0001118417-21-000100.txt : 20210510 0001118417-21-000100.hdr.sgml : 20210510 20210510163329 ACCESSION NUMBER: 0001118417-21-000100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 73 CONFORMED PERIOD OF REPORT: 20210331 FILED AS OF DATE: 20210510 DATE AS OF CHANGE: 20210510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MODEL N, INC. CENTRAL INDEX KEY: 0001118417 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 770528806 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35840 FILM NUMBER: 21907759 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BOULEVARD STREET 2: SUITE 300 CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: (650) 610-4600 MAIL ADDRESS: STREET 1: 777 MARINERS ISLAND BOULEVARD STREET 2: SUITE 300 CITY: SAN MATEO STATE: CA ZIP: 94404 FORMER COMPANY: FORMER CONFORMED NAME: MODEL T1 INC DATE OF NAME CHANGE: 20001031 FORMER COMPANY: FORMER CONFORMED NAME: MODEL N INC DATE OF NAME CHANGE: 20000707 10-Q 1 modn-20210331.htm 10-Q modn-20210331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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 94404
San Mateo,California
(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 classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.00015 per shareMODNNew 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, a 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 filerýAccelerated filer
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  ý
As of April 30, 2021, the registrant had 35,567,122 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
March 31, 2021
As of
September 30, 2020
Assets  
Current assets  
Cash and cash equivalents$148,345 $200,491 
Accounts receivable, net of allowance for doubtful accounts of $222 as of March 31, 2021 and $47 as of September 30, 2020
40,754 35,796 
Prepaid expenses2,206 2,797 
Other current assets8,517 7,314 
Total current assets199,822 246,398 
Property and equipment, net1,857 1,034 
Operating lease right-of-use assets14,908 3,332 
Goodwill65,665 39,283 
Intangible assets, net49,410 24,380 
Other assets7,335 5,863 
Total assets$338,997 $320,290 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$4,619 $3,009 
Accrued employee compensation14,379 17,056 
Accrued liabilities5,444 5,237 
Operating lease liabilities, current portion2,396 1,460 
Deferred revenue, current portion55,306 50,904 
Total current liabilities82,144 77,666 
Long term debt119,223 114,438 
Operating lease liabilities, less current portion12,716 2,067 
Other long-term liabilities2,073 1,448 
Total liabilities216,156 195,619 
Commitments and contingencies
Stockholders’ equity
Common Stock, $0.00015 par value; 200,000 shares authorized; 35,567 and 34,821 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively
5 5 
Preferred Stock, $0.00015 par value; 5,000 shares authorized; no shares issued and outstanding
  
Additional paid-in capital365,876 351,952 
Accumulated other comprehensive loss(1,128)(1,213)
Accumulated deficit(241,912)(226,073)
Total stockholders’ equity122,841 124,671 
Total liabilities and stockholders’ equity$338,997 $320,290 
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 March 31,Six Months Ended March 31,
 2021202020212020
Revenues    
Subscription$35,941 $28,991 $67,376 $57,173 
Professional services12,251 10,961 23,550 21,167 
Total revenues48,192 39,952 90,926 78,340 
Cost of revenues
Subscription13,734 8,798 22,726 17,508 
Professional services9,643 7,685 17,767 15,327 
Total cost of revenues23,377 16,483 40,493 32,835 
Gross profit24,815 23,469 50,433 45,505 
Operating expenses
Research and development12,495 9,102 21,192 17,618 
Sales and marketing11,509 10,953 20,965 19,966 
General and administrative7,612 7,545 16,399 14,510 
Total operating expenses31,616 27,600 58,556 52,094 
Loss from operations(6,801)(4,131)(8,123)(6,589)
Interest expense, net3,552 402 7,014 965 
Other expenses (income), net84 (243)214 (255)
Loss before income taxes(10,437)(4,290)(15,351)(7,299)
Provision for income taxes249 339 488 328 
Net loss$(10,686)$(4,629)$(15,839)$(7,627)
Net loss per share attributable to common stockholders:
Basic and diluted$(0.30)$(0.14)$(0.45)$(0.23)
Weighted average number of shares used in computing net loss per share attributable to common stockholders:
Basic and diluted35,305 33,794 35,119 33,468 

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 March 31,Six Months Ended March 31,
 2021202020212020
Net loss$(10,686)$(4,629)$(15,839)$(7,627)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on cash flow hedges(56)(450)9 (432)
Foreign currency translation gain (loss)(41)(270)76 (245)
Total comprehensive loss$(10,783)$(5,349)$(15,754)$(8,304)

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)
 Six Months Ended March 31,
 20212020
Cash flows from operating activities  
Net loss$(15,839)$(7,627)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization3,523 2,813 
Stock-based compensation12,910 11,832 
Amortization of debt discount and issuance costs4,784 140 
Deferred income taxes173 15 
Amortization of capitalized contract acquisition costs1,382 1,242 
Changes in assets and liabilities, net of acquisition
Accounts receivable(1,106)529 
Prepaid expenses and other assets(1,888)(1,278)
Accounts payable682 876 
Accrued employee compensation(3,963)(4,895)
Other current and long-term liabilities (816)(1,603)
Deferred revenue3,287 1,391 
Net cash provided by operating activities3,129 3,435 
Cash flows from investing activities
Purchases of property and equipment(745)(98)
Acquisition of business(56,834) 
Net cash used in investing activities(57,579)(98)
Cash flows from financing activities
Proceeds from exercise of stock options and issuance of employee stock purchase
plan
2,282 2,242 
Principal payments on debt (5,000)
Net cash provided by (used in) financing activities2,282 (2,758)
Effect of exchange rate changes on cash and cash equivalents22 (76)
Net increase (decrease) in cash and cash equivalents(52,146)503 
Cash and cash equivalents
Beginning of period200,491 60,780 
End of period$148,345 $61,283 

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. The Company is a provider of cloud revenue management solutions for the life sciences and high tech industries. The Company’s software and business services enable its 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. The Company’s corporate headquarters are located in San Mateo, California, with additional offices in the United States, India and Switzerland.
Fiscal Year
The Company’s fiscal year ends on September 30. References to fiscal year 2021, for example, refer to the fiscal year ending September 30, 2021.

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 September 30, 2020 has been derived from the audited financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 (“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 six months ended March 31, 2021 are not necessarily indicative of the operating results for the full fiscal year 2021 or any future periods.

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

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, liability and equity allocation of convertible senior notes, 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.

COVID-19
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. At this point, the extent to which COVID-19 may impact the Company’s financial condition or results of operations is uncertain. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require us to update our estimates, judgments or revise the carrying value of our assets or liabilities. The estimates discussed above may change, as new events occur and additional information is obtained, and are recognized in the condensed consolidated financial statements as soon as they become known.
6

New Accounting Pronouncements
Recently Adopted Accounting Guidance
In August 2018, the FASB issued ASU 2018-15, Intangibles (Topic 350), Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This standard also requires customers to amortize the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal year 2021 and it did not have a material impact on the condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. ASU 2016-13 requires a cumulative effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company adopted this guidance in the first quarter of fiscal year 2021 and it did not have a material impact on the condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740 and amending existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. ASU 2020-06 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2021, with early adoption permitted. The Company is currently evaluating the impact this standard will have on its condensed consolidated financial statements.
Significant Accounting Policies
There have been no changes in the significant accounting policies from those that were disclosed in the audited consolidated financial statements for the fiscal year ended September 30, 2020 included in the Annual Report on Form 10-K.

2.     Revenues from Contracts with Customers

Revenue Recognition

The Company derives revenues primarily from subscription revenues and professional services revenues.

Disaggregation of Revenues

See Note 13, Geographic Information, for information on revenue by geography.

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Customer Contract Balances

The following table reflects contract balances related to contracts with customers (in thousands):
As of
March 31, 2021
As of
September 30, 2020
Accounts receivable, net$40,754 $35,796 
Contract asset5,442 4,482 
Deferred revenue56,641 51,786 
Capitalized contract acquisition costs8,932 7,506 

Accounts Receivable
Accounts receivable represents the Company’s 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 receivable amounts.

Contract Asset
Contract asset represents revenue that has been recognized for satisfied performance obligations for which the Company does 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 the Company has 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 the condensed consolidated balance sheets. During the three and six months ended March 31, 2021, the Company recognized revenue of $23.0 million and $35.9 million, respectively, that was included in the deferred revenue balances at the beginning of the periods. During the three and six months ended March 31, 2020, the Company recognized revenue of $19.2 million and $31.6 million, respectively, that was included in the deferred revenue balances at the beginning of the periods.

Capitalized Contract Acquisition Costs

The Company capitalizes incremental costs incurred to acquire contracts with customers, primarily sales commissions, for which the associated revenue is expected to be recognized in future periods. The Company incurs these costs in connection with both initial contracts and renewals. Such costs for renewals are not considered commensurate with those for initial contracts given the substantive difference in commission rates in proportion to their respective contract values. 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. The Company determined the period of benefit by considering the Company’s 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 the condensed consolidated balance sheets. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.
As of March 31, 2021, the current and non-current portions of capitalized contract acquisition costs were $2.8 million and $6.1 million, respectively. As of September 30, 2020, the current and non-current portions of capitalized contract acquisition costs were $2.3 million and $5.2 million, respectively. The Company amortized $0.7 million and $1.4 million of contract acquisition costs during the three and six months ended March 31, 2021, respectively. The Company amortized $0.6 million and $1.2 million of contract acquisition costs during the three and six months ended March 31, 2020, respectively.
    
For the three and six months ended March 31, 2021 and 2020, there was no impairment related to capitalized contract acquisition costs.

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Customer Deposits

Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the related arrangement. These amounts are included in accrued liabilities on the condensed consolidated balance sheets. Customer deposits were immaterial as of March 31, 2021 and September 30, 2020.

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 March 31, 2021, the aggregate amount of the transaction price allocated to performance obligations either unsatisfied or partially unsatisfied was $203.9 million, 53% of which we expect to recognize as revenue over the next 12 months and the remainder thereafter.


3.     Leases

The Company leases facilities under noncancelable operating leases with lease terms between three years and 10 years. Certain leases include options to extend or terminate the lease. The Company factored into the determination of lease payments the options that it is reasonably certain to exercise.

Operating lease costs were $1.0 million and $1.8 million for the three and six months ended March 31, 2021, respectively, and $0.8 million and $1.7 million for the three and six months ended March 31, 2020, respectively. Short-term lease costs, variable lease costs, and sublease income were immaterial for the three and six months ended March 31, 2021 and 2020.

Cash flow information related to operating leases is as follows (in thousands):
Six months ended
March 31, 2021
Six months ended
March 31, 2020
Cash paid for amounts included in the measurement of operating lease liabilities$1,191 $1,804 
Operating lease ROU assets obtained in exchange for new operating lease liabilities12,592 578 

The Company’s headquarters lease commenced on December 1, 2020 which resulted in an increase of ROU assets of $10.3 million.

The weighted-average remaining lease term is 4.6 years and the weighted-average discount rate is 3.1% as of March 31, 2021.

Maturities of operating lease liabilities as of March 31, 2021 are as follows (in thousands):
Fiscal Year
Remaining fiscal 2021$926 
20223,756 
20233,607 
20243,321 
20252,833 
2026 and thereafter1,867 
Total operating lease payments16,310 
Less imputed interest1,198 
Total operating lease liabilities$15,112 

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In January 2021, the Company entered into a new noncancelable operating lease for office space in India with a five year lease term. The new lease has an early termination option and a five year renewal option which the Company is not reasonably certain to exercise. The lease commenced in April 2021. The payments over the five year lease term are approximately $7.5 million.


4.     Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, debt and certain accrued liabilities. The Company regularly reviews its financial instruments portfolio to identify and evaluate such instruments that have indications of possible impairment. The Company estimates the fair value of its 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.
The table below sets forth the Company’s marketable securities which are measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
Reported as:
 Amortized CostUnrealized GainsUnrealized LossesFair ValueCash and Cash Equivalents
As of March 31, 2021    
Level 1:
Money market funds$114,826 $ $ $114,826 $114,826 
Total$114,826 $ $ $114,826 $114,826 
As of September 30, 2020
Level 1:
Money market funds$31,915 $ $ $31,915 $31,915 
US Treasury securities149,982   149,982 149,982 
Total $181,897 $ $ $181,897 $181,897 

The Company’s 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.

See Note 6 for the fair value measurement of the Company’s derivative contracts and Note 7 for the fair value measurement of the Company’s convertible senior notes.


5.     Acquisition, Goodwill, and Intangible Assets

Acquisition

On December 31, 2020, the Company acquired certain assets, properties and rights and certain liabilities and obligations from Deloitte & Touche LLP’s pricing and contracting solutions business for a contractual purchase price of $60.0 million subject to net working capital adjustments (the “Acquisition”). The acquired business operates primarily in the same markets as the Company’s existing operations. The reason for the Acquisition was to increase the Company’s addressable market and expand the opportunity to sell existing Model N products. This Acquisition has been accounted for as a business combination. The Company has included the results of the acquired business in its condensed consolidated financial statements since the date
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of Acquisition. The Company incurred $2.4 million of acquisition-related expense during the six months ended March 31, 2021, which was recorded as general and administrative expenses.
The total purchase consideration was $57.8 million reflecting a $2.2 million net working capital adjustment from the contractual purchase price. The Company paid $56.8 million of purchase consideration in cash during the six months ended March 31, 2021.
The purchase price was allocated to assets acquired and liabilities assumed based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill. The following table sets forth the preliminary allocation of the purchase price in connection with the Acquisition (in thousands):
Acquisition Date Fair Value
Accounts receivable$3,844 
Property and equipment, net511 
Operating lease right-of-use assets2,764 
Goodwill26,382 
Intangible assets28,210 
Total assets acquired61,711 
Operating lease liabilities, current portion656 
Deferred revenue, current portion1,549 
Operating lease liabilities, less current portion1,657 
Total liabilities assumed3,862 
Total purchase price$57,849 
The fair value of the assets acquired and liabilities assumed is subject to change within the measurement period (up to one year from the Acquisition date), as the valuation is finalized and if new information becomes available. The Company does not expect the change to be material.
Intangible assets included customer relationships of $15.5 million, developed technology of $10.2 million, non-compete agreements of $1.6 million, and trade name of $0.9 million, which are amortized on a straight-line basis over 15 years, 6 years, 5 years, and 3 years, respectively, and over a weighted average period of 10.8 years. The Company applied significant judgment in determining the fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions including customer attrition rate, royalty rate and technology migration curve. Goodwill is comprised of expected synergies for the combined operations and the assembled workforce acquired in the Acquisition. This goodwill is deductible for income tax purposes.
The Acquisition contributed $6.5 million to the Company’s revenues and increased operating loss, which approximated net loss, by $2.4 million during the three months ended March 31, 2021. The Company has not presented the supplemental pro forma information for revenue and earnings related to the Acquisition, as it is deemed impracticable to determine and disclose this information, due to the unavailability of the information provided to the Company by Deloitte & Touche LLP, management’s inability to reasonably estimate the amounts from the carve out business and differing fiscal year-ends.
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Goodwill

The following table summarizes the changes in the carrying amount of goodwill (in thousands):
Balance at September 30, 2020$39,283 
Addition from Acquisition26,382 
Balance at March 31, 2021$65,665 

Intangible Assets

Intangible assets consisted of the following (in thousands):
 EstimatedAs of March 31, 2021
Useful Life
(in Years)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Intangible Assets:    
Customer relationships
3-15
$52,109 $(16,796)$35,313 
Developed technology
5-6
22,333 (10,535)11,798 
Non-compete agreements51,600 (80)1,520 
Trade name3850 (71)779 
Total $76,892 $(27,482)$49,410 
 EstimatedAs of September 30, 2020
Useful Life
(in Years)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Intangible Assets:    
Customer relationships
3-10
$36,599 $(14,758)$21,841 
Developed technology
5-6
12,083 (9,544)2,539 
Total $48,682 $(24,302)$24,380 
The Company recorded amortization expense related to acquired intangible assets of $2.0 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively, and $3.2 million and $2.4 million for the six months ended March 31, 2021 and 2020, respectively.

Estimated future amortization expense for the intangible assets as of March 31, 2021 is as follows (in thousands):
Fiscal Year
Remaining fiscal 2021 $4,016 
20228,032 
20237,186 
20246,691 
20256,620 
2026 and thereafter16,865 
Total future amortization$49,410 


6.     Derivative Instruments and Hedging

The Company uses foreign currency forward contracts to hedge a portion of the forecasted foreign currency-denominated expenses incurred 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. The Company does not use any of the derivative instruments for trading or speculative purposes. These contracts have maturities of 12 months or less. The Company records changes in the fair value of cash flow hedges in accumulated other comprehensive loss in the condensed consolidated balance sheets, until the forecasted transaction occurs, at which point, the related gain or loss on the cash flow
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hedge is reclassified to the financial statement line item to which the derivative relates. The amounts reclassified to expenses related to the hedged transactions were immaterial for the periods presented. The fair value of the outstanding non-deliverable foreign currency forward contracts was measured using Level 2 fair value inputs and was immaterial as of March 31, 2021 and September 30, 2020.

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. The notional amounts of the outstanding foreign currency forward contracts designated as cash flow hedges were $5.8 million and $5.5 million as of March 31, 2021 and September 30, 2020, respectively.


7.     Convertible Senior Notes

In May 2020, the Company issued $172.5 million aggregate principal amount of 2.625% convertible senior notes in a private placement, including $22.5 million which represents the exercise in full of the initial purchasers’ option to purchase additional notes. The net proceeds from the issuance of the Notes was $166.4 million, net of initial purchasers’ discounts and debt issuance costs of $6.1 million. The Company used $40.0 million of the net proceeds to repay in full the debt outstanding under, and terminated the Credit Agreement dated May 4, 2018, as amended, by and among the Company, Wells Fargo, as administrative agent, and the lenders party thereto.

The Notes are senior, unsecured obligations of the Company and bear an interest rate of 2.625% per year payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes mature on June 1, 2025 unless repurchased, redeemed or converted in accordance with their terms prior to such date.

The Notes are convertible into cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of 30.0044 shares of common stock per $1,000 principal amount of the Notes, which is equal to an initial conversion price of approximately $33.33 per share of common stock subject to adjustment, with a maximum conversion rate of 38.2555. The Company intends to settle the principal amount of the Notes with cash. Prior to the close of business on the scheduled trading day immediately preceding March 1, 2025, holders of the Notes may convert all or a portion of their Notes in multiples of $1,000 principal amount, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
upon the occurrence of specified corporate events.

On or after March 1, 2025 and prior to the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may convert all or a portion of their Notes in multiples of $1,000 principal amount regardless of the foregoing conditions.

Holders of the Notes who convert their Notes in connection with a make-whole fundamental change (as defined in the Indenture) or in connection with any optional redemption are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change (as defined in the Indenture), holders of the Notes may require the Company to repurchase all or a portion of their Notes at a price equal to 100% of the principal amount of Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date.

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The Company may not redeem the Notes prior to June 6, 2023. The Company may redeem for cash all or part of the Notes, at its option, on or after June 6, 2023 and on or before the 41st scheduled trading day immediately before the maturity date, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. No sinking fund is provided for the Notes.

During the three months ended March 31, 2021, the conditions allowing holders of the Notes to convert were not met. The Notes were classified as long-term debt on the condensed consolidated balance sheets as of March 31, 2021.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component of $115.3 million was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $57.2 million and was determined by deducting the fair value of the liability component from the principal amount of the Notes. The excess of the principal amount of the Notes over the carrying amount of the liability component is amortized to interest expense at an effective interest rate over the contractual terms of the Notes. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the issuance costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were $4.1 million and are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component of $2.0 million were netted with the equity component in stockholders’ equity.

The net carrying amounts of the liability and equity components for the Notes were as follows (in thousands):
As of
March 31, 2021
As of
September 30, 2020
Liability component:
Principal amount$172,500 $172,500 
Unamortized discount(49,605)(54,147)
Unamortized issuance costs(3,672)(3,915)
Net carrying amount$119,223 $114,438 
Equity component, net of issuance costs$55,227 $55,227 

The following table sets forth the interest expense recognized related to the Notes (in thousands):
 Three months ended
March 31, 2021
Six months ended March 31, 2021
Coupon interest expense$1,132 $2,264 
Amortization of debt discount2,302 4,541 
Amortization of debt issuance costs125 243 
Total interest expense related to the Notes$3,559 $7,048 
Effective interest rate of the liability component12.32 %12.32 %

The unamortized debt discount and debt issuance costs will be amortized over 50 months as of March 31, 2021.

As of March 31, 2021, the total estimated fair value of the Notes was approximately $223.6 million which includes the equity component. The fair value was determined based on the closing trading price per $100 of the Notes as of the last day of trading for the period. The fair value of the Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. The fair value of the Notes is considered a Level 2 measurement as they are not actively traded.

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8.     Stockholders’ Equity

The following tables present the changes in the components of stockholders’ equity (in thousands):
Three Months Ended March 31, 2021
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at December 31, 202035,049 $5 $357,106 $(1,031)$(231,226)$124,854 
  Issuance of common stock upon exercise of stock options
 — 5 — — 5 
Issuance of common stock upon release of restricted stock units
452 — — — — — 
Issuance of common stock upon ESPP purchase
66 — 2,251 — — 2,251 
  Stock-based compensation— — 6,514 — — 6,514 
  Other comprehensive loss— — — (97)— (97)
  Net loss— — — — (10,686)(10,686)
Balance at March 31, 202135,567 $5 $365,876 $(1,128)$(241,912)$122,841 
Three Months Ended March 31, 2020
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at December 31, 201933,334 $5 $275,866 $(1,126)$(215,407)$59,338 
  Issuance of common stock upon exercise of stock options
27 — 275 — — 275 
Issuance of common stock upon release of restricted stock units
803 — — — — — 
Issuance of common stock upon ESPP purchase
85 — 1,949 — — 1,949 
  Stock-based compensation— — 6,009 — — 6,009 
  Other comprehensive loss— — — (720)— (720)
  Net loss— — — — (4,629)(4,629)
Balance at March 31, 202034,249 $5 $284,099 $(1,846)$(220,036)$62,222 
Six Months Ended March 31, 2021
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at September 30, 202034,821 $5 $351,952 $(1,213)$(226,073)$124,671 
  Issuance of common stock upon exercise of stock options
4 — 31 — — 31 
  Issuance of common stock upon release of restricted stock units
676 — — — — — 
Issuance of common stock upon ESPP purchase
66 — 2,251 — — 2,251 
  Stock-based compensation— — 11,642 — — 11,642 
  Other comprehensive income— — — 85 — 85 
  Net loss— — — — (15,839)(15,839)
Balance at March 31, 202135,567 $5 $365,876 $(1,128)$(241,912)$122,841 
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Six Months Ended March 31, 2020
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at September 30, 201932,995 $5 $266,295 $(1,169)$(212,409)$52,722 
  Issuance of common stock upon exercise of stock options
30 — 293 — — 293 
  Issuance of common stock upon release of restricted stock units
1,139 — — — — — 
Issuance of common stock upon ESPP purchase
85 — 1,949 — — 1,949 
  Stock-based compensation— — 15,562 — — 15,562 
  Other comprehensive loss— — — (677)— (677)
  Net loss— — — — (7,627)(7,627)
Balance at March 31, 202034,249 $5 $284,099 $(1,846)$(220,036)$62,222 
For the six months ended March 31, 2020, additional paid-in capital included $3.7 million related to restricted stock unit (“RSU”) grants for the portion of the bonus recorded as stock-based compensation for the year ended September 30, 2019.

9.     Stock-based Compensation

As of March 31, 2021, the Company had approximately 3.6 million shares available for future stock awards under its equity plans and any additional releases resulting from an over-achievement relating to performance-based restricted stock units.

The following table summarizes our RSU activity which includes performance-based RSUs under all equity plans for the six months ended March 31, 2021:
Restricted 
Stock Units
Outstanding
(in thousands)
Weighted
Average
Grant Date
Fair Value
Balance at September 30, 20201,957 $22.43 
Granted1,100 36.04 
Released(675)21.93 
Forfeited(173)23.85 
Balance at March 31, 20212,209 $29.26 
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Stock-based compensation recorded in the condensed consolidated statements of operations is as follows (in thousands):
 Three Months Ended March 31,Six Months Ended March 31,
 2021202020212020
Cost of revenues    
Subscription $846 $495 $1,369 $1,017 
Professional services1,002 560 1,656 1,157 
Total stock-based compensation in cost of revenues1,848 1,055 3,025 2,174 
Operating expenses
Research and development1,613 1,243 2,744 2,669 
Sales and marketing1,967 1,656 3,520 3,062 
General and administrative2,354 2,055 3,621 3,927 
Total stock-based compensation in operating expenses5,934 4,954 9,885 9,658 
Total stock-based compensation$7,782 $6,009 $12,910 $11,832 
For the three and six months ended March 31, 2021, the total stock-based compensation included $1.3 million related to bonus expense, which was recorded in the accrued employee compensation line item in the Condensed Consolidated Balance Sheets.

10.     Income Taxes

The Company recorded income tax provisions of $0.2 million and $0.3 million, representing effective income tax rates of (2.4)% and (7.9)% for the three months ended March 31, 2021 and 2020, respectively; and $0.5 million and $0.3 million, representing effective income tax rates of (3.2)% and (4.5)% for the six months ended March 31, 2021 and 2020, respectively. The income tax provision for the three and six months ended March 31, 2021 was primarily related to foreign taxes on the Company’s profitable foreign operations, foreign withholding taxes on dividends, and deferred taxes on goodwill resulting from the Acquisition. The income tax provision for the three months ended March 31, 2020 was primarily related to foreign taxes on the Company’s profitable foreign operations and foreign withholding taxes on dividends. The income tax provision for the six months ended March 31, 2020 was primarily related to foreign taxes on the Company’s profitable foreign operations and foreign withholding taxes on dividends partially offset by a discrete tax benefit for a true-up in federal income tax payable.

The Company elected to partially reinvest foreign earnings in certain foreign jurisdictions and expects to repatriate future foreign earnings in certain foreign jurisdictions over time. As a result, the Company will record a deferred tax liability for the additional non-U.S. taxes that are expected to be incurred related to the repatriation of these earnings.

The Company elected to record GILTI as a period cost. The Company realized no benefit for current period losses due to maintaining a full valuation allowance against the U.S. net deferred tax assets.


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11.     Net Loss per Share

The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except per share data):
 Three Months Ended March 31,Six Months Ended March 31,
 2021202020212020
Numerator    
Basic and diluted    
Net loss attributable to common stockholders$(10,686)$(4,629)$(15,839)$(7,627)
Denominator
Basic and diluted
Weighted average shares used in computing net loss per share attributable to common stockholders
35,305 33,794 35,119 33,468 
Net loss per share attributable to common stockholders:
Basic and diluted$(0.30)$(0.14)$(0.45)$(0.23)
Potentially dilutive securities that were not included in the calculation of diluted net loss per share because their effect would have been anti-dilutive are as follows (in thousands):
 As of March 31,
 20212020
Stock options30 70 
Performance-based RSUs and RSUs2,209 2,411 
Shares issuable pursuant to the employee stock purchase plan63 68 
Convertible senior notes5,176  
Since the Company expects to settle the principal amount of its Notes in cash and any excess in cash or shares of the Company’s common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $33.33 per share for the Notes.

12.     Litigation and Contingencies

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


13.     Geographic Information

The Company has one operating segment with one business activity — developing and monetizing revenue management solutions.

Revenues

The Company disaggregates the revenues by geographic regions based on the bill to location of its customers. Revenues from customers outside of the United States were 7% and 10% of total revenues for the three months ended March 31, 2021 and 2020, respectively, and 8% and 9% of total revenues for the six months ended March 31, 2021 and 2020, respectively.

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Long-Lived Assets

The following table sets forth the Company’s property and equipment, net, by geographic region (in thousands):
As of
March 31, 2021
As of
September 30, 2020
United States$1,294 $562 
India563 472 
Total property and equipment, net$1,857 $1,034 
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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, the expected impact of the COVID-19 pandemic on our operations, 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. Our software and business services help companies drive mission critical business processes such as pricing, quoting, contracting, regulatory compliance, rebates and incentives. With deep industry expertise, Model N supports the complex business needs of the world’s leading brands in life sciences and high tech including Johnson & Johnson, AstraZeneca, Stryker, Seagate Technology, Broadcom and Microchip Technology.

Model N Revenue Cloud transforms the revenue life cycle into a strategic, end-to-end process aligned across the enterprise. Deployments may vary from specific divisions or territories to enterprise-wide implementations. Customers may purchase and deploy a single cloud product or a full suite.

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 and related to the solutions provided by the recent acquisition. 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 past few years, we have primarily been entering into cloud-based subscription arrangements with our new and existing customers and we anticipate that subscription arrangements will be the majority of new contractual arrangements going forward.

On December 31, 2020, we acquired certain assets, properties and rights and certain liabilities and obligations from Deloitte & Touche LLP’s pricing and contracting solutions business. The acquired business is complementary to our existing solutions and its offerings are configured to meet our life sciences customers’ needs by providing a complete end-to-end solution for reducing revenue loss and protecting profitability all the while meeting compliance requirements. The total
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purchase consideration was $57.8 million. We consider this acquisition to be fully integrated into Model N as of March 31, 2021.

For the three months ended March 31, 2021 and 2020, our total revenues were $48.2 million and $40.0 million, respectively, representing a year-over-year increase of 21% primarily due to the increase in subscription revenues from the acquired business and the increase in professional services revenues due to more services being provided to our new and existing customers some of which came through the acquisition.

COVID-19

The World Health Organization declared the outbreak of COVID-19 a pandemic and the U.S. federal government declared it a national emergency in March 2020. Our financial results for the periods presented have not been materially impacted by COVID-19. The extent of the impact of COVID-19 on our future operational and financial performance, revenues, and liquidity will depend on certain developments, including the duration and spread of the outbreak as well as the impact on our customers, employees, and partners, all of which are uncertain and cannot be predicted. We are conducting business with substantial modifications to employee travel, employee work locations, and virtualization or cancellation of certain sales and marketing events, among other modifications. Many of our customers have implemented similar measures, which may limit our ability to sell or provide professional services to them. Customers may also delay or cancel purchasing decisions or projects in light of uncertainties to their businesses arising from the COVID-19 pandemic. As the majority of our revenue is subscription-based, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods.


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 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 which generally renew on a one year or three year basis 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 including the support provided by the acquired business. 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.

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 and solutions provided by the acquired business. Professional services revenues are generally recognized as the services are rendered for time and materials contracts or recognized using a proportional performance method as hours are incurred relative to total estimated hours for the engagement 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.

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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 and support provided by the acquired business. Cost of subscription revenues primarily consists of personnel-related costs including salary, bonus, and stock-based compensation as well as costs for royalties, facilities expense, amortization, depreciation, third-party contractors and cloud infrastructure costs.

Professional Services
Cost of professional services revenues includes costs related to the set-up of our cloud-based solutions, services for on-premise and the acquired business solutions, training and customer-reimbursed expenses. Cost of professional services revenues primarily consists of personnel-related costs including salary, bonus, and stock-based compensation as well as 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.

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. We capitalize certain development costs incurred in connection with the cloud-based software platform for internal use.

Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs including salary, bonus, commissions, stock-based compensation, as well as amortization of intangibles, travel-related expenses and marketing programs.

General and Administrative
Our general and administrative expenses consist primarily of personnel-related costs including salary, bonus, and stock-based compensation, as well as audit and legal fees, costs related to third-party contractors, facilities expenses, costs associated with corporate transactions and travel-related expenses.


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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 March 31,Six Months Ended March 31,
 2021202020212020
 (in thousands)
Revenues    
Subscription$35,941 $28,991 $67,376 $57,173 
Professional services12,251 10,961 23,550 21,167 
Total revenues48,192 39,952 90,926 78,340 
Cost of revenues  
Subscription13,734 8,798 22,726 17,508 
Professional services9,643 7,685 17,767 15,327 
Total cost of revenues23,377 16,483 40,493 32,835 
Gross profit24,815 23,469 50,433 45,505