10-Q 1 modn2019q310q.htm 10-Q Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35840
 
Model N, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
77-0528806
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
777 Mariners Island Boulevard, Suite 300
San Mateo, California
 
94404
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (650) 610-4600
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, par value $0.00015 per share
 
MODN
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
Accelerated filer
 
ý
Non-accelerated filer
 
☐  
 
Smaller reporting company
 
Emerging growth company
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐  No  ☒

As of July 26, 2019, the registrant had 32,711,571 shares of common stock outstanding.

1



 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

1


PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)

MODEL N, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(Unaudited)

 
 
As of
June 30, 2019
 
As of
September 30, 2018
Assets
 
 

 
 

Current assets
 
 

 
 

Cash and cash equivalents
 
$
58,529

 
$
56,704

Accounts receivable, net of allowance for doubtful accounts of $64 as of June 30, 2019 and $172 as of September 30, 2018
 
25,505

 
28,273

Prepaid expenses
 
2,174

 
3,631

Other current assets
 
2,826

 
455

Total current assets
 
89,034

 
89,063

Property and equipment, net
 
1,232

 
2,146

Goodwill
 
39,283

 
39,283

Intangible assets, net
 
30,496

 
34,597

Other assets
 
4,418

 
1,064

Total assets
 
$
164,463

 
$
166,153

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities
 
 
 
 
Accounts payable
 
$
2,688

 
$
1,664

Accrued employee compensation
 
13,556

 
14,211

Accrued liabilities
 
4,371

 
3,182

Deferred revenue, current portion
 
41,557

 
52,176

Long term debt, current portion
 
4,828

 
1,375

Total current liabilities
 
67,000

 
72,608

Long term debt
 
44,277

 
52,329

Other long-term liabilities
 
1,070

 
1,182

Total liabilities
 
112,347

 
126,119

Commitments and contingencies
 


 


Stockholders’ equity
 
 
 
 
Common Stock, $0.00015 par value; 200,000 shares authorized; 32,711 and 31,444 shares issued and outstanding at June 30, 2019 and September 30, 2018, respectively
 
5

 
5

Preferred Stock, $0.00015 par value; 5,000 shares authorized; no shares issued and outstanding
 

 

Additional paid-in capital
 
259,834

 
244,814

Accumulated other comprehensive loss
 
(969
)
 
(1,285
)
Accumulated deficit
 
(206,754
)
 
(203,500
)
Total stockholders’ equity
 
52,116

 
40,034

Total liabilities and stockholders’ equity
 
$
164,463

 
$
166,153

 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2


MODEL N, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 

 
 

 
 

 
 
Subscription
$
26,638

 
$
24,944

 
$
77,780

 
$
72,795

Professional services
8,074

 
14,673

 
26,852

 
45,123

Total revenues
34,712

 
39,617

 
104,632

 
117,918

Cost of revenues
 
 
 
 
 
 
 
Subscription
8,658

 
9,564

 
26,248

 
28,619

Professional services
7,206

 
6,881

 
22,929

 
21,888

Total cost of revenues
15,864

 
16,445

 
49,177

 
50,507

Gross profit
18,848

 
23,172

 
55,455

 
67,411

Operating expenses
 
 
 
 
 
 
 
Research and development
7,060

 
7,746

 
21,887

 
24,861

Sales and marketing
7,164

 
9,338

 
23,814

 
26,845

General and administrative
6,713

 
17,044

 
19,702

 
33,099

Total operating expenses
20,937

 
34,128

 
65,403

 
84,805

Loss from operations
(2,089
)
 
(10,956
)
 
(9,948
)
 
(17,394
)
Interest expense, net
689

 
4,478

 
2,313

 
7,350

Other expenses, net
(4
)
 
(344
)
 
408

 
(306
)
Loss before income taxes
(2,774
)
 
(15,090
)
 
(12,669
)
 
(24,438
)
Provision for income taxes
230

 
345

 
969

 
150

Net loss
$
(3,004
)
 
$
(15,435
)
 
$
(13,638
)
 
$
(24,588
)
Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic and diluted
$
(0.09
)
 
$
(0.50
)
 
$
(0.43
)
 
$
(0.82
)
Weighted average number of shares used in computing net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic and diluted
32,596

 
30,749

 
32,028

 
30,042

 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


MODEL N, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(3,004
)
 
$
(15,435
)
 
$
(13,638
)
 
$
(24,588
)
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Unrealized gain on cash flow hedges
28

 

 
77

 

Foreign currency translation gain (loss)
(3
)
 
(391
)
 
239

 
(372
)
Total comprehensive loss
$
(2,979
)
 
$
(15,826
)
 
$
(13,322
)
 
$
(24,960
)
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4


MODEL N, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

 
Nine Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net loss
$
(13,638
)
 
$
(24,588
)
Adjustments to reconcile net loss to net cash used in operating activities
 
 
 
Depreciation and amortization
5,191

 
6,410

Stock-based compensation
12,822

 
19,312

Amortization of debt discount and issuance cost
401

 
686

Deferred income taxes
(170
)
 
(581
)
Amortization of capitalized contract acquisition costs
1,238

 

Other non-cash charges
(108
)
 
(30
)
Loss on debt extinguishment

 
3,142

Changes in assets and liabilities
 
 
 
Accounts receivable
2,295

 
(6,833
)
Prepaid expenses and other assets
(1,368
)
 
(102
)
Deferred cost of implementation services

 
488

Accounts payable
1,088

 
(1,752
)
Accrued employee compensation
(653
)
 
(2,541
)
Other accrued and long-term liabilities
443

 
(639
)
Deferred revenue
(2,740
)
 
6,386

Net cash provided by (used in) operating activities
4,801

 
(642
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(227
)
 
(165
)
Net cash used in investing activities
(227
)
 
(165
)
Cash flows from financing activities
 
 
 
Proceeds from exercise of stock options and issuance of common stock relating to employee stock purchase plan
2,198

 
3,008

Proceeds from term loan

 
49,588

Debt issuance costs

 
(145
)
Principal payments on term loan
(5,000
)
 
(50,000
)
Early payment penalty

 
(1,500
)
Net cash provided by (used in) financing activities
(2,802
)
 
951

Effect of exchange rate changes on cash and cash equivalents
53

 
(57
)
Net decrease in cash and cash equivalents
1,825

 
87

Cash and cash equivalents
 
 
 
Beginning of period
56,704

 
57,558

End of period
$
58,529

 
$
57,645

 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.


5


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.
The Company and Significant Accounting Policies and Estimates
Model N, Inc. (“Model N,” “we,” “us,” “our,” and “the Company”) was incorporated in Delaware on December 14, 1999. We are a provider of cloud revenue management solutions for the life sciences and high tech markets. Our solutions enable our customers to maximize revenues and reduce revenue compliance risk by transforming their revenue life cycle from a series of tactical, disjointed operations into a strategic end-to-end process, which enables them to manage the strategy and execution of pricing, contracting, incentives and rebates. Our corporate headquarters are located in San Mateo, California, with additional offices in the United States, India and Switzerland.
Fiscal Year
Our fiscal year ends on September 30. References to fiscal year 2019, for example, refer to the fiscal year ending September 30, 2019.

Basis for Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated balance sheet as of June 30, 2019 has been derived from our audited financial statements, which are included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 (“the Annual Report”) on file with the SEC. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report.

In the opinion of management, the unaudited interim consolidated financial statements include all the normal recurring adjustments necessary to present fairly our condensed consolidated financial statements. The results of operations for the nine months ended June 30, 2019 are not necessarily indicative of the operating results for the full fiscal year 2019 or any future periods.

Our condensed consolidated financial statements include the accounts of Model N and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation.

Change in Presentation
Previously, we presented revenue and cost of revenue on two lines: “SaaS and maintenance” and “License and implementation.” Historically, our growth was driven by the sale of on-premise solutions. Over the last few years, we shifted our focus to selling cloud-based software. As a result of our business model transition from an on-premise to a software-as-a-service model, we updated the presentation in the first quarter of fiscal year 2019 to present the revenue and cost of revenue line items within our condensed consolidated statements of operations with the break-out between two new lines called “Subscription” and “Professional services.” Revenues and cost of revenues in prior periods have been reclassified in this filing to conform to the new presentation. This change in presentation does not affect our previously-reported total revenues and total cost of revenues.

Subscription
Subscription revenues primarily include contractual arrangements with customers accessing our cloud-based solutions. Subscription revenues also include revenues associated with maintenance and support and managed support services. Maintenance and support revenues include post-contract customer support and the right to unspecified software updates and enhancements on a when and if available basis to customers using on-premise solutions. Managed support services revenues include supporting, managing and administering our software solutions and providing additional end user support. Term-based licenses for current products with the right to use unspecified future versions of the software and maintenance and support during the coverage period are also included in subscription revenues.


6



Professional services
Professional services revenues primarily include fees generated from implementation, cloud configuration, on-site support and other consulting services. Also included in professional services revenues are revenues related to training and customer-reimbursed expenses, as well as services related to software licenses for our on-premise solutions.

Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include revenue recognition, legal contingencies, income taxes, stock-based compensation and valuation of goodwill and intangibles. These estimates and assumptions are based on management’s best estimates and judgment. Management regularly evaluates its estimates and assumptions using historical experience and other factors. However, actual results could differ significantly from these estimates.

Significant Accounting Policies
There have been no changes in the significant accounting policies from those that were disclosed in the Annual Report, except for changes associated with revenue recognition resulting from the adoption of Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers” (ASC 606) and the addition of a hedging policy as described below:

Revenue Recognition
We derive our revenues primarily from subscription revenues and professional services revenues and apply the following framework to recognize revenue:
 
Identification of the contract, or contracts, with a customer,
Identification of the performance obligations in the contract,
Determination of the transaction price,
Allocation of the transaction price to the performance obligations in the contract, and
Recognition of revenue when, or as, the Company satisfies a performance obligation.

We enter into contracts with customers that can include various combinations of services which are generally distinct and accounted for as separate performance obligations. As a result, our contracts may contain multiple performance obligations. We determine whether the services are distinct based on whether the customer can benefit from the service on its own or together with other resources that are readily available and whether our commitment to transfer the product or service to the customer is separately identifiable from other obligations in the contract. We generally consider our cloud-based subscription offerings, maintenance and support, managed service support, professional services and training to be distinct performance obligations. Term-based licenses generally have two performance obligations: software licenses and software maintenance.

The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services and products to the customer. Variable consideration (if any) is estimated and included in the transaction price if, in our judgment, it is probable that there will not be a significant future reversal of cumulative revenue under the contract. We typically do not offer contractual rights of return or concessions.

For contracts that contain multiple performance obligations, the transaction price is allocated to each performance obligation based on its relative standalone selling price (“SSP”). SSP is estimated for each distinct performance obligation and judgment may be involved in the determination. We determine SSP using information that may include market conditions and other observable inputs. We evaluate SSP for our performance obligations on a quarterly basis.

Revenue is recognized when control of these services is transferred to our customers in an amount that reflects the consideration to which we expect to be entitled in exchange for these services. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined that our contracts generally do not include a significant financing component.


7




Subscription revenue related to cloud-based solutions, maintenance and support and managed service and support revenues are generally recognized ratably over the contractual term of the arrangement beginning on the date that our service is made available to the customer. These arrangements, in general, are for committed one to three-year terms. For term-based license contracts, the transaction price allocated to the software element is recognized when it is made available to the customer. The transaction price allocated to the related support and updates is recognized ratably over the contract term. Term-based license arrangements may include termination rights that limit the term of the arrangement to a month, quarter or year.

Professional services revenues are generally recognized as the services are rendered for time and materials contracts or on a proportional performance basis for fixed price contracts. The majority of our professional services contracts are on a time and materials basis. Revenue from training and customer-reimbursed expenses is recognized as we deliver these services. Our implementation projects generally have a term ranging from a few months to twelve months and may be terminated by the customer at any time.

Capitalized Contract Acquisition Costs
We capitalize incremental costs incurred to acquire contracts with customers, primarily sales commissions, for which the associated revenue is expected to be recognized in future periods. We incur these costs in connection with both initial contracts and renewals. The costs in connection with initial contracts and renewals are deferred and amortized over an expected customer life of five years and over the renewal term, respectively, which corresponds to the period of benefit to the customer. We determined the period of benefit by considering our history of customer relationships, length of customer contracts, technological development and obsolescence and other factors. The current and non-current portion of capitalized contract acquisition costs are included in other current assets and other assets on our condensed consolidated balance sheets. Amortization expense is included in sales and marketing expenses in our condensed consolidated statements of operations.
Hedging
Cash Flow Hedging—Hedges of Forecasted Foreign Currency Operation Costs

Our customers typically pay in U.S. dollars; however, in foreign jurisdictions, our expenses are typically denominated in local currency. We may use foreign exchange forward contracts to hedge certain cash flow exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts generally range from one month to one year in duration.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the fair value of these cash flow hedges in accumulated other comprehensive income (loss) in our condensed consolidated balance sheets, until the forecasted transaction occurs, at which point, the related gain or loss on the cash flow hedge is reclassified to the financial statement line item to which the derivative relates. In the event the underlying forecasted transaction does not occur or it becomes probable that it will not occur, the gain or loss on the related cash flow hedge is also reclassified into earnings from accumulated other comprehensive income (loss). If we do not elect hedge accounting or the contract does not qualify for hedge accounting treatment, the changes in fair value from period to period are recognized immediately in the same financial statement line item to which the derivative relates.

Hedge Effectiveness
For foreign currency hedges designated as cash flow hedges, we elected to utilize the critical terms method to determine if the hedges are highly effective and thus, eligible for hedge accounting treatment. We evaluate the effectiveness of the foreign exchange contracts on a quarterly basis.

New Accounting Pronouncements

Recently Adopted Accounting Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard, ASU 2014-09, Revenue from Contracts with Customers (ASC 606), as amended, which superseded nearly all existing revenue recognition guidance. Under ASC 606, an entity is required to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for those goods or services. ASC 606 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.


8




On October 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of October 1, 2018 and recorded adjustments to decrease the accumulated deficit by approximately $10.4 million. Results for reporting periods beginning after October 1, 2018 are presented under ASC 606. Prior period amounts are not adjusted and continue to be reported under accounting standards in effect for those periods.

ASC 606 primarily impacted our revenue recognition for on-premise solutions, which contained deliverables within the scope of ASC 985-605, Software-Revenue Recognition, by eliminating the requirement to have VSOE for undelivered elements, which accelerated the timing of revenue recognition. In addition, ASC 606 impacted our expenses as the guidance required incremental contract acquisition costs (such as sales commissions) for customer contracts to be capitalized and amortized on a systematic basis that is consistent with the pattern of transfer to the customer of the goods or services to which the capitalized cost relates rather than expense them immediately as under the previous standard.

The following table summarizes the cumulative effect of the changes from the adoption of ASC 606 on our condensed consolidated balance sheets as of October 1, 2018:
(in thousands)
 
Balance at
September 30, 2018
 
Cumulative effect
adjustments due to the
adoption of ASC 606
 
Balance at
October 1, 2018
Assets
 
 
 
 
 
 
Accounts receivables, net
 
$
28,273

 
$
(579
)
 
$
27,694

Other current assets
 
455

 
1,668

 
2,123

Other assets
 
1,064

 
2,142

 
3,206

Liabilities
 
 
 
 
 
 
Accrued liabilities
 
3,182

 
600

 
3,782

Deferred revenue, current portion
 
52,176

 
(7,753
)
 
44,423

Stockholders’ Equity
 
 
 
 
 
 
Accumulated deficit
 
(203,500
)
 
10,384

 
(193,116
)

The cumulative effect adjustment on accounts receivable, net, in our condensed consolidated balance sheets is related to unbilled accounts receivable for which revenue is recognized in advance of billings, but we do not have the unconditional right to the consideration. Under ASC 606, these amounts are reclassified from accounts receivable, net, to other current assets. The cumulative effect adjustment on other current assets and other assets line items in our condensed consolidated balance sheets is caused by the requirement in ASC 606 to capitalize incremental costs incurred to acquire contracts with customers. In prior periods, these costs were expensed as incurred under ASC 340. The cumulative effect adjustment included in accrued liabilities in our condensed consolidated balance sheets is related to reclassifying refundable amounts associated with customer contracts from deferred revenue under ASC 606. The cumulative effect adjustment on deferred revenue is primarily driven by ASC 606 which accelerated the timing of revenue recognition by eliminating the requirement to have VSOE for undelivered elements.

The following table summarizes the effects of adopting ASC 606 on our condensed consolidated balance sheets as of June 30, 2019:
(in thousands)
 
As Reported
 
Adjustments
 
As if presented under ASC 605
Assets
 
 
 
 
 
 
Accounts receivables, net
 
$
25,505

 
$
682

 
$
26,187

Other current assets
 
2,826

 
(2,386
)
 
440

Other assets
 
4,418

 
(3,328
)
 
1,090

Liabilities
 
 
 
 
 
 
Accrued liabilities
 
4,371

 
(294
)
 
4,077

Deferred revenue, current portion
 
41,557

 
3,438

 
44,995

Stockholders’ Equity
 
 
 
 
 
 
Accumulated deficit
 
(206,754
)
 
(8,176
)
 
(214,930
)
 
 
 
 
 
 
 


9





The following tables summarize the effects of adopting ASC 606 on our condensed consolidated statements of operations for the three and nine months ended June 30, 2019:
 
 
Three Months Ended June 30, 2019
(in thousands, except per share amounts)
 
As Reported
 
Adjustments
 
As if presented under ASC 605
Revenues
 
 
 
 
 
 
   Subscription
 
$
26,638

 
$
(1,158
)
 
$
25,480

   Professional services
 
8,074

 

 
8,074

Total revenues
 
34,712

 
(1,158
)
 
33,554

Cost of professional services revenues
 
7,206

 
15

 
7,221

Sales and marketing
 
7,164

 
909

 
8,073

Loss from operations
 
(2,089
)
 
(2,082
)
 
(4,171
)
Net loss
 
(3,004
)
 
(2,082
)
 
(5,086
)
Net loss per share - basic and diluted
 
(0.09
)
 
(0.07
)
 
(0.16
)

 
 
Nine Months Ended June 30, 2019
(in thousands, except per share amounts)
 
As Reported
 
Adjustments
 
As if presented under ASC 605
Revenues
 
 
 
 
 
 
   Subscription
 
$
77,780

 
$
(166
)
 
$
77,614

   Professional services
 
26,852

 
4,174

 
31,026

Total revenues
 
104,632

 
4,008

 
108,640

Cost of professional services revenues
 
22,929

 
78

 
23,007

Sales and marketing
 
23,814

 
1,723

 
25,537

Loss from operations
 
(9,948
)
 
2,207

 
(7,741
)
Net loss
 
(13,638
)
 
2,207

 
(11,431
)
Net loss per share - basic and diluted
 
(0.43
)
 
0.07

 
(0.36
)

The impact to our condensed consolidated statements of cash flows for the nine months ended June 30, 2019 as a result of adopting ASC 606 was not significant.

On August 28, 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging, requiring expanded hedge accounting for both non-financial and financial risk components and refining the measurement of hedge results to better reflect an entity’s hedging strategies. The updated standard also amends the presentation and disclosure requirements and changes how entities assess hedge effectiveness. The new standard must be adopted using a modified retrospective transition with a cumulative effect adjustment recorded to opening retained earnings as of the initial adoption date. We early adopted this guidance beginning in the first quarter of fiscal year 2019 and it did not have a material impact on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments. The amendments provide guidance on how companies present and classify certain cash receipts and cash payments in the statement of cash flows. We adopted this guidance beginning in the first quarter of fiscal year 2019 on a retrospective basis and it did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a business. The amendments in this guidance change the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. We adopted this guidance beginning in the first quarter of fiscal year 2019 on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (Topic 230): Clarifying the classification and presentation of restricted cash in the statement of cash flows. The standard requires that restricted cash and restricted cash equivalents are included in the cash and cash equivalents balance in the statement of cash flows. Further, reconciliation between the balance

10




sheet and statement of cash flows is required when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, transfers between these balances should no longer be presented as a cash flow activity. We adopted this guidance beginning in the first quarter of fiscal year 2019 and it did not have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Providing clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. We adopted this guidance beginning in the first quarter of fiscal year 2019 and it did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Guidance on the recognition and measurement of leases. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current accounting for lessors and does not make significant changes to the recognition, measurement and presentation of expenses and cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will be effective for us beginning in the first quarter of fiscal year 2020 and early adoption is permitted. We expect to adopt this guidance on a modified retrospective basis in the first quarter of fiscal year 2020. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350):  Simplifying the test for goodwill impairment. This new accounting standard update simplifies the measurement of goodwill by eliminating the step two impairment test. Step two measures a goodwill impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. The new guidance requires a comparison of our fair value of a reporting unit with the carrying amount and we are required to recognize an impairment charge for the amount by which the carrying amount exceeds the fair value. Additionally, we should consider the income tax effects from any tax deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, though early adoption is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements.


2.
Revenues from Contracts with Customers

Revenue Recognition

We derive our revenues primarily from subscription revenues and professional services revenues.

Disaggregation of Revenues

See Note 12, Geographic Information, for information on revenue by geography.

Customer Contract Balances

The following table reflects contract balances with customers (in thousands):
 
As of October 1, 2018(1)
 
As of June 30, 2019
 
Change
Accounts receivable, net
$
27,694

 
$
25,505

 
$
(2,189
)
Contract asset
579

 
682

 
103

Deferred revenue
44,854

 
42,105

 
(2,749
)
Capitalized contract acquisition costs
3,324

 
5,047

 
1,723

(1) Includes cumulative effect adjustments made to these accounts on October 1, 2018 due to the adoption of ASC 606.


11




Accounts Receivable
Accounts receivable represents our right to consideration that is unconditional, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on management’s assessment of the collectability of accounts.

Contract Asset
Contract asset represents revenue that has been recognized for satisfied performance obligations for which we do not have an unconditional right to consideration.

Deferred Revenue
Deferred revenue, which is a contract liability, consists of amounts that have been invoiced and for which we have the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred.

The non-current portion of deferred revenue is included in other long-term liabilities in our condensed consolidated balance sheets. During the three and nine months ended June 30, 2019, we recognized revenue of $17.2 million and $41.2 million, respectively, that was included in the deferred revenue balances at the beginning of the period.

Capitalized Contract Acquisition Costs
In connection with the adoption of ASC 606, we began to capitalize incremental costs incurred to acquire contracts with customers. See Note 1 for additional information. As of June 30, 2019, the current and non-current portions of capitalized contract acquisition costs were $1.7 million and $3.3 million, respectively. We amortized $0.5 million and $1.2 million of contract acquisition costs during the three and nine months ended June 30, 2019, respectively.
    
For the three and nine months ended June 30, 2019, there was no impairment related to capitalized contract acquisition costs.

Customer Deposits

Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the arrangement. These amounts are included in accrued liabilities on our condensed consolidated balance sheets. The customer deposits amount was immaterial as of June 30, 2019 and as of October 1, 2018.

Standard payment terms to customers generally range from thirty to ninety days; however, payment terms and conditions in our customer contracts may vary. In some cases, customers prepay for subscription and services in advance of the delivery; in other cases, payment is due as services are performed or in arrears following the delivery.

Performance Obligations
    
Remaining performance obligations represent non-cancelable contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of June 30, 2019, the aggregate amount of the transaction price allocated to performance obligations either unsatisfied or partially unsatisfied was $103.1 million, 56% of which we expect to recognize as revenue over the next 12 months and the remainder thereafter.



12




3.
Intangible Assets

Intangible assets consisted of the following (in thousands):
 
Estimated
 
As of June 30, 2019
 
Useful Life
(in Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Intangible Assets:
 
 
 

 
 

 
 

Customer relationships
3-10
 
$
36,599

 
$
(10,311
)
 
$
26,288

Developed technology
5-6
 
12,083

 
(7,875
)
 
4,208

Total
 
 
$
48,682

 
$
(18,186
)
 
$
30,496

 
 
 
 
 
 
 
 

 
Estimated
 
As of September 30, 2018
 
Useful Life
(in Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Intangible Assets:
 
 
 

 
 

 
 

Customer relationships
3-10
 
$
36,599

 
$
(7,642
)
 
$
28,957

Developed technology
5-6
 
12,083

 
(6,448
)
 
5,635

Backlog
5
 
280

 
(275
)
 
5

Total
 
 
$
48,962

 
$
(14,365
)
 
$
34,597

 
 
 
 
 
 
 
 
We recorded amortization expense related to the acquired intangible assets of $1.4 million for both of the three months ended June 30, 2019 and 2018, and $4.1 million and $4.2 million for the nine months ended June 30, 2019 and 2018, respectively.

Estimated future amortization expense for the intangible assets as of June 30, 2019 is as follows (in thousands):
Fiscal Year
 
 
2019 (remaining 3 months)
 
$
1,365

2020
 
4,751

2021
 
4,688

2022
 
4,686

2023 and thereafter
 
15,006

Total future amortization
 
$
30,496

 
 
 

4.
Debt
Term Loan
In connection with the Revitas acquisition, on January 5, 2017, we entered into a financing agreement (the “Financing Agreement”) with Crystal Financial SPV, LLC and TC Lending, LLC for a $50.0 million term loan. In May 2018, this term loan was extinguished and repaid in full in part from the proceeds of the refinancing with Wells Fargo Bank, N. A. (“Wells Fargo”), as discussed below.
Term Loan – Wells Fargo
On May 4, 2018, we entered into a credit agreement (the “Credit Agreement”) with Wells Fargo, as administrative agent, and the lenders party thereto, for a $50.0 million term loan, as well as a revolving line of credit for an amount up to $5.0 million. In part from the proceeds of this financing, we repaid in full the existing term loan under the Financing Agreement discussed above. The term loan will mature on May 4, 2023. As of June 30, 2019, we had not drawn down from the line of credit and had $5.0 million available.

At our election, the term loan under the Credit Agreement and the revolving line of credit will bear interest based upon our leverage ratio as defined in the Credit Agreement at either (i) a base rate plus applicable margin ranging from 2.0% to 3.5%

13




or (ii) LIBOR plus applicable margin ranging from 3.0% to 4.5%. Interest is payable periodically, in arrears, at the end of each interest period we elect. For the quarter ended June 30, 2019, our interest rate was LIBOR rate plus 3.5%. In addition, we are required to pay monthly in arrears an unused line fee ranging from 0.25% to 0.5% of the unused portion of the revolving line of credit based upon our leverage ratio.

We incurred approximately $0.7 million in transaction costs in connection with the Credit Agreement in fiscal year 2018. These costs were capitalized and included as part of our debt and are being amortized over the life of the debt. As a condition to entering into the Credit Agreement, we pledged substantially all of our assets in the United States.

We may voluntarily prepay the term loan, with any such prepayment applied against the remaining installments of principal of the term loan on a pro rata basis or direct order of maturity, subject to certain limitations. However, we are required to repay the term loan with proceeds from the sale of assets, the receipt of certain insurance proceeds, litigation proceeds or indemnity payments or the incurrence of debt (in each case subject to certain exceptions). We prepaid approximately $4.8 million of principal on January 2, 2019. We elected to apply the prepayment against the remaining principal installments in the direct order of maturity. On July 1, 2019, we made another prepayment of $5.0 million and such prepayment shall be applied against the remaining installments of principal on a pro rata basis. The remaining balance of the term loan is classified as long-term debt on our Condensed Consolidated Balance Sheets.

The Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting our ability and our subsidiaries to: incur additional indebtedness; incur liens; engage in mergers or other fundamental changes; consummate acquisitions; sell certain property or assets; change the nature of their business; prepay or amend certain indebtedness; pay cash dividends, other distributions or repurchase our equity interests or our subsidiaries; make investments; or engage in certain transactions with affiliates.

The Credit Agreement contains certain financial covenants, including maintaining consolidated liquidity (cash in the United States plus revolving credit line availability) of at least $15.0 million, minimum levels of maintenance and subscription fee revenue and, if liquidity is less than $30.0 million for 90 consecutive days, a leverage ratio of not greater than 3.50 to 1.00. The Credit Agreement also provides for customary events of default, including failure to pay amounts due or to comply with covenants, default on other indebtedness, or a change of control. As of June 30, 2019, we were in compliance with all covenant requirements.

Promissory Notes
Also in connection with the Revitas acquisition, we incurred $10.0 million in debt in the form of two $5.0 million promissory notes with the sellers, one of which matured and was paid on July 5, 2018 and the second promissory note will mature on January 5, 2020. The fair value of the promissory notes of $8.6 million was determined based on the discounted future cash flows at a 9.96% interest rate which represents an arm’s length interest rate. The remaining outstanding promissory note bears interest at the rate of 3.0% per annum and is subject to a right of set-off as partial security for the indemnification obligations of the target’s stockholders under the merger agreement. This remaining promissory note of $5.0 million is subordinate to the term loan with Wells Fargo and is classified as short-term debt on our Condensed Consolidated Balance Sheets.
 
The effective interest rate for the three months ended June 30, 2019 for the term loan with Wells Fargo was 7.12% and for the 36-month promissory note was 9.89%.

As of June 30, 2019, the term loan with Wells Fargo and the promissory note consisted of the following (in thousands):
Principal
$
49,750

Unamortized debt discount and issuance costs
(645
)
Net carrying amount
$
49,105



14




The future scheduled principal payments for the term loan with Wells Fargo and the promissory note as of June 30, 2019 were as follows (in thousands):
Fiscal Year
 
 

2019 (remaining 3 months)
 
$

2020
 
5,000

2021
 
2,938

2022
 
3,750

2023
 
38,062

Total
 
$
49,750



5.
Derivative Instruments and Hedging

In December 2018 and in May 2019 , we entered into foreign currency forward contracts to hedge a portion of our forecasted foreign currency-denominated expenses in the normal course of business. These contracts are designated as cash flows hedges. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign exchange rate movements. We do not use any of the derivative instruments for trading or speculative purposes. For the three and nine months ended June 30, 2019, the impact of the hedging activities to our condensed consolidated financial statements was immaterial. The fair value of our outstanding non-deliverable foreign currency forward contracts was immaterial as of June 30, 2019.

Notional Amounts of Derivative Contracts
Derivative transactions are measured in terms of the notional amount but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts are determined. As of June 30, 2019, the notional amounts of our outstanding foreign currency forward contracts designated as cash flow hedges was approximately $6.4 million.


6.
Fair Value of Financial Instruments

Our financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, debt and certain accrued liabilities. We regularly review our financial instruments portfolio to identify and evaluate such instruments that have indications of possible impairment. We estimate the fair value of our financial instruments when there is no readily available market data, which involves some level of management estimation and judgment and may not necessarily represent the amounts that could be realized in a current or future sale of these assets.

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value instruments defines the following three-level valuation hierarchy for disclosure:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Input other than quoted prices included in Level 1 that are observable, unadjusted quoted prices in markets that are not active or other inputs for similar assets and liabilities that are observable or can be corroborated by observable market data; and
Level 3—Unobservable inputs that are supported by little or no market activity, which requires us to develop our own models and involves some level of management estimation and judgment.

Our Level 1 assets consist of cash equivalents. These instruments are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.


15




The table below sets forth our cash equivalents as of June 30, 2019 and September 30, 2018 (in thousands) which are measured at fair value on a recurring basis by level within the fair value hierarchy. The assets are classified based on the lowest level of input that is significant to the fair value measurement.
 
Level 1
 
Level 2
 
Level 3
 
Total
As of June 30, 2019
 

 
 

 
 

 
 

Assets:
 

 
 

 
 

 
 

Cash equivalents
$
31,606

 
$

 
$

 
$
31,606

Total assets
$
31,606

 
$

 
$

 
$
31,606

 
 
 
 
 
 
 
 
As of September 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
43,741

 
$

 
$

 
$
43,741

Total assets
$
43,741

 
$

 
$

 
$
43,741

 
 
 
 
 
 
 
 

Our cash equivalents as of June 30, 2019 and September 30, 2018 consisted of money market funds with original maturity dates of three months or less from the date of their respective purchase. Cash equivalents are classified as Level 1. The fair value of our money market funds approximated amortized cost and, as such, there were no unrealized gains or losses on money market funds as of June 30, 2019 and September 30, 2018.

Our financial instruments not measured at fair value on a recurring basis include cash, accounts receivable, accounts payable and certain accrued liabilities. These financial instruments are reflected in the financial statements at cost and approximate their fair value due to their short-term nature.

As of June 30, 2019, the carrying value of the term loan with Wells Fargo approximated fair value since the term loan bears interest at rates that fluctuate with the changes in the base rate or the LIBOR rate as selected by us. The carrying value of the promissory note approximated its fair value as of June 30, 2019. We classified the term loan with Wells Fargo and the promissory note under level 2 of the fair value measurement hierarchy as these instruments are not actively traded. See Note 4 for additional information.


7.
Stock-based Compensation

As of June 30, 2019, we have approximately 4.0 million shares available for future stock awards under our equity plans and any additional releases resulting from an over-achievement relating to performance-based restricted stock units. There were no stock options granted during the three and nine months ended June 30, 2019 and 2018, respectively.

The following table summarizes the stock option activity and related information under all equity plans:
 
Number of
Shares
(thousands)
 
Weighted
Average
Exercised
Price
 
Weighted
Average
Remaining
Contract
Term
(in Years)
 
Aggregate
Intrinsic
Value
(in thousands)
Balance at September 30, 2018
227

 
$
7.64

 
2.94

 
$
1,861

Granted

 

 

 
 
Exercised
(86
)
 
6.59

 

 
 
Forfeited

 

 

 
 
Expired
(6
)
 
5.31

 

 
 
Balance at June 30, 2019
135

 
$
8.42

 
2.45

 
$
1,486

Options exercisable as of June 30, 2019
135

 
$
8.42

 
2.45

 
$
1,486

Options vested and expected to vest as of June 30, 2019
135

 
$
8.42

 
2.45

 
$
1,486

 
 
 
 
 
 
 
 


16




The following table summarizes our restricted stock unit (“RSU”) activity which includes performance-based RSUs under all equity plans (in thousands, except per share data):
 
Restricted 
Stock Units
Outstanding
 
Weighted
Average
Grant Date
Fair Value
Balance at September 30, 2018
2,313

 
$
15.78

Granted
1,575

 
15.60

Released
(1,062
)
 
15.33

Forfeited
(373
)
 
14.90

Balance at June 30, 2019
2,453

 
$
15.99

 
 
 
 

Stock-based compensation recorded in our condensed consolidated statements of operations is as follows (in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cost of revenues
 
 
 
 
 
 
 
Subscription
$
435

 
$
375

 
$
1,364

 
$
972

Professional services
503

 
324

 
1,543

 
1,000

Total stock-based compensation in cost of revenues
938

 
699

 
2,907

 
1,972

Operating expenses
 
 
 
 
 
 
 
Research and development
771

 
744

 
2,396

 
2,144

Sales and marketing
440

 
986

 
2,824

 
2,517

General and administrative
1,574

 
9,601

 
4,695

 
12,679

Total stock-based compensation in operating expenses
2,785

 
11,331

 
9,915

 
17,340

Total stock-based compensation
$
3,723

 
$
12,030

 
$
12,822

 
$
19,312

 
 
 
 
 
 
 
 


8.
Stockholders’ Equity

The following table presents the changes of the components of stockholders’ equity during the three months ended June 30, 2019 and 2018 (in thousands):
 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
Balance at March 31, 2019
32,481

 
$
5

 
$
255,931

 
$
(994
)
 
$
(203,750
)
 
$
51,192

  Issuance of common stock upon exercise of stock options
24

 

 
180

 

 

 
180

Issuance of common stock upon release of restricted stock units
206

 

 

 

 

 

  Stock-based compensation

 

 
3,723

 

 

 
3,723

  Other comprehensive income

 

 

 
25

 

 
25

  Net loss

 

 

 

 
(3,004
)
 
(3,004
)
Balance at June 30, 2019
32,711

 
$
5

 
$
259,834

 
$
(969
)
 
$
(206,754
)
 
$
52,116

 
 
 
 
 
 
 
 
 
 
 
 


17




 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
Balance at March 31, 2018
30,530

 
$
5

 
$
227,107

 
$
(483
)
 
$
(184,446
)
 
$
42,183

  Issuance of common stock upon exercise of stock options
26

 

 
234

 

 

 
234

  Issuance of common stock upon release of restricted stock units
694

 

 

 

 

 

  Stock-based compensation

 

 
12,031

 

 

 
12,031

  Other comprehensive loss

 

 

 
(391
)
 

 
(391
)
  Net loss

 

 

 

 
(15,435
)
 
(15,435
)
Balance at June 30, 2018
31,250


$
5


$
239,372


$
(874
)

$
(199,881
)

$
38,622

 
 
 
 
 
 
 
 
 
 
 
 

The following table presents the changes of the components of stockholders’ equity during the nine months ended June 30, 2019 and 2018 (in thousands):
 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
Balance at September 30, 2018
31,444

 
$
5

 
$
244,814

 
$
(1,285
)
 
$
(203,500
)
 
$
40,034

  Cumulative effect of a change in accounting principal

 

 

 

 
10,384

 
10,384

  Issuance of common stock upon exercise of stock options
86

 

 
567

 

 

 
567

  Issuance of common stock upon release of restricted stock units
1,062

 

 

 

 

 

Issuance of common stock upon ESPP purchase
119

 

 
1,631

 

 

 
1,631

  Stock-based compensation

 

 
12,822

 

 

 
12,822

  Other comprehensive income

 

 

 
316

 

 
316

  Net loss

 

 

 

 
(13,638
)
 
(13,638
)
Balance at June 30, 2019
32,711

 
$
5

 
$
259,834

 
$
(969
)
 
$
(206,754
)
 
$
52,116

 
 
 
 
 
 
 
 
 
 
 
 

 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
Balance at September 30, 2017
29,323

 
$
4

 
$
217,052

 
$
(502
)
 
$
(175,293
)
 
$
41,261

  Issuance of common stock upon exercise of stock options
177

 

 
1,524

 

 

 
1,524

  Issuance of common stock upon release of restricted stock units
1,621

 
1

 

 

 

 
1

Issuance of common stock upon ESPP purchase
129

 

 
1,483

 

 

 
1,483

  Stock-based compensation

 

 
19,313

 

 

 
19,313

  Other comprehensive income loss

 

 

 
(372
)
 

 
(372
)
  Net loss

 

 

 

 
(24,588
)
 
(24,588
)
Balance at June 30, 2018
31,250


$
5


$
239,372


$
(874
)

$
(199,881
)
 
$
38,622

 
 
 
 
 
 
 
 
 
 
 
 


9.
Income Taxes

On December 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Legislation”) was enacted in the United States (“U.S.”). The Tax Legislation significantly revised U.S. corporate income taxes by, among other things, lowering the corporate income tax rate to 21%, implementing a modified territorial tax system and imposing a one-time repatriation tax on

18




deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the “Toll Charge”) and limiting the deductibility of certain expenses, such as interest expense. As a fiscal-year taxpayer, certain provisions of the Tax Legislation impacted us in fiscal year 2018, including the change in the corporate income tax rate and the Toll Charge, while other provisions were effective starting at the beginning of fiscal year 2019.

Prior to the first quarter of fiscal year 2019, our provision for income taxes did not include provisions for foreign withholding taxes associated with the repatriation of undistributed earnings of certain foreign subsidiaries that we intend to reinvest indefinitely. The current Tax Legislation generally allows companies to make distributions of non-U.S. earnings to the U.S. without incurring additional federal income tax. As a result, we expect to repatriate future foreign earnings in certain foreign jurisdictions over time. We recorded a deferred tax liability for the additional non-U.S. taxes that are expected to be incurred related to the repatriation of these earnings. During the first quarter of fiscal year 2019, we repatriated $2.5 million of foreign subsidiary earnings to the U.S. (in the form of cash) and paid foreign withholding taxes of $0.5 million.

We recorded an income tax provision of $0.2 million and $0.3 million, representing effective income tax rates of 8.3% and 2.3% for the three months ended June 30, 2019 and 2018, respectively; and $1.0 million and $0.2 million, representing income tax rates of 7.6% and 0.6%, for the nine months ended June 30, 2019 and 2018, respectively. The income tax provisions for the three months ended June 30, 2019 and 2018 were primarily related to foreign taxes on our profitable foreign operations and state minimum taxes. The income tax provision recorded in the nine months ended June 30, 2019 was primarily related to the foreign withholding taxes on the dividend distribution and foreign taxes on our profitable foreign operations. The income tax provision for the nine months ended June 30, 2018 was primarily due to foreign taxes on our profitable foreign operations partially offset by a discrete tax benefit recorded as a result of reductions in deferred tax liabilities from the reduced corporate tax rate and valuation allowance release. This was in addition to a reversal of certain foreign unrecognized tax benefits.

We elected to record global intangible low-taxed income as a period cost. We realized no benefit for current period losses due to maintaining a full valuation allowance against the U.S. and foreign net deferred tax assets.


10.
Net Loss per Share

The following table sets forth the computation of our basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except per share data):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Numerator
 

 
 

 
 

 
 

Basic and diluted
 

 
 

 
 

 
 

Net loss attributable to common stockholders
$
(3,004
)
 
$
(15,435
)
 
$
(13,638
)
 
$
(24,588
)
Denominator
 
 
 
 
 
 
 
Basic and diluted
 
 
 
 
 
 
 
Weighted average shares used in computing net loss per share attributable to common stockholders
32,596

 
30,749

 
32,028

 
30,042

Net loss per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic and diluted
$
(0.09
)
 
$
(0.50
)
 
$
(0.43
)
 
$
(0.82
)
 
 
 
 
 
 
 
 
The following shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders as the effect would have been anti-dilutive (in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Stock options
82

 
138

 
96

 
175

Performance-based restricted stock units and restricted
   stock units
845

 
1,108

 
1,012

 
1,686




19




11.
Litigation and Contingencies

Legal Proceedings
We are not currently a party to any pending material legal proceedings. From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other factors.


12.
Geographic Information

We have one operating segment with one business activity — developing and monetizing revenue management solutions.

Revenues

We disaggregate our revenues by geographic regions based on the bill to location of our customers. Revenues from customers outside of the United States were 7% and 11% of total revenues for the three months ended June 30, 2019 and 2018, respectively, and 8% and 12% of total revenues for the nine months ended June 30, 2019 and 2018, respectively. However, no single jurisdiction outside of the United States represented 10% or more of our total revenues for the periods presented.

Long-Lived Assets

The following table sets forth our property and equipment, net, by geographic region (in thousands):
 
As of
June 30, 2019
 
As of
September 30, 2018
United States
$
998

 
$
1,809

India
234

 
337

Total property and equipment, net
$
1,232

 
$
2,146

 
 
 
 

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “anticipates,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are based only on our current expectations and projections and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below under “Part II, Item 1A. Risk Factors,” and elsewhere in this report. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

As used in this report, the terms “we,” “us,” “our,” and “the Company” mean Model N, Inc. and its subsidiaries unless the context indicates otherwise.

Overview

We are a leading provider of cloud revenue management solutions for life sciences and high tech companies. Driving mission-critical business processes such as pricing, quoting, contracting, regulatory compliance, rebates and incentives, our software helps companies know and grow their true top line and maximize every revenue moment at speed and scale. With deep industry expertise, Model N supports the complex business needs of the world’s leading brands in pharmaceutical, medical technology, semiconductor, and high-tech manufacturing across more than 120 countries, including Johnson & Johnson, AstraZeneca, Novartis, Microchip Technology and ON Semiconductor.

Model N Revenue Cloud transforms the revenue life cycle into a strategic, end-to-end process aligned across the enterprise. Our industry specific solution suites offer a range of solutions from individual applications to complete suites. Deployments may vary from specific divisions or territories to enterprise-wide implementations.

We derive revenues primarily from the sale of subscriptions to our cloud-based solutions, as well as subscriptions for maintenance and support and managed support services related to on-premise solutions. We price our solutions based on a number of factors, including revenues under management and number of users. Subscription revenues are recognized ratably over the coverage period. We also derive revenues from selling professional services related to past sales of perpetual licenses and implementation and professional services associated with our cloud-based solutions. The actual timing of revenue recognition may vary based on our customers’ implementation requirements and the availability of our services personnel.

We market and sell our solutions to customers in the life sciences and high tech industries. Historically, our growth was driven by the sale of on-premise solutions. Over the last few years, we shifted our focus to selling cloud-based software and in 2017, we started transitioning customers with on-premise software to cloud-based software.

For the three months ended June 30, 2019 and 2018 our total revenues were $34.7 million and $39.6 million, respectively, representing a year-over-year decrease of 12% primarily due to the adoption of ASC 606 and the reduction in professional services revenues as we moved towards cloud-based solutions. The decrease in total revenues was offset in part by an increase in our subscription revenues primarily caused by adding new customers and expanding our existing customer relationships.

Key Business Metric

In addition to the measures of financial performance presented in our condensed consolidated financial statements, we use adjusted EBITDA to establish budgets and operational goals and to evaluate and manage our business internally. We believe

21




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. See “Adjusted EBITDA” below.

Key Components of Results of Operations

Revenues

Subscription
Subscription revenues primarily include contractual arrangements with customers accessing our cloud-based solutions. These arrangements, on average, are for committed three-year terms. Included in subscription revenues are revenues associated with maintenance and support and managed support services. Maintenance and support revenues include post-contract customer support and the right to unspecified software updates and enhancements on a when and if available basis from customers using on-premise solutions. Managed support services revenue includes supporting, managing and administering our software solutions and providing additional end user support. Term-based licenses for current products with the right to use unspecified future versions of the software and maintenance and support during the coverage period are also included in subscription revenues. Subscription revenue is generally recognized ratably over the contractual term of the arrangement beginning on the date our service is made available to the customer. The software-as-a-service (“SaaS”) model is the primary way we sell to our customers in our vertical markets. Accordingly, we expect that subscription revenue for fiscal year 2019 will be higher as a percentage of total revenues than fiscal year 2018 as we continue to acquire new SaaS customers and expand our SaaS offerings within our existing customers.

Professional Services
Professional services revenues primarily include fees generated from implementation, cloud configuration, on-site support and other consulting services. Also included in professional services revenues are revenues related to training and customer-reimbursed expenses, as well as services related to software licenses for our on-premise solutions. Professional services revenues are generally recognized as the services are rendered for time and materials contracts or on a proportional performance basis for fixed price contracts. The majority of our professional services contracts are on a time and materials basis. The revenue from training and customer-reimbursed expenses is recognized as we deliver these services. We expect our professional services revenues for the fiscal year 2019 to be lower both in absolute dollars and as a percentage of total revenues from those recorded in the fiscal year ended on September 30, 2018, as our license implementation revenues are expected to significantly decrease since we ceased selling perpetual licenses in fiscal year 2018.

Cost of Revenues

Subscription
Cost of subscription revenues includes costs related to our cloud-based solutions, maintenance and support for our on-premise solutions and managed support services. Cost of subscription revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation and costs for royalties, facilities expense, amortization, depreciation, third-party contractors and cloud infrastructure costs. We believe the cost of subscription revenues will decrease as a percent of revenue as we continue to sell more cloud-based solutions.

Professional Services
Cost of professional services revenues includes costs related to the set-up of our cloud-based solutions, services for on-premise solutions, training and customer-reimbursed expenses. Cost of professional services revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation and costs for third-party contractors and other expenses. Cost of professional services 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. We expect the cost of professional services revenues for fiscal year 2019 to increase slightly when compared to fiscal year 2018.

Operating Expenses

Research and Development
Our research and development expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation and costs related to third-party contractors. Our software development costs are generally expensed as incurred. In

22




the past, we capitalized development costs in connection with the development of new cloud-based software. We expect our research and development expenses to be marginally lower in fiscal year 2019 from those recorded in fiscal year 2018.

Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs including salary, bonus, commissions, stock-based compensation, as well as the amortization of intangibles, travel-related expenses and marketing programs. We expect our sales and marketing expenses to be lower in fiscal year 2019 from those recorded in fiscal year 2018.

General and Administrative
Our general and administrative expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation and audit and legal fees, third-party contractors, facilities expenses, costs associated with corporate transactions and travel-related expenses. We expect our general and administrative expenses to be substantively lower in fiscal year 2019 from those recorded in fiscal year 2018. The decrease in general and administrative expenses expected for fiscal year 2019 is the result of a non-recurring charge we recorded in fiscal year 2018 that was primarily related to the stock issued in connection with our former Chief Executive Officer’s departure.

Change in Presentation
    
Previously, we presented revenue and cost of revenue on two lines: “SaaS and maintenance” and “License and implementation”. Historically, our growth was driven by the sale of on-premise solutions. Over the last few years, we shifted our focus to selling cloud-based software. As a result of our business model transition from an on-premise to a SaaS model, we have updated the presentation in the first quarter of fiscal year 2019 to present the revenue and cost of revenue line items within our consolidated statements of operations with the break-out between two new lines called “Subscription” and “Professional services.” Revenues and cost of revenues in prior periods have been reclassified in this filing to conform to the new presentation. This change in presentation does not affect our previously-reported total revenues or total cost of revenues.



23



Results of Operations

The following tables set forth our consolidated results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
(in thousands)
Revenues
 

 
 

 
 

 
 

Subscription
$
26,638

 
$
24,944

 
$
77,780

 
$
72,795

Professional services
8,074

 
14,673

 
26,852

 
45,123

Total revenues
34,712

 
39,617

 
104,632

 
117,918

Cost of Revenues
 
 
 
 
 

 
 

Subscription
8,658

 
9,564

 
26,248

 
28,619

Professional services
7,206

 
6,881

 
22,929

 
21,888

Total cost of revenues
15,864

 
16,445

 
49,177

 
50,507

Gross profit
18,848

 
23,172

 
55,455

 
67,411

Operating Expenses
 
 
 
 
 

 
 

Research and development
7,060

 
7,746

 
21,887

 
24,861

Sales and marketing
7,164

 
9,338

 
23,814

 
26,845

General and administrative
6,713

 
17,044

 
19,702

 
33,099

Total operating expenses
20,937

 
34,128

 
65,403

 
84,805

Loss from operations
(2,089
)
 
(10,956
)
 
(9,948
)
 
(17,394
)
Interest expense, net
689

 
4,478

 
2,313

 
7,350

Other expenses, net
(4
)
 
(344
)
 
408

 
(306
)
Loss before income taxes
(2,774
)
 
(15,090
)
 
(12,669
)
 
(24,438
)
Provision for income taxes
230

 
345

 
969

 
150

Net loss
$
(3,004
)
 
$
(15,435
)
 
$
(13,638
)
 
$
(24,588
)
 
 
 
 
 
 
 
 
Comparison of the Three Months Ended June 30, 2019 and 2018
Revenues
 
Three Months Ended June 30,
 
 
 
2019
 
2018
 
 
 
Amount
 
% of Total
Revenues
 
Amount
 
% of Total
Revenues
 
Change ($)
 
Change (%)
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Revenues
 

 
 

 
 

 
 

 
 

 
 

Subscription
$
26,638

 
77
%
 
$
24,944

 
63
%
 
$
1,694

 
7
 %
Professional services
8,074

 
23

 
14,673

 
37

 
(6,599
)
 
(45
)%
Total revenues
$
34,712

 
100
%
 
$
39,617

 
100
%
 
$
(4,905
)
 
(12
)%
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
Subscription revenues increased by $1.7 million, or 7%, to $26.6 million for the three months ended June 30, 2019 from $24.9 million for the same period in 2018. As a percentage of total revenues, subscription revenues increased from 63% to 77%. The increase in our subscription revenues was driven by adding new customers and expanding our existing customer relationships. We intend to focus on growing our recurring revenue from SaaS subscriptions in future periods.


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Professional services

Professional services revenues decreased by $6.6 million, or 45%, to $8.1 million for the three months ended June 30, 2019 from $14.7 million for the same period last fiscal year. As a percentage of total revenues, professional services revenues decreased from 37% to 23%. The decrease in revenue in absolute dollars and as a percentage of total revenue is primarily driven by the change in business model as we moved towards cloud-based solutions.

Cost of Revenues
 
Three Months Ended June 30,
 
 
 
2019
 
2018
 
 
 
Amount
 
% of
Revenues
 
Amount
 
% of
Revenues
 
Change ($)
 
Change (%)
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Cost of revenues
 

 
 

 
 

 
 

 
 

 
 

Subscription
$
8,658

 
33
%
 
$
9,564

 
38
%
 
$
(906
)
 
(9
)%
Professional services
7,206

 
89
%
 
6,881

 
47

 
325

 
5
 %
Total cost of revenues
$
15,864

 
46
%
 
$
16,445

 
42
%
 
$
(581
)
 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
Cost of subscription revenues decreased by $0.9 million, or 9%, to $8.7 million during the three months ended June 30, 2019 from $9.6 million for the same period in 2018. As a percentage of subscription revenues, cost of subscription revenues decreased from 38% to 33% during the three months ended June 30, 2019, as we continue to improve gross margins by more efficiently delivering our cloud platform.

Professional services
Cost of professional services revenues increased by $0.3 million, or 5%, to $7.2 million during the three months ended June 30, 2019 from $6.9 million for the same period last year. As a percentage of professional services revenue, cost of professional services revenues increased primarily due to the mix of professional services engagements.

Operating Expenses
 
Three Months Ended June 30,
 
 
 
 
 
2019
 
2018
 
Change ($)
 
Change (%)
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Operating expenses
 
 
 
 
 
 
 
Research and development
$
7,060

 
$
7,746

 
$
(686
)
 
(9
)%
Sales and marketing
7,164

 
9,338

 
(2,174
)
 
(23
)%
General and administrative
6,713

 
17,044

 
(10,331
)
 
(61
)%
Total operating expenses
$
20,937

 
$
34,128

 
$
(13,191
)
 
(39
)%
 
 
 
 
 
 
 
 
Research and Development
Research and development expenses decreased by $0.7 million, or 9%, to $7.1 million during the three months ended June 30, 2019 from $7.7 million for the same period in 2018. The decrease was due to a $0.7 million decrease in employee-related costs.
Sales and Marketing
Sales and marketing expenses decreased by $2.2 million, or 23%, to $7.2 million during the three months ended June 30, 2019 from $9.3 million for the same period in 2018. This decrease was primarily due to a $1.6 million decrease in employee-related costs, a $0.5 million decrease in marketing programs and related costs and a $0.1 million decrease in other costs.


25



General and Administrative
General and administrative expenses decreased by $10.3 million, or 61%, to $6.7 million during the three months ended June 30, 2019 from $17.0 million for the same period last year. The decrease was primarily driven by a $10.3 million decrease in employee-related costs mostly due to the stock issued in the third quarter of fiscal year 2018 in connection with our former Chief Executive Officer’s departure and a decrease in outside services costs of $0.5 million, partially offset by a $0.5 million increase in employee-related costs.

Interest and Other Expenses, Net
 
Three Months Ended June 30,
 
 
 
 
 
2019
 
2018
 
Change ($)
 
Change (%)
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Interest expense, net
$
689

 
$
4,478

 
$
(3,789
)
 
(85
)%
Other expenses, net
$
(4
)
 
$
(344
)
 
$
340