended September 30, 2016 as compared to $90.2 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017, interest expense was primarily comprised of interest incurred under the Credit Facility consisting of (i) interest payable in cash at an annual rate of 12.0%, for a total of $8.3 million, (ii) interest payable in kind at an annual rate of 3.0%, for a total of $2.0 million, (iii) accretion expense of $18.5 million related to DIC, and (iv) make-whole interest expense of $4.6 million related to the requirement to make a mandatory principal payment upon receipt of $18.7 million of net proceeds from an April 2017 insurance settlement. We expect our interest payable in cash and our PIK interest will increase during the remainder of the year ending December 31, 2017, since outstanding principal subject to interest increased by $50.0 million as a result of the Sixth Amendment to the Credit Facility entered into in October 2017, as discussed below under “Liquidity and Capital Resources” .

 

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For the nine months ended September 30, 2016, interest expense was primarily comprised of interest incurred under the Credit Facility, including interest payable in cash at an annual rate of 12.0% for a total of $1.0 million, interest payable in kind at an annual rate of 3.0% for a total of $0.3 million, and accretion expense of $3.3 million related to DIC. Additionally, we incurred interest of approximately $0.4 million under our previous line of credit with outstanding borrowings of approximately $14.7 million until June 2016 and that provided for interest at 4.25%.

 

Our effective interest rate for accretion of DIC decreased from 47.5% as of September 30, 2016 to 31.0% as of September 30, 2017. The decrease in our effective interest rate for the nine months ended September 30, 2017 was primarily driven by the increase in weighted average borrowings for the nine months ended September 30, 2017.

 

The overall effective interest rate, including interest at the stated rate of 15.0% and accretion of DIC, was 62.5% as of September 30, 2016 and 46.0% as of September 30, 2017. Additionally, we incur other debt financing expenses under the Credit Facility as discussed below.

 

Other debt financing expenses. Other debt financing expenses of $14.7 million for the nine months ended September 30, 2017 were attributable to the Credit Facility entered into in June 2016. For the nine months ended September 30, 2017, other debt financing expenses consisted of (i) collateral monitoring fees at the rate of 2.5% of outstanding borrowings, for a total of $1.7 million, (ii) unused line fees at 5.0% of undrawn borrowings of $17.5 million, for a total of $0.7 million, (iii) write-off of debt discount and issuance costs of $9.9 million related to aggregate principal prepayments of $21.5 million, (iv) a target date fee of $1.3 million since the merger with GPIA did not occur by August 31, 2017, (iv) amortization of $0.8 million related to $3.3 million of net DIC associated with the undrawn portion of the Credit Facility, and (v) amortization of prepaid agent fees of $0.3 million. We expect our collateral monitoring fees will increase during the remainder of the year ending December 31, 2017, since outstanding principal subject to such fees increased by $50.0 million as a result of the Sixth Amendment to the Credit Facility entered into in October 2017, as discussed below under “Liquidity and Capital Resources” .

 

For the nine months ended September 30, 2016, the key components of other debt financing expenses consisted of (i) unused line fees of $3.1 million for the period from June 24, 2016 through September 30, 2016, based on fees of 15.0% of the $65.0 million delayed draw A Term Loan and 5.0% of the $30.0 million delayed draw B Term Loan, and (ii) amortization of debt issuance costs of $1.0 million related to $14.2 million of net DIC associated with the $95.0 million unfunded portion of the Credit Facility. In October 2016, we borrowed the entire $65.0 million under the delayed draw A Term Loan and $12.5 million under the delayed draw B Term loan, which resulted in a significant reduction in unused line fees beginning in November 2016.

 

Loss on embedded derivatives and redeemable warrants, net. The requirements to pay default interest at 2.0% during the existence of an event of default, equity raise delay fees, and “make-whole” interest payments for certain principal prepayments as defined in the Credit Facility, are examples of embedded derivatives required to be bifurcated and reported at fair value. Make-whole interest payments are computed as set forth in the Credit Facility primarily based on the 15.0% per annum stated rate, and are required for certain prepayments prior to June 2019.

 

As of September 30, 2017 and 2016, the fair value of embedded derivatives was $9.8 million and $5.0 million, respectively. The change in fair value of embedded derivatives resulted in the recognition of a loss of $4.4 million and $5.0 million for the nine months ended September 30, 2017 and 2016, respectively. Increases in the fair value of embedded derivatives result in losses that are recognized when the likelihood increases that a future cash payment will be required to settle an embedded derivative, whereas gains are recognized when the fair value decreases. Decreases in fair value result when we become contractually obligated to pay an embedded derivative (whereby the embedded derivative liability is transferred to a contractual liability), or as the likelihood of a future cash settlement decreases.

 

In connection with our Credit Facility, we issued warrants to the Origination Agent for 2.7 million shares (as adjusted for the Exchange Ratio in the merger with GPIA) of our common stock in June 2016. These warrants were redeemable by the holder under certain circumstances which required classification as a liability. The fair value of these warrants was $8.8 million at issuance and $6.0 million as of September 30, 2016, resulting in a gain of $2.8 million for the nine months ended September 30, 2016.

 

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Due to an anti-dilution provision in the original warrant agreement, in October 2016 we issued a warrant for an additional 0.7 million shares (as adjusted for the Exchange Ratio in the business combination with GPIA) resulting in outstanding warrants for 3.4 million shares through October 10, 2017, when we issued an additional warrant for approximately 62,000 shares as consideration for the Origination Agent to eliminate the cash redemption and anti-dilution features. Accordingly, we recognized a loss of $14.1 million for the nine months ended September 30, 2017 for changes in fair value of the warrants for 3.4 million shares. Due to the elimination of the cash redemption feature on October 10, 2017, we will not recognize future changes in fair value in our statements of operations and the redeemable warrant liability of $21.3 million as of September 30, 2017, will be reclassified to additional paid-in capital.

 

Other income (expense), net. For the nine months ended September 30, 2016, we had net other expense of $0.7 million as compared to the nine months ended September 30, 2017, when we had net other income of $0.4 million. This change of $1.1 million was primarily attributable to an increase in foreign exchange gains for the nine months ended September 30, 2017.

 

Comparison of Years ended December 31, 2016 and 2015

 

Net revenue. Net revenue increased from $118.2 million for the year ended December 31, 2015 to $160.2 million for the year ended December 31, 2016, an increase of $42.0 million or 36%. The vast majority of this increase was driven by a 34% increase in the average number of unique clients, as opposed to existing unique clients subscribing to additional services. On a regional basis, United States net revenue grew from $82.8 million to $110.7 million, an increase of $27.9 million or 34%, while international net revenue grew from $35.4 million to $49.5 million, an increase of $14.1 million or 40%. Accelerated growth in our international business was driven by an increase in sales headcount primarily in Asia and Europe and an increase in marketing and advertising spend targeted for prospective clients outside the United States.

 

Cost of revenue. Total cost of revenue increased from $52.8 million for the year ended December 31, 2015 to $67.0 million for the year ended December 31, 2016, an increase of $14.2 million or 27%. This increase was primarily due to additional support for the increasing number of clients that resulted in an increase in employee compensation and benefits of $10.5 million, an increase in IT, facilities and security costs of $1.9 million, and an increase in contract labor costs of $1.6 million. The costs of both direct product support and shared services grew at a lower rate than the increase in clients and net revenue as the support provided by these functions was spread over a wider client base.

 

Gross Profit. The following table presents the key components of our net revenue, cost of revenue and gross profit for the years ended December 31, 2015 and 2016:

 

    Year Ended December 31,     Change  
    2015     2016     Amount     Percent  
    (in thousands, except percentages)  
Net revenue   $ 118,163     $ 160,175     $ 42,012       36 %
Cost of revenue:                                
Employee compensation and benefits     34,180       44,659       10,479       31 %
Engineering consulting costs     8,593       10,180       1,587       18 %
Administrative allocations (1)     6,350       8,101       1,751       28 %
All other costs     3,643       4,105       462       13 %
Total cost of revenue     52,766       67,045       14,279       27 %
                                 
Gross profit   $ 65,397     $ 93,130     $ 27,733       42 %
                                 
Gross profit percentage     55 %     58 %                

 

 

(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.

 

As shown in the table above, our net revenue for the year ended December 31, 2016 increased by $42.0 million compared to the year ended December 31, 2015, which was driven by a 35% increase in the average number of active clients from 735 for the year ended December 31, 2015 to 989 for the year ended December 31, 2016. Total cost of revenue increased by $14.3 million, or 27%, compared to the increase in net revenue of 36%. The key driver of the increase in cost of revenue was an increase of 99 in the average number of engineering employees which resulted in an increase in employee compensation and benefits costs of $10.5 million, or 31%. In addition to hiring employees, we relied on increased use of engineering consultants to support the growth in net revenue, resulting in an increase in contract labor costs of $1.6 million. Administrative cost allocations increased by $1.8 million for the year ended December 31, 2016 as a result of increases in headcount and locations compared to the year ended December 31, 2015. The increased net revenue combined with slower growth in the cost of revenue resulted in an improvement in our gross profit by $27.7 million, or 42%, as well as an improvement in our gross profit percentage from 55% for the year ended December 31, 2015 to 58% for the year ended December 31, 2016. The increased utilization of our engineering workforce continued to be a primary driver in our efforts to contain growth in cost of revenue and improve gross profit percentage for the year ended December 31, 2016.

 

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Sales and marketing expenses. Sales and marketing expenses increased from $50.3 million for the year ended December 31, 2015 to $72.9 million for the year ended December 31, 2016, an increase of $22.6 million or 45%. This increase was primarily due to a $16.1 million increase in employee and related compensation costs as a result of a 35% increase in average headcount, a $2.2 million increase in marketing and advertising costs, a $1.6 million increase in travel costs, a $1.1 million increase in contract labor and consulting costs as we continued to increase our investment in building brand awareness and supporting net revenue growth.

 

General and administrative expenses. General and administrative expenses increased from $24.2 million for the year ended December 31, 2015 to $36.2 million for the year ended December 31, 2016, an increase of $12.0 million or 49%. This increase was primarily due to an increase in average headcount of 26% resulting in an increase in employee and related compensation costs of $6.5 million, an increase in outside professional service costs of $3.5 million, an increase in sales and other taxes of $1.9 million, and an increase in contract labor costs related to Rimini II discovery of $0.6 million, partially offset by higher general and administrative allocations out to other departments of $2.9 million.

 

Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries for the years ended December 31, 2015 and 2016, consist of the following:

 

    Year Ended
December 31,
       
    2015     2016     Change  
    (in thousands)        
Litigation settlement and pre-judgment interest   $ 21,411     $ 2,920     $ (18,491 )
Professional fees and other defense costs of litigation     17,140       21,379       4,239  
Insurance recoveries     (5,819 )     (54,248 )     (48,429 )
                         
Litigation costs, net of related insurance recoveries   $ 32,732     $ (29,949 )   $ (62,681 )

 

Professional fees and other defense costs associated with litigation increased from $17.1 million for the year ended December 31, 2015 to $21.4 million for the year ended December 31, 2016, an increase of $4.3 million or 24%. This increase was due to appeals and additional litigation motions following the jury verdict in October 2015 for the Rimini I case and the increase of costs associated with the Rimini II case. Total insurance recoveries for professional fees and other defense costs also increased from $5.8 million for the year ended December 31, 2015 to $54.2 million for the year ended December 31, 2016, of which $12.5 million related to the reimbursement of professional fees while $41.7 million was reimbursement for insurance recoveries related to the judgment in 2016. The insurance recoveries for professional service fees increased in 2016 due to the higher level of such costs when compared to 2015. The Rimini I litigation had been ongoing from 2010 until October 2016 when the court ordered a judgment award of $124.4 million to Oracle. We recognized $100.0 million of the judgment award as a loss for the year ended December 31, 2014, $21.4 million for the year ended December 31, 2015, and the remainder of $2.9 million was comprised of pre-judgment interest for the year ended December 31, 2016.

 

Interest expense. Interest expense increased from $0.8 million for the year ended December 31, 2015 to $13.4 million for the year ended December 31, 2016, an increase of $12.6 million. The significant increase in interest expense resulted from the $125.0 million Credit Facility that we entered into in June 2016. For the year ended December 31, 2016, interest expense under the Credit Facility consisted of (i) interest payable in cash at an annual rate of 12.0% for a total of $3.6 million, (ii) interest payable in kind at an annual rate of 3.0% for a total of $0.9 million, and (iii) accretion expense of $8.4 million associated with total discount costs of $90.5 million and an annual accretion rate of 25.5% as of December 31, 2016, partially offset by a decrease in interest expense of $0.3 million on our previous line of credit that was fully paid off in June 2016.

 

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Other debt financing expenses. No other debt financing expenses were incurred for the year ended December 31, 2015. Other debt financing expenses of $6.4 million for the year ended December 31, 2016 were attributable to the Credit Facility entered in June 2016. For the year ended December 31, 2016, other debt financing expenses consisted of (i) unused line fees at 15.0% for $65.0 million of undrawn borrowings for the period from June 24, 2016 through October 2016, and 5.0% for $17.5 million of undrawn borrowings for the period from June 24, 2016 through December 31, 2016, for a total of $4.1 million, (ii) collateral monitoring fees of 0.5% of outstanding borrowings through October 2016, and 2.5% of outstanding borrowings for the last two months of the year ended December 31, 2016, for a total of $0.5 million, (iii) amortization of $1.5 million related to debt issuance costs associated with the undrawn portions of the Credit Facility during the year ended December 31, 2016, and (iv) amortization of prepaid agent fees of $0.3 million. We expect the unused line fees will decrease during the year ending December 31, 2017 due to additional borrowings of $77.5 million in October 2016.

 

Loss on embedded derivatives and redeemable warrants, net. We did not have any embedded derivatives or redeemable warrants outstanding for the year ended December 31, 2015. Our June 2016 Credit Facility includes embedded derivatives requiring bifurcation and accounting as separate financial instruments. The requirements to pay default interest at 2.0% during the existence of an event of default, and “make-whole” interest payments for certain principal prepayments as defined in the Credit Facility, are examples of embedded derivatives required to be bifurcated and reported at fair value. Make-whole interest payments are computed as set forth in the Credit Facility primarily based on the 15.0% per annum stated rate, and are required for certain prepayments prior to June 2019. As of December 31, 2016, the fair value of embedded derivatives was $5.4 million resulting in the recognition of an expense of $5.4 million for the year ended December 31, 2016. The requirement to incur make-whole interest payments are the most significant factor in the valuation of our embedded derivatives.

 

In connection with our June 2016 Credit Facility, we issued redeemable warrants to the Origination Agent for 11.1 million shares of our Class A common stock. These warrants had an estimated fair value of $8.8 million upon issuance and were treated as a debt issuance cost associated with the Credit Facility. Due to an anti-dilution provision in the original warrant agreement, in October 2016 we issued warrants for an additional 3.0 million shares of our Class A common stock with an estimated fair value of $1.5 million that was charged to expense. For the year ended December 31, 2016, we recognized a gain of $3.1 million due to changes in the fair value of the warrants between the issuance date and December 31, 2016.

 

Other expense, net. For the year ended December 31, 2015, we had other expense, net of $1.1 million as compared to $1.8 million for the year ended December 31, 2016, an increase of $0.7 million. The increase in other expense, net was primarily attributable to an increase in foreign exchange transaction losses.

 

Comparison of Years Ended December 31, 2015 and 2014

 

Net revenue. Net revenue increased from $85.3 million for the year ended December 31, 2014 to $118.2 million for the year ended December 31, 2015, an increase of $32.8 million or 38%. The vast majority of this increase was driven by a 29% increase in the average number of unique clients, as opposed to existing unique clients subscribing to additional services, and an 8% increase in the average net revenue per client. On a regional basis, our United States net revenue grew from $62.3 million to $82.8 million, an increase of $20.5 million or 33%, while international net revenue grew from $23.1 million to $35.4 million, an increase of $12.3 million or 53%. The increase in the unique client count is primarily attributable to the increased investment in sales and marketing.

 

Cost of revenue. Cost of revenue increased from $45.3 million for the year ended December 31, 2014 to $52.8 million for the year ended December 31, 2015, an increase of $7.5 million or 17%. This increase was primarily due to an increase in employee compensation and benefits of $5.0 million, an increase in engineering consulting costs of $0.5 million and an increase in information technology, facilities and security costs of $1.5 million. The costs of both direct product support and shared services grew at a lower rate than the increase in clients and net revenue as the support provided by these functions was spread over a wider client base.

 

Gross Profit. The following table presents the key components of our net revenue, cost of revenue and gross profit for the years ended December 31, 2014 and 2015:

 

    Year Ended
December 31,
    Change  
    2014     2015     Amount     Percent  
    (in thousands, except percentages)              
Net revenue   $ 85,348     $ 118,163     $ 32,815       38 %
Cost of revenue:                                
Employee compensation and benefits     29,153 (2)     34,180       5,027       17 %
Engineering consulting costs     8,145 (2)     8,593       448       6 %
Administrative allocations (1)     5,010       6,350       1,340       27 %
All other costs     2,950 (2)     3,643       693       23 %
Total cost of revenue     45,258       52,766       7,508       17 %
                                 
Gross profit   $ 40,090     $ 65,397     $ 25,307       63 %
                                 
Gross profit percentage     47 %     55 %                

 

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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.

 

(2) During 2014, as a result of the ongoing litigation with Oracle we decided to migrate all clients using a Rimini-hosted environment to a client-hosted environment. In connection with this undertaking, we incurred $3.3 million of incremental costs, which are included in (i) compensation and benefits for $0.4 million, (ii) engineering consulting costs for $1.8 million, and (iii) all other costs for $1.1 million.

 

As shown in the table above, our net revenue for the year ended December 31, 2015 increased by $32.8 million compared to the year ended December 31, 2014, which was driven by a 29% increase in the average number of active clients from 571 for the year ended December 31, 2014 to 735 for the year ended December 31, 2015. Total cost of revenue increased by $7.5 million, or 17%, compared to the increase in net revenue of 38%. The key driver of the increase in cost of revenue was an increase of 74 in the average number of engineering employees which resulted in an increase in employee compensation and benefits of $5.0 million, or 17% to support the growth in net revenue. Administrative cost allocations increased by $1.3 million for the year ended December 31, 2015 as a result of increases in headcount and locations compared to the year ended December 31, 2014. These increases in costs for the year ended December 31, 2015, were partially offset by a reduction in client migration costs of $3.3 million since substantially all migration related activities were completed in 2014. The increased net revenue combined with slower growth in the cost of revenue resulted in an improvement in our gross profit by $25.3 million, or 63%, as well as an improvement in our gross profit percentage from 47% for the year ended December 31, 2014 to 55% for the year ended December 31, 2015. The increased utilization of our engineering workforce continued to be a primary driver in our efforts to contain growth in cost of revenue and improve gross profit percentage for the year ended December 31, 2015.

 

Sales and marketing expenses. Sales and marketing expenses increased from $37.5 million for the year ended December 31, 2014 to $50.3 million for the year ended December 31, 2015, an increase of $12.8 million or 34%. This increase was primarily due to an increase in employee and related costs of $7.8 million as a result of an increase in average headcount of 37%, allocation of shared costs such as security, information technology and facilities of $2.0 million, advertising and marketing costs of $1.0 million, travel and related costs of $1.3 million, recruitment costs of $0.5 million, and contract labor and consulting costs of $0.2 million, as an effort to increase our investment in building brand awareness and client growth.

 

General and administrative expenses. General and administrative expenses increased from $19.3 million for the year ended December 31, 2014 to $24.2 million for the year ended December 31, 2015, an increase of $4.9 million or 26%. This increase was primarily due to an increase in average headcount of 39% resulting in an increase of compensation and related costs of $3.4 million, contract labor costs of $0.3 million, recruitment costs of $0.5 million, traveling and related costs of $0.5 million, and software license fees of $0.5 million as we continued to invest in revenue, infrastructure and geographic growth. These increases were partially offset by a reduction in external audit and accounting costs of $0.5 million due to our deferral of an initial public offering in the third quarter of 2014.

 

Litigation costs, net of related insurance recoveries. Litigation costs, net of related insurance recoveries for the years ended December 31, 2014 and 2015, consist of the following:

 

    Year Ended
December 31,
       
    2014     2015     Change  
    (in thousands)        
Litigation settlement and pre-judgment interest   $ 100,000     $ 21,411     $ (78,589 )
Professional fees and other defense costs of litigation     3,266       17,140       13,874  
Insurance recoveries           (5,819 )     (5,819 )
                         
Litigation costs, net of related insurance recoveries   $ 103,266     $ 32,732     $ (70,534 )

 

  - 54 -  

 

  

Professional fees and other defense costs associated with litigation increased from $3.3 million for the year ended December 31, 2014 to $17.1 million for the year ended December 31, 2015, an increase of $13.8 million. Total insurance recoveries for professional fees and other defense costs were $5.8 million for the year ended December 31, 2015, whereas no insurance recoveries were received in 2014. Such costs and the related insurance recoveries increased in 2015 due to the higher level of activity as we approached the September 2015 trial date for Rimini I. As discussed above, in October 2016 the court ordered a judgment award of $124.4 million to Oracle. In order to reflect an offer made to Oracle to settle the litigation prior to the issuance of our 2014 financial statements, we recognized $100.0 million of the judgment award as a loss for the year ended December 31, 2014. The remainder of the judgment award was recognized for $21.4 million for the year ended December 31, 2015, and $3.0 million of pre-judgment interest was recognized for the year ended December 31, 2016.

 

Write-off of deferred offering and financing costs. During the third quarter of 2014, we determined that proceeding with an initial public offering under then-current market and business conditions was not in the best interests of our stockholders. Accordingly, deferred offering costs incurred through the third quarter of 2014 of $5.3 million were charged to operating expenses. We did not write-off any deferred financing costs for the year ended December 31, 2014.

 

Interest expense. Interest expense increased from $0.7 million for the year ended December 31, 2014 to $0.8 million for the year ended December 31, 2015, an increase of $0.1 million. The increase in interest expense was primarily due to higher borrowings under our prior line of credit.

 

Other expense, net. For the year ended December 31, 2014, we had other expense, net of $0.8 million as compared to $1.1 million for the year ended December 31, 2015, an increase of $0.3 million or 38%. This increase in other expense, net was primarily attributable to an increase in foreign exchange transaction losses.

 

Selected Historical Financial Information

 

The following tables set forth selected unaudited consolidated quarterly statements of operations data for each of the seven fiscal quarters ended September 30, 2017. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly results are not necessarily indicative of our results of operations to be expected for any future period.

 

  - 55 -  

 

 

    2016     2017  
    Q1 (1)     Q2 (2)     Q3 (3)     Q4 (4)     Q1 (1)     Q2 (2)     Q3 (3)  
Consolidated statement of operations data:                                                        
Net revenue   $ 34,678     $ 38,037     $ 40,723     $ 46,737     $ 49,070     $ 52,048     $ 53,611  
Cost of revenue     14,570       16,273       17,231       18,971       18,356       19,537       20,109  
Gross profit     20,108       21,764       23,492       27,766       30,714       32,511       33,502  
Gross profit percentage (5)     58.0 %     57.2 %     57.7 %     59.4 %     62.6 %     62.5 %     62.5 %
Operating expenses:                                                        
Sales and marketing     15,539       19,309       18,725       19,363       14,696       15,801       17,188  
General and administrative     6,635       7,255       8,192       12,130       9,276       8,928       8,580  
Litigation costs, net of insurance recoveries     5,379       5,243       1,081       (41,652 )     3,945       301       365  
Write-off of deferred financing costs     -       2,000       -       -       -       -       -  
Total operating expenses     27,553       33,807       27,998       (10,159 )     27,917       25,030       26,133  
Operating income (loss)     (7,445 )     (12,043 )     (4,506 )     37,925       2,797       7,481       7,369  
Interest expense     (211 )     (492 )     (4,317 )     (8,336 )     (9,936 )     (14,541 )     (9,152 )
Other debt financing expenses     -       (305 )     (3,973 )     (2,093 )     (1,282 )     (10,859 )     (2,563 )
Loss on embedded derivatives and redeemable warrants, net     -       -       (2,145 )     (1,677 )     (5,702 )     (8,348 )     (4,417 )
Other income (expense), net     (74 )     (447 )     (144 )     (1,122 )     89       225       108  
Income (loss) before income taxes     (7,730 )     (13,287 )     (15,085 )     24,697       (14,034 )     (26,042 )     (8,655 )
Income tax benefit (expense)     (267 )     (322 )     (306 )     (637 )     (441 )     183       (385 )
Net income (loss)   $ (7,997 )   $ (13,609 )   $ (15,391 )   $ 24,060     $ (14,475 )   $ (25,859 )   $ (9,040 )
Earnings per share attributable to common stocholders:                                                        
Basic (6)   $ (0.08 )   $ (0.13 )   $ (0.15 )   $ 0.14     $ (0.14 )   $ (0.25 )   $ (0.09 )
Diluted (6)   $ (0.08 )   $ (0.13 )   $ (0.15 )   $ 0.13     $ (0.14 )   $ (0.25 )   $ (0.09 )
Weighted average number of common shares outstanding:                                                        
Basic (6)     101,310       101,328       101,339       101,386       101,721       102,587       103,280  
Diluted (6)     101,310       101,328       101,339       189,038       101,721       102,587       103,280  
Consolidated statement of cash flows data:                                                        
Net cash provided by (used in):                                                        
Operating activities   $ 6,003     $ 9,400     $ (3,355 )   $ (71,657 )   $ 6,594     $ 23,915     $ (4,353 )
Investing activities     (53 )     (157 )     (420 )     (558 )     (101 )     (802 )     (171 )
Financing activities     217       3,570       (300 )     73,601       (1,650 )     (28,564 )     (8,066 )
Consolidated balance sheet data (at end of period) (7) :                                                        
Working capital (8)   $ (206,610 )   $ (205,605 )   $ (213,167 )   $ (123,623 )   $ (155,759 )   $ (176,058 )   $ (152,221 )
Cash and cash equivalents     18,723       26,318       6,811       9,385       13,237       17,440       6,862  
Restricted cash     102       5,218       20,515       18,852       20,112       10,541       8,727  
Total assets     63,587       91,809       86,964       99,378       108,772       84,362       70,076  
Current maturities of long-term debt     15,154       3,500       6,500       24,750       48,131       30,630       11,750  
Total liabilities     283,319       324,694       334,725       312,888       336,189       336,942       330,124  
Stockholders' deficit     (219,732 )     (232,885 )     (247,761 )     (213,510 )     (227,417 )     (252,580 )     (260,048 )

 

 

(1) Amounts are derived from the unaudited condensed consolidated financial statements of RSI as of March 31, 2017 and for the three months ended March 31, 2016 and 2017.

 

(2) The standalone results for the second quarter of 2016 and 2017 are computed by subtracting the respective results for the first quarter of 2016 and 2017 (see footnote (1) ) from the corresponding amounts for the six months ended June 30, 2016 and 2017.

 

(3) Amounts are derived from the unaudited condensed consolidated financial statements of RSI as of September 30, 2017 and for the three and nine months ended September 30, 2016 and 2017.

 

  - 56 -  

 

  

(4) The standalone results for the fourth quarter of 2016 are computed by subtracting the respective results for the nine months ended September 30, 2017(see footnote (3) ) from the corresponding amounts for the year ended December 31, 2016.

 

(5) Gross profit percentage is computed by dividing gross profit by net revenue.

 

(6) The change in capital structure resulting from the consummation of the business combination and reverse recapitalization is not given effect until financial statements are provided for the first period that ends after the October 10, 2017 closing date. Accordingly, earnings per share is based on the capital structure of RSI that existed during the periods presented.

 

Basic net loss per share is computed by dividing the net loss attributable to common stockholders by the aggregate weighted average number of RSI Class A and Class B common shares outstanding for each period presented. Earnings (loss) per share for RSI’s Class A and Class B common stock is presented herein on a combined basis since the earnings (loss) per share applicable to each class is identical for all periods presented.

 

Diluted net loss per common share is computed by giving effect to all potential shares of RSI common stock, including convertible preferred stock, stock options and warrants, to the extent dilutive. For purposes of the calculation of diluted earnings per share for all periods except the fourth quarter of 2016, all common stock equivalents have been excluded from the weighted average number of common shares outstanding since the impact was antidilutive. For the fourth quarter of 2016, the treasury stock method was used for the calculation of diluted earnings per share whereby common stock equivalents for approximately 87.7 million shares were included in the weighted average number of shares outstanding. Additionally, for the calculation of basic earnings per share for the fourth quarter of 2016, a deemed dividend of $10.0 million on Series C preferred stock is deducted in the calculation of net income applicable to common stockholders; for the calculation of diluted net income attributable to common stockholders, the deemed dividend is excluded from the calculation since the Series C preferred stock is assumed to be converted to common stock.

 

(7) The condensed consolidated balance sheet data as of the end of the first through third quarters of 2016 is derived from our unaudited condensed consolidated financial statements that are not included in past filings with the SEC.

 

(8) Working capital is computed by subtracting our total current liabilities from our total current assets in our historical consolidated balance sheets.

 

Liquidity and Capital Resources

 

Overview. As of September 30, 2017, we had a working capital deficit of $152.2 million and an accumulated deficit of $300.5 million. We incurred a net loss of $49.4 million and $37.0 million for the nine months ended September 30, 2017 and 2016, respectively.

 

A key component of our business model requires that substantially all customers are required to 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 $125.9 million that is included in current liabilities as of September 30, 2017. 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 limited to approximately 37.5% of the related deferred revenue based on our gross profit percentage of 62.5% for the nine months ended September 30, 2017.

 

After giving effect to the Sixth Amendment to the Credit Facility discussed below, we have contractual obligations of approximately $36.6 million that are due during the 12 months ending September 30, 2018. This amount consists of operating and capital lease payments of $5.7 million and estimated payments due under the Credit Facility of $30.9 million, including (i) principal of $9.8 million, (ii) interest payable in cash for $14.8 million, (iii) collateral monitoring and unused line fees for $3.9 million, (iv) consulting fees for $2.0 million, and (v) annual loan service and agent fees for $0.4 million.

 

As of September 30, 2017, our existing capital resources to satisfy these payments consist of cash and cash equivalents of $6.9 million and restricted cash in control accounts of $8.7 million, for a total of $15.6 million. Based on our expectations for future growth in net revenue and improved leverage on our cost of revenue and operating expenses, we believe our cash flow from operating activities for the year ending September 30, 2018, combined with our existing capital resources and the net proceeds from the October 2017 reverse recapitalization of approximately $25.9 million, will be sufficient to fund our aggregate contractual obligations of $36.6 million. The reverse recapitalization and consummation of the business combination with GPIA are discussed further in Note 11 to the condensed consolidated financial statements of RSI for the nine months ended September 30, 2017 and 2016, included elsewhere in this prospectus.

 

  - 57 -  

 

  

As discussed below in greater detail, for the nine months ended September 30, 2017, we generated cash flows from our operating activities of $26.2 million which included $13.2 million of net operating cash receipts from a non-recurring insurance settlement. we believe our operating cash flows for the twelve months ending September 30, 2018 will be sufficient to fund the portion of our contractual obligations that are not funded with existing capital resources, as well as mandatory principal prepayments that may become due.

 

Credit Facility . In June 2016, we entered into a multi-draw term loan Credit Facility with a syndicate of lenders (the “lenders”). The key terms of the Credit Facility (including changes set forth in the Second Amendment entered into in October 2016, the Third Amendment entered into in May 2017, and the Fifth Amendment entered into in June 2017) are disclosed in Note 5 to the condensed consolidated financial statements of RSI for the nine months ended September 30, 2017 and 2016, included elsewhere in this prospectus.

 

On October 3, 2017, we entered into the Sixth Amendment to the Credit Facility. The Sixth Amendment became effective and was contingent upon the consummation of the business combination with GPIA that closed on October 10, 2017. Pursuant to the Sixth Amendment, upon consummation of the business combination we were required to prepay $5.0 million of mandatory trigger event consulting exit fees due to the Origination Agent. In addition, $50.0 million of the remaining mandatory trigger event exit fees under the Credit Facility were converted into principal under the Credit Facility. As a result, the existing mandatory trigger event exit fees were reduced by $55.0 million and the principal balance outstanding under the Credit Facility increased by $50.0 million. The $50.0 million of additional principal incurred by the transfer of mandatory trigger event exit fees is not subject to future make-whole interest penalties in the event of prepayment or repayment. In addition, the conditions set forth in the lender consents executed as of May 16, 2017 that required at the closing of the business combination a payment of at least $35.0 million be made to the lenders under the Credit Facility, was deemed to be satisfied upon the effectiveness of the Sixth Amendment.

 

Upon the effectiveness of the Sixth Amendment, we had a total of $135.0 million outstanding under the Credit Facility consisting of (i) outstanding term loans in the aggregate principal amount of $125.0 million, (ii) mandatory trigger event exit fees of $6.0 million, and (iii) mandatory consulting fees of $4.0 million. Additionally, we were obligated under the Credit Facility to make future payments to the lenders pursuant to the Fifth Amendment for an amendment fee of $1.25 million and an equity raise delay fee of $1.25 million, and for an amendment fee of $3.75 million pursuant to the Sixth Amendment.

 

Upon the effectiveness of the Sixth Amendment, the $50.0 million of mandatory trigger event exit fees that converted into term debt bears interest at 12.0% per annum payable in cash and 3.0% per annum PIK, and is subject to collateral monitoring fees at 2.5% per annum. Accordingly, our interest expense and other debt financing fees are expected to increase beginning in the fourth quarter of 2017. In addition, certain of the mandatory trigger event exit fees will continue to be adjusted up or down based on annualized net revenue for the most recently completed calendar quarter. Prior to the Sixth Amendment, these mandatory trigger event exit fees were required to be adjusted through the termination date of the Credit Facility. However, pursuant to the Sixth Amendment, these adjustments will cease when the principal balance under the Credit Facility is less than $52.0 million.

 

In connection with our entry into the Sixth Amendment, various financial covenants were adjusted such that we believe that future compliance will be maintained. We also agreed to pay an amendment fee in connection with the Sixth Amendment of $3.75 million, which is due and payable in July 2019, but will be waived under certain conditions as discussed below.

 

The Sixth Amendment is expected to improve our liquidity and capital resources in the following ways:

 

· The previous requirement to utilize $35.0 million of the proceeds from the Merger Agreement to make an estimated principal payment of $27.1 million and a make-whole interest payment of $7.9 million was eliminated.

 

· Principal payments of $6.75 million that would have been payable during the fourth quarter of 2017 were eliminated during that time period and will be due at maturity. For the six months ending June 30, 2018, principal payments were reduced from $2.25 million per month to $1.0 million per month. Beginning in July 2018 and continuing through maturity of the Credit Facility, principal payments were reduced from $2.5 million per month to $1.25 million per month. We may elect to prepay $4.25 million of the principal payments eliminated for the fourth quarter of 2017 by March 31, 2018, without incurring a make-whole interest payment on such prepayment.

 

  - 58 -  

 

  

· The Sixth Amendment capped aggregate cash payments for transaction costs and deferred underwriting fees related to the Merger Agreement at $20.0 million. We complied with this restriction whereby the actual cash payments were $19.4 million, consisting of $7.9 million related to GPIA and $11.5 million related to RSI.

 

· The requirement to make mandatory payments related to the calculation of Excess Cash Flow was reduced from 75% to 50%, and the measurement period was changed from quarterly to an annual measurement period beginning for the year ending December 31, 2019 (payable in cash beginning in April 2020).

 

· The requirement to make mandatory principal payment sweeps upon receipt of customer prepayments for periods extending beyond 12 months was eliminated.

 

· The due date for the amendment fee and the equity raise delay fee incurred on September 1, 2017 in connection with the Fifth Amendment to the Credit Facility is the earlier of (i) April 16, 2019 and (ii) such time that we raise at least $100.0 million of equity financing (including the gross proceeds of $50.3 million from the business combination).

 

· Upon consummation of the business combination on October 10, 2017, the lenders permanently waived the requirement to pay equity raise delay fees of $1.25 million for October 2017 and for each month thereafter.

 

· The unfunded portion of the Credit Facility for $17.5 million remains available and may be borrowed through the maturity date with the consent of the Origination Agent, with $5.0 million of the $17.5 million that may be drawn through February 2018 (i) without written consent of the Origination Agent, and (ii) subject to a lower minimum liquidity threshold.

 

The Sixth Amendment also provides for improvements in financial covenants and the elimination of certain covenants and changes in fees if we complete certain equity financings, including the business combination, and if the following events occur by April 10, 2018:

 

· If we complete one or more additional equity financings such that the aggregate gross proceeds of the business combination and such equity financings result in the principal balance of the term loans under the Credit Facility to be less than $95.0 million, and if we have received at least $42.5 million in net cash proceeds from the business combination and subsequent equity financings, then the lenders have agreed to make certain additional concessions in the terms of the Credit Facility, including the elimination of (i) accrual of PIK interest on all of the term loans under the Credit Facility, (ii) the requirement to pay the $3.75 million amendment fee for the Sixth Amendment, and (iii) the marketing return ratio, churn rate and minimum gross margin financial covenants.

 

· If the aggregate outstanding principal balance of the term loans under the Credit Facility is less than $95.0 million, but we have not received at least $42.5 million in net cash proceeds from the business combination and subsequent equity financings, then the lenders have agreed to eliminate the marketing return ratio, churn rate and minimum gross margin financial covenants, but PIK interest on the term loans will continue to accrue at the existing 3.0% rate, and we will be required to pay the $3.75 million amendment fee on the earlier to occur of (i) July 2, 2019 and (ii) the closing of aggregate equity financings of at least $100.0 million, including the proceeds from the business combination, if such equity financings occur prior to July 2, 2019.

 

· If the aggregate outstanding principal balance of the term loans under the Credit Facility is greater than or equal to $95.0 million, then we will be required to (i) pay the Sixth Amendment fee equal to $3.75 million which will be due and payable on the earlier to occur of July 2, 2019 and the closing of aggregate equity financings of at least $100.0 million, including the proceeds from the business combination, if such equity financings occur prior to July 2, 2019, (ii), PIK interest on the term loans will continue to accrue at the existing 3.0% per annum rate and (iii) the marketing return ratio, churn rate and minimum gross margin financial covenants will not be eliminated until the term loans under the Credit Facility are less than $95.0 million.

 

Proceeds from the business combination and subsequent equity financings will be applied as follows to the lenders and the Origination Agent under the Credit Facility:

 

· equity proceeds from the first $50.0 million of gross proceeds from the business combination are required to pay down $5.0 million of mandatory trigger event exit fees due to the Origination Agent; and

 

  - 59 -  

 

 

· net cash proceeds in excess of the $50.0 million minimum required for the closing of the business combination are applied as follows:

 

o the first $42.5 million of net cash proceeds may be retained by us or utilized to pay down the term loans;
o additional net cash proceeds are required to pay down the term loan to $95.0 million;
o we may then retain the next $17.5 million of such net cash proceeds on our balance sheet or utilize it to pay down the term loans; and

o 50% of any additional net cash proceeds shall be used to pay down term loans and the remaining 50% of such net cash proceeds to be retained on the balance sheet.

 

For additional information about the Credit Facility, please refer to Notes 5 and 11 to the unaudited condensed consolidated financial statements of RSI for the nine months ended September 30, 2017 and 2016, included elsewhere in this prospectus, and Notes 5 and 12 to our consolidated financial statements of RSI for the years ended December 31, 2016, 2015 and 2014, included elsewhere in this prospectus.

 

Carrying Value and DIC Accretion. As of September 30, 2017, the aggregate fees accounted for as discounts and issuance costs (collectively, “DIC”) and not yet accreted to interest expense related to the funded portion of the Credit Facility amounts to $59.8 million, and net DIC associated with the $17.5 million unfunded portion of the Credit Facility amounted to $3.3 million. DIC related to the funded debt is accreted to interest expense using the effective interest method, and DIC related to unfunded debt is being amortized using the straight-line method over the term of the Credit Facility. Presented below is a summary of activity related to the funded debt for the nine months ended September 30, 2017 (in thousands):

 

    December 31,     PIK     Amendment/     Liability     Principal Reductions     Accretion     September 30,  
    2016     Accrual     Fees     Adjustments     Scheduled     Prepayments     Expense     2017  
Contractual liabilities:                                                                
Principal balance   $ 107,900     $ 2,038     $ -     $ -     $ (13,500 )   $ (21,493 ) (1)   $ -     $ 74,945  
Mandatory trigger event exit fees     55,258       -       -       5,775       -     -       -       61,033  
Mandatory consulting fees     6,000       -       -       -       (2,000 )     -       -       4,000  
Total contractual liability   $ 169,158     $ 2,038     $ -     $ 5,775     $ (15,500 )   $ (21,493 )   $ -   $ 139,978  
Debt discount and issuance costs:                                                                
Original issue discount   $ 2,150     $ -     $ -     $ -     $ -     $ (269 ) (2)   $ -     $ 1,881  
Origination fee     5,375       -       -       -       -       (673 ) (2)     -       4,702  
Amendment fee     8,600       -       1,075       -       -       (1,080 ) (2)     -       8,595  
Fair value of warrants     7,608       -       -       -       -       (952 ) (2)     -       6,656  
Consulting fees to lenders     7,720       -       -       -       -       (966 ) (2)     -       6,754  
Mandatory trigger event exit fees     55,258       -       -       5,775       -       (7,480 ) (2)     -       53,553  
Other issuance costs     3,823                 287       -         -         (481 ) (2)     -         3,629  
Total discount and issuance costs     90,534       -       1,362       5,775       -       (11,901 )     -       85,770  
Cumulative accretion     (9,440 )     -       -       -       -       2,040 (2)     (18,548 )     (25,948 )
Net discount     81,094       -       1,362       5,775       -       (9,861 )     (18,548 )     59,822  
Net carrying value   $ 88,064     $ 2,038     $ (1,362 )   $ -     $ (15,500 )   $ (11,632 )   $ 18,548     $ 80,156  

 

 

 

(1) Mandatory principal prepayments in the aggregate of $21.5 million, are comprised of (i) $14.1 million in April 2017 in connection insurance settlement, (ii) a principal payment of $4.0 million in May 2017 for 75% of Excess Cash Flow for the quarter ended March 31, 2017, (iii) a principal payment of $2.5 million in May 2017 required under the Third Amendment, and (iv) mandatory principal prepayments required for customer prepayments received in the second and third quarters of 2017 of $0.9 million for service periods commencing more than one year after the contract effective date.

 

(2) Due to the mandatory prepayments of principal discussed under (1) above, the Company recorded a loss of $9.9 million, consisting of a write-off of the debt discounts and issuance costs associated with the funded debt in the aggregate amount of $11.9 million, less the previously recognized accretion expense related to these amounts of $2.0 million. The amount of debt discounts and issuance costs written off was based on the percentage of principal prepaid in relation to the total contractual liabilities immediately before the prepayment.

 

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As of September 30, 2017, accretion of DIC for the funded debt of the Credit Facility is at an annual rate of 31.0%, resulting in an overall effective annual rate of 46.0% (excluding the impact of unused line fees, collateral monitoring fees, and amortization of debt issuance costs related to the unfunded portion of the Credit Facility).

 

Maturities of Contractual Obligations. Based on the $140.0 million contractual liability outstanding under the Credit Facility and after giving effect to the Sixth Amendment to the Credit Facility, the scheduled future maturities, are as follows (in thousands):

 

12-Month Period Ending   Credit Facility        
September 30,   Principal     Exit Fees     Consulting     Total  
2018   $ 9,750     $ -     $ 2,000     $ 11,750  
2019     15,000       -       2,000       17,000  
2020     50,195       61,033       -       111,228  
Total   $ 74,945     $ 61,033     $ 4,000     $ 139,978  

 

As of September 30, 2017, the current maturities of long-term debt amounted to $11.8 million as shown in the table above. As a result of the Sixth Amendment to the Credit Facility there are no required principal payments based on the calculation of 75% of Excess Cash Flow generated for each of the four calendar quarters for the 12-month period ending on September 30, 2018, and the previous requirement to make mandatory principal payments related to certain customer prepayments has been eliminated.

 

Collateral and Covenants. Borrowings under the Credit Facility are collateralized by substantially all of our assets, including certain cash depository accounts that are subject to control agreements with the lenders under the Credit Facility. As of September 30, 2017, the restricted cash balance under the control agreements totaled $8.3 million. Under the Credit Facility, we are required to comply with various financial and operational covenants on a monthly or quarterly basis, including a leverage ratio, minimum liquidity, churn rate, asset coverage ratio, minimum gross margin, and certain budgetary compliance restrictions. The Credit Facility also prohibits or limits our ability to incur additional debt, pay cash dividends, sell assets, merge or consolidate with another company, and other customary restrictions associated with debt arrangements. From November 2016 through April 2017, we had made expenditures that exceeded certain budgetary compliance covenants which resulted in the existence of an event of default under the Credit Facility that was subsequently cured by the Third Amendment.

 

Origination Agent Consulting Agreement. In addition to the Credit Facility, we entered into a consulting agreement with the Origination Agent. In addition to four cash payments of $2.0 million to the Origination Agent, the consulting agreement also provided for the issuance of a warrant to the Origination Agent. This warrant had anti-dilution provisions that were triggered when RSI issued Series C Preferred Stock (the “Series C Preferred”) in October 2016 and, as adjusted for the Exchange Ratio in the merger with GPIA, resulted in warrants for an aggregate of 3.4 million shares of our common stock at an exercise price of $5.64 per share. The Origination Agent Warrants were redeemable for cash at the option of the holder under certain circumstances that required classification as a liability. Upon consummation of the business combination with GPIA, the holder of Origination Agent warrants agreed to eliminate the cash redemption feature and the anti-dilution provisions associated with such warrants in exchange for the issuance of an additional warrant to purchase approximately 62,000 shares of our common stock at an exercise price of $5.64 per share. As of September 30, 2017, the estimated fair value related to the Origination Agent Warrants for an aggregate of approximately 3.4 million shares of our common stock amounted to $21.3 million. Due to the elimination of the cash redemption feature upon consummation of the merger, the Origination Agent Warrants will no longer be classified as a liability as of October 10, 2017.

 

In October 2016, RSI entered into a Series C Preferred stock purchase agreement with a group of investors resulting in the issuance of approximately 56.4 million shares of Series C Preferred for approximately $0.18 per share, for gross proceeds of $10.0 million. The net proceeds were $9.9 million and were used to satisfy the required equity participation by the lenders under the Credit Facility and payment of the Rimini I judgment.

 

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Related Party Loan Payable. Upon consummation of the Merger Agreement, an outstanding loan payable incurred by GPIA that is payable to the Sponsor for approximately $3.0 million was not repaid, and will remain as our continuing obligation. The loan is non-interest bearing and will become due and payable when the outstanding principal balance under the Credit Facility is less than $95.0 million.

 

Cash Flows Summary

 

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

 

    Nine Months Ended                    
    September 30:     Year Ended December 31:  
    2017     2016     2016     2015     2014  
Net cash provided by (used in):                                        
Operating activities   $ 26,156     $ 12,048     $ (59,609 )   $ 1,573     $ 3,215  
Investing activities     (1,074 )     (630 )     (1,188 )     (1,747 )     (1,242 )
Financing activities     (38,280 )     3,487       77,088       (842 )     (2,954 )

 

Cash Flows Provided By Operating Activities

 

A key component of our business model requires that substantially all 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 and paid for. Also, as our net revenue has increased we have been able to improve our gross profit percentage, due to the costs of employee and shared support services being spread out over a wider client base. Additionally, we have been able to leverage our sales and marketing expenses over the increased client base and have found opportunities to reduce spending while continuing to expand our business.

 

For the nine months ended September 30, 2017, cash flows provided by operating activities amounted to $26.2 million. While we recognized a net loss of $49.4 million for the nine months ended September 30, 2017, non-cash expenses of $53.5 million mitigated the cash impact of our net loss, resulting in positive operating cash flows of $4.1 million. Non-cash expenses included accretion and amortization expense of $19.4 million, the write-off of debt discount and issuance costs of $9.9 million, and a loss on embedded derivatives and redeemable warrants of $18.5 million.

 

Changes in working capital also contributed to positive operating cash flows including (i) customer cash collections that resulted in a reduction in accounts receivable of $21.7 million, (ii) the cash proceeds from a non-recurring insurance settlement, net of related legal fees, of $13.2 million, and (iii) an increase in accounts payable accrued expenses of $0.8 million. These positive changes in working capital total $35.7 million and were partially offset by a decrease in deferred revenue of $12.0 million and cash payments resulting in an increase in prepaid expenses of $1.8 million. Due to the accounting for the insurance settlement as a deferred liability, future legal expenses will be reduced through the non-cash amortization of the deferred settlement liability.

 

For the nine months ended September 30, 2016, cash flows provided by operating activities were $12.0 million. The key drivers of our positive operating cash flow consist of our net loss of $37.0 million, which was offset by non-cash expenses of $10.0 million and changes in operating assets and liabilities of $39.0 million. The changes in operating assets and liabilities included (i) customer cash collections that resulted in a reduction in account receivable of $8.5 million and an increase in deferred revenue of $24.9 million, and (ii) a net increase in accounts payable and accrued expenses of $8.8 million. These increases in operating assets and liabilities total $42.2 million and were partially offset by cash payments to fund an increase in prepaid expenses and other assets of $3.2 million.

 

For the year ended December 31, 2016, cash flows used in operating activities were $59.6 million. The cash used primarily related to our net loss of $12.9 million, the $124.4 million litigation payment and an increase in accounts receivable of $14.6 million, partially offset by an increase in deferred revenue of $57.0 million, non-cash expenses of $18.4 million (including $10.1 million of accretion of debt discount and issuance costs) and a net decrease in other working capital amounts of $14.0 million.

 

For the year ended December 31, 2015, cash flows provided by operating activities were $1.6 million. The positive cash flows resulted primarily from an increase in deferred revenue and accrued litigation settlement of $22.3 million and $21.4 million, respectively, and a reduction of other working capital amounts of $8.2 million, and non-cash expenses of $3.5 million partially offset by an increase in accounts receivable of $8.5 million and our net loss of $45.3 million.

 

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For the year ended December 31, 2014, cash flows provided by operating activities were $3.2 million. The positive cash flows resulted primarily from an increase in accrued litigation settlement and deferred revenue of $100.0 million and $25.7 million, respectively, a reduction in other working capital amounts of $4.9 million, and non-cash expenses of $9.5 million, partially offset by an increase in accounts receivable of $9.0 million, and our net loss of $127.8 million.

 

Cash Flows Used In Investing Activities

 

Cash used in investing activities was primarily driven by capital expenditures for leasehold improvements and computer equipment as we continued to invest in our business infrastructure and advance our geographic expansion.

 

Capital expenditures totaled $1.1 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively. Since we entered into the Credit Facility in June 2016, we have been subject to covenants in the Credit Facility that put restrictions on our capital expenditures. For the nine months ended September 30, 2017, capital expenditures of $1.1 million consisted of $0.3 million for new computer equipment at our U.S. facilities, leasehold improvements and equipment of $0.6 million for our larger facility in Brazil, and $0.2 million for computer equipment for our facility in India. These expenditures were required to support net revenue growth in these locations.

 

For the nine months ended September 30, 2016, capital expenditures of $0.6 million consisted of $0.3 million for new computer equipment at our U.S. facilities and $0.3 million to support expansion of our business in India.

 

Capital expenditures totaled $1.2 million, $1.7 million and $1.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. The higher level of capital expenditures in 2015 compared to 2014 was due to office expansions and infrastructure spending both inside and outside the United States, while 2016 and 2017 spending decreased due to covenants in the Credit Facility that put restrictions on cash expenditures.

 

Cash Flows From Financing Activities

 

Cash used in financing activities of $38.3 million for the nine months ended September 30, 2017 was primarily attributable to principal payments of $37.0 million under the Credit Facility. Such principal payments include principal pay downs of $14.1 million from a deferred insurance settlement, $4.0 million from the 75% of Excess Cash Flow requirement under the Credit Facility for the first quarter of 2017, $2.5 million required under the Third Amendment in May 2017, $0.9 million from customer prepayments received, a scheduled consulting payment of $2.0 million, and scheduled principal payments of $13.5 million. Other uses of cash for the nine months ended September 30, 2017 included payments for debt issuance costs related to amendments to the Credit Facility of $0.3 million, payment of deferred offering costs related to the reverse recapitalization of $0.7 million, and principal payments under capital leases of $0.6 million. These uses of cash which total $38.6 million were partially offset by proceeds from the exercise of stock options of $0.3 million, to arrive at net cash used in financing activities of $38.3 million for the nine months ended September 30, 2017.

 

Cash provided by financing activities of $3.5 million for the nine months ended September 30, 2016 was primarily attributable to net proceeds from borrowings under the Credit Facility of $19.1 million and $0.5 million under our prior line of credit, for aggregate borrowings of $19.6 million. These cash inflows were partially offset by principal payments of $14.7 million to repay our prior line of credit, and principal payments of $0.4 million on capital lease and other debt obligations. Other cash outflows were comprised of payments of $0.6 million for debt issuance costs under the Credit Facility.

 

Cash provided by financing activities of $77.1 million for the year ended December 31, 2016 was primarily attributable to net proceeds from borrowings under the Credit Facility entered in June 2016 for $83.8 million, and net proceeds of $9.9 million from the issuance of Series C preferred stock in October 2016. These sources of cash total $93.7 million and were partially offset by (i) principal payments to repay our previous line of credit for $14.7 million, (ii) principal payments under the Credit Facility of $0.5 million, (iii) principal payments on capital lease obligations of $0.8 million, and (iv) payments for debt issuance costs of $0.6 million.

 

Cash used in financing activities of $0.8 million for the year ended December 31, 2015 was primarily attributable to principal payments of $0.4 million under our prior line of credit, and principal payments of $0.4 million on capital lease obligations.

 

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Cash used in financing activities of $2.9 million for the year ended December 31, 2014 was primarily attributable to payments for deferred offering costs of $2.3 million, and net principal reductions of $0.6 million under our prior line of credit and capital lease obligations.

 

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. Should any funds from our foreign subsidiaries be repatriated in the future, we believe we would not need to accrue and pay taxes on the amounts repatriated due to the significant amount of tax net operating loss carryforwards we have available to offset such income taxes. As of September 30, 2017, we had cash and cash equivalents of $3.4 million in our foreign subsidiaries.

 

Contractual Obligations

 

The following table summarizes our contractual obligations on an undiscounted basis as of December 31, 2016, and the period in which each contractual obligation is due:

 

    Year Ending December 31,        
    2017     2018     2019     2020     2021     Thereafter     Total  
    (in thousands)        
Credit Facility:                                                        
Components of debt carrying value (1) :                                                        
Principal   $ 22,750     $ 28,500     $ 30,000     $ 26,650     $ -     $ -     $ 107,900  
Consulting     2,000       2,000       2,000       -       -       -       6,000  
Trigger event fees     -       -       -       55,258       -       -       55,258  
Components of stated interest rate (2) :                                                        
Interest payable in cash     12,281       9,320       5,960       1,657       -       -       29,218  
Interest payable in kind     -       -       -       8,205       -       -       8,205  
Components of debt financing fees:                                                        
Collateral monitoring fees (3)     2,517       1,886       1,182       292       -       -       5,877  
Unused line fees (4)     887       887       425       -       -       -       2,199  
Annual loan service fee     395       395       395       -       -       -       1,185  
Annual agent fee     55       55       55       -       -       -       165  
Leases:                                                        
Operating leases     4,198       3,899       3,350       3,001       2,883       2,075       19,406  
Capital leases     893       460       87       -       -       -       1,440  
                                                         
Total   $ 45,976     $ 47,402     $ 43,454     $ 95,063     $ 2,883     $ 2,075     $ 236,853  

 

 

(1) The principal payments are based on the Credit Facility amortization schedule, as amended. Scheduled minimum principal payments shown above for the year ending December 31, 2017 exclude the impact of (i) the repayment of $14.1 million of principal in April 2017 in connection with an insurance settlement, (ii) principal payments based on the calculation of 75% of Excess Cash Flow, if any, generated for each of the calendar quarters ending in 2017, (iii) additional principal payments that we are required to make from the $35.0 million equity issuance proceeds, (iv) Customer Prepayments for service periods exceeding one year that are received after April 1, 2017, and that are required to be applied to reduce the outstanding principal balance, and (v) additional principal payments that we may elect to make in connection with the merger agreement. Principal payments based on the insurance settlement, Excess Cash Flow and future Customer Prepayments are excluded from the table since they are contingent payments based on the generation of working capital in the future, and principal payments that result from modifications of the Credit Facility are excluded until the period of the modification.

 

(2) Interest payable in cash at the stated rate of 12.0% per annum is included in the table based on the calculated principal balance as described in footnote (1) above. Make-whole interest payments are excluded from the table since they are in lieu of interest otherwise included in the table. Interest that is payable in kind at the stated rate of 3.0% per annum is payable at maturity of the Credit Facility and the amount presented is the cumulative PIK interest from January 1, 2017 through the maturity date, based on the principal balance as described in footnote (1) above.

 

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(3) Collateral monitoring fees are 2.5% per annum based on the outstanding principal balance as described in footnote (1) above.

 

(4) Unused line fee line fees are charged on the unfunded portion of the Credit Facility of $17.5 million based on a fee of 5.0% per annum. We are permitted to terminate the commitment related to the $17.5 million beginning in June 2019, and if we have not borrowed these funds we intend to terminate the commitment at that time. Accordingly, we have not included unused line fees in the table after June 2019.

 

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.

 

Qualitative and Quantitative Disclosures About Market Risk

 

Foreign Currency Exchange Risk

 

We have foreign currency risks related to our net 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. We generated approximately 73%, 70%, 69%, 69% and 68% of our net revenue in the United States and approximately 27%, 30%, 31%, 31% and 32% of our net revenue from our international business for the years ended December 31, 2014, 2015 and 2016, respectively, and for the nine months ended September 30, 2016 and 2017, respectively. Increases in the relative value of the U.S. Dollar to other currencies may negatively affect our net 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 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.

 

Interest Rate Sensitivity

 

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.

 

Inflation Risk

 

We do not believe that inflation currently has a material effect on our business.

 

Critical Accounting Policies and Significant Judgments and 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 net 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 believe that of our significant accounting policies that are described in Note 2 to the consolidated financial statements of RSI included elsewhere in this prospectus, 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.

 

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Debt

 

At inception of the Credit Facility, we evaluated the Credit Facility as well as several related agreements that were entered into concurrently to determine if the fair value of the cash and non-cash amounts payable pursuant to such agreements are required to be treated as debt discounts and issuance costs. In addition, for amounts subject to a consulting agreement entered into concurrently with the Origination Agent, we determined that the fair value of the warrants issued at inception, the annual consulting services, and the trigger event fees payable at termination of the Credit Facility, should all be accounted for as additional consideration to obtain the financing. Accordingly, these costs, as well as origination fees, original issue discounts, and incremental and direct professional fees paid by us for our own account and similar costs paid on behalf of the lenders under the Credit Facility, were treated as debt discount and issuance costs.

 

Debt issuance costs are allocated proportionately, based on cumulative borrowings in relation to the total financing commitment, between the funded and unfunded portions of the Credit Facility debt. Debt issuance costs and discounts related to funded debt are classified as a reduction in the carrying value of the debt in our consolidated balance sheets and are accreted to interest expense using the effective interest method. Debt issuance costs related to unfunded debt are classified as a long-term asset in our consolidated balance sheets, and are generally amortized using the straight-line method over the contractual term of the debt agreement. When we borrow incremental amounts under the Credit Facility, the net carrying value of debt issuance costs related to previously unfunded debt are transferred to debt discounts and issuance costs related to funded debt where they are included as a component of the carrying value of the funded debt and accreted prospectively using the effective interest method.

 

The Credit Facility is a highly complex legal document that contains numerous embedded derivatives that we are required to evaluate for accounting recognition. For embedded derivatives, we record the fair value, if any, as a liability at the date of such determination. We also evaluate each embedded derivative on a quarterly basis to determine if the facts and circumstances have changed whereby the liability has increased or decreased. When a liability is initially established or changed for an embedded derivative, a corresponding adjustment to non-operating income or expenses is reflected in our consolidated statements of operations.

 

The balance sheet classification of our debt between current and long-term liabilities takes into account scheduled principal payments in effect under the Credit Facility, certain customer prepayments required to be designated for mandatory principal reductions and Excess Cash Flow prepayments, if any, for quarterly periods ending on or before the balance sheet date. We are obligated to make principal payments in the future based on the calculation of Excess Cash Flow and such prepayments for periods after the balance sheet date are not included in current liabilities since they are contingent prepayments based on the generation of working capital in the future.

 

When we amend our debt agreements, we evaluate the terms to determine if the amendment should be accounted for as a modification or an extinguishment. This determination has a significant impact on our current and future results of operations, since a conclusion that a debt extinguishment has occurred results in the recognition of a loss consisting of all costs incurred before the amendment. Alternatively, if we conclude that the amendment should be accounted for as a modification, such costs continue to be accounted for as a component of the carrying value of the debt, and amounts paid to the lenders under the Credit Facility to obtain the amendment are accounted for as a debt issuance cost and allocated between the funded debt and the unfunded debt. When we make mandatory prepayments of principal under the Credit Facility we write-off a proportional amount of unamortized debt discount and issuance costs in relation to the total debt obligations under the Credit Facility.

 

Revenue Recognition

 

Revenue is derived from support services, and to a lesser extent, software licensing and related maintenance and professional services. A substantial majority of revenue is from support services, and revenue from other sources has been minimal to date. Revenue is recognized when all the following criteria are met:

 

· Persuasive evidence of an arrangement exists . We generally rely on a written sales contract to determine the existence of an arrangement.

 

· Delivery has occurred . We consider delivery to have occurred over the contractual term when support service is available to the customer in the manner prescribed in the contractual arrangement, and when there are no further additional performance or delivery obligations.

 

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· Fee is fixed or determinable . We assess whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment.

 

· Collection is reasonably assured . Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as payments become due. Previous uncollectable receivables have not had a material impact on the consolidated financial statements for the periods presented.

 

We recognize our support services revenue provided on third-party software in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition , and SEC Staff Accounting Bulletin (SAB) 104, Revenue Recognition . Pricing for support services is generally established on a per-customer basis as set forth in the arrangements. The non-cancellable terms of our support services arrangements average two years and in most cases, include an extended initial support service period of generally three to six months for transition and onboarding tasks. This results in a discounted fee for the initial support service period. For such arrangements, revenue is limited to the amount that is not contingent upon the future delivery of support services whereby each annual billing period is recognized on a straight-line basis over the respective annual support service period. For arrangements not subject to this contingent revenue limitation, the total arrangement fee is recognized as revenue on a straight-line basis over the non-cancellable term.

 

In certain circumstances, we enter into arrangements with multiple elements, comprised of support services for multiple third-party software platforms and to a much lesser extent professional services and software product licensing and related maintenance support. When we enter into multiple element arrangements, these arrangements are evaluated to determine if the multiple elements consist of more than one unit of accounting and can be separated accordingly. Based on separation criteria under U.S. GAAP, deliverables in multiple element arrangements can be segregated into separate units of accounting if: a) they have value to the customer on a standalone basis. The items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered items on a standalone basis; b) if the sales arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered items are considered probable and substantially in the control of the vendor. If deliverables can be separated into individual units of accounting, then we allocate consideration at the inception of an arrangement to all deliverables based on the relative selling price method in accordance with the selling price hierarchy, which includes: (i) vendor-specific objective evidence ( “VSOE”) if available; (ii) third-party evidence (“TPE”) if VSOE is not available, and (iii) best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Revenue from each deliverable are recognized when all requirements are met for that specific deliverable. If deliverables cannot be separated into separate units of accounting, then the arrangement will be accounted for as a single unit of accounting and revenue will be recognized when all requirements are met for all deliverables within the arrangement.

 

In determining VSOE, accounting guidance requires that a substantial majority of the standalone selling prices for these products fall within a reasonably narrow pricing range. We have not established VSOE due to lack of pricing consistency. We have also concluded that TPE is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing information. Accordingly, for replacement of vendor support services, we establish BESP primarily by consistently pricing its arrangements following its internal pricing policy of quoting the customers a 50% discount to their current annual support fees they would otherwise pay enterprise software vendors. We regularly review BESP. Changes in assumptions or judgments or changes to the elements in the arrangement could cause an increase or decrease in the amount of revenue that we report in a particular period.

 

In a limited number of arrangements, we also license software products and related maintenance services under term-based arrangements. The terms of software licenses and services support are the same, and when support services are terminated, the software license is also terminated. To date software has not been licensed separately, but rather has only been licensed along with service support arrangements. This software is considered essential to the functionality of the support services for these arrangements. We apply the provisions of ASC 985-605, Software Revenue Recognition , to these deliverables. Accordingly, all revenue from the software license is recognized over the term of the support services.

 

Deferred revenue consists of billings issued that are non-cancellable but not yet paid and payments received in advance of revenue recognition. We typically invoice our customers at the beginning of the contract term, in annual and multi-year installments. Deferred revenue that is anticipated to be recognized during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as long-term deferred revenue.

 

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Valuation of Embedded Derivatives, Redeemable Warrants, and Stock-Based Compensation

 

Through September 30, 2017, we were a private company with no active market for our common stock. When we enter into a financial instrument such as a debt or equity agreement (the “host contract”), we assess whether the economic characteristics of any embedded features are clearly and closely related to the primary economic characteristics of the remainder of the host contract. When it is determined that (i) an embedded feature possesses economic characteristics that are not clearly and closely related to the primary economic characteristics of the host contract, and (ii) a separate, stand-alone instrument with the same terms would meet the definition of a financial derivative instrument, then the embedded feature is bifurcated from the host contract and accounted for as a derivative instrument. The estimated fair value of the derivative feature is recorded separately from the carrying value of the host contract, with subsequent changes in the estimated fair value recorded as a non-operating gain or loss in our consolidated statements of operations.

 

The Credit Facility includes features that were determined to be embedded derivatives requiring bifurcation and accounting as separate financial instruments. The fair value of these embedded derivatives is estimated using the “with” and “without” method. Accordingly, the Credit Facility was first valued with the embedded derivatives (the “with” scenario) and subsequently valued without the embedded derivative (the “without” scenario). The fair values of the embedded derivatives were estimated as the difference between the fair values of the Credit Facility in the “with” and “without” scenarios. The fair values of the Credit Facility in the “with” and “without” scenarios were determined using the income approach, specifically the yield method. Significant “Level 3” assumptions used in the valuation of the embedded derivatives include the timing of projected principal payments, the remaining term to maturity, and the discount rate.

 

We issued warrants to the Origination Agent in connection with a consulting agreement entered into concurrently with the Credit Facility. Until October 10, 2017, the Origination Agent Warrants were redeemable for cash at the option of the holders under certain circumstances, including termination of the Credit Facility.

 

The valuation methodology for the warrants was performed through a hybrid model using Monte Carlo simulation, which considers possible future equity financing and liquidity scenarios, including an initial public offering, a sale of the business, and a liquidation of our company. Key assumptions inherent in the warrant valuation methodology include projected revenue multiples, historical volatility, the risk-free interest rate, a discount rate for lack of marketability, and an overall discount rate.

 

We measure the cost of employee and director services received in exchange for all equity awards granted, including stock options, based on the fair market value of the award as of the grant date. We compute the fair value of options using the Black-Scholes-Merton ( “BSM”) option pricing model. Assumptions used in the valuation of stock options include the expected life, volatility, risk-free interest rate, dividend yield, and the fair value of our common stock on the date of grant. We utilized the observable data for a group of peer companies that grant options with substantially similar terms to assist in developing our volatility assumption. The risk-free rate is based on U.S. Treasury yields in effect at the time of grant over the expected term. We did not assume a dividend yield since we have never paid dividends and do not plan to do so for the foreseeable future. The fair value of our common stock is based on the valuation methodology described above for the Origination Agent warrants.

 

We recognize the cost of the equity awards over the period that services are provided to earn the award, usually the vesting period. For awards granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized as an expense on a straight-line basis over the requisite service period as if the award was, in substance, a single award. Stock-based compensation expense is recognized based on awards ultimately expected to vest whereby estimates of forfeitures are based upon historical experience.

 

The assumptions used in estimating the fair value of warrants, derivatives and stock-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use different assumptions, warrant and stock-based compensation expense could be different in the future. Once our common stock becomes publicly traded, certain key valuation inputs to the option pricing method will be based on publicly available information. These key valuation inputs include the fair value of our common stock, and once there is sufficient trading history the volatility is expected to be derived from the historical trading activity of our common stock.

 

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Please refer to Note 6 to the unaudited condensed consolidated financial statements of RSI and to Note 7 to the 2016 audited consolidated financial statements of RSI included elsewhere in this prospectus for details regarding valuation and accounting for warrants and options under our equity-based compensation plans.

 

Income Taxes

 

We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled. Realization of deferred tax assets is dependent upon future taxable income. A valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence, including expected future earnings.

 

We recognize an uncertain tax position in our financial statements when we conclude that a tax position is more likely than not to be sustained upon examination based solely on its technical merits. Only after a tax position passes the first step of recognition will measurement be required. Under the measurement step, the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement. This is determined on a cumulative probability basis. The full impact of any change in recognition or measurement is reflected in the period in which such change occurs. Interest and penalties related to income taxes are recognized in the provision for income taxes.