0001118417-22-000017.txt : 20220209 0001118417-22-000017.hdr.sgml : 20220209 20220208173907 ACCESSION NUMBER: 0001118417-22-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 75 CONFORMED PERIOD OF REPORT: 20211231 FILED AS OF DATE: 20220209 DATE AS OF CHANGE: 20220208 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: 22603015 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-20211231.htm 10-Q modn-20211231
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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 December 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 January 28, 2022, the registrant had 36,432,699 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
December 31, 2021
As of
September 30, 2021
Assets  
Current assets  
Cash and cash equivalents$155,513 $165,467 
Funds held for customers592 316 
Accounts receivable, net of allowance for doubtful accounts of $198 as of December 31, 2021 and $225 as of September 30, 2021
49,712 43,185 
Prepaid expenses4,493 4,920 
Other current assets7,287 8,442 
Total current assets217,597 222,330 
Property and equipment, net1,925 1,907 
Operating lease right-of-use assets19,382 20,565 
Goodwill65,665 65,665 
Intangible assets, net43,386 45,394 
Other assets8,533 7,929 
Total assets$356,488 $363,790 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$2,565 $4,802 
Customer funds payable592 316 
Accrued employee compensation10,596 24,662 
Accrued liabilities3,640 4,719 
Operating lease liabilities, current portion4,549 4,529 
Deferred revenue, current portion58,032 57,431 
Total current liabilities79,974 96,459 
Long term debt126,957 124,301 
Operating lease liabilities, less current portion16,116 17,229 
Other long-term liabilities3,452 2,283 
Total liabilities226,499 240,272 
Commitments and contingencies
Stockholders’ equity
Common Stock, $0.00015 par value; 200,000 shares authorized; 36,433 and 36,059 shares issued and outstanding at December 31, 2021 and September 30, 2021, respectively
5 5 
Preferred Stock, $0.00015 par value; 5,000 shares authorized; no shares issued and outstanding
  
Additional paid-in capital393,278 380,528 
Accumulated other comprehensive loss(1,218)(1,205)
Accumulated deficit(262,076)(255,810)
Total stockholders’ equity129,989 123,518 
Total liabilities and stockholders’ equity$356,488 $363,790 
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 December 31,
 20212020
Revenues  
Subscription$38,088 $31,435 
Professional services13,454 11,299 
Total revenues51,542 42,734 
Cost of revenues
Subscription13,916 8,992 
Professional services8,735 8,124 
Total cost of revenues22,651 17,116 
Gross profit28,891 25,618 
Operating expenses
Research and development11,427 8,697 
Sales and marketing11,039 9,456 
General and administrative8,439 8,787 
Total operating expenses30,905 26,940 
Loss from operations(2,014)(1,322)
Interest expense, net3,778 3,462 
Other expenses (income), net100 130 
Loss before income taxes(5,892)(4,914)
Provision for income taxes374 239 
Net loss$(6,266)$(5,153)
Net loss per share attributable to common stockholders:
Basic and diluted$(0.17)$(0.15)
Weighted average number of shares used in computing net loss per share attributable to common stockholders:
Basic and diluted36,223 34,936 

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 December 31,
 20212020
Net loss$(6,266)$(5,153)
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on cash flow hedges(31)65 
Foreign currency translation gain (loss)18 117 
Total comprehensive loss$(6,279)$(4,971)

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)
 Three Months Ended December 31,
 20212020
Cash flows from operating activities  
Net loss$(6,266)$(5,153)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization2,240 1,320 
Stock-based compensation6,986 5,128 
Amortization of debt discount and issuance costs2,655 2,357 
Deferred income taxes158 60 
Amortization of capitalized contract acquisition costs982 651 
Other non-cash charges40  
Changes in assets and liabilities, net of acquisition
Accounts receivable(6,499)(233)
Prepaid expenses and other assets1,202 (602)
Accounts payable(2,229)(422)
Accrued employee compensation(8,367)(5,563)
Other current and long-term liabilities (1,542)(878)
Deferred revenue955 3,114 
Net cash used in operating activities(9,685)(221)
Cash flows from investing activities
Purchases of property and equipment(325)(336)
Acquisition of business (56,444)
Net cash used in investing activities(325)(56,780)
Cash flows from financing activities
Proceeds from exercise of stock options and issuance of employee stock purchase
plan
72 26 
Net changes in customer funds payable276  
Net cash provided by financing activities348 26 
Effect of exchange rate changes on cash and cash equivalents(16)1 
Net increase (decrease) in cash and cash equivalents(9,678)(56,974)
Cash and cash equivalents
Beginning of period165,783 200,491 
End of period$156,105 $143,517 

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 2022, for example, refer to the fiscal year ending September 30, 2022.

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 December 31, 2021 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, 2021 (“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 three months ended December 31, 2021 are not necessarily indicative of the operating results for the full fiscal year 2022 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 ongoing COVID-19 pandemic. At this point, the extent to which the COVID-19 pandemic 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 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 adopted this guidance in the first quarter of fiscal year 2022 and it did not have a material impact on the condensed consolidated financial statements.
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 prospectively 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 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.
In October 2021, the FASB issued Accounting Standards Update No. 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2022 on a prospective basis, with early adoption permitted. The Company is currently evaluating the potential impact of ASU 2021-08 to its 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, 2021 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 14, Geographic Information, for information on revenue by geography.
7


Customer Contract Balances

The following table reflects contract balances related to contracts with customers (in thousands):
As of
December 31, 2021
As of
September 30, 2021
Accounts receivable, net$49,712 $43,185 
Contract asset3,507 4,891 
Deferred revenue58,750 57,796 
Capitalized contract acquisition costs10,302 9,539 

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 months ended December 31, 2021 and 2020, the Company recognized revenue of $25.9 million and $22.8 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 December 31, 2021, the current and non-current portions of capitalized contract acquisition costs were $3.5 million and $6.8 million, respectively. As of September 30, 2021, the current and non-current portions of capitalized contract acquisition costs were $3.3 million and $6.3 million, respectively. The Company amortized $1.0 million and $0.7 million of contract acquisition costs during the three months ended December 31, 2021 and 2020, respectively.
    
For the three months ended December 31, 2021 and 2020, 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 related arrangement. These amounts are included in accrued liabilities on the condensed consolidated balance sheets. Customer deposits were immaterial as of December 31, 2021 and 2020.
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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.

Remaining 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 December 31, 2021, the aggregate amount of the transaction price allocated to performance obligations either unsatisfied or partially unsatisfied was $256.5 million, 48% of which we expect to recognize as revenue over the next 12 months and the remainder thereafter.


3.     Leases

The Company leases facilities under noncancellable operating leases with lease terms between three years and eleven 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 $1.5 million and $0.8 million for the three months ended December 31, 2021 and 2020, respectively. Short-term lease costs, variable lease costs, and sublease income were immaterial for the three months ended December 31, 2021 and 2020.

Cash flow information related to operating leases is as follows (in thousands):
Three Months Ended December 31, 2021Three Months Ended December 31, 2020
Cash paid for amounts included in the measurement of operating lease liabilities$1,236 $692 
Operating lease ROU assets obtained in exchange for new operating lease liabilities 12,592 

The weighted-average remaining lease term is 4.2 years and the weighted-average discount rate is 2.9% as of December 31, 2021.

Maturities of operating lease liabilities as of December 31, 2021 are as follows (in thousands):
Fiscal Year
Remaining fiscal 2022$3,834 
20235,186 
20245,037 
20254,679 
20262,669 
2027 and thereafter575 
Total operating lease payments21,980 
Less imputed interest1,315 
Total operating lease liabilities$20,665 


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4.     Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, funds held for customers, accounts receivable, accounts payable, customer funds 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 December 31, 2021    
Level 1:
Money market funds$50,492 $ $ $50,492 $50,492 
US Treasury securities84,997   84,997 84,997 
Total$135,489 $ $ $135,489 $135,489 
As of September 30, 2021
Level 1:
Money market funds$40,755 $ $ $40,755 $40,755 
US Treasury securities84,997   84,997 84,997 
Total $125,752 $ $ $125,752 $125,752 

The Company’s financial instruments not measured at fair value on a recurring basis include cash, funds held for customers, accounts receivable, accounts payable, customer funds 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 7 for the fair value measurement of the Company’s derivative contracts and Note 8 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 these results in its Consolidated Financial Statements since the date of Acquisition. The Company incurred $2.5 million of acquisition-related expense during the year ended September 30, 2021, which was recorded as general and administrative expenses.
The total purchase consideration was $57.8 million and reflected a $2.2 million net working capital adjustment from the contractual purchase price. The original estimate was $0.1 million in the first quarter of fiscal year 2021 which resulted in a measurement period adjustment of $2.1 million. The Company paid the entire purchase consideration in cash during the year ended September 30, 2021.
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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 

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. Fair value of the customer relationships was estimated using a multi-period excess earnings valuation method and fair value of the developed technology was estimated using a relief from royalty valuation method. The Company applied significant judgment in estimating the fair value of the customer relationships and developed technology intangible assets, which involved the use of significant assumptions. Significant assumptions used in the valuation of customer relationships intangible asset included subscription revenue growth rates, research and development expenses as percentage of revenue, discount rate, subscription gross margins, and customer attrition rate. Significant assumptions used in the valuation of developed technology intangible asset included royalty rate, obsolescence rate, and discount rate. 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 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.
Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in thousands):
Balance at September 30, 2021$65,665 
Additions 
Balance at December 31, 2021$65,665 
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Intangible Assets

Intangible assets consisted of the following (in thousands):
 EstimatedAs of December 31, 2021
Useful Life
(in Years)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Intangible Assets:    
Customer relationships
3-15
$52,109 $(20,240)$31,869 
Developed technology
5-6
22,333 (12,663)9,670 
Non-compete agreements51,600 (320)1,280 
Trade name3850 (283)567 
Total $76,892 $(33,506)$43,386 
 EstimatedAs of September 30, 2021
Useful Life
(in Years)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Intangible Assets:    
Customer relationships
3-15
$52,109 $(19,092)$33,017 
Developed technology
5-6
22,333 (11,954)10,379 
Non-compete agreements51,600 (240)1,360 
Trade name3850 (212)638 
Total $76,892 $(31,498)$45,394 
The Company recorded amortization expense related to acquired intangible assets of $2.0 million and $1.2 million for the three months ended December 31, 2021 and 2020, respectively.

Estimated future amortization expense for the intangible assets as of December 31, 2021 is as follows (in thousands):
Fiscal Year
Remaining fiscal 2022$6,024 
20237,186 
20246,691 
20256,620 
20266,069 
2027 and thereafter10,796 
Total future amortization$43,386 


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6.     Cash, Cash Equivalents, and Funds Held for Customers

As part of the acquisition of Deloitte & Touche LLP’s pricing and contracting solutions business, the Company now provides payment processing services to some customers whereby the Company has contractual obligations to remit funds to various third parties on behalf of these customers. Funds received from these customers represent cash and cash equivalents and are reflected in the “Funds held for customers” line item on the condensed consolidated balance sheets.

The table below reconciles the cash and cash equivalents and funds held for customers as reported on the condensed consolidated balance sheets to the cash and cash equivalents on the condensed consolidated statements of cash flows (in thousands):
As of December 31, 2021As of September 30, 2021
Cash and cash equivalents$155,513 $165,467 
Funds held for customers592 316 
Total cash and cash equivalents$156,105 $165,783 

7.     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 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 December 31, 2021 and September 30, 2021.

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 $6.4 million and $6.8 million as of December 31, 2021 and September 30, 2021, respectively.

8.     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
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(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.

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 December 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 December 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.

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The net carrying amounts of the liability and equity components for the Notes were as follows (in thousands):
As of
December 31, 2021
As of
September 30, 2021
Liability component:
Principal amount$172,500 $172,500 
Unamortized discount(42,299)(44,803)
Unamortized issuance costs(3,244)(3,396)
Net carrying amount$126,957 $124,301 
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 December 31,
20212020
Coupon interest expense$1,132 $1,132 
Amortization of debt discount2,504 2,239 
Amortization of debt issuance costs152 118 
Total interest expense related to the Notes$3,788 $3,489 
Effective interest rate of the liability component12.32 %12.32 %

The unamortized debt discount and debt issuance costs will be amortized over 41 months as of December 31, 2021.

As of December 31, 2021, the total estimated fair value of the Notes was approximately $204.2 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.

9.     Stockholders’ Equity

The following tables present the changes in the components of stockholders’ equity (in thousands):

Three Months Ended December 31, 2021
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at September 30, 202136,059 $5 $380,528 $(1,205)$(255,810)$123,518 
  Issuance of common stock upon exercise of stock options
8 — 72 — — 72 
Issuance of common stock upon release of restricted stock units
366 — — — — — 
  Stock-based compensation— — 12,678 — — 12,678 
Equity component of convertible senior notes, net of issuance costs
— — — — —  
  Other comprehensive loss— — — (13)— (13)
  Net loss— — — — (6,266)(6,266)
Balance at December 31, 202136,433 $5 $393,278 $(1,218)$(262,076)$129,989 

For the three months ended December 31, 2021, additional paid-in capital included $5.4 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, 2021.
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Three Months Ended December 31, 2020
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at September 30, 2020$34,821 $5 $351,952 $(1,213)$(226,073)$124,671 
  Issuance of common stock upon exercise of stock options
4 26 — 26 
Issuance of common stock upon release of restricted stock units
224 — — — 
  Stock-based compensation— 5,128 — 5,128 
Equity component of convertible senior notes, net of issuance costs— — —  
  Other comprehensive loss— — 182— 182 
  Net loss— — — — (5,153)(5,153)
Balance at December 31, 202035,049 $5 $357,106 $(1,031)$(231,226)$124,854 

10.     Stock-based Compensation

As of December 31, 2021, the Company had approximately 2.5 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 three months ended December 31, 2021:
Restricted 
Stock Units
Outstanding
(in thousands)
Weighted
Average
Grant Date
Fair Value
Balance at September 30, 20211,748 $30.54 
Granted1,220 35.02 
Released(366)28.37 
Forfeited(90)31.50 
Balance at December 31, 20212,512 $33.00 

Stock-based compensation recorded in the condensed consolidated statements of operations is as follows (in thousands):
 Three Months Ended December 31,
 20212020
Cost of revenues  
Subscription $858 $523 
Professional services621 654 
Total stock-based compensation in cost of revenues1,479 1,177 
Operating expenses
Research and development1,281 1,131 
Sales and marketing1,620 1,553 
General and administrative2,606 1,267 
Total stock-based compensation in operating expenses5,507 3,951 
Total stock-based compensation$6,986 $5,128 


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11.     Income Taxes

The Company recorded income tax provisions of $0.4 million and $0.2 million, representing effective income tax rates of (6.3)% and (4.9)% for the three months ended December 31, 2021 and 2020, respectively. The income tax provision for the three months ended December 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 December 31, 2020 was primarily related to foreign taxes on the Company’s profitable foreign operations and foreign withholding taxes on dividends.

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.


12.     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 December 31,
 20212020
Numerator  
Basic and diluted  
Net loss attributable to common stockholders$(6,266)$(5,153)
Denominator
Basic and diluted
Weighted average shares used in computing net loss per share attributable to common stockholders
36,223 34,936 
Net loss per share attributable to common stockholders:
Basic and diluted$(0.17)$(0.15)
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 December 31,
 20212020
Stock options17 30 
Performance-based RSUs and RSUs2,512 2,265 
Shares issuable pursuant to the employee stock purchase plan90 66 
Convertible senior notes 5,176 
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.

13.     Litigation and Contingencies

Legal Proceedings
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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.


14.     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 6% and 9% of total revenues for the three months ended December 31, 2021 and 2020, respectively.

Long-Lived Assets

The following table sets forth the Company’s property and equipment, net, by geographic region (in thousands):
As of
December 31, 2021
As of
September 30, 2021
United States$1,278 $1,374 
India647 533 
Total property and equipment, net$1,925 $1,907 
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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 of Deloitte & Touche LLP’s pricing and contracting solutions business. 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. We primarily enter 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 as well as 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
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solution for reducing revenue loss and protecting profitability all the while meeting compliance requirements. The total purchase consideration was $57.8 million.

For the three months ended December 31, 2021 and 2020, our total revenues were $51.5 million and $42.7 million, respectively, representing a year-over-year increase of 21% primarily due to the addition of subscription and professional services revenues from the acquired business and increased subscription and professional services revenues from new and existing customers.

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 the ongoing COVID-19 pandemic. 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, including due to new variants, 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 managed support services and maintenance and support which generally renew on a one year or three year basis. 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. 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. 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 business services. 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, managed support services and support provided by business services, and maintenance and support for our on-premise solutions. 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 business services 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 capitalized 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 December 31,
 20212020
 (in thousands)
Revenues  
Subscription$38,088 $31,435 
Professional services13,454 11,299 
Total revenues51,542 42,734 
Cost of revenues
Subscription13,916 8,992 
Professional services8,735 8,124 
Total cost of revenues22,651 17,116 
Gross profit28,891 25,618 
Operating expenses
Research and development11,427 8,697 
Sales and marketing11,039 9,456 
General and administrative8,439 8,787 
Total operating expenses30,905 26,940 
Loss from operations(2,014)(1,322)
Interest expense, net3,778 3,462 
Other expenses (income), net100 130 
Loss before income taxes(5,892)(4,914)
Provision for income taxes374 239 
Net loss$(6,266)$(5,153)
Comparison of the Three Months Ended December 31, 2021 and 2020
Revenues
 Three Months Ended December 31, 
 20212020
Amount% of Total
Revenues
Amount% of Total
Revenues
Change ($)Change (%)
 (in thousands, except percentages)
Revenues      
Subscription$38,088 74 %$31,435 74 %$6,653 21 %
Professional services13,454 26 %11,299 26 %2,155 19 %
Total revenues$51,542 100 %$42,734 100 %$8,808 21 %

Subscription

Subscription revenues increased by $6.7 million, or 21%, to $38.1 million for the three months ended December 31, 2021 from $31.4 million for the same period last year. The increase in our subscription revenues was due primarily to increased SaaS revenue relating to our cloud-based solutions and the addition of business services. As a percentage of total revenues, subscription revenues remained flat. We intend to continue to focus on growing our recurring revenue from SaaS subscriptions in future periods.

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Professional services
Professional services revenues increased by $2.2 million, or 19%, to $13.5 million for the three months ended December 31, 2021 from $11.3 million for the same period last year. The increase in our professional services revenue was primarily driven by the increase in delivery activities in the first quarter of fiscal year 2022. As a percentage of total revenues, professional services revenues remained flat.

Cost of Revenues
 Three Months Ended December 31, 
 20212020
Amount% of
Revenues
Amount% of
Revenues
Change ($)Change (%)
 (in thousands, except percentages)
Cost of revenues      
Subscription$13,916 37 %$8,992 29 %$4,924 55 %
Professional services8,735 65 %8,124 72 %611 %
Total cost of revenues$22,651 44 %$17,116 40 %$5,535 32 %

Subscription

Cost of subscription revenues increased by $4.9 million, or 55%, to $13.9 million during the three months ended December 31, 2021 from $9.0 million for the same period last year. As a percentage of subscription revenues, cost of subscription revenues increased from 29% to 37% during the three months ended December 31, 2021, primarily due to an increase in employee-related costs from the acquired business. The cost of subscription revenue also included $0.7 million of amortization expense related to the recently acquired intangible assets.

Professional services
Cost of professional services revenues increased by $0.6 million, or 8%, to $8.7 million during the three months ended December 31, 2021 from $8.1 million for the same period last year. As a percentage of professional services revenue, cost of professional services revenues decreased from 72% to 65% primarily due to improved cost efficiencies.

Operating Expenses
 Three Months Ended December 31, 
 20212020Change ($)Change (%)
 (in thousands, except percentages)
Operating expenses    
Research and development$11,427 $8,697 $2,730 31 %
Sales and marketing11,039 9,456 1,583 17 %
General and administrative8,439 8,787 (348)(4)%
Total operating expenses$30,905 $26,940 $3,965 15 %
Research and Development
Research and development expenses increased by $2.7 million, or 31%, to $11.4 million during the three months ended December 31, 2021 from $8.7 million for the same period last year. The increase was primarily due to employee-related costs, outside services, and equipment expense.
Sales and Marketing
Sales and marketing expenses increased by $1.6 million, or 17%, to $11.0 million during the three months ended December 31, 2021 from $9.5 million for the same period last year. This increase was primarily due to a $0.7 million increase in employee-related costs, a $0.4 million increase in intangible amortization expense related to the acquisition and a $0.5 million increase in marketing programs.
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General and Administrative
General and administrative expenses decreased by $0.3 million, or 4%, to $8.4 million during the three months ended December 31, 2021 from $8.8 million for the same period last year. This decrease was primarily due to a $2.3 million decrease in acquisition-related expenses, partially offset by $1.6 million increase in employee-related costs and $0.4 million increase in other expenses.

Interest and Other Expenses (Income), Net
 Three Months Ended December 31,  
 20212020Change ($)Change (%)
 (in thousands, except percentages)
Interest expense, net$3,778 $3,462 $316 %
Other expenses (income), net$100 $130 $(30)(23)%

Interest expense, net, increased during the three months ended December 31, 2021 compared to the same period last year and was primarily driven by the accretion of discount cost on the convertible senior notes we issued in May 2020. See Note 8 to the Notes to Condensed Consolidated Financial Statements.

The change in other expenses (income), net, was primarily due to currency fluctuations.

Provision for Income Taxes
 Three Months Ended December 31,  
 20212020Change ($)Change (%)
 (in thousands, except percentages)
Provision for income taxes$374 $239 $135 56 %

The income tax provision for the three months ended December 31, 2021 was primarily related to foreign taxes on our 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 December 31, 2020 was primarily related to foreign taxes on our profitable foreign operations and state minimum taxes.

Liquidity and Capital Resources

As of December 31, 2021, we had cash and cash equivalents of $155.5 million. Based on our future expectations, including the potential ability to raise cash through additional financing, and historical usage, we believe our current cash and cash equivalents are sufficient to meet our operating needs including principal payments related to our debt for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of spending to support research and development efforts, expansion of our business and capital expenditures. To the extent that existing cash and cash equivalents and cash from operations are insufficient to fund our future activities, we may elect to raise additional capital through the sale of additional equity or debt securities, obtain a credit facility or sell certain assets. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock and terms of any debt could impose restrictions on our operations. The sale of additional equity or additional convertible debt securities could result in more dilution to our stockholders and additional financing may not be available in amounts or on terms acceptable to us. We may also seek to invest in, or acquire complementary businesses or technologies, any of which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

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Cash Flows
 Three Months Ended December 31,
 20212020
(in thousands)
Net cash used in operating activities$(9,685)$(221)
Cash flows used in investing activities(325)(56,780)
Cash flows provided by financing activities348 26 

Operating Activities
Cash provided by or used in operating activities is primarily influenced by the sales of our products, our personnel-related expenditures, our facility related costs and the amount and timing of customer payments. Our largest source of operating cash inflows is cash collections from our customers from the sale of subscriptions and professional services.
Net cash used in operating activities during the three months ended December 31, 2021 was primarily the result of non-cash adjustments of $13.1 million exceeding our net loss of $(6.3) million partially offset by net cash outflows of $16.5 million from changes in operating assets and liabilities. Non-cash expenses consisted primarily of stock-based compensation of $7.0 million, amortization of debt discount and issuance costs of $2.7 million, depreciation and amortization of $2.2 million, and amortization of capitalized contract acquisition costs of $1.0 million. The net change in operating assets and liabilities primarily reflects an outflow from the changes in other current and long-term liabilities of $1.5 million, accounts receivable of $6.5 million due to timing of billing and cash collections, accounts payable of $2.2 million, and accrued employee compensation of $8.4 million due to payments of bonuses partially offset by an inflow from the changes of prepaid expenses and other assets of $1.2 million and deferred revenue of $1.0 million caused by the timing of invoicing.
Net cash used in operating activities during the three months ended December 31, 2020 was primarily the result of our net loss of $5.2 million and net cash outflows of $4.6 million from changes in operating assets and liabilities, partially offset by non-cash adjustments of $9.5 million. Non-cash expenses consisted primarily of stock-based compensation of $5.1 million, amortization of debt discount and issuance costs of $2.4 million, depreciation and amortization of $1.3 million, and amortization of capitalized contract acquisition costs of $0.7 million. The net change in operating assets and liabilities primarily reflects an outflow from the changes in accrued employee compensation of $5.6 million due to payments of bonuses and other employee benefits, other current and long-term liabilities of $0.9 million, prepaid expenses and other assets of $0.6 million, accounts payable of $0.4 million, accounts receivable of $0.2 million due to timing of billing and cash collections, offset mainly by an inflow from the changes in deferred revenue of $3.1 million caused by the timing of invoicing.

Investing Activities
Net cash used in investing activities for the three months ended December 31, 2021 was related to the acquisition and purchases of property and equipment. See Note 5 to the Notes to Condensed Consolidated Financial Statements for more information of the acquisition.
Net cash used in investing activities for the three months ended December 31, 2020 was related to the acquisition of Deloitte & Touche LLP’s pricing and contracting solutions business and purchases of property and equipment. See Note 6 Acquisition, Goodwill, and Intangible Assets for more information of the acquisition.

Financing Activities
Net cash provided by financing activities for the three months ended December 31, 2021 and 2020 resulted from purchases made under our employee stock purchase plan, stock option exercises and the increase in funds held for customers.

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Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies referred to below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our most recent Annual Report filed on Form 10-K for the fiscal year ended September 30, 2020.

Adjusted EBITDA

Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). We define adjusted EBITDA as net loss before items discussed below, including stock-based compensation expense, depreciation and amortization, acquisition-related expense, interest expense, net, other expenses (income), net, and provision for (benefit from) income taxes. We believe adjusted EBITDA provides investors with consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our operating results and our competitors’ operating results. We also use this measure internally to establish budgets and operational goals to manage our business and evaluate our performance.

We understand that, although adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, adjusted EBITDA has limitations as an analytical tool and it should not be considered in isolation or as a substitute for analysis of our results of operations as reported under U.S. GAAP. These limitations include:
adjusted EBITDA does not reflect stock-based compensation expense;
depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future and adjusted EBITDA does not reflect any cash requirements for these replacements;
adjusted EBITDA does not include acquisition-related expense;
adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of interest expense and other income and expense; and
other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following tables provide a reconciliation of adjusted EBITDA to net loss (in thousands):
 Three Months Ended December 31,
 20212020
Reconciliation of Adjusted EBITDA  
Net loss$(6,266)$(5,153)
Adjustments
Stock-based compensation expense6,986 5,128 
Depreciation and amortization2,240 1,320 
Acquisition-related expense— 2,362 
Interest expense, net3,778 3,462 
Other expenses (income), net100 130 
Provision for income taxes374 239 
Adjusted EBITDA$7,212 $7,488 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in our exposure to market risks from that discussed in Item 7A of our Annual Report on Form 10-K for the year ended September 30, 2021.

Item 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by a management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in various legal proceedings arising from the normal course of our business activities. We accrue a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of December 31, 2021, it was not reasonably possible that any material loss had been incurred. We review these matters at least quarterly and adjust our accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events.

ITEM 1A. Risk Factors
Our operating and financial results are subject to various risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this report, including the condensed consolidated financial statements and the related notes included elsewhere in this report, before deciding whether to invest in shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below actually occurs, our business, financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
Risk Factors Summary
Our business is subject to a number of risks and uncertainties, including those risks discussed at-length below. These risks include, among other things, the following:
We have incurred losses in the past, and we may not be profitable in the future.
Our operating results are likely to vary significantly from period to period and be unpredictable, which could cause the trading price of our common stock to decline.
We must improve our sales execution and increase our sales channels and opportunities in order to grow our revenues, and if we are unsuccessful, our operating results may be adversely affected.
Our sales cycles are time-consuming, and it is difficult for us to predict when or if sales will occur.
Our revenues are dependent on our ability to maintain and expand existing customer relationships and our ability to attract new customers.
The loss of one or more of our key customers could slow our revenue growth or cause our revenues to decline.
Because we recognize a majority of our subscription revenues from our customers over the term of their agreements, downturns or upturns in sales of our cloud-based solutions may not be immediately reflected in our operating results.
Our implementation cycle is lengthy and variable, depends upon factors outside our control and could cause us to expend significant time and resources prior to earning associated revenues.
The ongoing COVID-19 pandemic has had a material impact on the U.S. and global economies and could have a material adverse impact on our employees, suppliers and customers, which could adversely and materially impact our business, financial condition and results of operations.
We depend on our management team and our key sales and development and services personnel, and the loss of one or more key employees or groups could harm our business and prevent us from implementing our business plan in a timely manner.
Our transition from an on-premise to a cloud-based business model is subject to numerous risks and uncertainties.
Our future growth is, in large part, dependent upon the increasing adoption of revenue management solutions.
We are highly dependent upon the life sciences industry, and factors that adversely affect this industry could also adversely affect us.
Our acquisition of other companies could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.
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We rely on third parties and their systems as we introduce a variety of new services, including the processing of transaction data and settlement of funds to us and our counterparties, and these third parties’ failure to perform these services adequately could materially and adversely affect our business.
Failure to comply with applicable laws, regulations, or industry standards may harm our business and financial condition.
If our solutions do not interoperate with our customers’ IT infrastructure, sales of our solutions could be negatively affected, which would harm our business.
If our solutions experience data security breaches, and there is unauthorized access to our customers’ data, we may lose current or future customers, our reputation and business may be harmed, and we may incur significant liabilities.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand, which would substantially harm our business and operating results.
Our stock price may be volatile, and you may be unable to sell your shares at or above your purchase price.
Our indebtedness could adversely affect our business and limit our ability to expand our business or respond to changes, and we may be unable to generate sufficient cash flow to satisfy our debt service obligations.
Risks Related to Our Financial Condition
We have incurred losses in the past, and we may not be profitable in the future.
We have incurred net losses of $6.3 million and $5.2 million for the three months ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $262.1 million. Our expenses may increase in future periods as we implement additional initiatives designed to grow our business, including, among other things, increasing sales to existing customers, expanding our customer base, introducing new applications, enhancing existing solutions, extending into the mid-market, and continuing to penetrate the technology industry and integrating the personnel, products, technologies and customers from our acquisition of Deloitte & Touche LLP’s pricing and contracting solutions business. Increased operating expenses related to personnel costs such as salary, bonus, commissions and stock-based compensation as well as third-party contractors, travel-related expenses and marketing programs may also increase our expenses in future periods. In the near-term, our revenues may not be sufficient to offset increases in operating expenses, and we expect that we will incur losses. Additionally, we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may result in losses in future periods. We cannot assure you that we will again obtain and maintain profitability in the future. Any failure to return to profitability may materially and adversely affect our business, results of operations and financial condition.
Our operating results are likely to vary significantly from period to period and be unpredictable, which could cause the trading price of our common stock to decline.
Our operating results have historically varied from period to period, and we expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:
our ability to increase sales to and renew agreements with our existing customers;
our ability to expand and improve the productivity of our direct sales force;
our ability to attract and retain new customers and to improve sales execution;
our ability to continue to transition our customers from an on-premise to a cloud-based business model;
the timing and volume of incremental customer purchases of our cloud-based solutions, which may vary from period to period based on a customer’s needs at a particular time;
our a