S-1/A 1 d433338ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
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As filed with the Securities and Exchange Commission on March 15, 2013

Registration No. 333-186668

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 4 to

FORM S-1

REGISTRATION STATEMENT

Under The Securities Act of 1933

 

 

Model N, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   7372   77-0528806
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

Model N, Inc. 1800 Bridge Parkway

Redwood City, California 94065

(650) 610-4600

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Zack Rinat

Chief Executive Officer and

Chairman of the Board

Model N, Inc.

1800 Bridge Parkway

Redwood City, California 94065

(650) 610-4600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Theodore G. Wang, Esq.
Jeffrey R. Vetter, Esq.
Fenwick & West LLP
Silicon Valley Center
801 California Street
Mountain View, California 94041
(650) 988-8500
 

Sujan Jain, Chief Financial Officer

Errol H. Hunter, Esq.,

Associate General Counsel

Model N, Inc.

1800 Bridge Parkway

Redwood City, California 94065

(650) 610-4600

 

Jeffrey D. Saper, Esq.

Rezwan D. Pavri, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

   Accelerated filer   ¨    Non-accelerated filer  x    Smaller reporting company  ¨
      (Do not check if a smaller reporting company)   

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     38   

Market and Industry Data

     40   

Use of Proceeds

     41   

Dividend Policy

     41   

Capitalization

     42   

Dilution

     44   

Selected Consolidated Financial Data

     47   

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

     49   

Business

     80   

Management

     94   

Executive Compensation

     101   

Principal and Selling Stockholders

     111   

Related Party Transactions

     113   

Description of Capital Stock

     114   

Certain Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     120   

Shares Eligible for Future Sale

     125   

Underwriting

     128   

Legal Matters

     134   

Experts

     134   

Where You Can Find More Information

     134   

Index to Consolidated Financial Statements

     F-1   

You should rely only on the information contained in this prospectus or contained in any related free writing prospectus prepared by or on behalf of us. Neither we, the selling stockholder nor the underwriters have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any related free writing prospectus. We and the selling stockholder are offering to sell, and seeking offers to buy, common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale or our common stock.

Through and including                 , 2013 (25 days after the commencement of this offering), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: neither we, the selling stockholder nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus outside the United States.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. The following summary should be read together with the more detailed information and consolidated financial statements and related notes appearing elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. Before you decide to invest in our common stock, you should read the entire prospectus carefully, including the section entitled “Risk Factors” and the consolidated financial statements and related notes included in this prospectus.

Company Overview

We are a provider of revenue management solutions for the life science and technology industries, and we believe that we are a pioneer in this market. Our solutions enable our customers to maximize revenues and reduce revenue compliance risk by transforming their revenue lifecycle from a series of tactical, disjointed operations into a strategic end-to-end process. Our customers use our application suites to manage mission-critical functions, such as pricing, contracting, incentives and rebates. We believe our solutions serve as the system of record for our customers’ revenue management processes and can provide a competitive advantage for them. Our application suites are built on a modern, web-based platform that can be deployed both on-premise or through the cloud.

Our domain expertise in revenue management for the life science and technology industries has enabled us to develop applications designed to meet the unique, strategic needs of these industries. Our applications are then further configured to meet the specific needs of our customers. Our solutions include two complementary suites of software applications, Revenue Management Enterprise and Revenue Management Intelligence. Our Revenue Management Enterprise suite serves as the system of record for, and automates the execution of, revenue management processes such as pricing, contracting and incentive and rebate management. Our Revenue Management Intelligence suite provides analytical insights to define and optimize revenue management strategies. Each of these suites consists of a number of applications, which can be purchased together or as separate stand-alone applications. Historically, a substantial majority of our total revenues has been associated with our Revenue Management Enterprise suite. For example, in the fiscal year ended September 30, 2012 and in the three months ended December 31, 2012, revenues from this suite constituted more than 85% of our total revenues for each respective period.

We primarily target large and mid-sized organizations worldwide through our marketing team and direct sales force. We assist our customers with the configuration and implementation of our solutions. We have also established non-exclusive relationships with system integrators and consultants that promote our solutions through business referral activities such as joint prospective customer planning and marketing at industry events. These relationships also help to increase the number of skilled resources trained and qualified to assist with the implementation of our solutions. A representative list of our customers based on our total revenues for the fiscal year ended September 30, 2012 includes our life science customers Abbott Laboratories, Amgen Inc., Boston Scientific Corporation, Bristol-Meyers Squibb Company, Johnson & Johnson and Merck & Co., Inc., and our technology customers Dell Inc., Nokia Corporation, STMicroelectronics N.V. and VMware, Inc.

Our on-premise solutions are typically purchased as perpetual licenses and our cloud-based solutions are purchased on a subscription basis. We derive revenues primarily from license fees and related implementation services, as well as maintenance and application support, from the sale of our on-premise solutions, and from subscription fees and related implementation services from the sale of our cloud-based solutions. Our total revenues were $50.4 million, $65.2 million and $84.3 million for the fiscal years ended September 30, 2010, 2011 and 2012, respectively, representing period over

 

 

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period growth each year of approximately 29%. Our total revenues were $18.1 million and $22.3 million for the three months ended December 31, 2011 and 2012, respectively, representing period over period growth of approximately 24%. We generated net income of $0.6 million and $1.5 million and net losses of $5.7 million and $1.3 million in the fiscal years ended September 30, 2010, 2011 and 2012 and the three months ended December 31, 2012, respectively. We had an accumulated deficit of $62.5 million as of December 31, 2012.

Overview of the Life Science and Technology Industries

According to Gartner, Inc., a research firm, in 2011, life science and technology companies spent a combined $17.3 billion on software, consulting services and internal information technology (IT) personnel dedicated to sales support, marketing and finance. Management of the revenue lifecycle is becoming a strategic imperative and source of competitive advantage for life science and technology companies as they address increasingly globalized markets, sophisticated buyers, complex channels and expanding volumes of data from internal and market sources. We believe these companies are seeking innovative solutions to increase revenues and reduce missed revenue opportunities, or revenue leakage, as the opportunity to capture lost revenues has a significant business impact for life science and technology companies. For example, International Data Corporation (IDC), a research firm, reported in its Health Insights 2009 report that a lack of centralized and automated solutions for managing the revenue lifecycle resulted in over $11 billion per year in lost revenue for companies in the life science industry alone.

Traditionally, many life science and technology companies have addressed revenue management through a patchwork of manual processes and inflexible and costly custom systems, which has led to a number of challenges in managing the revenue lifecycle effectively, including:

 

  Ÿ  

Incomplete and unreliable information for key strategic decisions.    The legacy manual processes and systems used to manage the revenue lifecycle creates silos of data, which cause companies to make strategic marketing, pricing and resource allocation decisions that are often based on incomplete or inaccurate information.

 

  Ÿ  

Revenue leakage due to inadequate contract management and enforcement.    Legacy approaches can result in contract mismanagement due to ineffective automation and monitoring of the commercial terms of complex custom-tailored contracts frequently used in the life science and technology industries.

 

  Ÿ  

Revenue leakage due to overpayment of incentives.    Life science and technology companies process massive volumes of rebates and incentives. A lack of centralized, automated and enforceable processes can result in overpayment of incentives.

 

  Ÿ  

Ineffective pricing across geographies and complex channels.    The inability to enforce a single price for a specific sales opportunity across regions and channels can result in channel conflicts, which result in price and revenue erosion.

 

  Ÿ  

Inaccurate financial reporting.    Complex contracts and distribution channels have made it more difficult to obtain and process financial information, which can result in inaccurate financial reporting.

 

  Ÿ  

Difficulty complying with complicated government regulations.    Satisfying the regulatory requirements of numerous federal and state programs is increasingly complex for life science companies. Government audits can expose ineffective management of these regulatory requirements and can result in penalties or program ineligibility.

 

 

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Our Solutions

Our customers use our solutions to achieve significant returns on investment, improve gross margins and address vital business objectives by:

 

  Ÿ  

Driving optimal pricing and contracting strategies.    Our solutions consolidate information across the revenue lifecycle and provide visibility into historical volume, price and contract performance trends. Our pricing analytics enable our customers to identify untapped revenue opportunities across customers or products and make better pricing and contracting decisions.

 

  Ÿ  

Realizing greater value from contracts.    Our solutions enable customers to codify and automate complex pricing, incentives and financial and fulfillment terms that previously resided mainly on paper contracts. Our customers are able to maximize the value of contracts and realize additional revenue by tracking their customers’ performance and enforcing contract terms.

 

  Ÿ  

Maximizing revenue by standardizing and enforcing pricing and discounting policies.    Our solutions allow customers to standardize pricing policies that can be automatically enforced across the enterprise and the channels to restrict unauthorized sales practices and discounting by sales personnel.

 

  Ÿ  

Executing and optimizing channel incentives.    Our solutions enable customers to manage the entire incentive lifecycle, from contracting to recognition and payment. Accurate management allows our customers to eliminate unearned discounts and overpayment of incentives.

 

  Ÿ  

Achieving accurate financial reporting.    With our solutions, customers can manage all aspects of the contract-to-payment process related to calculating, monitoring, processing and triggering payments to end customers and channel intermediaries. This solution enables our customers to accurately and consistently record accruals in compliance with financial accounting requirements.

 

  Ÿ  

Automating government regulatory compliance to reduce revenue risk.    Our solutions enable automation and integration of contract terms, incentives and pricing into mandated price and payment calculations, enabling our life science customers to better manage compliance with the terms of critical government programs that provide significant sources of revenue.

Our Competitive Strengths

We believe our key competitive strengths include:

 

  Ÿ  

Comprehensive approach to revenue management.    Our integrated, end-to-end application suites enable our customers to transform their revenue management processes from disjointed operations into a cohesive strategic end-to-end process for decision making and process automation.

 

  Ÿ  

Deep domain knowledge.    Our expertise in the revenue management needs of life science and technology companies enables us to develop solutions that address the unique demands of these industries.

 

  Ÿ  

Strong installed customer base.    We have established a reputation for delivering revenue management solutions to leading life science and technology customers. We believe that the use of our products by respected industry leaders also increases the value of our brand in these industries.

 

  Ÿ  

Flexible delivery options.    Our modern, web-based platform supports both on-premise and cloud deployments. By offering both delivery options, we are able to reach a larger group of customers, address their unique needs and deliver cost and operational benefits.

 

 

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  Ÿ  

Talented team focused on customer success.    We employ experts from the life science and technology industries in key customer-facing and development roles, resulting in close relationships with our customers and a strong reference base for new sales opportunities.

Our Growth Strategy

We intend to expand our leadership in the market for revenue management solutions by:

 

  Ÿ  

Increasing sales to existing customers.    We plan to increase revenues from our existing customers by expanding their use of our solutions across their businesses and by cross-selling additional applications.

 

  Ÿ  

Expanding our customer base.    We intend to continue to aggressively pursue new customers by highlighting the strategic benefits of integrated revenue management.

 

  Ÿ  

Introducing new applications and enhancing existing solutions.    We intend to continue to develop innovative products and expand platform capabilities and functionality to meet the evolving needs of life science and technology companies. We have a number of new products under development as well as continued innovations to our existing solutions.

 

  Ÿ  

Extending into the mid-market through the cloud.    We intend to expand our customer base into small and medium sized businesses through continued development and deployment of our cloud-based solutions.

 

  Ÿ  

Expanding our presence in the technology industry.    Our first customer in the technology industry was in the semiconductor vertical, and we subsequently expanded into other technology verticals such as consumer electronics and software. We plan to continue to expand into these and adjacent technology verticals.

 

  Ÿ  

Pursuing selective acquisitions.    We intend to continue to pursue acquisitions of complementary businesses, products or technologies that expand our product offerings.

Risks Affecting Us

We believe the key risks affecting us include:

 

  Ÿ  

we have incurred losses in the past, and we may not be profitable in the future;

 

  Ÿ  

our operating results are likely to vary significantly from period to period and be unpredictable;

 

  Ÿ  

our revenues are dependent on our ability to maintain and expand existing customer relationships and our ability to attract new customers;

 

  Ÿ  

the loss of one or more of our key customers could slow our revenue growth or cause our revenues to decline;

 

  Ÿ  

our customers often require significant configuration efforts and the failure to meet their requirements could result in customer disputes, loss of anticipated revenues and additional costs;

 

  Ÿ  

our future growth is, in large part, dependent upon the increasing adoption of revenue management solutions;

 

  Ÿ  

we are highly dependent upon the life science industry;

 

  Ÿ  

a substantial majority of our total revenues come from our Revenue Management Enterprise suite;

 

  Ÿ  

the timing of our revenue recognition is dependent on our ability to reasonably estimate the time and resources required for project implementation; and

 

 

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  Ÿ  

our efforts to expand the adoption of our solutions in the technology industry will be affected by our ability to provide solutions that adequately address trends in that industry.

Corporate Information

We incorporated in Delaware on December 14, 1999. Our principal offices are located at 1800 Bridge Parkway, Redwood City, CA 94065, and our telephone number is (650) 610-4600. Our website address is www.modeln.com. The information contained on, or that can be accessed through, our website is not part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. In this prospectus, unless the context otherwise requires, the terms “Model N,” “we,” “us” and “our” refer to Model N, Inc., a Delaware corporation, together with its subsidiaries.

Model N is our registered trademark in various international jurisdictions and is pending registration in the United States. Model N, the Model N logo and all of our product names appearing in this prospectus are our trademarks. All other trademarks, trade names or service marks appearing in this prospectus are trademarks of the respective companies that use them. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with these other companies, or endorsement or sponsorship of us by these other companies. Other trademarks appearing in this prospectus are the property of their respective holders.

 

 

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THE OFFERING

 

Common stock offered by us

6,000,000 shares

 

Common stock offered by the selling stockholder

460,000 shares

 

Common stock to be outstanding after this offering

21,437,554 shares

 

Over-allotment option

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to 969,000 additional shares of common stock to cover over-allotments.

 

Use of Proceeds

We intend to use the net proceeds to us from this offering for working capital and general corporate purposes. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies or other assets. We will not receive any of the proceeds from the sale of common stock by the selling stockholder. See “Use of Proceeds.”

 

Proposed NYSE symbol

“MODN”

The number of shares to be outstanding after this offering is based on 15,437,554 shares of common stock outstanding as of December 31, 2012. This amount excludes:

 

  Ÿ  

4,446,635 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of December 31, 2012, at a weighted average exercise price of $4.32 per share;

 

  Ÿ  

20,000 shares of common stock subject to a restricted stock unit (RSU) that was outstanding as of December 31, 2012;

 

  Ÿ  

86,655 shares of common stock issuable upon the exercise of a warrant to purchase convertible preferred stock outstanding as of December 31, 2012, with an exercise price of $3.46 per share;

 

  Ÿ  

235,099 shares of common stock issuable upon the exercise of options to purchase common stock that were granted to employees on February 27, 2013, at an exercise price of $13.50 per share;

 

  Ÿ  

960,248 shares of common stock subject to RSUs granted to employees on March 15, 2013;

 

  Ÿ  

1,288,249 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, which includes 1,038,249 shares of common stock reserved for issuance as of December 31, 2012 and an additional 250,000 shares of common stock reserved for issuance on February 23, 2013 (and of which 1,195,347 shares are issuable or will be issuable upon the exercise of options or vesting of RSUs referred to in the two proceeding bullets), which shares will become available for future issuance under our 2013 Equity Incentive Plan in connection with this offering; and

 

 

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  Ÿ  

2,495,116 additional shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective in connection with this offering, and 500,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective in connection with this offering.

Unless otherwise noted, the information in this prospectus gives effect to and assumes:

 

  Ÿ  

a 1-for-3 reverse stock split of our outstanding capital stock, which occurred on February 26, 2013;

 

  Ÿ  

no exercise of options or a warrant outstanding as of the date of this prospectus;

 

  Ÿ  

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 7,249,987 shares of common stock upon the completion of this offering;

 

  Ÿ  

the filing of our restated certificate of incorporation in Delaware and the adoption of our restated bylaws upon the completion of this offering; and

 

  Ÿ  

no exercise of the underwriters’ option to purchase up to an additional 969,000 shares of our common stock from us in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data should be read together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” all included elsewhere in this prospectus. We derived the summary consolidated statement of operations data and other financial data for the fiscal years ended September 30, 2010, 2011 and 2012 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statement of operations data and other financial data for the three months ended December 31, 2011 and 2012 and the unaudited summary consolidated balance sheet data as of December 31, 2012 from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments that management considers necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected for the full year or any other period.

 

     Years Ended September 30,     Three Months Ended
December 31,
 
     2010      2011      2012     2011     2012  
     (in thousands)  

Consolidated Statements of Operations Data:

            

Revenues:

            

License and implementation(1)

   $ 31,759       $ 41,499       $ 49,756      $ 11,365      $ 12,462   

SaaS and maintenance(2)

     18,682         23,672         34,502        6,692        9,879   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     50,441         65,171         84,258        18,057        22,341   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Cost of revenues:

            

License and implementation(3)

     12,087         18,092         22,483        5,028        5,560   

SaaS and maintenance(3)

     6,328         8,828         18,053        2,496        4,523   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenues

     18,415         26,920         40,536        7,524        10,083   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     32,026         38,251         43,722        10,533        12,258   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Research and development(3)

     12,702         13,809         17,695        4,173        4,119   

Sales and marketing(3)

     11,221         13,935         19,640        3,981        5,336   

General and administrative(3)

     6,945         7,860         10,584        2,393        3,877   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,868         35,604         47,919        10,547        13,332   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     1,158         2,647         (4,197     (14     (1,074

Interest expense, net

     353         677         655        184        126   

Other expense, net

     20         316         540        406        52   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     785         1,654         (5,392     (604     (1,252

Provision for income taxes

     161         172         301        71        61   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 624       $ 1,482       $ (5,693   $ (675   $ (1,313
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other Financial Data:

            

Adjusted EBITDA(4)

   $ 3,230       $ 4,389       $ 4,957      $ 807      $ 395   

(footnotes appear on following page)

 

 

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(1) 

License and implementation revenues are generated from the sale of software licenses for our on-premise solutions and related implementation services. Our Revenue Management Enterprise and Revenue Management Intelligence suites can be deployed as on-premise or cloud-based solutions.

 

(2) 

SaaS and maintenance revenues primarily include subscription and related implementation fees from customers accessing our cloud-based solutions and revenues associated with maintenance contracts from license customers. Also included in SaaS and maintenance revenues are other revenues, including revenues related to application support, training and customer-reimbursed expenses. Our Revenue Management Enterprise and Revenue Management Intelligence suites can be deployed as on-premise or cloud-based solutions.

 

(3) 

Includes stock-based compensation as follows:

 

     Years Ended
September 30,
     Three Months
Ended
December 31,
 
     2010      2011      2012      2011      2012  
     (in thousands)  

Cost of revenues:

              

License and implementation

   $ 134       $ 92       $ 298       $ 77       $ 40   

SaaS and maintenance

     41         29         561         24         74   

Research and development

     133         127         297         97         54   

Sales and marketing

     173         108         1,103         245         259   

General and administrative

     276         175         262         65         130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 757       $ 531       $ 2,521       $ 508       $ 557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(4)

See “—Non-GAAP Financial Measure” for more information and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles in the United States.

The consolidated balance sheet data as of December 31, 2012 is presented:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect (1) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 7,249,987 shares of common stock and (2) the conversion of the convertible preferred stock warrant into a warrant for 86,655 shares of common stock, each to be effective upon the completion of this offering; and

 

  Ÿ  

on a pro forma as adjusted basis to give effect to (1) the pro forma adjustments set forth above, and (2) the sale by us of 6,000,000 shares of common stock at the assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of December 31, 2012  
     Actual     Pro
Forma
    Pro Forma
As Adjusted(1)
 
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 12,633      $ 12,633      $ 84,963   

Working capital (deficit)

     (14,501     (14,501     57,829   

Total assets

     42,158        42,158        114,488   

Loan obligations, current and long-term

     4,512        4,512        4,512   

Total liabilities

     53,281        52,547        52,547   

Convertible preferred stock

     41,776                 

Total stockholders’ (deficit) equity

     (52,899     (10,389     61,941   

(footnotes appear on following page)

 

 

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(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of cash and cash equivalents, working capital (deficit), total assets and total stockholders’ (deficit) equity by approximately $5.6 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions payable by us.

Non-GAAP Financial Measure

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States (GAAP). We define Adjusted EBITDA as net income (loss) before LeapFrogRx compensation charges (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), stock-based compensation, depreciation and amortization, interest expense, net, other expense, net, and provision for income taxes. We believe Adjusted EBITDA provides investors with consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our operating results and our competitors’ operating results. We also use this measure internally to establish budgets and operational goals to manage our business and evaluate our performance.

We understand that, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:

 

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Adjusted EBITDA does not include the effect of the LeapFrogRx compensation charges, which are a cash expense;

 

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Adjusted EBITDA does not reflect stock-based compensation expense;

 

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depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

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Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense; and

 

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other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following tables provide a reconciliation of Adjusted EBITDA to net income (loss):

 

     Years Ended September 30,     Three Months
Ended
December 31,
 
     2010      2011      2012     2011     2012  
     (in thousands)  

Reconciliation of Adjusted EBITDA:

            

Net income (loss)

   $ 624       $ 1,482       $ (5,693   $ (675   $ (1,313

Adjustments:

            

LeapFrogRx compensation charges

     —           —           4,873        —          389   

Stock-based compensation

     757         531         2,521        508        557   

Depreciation and amortization

     1,315         1,211         1,760        313        523   

Interest expense, net

     353         677         655        184        126   

Other expense, net

     20         316         540        406        52   

Provision for income taxes

     161         172         301        71        61   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 3,230       $ 4,389       $ 4,957      $ 807      $ 395   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks occur, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose some or all of your investment.

Risks Related to Our Business and Industry

We have incurred losses in the past, and we may not be profitable in the future.

Although we generated net income of $0.6 million and $1.5 million during the fiscal years ended September 30, 2010 and 2011, we have incurred net losses in prior periods and incurred net losses of $5.7 million and $1.3 million for the fiscal year ended September 30, 2012 and the three months ended December 31, 2012, respectively. As of December 31, 2012, we had an accumulated deficit of $62.5 million. We expect that our expenses will increase in future periods as we implement additional initiatives designed to grow our business, including, among other things, increasing sales to existing customers, expanding our customer base, introducing new applications and enhancing existing solutions, extending into the mid-market through the cloud, continuing to penetrate the technology industry and pursuing selective acquisitions. Increased operating expenses related to personnel costs such as salary, bonus, commissions, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as third-party contractors, travel-related expenses and marketing programs, will also increase our expenses in future periods. In the near-term, we do not expect that our revenues will sufficiently increase to offset these expected increases in operating expenses, and we expect that we will incur losses. Additionally, we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. You should not consider our historical growth rates in revenues as indicative of our future performance, and we cannot assure you that we will again obtain and maintain profitability in the future. Any failure to return to profitability may materially and adversely affect our business, results of operations and financial condition.

Our operating results are likely to vary significantly from period to period and be unpredictable, which could cause the trading price of our common stock to decline.

Our operating results have historically varied from period to period, and we expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:

 

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our ability to increase sales to and renew agreements with our existing customers;

 

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the timing of new orders and revenue recognition for new and prior period orders;

 

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our ability to attract and retain new customers;

 

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the complexity of implementations and the scheduling and staffing of the related personnel, each of which can affect the timing and duration of revenue recognition;

 

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issues related to changes in customers’ business requirements, project scope or implementations;

 

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the mix of revenues in any particular period between license and implementation, and software-as-a-service (SaaS) and maintenance;

 

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the timing and volume of incremental customer purchases of our cloud-based solutions, which may vary from period to period based on a customer’s needs at a particular time;

 

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the timing of upfront recognition of sales commission expense relative to the deferred recognition of our revenues;

 

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the timing of recognition of payment of royalties;

 

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the timing of our annual payment and recognition of employee non-equity incentive and bonus payments;

 

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the budgeting cycles and purchasing practices of customers;

 

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changes in customer requirements or market needs;

 

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delays or difficulties encountered during customer implementations, including customer requests for changes to the implementation schedule;

 

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the timing and success of new product or service introductions by us or our competitors;

 

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the amount and timing of any customer refunds or credits;

 

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our ability to accurately estimate the costs associated with any fixed bid projects;

 

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deferral of orders from customers in anticipation of new solutions or solution enhancements announced by us or our competitors;

 

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changes in the competitive landscape of our industry, including consolidation among our competitors or customers;

 

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the length of time for the sale and implementation of our solutions to be complete, and our level of upfront investments prior to the period we begin generating revenues associated with such investments;

 

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our ability to successfully expand our business domestically and internationally;

 

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the amount and timing of our operating expenses and capital expenditures;

 

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price competition;

 

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the rate of expansion and productivity of our direct sales force;

 

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disruptions in our relationships with partners;

 

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regulatory compliance costs;

 

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sales commissions expenses related to large transactions;

 

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technical difficulties or interruptions in the delivery of our cloud-based solutions;

 

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seasonality or cyclical fluctuations in our industries;

 

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future accounting pronouncements or changes in our accounting policies;

 

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increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, as a significant portion of our expenses are incurred and paid in currencies other than the U.S. dollar; and

 

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general economic conditions, both domestically and in our foreign markets.

Any one of the factors above or discussed elsewhere in this prospectus or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our financial and other operating results. This variability and unpredictability could result in our failure to meet expectations of investors for our revenues or other operating results for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could fall.

 

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A substantial majority of our total revenues have come from our Revenue Management Enterprise suite, and decreases in demand for our Revenue Management Enterprise suite could adversely affect our results of operations and financial condition.

Historically, a substantial majority of our total revenues has been associated with our Revenue Management Enterprise suite, whether deployed as individual applications or as a complete suite. For example, in the fiscal year ended September 30, 2012 and in the three months ended December 31, 2012, revenues from our Revenue Management Enterprise suite constituted more than 85% of our total revenues for each respective period. We expect our Revenue Management Enterprise suite to continue to generate a substantial majority of our total revenues for the foreseeable future. Declines and variability in demand for our Revenue Management Enterprise suite could occur for a number of reasons, including improved products or product versions being offered by competitors, competitive pricing pressures, failure to release new or enhanced versions on a timely basis, technological changes that we are unable to address or that change the way our customers utilize our solutions, export restrictions or other regulatory or legislative actions that could limit our ability to sell those products to key customer or market segments. Our business, results of operations, financial condition and cash flows would be adversely affected by a decline in demand for our Revenue Management Enterprise suite.

Our revenues are dependent on our ability to maintain and expand existing customer relationships and our ability to attract new customers.

Our total revenues are largely dependent on the sale of software licenses and the related implementation services we provide. For example, our license and implementation revenues constituted approximately 63%, 64% and 59% of our total revenues for the fiscal years ended September 30, 2010, 2011 and 2012, respectively, and approximately 63% and 56% of our total revenues for the three months ended December 31, 2011 and 2012, respectively. Customers purchasing software licenses for our solutions generally make large orders and the revenues related to these sales are recognized over the subsequent implementation period, which typically ranges from one to three years. The continued growth of our revenues is dependent in part on our ability to expand the use of our solutions by existing customers and attract new customers. Likewise, it is also important that customers using our on-premise solutions renew their maintenance agreements and that customers using our cloud-based solutions renew their subscription agreements with us. Our customers have no obligation to renew their maintenance or subscription agreements after the expiration of the initial term, and we cannot assure you that they will do so. We have had in the past and may in the future have disputes with customers regarding our solutions, which may impact such customers’ decisions to continue to use our solutions and pay for maintenance and support in the future.

If we are unable to expand our customers’ use of our solutions, sell additional solutions to our customers, maintain our renewal rates for maintenance and subscription agreements and expand our customer base, our revenues may decline or fail to increase at historical growth rates, which could adversely affect our business and operating results. In addition, if we experience customer dissatisfaction with customers in the future, we may find it more difficult to increase use of our solutions within our existing customer base and it may be more difficult to attract new customers, or we may be required to grant credits or refunds, any of which could negatively impact our operating results and materially harm our business.

The loss of one or more of our key customers could slow our revenue growth or cause our revenues to decline.

A substantial portion of our total revenues in any given period may come from a relatively small number of customers. As of December 31, 2012, we had 72 license and subscription customers across

 

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the life science and technology industries. Although our largest customers typically change from period to period, for the fiscal year ended September 30, 2012 and for the three months ended December 31, 2012, our 15 largest customers accounted for more than 75% of our total revenues for each respective period. During the fiscal year ended September 30, 2012, two customers, Merck & Co., Inc. and Amgen Inc., accounted for approximately 14% and 10% of our total revenues, respectively. During the fiscal years ended September 30, 2010 and 2011, one customer accounted for 15% of our total revenues each year. Two different customers also accounted for 13% and 12% of our total revenues for each of the fiscal years ended September 30, 2010 and 2011, respectively. We expect that we will continue to depend upon a relatively small number of customers for a significant portion of our total revenues for the foreseeable future. The loss of any of our significant customers or groups of customers for any reason, or a change of relationship with any of our key customers may cause a significant decrease in our total revenues.

Additionally, mergers or consolidations among our customers could reduce the number of our customers and could adversely affect our revenues and sales. In particular, if our customers are acquired by entities that are not our customers, that do not use our solutions or that have more favorable contract terms and choose to discontinue, reduce or change the terms of their use of our solutions, our business and operating results could be materially and adversely affected.

Our customers often require significant configuration efforts to match their complex business processes. The failure to meet their requirements could result in customer disputes, loss of anticipated revenues and additional costs, which could harm our business.

Our customers often require significant configuration services to address their unique business processes. Supporting such a diversity of configured settings and implementations could become difficult as the number of customers we serve grows. In addition, supporting our customers could require us to devote significant development services and support personnel and strain our personnel resources and infrastructure. We have had in the past and may in the future have disputes with customers regarding the performance and implementation of our solutions. If we are unable to address the needs of our customers in a timely fashion, our customers may decide to seek to terminate their relationship, renew on less favorable terms, not renew their maintenance agreements or subscriptions, fail to purchase additional solutions or services or assert legal claims against us. If any of these were to occur, our revenues may decline or we may be required to refund amounts to customers and our operating results may be harmed.

Our future growth is, in large part, dependent upon the increasing adoption of revenue management solutions.

Revenue management is at an early stage of market development and adoption, and the extent to which revenue management solutions will become widely adopted remains uncertain. It is difficult to predict customer adoption rates, customer demand for revenue management solutions, including our solutions in particular, the future growth rate and size of this market and the timing of the introduction of additional competitive solutions. Any expansion of the revenue management market depends on a number of factors, including the cost, performance and perceived value associated with revenue management solutions. For example, many companies have invested substantial personnel, infrastructure and financial resources in other revenue management infrastructure and therefore may be reluctant to implement solutions such as ours. Additionally, organizations that use legacy revenue management products may believe that these products sufficiently address their revenue management needs. Because this market is relatively undeveloped, we must spend considerable time educating customers as to the benefits of our solutions. If revenue management solutions do not achieve widespread adoption, or if there is a reduction in demand for revenue management solutions caused by a lack of customer acceptance, technological challenges, competing technologies and products,

 

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decreases in corporate spending or otherwise, it could result in lower sales, reduced renewal and upsell rates and decreased revenues and our business could be adversely affected.

We are highly dependent upon the life science industry, and factors that adversely affect this industry could also adversely affect us.

Our future growth depends, in large part, upon continued sales to companies in the life science industry. Demand for our solutions could be affected by factors that adversely affect demand for the underlying life science products and services that are purchased and sold pursuant to contracts managed through our solutions. The life science industry is affected by certain factors, including the emergence of large group purchasing and managed care organizations and integrated healthcare delivery networks, increased customer and channel incentives and rebates, the shift of purchasing influence from physicians to economic buyers, increased spending on healthcare by governments instead of commercial entities and increased scope of government mandates, frequency of regulatory reporting and audits, and fines. In addition, the life science industry has been adversely affected by the recent economic downturn and has experienced periods of considerable consolidation. Accordingly, our future operating results could be materially and adversely affected as a result of factors that affect the life science industry generally.

Our implementation cycle is lengthy and variable, depends upon factors outside our control and could cause us to expend significant time and resources prior to earning associated revenues.

The implementation and testing of our solutions typically ranges from one to three years, and unexpected implementation delays and difficulties can occur. Implementing our solutions typically involves integration with our customers’ systems, as well as adding their data to our system. This can be complex, time-consuming and expensive for our customers and can result in delays in the implementation and deployment of our solutions. The lengthy and variable implementation cycle may also have a negative impact on the timing of our revenues, causing our revenues and results of operations to vary significantly from period to period.

The revenues we recognize from our software licenses and implementation services are based to a certain extent upon our ability to reasonably estimate the time and resources required to complete our implementation projects, which may be difficult to do.

We recognize a substantial portion of our revenues from the sale of software licenses for our on-premise solutions and related implementation services over the period during which such services are performed using the percentage-of-completion method. For example, revenues from sales of our software licenses and related implementation services accounted for 56% of our total revenues during the three months ended December 31, 2012. We estimate the length of this period based on a number of factors, including the number of licensed applications and the scope and complexity of the customer’s deployment requirements. Under the percentage-of-completion method, the revenues we recognize during a reporting period are based on the resources expended during the reporting period as compared to the estimated total resources required to implement our solutions. If we are unable to reasonably estimate the overall total personnel resources required to implement our solutions, the timing of our revenues could be materially and adversely affected. In addition, changes in customer requirements or scope of the engagement could impact the timing of our revenue recognition. Any change in the timing of revenue recognition could adversely impact our quarterly or annual operating results.

Our efforts to expand the adoption of our solutions in the technology industry will be affected by our ability to provide solutions that adequately address trends in that industry.

We are attempting to expand the use of our solutions by companies in the technology industry, and our future growth depends in part on our ability to increase sales of solutions to customers in this

 

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industry and potentially other industries. The technology industry is affected by many factors, including shortening of product lifecycles, core technology products being sold into different end markets with distinct pricing, increasing complexity of multi-tiered global distribution channels, changing financial reporting requirements due to channel complexity and increasing use of off-invoice discounting. If our solutions are not perceived by existing or potential customers in the technology industry as capable of providing revenue management tools that will assist them in adequately addressing these trends, then our efforts to expand the adoption of our solutions in this industry may not be successful, which would adversely impact our business and operating results.

Most of our implementation contracts are on a time and materials basis and may be terminated by the customer.

The contracts under which we perform most of our implementation services generally have a term ranging between one to three years and are on a time and materials basis and may be terminated by the customer at any time. If an implementation project is terminated sooner than we anticipated or a portion of the implementation is delayed, we would lose the anticipated revenues that we might not be able to replace or it may take significant time to replace the lost revenues with other work or we may be unable to eliminate the associated costs. Consequently, we may recognize fewer revenues than we anticipated or incur unnecessary costs, and our results of operations in subsequent periods could be materially lower than expected.

Because we recognize a majority of our SaaS and maintenance revenues from our customers over the term of their agreements, downturns or upturns in sales of our cloud-based solutions may not be immediately reflected in our operating results.

SaaS and maintenance revenues primarily include subscription and related implementation fees from customers accessing our cloud-based solutions and revenues associated with maintenance contracts from license customers. We recognize a majority of our SaaS and maintenance revenues over the terms of our customer agreements, which are typically one year or longer in some cases. As a result, most of our quarterly SaaS and maintenance revenues result from agreements entered into during previous quarters. Consequently, a shortfall in sales of our cloud-based solutions or renewal of maintenance and support agreements in any quarter may not significantly reduce our SaaS and maintenance revenues for that quarter but would negatively affect SaaS and maintenance revenues in future quarters. Accordingly, the effect of significant downturns in sales of our cloud-based solutions or renewals of our maintenance and support agreements may not be fully reflected in our results of operations until future periods. We may be unable to adjust our cost structure to compensate for this potential shortfall in SaaS and maintenance revenues. Our revenue recognition model for our cloud-based solutions and maintenance and support agreements also makes it difficult for us to rapidly increase our revenues through additional sales in any period, as a significant amount of our revenues are recognized over the applicable agreement term. As a result, changes in the volume of sales of our cloud-based solutions or the renewals of our maintenance and support agreements in a particular period would not be fully reflected in our revenues until future periods.

Our sales cycles are time-consuming, and it is difficult for us to predict when or if sales will occur and when we will begin to recognize the revenues from our future sales.

Our sales efforts are targeted at larger enterprise customers, and as a result, we face greater costs, must devote greater sales support to individual customers, have longer sales cycles and have less predictability in completing some of our sales. Also, sales to large enterprises often require us to provide greater levels of education regarding the use and benefits of our solutions. We believe that our customers view the purchase of our solutions as a significant and strategic decision. As a result, customers carefully evaluate our solutions, often over long periods with a variety of internal

 

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constituencies. In addition, the sales of our solutions may be subject to delays if the customer has lengthy internal budgeting, approval and evaluation processes, which are quite common in the context of introducing large enterprise-wide technology solutions. As a result it is difficult to predict the timing of our future sales.

Failure to adequately expand and train our direct sales force will impede our growth.

We rely almost exclusively on our direct sales force to sell our solutions. We believe that our future growth will depend, to a significant extent, on the continued development of our direct sales force and its ability to manage and retain our existing customer base, expand the sales of our solutions to existing customers and obtain new customers. Because our software is complex and often must interoperate with complex computing requirements, it can take longer for our sales personnel to become fully productive compared to other software companies. Our ability to achieve significant growth in revenues in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New hires require significant training and may, in some cases, take more than a year before becoming fully productive, if at all. If we are unable to hire and develop sufficient numbers of productive direct sales personnel, and if these sales personnel are unable to achieve full productivity, sales of our solutions will suffer and our growth will be impeded.

Our efforts to expand our solutions into other verticals within the life science and technology industries or other industries may not succeed and may reduce our revenue growth rate. Even if we are successful in doing so, such efforts may be costly and may impact our ability to achieve profitability.

Our solutions are currently designed primarily for customers in certain verticals of the life science and technology industries and potentially into other industries outside of the life science and technology industries. Our ability to attract new customers and increase our revenues depends in part on our ability to enter into new industries and verticals. Developing and marketing new solutions to serve other industries and verticals will require us to devote substantial additional resources in advance of consummating new sales or realizing additional revenues. Our ability to leverage the expertise we have developed in the life science and technology industries into new industries is unproven and it is likely that we will be required to hire additional personnel, partner with additional third parties and incur considerable research and development expense in order to gain such expertise.

Our efforts to expand our solutions beyond the verticals within the life science and technology industries in which we have already developed expertise may not be successful and may reduce our revenue growth rate. Any early stage interest in our solutions in areas beyond the industries we already address may not result in long term success or significant revenues for us. Even if we achieve long-term success in expanding our solutions into other industries and verticals, the costs associated with such expansion may be high, which may impact our ability to achieve profitability.

If our solutions fail to perform properly, our reputation and customer relationships could be harmed, our market share could decline and we could be subject to liability claims.

Our solutions are inherently complex and may contain material defects or errors. Any defects in solution functionality or that cause interruptions in availability could result in:

 

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lost or delayed market acceptance and sales;

 

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reductions in current-period total revenues;

 

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breach of warranty or other contract breach or misrepresentation claims;

 

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sales credits or refunds to our customers;

 

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loss of customers;

 

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diversion of development and customer service resources; and

 

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injury to our reputation.

The costs incurred in correcting any material defects or errors might be substantial and could adversely affect our operating results. Because our customers often use our solutions as a system of record and many of our customers are subject to regulation of pricing of their products or otherwise have complex pricing commitments and revenue recognition policies, errors could result in an inability to process sales or lead to a violation of pricing requirements or misreporting of revenues by our customers that could potentially expose them to fines or other substantial claims or penalties. Accordingly, we could face increased exposure to product liability and warranty claims, litigation and other disputes and claims, resulting in potentially material losses and costs. Our limitation of liability provisions in our customer agreements may not be sufficient to protect us against any such claims.

Given the large amount of data that our solutions collect and manage, it is possible that failures or errors in our software could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. We may be required to issue credits or refunds or indemnify or otherwise be liable to our customers or third parties for damages they may incur resulting from certain of these events.

Our insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover any claim against us for claims related to any product defects or errors or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.

The market in which we participate is competitive, and if we do not compete effectively, our operating results could be harmed.

The market for revenue management solutions is highly competitive, fragmented and subject to rapid changes in technology. We face competition from spreadsheet-assisted manual processes, internally developed solutions, large integrated systems vendors and smaller companies that offer point solutions.

Companies lacking IT resources often resort to spreadsheet-assisted manual processes or personal database applications. In addition, some potential customers, particularly large enterprises, may elect to develop their own internal solutions, including custom-built solutions that are designed to support the needs of a single organization. Companies with large investments in packaged enterprise resource planning (ERP) or customer relationship management (CRM) applications, which do not typically provide revenue management capabilities, may extend these horizontal applications with configurations or point solution applications in order to address one or a small set of revenue management sub processes or drivers. Common horizontal applications that customers attempt to configure for this purpose in the life science and technology industries include large integrated systems vendors like SAP AG and Oracle Corporation. We also encounter competition from small independent companies, which compete on the basis of price, unique product features or functions and custom developments.

Many of our competitors have greater name recognition, larger sales and marketing budgets and greater resources than we do and may have pre-existing relationships with our potential customers, including relationships with, and access to, key decision makers within these organizations, and major distribution agreements with consultants and system integrators. Moreover, many software vendors could bundle solutions or offer them at a low price as part of a larger product sale.

 

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With the introduction of new technologies and market entrants, we expect competition to intensify in the future. We also expect enterprise software vendors that focus on enterprise resource planning or back-office applications to enter our market with competing products. In addition, we expect sales force automation vendors to acquire or develop additional solutions that may compete with our solutions. If we fail to compete effectively, our business will be harmed. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business.

If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.

We believe that maintaining and enhancing the “Model N” brand identity is critical to our relationships with our customers and partners and to our ability to attract new customers and partners. The successful promotion of our brand will depend largely upon our marketing efforts, our ability to continue to offer high-quality solutions and our ability to successfully differentiate our solutions from those of our competitors. Our brand promotion activities may not be successful or yield increased revenues. In addition, independent industry analysts often provide reviews of our solution, as well as those of our competitors, and perception of our solution in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected. We have a U.S. trademark application with respect to our corporate name currently pending. If we are unable to obtain this trademark, it may have an adverse effect on our ability to maintain our brand.

The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will increase as our market becomes more competitive and as we expand into new verticals within the life science and technology industries. To the extent that these activities yield increased revenues, these revenues may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors with stronger brands and we could lose customers and partners, all of which would adversely affect our business operations and financial results.

Our organization continues to grow and experience rapid changes. If we fail to manage our growth, we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges, and our business and operating results could be adversely affected.

We have experienced and may continue to experience growth in our headcount and operations, which has placed and will continue to place significant demands on our management and our operational and financial infrastructure. For example, our employee headcount has grown from 302 as of September 30, 2010 to 600 as of December 31, 2012. As we continue to grow, we must effectively integrate, develop and motivate a significant number of new employees, while maintaining the effectiveness of our business execution and the beneficial aspects of our corporate culture. In particular, we intend to continue to make directed and substantial investments to expand our research and development, sales and marketing, and general and administrative organizations, as well as our international operations. Failure to effectively manage organizational changes could result in difficulties in implementing customer requests, declines in quality or customer satisfaction, increases in costs and difficulties in introducing new features or other operational difficulties, and any of these difficulties could adversely impact our business performance and results of operations.

Additionally, our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new solutions or enhancements to existing solutions. For example, since it may take as long as six months to hire and train a new member of our

 

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implementation services staff, we make decisions regarding the size of our implementation services staff based upon our expectations with respect to customer demand for our solutions. If these expectations are incorrect, and we increase the size of our implementation services organization without experiencing an increase in sales of our solutions, we will experience reductions in our gross and operating margins and net income.

To effectively manage growth, we must continue to improve our operational, financial and management controls, and our reporting systems and procedures by, among other things:

 

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improving our key business applications, processes and IT infrastructure to support our business needs;

 

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enhancing information and communication systems to ensure that our employees and offices around the world are well-coordinated and can effectively communicate with each other and our growing base of customers;

 

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enhancing our internal controls to ensure timely and accurate reporting of all of our operations and financial results; and

 

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appropriately documenting our IT systems and our business processes.

We are planning to implement a new enterprise resource planning (ERP) system for our company. We expect that, once implemented, this new ERP system will combine and streamline the management of our financial, accounting, human resources, sales and marketing and other functions, enabling us to more effectively manage operations and track performance. However, this ERP system will require us to complete numerous processes and procedures for the effective use of this system or with running our business using this system, which will result in additional costs. A delay in such implementation, problems with transitioning to our new ERP system or a failure of our new ERP system to perform as we anticipate may result in transaction errors, processing inefficiencies and the loss of sales, may otherwise disrupt our operations and materially and adversely affect our business, results of operations and financial condition and may harm our ability to accurately forecast sales demand, fulfill customer orders and report financial and management information on a timely and accurate basis. In addition, ERP systems typically contain information and features that are part of a company’s internal control over financial reporting, and if we experience difficulties with our ERP system that may affect our internal control over financial reporting.

If we fail to implement this system effectively, our ability to manage our expected growth, ensure uninterrupted operation of key business systems and comply with the rules and regulations that are applicable to public reporting companies will be impaired. Additionally, if we do not effectively manage the growth of our business and operations, the quality of our solutions could suffer, our expenses may increase more than expected, our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy.

The market for cloud-based solutions is at a relatively early stage of development relative to on-premise solutions, and if it does not develop or develops more slowly than we expect, our business could be harmed.

The market for cloud-based solutions is at an early stage relative to on-premise solutions, and these types of deployments may not achieve and sustain high levels of demand and market acceptance. We plan to continue to expand the implementation of our cloud-based solutions by targeting additional markets in the future. Many companies have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to a cloud-based solution. Other factors that may affect the market acceptance of cloud-based solutions include:

 

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perceived security capabilities and reliability;

 

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perceived concerns about ability to scale operations for large enterprise customers;

 

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concerns with entrusting a third party to store and manage critical data; and

 

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the level of configurability or customizability of the solutions.

If organizations do not perceive the benefits of our cloud-based solutions, or if our competitors or new market entrants are able to develop cloud-based solutions that are or are perceived to be more effective than ours, this portion of our business may not grow further or may develop more slowly than we expect, either of which would adversely affect our business.

If we are unable to maintain successful relationships with system integrators, our business operations, financial results and growth prospects could be adversely affected.

Our relationships with system integrators are generally non-exclusive, which means they may recommend to their customers the solutions of several different companies, including solutions that compete with ours, and they may also assist in the implementation of software or systems that compete with ours. If our system integrators do not choose to continue to refer our solutions, assist in implementing our solutions, choose to use greater efforts to market and sell their own solutions or those of our competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our solutions may be adversely affected. The loss of a substantial number of our system integrators, our possible inability to replace them or the failure to recruit additional system integrators could harm our business.

Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships with our system integrators and in helping our system integrators enhance their ability to independently market and implement our solutions. Our growth in revenues, particularly in international markets, will be influenced by the development and maintenance of relationships with these companies. Although we have established relationships with some of the leading system integrators, our solutions compete directly against the solutions of other leading system integrators. We are unable to control the resources that our system integrators commit to implementing our solutions or the quality of such implementation. If they do not commit sufficient resources to these activities, or if we are unable to maintain our relationships with these system integrators or otherwise develop and expand our indirect distribution channel, our business, results of operations, financial condition or cash flows could be adversely affected.

Any failure to offer high-quality customer support services may adversely affect our relationships with our customers and harm our financial results.

Once our solutions are implemented, our customers use our support organization to resolve technical issues relating to our solutions. In addition, we also believe that our success in selling our solutions is highly dependent on our business reputation and on favorable recommendations from our existing customers. Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our ability to maintain existing customers or sell our solutions to existing and prospective customers, and harm our business, operating results and financial condition.

We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services. Increased customer demand for these services, without corresponding revenues, could also increase costs and adversely affect our operating results.

 

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If our solutions do not interoperate with our customers’ IT infrastructure, sales of our solutions could be negatively affected, which would harm our business.

Our solutions must interoperate with our customers’ existing IT infrastructure, which often have different specifications, utilize multiple protocol standards, deploy products from multiple vendors and contain multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. If we find errors in the existing products or defects in the hardware used in our customers’ IT infrastructure or problematic network configurations or settings, we may have to modify our solutions or platform so that our solutions will interoperate with our customers’ IT infrastructure. Any delays in identifying the sources of problems or in providing necessary modifications to our solutions could have a negative impact on our reputation and our customers’ satisfaction with our solutions, and our ability to sell solutions could be adversely affected.

Incorrect or improper implementation or use of our solutions could result in customer dissatisfaction and negatively affect our business, operations, financial results and growth prospects.

Our customers and third-party partners may need training in the proper use of and the variety of benefits that can be derived from our solutions to maximize their potential. If our solutions are not implemented or used correctly or as intended, inadequate performance may result. Since our customers rely on our solutions and customer support to manage key areas of their businesses, the incorrect or improper implementation or use of our solutions, our failure to train customers on how to efficiently and effectively use our solutions or our failure to provide services to our customers, may result in negative publicity, failure of customers to renew their SaaS or maintenance agreements or potentially make legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our solutions.

Competition for our target employees is intense, and we may not be able to attract and retain the quality employees we need to support our planned growth.

Our future success depends, in part, upon our ability to recruit and retain key management, technical, sales, marketing, finance, and other critical personnel. Despite the recent economic downturn, competition for qualified management, technical and other personnel is intense, and we may not be successful in attracting and retaining such personnel. If we fail to attract and retain qualified employees, including internationally, our ability to grow our business could be harmed. Competition for people with the specific skills that we require is significant. In order to attract and retain personnel in a competitive marketplace, we believe that we must provide a competitive compensation package, including cash and equity-based compensation. Volatility in our stock price may from time to time adversely affect our ability to recruit or retain employees. If we are unable to hire and retain qualified employees, or conversely, if we fail to manage employee performance or reduce staffing levels when required by market conditions, our business and operating results could be adversely affected.

We depend on our management team, particularly our Chief Executive Officer and our key sales and development and services personnel, and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.

Our success depends on the expertise and continued services of our executive officers, particularly our Chief Executive Officer. We have in the past and may in the future continue to experience changes in our executive management team resulting from the hiring or departure of executives, which may be disruptive to our business. For instance, we hired a new Chief Financial Officer in July 2012 and a new

 

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Senior Vice President, Global Customer Services and Support in August 2012. We are also substantially dependent on the continued service of our existing development and services personnel because of their familiarity with the inherent complexities of our solutions.

Our personnel do not have employment arrangements that require them to continue to work for us for any specified period and, therefore, they could terminate their employment with us at any time. We do not maintain key person life insurance policies on any of our employees. The loss of one or more of our key employees or groups could seriously harm our business.

In addition, many employees, including certain key employees, have been employed by us for a number of years and may be fully vested in their equity grants. As a result, they may be less incentivized to continue to provide services to us unless they receive additional equity compensation. Our plans to grant additional equity compensation to existing employees have yet to be determined.

If we are not able to enhance existing solutions and develop new applications that achieve market acceptance or that keep pace with technological developments, our business could be harmed.

Our ability to increase revenues from existing customers and attract new customers depends in large part on our ability to enhance and improve our existing solutions and to develop and introduce new applications. The success of any enhancement or new application depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance. Any enhancement or new application that we develop or acquire may not be introduced in a timely or cost-effective manner, may contain defects or may not achieve the broad market acceptance necessary to generate significant revenues. If we are unable to successfully enhance our existing solutions and develop new applications to meet customer requirements, our business and operating results will be adversely affected.

Because we designed our solutions to operate on a variety of network, hardware and software platforms, we will need to continuously modify and enhance our solutions to keep pace with changes in networking, Internet-related hardware, software, communication, browser and database technologies. If we are unable to respond in a timely manner to these rapid technological developments in a cost-effective manner, our solutions may become less marketable and less competitive or obsolete and our operating results may be negatively impacted.

If our solutions experience data security breaches, and there is unauthorized access to our customers’ data, we may lose current or future customers and our reputation and business may be harmed.

Our solutions are used by our customers to manage and store proprietary information and sensitive or confidential data relating to their business. Although we maintain security features in our solutions, our security measures may not detect or prevent hacker interceptions, break-ins, security breaches, the introduction of viruses or malicious code and other disruptions that may jeopardize the security of information stored in and transmitted by our solutions. A party that is able to circumvent our security measures in our solutions could misappropriate our or our customers’ proprietary or confidential information, cause interruption in their operations, damage or misuse their computer systems and misuse any information that they misappropriate. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

If any compromise of the security of our solutions were to occur, we may lose customers and our reputation, business, financial condition and results of operations could be harmed and we could incur significant liability. In addition, if there is any perception that we cannot protect our customers’

 

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proprietary and confidential information, we may lose the ability to retain existing customers and attract new customers and our revenues could decline.

We rely on a small number of third-party service providers to host and deliver our cloud-based solutions, and any interruptions or delays in services from these third parties could impair the delivery of our cloud-based solutions and harm our business.

We currently operate our cloud-based solutions from three data centers. We do not control the operation of these facilities. These facilities are vulnerable to damage or interruption from natural disasters, fires, power loss, telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions, which would have a serious adverse impact on our business. Additionally, our data center agreements are of limited duration and are subject to early termination rights in certain circumstances, and the providers of our data centers have no obligation to renew their agreements with us on commercially reasonable terms, or at all.

If we continue to add data centers and add capacity in our existing data centers, we may transfer data to other locations. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Interruptions in our service, data loss or corruption may cause customers to terminate their agreements and adversely affect our renewal rates and our ability to attract new customers. Data transfers may also subject us to regional privacy and data protection laws that apply to the transmission of customer data across international borders.

We also depend on access to the Internet through third-party bandwidth providers to operate our cloud-based solutions. If we lose the services of one or more of our bandwidth providers, or if these providers experience outages, for any reason, we could experience disruption in delivering our cloud-based solutions or we could be required to retain the services of a replacement bandwidth provider. Any Internet outages or delays could adversely affect our ability to provide our solutions to our customers.

Our data center operations also rely heavily on the availability of electricity, which also comes from third-party providers. If we or the third-party data center facilities that we use to deliver our services were to experience a major power outage or if the cost of electricity were to increase significantly, our operations and financial results could be harmed. If we or our third-party data centers were to experience a major power outage, we or they would have to rely on back-up generators, which might not work properly or might not provide an adequate supply during a major power outage. Such a power outage could result in a significant disruption of our business.

We license technology from third parties, and our inability to maintain those licenses could harm our business. Certain third-party technology that we use may be difficult to replace or could cause errors or failures of our service.

We incorporate technology that we purchase or license from third parties, including hardware and software, into our solutions. We cannot be certain that this technology will continue to be available on commercially reasonable terms, or at all. We cannot be certain that our licensors are not infringing the intellectual property rights of third parties or that our licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which we may sell our solutions. Some of our agreements with our licensors may be terminated for convenience by them. If we are unable to continue to license any of this technology because of intellectual property infringement claims brought by third parties against our licensors or against us, or if we are unable to continue our license agreements or enter into new licenses on commercially reasonable terms, our ability to develop and sell solutions containing that technology would be severely limited and our business could be harmed. Additionally, if we are unable

 

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to license or obtain the necessary technology from third parties, we may be forced to acquire or develop alternative technology of lower quality or performance standards. This would limit and delay our ability to offer new or competitive solutions and increase our costs of production. In addition, errors or defects in third-party hardware or software used in our cloud-based solutions could result in errors or a failure of our cloud-based solutions, which could harm our business.

Our significant international operations subject us to additional risks that can adversely affect our business, results of operations and financial condition.

We have significant international operations, including in emerging markets such as India, and we are continuing to expand our international operations as part of our growth strategy. As of December 31, 2012, approximately 38% of our employees are located in India, where we conduct a portion of our research and development activities, implementation services and support services. Our current international operations and our plans to expand our international operations have placed, and will continue to place, a strain on our employees, management systems and other resources.

Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks and competition that are different from those in the United States. Because of our limited experience with international operations, we cannot assure that our international expansion efforts will be successful or that returns on such investments will be achieved in the future. In addition, our international operations may fail to succeed due to other risks inherent in operating businesses internationally, including:

 

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our lack of familiarity with commercial and social norms and customs in international countries which may adversely affect our ability to recruit, retain and manage employees in these countries;

 

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difficulties and costs associated with staffing and managing foreign operations;

 

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the potential diversion of management’s attention to oversee and direct operations that are geographically distant from our U.S. headquarters;

 

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compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy and data protection laws and regulations;

 

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legal systems in which our ability to enforce and protect our rights may be different or less effective than in the United States and in which the ultimate result of dispute resolution is more difficult to predict;

 

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greater difficulty collecting accounts receivable and longer payment cycles;

 

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higher employee costs and difficulty in terminating non-performing employees;

 

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differences in workplace cultures;

 

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unexpected changes in regulatory requirements;

 

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the need to adapt our solutions for specific countries;

 

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our ability to comply with differing technical and certification requirements outside the United States;

 

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tariffs, export controls and other non-tariff barriers such as quotas and local content rules;

 

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more limited protection for intellectual property rights in some countries;

 

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adverse tax consequences, including as a result of transfer pricing adjustments involving our foreign operations;

 

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fluctuations in currency exchange rates;

 

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anti-bribery compliance by us or our partners;

 

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restrictions on the transfer of funds; and

 

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new and different sources of competition.

Our failure to manage any of these risks successfully could harm our existing and future international operations and seriously impair our overall business.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and operating results.

Our sales contracts are primarily denominated in U.S. dollars, and therefore, substantially all of our revenues are not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solutions to our customers outside of the United States, which could adversely affect our financial condition and operating results. In addition, an increasing portion of our operating expenses are incurred in India, are denominated in Indian Rupees and are subject to fluctuations due to changes in foreign currency exchange rates.

We may be sued by third parties for alleged infringement of their proprietary rights which could result in significant costs and harm our business.

There is considerable patent and other intellectual property development activity in our industry. Our success depends upon us not infringing upon the intellectual property rights of others. Companies in the software and technology industries, including some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. In addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our potential patents may provide little or no deterrence. We have received, and may in the future receive, notices that claim we have infringed, misappropriated or otherwise violated other parties’ intellectual property rights. To the extent we gain greater visibility, we face a higher risk of being the subject of intellectual property infringement claims, which is not uncommon with respect to software technologies in general and information security technology in particular. There may be third-party intellectual property rights, including issued or pending patents that cover significant aspects of our technologies or business methods. Any intellectual property claims, with or without merit, could be very time consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in violation of a third party’s rights. We might be required to seek a license for the intellectual property, which may not be available on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology, which could require significant effort and expense. If we cannot license or develop technology for any infringing aspect of our business, we would be forced to limit or stop sales of one or more of our solutions or features of our solutions and may be unable to compete effectively. Any of these results would harm our business, operating results and financial condition.

In addition, our agreements with customers and partners include indemnification provisions under which we agree to indemnify them for losses suffered or incurred as a result of claims of intellectual property infringement and, in some cases, for damages caused by us to property or persons. Large indemnity payments could harm our business, operating results and financial condition.

 

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Our use of open source and third-party technology could impose limitations on our ability to commercialize our solutions.

We use open source software in our solutions and in our services engagements on behalf of customers. As we increasingly handle configured implementation of our solutions on behalf of customers, we use additional open source software that we obtain from all over the world. Although we try to monitor our use of open source software, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our solutions. In such event, we could be required to seek licenses from third parties in order to continue offering our solutions, to re-engineer our technology or to discontinue offering our solutions in the event re-engineering cannot be accomplished on a timely basis, any of which could cause us to breach contracts, harm our reputation, result in customer losses or claims, increase our costs or otherwise adversely affect our business, operating results and financial condition.

Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar solutions with lower development effort and time and ultimately could result in a loss of product sales for us.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand, which would substantially harm our business and operating results.

The success of our business and the ability to compete depend in part upon our ability to protect and enforce our trade secrets, trademarks, copyrights and other intellectual property rights. We primarily rely on copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate or we may be unable to secure intellectual property protection for all of our solutions. Any of our copyrights, trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Competitors may independently develop technologies or solutions that are substantially equivalent or superior to our solutions or that inappropriately incorporate our proprietary technology into their solutions. Competitors may hire our former employees who may misappropriate our proprietary technology or misuse our confidential information. Although we rely in part upon confidentiality agreements with our employees, consultants and other third parties to protect our trade secrets and other confidential information, those agreements may not effectively prevent disclosure of trade secrets and other confidential information and may not provide an adequate remedy in the event of misappropriation of trade secrets or unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and confidential information, and in such cases we could not assert any trade secret rights against such parties.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation 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. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, operating results and financial condition. Certain jurisdictions may not provide adequate legal infrastructure for effective protection of

 

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our intellectual property rights. Changing legal interpretations of liability for unauthorized use of our solutions or lessened sensitivity by corporate, government or institutional users to refraining from intellectual property piracy or other infringements of intellectual property could also harm our business.

It is possible that innovations for which we seek patent protection may not be protectable. Additionally, the process of obtaining patent protection is expensive and time consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Given the cost, effort, risks and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may not choose to seek patent protection for certain innovations. However, such patent protection could later prove to be important to our business. Even if issued, there can be no assurance that any patents will have the coverage originally sought or adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. Any patents that are issued may be invalidated or otherwise limited, or may lapse or may be abandoned, enabling other companies to better develop products that compete with our solutions, which could adversely affect our competitive business position, business prospects and financial condition.

We cannot assure you that the measures we have taken to protect our intellectual property will adequately protect us, and any failure to protect our intellectual property could harm our business.

We may not be able to enforce our intellectual property rights throughout the world, which could adversely impact our international operations and business.

The laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Many companies have encountered significant problems in protecting and enforcing intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection. This could make it difficult for us to stop the infringement or misappropriation of our intellectual property rights. Proceedings to enforce our proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to enforce our intellectual property rights in such countries may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop, which could have a material adverse effect on our business, financial condition and results of operations.

Additional government regulations may reduce the size of market for our solutions, harm demand for our solutions, force us to update our solutions or implement changes in our services and increase our costs of doing business.

Any changes in government regulations that impact our customers or their end customers could have a harmful effect on our business by reducing the size of our addressable market, forcing us to update the solutions we offer or otherwise increasing our costs. For example, with respect to our life science customers, regulatory developments related to government-sponsored entitlement programs or U.S. Food and Drug Administration or foreign equivalent regulation of, or denial, withholding or withdrawal of approval of, our customers’ products could lead to a lack of demand for our solutions. Other changes in government regulations, in areas such as privacy, export compliance or anti-bribery statutes, such as the U.S. Foreign Corrupt Practices Act, could require us to implement changes in our solutions, services or operations that increase our cost of doing business and thereby adversely affecting our financial performance.

 

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Failure to comply with certain certifications and standards pertaining to our solutions, as may be required by governmental authorities or other standards-setting bodies, could harm our business. Additionally, failure to comply with governmental laws and regulations could harm our business.

Customers may require our solutions to comply with certain security or other certifications and standards, which are promulgated by governmental authorities or other standards-setting bodies. The requirements necessary to comply with these certifications and standards are complex and often change significantly. If our solutions are late in achieving or fail to achieve compliance with these certifications and standards, including when they revised or otherwise change, or our competitors achieve compliance with these certifications and standards, we may be disqualified from selling our solutions to such customers, or at a competitive disadvantage, which would harm our business, operating results and financial condition.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Certain of our solutions are subject to U.S. export controls and may be exported outside the United States only with the required export license or through an export license exception. Additionally, we incorporate encryption technology into our solutions, which may require additional filings prior to export. If we were to fail to comply with U.S. export licensing requirements, U.S. customs regulations, U.S. economic sanctions or other laws, we could be subject to substantial civil and criminal penalties, including fines, incarceration for responsible employees and managers, and the possible loss of export or import privileges. Obtaining the necessary export license for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments and persons. Even though we take precautions to ensure that our channel partners comply with all relevant regulations, any failure by our channel partners to comply with such regulations could have negative consequences, including reputational harm, government investigations and penalties.

In addition, various countries regulate the import of certain encryption technology, including through import permit and license requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our customers’ ability to implement our solutions in those countries. Changes in our solutions or changes in export and import regulations may create delays in the introduction of our solutions into international markets, prevent our customers with international operations from deploying our solutions globally or, in some cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business, financial condition, and operating results.

We may acquire other businesses, which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.

As part of our business strategy, we have in the past and may in the future make investments in other companies, solutions or technologies. We may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by users or investors. In addition, if we fail to

 

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integrate successfully such acquisitions, or the technologies associated with such acquisitions, into our company, the revenues and operating results of the combined company could be adversely affected. Any integration process will require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology and accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could affect our financial condition or the value of our capital stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. If we incur more debt it would result in increased fixed obligations and could also subject us to covenants or other restrictions that would impede our ability to manage our operations.

If we are required to collect sales and use taxes on the solutions we sell, we may be subject to liability for past sales and our future sales may decrease.

State and local taxing jurisdictions have differing rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our subscription services in various jurisdictions is unclear. Although we have historically collected and remitted sales tax in certain circumstances, it is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as state tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities for past sales, discourage customers from purchasing our solutions or otherwise harm our business and operating results.

Uncertainty in global economic conditions may adversely affect our business, operating results or financial condition.

Our operations and performance depend on global economic conditions. Challenging or uncertain economic conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and may cause our customers and potential customers to slow or reduce spending on our solutions. Furthermore, during challenging or uncertain economic times, our customers may face difficulties gaining timely access to sufficient credit and experience decreasing cash flow, which could impact their willingness to make purchases and their ability to make timely payments to us. Global economic conditions have in the past and could continue to have an adverse effect on demand for our solutions, including new bookings and renewal and upsell rates, on our ability to predict future operating results and on our financial condition and operating results. If global economic conditions remain uncertain or deteriorate, it may materially impact our business, operating results and financial condition.

Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption by manmade problems such as terrorism.

Our corporate headquarters and facilities are located near known earthquake fault zones and are vulnerable to significant damage from earthquakes. The corporate headquarters and facilities are also vulnerable to damage or interruption from human error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism or vandalism or other misconduct or other unanticipated problems with our facilities could result in lengthy interruptions to our services. If any disaster were to occur, our ability to operate our

 

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business at our facilities could be seriously or completely impaired or destroyed. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.

Our financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States (GAAP) are subject to interpretation by the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants, the Securities and Exchange Commission (SEC) and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our financial results, and could affect the reporting of transactions completed before the announcement of a change.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. For example, our revenue recognition policy is complex and we often must make estimates and assumptions that could prove to be inaccurate. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about revenue recognition, capitalized software, the carrying values of assets, taxes, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, share-based compensation and income taxes.

We will incur significantly increased costs and devote substantial management time as a result of operating as a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we will be required to comply with the requirements of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) and the Dodd Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, and the , our stock exchange, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Despite recent reform made possible by the Jumpstart Our Business Startups Act (JOBS Act), which allows us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth companies,” we expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements.

In particular, after we are no longer an “emerging growth company” as defined under the JOBS Act, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, when applicable to use. We

 

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cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

We are an “emerging growth company,” and we cannot be certain if reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company.” Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We will remain an emerging growth company for up to five years, although if our annual gross revenues exceed $1 billion in any fiscal year before that time, or if the market value of our common stock that is held by non-affiliates exceeds $700 million as of March 31 of any year before that time, or if we issue more than $1 billion in non-convertible debt over a three-year period, we would cease to be an emerging growth company.

We intend to take advantage of certain exemptions from various reporting requirements that are applicable to many public companies that are not emerging growth companies, including 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 stockholder approval of any golden parachute payments not previously approved by our stockholders. We cannot predict if investors will find our common stock less attractive because we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), the Sarbanes-Oxley Act and the rules and regulations of the applicable listing exchange. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our internal controls may be discovered

 

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in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs, and provide significant management oversight. Any failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the                     .

We are not currently required to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report.

Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

We may need additional capital, and we cannot be certain that additional financing will be available.

We may require additional financing in the future. Our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and condition of the capital markets at the time we seek financing. We cannot assure you that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock or preferred stock, and our stockholders may experience dilution.

If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

  Ÿ  

develop or enhance our solutions;

 

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  Ÿ  

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

 

  Ÿ  

acquire complementary technologies, solutions or businesses;

 

  Ÿ  

expand operations, in the United States or internationally;

 

  Ÿ  

hire, train and retain employees; or

 

  Ÿ  

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 operating results.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (Code), and similar state law provisions, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (NOLs) to offset future taxable income. If our existing NOLs are subject to limitations arising from ownership changes, possibly including, but not limited to, this initial public offering, our ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, also could result in an ownership change under Section 382 of the Code. There is also a risk that our NOLs could expire, or otherwise be unavailable to offset future income tax liabilities due to changes in the law, including regulatory changes, such as suspensions on the use of NOLs or other unforeseen reasons. For these reasons, we may not be able to utilize a material portion of the NOLs, even if we attain profitability.

Risks Related to this Offering, the Securities Market and Investment in Our Common Stock

Our stock price may be volatile, and you may be unable to sell your shares at or above the initial public offering price.

Following the completion of this offering, the market price of our common stock could be subject to wide fluctuations in response to, among other things, the factors described in this “Risk Factors” section or otherwise, and other factors beyond our control, such as fluctuations in the valuations of companies perceived by investors to be comparable to us.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have become subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention, which could harm our business.

If securities analysts do not publish research or reports or if they publish unfavorable or inaccurate research about our business and our stock, the price of our stock and the trading volume could decline.

We expect that the trading market for our common stock will be affected by research or reports that industry or financial analysts publish about us or our business. There are many large, well-

 

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established publicly-traded companies active in our industry and portions of the markets in which we compete, which may mean that we receive less widespread analyst coverage than our competitors. If one or more of the analysts who covers us downgrades their evaluations of our company or our stock, the price of our stock could decline. If one or more of these analysts cease coverage of our company, our stock may lose visibility in the market, which in turn could cause our stock price to decline.

An active trading market for our common stock may never develop or be sustained.

There has not been a public trading market for shares of our common stock prior to this offering and an active trading market may not develop or be sustained after this offering. The initial public offering price for the shares of common stock sold in this offering will be determined by negotiations among us, the selling stockholder and representatives of the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering, and our common stock could trade below the initial public offering price. Accordingly, we cannot provide any assurance regarding the liquidity of any trading market or the ability of an investor to sell shares of our common stock when desired or the prices that may be obtained for such shares.

The concentration of ownership of our common stock among our existing executive officers, directors and significant stockholders upon the completion of this offering will limit your ability to influence corporate matters.

We anticipate that our executive officers, directors, current five percent or greater stockholders and entities affiliated with them together will beneficially own approximately 53.4% of our common stock outstanding after this offering, based on the number of shares of our capital stock outstanding as of December 31, 2012. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with concentrated bases of stockholders. Also, these stockholders, acting together, will be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Upon completion of this offering, based on the number of shares of our capital stock outstanding as of December 31, 2012, we will have 21,437,554 outstanding shares of common stock, assuming no exercise of the underwriters’ over-allotment option and no exercise of options or the warrant outstanding as of the date of this prospectus. Beginning on the date of this prospectus, the 6,460,000 shares being sold in this offering will be immediately available for sale in the public market without restriction, and 14,910,888 shares outstanding upon the completion of this offering will be available for sale, subject to the volume, manner of sale and other limitations under Rules 144 and 701, upon the expiration of the lock-up and market standoff agreements, described below, beginning 181 days after the date of this prospectus. The remaining 66,666 shares will be eligible for sale from time to time thereafter upon the lapse of our right of repurchase with respect to unvested shares.

 

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Based on outstanding options as of December 31, 2012, 3,010,303 shares will also be eligible for sale upon the exercise of vested options, beginning 181 days after the date of this prospectus. The representatives of the underwriters may, in their sole discretion and at any time, release all or any portion of the securities subject to lock-up agreements. After this offering, we intend to register approximately 8,500,000 shares of common stock that have been issued or reserved for future issuance under our stock plans.

In addition, all holders of our common stock and securities convertible into or exchangeable for our common stock hold such securities subject to a market standoff agreement with us that limits their ability to transfer or dispose of such securities during the 180 day period after the date of this prospectus without our consent. We have agreed not to release any securities subject to the market standoff agreement without the prior written consent of J.P. Morgan Securities LLC and Deutsche Bank Securities Inc.

Because our estimated initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution.

The assumed initial public offering price of $13.50, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the total value of our tangible assets less our total liabilities immediately following this offering. Therefore, if you purchase common stock in this offering, you will experience immediate and substantial dilution of approximately $10.74 per share, which is the difference between the price you pay for our common stock and its pro forma as adjusted net tangible book value after completion of the offering. To the extent outstanding options and the warrant to purchase our common stock are exercised, there will be further dilution.

Our management has broad discretion in the use of the proceeds from this offering that we receive and may not use the proceeds effectively.

Our management will have broad discretion in the application of the net proceeds of this offering that we receive. We cannot specify with certainty the uses to which we will apply these net proceeds. We may not be able to obtain a significant return, if any, on our investment of those proceeds, and accordingly may not yield a favorable return to our investors. The failure by our management to apply these funds effectively could adversely affect our ability to maintain and expand our business.

Our restated certificate of incorporation and restated bylaws and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our restated certificate of incorporation and restated bylaws that will be in effect upon the completion of this offering will contain provisions that could delay or prevent a change in control of us. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

 

  Ÿ  

providing for a classified board of directors with staggered, three year terms;

 

  Ÿ  

authorizing the board of directors to issue, without stockholder approval, preferred stock with rights senior to those of our common stock;

 

  Ÿ  

providing that vacancies on our board of directors be filled by appointment by the board of directors;

 

  Ÿ  

prohibiting stockholder action by written consent;

 

  Ÿ  

requiring that certain litigation must be brought in Delaware;

 

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  Ÿ  

limiting the persons who may call special meetings of stockholders; and

 

  Ÿ  

requiring advance notification of stockholder nominations and proposals.

In addition, we are subject to Section 203 of the Delaware General Corporation Law which may prohibit large stockholders, in particular those owning fifteen percent or more of our outstanding voting stock, from merging or combining with us for a certain period of time without the consent of our board of directors.

These and other provisions in our restated certificate of incorporation and our restated bylaws, as in effect upon completion of this offering, and under the Delaware General Corporation Law could discourage potential takeover attempts, reduce the price that investors might be willing to pay in the future for shares of our common stock and result in the market price of our common stock being lower than it would be without these provisions. For more information regarding these and other provisions, see “Description of Capital Stock—Anti-Takeover Provisions—Restated Certificate of Incorporation and Restated Bylaws.”

We do not anticipate paying any dividends on our common stock.

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Further, our loan and security agreement limits our ability to pay dividends. If we do not pay cash dividends, you would receive a return on your investment in our common stock only if the market price of our common stock is greater than the initial public offering price at the time you sell your shares.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition. Forward-looking statements include all statements that are not historical facts and can often be identified by terms such as “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” or other similar words and expressions and the negatives of those statements.

Forward-looking statements in this prospectus include, among other things, statements about:

 

  Ÿ  

our expectations regarding our revenues, expenses and results of operations;

 

  Ÿ  

our anticipated capital expenditures;

 

  Ÿ  

our liquidity and working capital requirements;

 

  Ÿ  

our need to obtain additional funding and our ability to obtain future funding on acceptable terms;

 

  Ÿ  

our expected use of the net proceeds from this offering;

 

  Ÿ  

the growth rates of the markets in which we compete;

 

  Ÿ  

our anticipated strategies for growth;

 

  Ÿ  

maintaining and expanding our customer base and our relationships with partners;

 

  Ÿ  

our ability to anticipate market needs and changing regulatory requirements and develop new and enhanced solutions to meet those needs and requirements;

 

  Ÿ  

our current and future solutions and functionality and plans to promote them;

 

  Ÿ  

anticipated trends and challenges in our business and in the markets in which we operate;

 

  Ÿ  

the evolution of technology affecting our solutions, services and markets;

 

  Ÿ  

our ability to adequately protect our intellectual property;

 

  Ÿ  

our ability to compete in our industry and innovation by our competitors; and

 

  Ÿ  

the estimates and estimate methodologies used in preparing our consolidated financial statements and determining option exercise prices.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors.” You should read these risk factors and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this

 

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prospectus forms a part, completely and with the understanding that our actual future results may be materially different from what is expressed by any forward-looking statements contained herein.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, whether as a result of new information, future events or otherwise, even if new information becomes available in the future.

 

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MARKET AND INDUSTRY DATA

This prospectus contains estimates and other information that are based on industry publications, reports, surveys and forecasts generated by Gartner, IDC, The Datamonitor Group (Datamonitor) and S&P Capital IQ. These industry publications, reports, surveys and forecasts generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates, as there is no assurance that any of them will be reached. Although we have not independently verified the accuracy or completeness of the data contained in these industry publications and reports, based on our industry experience we believe that the publications and reports are reliable and that the conclusions contained in the publications and reports are reasonable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications, reports, surveys and forecasts.

The Gartner reports described herein (Gartner Reports) represent data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice.

The industry publications, reports, surveys and forecasts contained in this prospectus are provided below:

 

  (1) Datamonitor, “Global Health Care Equipment & Supplies,” July 2012; Reference Code: 0199-2067.

 

  (2) Datamonitor, “Global Pharmaceuticals, Biotechnology & Life Sciences,” May 2012; Reference Code: 0199-2357.

 

  (3) IDC, Health Industry Insights 2009; Document # HI220793.

 

  (4) Gartner, “Forecast: Enterprise IT Spending for the Manufacturing and Natural Resources Market, Worldwide, 2010-2016, 2Q12 Update,” July 2012.

 

  (5) Gartner, “Forecast: Desk-Based PCs, Notebooks, Ultramobiles and Tablets. Worldwide, 2010-2016, 3Q12 Update,” September 2012.

 

  (6) Gartner, “Forecast: Enterprise Network Equipment by Market Segment, Worldwide, 2009-2016, 3Q12 Update,” September 2012.

 

  (7) Gartner, “Semiconductor Forecast Database, Worldwide, 3Q12 Update,” September 2012.

 

  (8) Gartner, “IT Metrics: Align IT Investment Levels With Strategy Using Run, Grow, Transform and Beyond,” March 2012.

 

  (9) Gartner, “Market Share: All Software Markets, Worldwide, 2011,” March 2012.

 

  (10) Gartner, “Forecast Analysis: Mobile Phones and Consumer Electronics, Worldwide, 4Q11 Update,” January 2012.

 

  (11) S&P Capital IQ, “Capital IQ Company Screening Report—lifesciences industry classifications,” February 2013.

 

  (12) S&P Capital IQ, “Capital IQ Company Screening Report—technology companies,” February 2013.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $72.3 million, based upon an assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that we will receive additional net proceeds of $12.2 million after deducting estimated underwriting discounts and commissions. We will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholder.

A $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share would increase or decrease the net proceeds to us from this offering by approximately $5.6 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to obtain additional working capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We anticipate using the net proceeds to us from this offering for working capital and general corporate purposes, which may include hiring additional personnel and investing in sales and marketing, research and development and infrastructure, although we do not currently have any specific plans to use any net proceeds with respect to these items. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies or other assets. We have not entered into any agreements or commitments with respect to any material investments or acquisitions at this time.

We currently have no specific plans for the use of the net proceeds to us from this offering. We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, our management will have broad discretion in the application of the net proceeds of this offering to us, and investors will be relying on the judgment of our management regarding the application of these proceeds.

Pending their use, we plan to invest the net proceeds to us from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. We cannot predict whether the invested proceeds will yield a favorable return.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. Additionally, under our loan agreement with Silicon Valley Bank, we are restricted from paying cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements, overall financial conditions, and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, total loan obligations and capitalization as of December 31, 2012:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to reflect the (1) conversion of all outstanding shares of our convertible preferred stock into an aggregate of 7,249,987 shares of common stock and (2) the conversion of the convertible preferred stock warrant into a warrant for 86,655 shares of common stock, each to be effective upon the completion of this offering; and

 

  Ÿ  

on a pro forma as adjusted basis to give effect to (1) the pro forma adjustments set forth above, (2) the sale by us of 6,000,000 shares of common stock at the assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and (3) the filing of our restated certificate of incorporation to authorize 200,000,000 shares of common stock and 5,000,000 shares of preferred stock.

The information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     As of December 31, 2012  
     Actual     Pro
Forma
    Pro Forma
As Adjusted(1)
 
     (in thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 12,633      $ 12,633      $ 84,963   
  

 

 

   

 

 

   

 

 

 

Total loan obligations, current and long-term

   $ 4,512      $ 4,512      $ 4,512   

Convertible preferred stock warrant liability

     734        —          —     

Convertible preferred stock, $0.00005 par value; 20,571,428 shares authorized, 20,103,491 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     41,776        —          —     
  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity:

      

Preferred stock, $0.00015 par value; no shares authorized, no shares issued or outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Common stock, $0.00015 par value; 100,000,000 shares authorized, 8,187,567 shares issued and outstanding, actual; 100,000,000 shares authorized, 15,437,554 shares issued and outstanding, pro forma; 200,000,000 shares authorized, 21,437,554 shares issued and outstanding, pro forma as adjusted

     1        2        3   

Additional paid-in capital

     9,704        52,213        124,542   

Accumulated other comprehensive loss

     (102     (102     (102

Accumulated deficit

     (62,502     (62,502     (62,502
  

 

 

   

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (52,899     (10,389     61,941   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ (5,877   $ (5,877   $ 66,453   
  

 

 

   

 

 

   

 

 

 

(footnote appears on following page)

 

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(1)

Each $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $5.6 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions payable by us.

The number of shares of common stock outstanding actual and as adjusted on the table above does not reflect:

 

  Ÿ  

4,446,635 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of December 31, 2012, at a weighted average exercise price of $4.32;

 

  Ÿ  

20,000 shares of common stock subject to a RSU that was outstanding as of December 31, 2012;

 

  Ÿ  

86,655 shares of common stock issuable upon the exercise of a warrant to purchase convertible preferred stock that was outstanding as of December 31, 2012, with an exercise price of $3.46 per share;

 

  Ÿ  

235,099 shares of common stock issuable upon the exercise of options to purchase common stock that were granted to employees on February 27, 2013, at an exercise price of $13.50 per share;

 

  Ÿ  

960,248 shares of common stock subject to RSUs granted to employees on March 15, 2013;

 

  Ÿ  

1,288,249 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, which includes 1,038,249 shares of common stock reserved for issuance as of December 31, 2012 and an additional 250,000 shares of common stock reserved for issuance on February 23, 2013 (and of which 1,195,347 shares are issuable or will be issuable upon the exercise of options or vesting of RSUs referred to in the two proceeding bullets), which shares will become available for future issuance under our 2013 Equity Incentive Plan in connection with this offering; and

 

  Ÿ  

2,495,116 additional shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective in connection with this offering, and 500,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective in connection with this offering.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of our outstanding shares of common stock, after giving effect to (1) the conversion of all outstanding shares of convertible preferred stock as of December 31, 2012 into an aggregate of 7,249,987 shares of common stock and (2) the conversion of the convertible preferred stock warrant into a warrant for 86,655 shares of common stock, each to be effective upon the completion of this offering. Our pro forma net tangible book value as of December 31, 2012 would have been approximately $(13.1) million, or approximately $(0.85) per share.

After giving effect to the sale of common stock offered by us in this offering at an assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2012 would have been approximately $59.3 million, or approximately $2.76 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $3.61 per share to existing stockholders and an immediate dilution of $10.74 per share to new investors participating in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

     $ 13.50   

Pro forma net tangible book value per share as of December 31, 2012

   $ (0.85  

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     3.61     
  

 

 

   

Pro forma as adjusted net tangible book value per share after giving effect to this offering

       2.76   
    

 

 

 

Dilution in pro forma as adjusted net tangible book value per share to new investors in this offering

     $ 10.74   
    

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease our pro forma as adjusted net tangible book value as of December 31, 2012 by approximately $5.6 million, the pro forma as adjusted net tangible book value per share after this offering by approximately $0.26 and the dilution in pro forma as adjusted net tangible book value to new investors in this offering by approximately $0.74 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering would be $3.12 per share, and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering would be $10.38 per share.

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2012, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into common stock upon the completion of this offering, the differences between the number of shares of common stock purchased from us, the total consideration and the average price per share paid to us by existing stockholders and by new investors participating in this offering, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an

 

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assumed initial public offering price of $13.50 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus:

 

     Shares purchased     Total consideration     Average
price

per share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     15,437,554         72   $ 45,703,073         36   $   2.96   

New investors

     6,000,000         28        81,000,000         64        13.50   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     21,437,554         100.0   $ 126,703,073         100.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase or decrease in the assumed initial public offering price of $13.50 per share would increase or decrease total consideration paid to us by investors participating in this offering by approximately $6.0 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions payable by us.

The discussion and tables above assume no sale of shares by the selling stockholder and no exercise of the underwriters’ option to purchase additional shares or of any outstanding options or the warrant. The sale of 460,000 shares of common stock to be sold by the selling stockholder in this offering will reduce the number of shares held by existing stockholders to 14,977,554 or 70% of the total shares outstanding, and will increase the number of shares held by investors participating in this offering to 6,460,000, or 30% of the total shares outstanding. In addition, if the underwriters’ option to purchase additional shares is exercised in full, the number of shares of common stock held by investors participating in this offering will be increased to 6,969,000 or 31% of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by existing stockholders will be 15,437,554, or 69% of the total number of shares of common stock to be outstanding after this offering.

The number of shares outstanding as of December 31, 2012 excludes:

 

  Ÿ  

4,446,635 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of December 31, 2012, at a weighted average exercise price of $4.32 per share;

 

  Ÿ  

20,000 shares of common stock subject to a RSU that was outstanding as of December 31, 2012;

 

  Ÿ  

86,655 shares of common stock issuable upon the exercise of a warrant to purchase convertible preferred stock that was outstanding as of December 31, 2012, with an exercise price of $3.46 per share;

 

  Ÿ  

235,099 shares of common stock issuable upon the exercise of options to purchase common stock that were granted to employees on February 27, 2013, at an exercise price of $13.50 per share;

 

  Ÿ  

960,248 shares of common stock subject to RSUs granted to employees on March 15, 2013;

 

  Ÿ  

1,288,249 shares of common stock reserved for future issuance under our 2010 Equity Incentive Plan, which includes 1,038,249 shares of common stock reserved for issuance as of December 31, 2012 and an additional 250,000 shares of common stock reserved for issuance on February 23, 2013 (and of which 1,195,347 shares are issuable or will be issuable upon the exercise of options or vesting of RSUs referred to in the two proceeding bullets), which shares will become available for future issuance under our 2013 Equity Incentive Plan in connection with this offering; and

 

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  Ÿ  

2,495,116 additional shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective in connection with this offering, and 500,000 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective in connection with this offering.

To the extent that any options or the warrant are exercised, new options, RSUs or shares of common stock are issued under our 2013 Equity Incentive Plan or our 2013 Employee Stock Purchase Plan or we issue additional shares of common stock in the future, there may be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read together with our consolidated financial statements and notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We derived the selected consolidated statement of operations data and other financial data for the fiscal years ended September 30, 2010, 2011 and 2012 and the selected consolidated balance sheet data as of September 30, 2011 and 2012 from our audited consolidated financial statements, which are included elsewhere in this prospectus. We derived the selected consolidated statement of operations data and other financial data for the three months ended December 31, 2011 and 2012 and the selected consolidated balance sheet as of December 31, 2012 from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments that management considers necessary for a fair statement of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected for the full year or any other period.

 

     Years Ended
September 30,
    Three Months Ended
December 30,
 
     2010      2011      2012     2011     2012  
    

(in thousands, except

per share data)

 

Consolidated Statements of Operations Data:

            

Revenues:

            

License and implementation

   $ 31,759       $ 41,499       $ 49,756      $ 11,365      $ 12,462   

SaaS and maintenance

     18,682         23,672         34,502        6,692        9,879   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     50,441         65,171         84,258        18,057        22,341   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Cost of revenues:

            

License and implementation(1)

     12,087         18,092         22,483        5,028        5,560   

SaaS and maintenance(1)

     6,328         8,828         18,053        2,496        4,523   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenues

     18,415         26,920         40,536        7,524        10,083   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

    
32,026
  
     38,251         43,722        10,533        12,258   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Research and development(1)

     12,702         13,809         17,695        4,173        4,119   

Sales and marketing(1)

     11,221         13,935         19,640        3,981        5,336   

General and administrative(1)

     6,945         7,860         10,584        2,393        3,877   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,868         35,604         47,919        10,547        13,332   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     1,158         2,647         (4,197     (14     (1,074

Interest expense, net

     353         677         655        184        126   

Other expense, net

     20         316         540        406        52   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     785         1,654         (5,392     (604     (1,252

Provision for income taxes

     161         172         301        71        61   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 624       $ 1,482       $ (5,693   $ (675   $ (1,313
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:(2)

            

Basic and diluted

   $ —         $ —         $ (0.73   $ (0.09   $ (0.16
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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     Years Ended
September 30,
    Three Months Ended
December 30,
 
     2010      2011      2012     2011      2012  
    

(in thousands, except

per share data)

 

Weighted average number of shares used in computing net income (loss) per share attributable to common stockholders:(2)

             

Basic and diluted

     7,028         7,324         7,815        7,623         8,028   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Pro forma net income (loss) per share:(2)

             

Basic and diluted

         $ (0.38      $ (0.09
        

 

 

      

 

 

 

Shares used in computing pro forma net loss per share:(2)

             

Basic and diluted

           15,065           15,278   
        

 

 

      

 

 

 

Other Financial Data:

             

Adjusted EBITDA(3)

   $ 3,230       $ 4,389       $ 4,957      $ 807       $ 395   

 

(1)

Includes stock-based compensation as follows:

 

     Years Ended
September 30,
     Three Months Ended
December 31,
 
     

2010

    

2011

    

2012

    

2011

    

2012

 
    

(in thousands)

 

Cost of revenues:

              

License and implementation

   $ 134       $ 92       $ 298       $ 77       $ 40   

SaaS and maintenance

     41         29         561         24         74   

Research and development

     133         127         297         97         54   

Sales and marketing

     173         108         1,103         245         259   

General and administrative

     276         175         262         65         130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 757       $ 531       $ 2,521       $ 508       $ 557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
(2)

See Note 10 to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per share attributable to common stockholders and pro forma basic and diluted net income (loss) per share.

 

(3) 

See “Prospectus Summary—Summary Consolidated Financial Data—Non-GAAP Financial Measure” for more information and a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles in the United States.

 

     As of September 30,     As of December  31,
2012
 
     2011     2012    
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 18,420      $ 15,768      $ 12,633   

Working capital (deficit)

     1,082        (12,584     (14,501

Total assets

     36,954        40,598        42,158   

Loan obligations, current and long-term

     7,378        5,127        4,512   

Total liabilities

     44,881        51,085        53,281   

Convertible preferred stock

     41,776        41,776        41,776   

Total stockholders’ deficit

     (49,703     (52,263     (52,899

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of our operations in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

Overview

We are a provider of revenue management solutions for the life science and technology industries, and we believe that we are a pioneer in this market. Our solutions enable our customers to maximize revenues and reduce revenue compliance risk by transforming their revenue lifecycle from a series of tactical, disjointed operations into a strategic end-to-end process. We believe our solutions serve as the system of record for our customers’ revenue management processes and can provide a competitive advantage for them.

We were founded in 1999 with a vision of transforming the way companies manage the strategy and execution of pricing, contracting, incentives and rebates. Since we were founded, we have achieved several significant milestones, including:

 

  Ÿ  

In 2002, we released the initial version of our first revenue management application suite, which was designed for the medical device industry.

 

  Ÿ  

In 2004, we introduced new applications and extended the capabilities of our solutions to support the pharmaceutical industry, and we signed our first pharmaceutical client.

 

  Ÿ  

In 2006, we acquired Azerity, Inc., a provider of revenue management solutions for the semiconductor industry as we began expanding into the technology industry more broadly.

 

  Ÿ  

In 2006, we also started operations in India to continue scaling our development, implementation and support capabilities.

 

  Ÿ  

We expanded the functionality of our solutions to address the consumer electronics and software verticals, and in 2009, signed our first consumer electronics customer.

 

  Ÿ  

In 2010, we also introduced analytics capabilities and began offering our solutions through the cloud to accelerate the time-to-value of deploying our revenue management solutions.

 

  Ÿ  

As we invested in growing our research and development, implementation and sales and marketing forces, we significantly increased the number of our employees between 2010 and 2012.

 

  Ÿ  

In January 2012, we acquired LeapFrogRx, a provider of cloud-based analytics solutions for the pharmaceutical industry, to enhance our analytics capabilities.

Our solutions are comprised of two complementary suites of software applications: Revenue Management Enterprise and Revenue Management Intelligence. Sales of our solutions range from individual applications to complete suites, and deployments may vary from specific divisions or territories to enterprise-wide implementations. Historically, a substantial majority of our total revenues has been associated with our Revenue Management Enterprise suite, whether deployed as individual applications or as a complete suite. For example, in the fiscal year ended September 30, 2012 and in the three months ended December 31, 2012, revenues from our Revenue Management Enterprise suite constituted more than 85% of our total revenues for each respective period. We expect our

 

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Revenue Management Enterprise suite to continue to generate the substantial majority of our total revenues for the foreseeable future.

We derive revenues primarily from the sale of our on-premise and cloud-based solutions and related implementation services, as well as maintenance and support and application support. We price our solutions based on a number of factors, including revenues under management and number of users. Our license and implementation revenues are comprised of sales of perpetual license and related implementation services, which revenues are recognized over the implementation period, which commences when implementation work begins and typically ranges from one to three years. Maintenance and support revenues are recognized ratably over the support period, which is typically one year. SaaS revenues for cloud-based solutions are derived from subscription fees from customers accessing our cloud-based solutions, as well as from associated implementation services. SaaS revenues are recognized ratably over the subscription period, which is typically one year but can be longer. Due to the manner in which our revenues are recognized, we believe we have significant visibility into a substantial portion of our future revenues, although the actual timing of revenue recognition may vary based on our customers’ implementation requirements and availability of our services personnel. As a result, bookings, which we define as the total dollar value of new contracts signed in a given period, is not a direct indicator of revenues in specific future periods. Our bookings grew 34% year-over-year to $101.3 million for the fiscal year ended September 30, 2012, but will be recognized as revenue over varying implementation periods. This bookings amount includes bookings from LeapFrogRx, which we acquired in January 2012, which totaled $9.1 million during fiscal year 2012.

We market and sell our solutions to customers in the life science and technology industries. While we have historically generated the substantial majority of our revenues from companies in the life science industry, we have also grown our base of technology customers and intend to continue to focus on increasing the revenues from customers in the technology industry. A representative list of our customers based on our total revenues for the fiscal year ended September 30, 2012 includes our life science customers Abbott Laboratories, Amgen Inc., Boston Scientific Corporation, Bristol-Meyers Squibb Company, Johnson & Johnson and Merck & Co., Inc., and our technology customers Dell Inc., Nokia Corporation, STMicroelectronics N.V. and VMware, Inc. During the fiscal year ended September 30, 2012, two customers, Merck & Co., Inc. and Amgen Inc., accounted for approximately 14% and 10% of our total revenues, respectively. During the fiscal years ended September 30, 2010 and 2011, one customer accounted for 15% of our total revenues each year. Two different customers also accounted for 13% and 12% of our total revenues for each of the fiscal years ended September 30, 2010 and 2011, respectively. Our most significant customers in any given period generally vary from period to period due to the timing of implementation and related revenue recognition over those periods of larger projects.

Our sales and marketing team primarily targets large and mid-sized organizations worldwide through our direct sales force. We have historically focused our sales efforts in the United States, but we believe markets outside of the United States offer a significant opportunity for growth, and we intend to make additional investments in sales and marketing to expand in these markets.

We have experienced significant growth in our revenues in recent periods. We generated total revenues of $50.4 million, $65.2 million, $84.3 million and $22.3 million during the fiscal years ended September 30, 2010, 2011 and 2012 and the three months ended December 31, 2012, respectively, and we generated net income of $0.6 million and $1.5 million and net losses of $5.7 million and $1.3 million in the fiscal years ended September 30, 2010, 2011 and 2012 and the three months ended December 31, 2012, respectively.

 

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Key Factors Affecting Our Financial Performance

We believe that the growth of our business and our future success are dependent upon many factors, including our ability to retain and expand business with existing customers, attract new customers, continue to innovate and enhance our solutions and successfully invest in our growth. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results.

Retain and Expand Business with Existing Customers

We have enjoyed renewal rates for maintenance and support in excess of 95% during fiscal years ended September 30, 2010, 2011 and 2012. Renewal rates for any fiscal year are calculated by identifying our maintenance and support customers existing at the beginning of the prior fiscal year (prior year customers), and dividing the dollar amount of maintenance and support revenues that we earned from those prior year customers in the current fiscal year by the dollar amount of maintenance and support revenues we earned from such customers in the prior fiscal year. Our future financial performance depends, in part, on our ability to maintain high renewal rates.

We also intend to continue to broaden adoption of existing applications across our customers’ organizations. We also believe that the sales cycle for selling to existing customers can be shorter than the sales cycle for new customers, and therefore our sales and marketing costs for existing customers can be lower, allowing us to focus additional sales and marketing resources on obtaining new customers. If we are unable to maintain high levels of renewals and sell additional solutions to existing customers, our future revenues would not grow as we anticipate.

Attract New Customers

We believe the global market for life science and technology revenue management solutions is large and underserved. We intend to target new customers by continuing to invest in our sales force and marketing initiatives to drive awareness and adoption of revenue management solutions. It can take new sales personnel a significant period of time to become productive, which may result in a delay in increased revenues as compared to our investments in sales and marketing. If our investments in sales and marketing activities do not result in significant additional customers or if competition begins to emerge, our business would be harmed.

Continue to Innovate and Enhance Our Solutions

To extend our leadership position in revenue management, we intend to continue to drive product innovation through significant investments in research and development. We expect these initiatives will be focused on developing new applications for the life science and technology industries, as well as for additional verticals within those industries. We will also need to continually engage in development activities to update our applications to reflect changing market and regulatory requirements.

Invest in Our Growth

In order to grow our business, we must continue to invest in our people, software and solutions, data center and infrastructure, which will likely result in higher costs of revenues, operating expenses and capital expenditures. If our business continues to grow rapidly, we may need to increase our use of third-party contractors to provide services to our customers, which could adversely affect our gross margins. In addition, we plan to continue to invest in additional data center capacity with third-party providers as well as

 

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additional computing infrastructure to continue to enhance our cloud-based solutions. We expect that our cost of revenues will increase in absolute dollars, and that our gross margins will decline in the near term, as we continue to increase headcount in our implementation function in anticipation of expected growth in the sales of our on-premise solutions and as we continue to focus on building infrastructure for our cloud-based solutions. Our future revenue growth will also depend on our ability to expand our sales force domestically and internationally.

Key Business Metrics

In addition to the measures of financial performance presented in our consolidated financial statements, we use certain key metrics to evaluate and manage our business, including four-quarter revenues from current customers and Adjusted EBITDA. We use these key metrics internally to manage the business, and we believe they are useful for investors to compare key financial data from various periods.

Four-Quarter Revenues From Existing Customers

We derive a large majority of revenues from existing customers, which we define as customers from which we have generated revenues in each of the preceding four quarters, which would exclude historical customers of LeapFrogRx. We measure four-quarter revenues from our existing license and subscription customers by calculating the sum of revenues recognized during the last four quarters from any customer that has contributed revenue in each of the preceding four quarters. We believe four-quarter revenues from existing customers provides us and investors with a metric to measure the historical revenue visibility in our business. We also use this metric internally to understand the proportion of revenues being generated in any period from existing customers as compared to entirely new customers or customers with whom we have not been recently engaged. This measure helps us guide our sales activities and establish budgets and operational goals for our sales function.

Our four-quarter revenues from existing customers for the periods presented were as follows:

 

    Four Quarters Ended  
    September 30,
2011
    December 31,
2011
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
 
    (unaudited)        
    (in thousands)        

Four-quarter revenues

  $ 60,024      $ 66,459      $ 66,785      $ 73,157      $ 76,892      $ 77,633   

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before LeapFrogRx compensation charges, as discussed below, stock-based compensation, depreciation and amortization, interest expense, net, other expense, net, and provision for income taxes. We believe Adjusted EBITDA provides investors with consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our operating results and our competitors’ operating results. We also use this measure internally to establish budgets and operational goals to manage our business and evaluate our performance.

Adjusted EBITDA was $3.2 million, $4.4 million, $5.0 million, $0.8 million and $0.4 million for fiscal years ended September 30, 2010, 2011 and 2012 and the three months ended December 31, 2011 and 2012, respectively. Our Adjusted EBITDA for the fiscal years ended September 30, 2011 and 2012 increased primarily due to increases in total revenues, which were partially offset by increased expenses. The increase in expenses was primarily due to increases in personnel costs arising principally from headcount increases as we continued to make investments in new products and solutions, as well as from expanding our global marketing efforts. See “Prospectus Summary—Summary Consolidated Financial Data—Non-GAAP Financial Measure” for a reconciliation of Adjusted EBITDA to net income (loss) and a description of the limitations of Adjusted EBITDA.

 

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Key Components of Results of Operations

Revenues

Revenues are comprised of license and implementation revenues and SaaS and maintenance revenues.

License and Implementation

License and implementation revenues are generated from the sale of software licenses for our on-premise solutions and related implementation services.

SaaS and Maintenance

SaaS and maintenance revenues primarily include subscription and related implementation fees from customers accessing our cloud-based solutions and revenues associated with maintenance contracts from license customers. Also included in SaaS and maintenance revenues are other revenues, including revenues related to application support, training and customer-reimbursed expenses. Prior to 2012, revenues from subscriptions for our cloud-based solutions were not material; however, following our acquisition of LeapFrogRx in January 2012, they have increased but remain less than 15% of our total revenues. Over time, we expect that SaaS revenues will increase as a percentage of total revenues.

Cost of Revenues

Our total cost of revenues is comprised of the following:

License and Implementation

Cost of license and implementation revenues includes costs related to the implementation of our on-premise solutions. Cost of license and implementation revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation and overhead allocation as well as third-party contractors, royalty fees paid to third parties for rights to their intellectual property and travel-related expenses. Cost of license and implementation revenues may vary from period to period depending on a number of factors, including the amount of implementation services required to deploy our solutions and the level of involvement of third party contractors providing implementation services.

SaaS and Maintenance

Cost of SaaS and maintenance revenues includes those costs related to the implementation of our cloud-based solutions, maintenance and support and application support for our on-premise solutions and training. Cost of SaaS and maintenance revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as reimbursable expenses, third-party contractors and data center-related expenses. We believe that cost of SaaS and maintenance revenues will continue to increase in absolute dollars as we continue to focus on building infrastructure for our cloud-based solutions.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses.

Research and Development

Our research and development expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation and overhead allocation as well as third-party contractors

 

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and travel-related expenses. Our software development costs for new software solutions and enhancements to existing software solutions are generally expensed as incurred. However, we capitalize development costs incurred in connection with the development of certain additional service offerings that will only be offered through the cloud. We expect to cease capitalization of development costs when we have completed all final testing of this product, at which time amortization charges related to such capitalized costs will be included in cost of revenues. As of December 31, 2012, we had $2.1 million of capitalized software development costs. We have not begun to amortize any of these capitalized software development costs as the development of the product is not completed. We expect our research and development expenses to continue to increase in absolute dollars as we continue to develop new applications and enhance our existing software solutions.

Sales and Marketing

Our sales and marketing expenses consist primarily of personnel-related costs including salary, bonus, commissions, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as third-party contractors, travel-related expenses and marketing programs. We recognize sales commission expense upon contract signing, while we recognize revenue over the period the services are provided. We expect our sales and marketing expenses to continue to increase in absolute dollars as we increase the number of our sales and marketing employees to support the growth in our business.

General and Administrative

Our general and administrative expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as third-party contractors and travel-related expenses. We expect to incur significant accounting and legal costs related to becoming a public company, as well as additional insurance, investor relations and other costs. In addition, we expect to incur additional costs related to the implementation of a new ERP system.

LeapFrogRx Compensation Charges

In January 2012, we acquired LeapFrogRx for initial cash consideration of $3.0 million as well as potential additional payments to former LeapFrogRx stockholders totaling up to $8.3 million which are expected to be incurred through January 2015. These additional payments are, among other things, subject to future continued employment and are therefore considered compensatory in nature and are being recognized as compensation expense (LeapFrogRx compensation charges) over the term of each component. As of December 31, 2012, we had expensed an aggregate of $5.3 million of LeapFrogRx compensation charges.

 

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Results of Operations

The following tables set forth our consolidated results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

     Years Ended September 30,     Three Months Ended
December  31,
 
     2010      2011      2012     2011     2012  
     (in thousands)  

Consolidated Statements of Operations Data:

            

Revenues:

            

License and implementation

   $ 31,759       $ 41,499       $ 49,756      $ 11,365      $ 12,462   

SaaS and maintenance

     18,682         23,672         34,502        6,692        9,879   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     50,441         65,171         84,258        18,057        22,341   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Cost of revenues:

            

License and implementation(1)

     12,087         18,092         22,483        5,028        5,560   

SaaS and maintenance(1)

     6,328         8,828         18,053        2,496        4,523   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total cost of revenues

     18,415         26,920         40,536        7,524        10,083   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     32,026         38,251         43,722        10,533        12,258   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Research and development(1)

     12,702         13,809         17,695        4,173        4,119   

Sales and marketing(1)

     11,221         13,935         19,640        3,981        5,336   

General and administrative(1)

     6,945         7,860         10,584        2,393        3,877   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     30,868         35,604         47,919        10,547        13,332   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     1,158         2,647         (4,197     (14     (1,074

Interest expense, net

     353         677         655        184        126   

Other expense, net

     20         316         540        406        52   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     785         1,654         (5,392     (604     (1,252

Provision for income taxes

     161         172         301        71        61   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 624       $ 1,482       $ (5,693   $ (675   $ (1,313
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

Includes stock-based compensation as follows:

 

     Years Ended
September 30,
     Three Months
Ended
December 31,
 
     2010      2011      2012      2011      2012  
     (in thousands)  

Cost of revenues:

              

License and implementation

   $ 134       $ 92       $ 298       $ 77       $ 40   

SaaS and maintenance

     41         29         561         24         74   

Research and development

     133         127         297         97         54   

Sales and marketing

     173         108         1,103         245         259   

General and administrative

     276         175         262         65         130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 757       $ 531       $ 2,521       $ 508       $ 557   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Years Ended
September 30,
    Three Months
Ended
December 31,
 
     2010     2011     2012     2011     2012  

Revenues:

          

License and implementation

     63     64     59     63     56

SaaS and maintenance

     37        36        41        37        44   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

          

License and implementation

     24        28        27        28        25   

SaaS and maintenance

     13        13        21        14        20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     37        41        48        42        45   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     63        59        52        58        55   

Operating expenses:

          

Research and development

     25        21        21        23        18   

Sales and marketing

     22        22        23        22        24   

General and administrative

     14        12        13        14        18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     61        55        57        59        60   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     2        4        (5     (1     (5

Interest expense, net

     1        1        1        1        1   

Other expense, net

     0        0        1        2        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     1        2        (7     (4     (6

Provision for income taxes

     0        0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1     2     (7 )%      (4 )%      (6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Three Months Ended December 31, 2011 and 2012

Revenues

 

     Three Months Ended December 31,               
     2011     2012     Change  
     Amount      % of Total
Revenues
    Amount      % of Total
Revenues
    ($)      (%)  
     (in thousands, except percentages)  

Revenues:

               

License and implementation

   $ 11,365         63   $ 12,462         56   $ 1,097         10

SaaS and maintenance

     6,692         37        9,879         44        3,187         48   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenues

   $ 18,057         100   $ 22,341         100   $ 4,284         24   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

License and Implementation

License and implementation revenues increased $1.1 million, or 10%, to $12.5 million for the three months ended December 31, 2012 from $11.4 million for the three months ended December 31, 2011. Our revenues from existing customers were $10.7 million for the three months ended December 31, 2012 and $9.8 million for the three months ended December 31, 2011. The increase was primarily due to an increase in sales volume.

SaaS and Maintenance

SaaS and maintenance revenues increased $3.2 million, or 48%, to $9.9 million for the three months ended December 31, 2012 from $6.7 million for the three months ended December 31, 2011.

 

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The increase in SaaS and maintenance revenues was primarily due to an increase of $3.3 million in SaaS revenues, of which $2.7 million was due to the acquisition of LeapFrogRx and $0.6 million was due to sales to new customers.

Cost of Revenues

 

     Three Months Ended December 31,               
     2011     2012     Change  
     Amount      % of
Revenues
    Amount      % of
Revenues
    ($)      (%)  
     (in thousands, except percentages)  

Cost of revenues:

               

License and implementation

   $ 5,028         44   $ 5,560         45   $ 532         11

SaaS and maintenance

     2,496         37        4,523         46        2,027         81   
  

 

 

      

 

 

      

 

 

    

Total cost of revenues

   $ 7,524         42      $ 10,083         45      $ 2,559         34   
  

 

 

      

 

 

      

 

 

    

Gross profit:

               

License and implementation

   $ 6,337         56   $ 6,902         55   $ 565         9

SaaS and maintenance

     4,196         63        5,356         54        1,160         28   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 10,533         58      $ 12,258         55      $ 1,725         16   
  

 

 

      

 

 

      

 

 

    

License and Implementation

Cost of license and implementation revenues increased $0.5 million, or 11%, to $5.6 million during the three months ended December 31, 2012 from $5.0 million for the three months ended December 31, 2011. The increase in the cost of license and implementation revenues was primarily the result of increases in personnel costs due primarily to increased headcount.

SaaS and Maintenance

Cost of SaaS and maintenance revenues increased $2.0 million, or 81%, to $4.5 million during the three months ended December 31, 2012 from $2.5 million for the three months ended December 31, 2011. The increase in the cost of SaaS and maintenance revenues was primarily the result of a $1.6 million increase in personnel costs due primarily to increased headcount, including personnel from LeapFrogRx. The increase in personnel costs included $0.2 million of LeapFrogRx compensation charges.

Operating Expenses

 

     Three Months Ended
December 31,
              
     2011      2012      Change  
     Amount      Amount      ($)     (%)  
     (in thousands, except percentages)  

Operating expenses:

          

Research and development

   $ 4,173       $ 4,119       $ (54     (1 )% 

Sales and marketing

     3,981         5,336         1,355        34   

General and administrative

     2,393         3,877         1,484        62   
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 10,547       $ 13,332       $ 2,785        26   
  

 

 

    

 

 

    

 

 

   

 

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Research and Development

Research and development expenses during the three months ended December 31, 2012 were consistent with research and development expenses for the three months ended December 31, 2011. We believe that continued investment in our technology is important for our future growth, and as a result, we expect research and development expenses to increase in absolute dollars.

Sales and Marketing

Sales and marketing expenses increased by $1.4 million, or 34%, to $5.3 million during the three months ended December 31, 2012 as compared to $4.0 million for the three months ended December 31, 2011. The increase was primarily the result of a $1.1 million increase in personnel costs due primarily to increased headcount, including personnel from LeapFrogRx. We expect sales and marketing expenses to continue to increase in absolute dollars as we continue to expand our direct sales teams and increase our marketing activities.

General and Administrative

General and administrative expenses increased $1.5 million, or 62%, to $3.9 million during the three months ended December 31, 2012 as compared to $2.4 million for the three months ended December 31, 2011. This increase was primarily due to a $0.7 million increase in personnel costs due to increased headcount, including personnel from LeapFrogRx, and a $0.4 million increase in third-party contractor expense, primarily audit fees. We expect to incur higher general and administrative expenses in absolute dollars as a result of both our growth and transition to a public company, including higher legal, insurance and accounting expenses, and the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act and related regulations.

Interest and Other Expense, Net

 

     Three Months Ended
December  31,
              
     2011      2012      Change  
     Amount      Amount      ($)     (%)  
     (in thousands, except percentages)  

Interest expense, net

   $ 184       $ 126       $ (58     (32 )% 

Other expense, net

     406         52         (354     (87

Interest expense, net primarily relates to financing costs related to our term loan and capital leases.

Other expense, net decreased primarily due to a reduction of $0.3 million in changes in the fair value of a convertible preferred stock warrant during the three months ended December 31, 2012 as compared to the three months ended December 31, 2011.

Provision for Income Taxes

 

     Three Months Ended
December  31,
              
     2011      2012      Change  
     Amount      Amount      ($)     (%)  
     (in thousands, except percentages)  

Provision for income taxes

   $ 71       $ 61       $ (10     (14 )% 

 

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Provision for income taxes is primarily related to the state minimum tax and foreign tax on our profitable foreign operations. The change in income tax provision is primarily due to the change in income related to our foreign operations.

Comparison of the Fiscal Years Ended September 30, 2011 and 2012

Revenues

 

     Years Ended September 30,               
     2011     2012     Change  
     Amount      % of Total
Revenues
    Amount      % of Total
Revenues
    ($)      (%)  
     (in thousands, except percentages)  

Revenues:

               

License and implementation

   $ 41,499         64   $ 49,756         59   $ 8,257         20

SaaS and maintenance

     23,672         36        34,502         41        10,830         46   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenues

   $ 65,171         100   $ 84,258         100   $ 19,087         29   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

License and Implementation

License and implementation revenues increased $8.3 million, or 20%, to $49.8 million for the fiscal year ended September 30, 2012 from $41.5 million for the fiscal year ended September 30, 2011. Our revenues from existing customers were $41.9 million for the fiscal year ended September 30, 2012 and $34.1 million for the fiscal year ended September 30, 2011. The increase was due to an increased volume of activity.

SaaS and Maintenance

SaaS and maintenance revenues increased $10.8 million, or 46%, to $34.5 million for the fiscal year ended September 30, 2012 from $23.7 million for the fiscal year ended September 30, 2011. The increase in SaaS and maintenance revenues was primarily driven by an increase of $8.2 million in SaaS revenues, of which $5.9 million was due to the acquisition of LeapFrogRx and $2.3 million was due to sales to new customers. Our maintenance and support and application support revenues increased $2.5 million primarily due to an increase in the number of service contracts.

Cost of Revenues

 

     Years Ended September 30,               
     2011     2012     Change  
     Amount      % of
Revenues
    Amount      % of
Revenues
    ($)      (%)  
     (in thousands, except percentages)  

Cost of revenues:

               

License and implementation

   $ 18,092         44   $ 22,483         45   $ 4,391         24

SaaS and maintenance

     8,828         37        18,053         52        9,225         104   
  

 

 

      

 

 

      

 

 

    

Total cost of revenues

   $ 26,920         41      $ 40,536         48      $ 13,616         51   
  

 

 

      

 

 

      

 

 

    

Gross profit:

               

License and implementation

   $ 23,407         56   $ 27,273         55   $ 3,866         17

SaaS and maintenance

     14,844         63        16,449         48        1,605         11   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 38,251         59      $ 43,722         52      $ 5,471         14   
  

 

 

      

 

 

      

 

 

    

 

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License and Implementation

Cost of license and implementation revenues increased $4.4 million, or 24%, to $22.5 million during the fiscal year ended September 30, 2012 from $18.1 million for the fiscal year ended September 30, 2011. The increase in the cost of license and implementation revenues was primarily the result of a $2.1 million increase in personnel costs due primarily to increased headcount and a $2.5 million increase in third-party contractors, partially offset by a reduction in royalty fees paid to third parties.

SaaS and Maintenance

Cost of SaaS and maintenance revenues increased $9.2 million, or 104%, to $18.1 million during the fiscal year ended September 30, 2012 from $8.8 million for the fiscal year ended September 30, 2011. The increase in the cost of SaaS and maintenance revenues was primarily the result of a $8.1 million increase in personnel costs due primarily to increased headcount, including personnel from LeapFrogRx and a $0.7 million increase in third-party contractors. The increase in personnel costs includes $2.9 million of LeapFrogRx compensation charges and a $0.5 million increase in stock-based compensation expense.

Operating Expenses

 

     Years Ended
September 30,
               
     2011      2012      Change  
     Amount      Amount      ($)      (%)  
     (in thousands, except percentages)  

Operating expenses:

           

Research and development

   $ 13,809       $ 17,695       $ 3,886         28

Sales and marketing

     13,935         19,640         5,705         41   

General and administrative

     7,860         10,584         2,724         35   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 35,604       $ 47,919       $ 12,315         35   
  

 

 

    

 

 

    

 

 

    

Research and Development

Research and development expenses increased by $3.9 million, or 28%, to $17.7 million during the fiscal year ended September 30, 2012 as compared to $13.8 million for the fiscal year ended September 30, 2011. The increase was primarily the result of a $3.5 million increase in personnel costs due primarily to increased headcount and a $0.4 million increase in third-party contractors. The increase in personnel costs included $0.1 million of LeapFrogRx compensation charges.

Sales and Marketing

Sales and marketing expenses increased by $5.7 million, or 41%, to $19.6 million during the fiscal year ended September 30, 2012 as compared to $13.9 million for the fiscal year ended September 30, 2011. The increase was primarily the result of a $5.1 million increase in personnel costs due primarily to increased headcount, including personnel from LeapFrogRx, a $0.3 million increase in expenses related to direct marketing events and a $0.3 million increase in travel-related expenses. The increase in personnel costs includes $1.1 million of LeapFrogRx compensation charges and a $1.0 million increase in stock-based compensation expense.

General and Administrative

General and administrative expenses increased $2.7 million, or 35%, to $10.6 million during the fiscal year ended September 30, 2012 as compared to $7.9 million for the fiscal year ended September 30, 2011. This increase was primarily due to an increase in personnel costs due to increased

 

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headcount, including personnel from LeapFrogRx. The increase in personnel costs includes $0.7 million of LeapFrogRx compensation charges.

Interest and Other Expense, Net

 

     Years Ended September 30,                
     2011      2012      Change  
     Amount      Amount      ($)      (%)  
     (in thousands, except percentages)  

Interest expense, net

   $ 677       $ 655       $ (22)         (3)

Other expense, net

     316         540         224         71   

Interest expense, net primarily relates to financing costs related to our term loan and capital leases.

Other expense, net increased primarily due to changes in fair value of convertible preferred stock warrant of $0.3 million, during the fiscal year ended September 30, 2012 as compared to the fiscal year ended September 30, 2011.

Provision for Income Taxes

 

     Years Ended
September 30,
        
     2011      2012      Change  
     Amount      Amount      ($)      (%)  
     (in thousands, except
percentages)
 

Provision for income taxes

   $   172       $   301       $ 129         75

Provision for income taxes increased $0.1 million to $0.3 million for the fiscal year ended September 30, 2012 as compared to $0.2 million for the fiscal year ended September 30, 2011. This change was primarily the result of an increase in the income tax provision in foreign jurisdictions due to an increase in income from our foreign operations.

For the fiscal year ended September 30, 2012, the tax expense computed using the statutory federal tax rate would have been a benefit of $1.8 million as compared to the income tax provision of $0.3 million. The difference was primarily due to the valuation allowance, partially offset by research and development tax credits and state taxes net of federal benefit.

For the fiscal year ended September 30, 2011, the tax expense computed using the statutory federal tax rate would have been an expense of $0.6 million as compared to the income tax provision of $0.2 million. The difference was primarily due to the valuation allowance and research and development tax credits, partially offset by permanent differences for expenses not deductible for tax purposes and a change in the state effective rate.

 

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Comparison of the Fiscal Years Ended September 30, 2010 and 2011

Revenues

 

     Years Ended September 30,        
     2010     2011     Change  
     Amount      % of
Total

Revenues
    Amount      % of
Total

Revenues
    ($)      (%)  
     (in thousands, except percentages)  

Revenues:

               

License and implementation

   $ 31,759         63   $ 41,499         64   $ 9,740         31

SaaS and maintenance

     18,682         37        23,672         36        4,990         27   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenues

   $ 50,441         100   $ 65,171         100   $ 14,730         29
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

License and Implementation

License and implementation revenues increased $9.7 million, or 31%, to $41.5 million for the fiscal year ended September 30, 2011 from $31.8 million for the fiscal year ended September 30, 2010. Our revenues from existing customers were $34.1 million for the fiscal year ended September 30, 2011 and $18.3 million for the fiscal year ended September 30, 2010. The increase was due to an increased volume of activity.

SaaS and Maintenance

SaaS and maintenance revenues increased $5.0 million, or 27%, to $23.7 million for the fiscal year ended September 30, 2011 from $18.7 million for the fiscal year ended September 30, 2010. The increase in SaaS and maintenance revenues was primarily driven by an increase of $3.4 million in maintenance and support and application support revenues due to an increase in the number of service contracts, an increase of $0.9 million in customer-reimbursed expenses due to an increase in the volume of sales activity and an increase of $0.8 million in SaaS revenues due to an increase in the volume of sales activity.

Cost of Revenues

 

     Years Ended September 30,        
     2010     2011     Change  
     Amount      Margin%     Amount      Margin%     ($)      (%)  
     (in thousands, except percentages)  

Cost of revenues:

               

License and implementation

   $ 12,087         38   $ 18,092         44   $ 6,005         50

SaaS and maintenance

     6,328         34        8,828         37        2,500         40   
  

 

 

      

 

 

      

 

 

    

Total cost of revenues

   $ 18,415         37   $ 26,920         41   $ 8,505         46
  

 

 

      

 

 

      

 

 

    

Gross profit:

               

License and implementation

   $ 19,672         62   $ 23,407         56   $ 3,735         19

SaaS and maintenance

     12,354         66        14,844         63        2,490         20   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 32,026         63   $ 38,251         59   $ 6,225         19
  

 

 

      

 

 

      

 

 

    

 

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License and Implementation

Cost of license and implementation revenues increased $6.0 million, or 50%, to $18.1 million during the fiscal year ended September 30, 2011 from $12.1 million for the fiscal year ended September 30, 2010. The increase in the cost of license and implementation revenues was primarily the result of a $3.2 million increase in personnel costs due primarily to increased headcount, a $1.7 million increase in third-party contractors, and a $0.9 million increase in royalty fees paid to third parties.

SaaS and Maintenance

Cost of SaaS and maintenance revenues increased $2.5 million, or 40%, to $8.8 million during the fiscal year ended September 30, 2011 from $6.3 million for the fiscal year ended September 30, 2010. The increase in the cost of SaaS and maintenance revenues was primarily the result of a $1.5 million increase in personnel costs due primarily to increased headcount and a $0.9 million increase in customer-reimbursed expenses.

Operating Expenses

 

     Years Ended
September 30,
        
     2010      2011      Change  
     Amount      Amount      ($)      (%)  
     (in thousands, except percentages)  

Operating expenses:

           

Research and development

   $ 12,702       $ 13,809       $ 1,107         9

Sales and marketing

     11,221         13,935         2,714         24   

General and administrative

     6,945         7,860         915         13   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 30,868       $ 35,604       $ 4,736         15
  

 

 

    

 

 

    

 

 

    

Research and Development

Research and development expenses increased by $1.1 million, or 9%, to $13.8 million during the fiscal year ended September 30, 2011 as compared to $12.7 million for the fiscal year ended September 30, 2010. The increase was primarily the result of a $1.5 million increase in personnel costs due primarily to increased headcount, partially offset by a $0.7 million reduction in third-party contractor expenses.

Sales and Marketing

Sales and marketing expenses increased by $2.7 million, or 24%, to $13.9 million during the fiscal year ended September 30, 2011 as compared to $11.2 million for the fiscal year ended September 30, 2010. The increase was primarily the result of a $2.6 million increase in personnel costs due primarily to increased headcount.

General and Administrative

General and administrative expenses increased $0.9 million, or 13%, to $7.9 million during the fiscal year ended September 30, 2011 as compared to $6.9 million for the fiscal year ended September 30, 2010. This increase was primarily the result of an increase in personnel costs due to increased headcount.

 

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Interest and Other Expense, Net

 

     Years Ended
September 30,
        
     2010      2011      Change  
     Amount      Amount      ($)      (%)  
     (in thousands, except percentages)  

Interest expense, net

   $ 353       $ 677       $ 324         92

Other expense, net

     20         316         296         1480   

Interest expense, net increased primarily due to higher borrowing levels during the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010.

Other expense, net increased primarily due to changes in the fair value of a convertible preferred stock warrant of $0.2 million during the fiscal year ended September 30, 2011 as compared to the fiscal year ended September 30, 2010.

Provision for Income Taxes

 

     Years Ended
September 30,
        
     2010      2011      Change  
     Amount      Amount      ($)      (%)  
     (in thousands, except
percentages)
 

Provision for income taxes

   $   161       $   172       $ 11           7

We recorded an income tax provision of $0.2 million for each of the fiscal years ended September 30, 2010 and 2011. The tax provision for both years was primarily related to state taxes and foreign tax on our income from foreign operations.

For the fiscal year ended September 30, 2011, the tax expense computed using the statutory federal tax rate would have been $0.6 million as compared to the income tax provision of $0.2 million. The difference was primarily due to the valuation allowance and research and development tax credits, partially offset by permanent differences for expenses not deductible for tax purposes and changes in the state effective rate.

For the fiscal year ended September 30, 2010, the tax expense computed using the statutory federal tax rate would have been an expense of $0.3 million as compared to the income tax provision of $0.2 million. The difference was primarily due to the valuation allowance and research and development tax credits, partially offset by permanent differences for expenses not deductible for tax purposes and a change in the state effective rate.

 

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Quarterly Results of Operations

The following tables set forth our unaudited quarterly consolidated statements of operations data and our unaudited quarterly consolidated statements of operations data as a percentage of total revenues for each of the nine quarters in the period ended December 31, 2012. The data below have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results to be expected for any future period.

 

    Three Months Ended  
    December 31,
2010
        March 31,    
2011
         June 30,     
2011
    September 30,
2011
    December 31,
2011
        March 31,    
2012
         June 30,     
2012
    September 30,
2012
    December 31,
2012
 
   

(in thousands)

 

Revenues:

                 

License and implementation

  $ 9,210      $ 10,629      $ 10,834      $ 10,826      $ 11,365      $ 11,659      $ 13,191      $ 13,541      $ 12,462   

SaaS and maintenance

    5,925        5,865        6,071        5,811        6,692        8,581        9,582        9,647        9,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    15,135        16,494        16,905        16,637        18,057        20,240        22,773        23,188        22,341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

                 

License and implementation(1)

    4,595        4,266        4,218        5,013        5,028        5,515        5,712        6,228        5,560   

SaaS and maintenance(1)

    1,799        2,153        2,213        2,663        2,496        5,168        5,616        4,773        4,523   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    6,394        6,419        6,431        7,676        7,524        10,683        11,328        11,001        10,083   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,741        10,075        10,474        8,961        10,533        9,557        11,445        12,187        12,258   

Operating expenses:

                 

Research and development(1)

    3,091        3,362        3,299        4,057        4,173        4,817        4,491        4,214        4,119   

Sales and marketing(1)

    2,967        3,452        3,364        4,152        3,981        5,705        5,356        4,598        5,336   

General and administrative(1)

    1,667        1,983        1,914        2,296        2,393        2,773        2,618        2,800        3,877   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,725        8,797        8,577        10,505        10,547        13,295        12,465        11,612        13,332   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    1,016        1,278        1,897        (1,544     (14     (3,738     (1,020     575        (1,074

Interest expense, net

    150        167        173        187        184        170        160        141        126   

Other expense, net

    20        44        5        247        406        179        (36     (9     52   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    846        1,067        1,719        (1,978     (604     (4,087     (1,144     443        (1,252

Provision for income taxes

    31        9        83        49        71        68        92        70        61   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 815      $ 1,058      $ 1,636      $ (2,027   $ (675   $ (4,155   $ (1,236   $ 373      $ (1,313
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock based compensation expense as follows:

  

Cost of revenues

                 

License and implementation

  $ 25      $ 24      $ 23      $ 20      $ 77      $ 69      $ 61      $ 91      $ 40   

SaaS and maintenance

    7        7        8        7        24        368        77        92        74   

Research and development

    41        34        34        18        97        73        56        71        54   

Sales and marketing

    27        31        32        18        245</