UNITED STATTT ES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORTRR PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
OR
TRANSITION REPORTRR 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
( State or other jurisdiction of
incorporation or organization)
777 Mariners Island Boulevard, Suite 300
San Mateo, California
(Address of principal executive offices)
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77-0528806
(I.R.S. Employer
Identification No.)
94404
(Zip Code)
Registrant’s telephone number,rr including area code: (650) 610-4600
Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.00015 Per Share; Common stock traded on the New York Stock
Exchange stock market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
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 ☒ 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 ☒ NO ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained,
to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,yy or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”yy and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☐
☐
☐
Accelerated filer
Smaller reporting company
☒
☐
If an emerging growth company,yy 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 ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates
common stock on The New York Stock Exchange Stock Market on March 31, 2018, was approximately $471 million.
The number of shares of Registrant’s Common Stock outstanding as of November 2, 2018 was 31,447,507. Portions of the Registrant’s Definitive Proxy
Statement relating to the Annual Meeting of Shareholders, scheduled to be held on February 15, 2019, are incorporated by reference into Part III of this Report.
of the Registrant, based on the closing price of the shares of
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TABLE OF CONTENTS
PART I
Business ................................................................................................................................................................
Item 1.
Item 1A. Risk Factors ..........................................................................................................................................................
Item 1B. Unresolved Staffff Comments.................................................................................................................................
Item 2.
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Item 3.
Item 4. Mine Safety Disclosures
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Properties
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Legal Proceedings
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PART II
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Market for Registrant’s Common Equity,yy Related Stockholder Matters and Issuer Purchases of Equity
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Securities...............................................................................................................................................................
Item 5.
Selected Consolidated Financial Data ..................................................................................................................
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk..............................................................................
Item 8.
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Consolidated Financial Statements and Supplementary Data
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
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Item 9A. Controls and Procedures .......................................................................................................................................
Item 9B. Other Information .................................................................................................................................................
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PART III
and Corporate Governance
Item 10. Directors, Executive Officers
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Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
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Item 15. Exhibits, Financial Statements Schedules ............................................................................................................
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PART IV
[THIS PAGE INTENTIONALLY LEFT BLANK]
SPECIAL NOTE REGARDING FORWARR
RD-LOOKING STATTT EMENTS
PART I.
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 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). All
statements contained in this report other than statements of historical fact, including statements regarding our future results of
operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking
statements. The words “believe,” “may,”yy “will,” “estimate,” “continue,” “anticipate,” “goal,” “plan,” “intend,” “expect,” “seek”,
and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements
largely on our current expectations and projections about future events and trends. These forward-looking statements are subject
to a number of risks, uncertainties and assumptions, including those described under “Part I, Item 1A. Risk Factors,” and elsewhere
in this report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time.
It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ
ff materially from those contained in any forward-
looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in
this report may not occur and actual results could differ
ff materially and adversely from those anticipated or implied in the forward-
looking statements.
You should not rely upon forward-looking statements as predictions of future events. 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,yy performance, or achievements. We are
under no duty to update any of these forward-looking statements after the date of this report or to conform these statements to
actual results or revised expectations.
As used in this report, the terms “Model N,” “we,” “us,” “our,” and “the Company” mean Model N, Inc. and its subsidiaries
unless the context indicates otherwise.
1
ITEM 1.
Business
Overview
Model N is a leader in Revenue Management solutions. Our solutions transform the revenue lifecycle from a series of
disjointed operations into a strategic end-to-end process. With deep industry expertise, we support the complex business needs of
the world’s leading brands in life sciences and technology across more than 120 countries, including Pfizer, AstraZeneca, Sanofi,
Gilead, Abbott, Stryker, AMD, Micron, Seagate, STMicroelectronics, NXP,PP Sesotec, and Southern States.
Many companies, in particular in the life sciences and technology industries, experience a gap between the strategic
importance of revenue management and the current state of their revenue management processes. Historically,yy companies tended
to rely on a disjointed patchwork of manual processes, spreadsheets, point applications and legacy systems to manage their revenue
processes. These processes and systems operated in isolation from one another and were labor intensive, error prone, inflexible
and costly,yy often resulting in missed revenue opportunities, suboptimal margins and increased revenue compliance risk. Current
industry trends, which include shortening product lifecycles, tightening compliance and regulatory controls, increasing channel
complexity and growing volumes of transactional data are causing these outdated processes and legacy systems to become
increasingly ineffective.
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Our expertise in cloud-based revenue management solutions and knowledge of the life sciences and technology industries
has enabled us to develop software designed to meet the unique, strategic needs of these industries, such as managed care and
government pricing for life sciences companies and channel incentives for technology companies. Model N Revenue Cloud
transforms the revenue lifecycle into a strategic, end-to-end process aligned across the enterprise. Our industry specific solution
suites – Revenue Cloud for Pharma, Revenue Cloud for Med Tech, Revenue Cloud for Semiconductors and High Tech
a range of solutions from individual products to complete product suites. Deployments may vary from
Manufacturing – offer
specific divisions or territories to enterprise-wide implementations.
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Overview of the Life Sciences and Technology Industries
The life sciences and technology industries are large and highly fragmented. Companies in both industries market their
products to a global customer base through diverse channels. Significant costs are required to launch a drug to the global market.
Regulatory pressures, consolidation, and other factors in these industries continue to drive a significant focus on revenue
management.
Management of the revenue lifecycle is a strategic imperative and source of competitive advantage for life sciences and
technology companies as they address increasingly globalized markets, sophisticated buyers, complex channels and expanding
volumes of data from internal and market sources. Emerging business models like outcome based pricing, service bundles, further
complicate the revenue management processes, which increases the need for effective
solution.
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Several trends specific to these industries further complicate revenue management.
Life sciences:
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the emergence of large group purchasing, managed care organizations and integrated healthcare delivery networks
drive increased pricing pressure, contract volume and complexity;
increased customer and channel incentives and rebates result in the increased risk of extending unearned discounts
and the overpayment of rebates;
shift of purchasing influence from physicians to economic buyers makes price and commercial terms key decision
making factors;
increased spending on healthcare by governments instead of commercial entities adds further regulatory oversight
to transactions; and
increased scope of government mandates, frequency of regulatory reporting and audits, and fines, all of which increase
administrative burden and monitoring costs.
Technology:
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shortened product lifecycles drive rapid pricing changes and require quick responses to quotes and competitive
bidding;
increased number of core technology products sold into different
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end markets with segment-specific pricing;
cyclicality and rising R&D costs contributing to a focus on maximizing sell time, margins and revenues;
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increased complexity of multi-tiered global distribution channels which intensify channel conflict and price erosion;
changing financial reporting requirements due to channel complexity; and
increased use of off-invoice
of price transparency that can erode gross margins.
discounting to offset
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upfront discounts and mask end-customer pricing result in a lack
Challenges to Effective Revenue Management
Traditionally,yy companies addressed revenue management through a patchwork of manual processes and inflexible and
costly custom solutions. This outdated approach to revenue management impedes the ability of companies to respond to changing
market conditions, preventing them from maximizing revenue and increasing their revenue compliance risk. Critical challenges
include:
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Incomplete and unreliable information for key strategic decisions. Legacy manual processes and systems used
to manage the revenue lifecycle creates silos of data causing companies to make strategic marketing, pricing and
resource allocation decisions that are often based on incomplete or inaccurate information. As a result, revenue
can fail to positively
strategies can be suboptimal, budgets may be misallocated, and sales and marketing efforts
impact revenues.
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Revenue leakage due to inadequate contract management and enforcement. Customer-specific contracts with
complex pricing and commercial terms are common in many industries, in particular life sciences and technology.
When the commercial terms of these contracts are not automated and monitored systematically,yy deviations from
contract pricing can occur, volume commitments can be missed, unearned discounts may be given, and revenue
can be lost.
Revenue leakage due to overpayment of incentives. Life sciences and technology companies process massive
volumes of rebates and incentives. A lack of centralized, automated and enforceable processes can result in
overpayment of incentives. Revenue leakage is also driven by inconsistent global pricing, poor price concession
controls, and unmet contractual volume commitments.
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pricing across geographies and complex channels. Sophisticated buyers deploy global procurement
Ineffective
strategies to discover and exploit regional and channel differences
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enforce a single price for a specific sales opportunity across regions and channels can result in channel conflicts,
which result in price and revenue erosion.
in pricing and contracting. The inability to
Inaccurate financial reporting. Complex contracts and distribution channels have made it more difficult
and process financial information, which can result in inaccurate financial reporting. For example, technology
companies face significant complexity in financial reporting and revenue recognition at the point of sale in their
distribution channels. Life sciences companies have significant challenges correctly accruing their massive rebate
and incentive claim volumes.
to obtain
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complying with complicated government regulations. Satisfying the regulatory requirements of
Difficulty
numerous federal and state programs is increasingly complex for life sciences companies. For example,
government-driven programs require complex monitoring and reporting to compute and pay mandated rebates and
fees under numerous federal and state programs. Government audits can expose ineffective
regulatory requirements and can result in penalties or program ineligibility.
management of these
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Our Solutions
Our solutions enable customers to achieve significant returns on investment through increased revenues and gross margins
while addressing vital business objectives:
•
•
Driving optimal pricing and contracting strategies. Our customers use our solutions to develop, deploy,yy monitor
and drive optimal pricing and contracting strategies. Our solutions consolidate information across the revenue
lifecycle and provide visibility into historical volume, price and contract performance trends. Our pricing
analytics enable our customers to identify untapped revenue opportunities across customers or products and make
better pricing and contracting decisions.
Realizing greater value from contracts. Our solutions enable customers to codify and automate complex pricing,
incentives and financial and fulfillment terms that previously resided mainly on paper contracts. Our customers
are able to maximize the value of contracts and realize additional revenue by tracking their customers’
performance and enforcing contract terms. Our solutions automatically price orders in real-time and enforce
contract pricing and commercial terms. Our solutions also enable customers to track and execute other revenue-
enhancing financial terms, such as negotiated price increases.
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•
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Maximizing revenue by standardizing and enforcing pricing and discounting policies. Our solutions allow
customers to standardize pricing policies that can be enforced automatically across the enterprise and the channels
to restrict unauthorized sales practices and discounting by sales personnel. By raising the visibility of, requiring
authorization of, and enabling rapid resolution of, non-standard pricing, our customers can use our solutions to
reduce unauthorized discounting. Through our channel solutions, our customers can gain visibility into and
enforce channel pricing, and reduce price erosion caused by different
price quotes for the same end customer.
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Executing and optimizing channel incentives. Our solutions enable customers to manage the entire incentive
lifecycle, from contracting to recognition and payment. Accurate management allows our customers to eliminate
unearned discounts and overpayment of incentives. Our solutions also provide our customers with greater cross
channel visibility to manage the effectiveness
customers can better utilize their channel incentives to positively influence channel behavior and thus increase
revenue.
of their channel incentive programs. With this insight, our
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Achieving accurate financial reporting. With our solutions, customers can manage all aspects of the contract-to-
payment process related to calculating, monitoring, processing and triggering payments to end customers and
channel intermediaries. For example, by automating all rebates, these liabilities can be accurately accrued,
enabling our customers to consistently record accruals in compliance with financial accounting requirements,
while ensuring customers and channels are credited on a timely basis.
Automating government regulatory compliance to reduce revenue risk. Our solutions enable customers to
comply systematically with government regulations, policies, procedures, and pricing and reporting requirements.
Further, by automating and integrating contract terms, incentives and pricing into mandated price and payment
calculations, our life sciences customers are better able to manage compliance with the terms of critical
government programs that provide significant sources of revenue.
Our Competitive Strengths
We believe our key competitive strengths include:
•
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•
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Comprehensive approach to revenue management. Our solutions address the end-to-end revenue management
lifecycle. Our integrated, end-to-end application suites enable our customers to transform their revenue
management processes from disjointed tactical operations into a cohesive, strategic, end-to-end process. Providing
suites of cloud-based solutions is an advantage that enables us to address both decision making and process
automation.
Deep domain knowledge. Our expertise in the revenue management needs of life sciences and technology
companies enables us to develop solutions that address the unique demands of these industries. By incorporating
best practices into our industry-specific solutions, implementation methodologies and support programs, our
customers can experience significantly accelerated time to value. Our team possesses the deep industry expertise
in life sciences and technology to enable our customers to maximize and accelerate the transformational benefits
of our solutions.
Strong installed customer base. We have established a reputation for delivering revenue management solutions to
leading life sciences and technology customers. Our close customer relationships provide us with insight into how
these companies use our solutions and help us to maintain a competitive advantage by anticipating their future
requirements. We also believe that the use of our products by respected industry leaders also increases the value of
our brand in these industries.
Talented team focused on customer success. We employ experts from the life sciences and technology industries
in key customer-facing and development roles. Additionally,yy we have established strong core values that start with
a focus on customer success. Our customer focus has resulted in close relationships with our customers and a
strong reference base for sales opportunities.
Products
We provide solutions that span the organizational and operational boundaries of functions such as sales, marketing and
finance, and serve as a system of record for key revenue management processes including pricing, contracts, rebates, incentives,
channel management, and regulatory compliance. Our solutions are purpose-built for the life sciences and technology industries
and are designed to work with enterprise resource planning (ERP) and customer relationship management (CRM) applications
that do not typically provide revenue management capabilities. Our solutions enable real-time pricing, contract management,
vertical sales management (such as for the semiconductor industry), and channel incentives management, including rebates,
incentives and regulatory compliance. Our Revenue Cloud suites are comprised of multiple applications, which are integrated to
work together but which may be deployed individually. For example, when deployed as an interconnected suite, our solutions
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allow prices that are set up in the price management process to flow into the quoting process. Similarly,yy closed deals are captured
in contract management and can be synchronized with ERP systems and into regulatory reporting as required by government
agencies. Our solutions provide critical data that is typically not available in either CRM or ERP systems, such as prices, quotes,
contracts, incentives and rebate claims. Our solutions can also provide customers predictive revenue insight optimization of sales
and marketing investments and offers,
as well as customer profitability intelligence.
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Revenue Clouds for Pharma and Med Tech – These Revenue Clouds help life science companies optimize revenue throughout
the commercialization process and reduces revenue leakage, while adhering to government regulations.
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Government Pricing. Helps customers optimize revenue and reduces risk of fines and other penalties due to non-
compliance with regulatory pricing requirements.
Medicaid. Helps customers comply with regulatory requirements and pay rebate claims timely and at correct rates
for government Medicaid programs.
Global Pricing Management. Enables a streamlined pricing process by consolidating information into a single
system of record, which provides users’ access to accurate and up-to-date information.
Global Tender Management. Optimizes revenue regionally and globally by enabling opportunity segmentation
and targeting, optimal bid pricing and post-award tracking to manage the contract lifecycle and award value.
Provider Management. Reduces the risk of non-compliance with regulatory requirements throughout the
institutional contracting process.
Payer Management. Reduces the risk of non-compliance with regulatory requirements throughout the pharmacy
benefit manager and payer contracting process.
Pricing Intelligence. Helps customers to quickly identify margin and revenue issues, and disaggregate their data
to identify root causes.
Configure Price Quote. Streamlines the quote to contract process by enabling the configuration of complex
services, bundles and solutions into a single interface. This application provides integration with the SAP ERP
system and SAP Variant Configurator.
Contract Lifecycle Management. Enables organizations to create and manage all types of sell-side contracts in
one place including service contracts, sales contracts, NDAs, statements of work, and more. The solution enables
users to create and manage contracts directly.
Revenue Cloud for
sales processes by adopting a strategic approach to manage the revenue lifecycle by planned revenue.
Semiconductors and High Tech Manufacturing- These Revenue Clouds enable customers to modernize their
d
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Deal Management. This subscription increases deal conversion and pricing consistency with pricing, quotes and
contracts natively supporting the High Tech Channel end-to-end.
Deal Intelligence. This subscription controls price concessions and determines ideal prices using in context
analytics.
Channel Management. This subscription provides manufacturers a clearer view of inventory,yy including the ability
to evaluate and perform actions, such as price protection and stock rotation and match available inventory to
quotes.
Development Fund Management. This subscription allows companies to streamline their MDF process
Market
MM
and reduce revenue leakage by increasing partner participation.
Sales Conductor.rr This subscription extends Salesforce Sales Cloud with purpose-built capabilities for the
semiconductor and electronic component industries.
Rebates Management. This subscription centralizes control of rebate programs to reduce upfront discounts and
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effective
management of all rebate programs.
Channel Data Management. This subscription automates the process of collection, cleansing, validation and
standardization of channel partner data, such as POS, inventory,yy and claims.
Price Quote. Streamlines the quote to contract process by enabling the configuration of complex
Configure
CC
services, bundles and solutions into a single interface. This application provides integration with the SAP ERP
system and SAP Variant Configurator.
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•
Contract Lifecycle Management. Enables organizations to create and manage all types of sell-side contracts in
one place including service contracts, sales contracts, NDAs, statements of work, and more. The solution enables
users to create and manage contracts directly.
Technology
Our Revenue Cloud solution is architected in layers. The first layer is composed of end-user operational and analysis
solutions. The middle layer is comprised of supporting services and business engines. The lowest layer is comprised of a unified
technology platform used to construct and support all modules in higher layers. The platform also provides access to the normalized
operational database where the transactional revenue management data used by the operational solutions are stored. It also provides
access and facilitates the synchronization with the de-normalized analytics database where the revenue management data used by
the analytics solutions are stored.
Our Revenue Cloud solutions are built on a variety of industry standards, depending on the solution, such as Java EE,
HTML5, Amazon Web Service and Force.com, which give the end-users an intuitive and familiar browsing experience. These
standard technologies enable us to offer
our customers a familiar technology environment that is widely understood and utilized,
as well as the ability to use certain solutions on a tablet and other mobile devices, including smart phones running iOS and Android.
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Our technology platform has allowed us to quickly develop new solutions, features and functionalities. We believe the
platform is configured to meet the needs of broad horizontal markets as well as specific vertical markets and, within each instance,
to meet the specific needs of each of our customers. The flexibility of the technology platform has also allowed us to add mobile
manner, and we believe it will enable us to continue to
device support and deploy cloud-based solutions in a rapid and efficient
add new capabilities in the future.
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Our technology is designed specifically to handle the complex calculations and massive data sets associated with revenue
management processes typical in the life sciences and technology industries. With the expansion of global deployments, scalability
has also been a key requirement of our customers and has been a focus for us across all of the layers of our application suites.
Our solutions have been designed to ensure high reliability,yy strong security and the technology platform includes a
comprehensive set of built-in features and management tools to allow optimal and continuous operation. The Revenue Cloud for
Pharma, Revenue Cloud for Med Tech, Revenue Cloud for Semiconductors and High Tech Manufacturing suites are only offered
to our customers through the cloud. We operate a reliable architecture designed to reduce the risk associated with infrastructure
outages, improve system scalability and security,yy and allow for flexibility in deployment. The environment for our cloud-based
solutions is designed to be secure and provide high availability with disaster recovery capabilities.
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Services and Customer Support
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We offer
a comprehensive set of services to assist our customers through the full lifecycle of new business transformations
or upgrades of existing solutions. We help our customers define, implement and support or manage our solutions. We provide
implementation services, managed services and strategic services both on and off-shore,
as described below.
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Implementation services. We assist our customers in the implementation or upgrade of our Revenue Cloud,
including project management, design and solution blueprint, process improvement, application configuration or
customization, systems integration, data cleansing and migration, testing and performance tuning, production
cutover and post go-live support.
Managed services. We offer
legacy contract or in the cloud, which include systems administration and infrastructure management, application
support, custom feature support and education services, including process, application and end-user training.
ff managed services for customers using our solutions either on-premise through a
Strategic services. We assist our customers in defining best practices and strategies in revenue management,
assessing the capability of existing transaction and decision support solutions, developing business cases for
change and transformation plans and answering strategic questions.
Customer support. We deliver customer support from support centers located in United States, as well as at our
offices
in India. We offer
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to our support resources.
including 24x7x365, packaged into varying levels of access
a range of support offerings,
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For project delivery,yy we use a standard implementation methodology incorporating lessons learned from past work to ensure
the success of our current projects. This methodology enables us to predictably estimate project costs and schedule, and proactively
mitigate most implementation challenges.
In addition, we have cultivated relationships to promote and assist with the implementation of our solutions with consulting
firms. While we do not maintain formal contractual relationships with these firms that require them to promote our solutions to
their clients, we work with them for implementation and other professional services projects. As a result, these firms have expertise
in our technologies and best practices and have invested in building out their practice areas with our revenue management solutions.
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We deploy our resources globally through offices
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located in the United States, India, and Switzerland.
Customers
As of September 30, 2018, we had 154 direct customers which includes two channel partners. These channel partners use
our cloud-based software to serve over 20 end customers in life sciences. We often sell to multiple divisions within our customers’
organizations, which have the ability to independently purchase solutions and services directly; however, we treat multiple divisions
as a single customer to the extent they are part of a consolidated corporation. For the fiscal year ended September 30, 2018, revenues
from our life sciences and technology customers accounted for approximately 83% and 17% of our total revenues, respectively.
Our customers range in size from the largest multi-national corporations to smaller, emerging companies. Our customers represent
a range of sub-verticals within the larger life sciences and technology industries, including biotechnology,yy pharmaceutical, medical
device, generics, semiconductor, electronic component, consumer electronics and software. During the fiscal years ended
September 30, 2018 and 2017, one customer, Johnson & Johnson, accounted for approximately 15% and 11% of our total revenues,
respectively. However, during the fiscal year ended September 30, 2018 and 2017, no customer represented more than 10% of our
subscription revenues. During the fiscal year ended September 30, 2016, no customer accounted for more than 10% of our total
revenues.
We pursue close, long-term relationships with our customers because we believe strong customer relationships are the key
to our success. Many of these relationships date back to our original on-premise, perpetual license business model. Customers
maintaining on-premise implementations under legacy perpetual license contracts may purchase, at their discretion, maintenance
and support services and in some cases managed services on an annual basis. For the last several years, we have been transitioning
our business model to software as a service. New customers as well as customers who originally purchased a perpetual license
now enter into a software as a service agreement that provides for a subscription to our solutions as well as implementation services.
Sales and Marketing
We primarily target large and mid-sized organizations worldwide through our direct sales force. Our sales and marketing
programs are also organized by geographic region. We augment our sales professionals with solutions engineers and industry
domain experts via our Center of Excellence. These professionals work closely with prospective customers during the sales process.
Our marketing team supports sales with demand generation, competitive analysis and sales tools, and contributes to the sales
process through lead generation, brand building, industry analyst relations, public relations and industry research.
We host an annual customer conference, Rainmaker, which plays a significant role in driving sales of our solutions. Customers
are invited both as attendees and participants to deliver sessions relevant to the interests and practices of the life sciences and
technology industries. We also invite potential customers to this conference in order to leverage our strong customer relationships
to accelerate sales cycles. In addition, Rainmaker provides a forum to build our eco-system of strategic partner relationships,
offering
partners the opportunity to work closely with our sales force on joint sales pursuits.
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Research and Development
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Our research and development organization is responsible for the definition, design, development, testing, certification and
ongoing maintenance of our solutions. Our efforts
are focused on developing new solutions and technologies and further enhancing
the functionality,yy reliability,yy performance and flexibility of existing solutions. When considering improvements and enhancements
to our solutions, we communicate with our customers and partners who provide significant feedback for product development and
innovation. We focus our efforts
on anticipating customer demand and bringing our new solutions and enhancements of existing
solutions to market through a seasonal release schedule (Spring, Summer, and Winter) in order to remain competitive in the
marketplace. We also closely monitor the changes in business environment and regulations in our target industries, particularly in
life sciences, where quick deliveries of updates to our solutions are critical to allowing our customers to remain in compliance
with government regulations.
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Because our solutions often serve as a system-of-record for our customers’ revenue management processes, our research
reflect the extensive IT needs of our customers in both life sciences and technology. Our research and
continue to focus on enhancing our solutions to meet the increasingly complex infrastructure requirements
and development efforts
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development efforts
of our customers in these industries.
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Our product development process is based on deep industry knowledge and familiarity with the specific requirements of
individual customers, combined with continued innovation using state of the art software development processes and tools. We
follow an “agile” development process, which helps us clarify requirements and receive feedback early,yy accommodate changes
and deliver products that better match the overall needs of our customers with higher quality.
As of September 30, 2018, our research and development team consisted of 232 full-time employees globally.
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Competition
The market for revenue management solutions is highly competitive, fragmented and subject to rapid changes in technology.
We face competition from spreadsheet-assisted manual processes, internally developed solutions, large integrated systems vendors,
providers of business process outsourcing services, horizontal revenue management solutions and smaller companies that offer
point solutions. Companies lacking information technology (IT) resources often resort to spreadsheet-assisted manual processes
or personal database applications. In addition, some potential customers, particularly large enterprises, may elect to develop their
own internal solutions, including custom-built solutions that are designed to support the needs of a single organization. Companies
with large investments in ERP or CRM applications, which do not typically provide revenue management capabilities, may extend
these horizontal applications with customizations or point solution applications in order to address single or a small set of revenue
management sub processes or drivers. Common horizontal applications that customers attempt to configure for this purpose in the
life sciences and technology industries include large integrated systems vendors like SAP AG and Oracle Corporation. We also
encounter competition from small independent companies, which compete on the basis of price, unique product features or functions
and custom developments.
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We believe we compete based primarily on the following factors:
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industry expertise;
comprehensiveness of solution;
reliability,yy scalability and performance;
access to prospective customers through strategic partnerships;
global system and support capabilities; and
industry brand, reputation and customer base.
While we believe that we compete favorably on the basis of each of the factors listed above, many of our competitors have
greater name recognition, larger sales and marketing budgets and greater resources than we do and may have pre-existing
relationships with our potential customers, including relationships with, and access to, key decision makers within these
organizations, and major distribution agreements with consultants and system integrators. Moreover, many software vendors could
bundle solutions or offer
them at a low price as part of a larger product sale.
ff
With the introduction of new technologies and market entrants, we expect competition to intensify in the future. We also
applications to enter our market with
expect enterprise software vendors that focus on enterprise resource planning or back-office
competing products. In addition, we expect sales force automation vendors to acquire or develop additional solutions that may
compete with our solutions.
ff
Intellectual Property
We rely upon a combination of copyright, trade secret, trademark and, to a lesser extent, patent laws, and we also rely on
contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. As of
September 30, 2018, we had ten patent applications pending and five issued patents expiring between 2023 and 2034. We have a
number of registered and unregistered trademarks. We maintain a policy requiring our employees, consultants and other third
parties to enter into confidentiality and proprietary rights agreements and to control access to our software, documentation and
other proprietary information. We also believe that factors resulting from our length of presence in the market and significant
research and development investments, such as our deep expertise in life sciences and technology revenue management practices,
the ability of our solutions to handle the complexities of revenue management processes, the technological and creative skills of
our personnel, the creation of new features and functionality and frequent enhancements to our solutions are essential to establishing
and maintaining our technology leadership position.
ff
Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or obtain and use our technology
The laws
to develop products with the same functionality as our solutions. Policing unauthorized use of our technology is difficult.
of other countries in which we market our application suite may offer
protection of our proprietary technology.
ff
Our competitors could also independently develop technologies equivalent to ours, and our intellectual property rights may not
be broad enough for us to prevent competitors from selling products incorporating those technologies. Reverse engineering,
unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our
technology without paying us for it, which would significantly harm our business.
little or no effective
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8
Employees
As of September 30, 2018, we employed 782 people, including 400 in services and customer support, 232 in research and
development, 86 in sales and marketing and 64 in a general and administrative capacity. As of such date, we had 411 employees
in the United States and 371 employees in international locations. We also engage temporary employees and consultants. None
of our employees are represented by a labor union with respect to his or her employment with us. We have not experienced any
work stoppages and we consider our relations with our employees to be good.
Corporate Information
We were incorporated in Delaware on December 14, 1999. Our principal offices
are located at 777 Mariners Island
Boulevard, Suite 300, San Mateo, CA 94404, and our telephone number is (650) 610-4600. Our website address is
www.modeln.com. The information contained on, or that can be accessed through, our website is not part of this report. Model N
is our registered trademark in the United States and in various international jurisdictions. Model N, the Model N logo and all of
our product names appearing in this report are our trademarks. Other trademarks appearing in this report are the property of their
respective holders.
ff
Available Information
We file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange
Commission (SEC) under the Securities Exchange Act of 1934, as amended (Exchange Act). We also make available, free of
charge on the investor relations portion of our website at investor.modeln.com, our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15
(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. You can also view these
reports on the SEC's website at http://www.sec.gov/ where you can obtain most of our SEC filings. You can also obtain paper
copies of these reports, without charge, by contacting Investor Relations at (650) 610-4600.
ITEM 1A.
Risk Factors
Our operating and financial results arerr subject to various risks and uncertainties. You should carefully
consider the risks
including the Consolidated Financial
and uncertainties described below,ww together with all of the other information in this report,
Statements and the related notes included elsewhererr in this report,
of our common
stock. The risks and uncertainties described below arerr not the only ones we face. Additional risks and uncertainties that we arerr
believe arerr not material, may also become important factors that adversely affect our business.
unawarerr of, or that we currently
If any of the following risks or others not specified below actually occurs, our business, financial condition, results of operations,
and futur
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
beforerr deciding whether to invest in sharesrr
err prospects
investment.
d
e
e
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Risks Related to Our Business
We have incurred losses in the past, and we may not be profitable in the future.
We have incurred net losses of $28.2 million and $39.5 million for the fiscal years ended September 30, 2018 and 2017,
respectively. As of September 30, 2018, we had an accumulated deficit of $203.5 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. Increased operating expenses related to personnel costs such as
salary,yy bonus, commissions and stock-based compensation as well as third-party contractors, travel-related expenses and marketing
increases
programs may also increase our expenses in future periods. In the near-term, our revenues may not be sufficient
in operating expenses, and we expect that we will incur losses. Additionally,yy we may encounter unforeseen expenses, difficulties,
ff
complications, delays and other unknown factors that may result in losses in future periods. We cannot assure you that we will
our
again obtain and maintain profitability in the future. Any failure to return to profitability may materially and adversely affect
business, results of operations and financial condition.
ff
to offset
ff
ff
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
ff
to predict, including:
•
our ability to increase sales to and renew agreements with our existing customers;
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•
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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;
the continued ability to transition from an on-premise to a cloud-based business model;
our ability to transition effectively
ff
to new leadership under a new Chief Executive Officer;
ff
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 ability to successfully expand our business domestically and internationally;
disruptions in our relationships with partners;
the timing of new orders and revenue recognition for new and prior period orders;
changes in the competitive landscape of our industry,yy including mergers or consolidation among our customers
or competitors;
the complexity of implementations and the scheduling and staffing
the timing and duration of revenue recognition;
ff
of the related personnel, each of which can affect
ff
issues related to changes in customers’ business requirements, project scope, implementations or market needs;
the mix of revenues in any particular period between license and implementation, and SaaS and maintenance;
the timing of upfront recognition of sales commission expense relative to the deferred recognition of our revenues;
the timing of recognition of payment of royalties;
the timing of our annual payment and recognition of employee non-equity incentive and bonus payments;
the budgeting cycles and purchasing practices of customers;
changes in customer requirements or market needs;
delays or reductions in information technology spending and resulting variability in customer orders from quarter
to quarter;
ff
delays or difficulties
implementation schedule;
encountered during customer implementations, including customer requests for changes to the
the timing and success of new product or service introductions by us or our competitors;
the amount and timing of any customer refunds or credits;
our ability to accurately estimate the costs associated with any fixed bid projects;
deferral of orders from customers in anticipation of new solutions or solution enhancements announced by us or our
competitors;
the length of time for the sale and implementation of our solutions to be complete, and our level of upfront investments
prior to the period we begin generating revenues associated with such investments;
the amount and timing of our operating expenses and capital expenditures, and our ability to timely repay our debt;
price competition;
the rate of expansion and productivity of our direct sales force;
regulatory compliance costs;
sales commissions expenses related to large transactions;
technical difficulties
ff
or interruptions in the delivery of our cloud-based solutions;
seasonality or cyclical fluctuations in our industries;
ff
future
accounting pronouncements or changes in our accounting policies;
increases or decreases in our expenses caused by fluctuations in foreign currency exchange rates, as a significant
portion of our expenses are incurred and paid in currencies other than the U.S. dollar;
general economic conditions, both domestically and in our foreign markets; and
10
•
entry of new competitors into our market.
Any one of the factors above or discussed elsewhere in this report or the cumulative effect
of some of the factors referred
to above may result in significant fluctuations in our financial and other operating results. This variability and unpredictability
could result in our failure to meet expectations of investors for our revenues or other operating results for a particular period. If
we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could decrease.
ff
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.rr
ff
Our success depends on the expertise, efficacy
and continued services of our executive officers,
who are geographically
dispersed. We have in the past and may in the future continue to experience changes in our executive management team resulting
from the departure of executives or subsequent hiring of new executives, which may be disruptive to our business. For example,
in May,yy 2018, Jason Blessing assumed the role of Chief Executive Officer
and Zack Rinat, our interim Chief Executive Officer
and Chairman of the Board. We anticipate that we will experience a transitional
resigned from his position as Chief Executive Officer
period as Mr. Blessing becomes fully integrated into his new role, and such transition may have a disruptive impact on our ability
on our business. Any changes in business strategies
to implement our business strategy and could have a material adverse effect
can create uncertainty,yy may negatively impact our ability to execute our business strategy quickly and effectively
and may ultimately
be unsuccessful. The impact of hiring new executives may not be immediately realized. We are also substantially dependent on
the continued service of our existing development and services personnel because of their familiarity with the inherent complexities
of our solutions.
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Our personnel do not have employment arrangements that require them to continue to work for us for any specified period
and, therefore, they could terminate their employment with us at any time. We do not maintain key person life insurance policies
on any of our employees. The loss of one or more of our key employees or groups could seriously harm our business.
We must improve our sales execution and increase our sales channels and opportunities in order to grow our revenues, and if
ff
we are unsuccessful, our operating results may be adversely affected.
We must improve our sales execution in order to, among other things, increase the number of our sales opportunities and
grow our revenue. We must improve the market awareness of our solutions and expand our relationships with our channel partners
in order to increase our revenues. Further, we believe that we must continue to develop our relationships with new and existing
customers and partners, and create additional sales opportunities to effectively
extend our geographic reach and
to improve our sales execution could result in a material increase in our sales and marketing expense
market penetration. Our efforts
and general and administrative expense, and there can be no assurance that such efforts
will be successful. We have experienced
challenges in sales execution in the past, and if we are unable to significantly improve our sales execution, increase the awareness
of our solutions, create additional sales opportunities, expand our relationships with channel partners, leverage our relationship
with strategic partners, such as Cumberland and High Point, or effectively
our
operating results and financial condition could be materially and adversely affected.
manage the costs associated with these efforts,
ff
and efficiently
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ff
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Our transition from an on-premise to a cloud-based business model is subject to numerous risks and uncertainties.
Our business model has shifted away from sales of on premise software licenses to focus on sales of subscriptions for our
cloud-based solutions, which provide our customers the right to access certain of our software in a hosted environment for a
specified subscription period. This cloud-based strategy may give rise to a number of risks, including the following:
•
•
•
•
•
if customers are uncomfortable with cloud-based solutions and desire only perpetual licenses, we may experience
longer than anticipated sales cycles and sales of our cloud-based solutions may lag behind our expectations;
our cloud-based strategy may raise concerns among our customer base, including concerns regarding changes to
pricing over time, service availability,yy information security of a cloud-based solution and access to files while offline
or once a subscription has expired;
ff
we may be unsuccessful in maintaining our target pricing, adoption and projected renewal rates;
we may select a target price that is not optimal and could negatively affect
ff
our sales or earnings; and
we may incur costs at a higher than forecasted rate as we expand our cloud-based solutions.
Our cloud-based strategy also requires a considerable investment of technical, financial, legal and sales resources, and a
by a variety of factors, including but not limited to: security,yy
scalable organization. Market acceptance of such offerings
is affected
ff
ff
11
reliability,yy scalability,yy customization, performance, current license terms, customer preference, customer concerns with entrusting
a third party to store and manage their data, public concerns regarding privacy and the enactment of restrictive laws or regulations.
Whether our business model transition will prove successful and will accomplish our business and financial objectives is subject
to numerous uncertainties, including but not limited to: customer demand, renewal rates, channel acceptance, our ability to further
develop and scale infrastructure, our ability to include functionality and usability in such solutions that address customer
requirements, tax and accounting implications, pricing and our costs. In addition, the metrics we use to gauge the status of our
business may evolve over the course of the transition as significant trends emerge.
If we are unable to successfully execute our cloud-based strategy and navigate our business model transition in light of the
foregoing risks and uncertainties, our results of operations could be negatively impacted.
Failure to adequately expand and train our direct sales force will impede our growth.
We rely almost exclusively on our direct sales force to sell our solutions. We believe that our future growth will depend,
to a significant extent, on the continued development of our direct sales force and its ability to manage and retain our existing
customer base, expand the sales of our solutions to existing customers and obtain new customers. Because our software is complex
and often must interoperate with complex computing requirements, it can take longer for our sales personnel to become fully
productive compared to other software companies. Our ability to achieve significant growth in revenues in the future will depend,
in large part, on our success in recruiting, training and retaining a sufficient
number of direct sales personnel. New hires require
significant training and may,yy in some cases, take more than a year before becoming fully productive, if at all. If we are unable to
hire and develop sufficient
numbers of productive direct sales personnel, and if these sales personnel are unable to achieve full
productivity,yy sales of our solutions will suffer
and our growth will be impeded.
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ff
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Our sales cycles are time-consuming, and it is difficult
ff
for us to predict when or if sales will occur.rr
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Our sales efforts
are often targeted at larger enterprise customers, and as a result, we face greater costs, must devote greater
sales support to individual customers, have longer sales cycles and have less predictability in completing some of our sales. Also,
sales to large enterprises often require us to provide greater levels of education regarding the use and benefits of our solutions. We
believe that our customers view the purchase of our solutions as a significant and strategic decision. As a result, customers carefully
evaluate our solutions, often over long periods with a variety of internal constituencies. In addition, the sales of our solutions may
be subject to delays if the customer has lengthy internal budgeting, approval and evaluation processes, which are quite common
in the context of introducing large enterprise-wide technology solutions. As a result, it is difficult
to predict the timing of our future
sales.
ff
Our revenues are dependent on our ability to maintain and expand existing customer relationships and our ability to attract
new customers.
The continued growth of our revenues is dependent in part on our ability to expand the use of our solutions by existing
customers and attract new customers. Likewise, it is also important that customers using our on-premise solutions renew their
maintenance agreements and that customers using our cloud-based solutions renew their subscription agreements with us. Our
customers have no obligation to renew their agreements after the expiration of the initial term, and there can be no assurance that
they will do so. We have had in the past and may in the future have disputes with customers regarding our solutions, which may
impact such customers’ decisions to continue to use our solutions and pay for maintenance and support in the future.
If we are unable to expand our customers’ use of our solutions, sell additional solutions to our customers, maintain our
renewal rates for maintenance and subscription agreements and expand our customer base, our revenues may decline or fail to
our business and operating results. In addition, if we experience
increase at historical growth rates, which could adversely affect
customer dissatisfaction with customers in the future, we may find it more difficult
to increase use of our solutions within our
to attract new customers, or we may be required to grant credits or refunds,
ff
existing customer base and it may be more difficult
any of which could negatively impact our operating results and materially harm our business.
ff
ff
The loss of one or more of our key customers could slow our revenue growth or cause our revenues to decline.
A substantial portion of our total revenues in any given period may come from a relatively small number of customers. As
of September 30, 2018, we had 154 customers. Although our largest customers typically change from period to period, for the
fiscal year ended September 30, 2018, our 15 largest customers accounted for more than 57% of our total revenues, and one
customer, Johnson & Johnson, accounted for approximately 15% of our total revenues in fiscal year 2018. However, during the
fiscal year ended September 30, 2018, no customer represented more than 10% of our subscription revenues. We expect that we
will continue to depend upon a relatively small number of customers for a significant portion of our total revenues for the foreseeable
12
future. The loss of any of our significant customers or groups of customers for any reason, or a change of relationship with any
of our key customers may cause a significant decrease in our total revenues.
Additionally,yy mergers or consolidations among our customers in the life sciences and semiconductor industries, both of
which are currently undergoing significant consolidation, could reduce the number of our customers and could adversely affect
our revenues and sales. In particular, if our customers are acquired by entities that are not also our customers, that do not use our
solutions or that have more favorable contract terms and choose to discontinue, reduce or change the terms of their use of our
solutions, our business and operating results could be materially and adversely affected.
ff
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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.
Our solutions are used by our customers to manage and store personally identifiable information, proprietary information
and sensitive or confidential data relating to their business. Although we maintain security features in our solutions, our security
measures may not detect or prevent hacker interceptions, break-ins, security breaches, the introduction of viruses or malicious
code, such as “ransomware,” and other disruptions that may jeopardize the security of information stored in and transmitted by
our solutions. Cyber-attacks and other malicious Internet-based activity continue to increase generally. A party that is able to
circumvent our security measures in our solutions could misappropriate our or our customers’ proprietary or confidential
information, cause interruption in their operations, damage or misuse their computer systems and misuse any information that
they misappropriate. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally
are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures.
There can be no assurance that limitation of liability,yy indemnification or other protective provisions in our contracts would
be applicable, enforceable or adequate in connection with a security breach, or would otherwise protect us from any such liabilities
or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and
coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient
amounts to
cover one or more large claims, or that the insurer will not deny coverage as to any future claim. One or more large claims may
be asserted against us that exceed our available insurance coverage, or changes in our insurance policies may occur, including
premium increases or the imposition of large deductible or co-insurance requirements. If any compromise of the security of our
solutions were to occur, we may be subject to litigation, indemnity obligations and other possible liabilities, and we may lose
existing customers and the ability to attract future customers, any of which could harm our reputation, business, financial condition
and results of operations and result in significant liability.
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.rr
Changes in privacy laws, regulations and standards may cause our business to sufferff
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Personal privacy and data security have become significant issues in the United States, Europe and in many other jurisdictions
where we offer
our solutions. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely
to remain uncertain for the foreseeable future. For example, the Court of Justice of the European Union ruled in October 2015 that
the US-EU Safe Harbor framework was invalid, and the framework’s successor, the US-EU Privacy Shield, while adopted, has
been criticized and challenged by multiple privacy advocacy groups. Furthermore, federal, state or foreign government bodies or
agencies have in the past adopted, and may in the future adopt, laws and regulations affecting
data privacy. Industry organizations
also regularly adopt and advocate for new standards in this area. In the United States, these include rules and regulations promulgated
under the authority of federal agencies and state attorneys general and legislatures and consumer protection agencies. Internationally,yy
many jurisdictions in which we operate have established their own data security and privacy legal framework with which we or
our customers must comply,yy including but not limited to, the European General Data Protection Regulation, which imposes
additional obligations and risks upon our business. In many jurisdictions, enforcement actions and consequences for noncompliance
are also rising. In addition to government regulation, privacy advocates and industry groups may propose new and different
self-
regulatory standards that either legally or contractually applies to us.
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ff
Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy
and data security laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit
our business. Furthermore, the costs of compliance with, and other burdens imposed by,yy the laws,
sales and adversely affect
regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the
overall demand for, our solutions. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of
our solutions, particularly in foreign countries. If we are not able to adjust to changing laws, regulations and standards related to
privacy or security,yy our business may be harmed.
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13
Our acquisition of other companies could require significant management attention, disrupt our business, dilute stockholder
value and adversely affect
our operating results.
ff
As part of our business strategy,yy we have in the past and may in the future make investments in other companies, solutions
or technologies to, among other reasons, expand or enhance our product offerings.
In the future, any significant acquisition would
require the consent of our lenders. Any failure to receive such consent could delay or prohibit us from acquiring companies that
we believe could enhance our business.
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We may not ultimately strengthen our competitive position or achieve our goals from any future acquisition, and any
acquisitions we complete could be viewed negatively by users, customers, partners or investors. In addition, if we fail to integrate
successfully such acquisitions, or the technologies associated with such acquisitions, into our company,yy the revenues and operating
In addition, we may not be able to successfully retain the customers
results of the combined company could be adversely affected.
and key personnel of such acquisitions over the longer term, which could also adversely affect
our business. The integration of
any future-acquired business will require significant time and resources, and we may not be able to manage the process successfully.
We may not successfully evaluate or utilize the acquired technology and accurately forecast the financial impact of the acquisition,
including accounting charges.
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It is also possible that a governmental entity could initiate an antitrust investigation at any time. Among other things, an
investigation that is resolved unfavorably to us could delay or prevent the completion of a transaction, require us to divest or sell
the assets or businesses we acquired, limit the ability to realize the expected financial or strategic benefits of a transaction or have
other adverse effects
on our current business and operations.
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We may have to pay cash, incur debt or issue equity securities to pay for any acquisition, each of which could affect
our
financial condition or the value of our capital stock. To fund any future acquisition, we may issue equity,yy which would result in
dilution to our stockholders, or incur more debt, which would result in increased fixed obligations and could subject us to additional
covenants or other restrictions that would impede our ability to manage our operations.
ff
Because we recognize a majority of our SaaS and maintenance revenues from our customers over the term of their agreements,
downturns or upturns in sales of our cloud-based solutions may not be immediately reflected in our operating results.
SaaS and maintenance revenues primarily include subscription and related implementation fees from customers accessing
our cloud-based solutions and revenues associated with maintenance agreements from license customers. We recognize a majority
of our SaaS and maintenance revenues over the term of our customer agreements, which are typically one year or longer in some
cases. As a result, most of our quarterly SaaS and maintenance revenues result from agreements entered into during previous
quarters. Consequently,yy a shortfall in sales of our cloud-based solutions or renewal of maintenance and support agreements in any
quarter may not significantly reduce our SaaS and maintenance revenues for that quarter but would negatively affect
SaaS and
maintenance revenues in future quarters. Accordingly,yy the effect
of significant downturns in sales of our cloud-based solutions or
ff
renewals of our maintenance and support agreements may not be fully reflected in our results of operations until future periods.
We may be unable to adjust our cost structure to compensate for this potential shortfall in SaaS and maintenance revenues. Our
revenue recognition model for our cloud-based solutions and maintenance and support agreements also makes it difficult
for us
to rapidly increase our revenues through additional sales in any period, as a significant amount of our revenues are recognized
over the applicable agreement term. As a result, changes in the volume of sales of our cloud-based solutions or the renewals of
our maintenance and support agreements in a particular period would not be fully reflected in our revenues until future periods.
ff
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Our indebtedness could adversely affect
we may be unable to generate sufficient
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our business and limit our ability to expand our business or respond to changes, and
cash flow to satisfy our debt service obligations.
In May 2018, we entered into a credit agreement with Wells Fargo under which we incurred $50 million of indebtedness
to refinance indebtedness that we incurred in January 2017 to fund the cash portion of our Revitas acquisition, and established a
revolving credit facility of $5.0 million. This term loan is secured by substantially all of our assets and matures in May 2023. We
also issued two promissory notes for an aggregate of $10 million in January 2017 to the sellers of Revitas, one of which was repaid
in full in May 2018. The incurrence of significant indebtedness could have adverse consequences, including the following:
•
•
•
•
reducing the availability of our cash flow for our operations, capital expenditures, future business opportunities and
other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
increasing our vulnerability to general adverse economic and industry conditions; and
lengthening our sales process as customers evaluate our financial viability.
14
We must repay the $50 million term loan in quarterly installments of $250,000 each from September 30, 2018 through June
30, 2019, $625,000 each from September 30, 2019 through June 30, 2020, and $937,500 each from September 30, 2020 through
March 31, 2023, and must repay the remaining principal amount at maturity in May 2023. Additionally,yy our remaining promissory
note to the sellers of Revitas will mature in January 2020. Our ability to generate cash to repay our indebtedness is subject to the
performance of our business, as well as general economic, financial, competitive and other factors that are beyond our control. If
our business does not generate sufficient
cash flow from operating activities or if future borrowings are not available to us in
to enable us to fund our liquidity needs, our operating results, financial condition and ability to expand our
amounts sufficient
business may be adversely affected.
ff
ff
ff
The term loan bear interest at a variable rate of either a base rate plus a margin ranging from 2.0% to 3.5%, or LIBOR plus
a margin ranging from 3.0% to 4.5%, which exposes us to interest rate risk. Changes in economic conditions outside of our control
could result in higher interest rates, thereby increasing our interest expense even though the amount borrowed remained the same.
Additionally,yy the credit agreement governing our term loans with Wells Fargo contains various restrictive covenants,
including maintaining consolidated liquidity (cash in the United States plus revolving credit line availability) of at least $15.0
million, minimum levels of maintenance and subscription fee revenue and, if liquidity is less than $30 million for 90 consecutive
days, a leverage ratio not greater than 3.50 to 1.00. The credit agreement also requires us and our guarantors to maintain certain
non-financial covenants, including covenants restricting our ability to dispose of assets, changing our organizational documents,
merging with or acquiring other entities, incurring other indebtedness and making investments. Our ability to comply with some
by events beyond our control, and we may be unable to do so. Upon the occurrence
of these restrictive covenants can be affected
of an event of default, our lenders could elect to declare all amounts outstanding under our financing agreement to be immediately
due and payable. If we are unable to repay that amount, our lenders could seize our assets securing the loans and our financial
condition could be adversely affected.
ff
ff
We maya face risks related to securities litigation that could result in significant legal expenses and settlement or damage awards.
We have been in the past and may in the future become subject to claims and litigation alleging violations of the securities
laws or other related claims, which could harm our business and require us to incur significant costs. Significant litigation costs
could impact our ability to comply with certain financial covenants under our credit agreement. We are generally obliged, to the
extent permitted by law,ww to indemnify our current and former directors and officers
who are named as defendants in these types
of lawsuits. Regardless of the outcome, litigation may require significant attention from management and could result in significant
legal expenses, settlement costs or damage awards that could have a material impact on our financial position, results of operations
and cash flows.
ff
Our implementation cycle is lengthy and variable, depends upon factors outside our control and could cause us to expend
significant time and resources prior to earning associated revenues.
The implementation and testing of our solutions typically range from a few months to up to twelve months, and unexpected
implementation delays and difficulties
can occur. Implementing our solutions typically involves integration with our customers’
systems, as well as adding their data to our system. This can be complex, time-consuming and expensive for our customers and
can result in delays in the implementation and deployment of our solutions. The lengthy and variable implementation cycle may
also have a negative impact on the timing of our revenues, causing our revenues and results of operations to vary significantly
from period to period.
ff
A substantial majority of our total revenues have come from sales of our enterprise application suite, and decreases in demand
for our enterprise application suite could adversely affect
our results of operations and financial condition.
ff
Historically,yy a substantial majority of our total revenues has been associated with our enterprise application suite, whether
deployed as individual solutions or as a complete suite. We expect our enterprise application suite to continue to generate a
substantial majority of our total revenues for the foreseeable future. Declines and variability in demand for our enterprise application
suite could occur for a number of reasons, including improved products or product versions being offered
by competitors,
competitive pricing pressures, failure to release new or enhanced versions on a timely basis, technological changes that we are
unable to address or that change the way our customers utilize our solutions, reductions in technology spending, export restrictions
or other regulatory or legislative actions that could limit our ability to sell those products to key customer or market segments.
Our business, results of operations, financial condition and cash flows would be adversely affected
by a decline in demand for our
enterprise application suite.
ff
ff
15
Our customers often require significant configuration efforts
to match their complex business processes. The failure to meet
their requirements could result in customer disputes, loss of anticipated revenues and additional costs, which could harm our
business.
ff
Our customers often require significant configuration services to address their unique business processes. Supporting such
a diversity of configured settings and implementations could become difficult
as the number of customers we serve grows. In
addition, supporting our customers could require us to devote significant development services and support personnel and strain
our personnel resources and infrastructure. We have had in the past and may in the future have disputes with customers regarding
the performance and implementation of our solutions. If we are unable to address the needs of our customers in a timely fashion,
our customers may decide to seek to terminate their relationship, renew on less favorable terms, not renew their maintenance
agreements or subscriptions, fail to purchase additional solutions or services, assert legal claims against us or cease to be a
reference. If any of these were to occur, our revenues may decline or we may be required to refund amounts to customers and our
operating results may be harmed.
ff
Our future growth is, in large part, dependent upon the increasing adoption of revenue management solutions.
Revenue management is at an early stage of market development and adoption, and the extent to which revenue management
solutions will become widely adopted remains uncertain. It is difficult
to predict customer adoption rates, customer demand for
ff
revenue management solutions, including our solutions in particular, the future growth rate and size of this market and the timing
of the introduction of additional competitive solutions. Any expansion of the revenue management market depends on a number
of factors, including the cost, performance and perceived value associated with revenue management solutions. For example, many
companies have invested substantial personnel, infrastructure and financial resources in other revenue management infrastructure
and therefore may be reluctant to implement solutions such as ours.Additionally,yy organizations that use legacy revenue management
address their revenue management needs. Because this market is relatively
products may believe that these products sufficiently
undeveloped, we must spend considerable time educating customers as to the benefits of our solutions. If revenue management
solutions do not achieve widespread adoption, or if there is a reduction in demand for revenue management solutions caused by
a lack of customer acceptance, technological challenges, competing technologies and products, decreases in corporate spending
or otherwise, it could result in lower sales, reduced renewal and upsell rates and decreased revenues and our business could be
adversely affected.
ff
ff
If we are unable to enhance existing solutions and develop new solutions that achieve market acceptance or that keep pace
with technological developments, our business could be harmed.
Our ability to increase revenues from existing customers and attract new customers depends in large part on our ability to
enhance and improve our existing solutions and to develop and introduce new solutions. The success of any enhancement or new
solutions depends on several factors, including timely completion, adequate quality testing, introduction and market acceptance.
Any enhancement or new solutions that we develop (such as our Revenue Cloud and Revenue Management as a Service) or acquire
may not be introduced in a timely or cost-effective
manner, may contain defects or may not achieve the broad market acceptance
necessary to generate significant revenues. If we are unable to successfully enhance our existing solutions and develop new solutions
to meet customer requirements, our business and operating results will be adversely affected.
ff
ff
Because we designed our solutions to operate on a variety of network, hardware and software platforms, we will need to
continuously modify and enhance our solutions to keep pace with changes in networking, internet-related hardware, and software,
communication, browser and database technologies. If we are unable to respond in a timely manner to these rapid technological
manner, our solutions may become less marketable and less competitive or obsolete and our
developments in a cost-effective
operating results may be negatively impacted.
ff
We are highly dependent upon the life sciences industry,yy and factors that adversely affect
ff
affect
us.
ff
this industry could also adversely
ff
by factors that adversely affect
Our future growth depends, in large part, upon continued sales to companies in the life sciences industry. Demand for our
demand for the underlying life sciences products and services that are
solutions could be affected
ff
purchased and sold pursuant to contracts managed through our solutions. The life sciences industry is affected
by certain factors,
including the emergence of large group purchasing and managed care organizations and integrated healthcare delivery networks,
increased customer and channel incentives and rebates, the shift of purchasing influence from physicians to economic buyers,
increased spending on healthcare by governments instead of commercial entities and increased scope of government mandates,
frequency of regulatory reporting and audits, and fines. Accordingly,yy our future operating results could be materially and adversely
ff
affected
the life sciences industry generally.
as a result of factors that affect
ff
ff
16
Our efforts
ff
that adequately address trends in that industry.yy
to expand the adoption of our solutions in the technology industry will be affected
ff
by our ability to provide solutions
ff
We are attempting to expand the use of our solutions by companies in the technology industry,yy and our future growth
depends in part on our ability to increase sales of solutions to customers in this industry and potentially other industries. The
technology industry is affected
by many factors, including shortening of product lifecycles, core technology products being sold
into different
end markets with distinct pricing, increasing complexity of multi-tiered global distribution channels, changing
ff
discounting. If our solutions are not
financial reporting requirements due to channel complexity and increasing use of off-invoice
perceived by existing or potential customers in the technology industry as capable of providing revenue management tools that
will assist them in adequately addressing these trends, then our efforts
to expand the adoption of our solutions in this industry may
ff
not be successful, which would adversely impact our business and operating results.
ff
Most of our implementation contracts are on a time and materials basis and may be terminated by the customer.rr
The contracts under which we perform most of our implementation services may have a term typically ranging between a
few months to up to twelve months and are on a time and materials basis and may be terminated by the customer at any time. If
an implementation project is terminated sooner than we anticipated or a portion of the implementation is delayed, we would lose
the anticipated revenues that we might not be able to replace or it may take significant time to replace the lost revenues with other
work or we may be unable to eliminate the associated costs. Consequently,yy we may recognize fewer revenues than we anticipated
or incur unnecessary costs, and our results of operations in subsequent periods could be materially lower than expected.
Our efforts
ff
may not succeed and may reduce our revenue growth rate. Even if we are successful in doing so, such efforts
and may impact our ability to achieve profitability.yy
to expand our solutions into other verticals within the life sciences and technology industries or other industries
may be costly
ff
Our solutions are currently designed primarily for customers in certain verticals of the life sciences and technology industries
and potentially into other industries. Our ability to attract new customers and increase our revenues depends in part on our ability
to enter into new industries and verticals. Developing and marketing new solutions to serve other industries and verticals will
require us to devote substantial additional resources in advance of consummating new sales or realizing additional revenues. Our
ability to leverage the expertise we have developed in the life sciences and technology industries into new industries is unproven
and it is likely that we will be required to hire additional personnel, partner with additional third parties and incur considerable
research and development expense in order to gain and develop additional expertise for new industries where we lack experience
and expertise.
ff
Our efforts
to expand our solutions beyond the verticals within the life sciences and technology industries in which we
have already developed expertise may not be successful and may reduce our revenue growth rate. Any early stage interest in our
solutions in areas beyond the industries we already address may not result in long term success or significant revenues for us.
Even if we achieve long-term success in expanding our solutions into other industries and verticals, the costs associated with such
expansion may be high, which may impact our ability to achieve profitability.
The market for cloud-based solutions is at an early stage of acceptance relative to on-premise solutions, and if it does not
develop or develops more slowly than we expect, our business could be harmed.
Although gaining wider acceptance, the market for cloud-based solutions is at an early stage relative to on-premise solutions,
and these types of deployments may not achieve and sustain high levels of demand and market acceptance. We plan to accelerate
the shift in our business model to recurring revenues, including revenues derived from our cloud-based solutions, by continuing
to expand the implementation of our cloud-based solutions both within our current installed base of customers as well as new
customers and additional markets in the future. Many companies have invested substantial personnel and financial resources to
integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to a cloud-
based solution. Other factors that may affect
the market acceptance of cloud-based solutions include:
ff
•
•
•
•
•
perceived security capabilities and reliability;
perceived concerns about ability to scale operations for large enterprise customers;
concerns with entrusting a third party to store and manage critical data;
the level of configurability or customizability of the solutions; and
a
ability
to perform at or near the capabilities of our on-premise solutions.
17
If organizations do not perceive the benefits of our cloud-based solutions, or if our competitors or new market entrants are
able to develop cloud-based solutions that are or are perceived to be more effective
than ours, our plan to accelerate the shift in
our business model to recurring revenues may not succeed or may develop more slowly than we expect, if at all, or may result in
short-term declines in recognized revenue, any of which would adversely affect
our business.
ff
ff
We relyll on a small number of third-party service providers to host and deliver our cloud-based solutions, and any interruptions
or delays in services from these third parties could impair the delivery of our cloud-based solutions and harm our business.
We currently operate our cloud-based solutions primarily through third party data centers. We do not control the operation
of these facilities. These facilities are vulnerable to damage or interruption from natural disasters, fires, power loss,
telecommunications failures and similar events. They are also subject to break-ins, computer viruses, sabotage, intentional acts of
vandalism and other misconduct. The occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without
adequate notice or other unanticipated problems could result in lengthy interruptions, which would have a serious adverse impact
on our business. Additionally,yy our data center agreements are of limited duration, subject to early termination rights in certain
circumstances, may include inadequate indemnification and liability provisions, and the providers of our data centers have no
obligation to renew their agreements with us on commercially reasonable terms, or at all.
If we continue to add data centers and add capacity in our existing data centers, we may transfer data to other locations.
Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Interruptions
in our service, data loss or corruption may subject us to liability to our customers, cause customers to terminate their agreements
and adversely affect
our renewal rates and our ability to attract new customers. Data transfers may also subject us to regional
privacy and data protection laws that apply to the transmission of customer data across international borders.
ff
We also depend on access to the Internet through third-party bandwidth providers to operate our cloud-based solution. If
we lose the services of one or more of our bandwidth providers, or if these providers experience outages, for any reason, we could
experience disruption in delivering our cloud-based solutions or we could be required to retain the services of a replacement
bandwidth provider.Any Internet outages or delays could adversely affect
our ability to provide our solutions to our customers. Our
data center operations also rely heavily on the availability of electricity,yy which also comes from third-party providers. If we or the
third-party data center facilities that we use to deliver our services were to experience a major power outage or if the cost of
electricity were to increase significantly,yy our operations and financial results could be harmed. If we or our third-party data centers
were to experience a major power outage, we or they would have to rely on back-up generators, which might not work properly
or might not provide an adequate supply during a major power outage. Such a power outage could result in a significant disruption
of our business.
ff
We license technology from third parties, and our inability to maintain those licenses could harm our business. Certain third-
party technology that we use may be difficult
to replace or could cause errors or failures of our service.
ff
ff
We incorporate technology that we purchase or license from third parties, including hardware and software, into our
solutions. We cannot be certain that this technology will continue to be available on commercially reasonable terms, or at all. We
cannot be certain that our licensors are not infringing the intellectual property rights of third parties or that our licensors have
rights to the licensed intellectual property in all jurisdictions in which we may sell our solutions. Some of our agreements
sufficient
with our licensors may be terminated for convenience by them. If we are unable to continue to license any of this technology
because of intellectual property infringement claims brought by third parties against our licensors or against us, or if we are unable
to continue our license agreements or enter into new licenses on commercially reasonable terms, our ability to develop and sell
solutions containing that technology would be severely limited and our business could be harmed. Additionally,yy if we are unable
to license or obtain the necessary technology from third parties, we may be forced to acquire or develop alternative technology of
lower quality or performance standards. This would limit and delay our ability to offer
new or competitive solutions and increase
our costs of production. In addition, errors or defects in third-party hardware or software used in our cloud-based solutions could
result in errors or a failure of our cloud-based solutions, which could harm our business.
ff
If we or our solutions fail to perform properly,yy our reputation and customer relationships could be harmed, our market share
could decline and we could be subject to liability claims.
Our solutions are inherently complex and may contain material defects or errors. Any defects in solution functionality or
that cause interruptions in availability could result in:
•
•
lost or delayed market acceptance and sales;
reductions in current-period total revenues;
18
•
•
•
•
•
breach of warranty or other contract breach or misrepresentation claims;
sales credits or refunds to our customers;
loss of customers;
diversion of development and customer service resources; and
injury to our reputation.
The costs incurred in correcting any material defects or errors might be substantial and could adversely affect
our operating
results. Because our customers often use our solutions as a system of record and many of our customers are subject to regulation
of pricing of their products or otherwise have complex pricing commitments and revenue recognition policies, errors could result
in an inability to process sales or lead to a violation of pricing requirements or misreporting of revenues by our customers that
could potentially expose them to fines or other substantial claims or penalties. Accordingly,yy we could face increased exposure to
product liability and warranty claims, litigation and other disputes and claims, resulting in potentially material losses and costs.
Our limitation of liability provisions in our customer agreements may not be sufficient
to protect us against any such claims.
ff
ff
Given the large amount of data that our solutions collect and manage, it is possible that failures or errors in our software
could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our
customers regard as significant. We may be required to issue credits or refunds or indemnify or otherwise be liable to our customers
or third parties for damages they may incur resulting from certain of these events.
Our insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy
may not cover any claim against us for claims related to any product defects or errors or other indirect or consequential damages
and defending a suit, regardless of its merit, could be costly and divert management’s attention.
The market in which we participate is highly competitive, and if we do not compete effectively
harmed.
ff
,yy our operating results could be
The market for revenue management solutions is highly competitive, fragmented and subject to rapid changes in technology.
We face competition from spreadsheet-assisted manual processes, internally developed solutions, large integrated systems vendors,
providers of business process outsourcing services and smaller companies that offer
point solutions.
ff
Companies lacking IT resources often resort to spreadsheet-assisted manual processes or personal database applications.
In addition, some potential customers, particularly large enterprises, may elect to develop their own internal solutions, including
custom-built solutions that are designed to support the needs of a single organization. Companies with large investments in packaged
ERP or CRM applications, which do not typically provide revenue management capabilities, may extend these horizontal
applications with configurations or point solution applications in order to address one or a small set of revenue management sub
processes or drivers. Common horizontal applications that customers attempt to configure for this purpose in the life sciences and
technology industries include large integrated systems vendors like SAPAG and Oracle Corporation. We also encounter competition
from small independent companies, which compete on the basis of price, unique product features or functions and custom
developments.
Many of our competitors have greater name recognition, larger sales and marketing budgets and greater resources than we
do and may have pre-existing relationships with our potential customers, including relationships with, and access to, key decision
makers within these organizations, and major distribution agreements with consultants and system integrators. Moreover, many
software vendors could bundle solutions or offer
them at a low price as part of a larger product sale.
ff
With the introduction of new technologies and market entrants, we expect competition to intensify in the future. We also
applications to enter our market with
expect enterprise software vendors that focus on enterprise resource planning or back-office
competing products. In addition, we expect sales force automation vendors to acquire or develop additional solutions that may
compete with our solutions. If we fail to compete effectively
,yy our business will be harmed. In addition, pricing pressures and
increased competition generally could result in reduced sales, reduced margins, losses or the failure of our solutions to achieve or
maintain more widespread market acceptance, any of which could harm our business.
ff
ff
If we are not able to maintain and enhance our brand, our business and operating results may be adversely affected.
ff
We believe that maintaining and enhancing the “Model N” brand identity is critical to our relationships with our customers
and partners and to our ability to attract new customers and partners. The successful promotion of our brand will depend largely
our
upon our marketing efforts,
high-quality solutions and our ability to successfully differentiate
our ability to continue to offer
ff
ff
ff
19
solutions from those of our competitors. Our brand promotion activities may not be successful or yield increased revenues. In
addition, independent industry analysts often provide reviews of our solution, as well as those of our competitors, and perception
of our solution in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive
as compared to those of our competitors’ products and services, our brand may be adversely affected.
ff
The promotion of our brand requires us to make substantial expenditures, and we anticipate that the expenditures will
increase as our market becomes more competitive and as we expand into new verticals within the life sciences and technology
industries. To the extent that these activities yield increased revenues, these revenues may not offset
the increased expenses we
incur. If we do not successfully maintain and enhance our brand, our business may not grow,w we may have reduced pricing power
relative to competitors with stronger brands and we could lose customers and partners, all of which would adversely affect
our
business operations and financial results.
ff
ff
If we are unable to maintain successful relationships with system integrators, our business operations, financial results and
growth prospects could be adversely affected.
ff
ff
Our relationships with system integrators are generally non-exclusive, which means they may recommend to their customers
the solutions of several different
companies, including solutions that compete with ours, and they may also assist in the
implementation of software or systems that compete with ours. If our system integrators do not choose to continue to refer our
solutions, assist in implementing our solutions, choose to use greater efforts
to market and sell their own solutions or those of our
competitors, or fail to meet the needs of our customers, our ability to grow our business and sell our solutions may be adversely
affected.
The loss of a substantial number of our system integrators, our possible inability to replace them or the failure to recruit
ff
additional system integrators could harm our business.
ff
Our ability to achieve revenue growth in the future will depend in part on our success in maintaining successful relationships
with our system integrators and in helping our system integrators enhance their ability to independently market and implement
our solutions. Our growth in revenues, particularly in international markets, will be influenced by the development and maintenance
of relationships with these companies. Although we have established relationships with some of the leading system integrators,
our solutions compete directly against the solutions of other leading system integrators. We are unable to control the resources
that our system integrators commit to implementing our solutions or the quality of such implementation. If they do not commit
sufficient
resources to these activities, or if we are unable to maintain our relationships with these system integrators or otherwise
develop and expand our indirect distribution channel, our business, results of operations, financial condition or cash flows could
be adversely affected.
ff
ff
Any failure to offerff
customers and harm our financial results.
high-quality customer support cloud platform services may adversely affect
ff
our relationships with our
Once our solutions are implemented, our customers use our support organization to resolve technical issues relating to our
solutions. In addition, we also believe that our success in selling our solutions is highly dependent on our business reputation and
on favorable recommendations from our existing customers. Any failure to maintain high-quality customer support, or a market
perception that we do not maintain high-quality support, could harm our reputation, adversely affect
our ability to maintain existing
customers or sell our solutions to existing and prospective customers, and harm our business, operating results and financial
condition.
ff
We may be unable to respond quickly enough to accommodate short-term increases in customer demand for support services.
our
Increased customer demand for these services, without corresponding revenues, could also increase costs and adversely affect
operating results.
ff
If our solutions do not interoperate with our customers’ IT infrastructure, sales of our solutions could be negatively affected,
which would harm our business.
ff
Our solutions must
interoperate with our customers’ existing IT infrastructure, which often have different
specifications, complex configuration, utilize multiple protocol standards, deploy products from multiple vendors and contain
multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult
to identify the sources of these problems. If we find errors in the existing products or defects in the hardware used in our customers’
IT infrastructure or problematic network configurations or settings, we may have to modify our solutions or platform so that our
solutions will interoperate with our customers’ IT infrastructure. Any delays in identifying the sources of problems or in providing
necessary modifications to our solutions could have a negative impact on our reputation and our customers’ satisfaction with our
solutions, and our ability to sell solutions could be adversely affected.
ff
ff
ff
20
Incorrect or improper implementation or use of our solutions could result in customer dissatisfaction and negatively affect
business, operations, financial results and growth prospects.
ff
our
Our customers and third-party partners may need training in the proper use of and the variety of benefits that can be derived
from our solutions to maximize their potential. We have implemented the Model N Align Program, which gives our customers
full access to expert knowledge through a portal for easy and fast access to information, experienced customer success managers
and defined customer success plans, in order to help our customers maximize the value of our solutions. However, our customers
and as a result may become dissatisfied
may choose not to use such programs or may not use such programs efficiently
with our solutions. If our solutions are not implemented or used correctly or as intended, inadequate performance may result. Since
our customers rely on our solutions and customer support to manage key areas of their businesses, the incorrect or improper
implementation or use of our solutions, our failure to train customers on how to efficiently
use our solutions or
our failure to provide services to our customers, may result in negative publicity,yy failure of customers to renew their SaaS
maintenance agreements or subscriptions or potentially make legal claims against us. Also, as we continue to expand our customer
base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our solutions.
and effectively
or effectively
ff
ff
ff
ff
Competition for our target employees is intense, and we may not be able to attract and retain the quality employees we need to
support our planned growth.
Our future success depends, in part, upon our ability to recruit and retain key management, technical, sales, marketing,
finance, and other critical personnel. Competition for qualified management, technical and other personnel is intense, and we may
not be successful in attracting and retaining such personnel. If we fail to attract and retain qualified employees, including
internationally,yy our ability to grow our business could be harmed. Competition for people with the specific skills that we require
is significant. In order to attract and retain personnel in a competitive marketplace, we believe that we must provide a competitive
compensation package, including cash and equity-based compensation. Volatility in our stock price may from time to time adversely
our ability to recruit or retain employees. If we are unable to hire and retain qualified employees, or conversely,yy if we fail
affect
ff
to manage employee performance or reduce staffing
levels when required by market conditions, our business and operating results
could be adversely affected.
ff
ff
Our significant international operations subject us to additional risks that can adversely affect
and financial condition.
ff
our business, results of operations
ff
We have significant international operations, including in emerging markets such as India, and we are continuing to expand
our international operations as part of our growth strategy. As of September 30, 2018, approximately 47% of our total employees
were located in India, where we conduct a portion of our development activities, implementation services and support services.
Our current international operations and our plans to expand our international operations have placed, and will continue to place,
a strain on our employees, management systems and other resources.
Operating in international markets requires significant resources and management attention and will subject us to regulatory,yy
from those in the United States. Because of our limited experience
economic and political risks and competition that are different
with international operations, we cannot assure you that our international expansion efforts
will be successful or that returns on
such investments will be achieved in the future. In addition, our international operations may fail to succeed due to other risks
inherent in operating businesses internationally,yy including:
ff
ff
•
•
•
•
•
•
•
•
•
our lack of familiarity with commercial and social norms and customs in countries which may adversely affect
ability to recruit, retain and manage employees in these countries;
ff
our
difficulties
ff
and costs associated with staffing
ff
and managing foreign operations;
the potential diversion of management’s attention to oversee and direct operations that are geographically distant
from our U.S. headquarters;
compliance with multiple, conflicting and changing governmental laws and regulations, including employment, tax,
privacy and data protection laws and regulations;
legal systems in which our ability to enforce and protect our rights may be different
United States and in which the ultimate result of dispute resolution is more difficult
ff
ff
to predict;
ff
or less effective
than in the
greater difficulty
ff
collecting accounts receivable and longer payment cycles;
higher employee costs and difficulty
ff
in terminating non-performing employees;
differences
ff
in workplace cultures;
unexpected changes in regulatory requirements;
21
•
•
•
•
•
•
•
•
•
the need to adapt our solutions for specific countries;
our ability to comply with differing
ff
technical and certification requirements outside the United States;
ff
tariffs,
export controls and other non-tariffff barriers such as quotas and local content rules;
more limited protection for intellectual property rights in some countries;
adverse tax consequences, including as a result of transfer pricing adjustments involving our foreign operations;
ff
fluctuations
in currency exchange rates;
anti-bribery compliance by us or our partners;
restrictions on the transfer of funds; and
new and different
ff
sources of competition.
Our failure to manage any of these risks successfully could harm our existing and future international operations and
seriously impair our overall business.
We are exposed to fluctuations in currency exchange rates, which could negatively affect
results.
ff
our financial condition and operating
Our sales contracts are primarily denominated in U.S. dollars, and therefore, substantially all of our revenues are not subject
to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our solutions to our customers
outside of the United States, which could adversely affect
our financial condition and operating results. In addition, an increasing
portion of our operating expenses are incurred in India, are denominated in Indian Rupees and are subject to fluctuations due to
changes in foreign currency exchange rates.
ff
We may be sued by third parties for alleged infringement of their proprietary rights which could result in significant costs and
harm our business.
There is considerable patent and other intellectual property development activity in our industry. Our success depends upon
us not infringing upon the intellectual property rights of others. Companies in the software and technology industries, including
some of our current and potential competitors, own large numbers of patents, copyrights, trademarks and trade secrets and frequently
enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. In
addition, many of these companies have the capability to dedicate substantially greater resources to enforce their intellectual
property rights and to
defend claims that may be brought against them. The litigation may involve patent holding companies or other adverse
patent owners who have no relevant product revenue and against whom our potential patents may provide little or no deterrence.
We have received, and may in the future receive, notices that claim we have infringed, misappropriated or otherwise violated other
parties’ intellectual property rights. To the extent we gain greater visibility,yy we face a higher risk of being the subject of intellectual
property infringement claims, which is not uncommon with respect to software technologies in general and information security
technology in particular. There may be third-party intellectual property rights, including issued or pending patents that cover
significant aspects of our technologies or business methods. Any intellectual property claims, with or without merit, could be very
time consuming, could be expensive to settle or litigate and could divert our management’s attention and other resources. These
claims could also subject us to significant liability for damages, potentially including treble damages if we are found to have
willfully infringed patents or copyrights. These claims could also result in our having to stop using technology found to be in
violation of a third party’s rights. We might be required to seek a license for the intellectual property,yy which may not be available
on reasonable terms or at all. Even if a license were available, we could be required to pay significant royalties, which would
increase our operating expenses. As a result, we may be required to develop alternative non-infringing technology,yy which could
and expense. If we cannot license or develop technology for any infringing aspect of our business, we
require significant effort
would be forced to limit or stop sales of one or more of our solutions or features of our solutions and may be unable to compete
ff
effectively
. Any of these results would harm our business, operating results and financial condition.
ff
In addition, our agreements with customers and partners include indemnification provisions under which we agree to
indemnify them for losses suffered
or incurred as a result of claims of intellectual property infringement and, in some cases, for
damages caused by us to property or persons. Large indemnity payments could harm our business, operating results and financial
condition.
ff
22
Our use of open source and third-party technology could impose limitations on our ability to commercialize our solutions.
We use open source software in our solutions and in our services engagements on behalf of customers. As we increasingly
handle configured implementation of our solutions on behalf of customers, we use additional open source software that we obtain
from all over the world. Although we try to monitor our use of open source software, the terms of many open source licenses have
not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated
conditions or restrictions on our ability to market our solutions. In such event, we could be required to seek licenses from third
our solutions in the
parties in order to continue offering
event re-engineering cannot be accomplished on a timely basis, any of which could cause us to breach contracts, harm our reputation,
result in customer losses or claims, increase our costs or otherwise adversely affect
our business, operating results and financial
condition.
our solutions, to re-engineer our technology or to discontinue offering
ff
ff
ff
Some open source licenses contain requirements that we make available source code for modifications or derivative works
we create based upon the type of open source software we use. If we combine our proprietary software with open source software
in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software
and time and ultimately
to the public. This would allow our competitors to create similar solutions with lower development effort
could result in a loss of product sales for us.
ff
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our
brand, which would substantially harm our business and operating results.
The success of our business and the ability to compete depend in part upon our ability to protect and enforce our patents,
trade secrets, trademarks, copyrights and other intellectual property rights. We primarily rely on patent, copyright, trade secret and
trademark laws, trade secret protection and confidentiality or license agreements with our employees, customers, partners and
others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be
inadequate or we may be unable to secure intellectual property protection for all of our solutions. Any of our copyrights, trademarks
or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation.
Competitors may independently develop technologies or solutions that are substantially equivalent or superior to our solutions or
that inappropriately incorporate our proprietary technology into their solutions. Competitors may hire our former employees who
may misappropriate our proprietary technology or misuse our confidential information. Although we rely in part upon
confidentiality agreements with our employees, consultants and other third parties to protect our trade secrets and other confidential
information, those agreements may not effectively
prevent disclosure of trade secrets and other confidential information and may
not provide an adequate remedy in the event of misappropriation of trade secrets or unauthorized disclosure of confidential
information. In addition, others may independently discover our trade secrets and confidential information, and in such cases we
could not assert any trade secret rights against such parties.
ff
In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect
these rights. Litigation to protect and enforce our intellectual property rights could be costly,yy time-consuming and distracting to
management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts
to enforce
our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability
of our intellectual property rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to
our business, operating results
us and divert the efforts
and financial condition. Certain jurisdictions may not provide adequate legal infrastructure for effective
protection of our intellectual
property rights. Changing legal interpretations of liability for unauthorized use of our solutions or lessened sensitivity by corporate,
government or institutional users to refraining from intellectual property piracy or other infringements of intellectual property
could also harm our business.
of our technical and management personnel, which may adversely affect
ff
ff
ff
ff
It is possible that innovations for which we seek patent protection may not be protectable. Additionally,yy the process of
obtaining patent protection is expensive and time consuming, and we may not be able to prosecute all necessary or desirable patent
risks and downside of obtaining patent protection,
applications at a reasonable cost or in a timely manner. Given the cost, effort,
including the requirement to ultimately disclose the invention to the public, we may not choose to seek patent protection for certain
innovations. However, such patent protection could later prove to be important to our business. Even if issued, there can be no
assurance that any patents will have the coverage originally sought or adequately protect our intellectual property,yy as the legal
standards relating to the validity,yy enforceability and scope of protection of patent and other intellectual property rights are uncertain.
Any patents that are issued may be invalidated or otherwise limited, or may lapse or may be abandoned, enabling other companies
to better develop products that compete with our solutions, which could adversely affect
our competitive business position, business
prospects and financial condition.
ff
ff
23
We cannot assure you that the measures we have taken to protect our intellectual property will adequately protect us, and
any failure to protect our intellectual property could harm our business.
We may not be able to enforce our intellectual property rights throughout the world, which could adversely impact our
international operations and business.
The laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws
in the United States. Many companies have encountered significant problems in protecting and enforcing intellectual property
rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor
the enforcement of patents and other intellectual property protection. This could make it difficult
for us to stop the infringement
or misappropriation of our intellectual property rights. Proceedings to enforce our proprietary rights in foreign jurisdictions could
result in substantial costs and divert our efforts
to enforce
our intellectual property rights in such countries may be inadequate to obtain a significant commercial advantage from the
intellectual property that we develop, which could have a material adverse effect
on our business, financial condition and results
of operations.
and attention from other aspects of our business. Accordingly,yy our efforts
ff
ff
ff
ff
Changes to government regulations may reduce the size of the market for our solutions, harm demand for our solutions, force
us to update our solutions or implement changes in our services and increase our costs of doing business.
Any changes in government regulations that impact our customers or their end customers could have a harmful effect
on
our business by reducing the size of our addressable market, forcing us to update the solutions we offer
or otherwise increasing
our costs. For example, with respect to our life sciences customers, regulatory developments related to government-sponsored
entitlement programs or U.S. Food and Drug Administration or foreign equivalent regulation of, or denial, withholding or
withdrawal of approval of, our customers’ products could lead to a lack of demand for our solutions. Other changes in government
regulations, in areas such as privacy,yy export compliance or anti-bribery statutes, such as the U.S. Foreign Corrupt Practices Act,
could require us to implement changes in our solutions, services or operations that increase our cost of doing business and thereby
adversely affecting
our financial performance.
ff
ff
ff
Failure to comply with certain certifications and standards pertaining to our solutions, as may be required by governmental
authorities or other standards-setting bodies could harm our business. Additionally,yy failure to comply with governmental laws
and regulations could harm our business.
Customers may require our solutions to comply with certain security or other certifications and standards, which are
promulgated by governmental authorities or other standards-setting bodies. The requirements necessary to comply with these
certifications and standards are complex and often change significantly. If our solutions are late in achieving or fail to achieve
compliance with these certifications and standards, including when they are revised or otherwise change, or our competitors achieve
compliance with these certifications and standards, we may be disqualified from selling our solutions to such customers, or at a
competitive disadvantage, which would harm our business, operating results and financial condition.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in
international markets.
Certain of our solutions are subject to U.S. export controls and may be exported outside the United States only with the
required export license or through an export license exception. Additionally,yy we incorporate encryption technology into our
solutions, which may require additional filings prior to export. If we were to fail to comply with U.S. export licensing requirements,
U.S. customs regulations, U.S. economic sanctions or other laws, we could be subject to substantial civil and criminal penalties,
including fines, incarceration for responsible employees and managers, and the possible loss of export or import privileges.
Obtaining the necessary export license for a particular sale may be time-consuming and may result in the delay or loss of sales
opportunities. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S.
embargoed or sanctioned countries, governments and persons. Even though we take precautions to ensure that our channel partners
comply with all relevant regulations, any failure by our channel partners to comply with such regulations could have negative
consequences, including reputational harm, government investigations and penalties.
In addition, various countries regulate the import of certain encryption technology,yy including through import permit and
license requirements, and have enacted laws that could limit our ability to distribute our solutions or could limit our customers’
ability to implement our solutions in those countries. Changes in our solutions or changes in export and import regulations may
create delays in the introduction of our solutions into international markets, prevent our customers with international operations
from deploying our solutions globally or, in some cases, prevent the export or import of our solutions to certain countries,
governments or person’s altogether. Any change in export or import regulations, economic sanctions or related legislation, shift
24
in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by
such regulations, could result in decreased use of our solutions by,yy or in our decreased ability to export or sell our solutions to,
existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to
export or sell our solutions would likely adversely affect
our business, financial condition, and operating results.
ff
If we are required to collect sales and use taxes on the solutions we sell, we may be subject to liability for past sales and our
future sales may decrease.
ff
State and local taxing jurisdictions have differing
rules and regulations governing sales and use taxes, and these rules and
regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales taxes to our
subscription services in various jurisdictions is unclear. Although we have historically collected and remitted sales tax in certain
circumstances, it is possible that we could face sales tax audits and that our liability for these taxes could exceed our estimates as
state tax authorities could still assert that we are obligated to collect additional amounts as taxes from our customers and remit
those taxes to those authorities. We could also be subject to audits with respect to state and international jurisdictions for which
we have not accrued tax liabilities. A successful assertion that we should be collecting additional sales or other taxes on our services
in jurisdictions where we have not historically done so and do not accrue for sales taxes could result in substantial tax liabilities
for past sales, discourage customers from purchasing our solutions or otherwise harm our business and operating results.
Uncertainty in global economic conditions may adversely affect
ff
our business, operating results or financial condition.
ff
Our operations and performance depend on global economic conditions. Challenging or uncertain economic conditions
make it difficult
for our customers and potential customers to accurately forecast and plan future business activities, and may cause
our customers and potential customers to slow or reduce spending, or vary order frequency,yy on our solutions. Furthermore, during
credit and
challenging or uncertain economic times, our customers may face difficulties
experience decreasing cash flow,ww which could impact their willingness to make purchases and their ability to make timely payments
to us. Global economic conditions have in the past and could continue to have an adverse effect
on demand for our solutions,
including new bookings and renewal and upsell rates, on our ability to predict future operating results and on our financial condition
and operating results. If global economic conditions remain uncertain or deteriorate, it may materially impact our business, operating
results and financial condition.
gaining timely access to sufficient
ff
ff
ff
Our business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption
by manmade problems such as terrorism.
Our corporate headquarters and facilities are located near known earthquake fault zones and are vulnerable to significant
damage from earthquakes. The corporate headquarters and facilities are also vulnerable to damage or interruption from human
error, intentional bad acts, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems
failures, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism or vandalism
or other misconduct or other unanticipated problems with our facilities could result in lengthy interruptions to our services. If any
disaster were to occur, our ability to operate our business at our facilities could be seriously or completely impaired or destroyed.
The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions.
Our financial results may be adversely affected
ff
by changes in accounting principles generally accepted in the United States.
FF
Generally accepted accounting principles in the United States (U.S. GAAP) is subject to interpretation by the Financial
the American Institute of Certified Public Accountants, the SEC and various bodies formed
Accounting Standards Board (FASB),
to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued accounting standards
update No. 2014-09 (TopicTT
606), Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition
guidance under U.S. GAAP.PP We will be required to implement this guidance in the first quarter of our fiscal year 2019. Any
difficulties
in implementing this guidance could cause us to fail to meet our financial reporting obligations, which could result in
regulatory discipline and harm investors’ confidence in us. Additionally,yy the implementation of this guidance or a change in other
principles or interpretations could have a significant effect
the reporting of transactions
completed before the announcement of a change. Furthermore, we will be adopting Topic 606 through the modified retrospective
method. This will impact the comparability of our financial results which might lead investors to draw incorrect conclusions which
could harm investor interest in holding or purchasing our equity.
on our financial results, and could affect
ff
ff
ff
25
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be
incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our
stock price.
ff
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect
the amounts reported in the Consolidated Financial Statements and accompanying notes. For example, our
revenue recognition policy is complex and we often must make estimates and assumptions that could prove to be inaccurate. We
base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about revenue recognition, capitalized software, the
carrying values of assets, taxes, liabilities, equity,yy revenues and expenses that are not readily apparent from other sources. Our
operating results may be adversely affected
from those in our assumptions,
which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline
in our stock price. Significant assumptions and estimates used in preparing our Consolidated Financial Statements include those
related to revenue recognition, share-based compensation and income taxes.
if our assumptions change or if actual circumstances differ
ff
ff
We incur significant costs and devote substantial management time as a result of operating as a public company.yy
As a public company,yy we incur significant legal, accounting and other expenses. For example, we are required to comply
with the requirements of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act) and the Dodd Frank Wall Street Reform and
Consumer Protection Act, as well as rules and regulations subsequently implemented by the Securities and Exchange Commission
(SEC) and the New York Stock Exchange, including the establishment and maintenance of effective
disclosure and financial
controls and changes in corporate governance practices. Compliance with these requirements results in legal and financial
compliance costs and make some activities more time consuming.
ff
Additionally,yy as of September 30, 2018, we were no longer an "emerging growth company" and are now required to comply
with additional disclosure and reporting requirements, including an attestation report on internal control over financial reporting
as of September 30, 2018 issued by our independent registered public accounting firm. We are also required to include additional
information regarding executive compensation in our 2019 proxy statement and hold a nonbinding advisory vote on executive
compensation at our 2019 annual meeting of stockholders. These additional reporting requirements may increase our legal and
financial compliance costs and cause management and other personnel to divert attention from operational and other business
matters to devote substantial time to these public company requirements.
If we fail to maintain an effective
or comply with applicable regulations could be impaired.
ff
system of internal controls, our ability to produce timely and accurate financial statements
As a public company,yy we are subject to the reporting requirements of the Securities Exchange Act of 1934 (Exchange Act),
the Sarbanes-Oxley Act and the rules and regulations of the applicable listing exchange. We expect that the requirements of these
rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more
difficult,
time consuming and costly,yy and place significant strain on our personnel, systems and resources.
ff
The Sarbanes-Oxley Act requires, among other things, that we maintain effective
disclosure controls and procedures and
internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that
are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed
in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.
ff
ff
ff
controls, or any difficulties
Our current controls and any new controls that we develop may become inadequate because of changes in conditions in
our business. Further, weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain
effective
encountered in their implementation or improvement, could harm our operating results or
ff
cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any
the results of periodic management
failure to implement and maintain effective
evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness
of our internal
control over financial reporting that we are required to include in our periodic reports we file with the SEC under Section 404 of
the Sarbanes-Oxley Act. For example, our independent registered public accounting firm may issue a report that is adverse in the
event it is not satisfied with the level at which our controls are documented, designed or operating. Ineffective
disclosure controls
and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial
and other information, which would likely have a negative effect
internal controls also could adversely affect
on the trading price of our common stock.
ff
ff
ff
ff
ff
26
ff
In order to maintain and improve the effectiveness
of our disclosure controls and procedures and internal control over
financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-
related costs, and provide significant management oversight. Any failure to maintain the adequacy of our internal controls, or
consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could
materially impair our ability to operate our business. In the event that our internal controls are perceived as inadequate or that we
are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock
price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on
the New York Stock Exchange.
We may need additional capital, and we cannot be certain that additional financing will be available.
We may require additional financing in the future to operate or expand our business, acquire assets or repay or refinance
our existing debt. Our ability to obtain financing will depend, among other things, on our development efforts,
business plans,
operating performance and condition of the capital markets at the time we seek financing. We cannot assure you that additional
financing will be available to us on favorable terms when required, or at all. Additionally,yy under our credit agreement, we are
restricted from incurring additional debt, subject to certain exceptions. If we raise additional funds through the issuance of equity,yy
equity-linked or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common
stock or preferred stock, and our stockholders may experience dilution.
ff
If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
•
•
•
•
•
•
•
develop or enhance our solutions;
continue to expand our sales and marketing and research and development organizations;
repay or refinance our existing debt;
acquire complementary technologies, solutions or businesses;
expand operations, in the United States or internationally;
hire, train and retain employees; or
respond to competitive pressures or unanticipated working capital requirements.
Our failure to do any of these things could seriously harm our business, financial condition, and operating results.
Our ability to use our net operating losses to offset
ff
future taxable income may be subject to certain limitations.
ff
In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (Code), and similar state law provisions,
a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating
losses (NOLs) to offset
future taxable income. If our existing NOLs are subject to limitations arising from ownership changes,
our ability to utilize NOLs could be limited by Section 382 of the Code. Future changes in our stock ownership, some of which
are outside of our control, also could result in an ownership change under Section 382 of the Code. There is also a risk that our
NOLs could expire, or otherwise be unavailable to offset
future income tax liabilities due to changes in the law,ww including regulatory
changes, such as suspensions on the use of NOLs or other unforeseen reasons. For these reasons, we may not be able to utilize a
material portion of the NOLs, even if we attain profitability. For example, certain of our NOLs started expiring in 2016.
ff
Risks Related to the Ownership of Our Common Stock
Our stock price may be volatile, and you may be unable to sell your shares at or above your purchase price.
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the factors
described in this “Risk Factors” section or otherwise and other factors beyond our control, such as fluctuations in the valuations
of companies perceived by investors to be comparable to us.
Furthermore, the stock markets have experienced price and volume fluctuations that have affected
and continue to affect
the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the
operating performance of those companies. These broad market fluctuations, as well as general economic, systemic, political and
market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect
the market
price of our common stock.
ff
ff
ff
27
In the past, many companies that have experienced volatility in the market price of their stock have become subject to
securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could
result in substantial costs and divert our management’s attention, which could harm our business.
If securities
ff
and our stock, the price of our stock and the trading volume could decline.
analysts do not publish research or reports or if they publish unfavorable or inaccurate research about our business
We expect that the trading market for our common stock will be affected
by research or reports that industry or financial
analysts publish about us or our business. There are many large, well-established companies active in our industry and portions
of the markets in which we compete, which may mean that we receive less widespread analyst coverage than our competitors. If
one or more of the analysts who covers us downgrades their evaluations of our company or our stock, the price of our stock could
decline. If one or more of these analysts cease coverage of our company,yy our stock may lose visibility in the market, which in turn
could cause our stock price to decline.
ff
Our restated certificate of incorporation and restated bylaws and Delaware law could prevent a takeover that stockholders
consider favorable and could also reduce the market price of our stock.
Our restated certificate of incorporation and restated bylaws contain provisions that could delay or prevent a change in
for stockholders to elect directors and take other corporate actions.
control of us. These provisions could also make it more difficult
These provisions include:
ff
•
•
•
•
•
•
•
providing for a classified board of directors with staggered, three-year terms;
authorizing the board of directors to issue, without stockholder approval, preferred stock with rights senior to those
of our common stock;
providing that vacancies on our board of directors be filled by appointment by the board of directors;
prohibiting stockholder action by written consent;
requiring that certain litigation must be brought in Delaware;
limiting the persons who may call special meetings of stockholders; and
requiring advance notification of stockholder nominations and proposals.
In addition, we are subject to Section 203 of the Delaware General Corporation Law which may prohibit large stockholders,
in particular those owning fifteen percent or more of our outstanding voting stock, from merging or combining with us for a certain
period of time without the consent of our board of directors.
These and other provisions in our restated certificate of incorporation and our restated bylaws and under the Delaware
General Corporation Law could discourage potential takeover attempts, reduce the price that investors might be willing to pay in
the future for shares of our common stock and result in the market price of our common stock being lower than it would be without
these provisions.
We do not anticipate paying any dividends on our common stock.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash
dividends, you would receive a return on your investment in our common stock only if the market price of our common stock is
greater at the time you sell your shares than the market price at the time you bought your shares.
ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
Properties
Our corporate headquarters are located in San Mateo, California, and consist of approximately 35,000 square feet of space
under a lease that expires on November 30, 2020.
28
ff
We have additional U.S. offices
in Colorado, Illinois, Maine, Massachusetts and New Jersey. We also have international
office
locations in India and Switzerland. We believe our facilities are adequate for our current needs and for the foreseeable future;
ff
however, we will continue to seek additional space as needed. See Note 8 to the Consolidated Financial Statements and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Payment Obligations”
for information regarding our lease obligations.
ITEM 3.
Legal Proceedings
We are not currently a party to any pending material legal proceedings. From time to time, we may become involved in
legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on
us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other
factors.
ITEM 4.
Mine Safety Disclosure
Not applicable
PART II
ITEM 5.
Securities
Market for Registrant’s Common Equity,yy Related Stockholder Matters and Issuer Purchases of Equity
Market Information for Common Stock
Model N common stock is traded on the New York Stock Exchange under the symbol “MODN”.
Dividend Policy
We have never declared or paid, and do not anticipate declaring or paying in the foreseeable future, any cash dividends on
our capital stock. Any future determination as to the declaration and payment of dividends, if any,yy will be at the discretion of our
board of directors, subject to applicable laws and will depend on then existing conditions, including our financial condition,
operating results, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may
deem relevant.
Stockholders
As of November 2, 2018, there were 54 holders of record of our common stock, including The Depository Trust
rr
Company,yy
which holds shares of our common stock on behalf of an indeterminate number of beneficial owners.
Securities Authorized for Issuance under Equity Compensation Plans
The information called for by this item is incorporated by reference to our Proxy Statement for the Annual Meeting of
Stockholders to be held in 2019 (Proxy Statement). See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information.”
Stock Performance Graph
The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference
into any of our other filings under the Exchange Act or the Securities Act of 1933, as amended, except to the extent we specifically
incorporate it by reference into such filing.
This chart compares the cumulative total return on our common stock with that of the NASDAQ Composite Index and the
NASDAQ Computer Index. The chart assumes $100 was invested at the close of market on September 30, 2013, in our common
stock, the NASDAQ Composite Index and the NASDAQ Computer Index, and assumes the reinvestment of any dividends.
29
Model N
NASDAQ Composite Index
NASDAQ Computer Index
9/30/2014
9/30/2015
9/30/2016
9/30/2017
9/30/2018
$
$
$
99.60
119.14
131.47
$
$
$
101.11
122.50
131.82
$
$
$
112.22
140.85
161.25
$
$
$
151.01
172.24
208.61
$
$
$
160.10
213.35
267.67
ITEM 6.
Selected Consolidated Financial Data
The consolidated statement of operations data for the fiscal years ended September 30, 2018, 2017 and 2016 and the selected
consolidated balance sheet data as of September 30, 2018 and 2017 are derived from our audited consolidated financial statements
included in this Form 10-K. The consolidated statement of operations data for fiscal years ended September 30, 2015 and 2014,
and the selected consolidated balance sheet data as of September 30, 2016, 2015 and 2014 are derived from audited consolidated
financial statements that are not included in the Form 10-K. The information set forth below is not necessarily indicative of results
of future operations, and should be read in conjunction with Item 7, “Management's Discussion andAnalysis of Financial Condition
and Results of Operations” and the consolidated financial statements and related notes included in Part II, Item 8, "Consolidated
Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
30
Consolidated Statements of Operations Data:
Fiscal Years Ended September 30,
2018
2017(1)
2016
2015
2014
(in thousands, except per share data)
Revenues:
SaaS and maintenance
License and implementation
Total revenues
Cost of Revenues:
SaaS and maintenance
License and implementation
Total cost of revenues
Gross profit
Operating Expenses:
Research and development
Sales and marketing
General and administrative
Restructuring
Total operating expenses
(Loss) income from operations
Interest (income) expense, net
Other (income) expenses, net
Loss before income taxes
(Benefit) provision for income taxes
Net loss
Net loss per share attributable to common
stockholders (2):
Basic and diluted
Weighted average number of shares used in
computing net loss per share attributable to
common stockholders (2):
Basic and diluted
$
$
$
135,927
$
108,055
$
86,392
$
57,596
$
18,705
154,632
23,114
131,169
20,579
106,971
53,903
11,431
65,334
89,298
32,416
35,482
42,178
—
46,872
14,224
61,096
70,073
31,064
41,339
36,281
—
40,717
12,976
53,693
53,278
23,706
32,261
30,051
—
36,172
93,768
26,014
15,555
41,569
52,199
17,906
30,300
23,132
—
110,076
(20,778)
8,178
(722)
(28,234)
(27)
(28,207) $
108,684
(38,611)
4,159
62
(42,832)
(3,285)
(39,547) $
86,018
(32,740)
(50)
86
(32,776)
335
(33,111) $
71,338
(19,139)
(6)
(22)
(19,111)
528
(19,639) $
46,423
35,333
81,756
21,092
16,652
37,744
44,012
18,710
25,998
19,671
26
64,405
(20,393)
(12)
116
(20,497)
384
(20,881)
(0.93) $
(1.38) $
(1.21) $
(0.76) $
(0.86)
30,370
28,649
27,379
26,015
24,399
Other Financial Data:
Adjusted EBITDA (3)
$
11,472
$
(8,269) $
(12,571) $
(3,332)
N/A
(1)
(2)
(3)
On January 5, 2017, we completed the Revitas acquisition. See Note 3 to our consolidated financial statements for more
information.
See Note 11 to our consolidated financial statements for a description of the method used to compute basic and diluted
net loss per share attributable to common stockholders.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial
Measure” in Item 7 for more information and a reconciliation of adjusted EBITDAto net loss, the most directly comparable
financial measure calculated and presented in accordance with generally accepted accounting principles in the United
States.
31
Consolidated Balance Sheet Data
Cash and cash equivalents
Working capital
Total assets
Loan obligations, current and long-term
Total liabilities
Total stockholders' equity
As of September 30,
2018
2017(1)
2016
2015
2014
(in thousands)
$
$
$
$
56,704
16,455
166,153
53,704
126,119
40,034
57,558
10,172
171,936
57,205
130,675
41,261
66,149
48,588
112,967
—
46,765
66,202
$
91,019
74,814
121,970
—
38,908
83,062
101,006
82,370
129,131
—
40,167
88,964
(1)
On January 5, 2017, we completed the Revitas acquisition. See Note 3 to our consolidated financial statements for more
information.
32
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
d
You should read the following discussion and analysis of our financial condition and results of operations together with
This discussion contains forward-rr
expectations that involve risks and uncertainties. Our actual results may differ materially
statements as a result of various factors, including those set forth under “Risk
statements and related notes that arerr included elsewhererr in this report.
those anticipated in these forward-looking
the consolidated financial
looking statements based upon current
fromrr
rr
Factors” or in other parts of this report.
e
e
rr
Overview
We are a leader in Revenue Management solutions for life sciences and technology companies. Our solutions enable
customers to transform the revenue lifecycle from a series of disjointed operations into a strategic end-to-end process. With deep
industry expertise, we support the complex business needs of the world’s leading brands in life sciences and technology across
tens of thousands of users in more than 120 countries.
Our industry specific clouds offer
ff
a range of solutions from individual products to complete suites and deployments may
vary from specific divisions or territories to enterprise-wide implementations.
We derive revenues primarily from the sale of subscriptions to our Revenue Cloud solutions and implementation services,
as well as maintenance and support and managed support services for our legacy on premise customers. We price our cloud
solutions based on a number of factors, including revenues under management and number of users. We also derive revenues from
selling professional services related to past sales of perpetual licenses. Maintenance and support revenues are recognized ratably
over the support period, which is typically one year. SaaS revenues for cloud-based solutions are derived from subscription fees
from customers accessing our cloud-based solutions, as well as from associated professional services related to the implementation
and set up. The actual timing of revenue recognition may vary based on our customers’implementation requirements and availability
of our services personnel.
We market and sell our solutions to customers in the life sciences and technology industries. While we have historically
generated the substantial majority of our revenues from companies in the life sciences industry,yy we have also grown our base of
technology customers. Our most significant customers in any given period generally vary from period to period due to the timing
in the delivery of our professional services and related revenue recognition. During the fiscal years ended September 30, 2018
and 2017, one customer, Johnson & Johnson, accounted for approximately 15% and 11% of our total revenues. However, during
the fiscal year ended September 30, 2018 and 2017, no customer represented more than 10% of our subscription revenues. No
customer accounted for more than 10% of total revenues during the fiscal year ended September 30, 2016. For the fiscal year
ended September 30, 2018, approximately 12% of our total revenues were derived from customers located outside the United
States.
For the fiscal years ended September 30, 2018, 2017 and 2016, our total revenues were $154.6 million, $131.2 million and
$107.0 million, respectively,yy representing a year-over-year increase of approximately 18% from 2017 to 2018 and year-over-over
increase of approximately 23% from 2016 to 2017. Revenues increased in the 2018 fiscal year primarily due to improvement in
sales execution and the full year effect
of acquisition of Revitas.
ff
Significant Transactions
On May 4, 2018, we entered into a CreditAgreement (the “CreditAgreement”) with Wells Fargo Bank, NationalAssociation.
The Credit Agreement provides for a term loan in the amount of $50.0 million and an additional revolving line of credit up to an
aggregate amount of $5.0 million. The loans will bear interest, at a rate of: (i) when we have a leverage ratio of more than 3.5:1.0,
either the Base Rate plus 3.50% or the LIBOR Rate plus 4.50%, as selected by us; (ii) when we have a leverage ratio between
2.0:1.0 and 3.5:1.0, either the Base Rate plus 2.50% or the LIBOR Rate plus 3.50%; or (iii) when we have a leverage ratio of less
than 2.0:1.0, either the Base Rate plus 2.00% or the LIBOR Rate plus 3.00%. In conjunction with this refinancing, we repaid in
full the existing term loan related to Revitas acquisition under a financing agreement, dated January 5, 2017.
Key Business Metrics
In addition to the measures of financial performance presented in our Consolidated Financial Statements, we use adjusted
EBITDA to evaluate and manage our business We use adjusted EBITDA internally to manage the business, and we believe it is
useful for investors to compare key financial data from various periods. See “—Non-GAAP Financial Measure” below.
33
Key Components of Results of Operations
Revenues
Revenues are comprised of SaaS and maintenance revenues and license and implementation revenues.
SaaS and Maintenance
SaaS and maintenance revenues primarily include SaaS subscription fees and related implementation services from
customers setting up and implementing our cloud-based solutions. Also included in SaaS and maintenance revenues are revenues
related to maintenance and support, managed support services, training and customer-reimbursed expenses. The SaaS model is
the primary way we sell to our customers in our vertical markets. Accordingly,yy we expect that subscription related revenues for
the fiscal year 2019 will be higher both in absolute dollars and as a percentage of total revenues, as we continue to acquire new
SaaS customers and expand our SaaS offerings
within our existing customers base.
ff
License and Implementation
License and implementation revenues are generated from the sale of software licenses for our on-premise solutions and
related implementation and professional services. We no longer sell perpetual licenses and have not recorded any license revenue
in fiscal year 2018. We expect our associated implementation revenues for the fiscal year 2019 to be lower both in absolute dollars
and as a percentage of total revenue from those recorded in the fiscal year ended on September 30, 2018, as we are only helping
customers implement perpetual licenses purchased in prior fiscal years.
Deferred revenue on our consolidated balance sheet does not represent the total contract value of annual or multi-year,
noncancelable subscription agreements. Backlog represents expected future billings which are contractually committed under our
existing subscription agreements that have not been invoiced. Backlog was approximately $25.7 million, $37.4 million and $16.0
and
as of September 30, 2018, 2017 and 2016, respectively. The decrease in our backlog was primarily attributable to our efforts
the contractual rights associated with transitioning customers to cloud based solutions. Out of backlog as of September 30, 2018,
2017 and 2016, approximately $13.2 million, $20.2 million and $6.3 million was long-term backlog and $12.5 million, $17.2
million and $9.7 million was short-term backlog, respectively. We expect that the amount of backlog may change from year-to-
year for several reasons, including billing cycles, timing of customer renewals, remaining duration of arrangement, and the timing
of when unbilled deferred revenue is to be recognized as revenues. For multi-year subscription agreements, the associated backlog
is typically high at the beginning of the contract period, zero immediately prior to expiration and increases if the agreement is
renewed. Low backlog attributable to a particular subscription agreement is typically associated with an impending renewal and
is not an indicator of the likelihood of renewal or future revenue of that customer. Accordingly,yy we expect that the amount of
backlog may change from year to year depending in part upon the number of subscription agreements in particular stages in their
renewal cycle. Such fluctuations are not reliable indicators of future revenues.
ff
Cost of Revenues
Our total cost of revenues is comprised of the following:
SaaS and Maintenance
Cost of SaaS and maintenance revenues includes costs related to our cloud operations, the implementation of our cloud-
based solutions, maintenance and support for our on-premise solutions and managed support services for our on premise solutions,
training and customer reimbursed expenses. Cost of SaaS and maintenance revenues primarily consists of personnel-related costs
including salary,yy bonus, stock-based compensation, royalties, facility expense, amortization of capitalized software and acquired
technologies, depreciation related to server equipment, reimbursable expenses, third-party contractors and cloud hosting costs.
We believe that cost of SaaS and maintenance revenues will continue to increase in absolute dollars as we continue to sell more
cloud-based products and subscriptions.
License and Implementation
Cost of license and implementation revenues includes costs related to the implementation of our on-premise solutions. Cost
of license and implementation revenues primarily consists of personnel-related costs including salary,yy bonus, stock-based
compensation, third-party contractor costs and royalty fees paid to third parties for rights to their intellectual property. Cost of
license and implementation revenues may vary from period to period depending on a number of factors, including the amount of
implementation services required to deploy our solutions and the level of involvement of third-party contractors providing
implementation services. We believe that cost of license and implementation revenues will continue to decrease in absolute dollars
as we no longer sell perpetual licenses.
Operating Expenses
34
Our operating expenses consist of research and development, sales and marketing and general and administrative expenses.
Researchrr
and Development
Our research and development expenses consist primarily of personnel-related costs including salary,yy bonus, stock-based
compensation and third-party contractors and travel-related expenses. Our software development costs are generally expensed as
incurred. In the past, we capitalized development costs in connection with the development of new cloud-based application. As
of September 30, 2018, the net book value of capitalized software development costs was $0.7 million. We expect our research
and development expenses to be marginally lower in fiscal year 2019 from those recorded in fiscal year 2018.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs including salary,yy bonus, commissions, stock-
based compensation, amortization of intangibles, travel-related expenses and marketing programs. We recognize sales commission
expense upon the booking of a contract, while we recognize revenue over the period services were provided. We expect our sales
and marketing expenses to be flat to marginally lower in fiscal year 2019 from those recorded in fiscal year 2018.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related costs including salary,yy bonus, stock-based
compensation, audit and legal fees as well as third-party contractors, facilities , costs associated with corporate transactions and
travel-related expenses. We expect our general and administrative expense to be substantively lower in fiscal year 2019 from those
recorded in fiscal year 2018. It primarily related to the stock issued in connection with our former Chief Executive Officer
’s
departure in fiscal year 2018.
ff
Results of Operations
The following tables set forth our consolidated results of operations for the periods presented and as a percentage of our
total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial
results to be achieved in future periods.
Consolidated Statements of Operations Data:
Revenues:
SaaS and maintenance
License and implementation
Total revenues
Cost of Revenues:
SaaS and maintenance
License and implementation
Total cost of revenues
Gross profit
Operating Expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Interest (expense) income, net
Other (income) expenses, net
Loss before income taxes
(Benefit) provision for income taxes
Net loss
Fiscal Years Ended September 30,
2018
2017
(in thousands)
2016
$
$
135,927
18,705
154,632
$
108,055
23,114
131,169
53,903
11,431
65,334
89,298
32,416
35,482
42,178
110,076
(20,778)
8,178
(722)
(28,234)
(27)
(28,207) $
46,872
14,224
61,096
70,073
31,064
41,339
36,281
108,684
(38,611)
4,159
62
(42,832)
(3,285)
(39,547) $
$
35
86,392
20,579
106,971
40,717
12,976
53,693
53,278
23,706
32,261
30,051
86,018
(32,740)
(50)
86
(32,776)
335
(33,111)
Comparison of the Fiscal Years Ended September 30, 2018 and 2017
Revenues
Fiscal Years Ended September 30,
2018
2017
Amount
% of
Total
Revenues
% of
Total
Revenues
Amount
(in thousands, except percentages)
Change
($)
(%)
$ 135,927
18,705
$ 154,632
88% $ 108,055
23,114
12
100% $ 131,169
82% $
18
100% $
27,872
(4,409)
23,463
26%
(19)
18%
Revenues:
SaaS and maintenance
License and implementation
Total revenues
SaaS and Maintenance
SaaS and maintenance revenues increased $27.9 million, or 26%, to $135.9 million for the fiscal year ended September 30,
2018 from $108.1 million for the fiscal year ended September 30, 2017. The increase in our SaaS and maintenance revenues
included a $20.5 million increase in our SaaS offering
revenues, a $6.0 million increase in our maintenance and support and
managed support services revenues, and $1.4 million in our training and customer reimbursable expense. The increase in these
revenues was partially due to the revenue attributable from the acquisition of Revitas in the second quarter of fiscal year 2017.
in future periods and also as a percentage of total revenues.
ff
We intend to focus on growing our recurring revenue from SaaS offering
ff
License and Implementation
License and implementation revenues decreased $4.4 million, or 19%, to $18.7 million for the fiscal year ended
September 30, 2018 from $23.1 million for the fiscal year ended September 30, 2017. As a percentage of total revenues, license
and implementation revenue decreased from 18% to 12%. The decrease in these revenues in absolute dollars and as a percentage
of total revenues was primarily due to fewer sales of software licenses for our on-premise solutions and related implementation
services as our business model has shifted to cloud-based solutions and no longer sell perpetual licenses.
Cost of Revenues
Cost of revenues
SaaS and maintenance
License and implementation
Total cost of revenues
Gross profit
SaaS and maintenance
License and implementation
Total gross profit
SaaS and Maintenance
Fiscal Years Ended September 30,
2018
% of
2017
% of
Change
Amount
Revenues
Amount
Revenues
($)
(%)
(in thousands, except percentages)
$
$
$
$
53,903
11,431
65,334
82,024
7,274
89,298
40% $
61
42% $
60% $
39
58% $
46,872
14,224
61,096
61,183
8,890
70,073
43% $
62
47%
7,031
(2,793)
4,238
57% $
38
53% $
20,841
(1,616)
19,225
15%
(20)
7%
34%
(18)
27%
Cost of SaaS and maintenance revenues increased $7.0 million, or 15%, to $53.9 million during the fiscal year ended
September 30, 2018 from $46.9 million for the fiscal year ended September 30, 2017. As a percentage of SaaS and maintenance
revenues, cost of SaaS and maintenance revenues decreased from 43% to 40% in fiscal year 2018, as we continued to improve
gross margins due to increased efficiencies
of the synergies related to our acquisition of Revitas
in the second quarter of fiscal year 2017, and as we optimized our cloud platform.
in our business, full year effect
ff
ff
36
License and Implementation
Cost of license and implementation revenues decreased $2.8 million, or 20%, to $11.4 million during the fiscal year ended
September 30, 2018 from $14.2 million for the fiscal year ended September 30, 2017. As a percentage of revenue, cost of license
and implementation revenues decreased to 61% in fiscal year 2018 from 62% in fiscal year 2017. The decrease in these costs as
a percentage of total revenues was primarily due to an increase of professional services with higher profit margins in the overall
mix of sales associated with license and implementation.
Fiscal Years Ended September 30,
2018
Amount
2017
Amount
Change
($)
(%)
(in thousands, except percentages)
$
$
32,416
35,482
42,178
110,076
$
$
31,064
41,339
36,281
108,684
$
$
1,352
(5,857)
5,897
1,392
4%
(14)
16
1%
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Researchrr
and Development
Research and development expenses increased by $1.4 million, or 4%, to $32.4 million during the fiscal year ended
September 30, 2018 from $31.1 million for the fiscal year ended September 30, 2017. Employee-related expenses increased $1.4
million. We also had a $0.5 million increase in consulting costs, offset
by a $0.5 million decreased in travel and other costs.
ff
Sales and Marketing
Sales and marketing expenses decreased by $5.9 million, or 14%, to $35.5 million during the fiscal year ended September 30,
2018 from $41.3 million for the fiscal year ended September 30, 2017. Employee related expenses decreased $5.9 million in part
due to headcount reduction and a $1.7 million decrease in marketing and travel costs, which were partially offset
by an $0.8 million
increase of intangible amortization expense related to the acquisition of Revitas in the second quarter of fiscal year 2017 and a
$1.0 million increase in consulting and other costs.
ff
General and Administrative
General and administrative expenses increased by $5.9 million, or 16%, to $42.2 million during the fiscal year ended
September 30, 2018 from $36.3 million for the fiscal year ended September 30, 2017. The increase was primarily due to a $7.9
million increase in employee-related costs, which primarily reflects the impact of the common stock issued in connection with
our former Chief Executive Officer
by a $2.0 million decrease in other costs such as facility,yy
travel, third-party data center and other costs.
’s departure, which was partially offset
ff
ff
Interest and Other (Income) Expense, Net
Fiscal Years Ended September 30,
2018
Amount
2017
Amount
Change
($)
(%)
(in thousands, except percentages)
Interest expense, net
Other (income) expenses, net
$
$
8,178
$
(722) $
4,159
62
$
$
4,019
(784)
97 %
(1,265)%
In May 2018, we refinanced the term loan related to the Revitas acquisition. The increase of $4.0 million during fiscal year
2018 was driven by approximately $3.1 million of loss on extinguishment in connection with the refinancing.
Change in other (income) expense, net was primarily due to currency fluctuation.
37
Provision (Benefit) for Income Taxesaa
Fiscal Years Ended September 30,
2018
Amount
2017
Amount
Change
($)
(%)
(in thousands, except percentages)
Provision (benefit) for income taxes
$
(27) $
(3,285) $
3,258
(99)%
The change in income tax provision is primarily due to a discrete tax benefit of $4.2 million recorded in the second quarter
of fiscal year 2017. The discrete item is a result of releasing a portion of our valuation allowance in connection with the acquisition
of Revitas.
Provision for (benefit from) income taxes was primarily related to the state minimum tax and foreign tax on our profitable
by discrete tax benefit recorded as a result of a reduction in deferred tax liabilities from the reduced
foreign operations offset
corporate tax rate and valuation allowance release. This is in addition to a reversal of certain foreign unrecognized tax benefits.
ff
Comparison of the Fiscal Years Ended September 30, 2017 and 2016
Revenues
Fiscal Years Ended September 30,
2017
2016
% of
Total
% of
Total
Change
Amount
Revenues
Amount
Revenues
($)
(%)
(in thousands, except percentages)
$ 108,055
23,114
$ 131,169
82
18
100
$
86,392
20,579
$ 106,971
81
19
100
$
$
21,663
2,535
24,198
25%
12
23%
Revenues:
SaaS and maintenance
License and implementation
Total revenues
SaaS and Maintenance
SaaS and maintenance revenues increased $21.7 million, or 25%, to $108.1 million for the fiscal year ended September 30,
2017 from $86.4 million for the fiscal year ended September 30, 2016. The increase in these revenues was primarily due to the
revenue attributable from the acquisition of Revitas on January 5, 2017 as well as continued growth in our SaaS business. The
increase in our SaaS and maintenance revenues included a $12.5 million increase in our SaaS subscription revenues, a $8.8 million
increase in our maintenance and support and managed support services revenues, and $0.4 million in our training and customer
reimbursable expense. We intend to focus on growing our recurring revenue from SaaS and maintenance in future periods and
also as a percentage of total revenues.
License and Implementation
License and implementation revenues increased $2.5 million, or 12%, to $23.1 million for the fiscal year ended September 30,
2017 from $20.6 million for the fiscal year ended September 30, 2016.As a percentage to total revenues, license and implementation
revenue decreased from 19% to 18%. The decrease in these revenues as a percentage of total revenue was primarily due to fewer
sales of perpetual licenses and related implementation services as we shifted our business model towards cloud-based solutions
and stopped selling perpetual licenses. The increase in revenue in absolute dollars was primarily due to the revenue attributable
from the acquisition of Revitas, which historically prior to our acquisition derived a greater portion of their business from perpetual
license related contracts.
38
Cost of Revenues
Cost of revenues
SaaS and maintenance
License and implementation
Total cost of revenues
Gross profit
SaaS and maintenance
License and implementation
Total gross profit
SaaS and Maintenance
Fiscal Years Ended September 30,
2017
2016
Amount
% of
Revenues
Amount
% of
Revenues
Change
($)
(%)
(in thousands, except percentages)
$
$
$
$
46,872
14,224
61,096
61,183
8,890
70,073
43
62
47
$
$
57% $
38%
53% $
40,717
12,976
53,693
45,675
7,603
53,278
47
63
50
53
37
50
$
$
$
$
6,155
1,248
7,403
15,508
1,287
16,795
15%
10
14%
34%
17
32%
Cost of SaaS and maintenance revenues increased $6.2 million, or 15%, to $46.9 million during the fiscal year ended
September 30, 2017 from $40.7 million for the fiscal year ended September 30, 2016. As a percentage of SaaS and maintenance
revenues, cost of SaaS and maintenance revenues decreased from 47% to 43% in fiscal year 2017. The decreases in costs as a
and synergies associated with the acquisition of
percentage of revenue were driven by our increased ability to drive efficiencies
Revitas and the increase in efficiencies
as we continuously modernize our cloud platform.
ff
ff
License and Implementation
Cost of license and implementation revenues increased $1.2 million, or 10%, to $14.2 million during the fiscal year ended
September 30, 2017 from $13.0 million for the fiscal year ended September 30, 2016 due to the increase in related revenue. As a
percentage of revenue, cost of license and implementation revenues decreased to 62% in fiscal year 2017 from 63% in fiscal year
2016. The decrease in these costs as a percentage of total revenues was primarily due to a more favorable mix of services
engagements, partially offset
by an increase in the accelerated amortization of a prepaid royalty agreement resulting from a shift
ff
to cloud-based solutions.
Operating Expenses
Fiscal Years Ended September 30,
2017
Amount
2016
Amount
Change
($)
(%)
(in thousands, except percentages)
$
$
31,064
41,339
36,281
108,684
$
$
23,706
32,261
30,051
86,018
$
$
7,358
9,078
6,230
22,666
31%
28
21
26%
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Researchrr
and Development
Research and development expenses increased by $7.4 million, or 31%, to $31.1 million during the fiscal year ended
September 30, 2017 from $23.7 million for the fiscal year ended September 30, 2016. Employee related expenses increased $4.1
million due to severance, salaries, bonus and stock-based compensation. We also had a $0.9 million increase in consulting costs,
$0.8 million increases software-related costs, an $1.3 million increase in costs that had been previously capitalized, and a $0.3
million increase in travel and entertainment expense and other costs.
39
Sales and Marketing
Sales and marketing expenses increased by $9.1 million, or 28%, to $41.3 million during the fiscal year ended September 30,
2017 from $32.3 million for the fiscal year ended September 30, 2016. Employee-related expenses increased $6.4 million due to
severance and commissions, bonus and salaries as a result of increased headcount. We also had a $2.5 million increase of
amortization expense related to intangible assets and an $0.7 million increase in marketing program, facility and equipment related
expense, partially offset
by decrease in $0.5 million consulting cost, travel and entertainment expense and other costs.
ff
General and Administrative
General and administrative expenses increased by $6.2 million, or 21%, to $36.3 million during the fiscal year ended
September 30, 2017 from $30.1 million for the fiscal year ended September 30, 2016. Employee-related costs increased $3.2
million dues to severance and increased headcount, inclusive of transitional employees, related to our acquisition of Revitas. We
also had an $1.0 million increased in facility costs, $0.6 million increased in consulting costs and a $1.4 million increase in
depreciation and other expenses.
Interest and Other Expense, Net
Interest expense (income), net
Other expenses (income), net
Fiscal Years Ended September 30,
2017
Amount
2016
Amount
Change
($)
(%)
$
$
4,159
62
$
$
(in thousands, except percentages)
(50) $
$
86
4,209
(24)
(8,418)%
(39)%
Interest expense increased $4.4 million during fiscal year 2017 primarily due to borrowings in January 2017 in connection
by $0.2 million
with the acquisition of Revitas as described in the Notes to the Consolidated Financial Statement, partially offset
interest income.
ff
Change in other (income) expenses, net was immaterial and primarily related to currency fluctuation.
Provision for Income Taxesaa
Fiscal Years Ended September 30,
2017
Amount
2016
Amount
Change
($)
(%)
(in thousands, except percentages)
Provision for income taxes
$
(3,285) $
335
$
(3,620)
(1,081)%
The change in income tax provision is primarily due to a discrete tax benefit of $4.2 million recorded in the second
quarter of fiscal 2017. The discrete item is a result of releasing a portion of our valuation allowance resulting from the
acquisition of Revitas.
40
Quarterly Results of Operations (Unaudited)
The following table sets forth our unaudited quarterly statements of operations data for the last eight fiscal quarters. The
information for each of these quarters has been prepared on the same basis as the audited annual financial statements included
elsewhere in this annual report and, in the opinion of management, includes all adjustments, which includes only normal recurring
adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction
with our audited consolidated financial statements and related notes included elsewhere in this annual report. These quarterly
operating results are not necessarily indicative of our operating results for any future period.
Revenues:
SaaS and maintenance
License and implementation
Total revenues
Cost of Revenues:
SaaS and maintenance
License and implementation
Total cost of revenues
Gross profit
Operating Expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Interest (income) expense, net
Other (income) expenses, net
Loss before income taxes
Sep 30,
2018
Jun 30,
2018
Mar 31,
2018
Dec 31,
2017
Sep 30,
2017
Jun 30,
2017
Mar 31,
2017
Dec 31,
2016
(in thousands, except per share amounts)
Three Months Ended
$ 34,984
1,730
36,714
$ 35,623
3,994
39,617
$ 32,997
6,237
39,234
$ 32,323
6,744
39,067
$ 29,628
5,977
35,605
$ 28,530
5,714
34,244
$ 27,257
6,000
33,257
$ 22,640
5,423
28,063
13,414
1,413
14,827
21,887
7,555
8,637
9,079
25,271
14,599
1,846
16,445
23,172
7,746
9,338
17,044
34,128
12,866
4,387
17,253
21,981
8,047
9,015
7,324
13,024
3,785
16,809
22,258
12,345
3,118
15,463
20,142
12,439
3,333
15,772
18,472
9,068
8,492
8,731
7,762
8,393
10,258
10,739
9,332
8,096
24,386
26,291
27,352
27,228
11,880
4,159
16,039
17,218
8,934
11,608
11,668
32,210
10,208
3,614
13,822
14,241
5,975
8,734
7,185
21,894
(3,384)
(10,956)
(2,405)
(4,033)
(7,210)
(8,756)
(14,992)
(7,653)
828
(416)
4,478
(344)
1,449
(87)
1,423
125
1,370
1,442
(15)
3
1,380
228
(33)
(154)
(3,796)
(15,090)
(3,767)
(5,581)
(8,565)
(10,201)
(16,600)
(7,466)
Provision (benefit) for income taxes
(177)
345
129
(324)
457
234
(4,110)
134
Net loss
$ (3,619) $(15,435) $ (3,896) $ (5,257) $ (9,022) $(10,435) $(12,490) $ (7,600)
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents. As of September 30, 2018, we had cash and cash
equivalents of $56.7 million.
ff
We expect that our operating losses will continue through at least the foreseeable future. Based on our future expectations
to meet our operating needs for at least the
and historical usage, we believe our current cash and cash equivalents are sufficient
next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion
of our sales and marketing activities, and the timing and extent of spending to support research and development efforts
and
expansion of our business and capital expenditures for the purchase of computer hardware and software. To the extent that existing
to fund our future activities, we may elect to raise additional
cash and cash equivalents and cash from operations are insufficient
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 convertible
debt securities could result in additional 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.
ff
ff
41
Term Loan
In January 2017, we entered into a financing agreement (Financing Agreement) pursuant to which we borrowed an aggregate
principal amount of $50 million, which was used to fund part of the cash portion of the Revitas acquisition.
The term loan bore interest at a rate of either (i) the Base Rate (as defined in the Financing Agreement) plus 9.25% or (ii)
the LIBOR Rate (as defined in the Financing Agreement) plus 8.25%, as selected by us. From April 1, 2018 though the payoffff the
loan in May 2018, we selected Base Rate plus 9.25%. The term loan would have matured on January 5, 2022.
The Financing Agreement required us to maintain certain financial covenants and also contained certain non-financial
covenants, including restricting our ability to dispose of assets, changing our organizational documents or amending our material
agreements in a manner adverse to the lender, changing a method of accounting, merging with or acquiring other entities, incurring
other indebtedness and making certain investments. We were in compliance with all the covenants described in the Financing
Agreement through the payoffff in conjunction with the new term loan with Wells Fargo Bank entered into in May 2018, discussed
below.
In May 2018, this term loan was extinguished and repaid in full, in connection with a new facility with Wells Fargo Bank,
N.A. (WellsWW Fargo), as discussed below.
Term Loan Refinancing
On May 4, 2018, we entered into Credit Agreement (the “Credit Agreement”) with Wells Fargo for a term loan in the amount
of $50.0 million and up to a $5.0 million revolving line of credit. In conjunction with this refinancing, we repaid in full the existing
term loan under the Financing Agreement, dated as January 5, 2017. The results of this action will allow us to obtain a more
favorable interest rate.
The loans made pursuant to the Credit Agreement will bear interest at a rate of: (i) when we have a leverage ratio of more
than 3.5:1.0, either the Base Rate plus 3.50% or the LIBOR Rate plus 4.50%, as selected by us; (ii) when we have a leverage ratio
between 2.0:1.0 and 3.5:1.0, either the Base Rate plus 2.50% or the LIBOR Rate plus 3.50%; or (iii) when we have a leverage
ratio of less than 2.0:1.0, either the Base Rate plus 2.00% or the LIBOR Rate plus 3.00%. The term loan will mature on May 4,
2023. We are required to repay the principal of the term loan in quarterly installments of $250,000 each from September 30, 2018
through June 30, 2019, $625,000 each from September 30, 2019 through June 30, 2020, and $937,500 each from September 30,
2020 through March 31, 2023, and to repay the remaining principal amount at maturity. We may voluntarily prepay the term
loan, with any such prepayment applied against the remaining installments of principal of the term loan on a pro rata basis; provided,
that at our election, one such prepayment made during the fiscal quarter ending December 31, 2018 in an amount not to exceed
$5 million may be applied against the remaining installments of principal in the direct order of maturity. We are required to repay
the term loan with proceeds from the sale of assets, the receipt of certain insurance proceeds, litigation proceeds or indemnity
payments, or the incurrence of debt (in each case subject to certain exceptions).
Certain United States subsidiaries of ours (Guarantors) and the Company have entered into a guaranty and security agreement
pursuant to which the Guarantors have agreed to guarantee our payment of obligations under the Credit Agreement, and pursuant
to which we and Guarantors’ obligations under the Credit Agreement and the guaranty and security agreement are secured by
substantially all of their assets.
The Credit Agreement requires us and our subsidiaries to maintain certain financial covenants, including maintaining
consolidated liquidity (cash in the United States plus revolving credit line availability) of at least $15 million, minimum levels of
maintenance and subscription fee revenue and, if liquidity is less than $30 million for 90 consecutive days, leverage ratio not
greater than 3.50 to 1.00. The Credit Agreement also requires us and Guarantors to maintain certain non-financial covenants,
including covenants restricting our ability to dispose of assets, changing our organizational documents, merging with or acquiring
other entities, incurring other indebtedness and making investments. The Credit Agreement also provides for customary events of
default, including failure to pay amounts due or to comply with covenants, default on other indebtedness, or a change of control
with respect to us.
In the third quarter of fiscal 2018, we recorded approximately $3.1 million of expense in connection with the repayment
of our first term loan, of which approximately $1.6 million is non-cash unamortized discounts and deferred financing costs and
$1.5 million in prepayment penalty.
Promissory
rr
Notes
Also, in connection with the Revitas acquisition, the Company incurred $10.0 million in debt in the form of two promissory
notes with the sellers, one which matured on July 5, 2018 and the other which will mature on January 5, 2020. The Company paid
the first promissory note of $5.0 million on July 5, 2018. The remaining promissory note bears interest at the rate of 3% per
annum, and is subject to a right of set-offff as partial security for the indemnification obligations of the target’s stockholders under
the Merger Agreement. The remaining promissory notes is subordinate to the term loan with Wells Fargo.
42
Cash Flows
Fiscal Years Ended September 30,
2018
2017
(in thousands)
2016
Cash flows provided by (used in) operating activities
Cash flows used in investing activities
Cash flows (used in) provided by financing activities
$
$
2,523
(252)
(3,003)
(11,965) $
(48,501)
51,866
(12,324)
(15,789)
3,279
Cash Flows fromrr Operating Activities
Net cash provided by operating activities during the fiscal year ended September 30, 2018 was primarily the result of our
net loss of $28.2 million and an $4.6 million change in operating assets and liabilities, partially offset
by $32.2 million of non-
cash adjustments of deferred income taxes benefits, stock-based compensation, and depreciation and amortization and $3.1 million
in loss on extinguishment of debt. The $4.6 million net change in operating assets and liabilities consisted of a $3.6 million increase
in accounts receivable, primarily reflective of invoicing in excess of collection during the period, a $1.0 million increase in prepaid
expense and other assets, a $0.5 million decrease in deferred cost of implementation services, an $3.2 million increase in deferred
revenue primarily due to timing of amount invoiced and revenue recognized, a $0.7 million decrease in accrued employee
compensation primarily due to payment of bonuses and other employee benefits, and $1.6 million decrease in other accrued and
long term liabilities and a $1.4 million decrease in accounts payable.
ff
Net cash used in operating activities during the fiscal year ended September 30, 2017 was primarily the result of our net
loss of $39.5 million and an $11.9 million change in operating assets and liabilities, partially offset
by $15.7 million of non-cash
adjustments of deferred income taxes benefits, stock-based compensation and depreciation and amortization. The $11.9 million
net change in operating assets and liabilities consisted of a $1.4 million decrease in accounts receivable, primarily reflective of
collections in excess of invoicing during the period, a $2.1 million decrease in prepaid expense and other assets, a $1.5 million
decrease in deferred cost of implementation services, an $5.8 million increase in deferred revenue primarily due to timing of
amount invoiced and revenue recognized, a $2.6 million increase in accrued employee compensation primarily due to accrual of
bonuses and other employee benefits, and a $1.6 million decrease in accounts payable.
ff
Net cash used in operating activities was $12.3 million during fiscal year ended September 30, 2016 was primarily the
result of our net loss of $33.1 million and $1.6 million change in operating assets and liabilities, partially offset
by $19.1 million
of non-cash adjustments comprised of $13.1 million in stock-based compensation, $6.0 million in depreciation and amortization
and $0.2 million in other non-cash charges. The net change in operating assets and liabilities consisted of a $2.9 million increase
in accounts receivable primarily reflective of invoicing in excess of collection during the year, a $1.0 million increase in deferred
cost of implementation services, a $5.9 million increase in deferred revenue primarily due to timing of amount invoiced and
revenue recognized, a $1.5 million increase in prepaid expenses and other assets, a $1.5 million increase in accounts payable, a
$0.7 million decrease in accrued employee compensation primarily due to payment of bonuses and other employee benefits and
a $0.3 million increase in other accrued and long term liabilities.
ff
Cash Flows fromrr
Investing Activities
Net cash used in investing activities for fiscal year ended September 30, 2018 was primarily due to purchases of property
and equipment.
Net cash used in investing activities for fiscal year ended September 30, 2017 was primarily due to $47.8 million net cash
paid for the acquisition of Revitas, $0.4 million associated with capitalization of software development costs and purchases of
property and equipment of $0.4 million.
Net cash used in investing activities for the fiscal year ended September 30, 2016 was primarily due to cash paid for the
acquisition of a business of $12.6 million, $1.1 million associated with capitalization of software development costs and purchases
of property and equipment of $2.1 million.
Cash Flows fromrr
Financing Activities
Net cash used in financing activities for fiscal year ended September 30, 2018 was driven by $4.4 million from the exercises
by $2.2 million net cash used in extinguishing
of stock options and purchases made under our employee stock purchase plan offset
our term loan and new borrowing arrangement with Wells Fargo, as well as the $5.2 million principal related to promissory note
and Wells Fargo's quarterly principal.
ff
Net cash provided by financing activities for fiscal year ended September 30, 2017 was primarily related to our borrowing
activities related to the Revitas transaction, for which we received net cash proceeds of $47.9 million during fiscal year 2017, as
well as $4.0 million from the exercises of stock options and purchase made under our employee stock purchase plan.
43
Net cash provided by financing activities for the fiscal year ended September 30, 2016 was from the exercises of stock
options and purchases made under our employee stock purchase plan.
Contractual Obligations
The following summarizes our contractual obligations as of September 30, 2018:
Contractual Payment Obligations Due by Period
Total
Less than
1 Year
1 to 3
Years
3 to 5
Years
More than 5
Years
Operating lease obligations(1)
$
8,900
$
3,200
$
4,600
$
1,100
$
—
(1) Operating lease obligations represent our obligations to make payments under the lease agreements for our facilities leases.
Off-Balance Sheet Arrangements
As of September 30, 2018, we did not have any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose
of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
ff
44
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles in
the United States (U.S. GAAP). The preparation of the accompanying consolidated financial statements in conformity with U.S.
GAAP requires our management to make certain estimates and assumptions that affect
the amounts of assets and liabilities reported
disclosures about contingent assets and liabilities and reported amounts of revenues and expenses during the reporting periods.
Significant items subject to such estimates include revenue recognition, legal contingencies, income taxes, stock-based
compensation, and valuation of goodwill and intangibles. These estimates and assumptions are based on our management’s best
estimates and judgment. Our management regularly evaluates these estimates and assumptions using historical experience and
other factors; however, actual results could differ
significantly from these estimates.
ff
ff
We believe that the assumptions and estimates associated with revenue recognition, share-based compensation, business
combinations and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider
these to be our critical accounting policies and estimates. Accordingly,yy we believe these are the most critical to fully understand
and evaluate our financial condition and results of operations.
Revenue recognition
We generate revenue from two sources: SaaS and maintenance and License and implementation.
License and implementation revenues include revenues from the sale of perpetual software licenses for our solutions and
the related implementation services. SaaS and maintenance revenues primarily include subscription and the related implementation
fees from customers accessing our cloud-based solutions and revenues associated with maintenance and support contracts from
customers using on-premise solutions. Also included in SaaS and maintenance revenues are other revenues, such as managed
support services, training and customer-reimbursed expenses. We commence revenue recognition when all of the following
conditions are satisfied:
•
•
•
•
there is persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered,
the price is fixed or determinable and
the collection of the fees is probable or reasonably estimable.
However, determining whether and when some of these criteria have been satisfied often involves assumptions and
judgments that can have a significant impact on the timing and amount of revenues we report.
For SaaS arrangements related to Revenue Cloud for Life Sciences and High Tech companies we historically concluded
that the SaaS deliverable did not have standalone value without the implementation services primarily because other vendors could
not perform the services, and in some cases the complexity of the customer environment in which the SaaS deliverable was
deployed.
Prior to fiscal year 2016, for SaaS arrangements related to Revenue Cloud for Life Sciences and High Tech companies we
treated the entire arrangement consideration, including subscription fees and related implementation services fees, as a single unit
of accounting and recognized the revenues ratably beginning the day the customer was provided access to the subscription service
through the end of contractual period. During fiscal year 2016, we concluded that a sufficient
number of implementation projects
had been completed with several third-party consulting companies participating in either a primary or sub-contractor role, such
that the third-party vendors have the requisite know-how to complete, and, have completed the implementation services
independently. Therefore, the Company concluded that the SaaS deliverable has standalone value to the customer without the
implementation services. The total arrangement fee for a multiple-element arrangement is allocated based on the relative selling
price method. The consideration allocated to subscription fees is recognized as revenue ratably over the contract period. The
consideration allocated to implementation services is recognized as revenue as services are performed, in accordance with the
Accounting Standards Update (ASU) No. 2009-13, Revenue
FF
provisions of Financial Accounting Standards Board (FASB)
Recognition (Accounting Standards Codification (ASC) Topic 605)—Multiple-Deliverable Revenue Arrangements.”
ff
For the remaining SaaS arrangements subscription fees and implementation services continue to have standalone value and
we allocate revenue to each element in the arrangement based on a selling price hierarchy. The selling price for a deliverable is
based on its vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE), if VSOE is not available, or best
estimated selling price (BESP), if neither VSOE nor TPE is available. For SaaS arrangements, where we utilize BESP,PP we established
the BESP for each element by considering specific factors such as existing pricing and discounting. The total arrangement fee for
a multiple element arrangement is allocated based on the relative BESP of each element. The consideration allocated to subscription
fees is recognized as revenue ratably over the contract period. The consideration allocated to services is recognized as revenue as
services are performed.
45
Revenue related to up-front fees are deferred and recognized ratably over the estimated period that the customer benefits
from the related service.
Maintenance and support revenue include post-contract customer support and the right to unspecified software updates and
enhancements on a when and if available basis. Managed support services revenue includes supporting, managing and administering
our software solutions, and providing additional end user support. Maintenance and support revenue and managed support services
revenue are recognized ratably over the period in which the services are provided. The revenue from training and customer-
reimbursed expenses is recognized as we deliver services.
Arrangements that include term-based licenses for current products with the right to use unspecified future versions of the
software during the coverage period, are also accounted for as subscriptions, with revenue recognized ratably over the coverage
period.
License and implementation revenue is recognized based on the nature and scope of the implementation services, we have
concluded that generally the implementation services are essential to our customers’ use of the on-premise solutions, and therefore,
we recognize revenues from the sale of software licenses for our on-premise solutions and the related implementation services on
a percentage-of-completion basis over the expected implementation period which is estimated at a few months to three years. The
percentage-of-completion computation is measured as the hours expended on the implementation during the reporting period as
a percentage of the total estimated hours needed to complete the implementation.
46
Stock-based compensation
We recognize compensation expense for stock option, restricted stock units, employee stock purchase plan (“ESPP”) and
performance based restricted stock units. We use the Black-Scholes-Merton valuation model to estimate the fair value of stock
option awards and ESPP shares. However, we have not granted stock options since fiscal year 2013. The fair value of restricted
stock units is determined based on the intrinsic value of the award on the grant date. Our performance share unit grants included
market condition performance criteria so we used a Monte Carlo simulation model to determine their fair value on the grant date.
The fair value of these grants with a market condition is recognized using the graded-vesting attribution method over the requisite
service period. The Monte-Carlo simulation model takes into account the same input assumptions as the Black-Scholes model;
however, it also further incorporates into the fair value determination the possibility that the performance criteria may not be
satisfied. The weighted-average assumptions used to estimate the fair values of these awards were determined using the following
assumptions:
Risk-free interest rate
Dividend yield
Volatility
Fiscal Year Ended
9/30/2018
2.42%-2.57%
—
39%-40%
Changes in the estimates used to determine the fair value of share-based equity compensation instruments could result in
changes to our compensation charges.
Business Combinations
We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair
value determination of identifiable assets such as customer contracts and any other significant assets or liabilities and contingent
consideration. We adjust the preliminary purchase price allocation, as necessary,yy up to one year after the acquisition closing date
if we obtain more information regarding asset valuation and liabilities assumed.
Our purchase price allocation methodology contains uncertainties because it requires assumptions and management’s
judgment to estimate the fair value of assets acquired and liabilities assumed at the acquisition date. Management estimates the
fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted
valuation techniques, including discounted cash flows and market multiple analyses. Our estimates are inherently uncertain and
subject to refinement. Unanticipated events or circumstances may occur which could affect
the accuracy of our fair value estimates,
including assumptions regarding industry economic factors and business strategies.
ff
During the last three years, we have completed two business combinations, including the Revitas acquisition in January
2017 and the Channelinsight acquisition in October 2015. We do not believe there is a reasonable likelihood that there will be a
material change in the estimates or assumptions we used for the purchase price allocations and the fair value of assets acquired
and liabilities assumed. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to
losses that could be material.
47
Income Taxes
We account for income taxes in accordance with the FASB ASC No. 740—Accounting
(ASC 740). We
make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and
judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation of certain tax assets and
liabilities, which arise from differences
in the timing of recognition of revenue and expense for tax and financial statement purposes.
Significant changes to these estimates may result in an increase or decrease to our tax provision in the subsequent period when
such a change in estimate occurs.
for Income Taxesaa
—
ff
We regularly assess the likelihood that our deferred income tax assets will be realized from future taxable income based
on the realization criteria set forth in ASC 740. To the extent that we believe any amounts are not more likely than not to be realized,
we record a valuation allowance to reduce the deferred income tax assets. In assessing the need for a valuation allowance, we
consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax
planning strategies. In the event we determine that all or part of the net deferred tax assets are not realizable in the future, an
adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly,yy if we
subsequently realize deferred income tax assets that were previously determined to be unrealizable, the respective valuation
allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.
On December 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the Tax Legislation) was enacted in
the United States (U.S.). The Tax Legislation significantly revises the U.S. corporate income tax by,yy among other things, lowering
the corporate income tax rate to 21%, implementing a modified territorial tax system and imposing a one-time repatriation tax on
deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the Toll Charge), and limiting the deductibility of
certain expenses, such as interest expense. As a fiscal-year taxpayer, certain provisions of the Tax Legislation impact us in fiscal
year 2018, including the change in the corporate income tax rate and the Toll Charge, while other provisions will be effective
as of January 1, 2018.
starting at the beginning of fiscal year 2019. The U.S. federal income tax rate reduction was effective
Accordingly,yy our federal statutory income tax rate for fiscal year 2018 reflects a blended rate of approximately 24.3%.
ff
ff
On December 22, 2017, the SEC issued Staffff Accounting Bulletin No.118 (SAB 118), which addresses how a company
recognizes provisional estimates when a company does not have the necessary information available, prepared or analyzed
of the changes in the Tax Legislation. The
(including computations) in reasonable detail to complete its accounting for the effect
measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting,
but cannot extend beyond one year. The final impact of the Tax Legislation may differ
from the above provisional estimates due
to changes in interpretations of the Tax Legislation, any legislative action to address questions that arise because of the Tax
Legislation, by changes in accounting standard for income taxes and related interpretations in response to the Tax Legislation, and
any updates or changes to estimates used in the provisional amounts.
ff
ff
As of September 30, 2018, we had gross deferred income tax assets, related primarily to net operating loss (NOL) carry
forward, deferred revenues, stock compensation, accruals and reserves that are not currently deductible, depreciation and
by deferred tax liabilities
amortization and research and development tax credits of $77.2 million, which have been fully offset
and valuation allowance. Utilization of these net loss carry forwards is subject to the limitations of IRC Section 382. A Section
382 study was performed when we went IPO and subsequent Section 382 analysis have been performed. It is determined that there
is no material limitation of IRC Section 382. However, in the future, some portion or all of these carry forwards may not be
any future taxable income. The federal and state net operating losses will begin expiring in 2021 and 2019,
available to offset
respectively.
ff
ff
We account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is
more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement. We classify the liability for unrecognized tax benefits as current to the extent that our anticipate payment (or receipt)
of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
48
Recent Accounting Pronouncements
Recent Adopted Accounting Guidance
FF
In March 2016, Financial Accounting Standard Board (“FASB”)
issued Accounting Standard Update ("ASU") 2016-09,
Compensation – Stock Compensation (TopicTT
718), which simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on
for financial statements issued for annual periods
the statement of cash flows. For public companies, the guidance is effective
beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted for all companies
in any interim or annual period. Forfeitures can be estimated, as required today,yy or recognized when they occur. Estimates of
forfeitures will still be required in certain circumstances, such as at the time of modification of an award or issuance of a replacement
award in a business combination. We adopted this guidance in the first quarter of fiscal year 2018 and have elected to continue to
estimate our forfeiture rate. In the year of adoption, the ASU requires that the cumulative effect
adjustment be recorded to retained
earnings. Due to a full valuation allowance, there is no cumulative effect
adjustment to record and the adoption of this guidance
had no material impact on our consolidated financial statements.
ff
ff
ff
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (TopicTT
740), which
amended the existing accounting standards for income taxes. The amendments require companies to report their deferred tax
liabilities and deferred tax assets each as a single non-current item on their classified balance sheets. We have adopted this guidance.
The adoption of this guidance had no material impact on our consolidated financial statements.
Recently Enacted Accounting Pronouncements
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (TopicTT
718): providing clarification on
when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU
does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if
there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered
non-substantive. The amendments of this ASU are effective
for reporting periods beginning after December 15, 2017, with early
adoption permitted. We do not believe this will have a material impact on our consolidated financial statements.
ff
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (TopicTT
350): Simplifying the Test for
Goodwill Impairment. This new accounting standard update simplifies the measurement of goodwill by eliminating the Step two
impairment test. Step two measures a goodwill impairment loss by comparing the implied fair value of goodwill with the carrying
amount of that goodwill. The new guidance requires a comparison of our fair value with the carrying amount and we are required
to recognize an impairment charge for the amount by which the carrying amount exceeds the fair value. Additionally,yy we should
from any tax deductible goodwill on the carrying amount when measuring the goodwill impairment
consider income tax effects
loss, if applicable. The new guidance becomes effective
for goodwill impairment tests in fiscal years beginning after December
15, 2019, though early adoption is permitted. We are currently evaluating the impact this standard will have on our consolidated
financial statements.
ff
ff
In January 2017, the FASB issued ASU 2017-01, Business Combination (TopicTT
805): clarifying the definition of a business.
The amendments in this guidance change the definition of a business to assist with evaluating when a set of transferred assets and
activities is a business. The guidance becomes effective
for us at the beginning of our first quarter of fiscal year 2019. Early
adoption is permitted. We do not believe this will have a material impact on our consolidated financial statements.
ff
In November 2016, the FASB issued ASU 2016-18, Restricted Cash (TopicTT
230), clarifying the classification and
presentation of restricted cash in the statement of cash flows. The standard requires that restricted cash and restricted cash equivalents
are included in the cash and cash equivalent balance in the statement of cash flows. Further, reconciliation between the balance
sheet and statement of cash flows is required when the balance sheet includes more than one line item for cash, cash equivalents,
restricted cash, and restricted cash equivalents. Therefore, transfers between these balances should no longer be presented as a
cash flow activity. The guidance become effective
for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017, with early adoption permitted. We do not plan to early adopt, and accordingly we will adopt the new standard
at the beginning of our first quarter of fiscal year 2019. We do not believe this will have material impact on our consolidated
financial statements.
ff
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow (TopicTT
230), amended the existing accounting
standards for the statement of cash flows. The amendments provide guidance on how companies present and classify certain cash
for us at the beginning of its first
receipts and cash payments in the statement of cash flows. The guidance becomes effective
quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. We do not believe this will have
a material impact on our consolidated financial statements.
ff
In February 2016, the FASB issued ASU 2016-02, Lease (TopicTT
842), guidance on the recognition and measurement of
leases. Under the new guidance, lessees are required to recognize a lease liability,yy which represents the discounted obligation to
49
make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. The guidance
retains the current accounting for lessors and does not make significant changes to the recognition, measurement, and presentation
of expenses and cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to
assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will require modified retrospective
application at the beginning of October 1, 2019 for us, with optional practical expedients, but permits adoption in an earlier period.
We are currently evaluating the impact this standard will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), as amended, which
will supersede nearly all existing revenue recognition guidance. The underlying principle of ASC 606 is to recognize revenue
when a customer obtains control of promised goods or services at an amount that reflects the consideration that we expect to be
entitled to in exchange for those goods or services. To achieve this, the Company should apply the five-step revenue recognition
model, which may require the use of judgments and estimates, also requires expanded qualitative and quantitative disclosures
relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including
significant judgments and estimates used. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts
with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Subsequently,yy the FASB
certain aspects of ASC 606 but did not change the core
issued several amendments to the new standard, which clarified or affected
principle of the guidance.
ff
The new standard permits two methods of adoption: (i) retrospectively to each prior period presented (full retrospective
method), or ii) retrospectively with the cumulative effect
recognized in retained earnings as of the date of adoption (modified
retrospective method). We will adopt the new standard using the modified retrospective method at the beginning of our first quarter
of fiscal year 2019.
ff
We are in process of finalizing our new accounting policies, processes, and internal controls necessary to support the
requirements of ASC 606. We have substantially completed our assessment of the financial statement impact of ASC 606, the
impact of which are as discussed below.
ASC 606 will primarily impact our revenue recognition for on-premises offerings,
which contained deliverables within the
scope of ASC 985-605, Software-Revenue Recognition, by eliminating the requirement to have VSOE for undelivered elements,
which accelerates the timing of revenue recognition. In addition, ASC 606 requires incremental contract acquisition costs (such
as sales commissions) for customer contracts to be capitalized and amortized on a systematic basis that is consistent with the
transfer to the customer of the goods or services to which the capitalized cost relates. Currently,yy these costs are expensed as incurred.
ff
Upon adopting ASC 606 at the beginning of fiscal year 2019, our cumulative effect
adjustment will decrease accumulated
deficit by approximately $10.3 million. This cumulative effect
adjustment is primarily driven by a reduction to our deferred
subscription revenues of approximately $3.2 million and deferred license and implementation revenues of approximately $3.9
million. Further, refundable amounts associated with customer contracts of approximately $0.6 million will be reclassified from
deferred subscription revenues to customer deposit. In addition to the adjustment to deferred revenue, other adjustments at transition
include adjustments to other current and noncurrent assets. The adjustment to other current and noncurrent assets is primarily for
capitalized incremental contract acquisitions costs of approximately $3.2 million. We do not expect that this accounting standard
update will have a material impact our tax provision.
ff
ff
50
Non-GAAP Financial Measure
Adjusted EBITDA
Adjusted EBITDA is a financial measure that is not calculated in accordance with generally accepted accounting principles
in U.S. GAAP.PP We define adjusted EBITDAas net loss before items discussed below,ww including: stock-based compensation expense,
depreciation and amortization, acquisition and integration related expense, deferred revenue adjustment related to the acquisition
of Revitas, interest (income) expenses, net, other (income) expenses, net, certain legal expenses and provision (benefit) for income
taxes. We believe adjusted EBITDA provides investors with consistency and comparability with our past financial performance
and facilitates period-to-period comparisons of our operating results and our competitors’ operating results. We also use this
measure internally to establish budgets and operational goals to manage our business and evaluate our performance.
We understand that, although adjusted EBITDA is freff quently 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.PP These limitations include:
•
•
•
•
•
•
adjusted EBITDA does not include deferred revenue adjustment, integration, and expense related Revitas acquisition;
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; adjusted EBITDA does not reflect any cash requirements for these replacements;
adjusted EBITDA does not reflect legal expense related to class action lawsuits;
adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of interest income or expense
and other income or expense; and
other companies in our industry may calculate adjusted EBITDA differently
comparative measure.
than we do, limiting its usefulness as a
ff
Reconciliation of Adjusted EBITDA:
Net loss
Adjustments:
Stock-based compensation expense
Depreciation and amortization
Deferred revenue adjustments
Acquisition and integration related expense
Interest (income) expense, net
Other (income) expenses, net
Legal expenses
(Benefit) provision for income taxes
Fiscal Years Ended September 30,
2018
2017
(in thousands)
2016
$
(28,207) $
(39,547)
(33,111)
23,324
8,299
627
—
8,178
(722)
—
(27)
10,560
8,185
5,151
6,446
4,159
62
—
(3,285)
(8,269) $
13,068
5,929
—
867
(50)
86
305
335
(12,571)
Adjusted EBITDA
$
11,472
$
Adjusted EBITDA was $11.5 million, $(8.3) million and $(12.6) million for the fiscal years ended September 30, 2018,
2017 and 2016, respectively. The increase in our adjusted EBITDA for the fiscal year ended September 30, 2018 as compared to
fiscal year ended September 30, 2017, was primarily due to an increase in our revenues from our SaaS and maintenance business
as we acquired new customers, the full year effect
of the Revitas acquisition and synergies associated with the acquisition.
ff
51
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may
impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily
a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for
trading purposes.
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents, which bear
interest at a fixed interest rate. Our primary exposure to market risk is interest income and expense sensitivity,yy which is affected
by changes in the general level of the interest rates in the United States. However, because of the short-term nature of our interest-
bearing securities, a 10% change in market interest rates would not be expected to have a material impact on our consolidated
financial condition or results of operations. In addition, as of September 30, 2018, we had approximately $49.8 million, respectively,yy
in short-term and long-term debt with variable interest components. With respect to our interest expense for the fiscal year ended
September 30, 2018, a 10% hypothetical change in interest rates would have resulted in an increase of $0.3 million, respectively,yy
in our interest expense for such period.
ff
Foreign Currency Exchange Risk
Our customers typically pay us in U.S. dollars; however, in foreign jurisdictions, our expenses are typically denominated
in local currency. Our expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates,
particularly changes in the Indian Rupee. The volatility of exchange rates depends on many factors that we cannot forecast with
reliable accuracy. As of September 30, 2018, we have not entered into foreign currency hedging contracts. During fiscal year 2018,
the effect
of a hypothetical 10% change in foreign currency exchange rates applicable to our business would have had an impact
ff
of approximately $3.3 million on our Consolidated Financial Statements. As our international operations grow,w we will continue
to reassess our approach to manage our risk relating to fluctuations in currency rates.
52
Item 8. Financial Statements and Supplementary Data
MODEL N, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Loss
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
54
55
56
57
58
59
60
The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly
Results of Operations (Unaudited)”.
53
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Model N, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Model N, Inc. and its subsidiaries (the “Company”) as of September 30, 2018
and 2017, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three
years in the period ended September 30, 2018, including the related notes and schedule of valuation and qualifying accounts for each of the three
years in the period ended September 30, 2018 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).
We also have audited the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Controlrr
In our opinion, the consolidated financial statements referred to above present fairly,yy in all material respects, the financial position of the Company
as of September 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended September
30, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
internal control over financial reporting as of September 30, 2018, based on criteria established in
maintained, in all material respects, effective
Internal Controlrr
- Integrated Framework (2013) issued by the COSO.
ff
Basis for Opinions
internal control over financial
The Company's management is responsible for these consolidated financial statements, for maintaining effective
reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in Management's Annual Report on
Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
ff
ff
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective
internal control over financial reporting was maintained in all material respects.
ff
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
ff
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
on the financial statements.
of the company’s assets that could have a material effect
ff
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
evaluation of effectiveness
that the degree of compliance with the policies or procedures may deteriorate.
ff
/s/ PricewaterhouseCoopers LLP
San Jose, California
November 16, 2018
We have served as the Company’s auditor since 2007.
54
MODEL N, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $172 and $85 at
September 30, 2018 and 2017
Prepaid expenses
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued employee compensation
Accrued liabilities
Deferred revenue, current portion
Long term debt, current portion
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 8)
Convertible preferred stock:
Convertible preferred stock, $0.0005 par value; no shares authorized, issued and
outstanding at September 30, 2018 and 2017, respectively
Stockholders' equity:
Common Stock, $0.00015 par value; 200,000 shares authorized; 31,444 and 29,323
shares issued and outstanding at September 30, 2018 and September 30, 2017,
respectively
Preferred Stock, $0.00015 par value; 5,000 shares authorized; no shares issued and
outstanding
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
As of September 30,
2018
2017
$
56,704
$
57,558
$
$
28,273
3,631
455
89,063
2,146
39,283
34,597
1,064
24,784
3,733
1,013
87,088
4,611
39,283
40,156
798
166,153
$
171,936
1,664
$
14,211
3,182
52,176
1,375
72,608
52,329
1,182
3,002
14,996
4,979
49,186
4,753
76,916
52,452
1,307
126,119
130,675
—
5
—
244,814
(1,285)
(203,500)
40,034
$
166,153
$
—
4
—
217,052
(502)
(175,293)
41,261
171,936
The accompanying notes are an integral part of these consolidated financial statements.
55
MODEL N, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
Fiscal Years Ended September 30,
2018
2017
2016
Revenues:
SaaS and maintenance
License and implementation
Total revenues
Cost of revenues:
SaaS and maintenance
License and implementation
Total cost of revenues
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total operating expenses
Loss from operations
Interest expense (income), net
Other expenses (income), net
Loss before income taxes
(Benefit) provision for income taxes
Net loss
Net loss per share attributable to common stockholders:
Basic and diluted
Weighted average number of shares used in computing net loss per
share attributable to common stockholders:
$
135,927
$
108,055
$
18,705
154,632
53,903
11,431
65,334
89,298
32,416
35,482
42,178
110,076
(20,778)
8,178
(722)
(28,234)
(27)
23,114
131,169
46,872
14,224
61,096
70,073
31,064
41,339
36,281
108,684
(38,611)
4,159
62
(42,832)
(3,285)
86,392
20,579
106,971
40,717
12,976
53,693
53,278
23,706
32,261
30,051
86,018
(32,740)
(50)
86
(32,776)
335
$
$
(28,207) $
(39,547) $
(33,111)
(0.93) $
(1.38) $
(1.21)
Basic and diluted
30,370
28,649
27,379
The accompanying notes are an integral part of these consolidated financial statements.
56
MODEL N, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
Net loss
Other comprehensive income (loss), net:
Change in foreign currency translation adjustment
Total comprehensive loss
Fiscal Years Ended September 30,
2018
2017
2016
(28,207) $
(39,547) $
(33,111)
(783)
(28,990) $
60
(39,487) $
(96)
(33,207)
$
$
The accompanying notes are an integral part of these consolidated financial statements.
57
MODEL N, INC.
Consolidated Statements of Stockholders’ Equity
(in thousands)
Balance at September 30, 2015
26,666
$
4
$ 186,159
$
(466) $
(102,635) $
83,062
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
Stockholders'
Equity
Issuance of common stock upon exercise of
stock options
Issuance of common stock upon release of
restricted stock units
Issuance of common stock under stock
purchase plans
Stock-based compensation
Other comprehensive loss
Net loss
233
719
273
—
—
—
Balance at September 30, 2016
27,891
Issuance of common stock upon exercise of
stock options
Issuance of common stock upon release of
restricted stock units
Issuance of common stock under stock
purchase plans
Stock-based compensation
Other comprehensive income
Net loss
Balance at September 30, 2017
Issuance of common stock upon exercise of
stock options
Issuance of common stock upon release of
restricted stock units
Issuance of common stock under stock
purchase plans
Stock-based compensation
Other comprehensive income
Net loss
329
813
290
—
—
—
29,323
180
1,709
232
—
—
—
Balance at September 30, 2018
31,444
$
—
—
—
—
—
—
4
—
—
—
—
—
—
4
—
1
—
—
—
—
5
923
—
2,356
13,068
—
—
202,506
1,339
—
2,647
10,560
—
—
—
—
—
—
(96)
—
(562)
—
—
—
—
60
—
—
—
—
—
—
(33,111)
(135,746)
—
—
—
—
—
(39,547)
217,052
(502)
(175,293)
1,546
(1)
2,893
23,324
—
—
—
—
—
—
(783)
—
—
—
—
—
—
(28,207)
923
—
2,356
13,068
(96)
(33,111)
66,202
1,339
—
2,647
10,560
60
(39,547)
41,261
1,546
—
2,893
23,324
(783)
(28,207)
$ 244,814
$
(1,285) $
(203,500) $
40,034
The accompanying notes are an integral part of these consolidated financial statements.
58
MODEL N, INC.
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization
Stock-based compensation
Amortization of debt discount and issuance costs
Deferred income taxes
Other non-cash charges
Loss on extinguishment
Changes in assets and liabilities, net of acquisition:
Accounts receivable
Prepaid expenses and other assets
Deferred cost of implementation services
Accounts payable
Accrued employee compensation
Other accrued and long-term liabilities
Deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of property and equipment
Acquisition of business, net of cash acquired
Capitalization of software development costs
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options and issuance of employee stock
purchase plan
Proceeds from term loan
Debt issuance costs
Principal payment on loan
Early payment penalty
Net cash (used in) provided by financing activities
of exchange rate changes on cash and cash equivalents
Effect
ff
Net decrease in cash and cash equivalents
Cash and cash equivalents
Beginning of period
End of period
Supplemental Disclosure of Cash Flow Data:
Cash paid for income taxes
Cash paid for interest
Noncash Investing and Financing Activities:
Promissory notes issued for acquisition
Fiscal Years Ended September 30,
2018
2017
2016
$
(28,207) $
(39,547) $
(33,111)
8,299
23,324
800
(392)
137
3,142
(3,555)
(960)
486
(1,434)
(687)
(1,622)
3,192
2,523
(252)
—
—
(252)
4,439
49,588
(280)
(55,250)
(1,500)
(3,003)
(122)
(854)
57,558
56,704
622
4,181
$
$
8,185
10,560
683
(3,952)
216
—
1,420
2,117
1,502
(1,558)
2,626
13
5,770
(11,965)
(359)
(47,773)
(369)
(48,501)
3,986
48,686
(806)
—
—
51,866
9
(8,591)
66,149
57,558
677
3,462
$
$
— $
8,643
$
5,929
13,068
—
172
(94)
—
(2,850)
(1,458)
(996)
1,494
(677)
253
5,946
(12,324)
(2,102)
(12,615)
(1,072)
(15,789)
3,279
—
—
—
—
3,279
(36)
(24,870)
91,019
66,149
233
—
—
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
59
1. The Company
Notes to Consolidated Financial Statements
Model N, Inc. (Company) was incorporated in Delaware on December 14, 1999. The Company is a provider of cloud
revenue management solutions for the life sciences and technology industries. The Company’s solutions 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,
in the
incentives and rebates. The Company’s corporate headquarters are located in San Mateo, California, with additional offices
United States, India and Switzerland.
ff
Fiscal Year
The Company’s fiscal year ends on September 30. References to fiscal year 2018, for example, refer to the fiscal year ended
September 30, 2018.
2. Summary of Significant Accounting Policies and Estimates
Basis for Presentation
The Company’s consolidated financial statements and accompanying notes are prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation. The
Company has evaluated subsequent events through the date that the financial statements were issued.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management
the amounts of assets and liabilities reported, disclosures about contingent
to make certain estimates and assumptions that affect
assets and liabilities, and reported amounts of revenues and expenses during the reporting periods. Significant items subject to
such estimates include revenue recognition, legal contingencies, income taxes, stock-based compensation and valuation of goodwill
and intangibles. These estimates and assumptions are based on management’s best estimates and judgment. Management regularly
evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ
significantly from these estimates.
ff
ff
Revenue Recognition
Revenues are comprised of Software as a Service (“SaaS”) and maintenance revenues and license and implementation
revenues.
SaaS and Maintenance
SaaS and maintenance revenues primarily include subscription and the related implementation fees from customers accessing
the Company’s cloud-based solutions and revenues associated with maintenance and support contracts from customers using on-
premise solutions. Also included in SaaS and maintenance revenues are other revenues, including revenues related to managed
support services, training and customer-reimbursed expenses.
The Company has determined that its subscriptions have standalone value without the implementation services and allocates
revenue to each deliverable in the arrangement based on a selling price hierarchy. The selling price for a deliverable is based on
its vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE), if VSOE is not available, or best estimated
selling price (BESP), if neither VSOE nor TPE are available. As the Company has been unable to establish VSOE or TPE for the
elements of its SaaS arrangements, the Company established the BESP for each element by considering company-specific factors
such as existing pricing and discounting. The total arrangement fee for a multiple element arrangement is allocated based on the
relative selling price method, taking into consideration contingent revenue restraints. The consideration allocated to subscription
fees is recognized as revenue ratably over the contract period. The consideration allocated to implementation services is recognized
as revenue as services are performed.
Prior to fiscal year 2016, for SaaS arrangements related to Revenue Cloud for Life Science and High Tech companies the
Company treated the entire arrangement consideration, including subscription fees and related implementation services fees, as a
single unit of accounting and recognized the revenues ratably beginning the day the customer was provided access to the subscription
service through the end of contractual period. During fiscal year 2016, the Company concluded that the SaaS deliverable has
standalone value to the customer without the implementation services, primarily due to the number of third-party consulting
companies that have the know-how to be able to independently perform the implementation services.
Revenue related to up-front fees are deferred and recognized ratably over the estimated period that the customer benefits
from the related service.
60
MODEL N, INC.
Notes to Consolidated Financial Statements
Maintenance and support revenue include post-contract customer support and the right to unspecified software updates and
enhancements on a when and if available basis. Managed support services revenue includes supporting, managing and administering
our software solutions, and providing additional end user support. Maintenance and support revenue and managed support services
revenue are recognized ratably over the period in which the services are provided. The revenue from training and customer-
reimbursed expenses is recognized as the Company delivers these services.
Arrangements that include 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 accounted for as subscriptions, with revenue recognized
ratably over the coverage period.
License and Implementation
License and implementation revenues include revenues from the sale of perpetual software licenses for the Company’s
solutions and the related implementation services. Based on the nature and scope of the implementation services, the Company
has concluded that generally the implementation services are essential to its customers’ use of the on-premise solutions, and
therefore, the Company recognizes revenues from the sale of software licenses for its on-premise solutions and the related
implementation services on a percentage-of-completion basis over the expected implementation period. The Company estimates
the length of this period based on a number of factors, including the number of licensed applications and the scope and complexity
of the customer’s deployment requirements. The percentage-of-completion computation is measured as the hours expended on the
implementation during the reporting period as a percentage of the total estimated hours needed to complete the implementation.
Revenue Recognition
The Company commences revenue recognition when all of the following conditions are satisfied: persuasive evidence of
an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection of
the fees is probable or reasonably estimable. However, determining whether and when some of these criteria have been satisfied
often involves assumptions and judgments that can have a significant impact on the timing and amount of revenues the Company
reports.
For multiple software element arrangements, the Company allocates the sales price among each of the deliverables using
the residual method, under which revenue is allocated to undelivered elements based on their VSOE of fair value. VSOE is the
price charged when an element is sold separately or a price set by management with the relevant authority. The Company has
established VSOE for maintenance and support and training.
ff
The Company does not offer
any contractual rights of return or concessions. The Company’s implementation projects
generally have a term ranging from a few months to twelve months and may be terminated by the customer at any time. Should
a loss be anticipated on a contract, the full amount of the loss is recorded when the loss is determinable. The Company updates its
estimates regarding the completion of implementations based on changes to the expected contract value and revisions to its estimates
of time required to complete each implementation project. Amounts that may be payable to customers to settle customer disputes
are recorded as a reduction in revenues or reclassified from deferred revenue to customer payables in accrued liabilities and other
long-term liabilities.
Costs of Revenues
Cost of SaaS and maintenance revenues consists primarily of personnel-related costs including salary,yy bonus, stock-based
compensation, royalties, facility expense, amortization, depreciation related to server equipment and capitalized software,
reimbursable expenses,
third-party contractors and cloud hosting costs. Cost of license and implementation revenues consists
primarily of personnel-related costs including salary,yy bonus, stock-based compensation, third-party contractor costs and other
related expenses.
Deferred cost of implementation services consists of costs related to implementation services that were provided to the
customer but the revenues for the services have not yet been recognized, provided however that the customer is contractually
required to pay for the services. These costs primarily consist of personnel costs. As of September 30, 2018 and 2017, the deferred
cost of implementation services totaled $0.1 million and $0.6 million, respectively.
Warranty
The Company provides limited warranties on all sales and provides for the estimated cost of warranties at the date of sale.
The estimated cost of warranties has not been material to date.
Foreign Currency Translation
The functional currency of the Company’s foreign subsidiaries is their respective local currency. The Company translates
all assets and liabilities of foreign subsidiaries to U.S. dollars at the current exchange rate as of the applicable consolidated balance
of foreign
sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period. The effects
ff
61
MODEL N, INC.
Notes to Consolidated Financial Statements
currency translations are recorded in accumulated other comprehensive loss as a separate component of stockholders’ equity in
the accompanying consolidated statements of stockholders’ equity. Realized gains and losses from foreign currency transactions
are included in other expenses, net in the consolidated statements of operations and have not been material for all periods presented.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original or remaining maturity of three months at date of
purchase to be cash equivalents. The Company’s cash equivalents are comprised of money market funds, and are maintained with
financial institutions with high credit ratings.
Concentration of Credit Risk and Significant Customers
The Company maintains cash and cash equivalents with major financial institutions. The Company’s cash and cash
equivalents consist of bank deposits held with banks, money market funds that, at times, exceed federally insured limits. The
Company limits its credit risk by dealing with counterparties that are considered to be of high credit quality and by performing
periodic evaluations of its investments and of the relative credit standing of these financial institutions.
Credit risk is the risk of loss from amounts owed by financial counterparties. Credit risk can occur at multiple levels; as a
result of broad economic conditions, challenges within specific sectors of the economy,yy or from issues affecting
individual
companies. Financial instruments that potentially subject the Company to credit risk consist of cash equivalents and accounts
receivable.
ff
In the normal course of business, the Company is exposed to credit risk from its customers. To reduced
credit risk, the
Company performs ongoing credit evaluations of its customers.
The following customers comprised 10% or more of the Company’s accounts receivable at September 30, 2018 and 2017
and of the Company’s total revenues for the fiscal years ended September 30, 2018, 2017 and 2016, respectively:
Accounts Receivable
Company A
Revenue
Company B
As of September 30,
2018
10%
Fiscal Years Ended September 30,
2018
15%
2017
11%
2017
N/A
2016
N/A
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for
doubtful accounts is based on management’s assessment of the collectability of accounts. The Company regularly reviews the
adequacy of this allowance for doubtful accounts by considering historical experience, the age of the accounts receivable balances,
customers’ ability to pay to
the credit quality of the customers, current economic conditions, and other factors that may affect
determine whether a specific allowance is appropriate.Accounts receivable deemed uncollectable are charged against the allowance
for doubtful accounts when identified.
ff
Revenue that has been recognized, but for which the Company has not invoiced the customer, amounting to $3.6 million
and $4.6 million is recorded as unbilled receivables and is included in accounts receivables in the consolidated balance sheets as
of September 30, 2018 and 2017, respectively. Invoices that have been issued before revenue has been recognized are recorded
as deferred revenue in the consolidated balance sheets.
Property and Equipment, Net
Property and equipment are recorded at cost less accumulated depreciation. Depreciation of property and equipment is
calculated using on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a
straight-line basis over the shorter of lease term or estimated useful lives of the assets.
The estimated useful lives of property and equipment are as follows:
Computer software and equipment
Furniture and fixtures
Leasehold improvements
Software development costs
2-5 years
2-5 years
Shorter of the lease term or estimated useful life
3 years
62
MODEL N, INC.
Notes to Consolidated Financial Statements
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense as
incurred. Upon retirement or sale of property and equipment, the cost and related accumulated depreciation are removed from the
balance sheet and the resulting gain or loss is reflected in statement of operations.
Long-lived Assets
The Company continually monitors events and changes in circumstances that could indicate that carrying amounts of its
long-lived assets, including property and equipment and intangible assets may not be recoverable. When such events or changes
in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value
of such assets will be recovered through their undiscounted expected future cash flows. If the future undiscounted cash flows are
less than the carrying amount of these assets, the Company recognizes an impairment loss based on the excess of the carrying
amount over the fair value of the assets. The Company did not recognize any impairment charges on its long-lived assets during
any periods presented.
Goodwill and Intangible Assets
The Company records goodwill when consideration paid in an acquisition exceeds the fair value of the net tangible assets
and the identified intangible assets acquired. Goodwill is not amortized, but rather is tested for impairment annually or more
frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. We conducted our annual
impairment test of goodwill as of September 30, 2018 and 2017. We have elected to first assess the qualitative factors to determine
whether it is more likely than not that the fair value of our single reporting unit is less than its carrying amount as a basis for
determining whether it is necessary to perform the two-step goodwill impairment under Accounting Standards Update (ASU) No.
2011-08, Goodwill and Other (Topic
350): Testing Goodwill for Impairment, issued by the Financial Accounting Standards Board
If we determine that it is more likely than not that its fair value is less than its carrying amount, then the two-step goodwill
FF
(FASB).
impairment test is performed. The first step, identifying a potential impairment, compares the fair value of the reporting unit with
its carrying amount. If the carrying amount exceeds its fair value, the second step would need to be performed; otherwise, no
further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the
carrying amount of the goodwill. Any excess of the goodwill carrying amount over the applied fair value is recognized as an
impairment loss, and the carrying value of goodwill is written down to fair value.
TT
Intangible assets, consisting of developed technology,yy backlog, non-competition agreements customer relationships and
trade name, are stated at fair value less accumulated amortization. All intangible assets have been determined to have finite lives
and are amortized on a straight-line basis over their estimated remaining economic lives, ranging from three to ten years.
Amortization expense related to developed technology is included in cost of SaaS and maintenance revenue while amortization
expense related to backlog, non-competition agreements, trade name and customer relationships is included in sales and marketing
expense. No goodwill or intangible assets impairment has been identified in any of the years presented.
Research and Development and Capitalization of Software Development Costs
The Company generally expenses costs related to research and development, including those activities related to software
solutions to be sold, leased or otherwise marketed. As such development work is essentially completed concurrently with the
establishment of technological feasibility,yy and accordingly,yy the Company has not capitalized any such development costs.
The Company capitalizes certain software development costs incurred in connection with its cloud-based software platform
for internal use. The Company capitalizes software development costs when application development begins, it is probable that
the project will be completed, and the software will be used as intended. When development becomes substantially complete and
ready for its intended use, such capitalized costs are amortized on a straight-line basis over the estimated useful life of the related
asset, which is generally three years. Costs associated with preliminary project stage activities, training, maintenance and all post
implementation stage activities are expensed as incurred. The Company capitalized software development costs of zero, $0.4
million and $1.1 million during the fiscal years ended September 30, 2018, 2017 and 2016, respectively.
Fair Value of Financial Instruments
The financial instruments of the Company consist primarily of cash and cash equivalents, accounts receivable, accounts
payable and certain accrued liabilities. The Company regularly reviews its financial instruments portfolio to identify and evaluate
such instruments that have indications of possible impairment. When there is no readily available market data, fair value estimates
are made by the Company,yy 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.
Based on borrowing rates currently available to the Company for financing obligations with similar terms and considering
the Company’s credit risks, the carrying value of the financing obligation approximates fair value.
Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
63
MODEL N, INC.
Notes to Consolidated Financial Statements
measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs. The current accounting guidance for fair value instruments defines a three-level valuation hierarchy
for disclosures as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Input other than quoted prices included in Level I that are observable, unadjusted quoted prices in markets that
are not active, or other inputs for similar assets and liabilities that are observable or can be corroborated by observable market
data; and
Level 3—Unobservable inputs that are supported by little or no market activity,yy which requires the Company to develop
its own models and involves some level of management estimation and judgment.
The Company’s Level 1 assets consist of cash equivalent. These instruments are classified within Level 1 of the fair value
hierarchy because they are valued based on quoted market prices in active markets.
Sales Commissions
Sales commissions are recognized as an expense upon booking the contract. Substantially all of the compensation due to
the sales force is earned at the time of the contract signing, with limited ability to recover any commissions paid if a contract is
terminated.
Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. The Company incurred $0.4 million, $0.3 million and $0.3
million in advertising and promotions costs during the fiscal years ended September 30, 2018, 2017, and 2016, respectively.
Employee Benefit Plan
The Company has a savings plan that qualifies under Section 401(k) of the Internal Revenue Code (IRC). Under these 401
(k) Plans, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. We
contributed approximately $0.6 million, $0.7 million and $0.6 million for the years ended September 30, 2018, 2017 and 2016.
Stock-Based Compensation
Stock-based compensation expense for all share-based payment awards granted to our employees and directors including
stock options and restricted stock units (“RSUs”) is measured and recognized based on the fair value of the awards on the grant
date. The fair value is recognized as expense, net of estimated forfeitures on a ratable basis, over the requisite service period, which
is generally the vesting period of the respective award. The Company uses a Monte Carlo simulation model to determine the fair
value of its performance-based restricted stock units (“PB-RSUs”) on the grant date. The fair value of these grants with a market
condition is recognized using the graded-vesting attribution method over the requisite service period. As the PB-RSUs are only
granted to executives and leadership team, the Company has determined no forfeiture rate would be applied to the PB-RSUs. The
Company uses the Black-Scholes-Merton valuation model to estimate the fair value of stock option awards and employee stock
purchase plan (“ESPP”). The Black-Scholes-Merton valuation model requires the use of subjective assumptions to determine the
fair value of stock option awards, including the expected stock price volatility over the expected term of the options, stock option
exercise and cancellation behaviors, risk-free interest rates and expected dividends. The Company periodically estimates the portion
of awards which will ultimately vest based on its historical forfeiture experience. These estimates are adjusted over the requisite
service period to the extent that actual forfeitures differ
, from the prior estimates.
, or are expected to differ
ff
ff
Income Taxesaa
ff
—
The Company accounts for income taxes in accordance with the FASB ASC No. 740—Accounting
for Income
Taxesaa
(ASC 740). The Company makes certain estimates and judgments in determining income tax expense for financial statement
purposes. These estimates and judgments occur in the calculation of tax credits, tax benefits and deductions and in the calculation
in the timing of recognition of revenue and expense for tax and
of certain tax assets and liabilities, which arise from differences
financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in
the subsequent period when such a change in estimate occurs.The Company regularly assesses the likelihood that its deferred
income tax assets will be realized from future taxable income based on the realization criteria set forth in ASC 740. To the extent
that the Company believes any amounts are not more likely than not to be realized, the Company records a valuation allowance
to reduce the deferred income tax assets. In assessing the need for a valuation allowance, the Company considers all available
evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the
event the Company determines that all or part of the net deferred tax assets are not realizable in the future, an adjustment to the
valuation allowance would be charged to earnings in the period such determination is made. Similarly,yy if the Company subsequently
realizes deferred income tax assets that were previously determined to be unrealizable, the respective valuation allowance would
be reversed, resulting in an adjustment to earnings in the period such determination is made.
64
MODEL N, INC.
Notes to Consolidated Financial Statements
As of September 30, 2018 and 2017, the Company had gross deferred income tax assets, related primarily to net operating
loss (NOL) carry forwards, deferred revenues, accruals and reserves that are not currently deductible and depreciable and
amortizable items of $77.2 million and $92.5 million, respectively,yy which have been fully offset
by a valuation allowance. Utilization
of these net loss carry forwards is subject to the limitations of IRC Section 382 (Section 382 Limitations). A Section 382 study
was performed when the Company went IPO and subsequent Section 382 analysis have been performed. It is determined that there
are no material limitations of IRC Section 382. However, in the future, some portion or all of these carry forwards may not be
available to offset
any future taxable income.
ff
ff
We account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is
more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if
any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement. We classify the liability for unrecognized tax benefits as current to the extent that we anticipate payment (or receipt)
of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Segment
The Company has one operating segment with one business activity,yy developing and monetizing revenue management
solutions. The Company’s Chief Operating Decision Maker (CODM) is its Chief Executive Officer
, who manages operations on
a consolidated basis for purposes of allocating resources. When evaluating performance and allocating resources, the CODM
reviews financial information as presented on a consolidated basis.
ff
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive (loss) income. Other comprehensive loss includes
foreign currency translation adjustments.
Recent Accounting Pronouncements
Recent Adopted Accounting Guidance
FF
In March 2016, the FinancialAccounting Standard Board (“FASB”)
issuedAccounting Standards Update ("ASU") 2016-09,
Compensation - Stock Compensation (TopicTT
718), which simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on
the statement of cash flows. For public companies, the guidance is effective
for financial statements issued for annual periods
beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted for all companies
in any interim or annual period. Forfeitures can be estimated, as required today,yy or recognized when they occur. Estimates of
forfeitures will still be required in certain circumstances, such as at the time of modification of an award or issuance of a replacement
award in a business combination. The Company adopted this guidance in the first quarter of fiscal year 2018 and has elected to
continue to estimate our forfeiture rate. In the year of adoption, the ASU requires that the cumulative effect
adjustment be recorded
to retained earnings. Due to a full valuation allowance, there is no cumulative effect
adjustment to record and the adoption of this
guidance had no material impact on the Company's consolidated financial statements.
ff
ff
ff
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (TopicTT
740), which
amended the existing accounting standards for income taxes. The amendments require companies to report their deferred tax
liabilities and deferred tax assets each as a single non-current item on their classified balance sheets. The Company adopted this
guidance. The adoption of this guidance had no material impact on the Company's consolidated financial statements.
Recently Enacted Accounting Pronouncements
rr
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (TopicTT
718): providing clarification on
when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU
does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if
there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered
for reporting periods beginning after December 15, 2017, with early
non-substantive. The amendments of this ASU are effective
adoption permitted. The Company does not believe this will have a material impact on its consolidated financial statements.
ff
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (TopicTT
350): Simplifying the Test for
Goodwill Impairment. This new accounting standard update simplifies the measurement of goodwill by eliminating the Step two
impairment test. Step two measures a goodwill impairment loss by comparing the implied fair value of goodwill with the carrying
amount of that goodwill. The new guidance requires a comparison of the Company’s fair value of with carrying amount and the
Company is required to recognize an impairment charge for the amount by which the carrying amount exceeds the fair value.
65
MODEL N, INC.
Notes to Consolidated Financial Statements
from any tax deductible goodwill on the carrying amount when measuring
Additionally,yy we should consider income tax effects
the goodwill impairment loss, if applicable. The new guidance becomes effective
for goodwill impairment tests in fiscal years
beginning after December 15, 2019, though early adoption is permitted. The Company is currently evaluating the impact this
standard will have on its consolidated financial statements.
ff
ff
In January 2017, the FASB issued ASU 2017-01, Business Combination (TopicTT
805): clarifying the definition of a business.
The amendments in this guidance change the definition of a business to assist with evaluating when a set of transferred assets and
activities is a business. The guidance becomes effective
for the Company at the beginning of its first quarter of fiscal year 2019.
Early adoption is permitted. The Company does not believe this will have a material impact on its consolidated financial statements.
ff
In November 2016, the FASB issuedASU 2016-18, Restricted Cash (TopicTT
230), clarifying the classification and presentation
of restricted cash in the statement of cash flows. The standard requires that restricted cash and restricted cash equivalents are
included in the cash and cash equivalent balance in the statement of cash flows. Further, reconciliation between the balance sheet
and statement of cash flows is required when the balance sheet includes more than one line item for cash, cash equivalents, restricted
cash, and restricted cash equivalents. Therefore, transfers between these balances should no longer be presented as a cash flow
activity. The guidance become effective
for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2017, with early adoption permitted. The Company do not plan to early adopt, and accordingly we will adopt the new standard
effective
at the beginning of its first quarter of fiscal year 2019. The Company does not believe this will have material impact on
ff
our consolidated financial statements.
ff
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow (TopicTT
230), amended the existing accounting
standards for the statement of cash flows. The amendments provide guidance on how companies present and classify certain cash
receipts and cash payments in the statement of cash flows. The guidance becomes effective
for the Company at the beginning of
its first quarter of fiscal year 2019. Early adoption is permitted, including adoption in an interim period. The Company does not
believe this will have a material impact on its consolidated financial statements.
ff
In February 2016, the FASB issued ASU 2016-02, guidance on the recognition and measurement of leases. Under the new
guidance, lessees are required to recognize a lease liability,yy which represents the discounted obligation to make future minimum
lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current
accounting for lessors and does not make significant changes to the recognition, measurement, and presentation of expenses and
cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount,
timing and uncertainty of cash flows arising from leases. The guidance will require modified retrospective application at the
beginning of October 1, 2019 for the Company,yy with optional practical expedients, but permits adoption in an earlier period.
The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), as amended, which will
supersede nearly all existing revenue recognition guidance. The underlying principle of ASC 606 is to recognize revenue when a
customer obtains control of promised goods or services at an amount that reflects the consideration that the Company expects to
be entitled to in exchange for those goods or services. To achieve this, the Company should apply the five-step revenue recognition
model, which may require the use of judgments and estimates, also requires expanded qualitative and quantitative disclosures
relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including
significant judgments and estimates used. ASC 606 also includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts
with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer. Subsequently,yy the FASB
issued several amendments to the new standard, which clarified or affected
certain aspects of ASC 606 but did not change the core
principle of the guidance.
ff
The new standard permits two methods of adoption: (i) retrospectively to each prior period presented (full retrospective
method), or ii) retrospectively with the cumulative effect
recognized in retained earnings as of the date of adoption (modified
retrospective method). The Company will adopt the new standard using the modified retrospective method at the beginning of the
first quarter of fiscal year 2019.
ff
The Company is in process of finalizing its new accounting policies, processes, and internal controls necessary to support
the requirements of ASC 606. The Company has substantially completed its assessment of the financial statement impact of ASC
606, the impact of which are as discussed below.
ASC 606 will primarily impact our revenue recognition for on-premises offerings,
which contained deliverables within the
scope of ASC 985-605, Software-Revenue Recognition, by eliminating the requirement to have VSOE for undelivered elements,
which accelerates the timing of revenue recognition. In addition, ASC 606 requires incremental contract acquisition costs (such
as sales commissions) for customer contracts to be capitalized and amortized on a systematic basis that is consistent with the
transfer to the customer of the goods or services to which the capitalized cost relates. Currently,yy these costs are expensed as incurred.
ff
66
MODEL N, INC.
Notes to Consolidated Financial Statements
Upon adopting ASC 606 at the beginning of fiscal year 2019, the Company's cumulative effect
adjustment will decrease
accumulated deficit by approximately $10.3 million. This cumulative effect
adjustment is primarily driven by a reduction to our
deferred subscription revenues of approximately $3.2 million and deferred license and implementation revenues of approximately
$3.9 million. Further, refundable amounts associated with customer contracts of approximately $0.6 million will be reclassified
from deferred subscription revenues to customer deposit. In addition to the adjustment to deferred revenue, other adjustments at
transition include adjustments to other current and noncurrent assets. The adjustment to other current and noncurrent assets is
primarily for capitalized incremental contract acquisitions costs of approximately $3.2 million. The Company does not expect that
this accounting standard update will have a material impact on the Company's tax provision.
ff
ff
3. Business Combinations
Revitas Acquisition
On January 5, 2017, the Company completed the acquisition of 100% of the equity interests of Sapphire Stripe Holdings,
Inc., the parent company of Revitas, Inc. (“Revitas”). Pursuant to the Agreement and Plan of Merger (“Merger Agreement”), the
Company paid approximately $52.8 million in cash and issued to the sellers two $5.0 million promissory notes, one which will
mature 18 months after the closing and the other which will mature 36 months after the closing. The Company acquired Revitas
to, among other things, expand the Company’s revenue management solutions for customers. The Company incurred acquisition
and transaction costs associated with the acquisition of Revitas of approximately $2.2 million for the fiscal year ended September
30, 2017, which were recorded as general and administrative expenses.
In connection with Revitas acquisition, the Company funded the cash portion of the purchase price, in part with a five years
term loan in the aggregate amount of $50.0 million. See Note 6, “Debt”, for additional information.
The final allocation of the purchase price is as follows:
Cash and cash equivalents
Accounts receivable
Prepaid expenses
Other current assets
Property,yy plant and equipment
Intangible assets
Goodwill
Other assets
Total assets acquired
Accounts payable
Accrued employee compensation
Accrued liabilities
Deferred revenue liability
Other liabilities
Total liabilities assumed
Net acquired assets
Fair Value
(in thousands)
5,067
6,184
1,067
47
1,506
39,100
32,344
25
85,340
(1,352)
(3,983)
(1,410)
(12,856)
(4,256)
(23,857)
61,483
$
$
The following table presents certain information on the acquired identifiable assets:
Intangible assets
Developed technology
Customer relationship
Trade name
Fair value
(in thousands)
6,770
32,180
150
$
$
$
Estimated useful
lives (years)
Weighted-average
estimated useful
lives (years)
6
10
1
6
10
1
67
MODEL N, INC.
Notes to Consolidated Financial Statements
The purchase accounting allocation resulted in an ascribed value to the acquired intangible assets of $39.1 million and
goodwill of $32.3 million. The key factors attributable to the creation of goodwill by the transaction are synergies in skill-sets,
return on future technology and customer development.
The Company does not expect the goodwill recognized as a part of the acquisition to be deductible for income tax purposes.
See Note 5, “Goodwill” for additional information.
Unaudited Prorr Forma Combined Consolidated Financial Information
The results of operations for Revitas and the estimated fair values of the assets acquired and liabilities assumed have been
included in the Company’s consolidated financial statements since the respective dates of acquisition.
The unaudited pro forma combined consolidated financial information is presented for illustrative purpose only and is not
necessarily indicative of the result of operations that would have actually been reported had the acquisitions occurred on the above
dates, nor is it necessarily indicative of the future results of operations of the combined company. The unaudited pro forma combined
consolidated financial information reflects certain adjustments, such as amortization, interest expense, deferred tax valuation
allowance and transaction related costs.
The following unaudited pro forma combined consolidated financial information has been prepared by the Company using
to the Revitas acquisition as if it had occurred on October 1, 2015. The following
the acquisition method of accounting to give effect
table sets forth the unaudited pro forma consolidated combined results of operations:
ff
Revenue
Net loss
Net loss per shares-basic and diluted
Fiscal Year Ended September 30,
2017
2016
(in thousands, except per share data)
$
$
140,227
(45,346)
$
(1.58) $
149,632
(38,656)
(1.41)
4. Consolidated Balance Sheet Components
Components of property and equipment, and intangible assets consisted of the following:
Property and Equipment
Computer software and equipment
Furniture and fixtures
Leasehold improvements
Software development costs
Total property and equipment
Less: Accumulated depreciation and amortization
Total Property and equipment, net
As of September 30,
2018
2017
$
(in thousands)
8,154
$
1,309
1,251
9,416
20,130
(17,984)
2,146
10,274
1,284
1,466
9,416
22,440
(17,829)
4,611
Depreciation expense including depreciation of assets under capital leases totaled $2.7 million, $3.5 million and $4.5 million
for the fiscal years ended September 30, 2018, 2017 and 2016, respectively.
68
Intangible Assets
Intangible Assets:
Developed technology
Backlog
Customer relationships
Total
Intangible Assets:
Developed technology
Backlog
Non-competition agreement
Customer relationships
Trade name
Total
MODEL N, INC.
Notes to Consolidated Financial Statements
As of September 30, 2018
Estimated Useful
Life (in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in thousands)
5-6
5
3-10
Estimated Useful
Life (in years)
5-6
5
3
3-10
1
$
$
$
$
12,083
280
36,599
48,962
$
$
(6,448) $
(275)
(7,642)
(14,365) $
5,635
5
28,957
34,597
As of September 30, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(in thousands)
12,083
280
100
36,599
260
49,322
$
$
(4,545) $
(215)
(100)
(4,084)
(222)
(9,166) $
7,538
65
—
32,515
38
40,156
The Company recorded amortization expense related to the acquired intangible assets of $5.6 million, $4.6 million and $1.4
million during the fiscal years ended September 30, 2018, 2017 and 2016, respectively.
Estimated future amortization expense for the intangible assets as of September 30, 2018 is as follows:
Fiscal Years Ending
September 30,
(in thousands)
2019
2020
2021
2022
2023 and thereafter
Total future amortization
5. Goodwill
$
$
The following table presents goodwill activity for the years ended September 30, 2018 and 2017 (in thousands):
Balance as at September 30, 2016
Add: Goodwill from acquisition of business
Balance as at September 30, 2017
Add: Goodwill from acquisition of business
Balance as at September 30, 2018
$
$
$
5,466
4,751
4,687
4,687
15,006
34,597
6,939
32,344
39,283
—
39,283
As a result of the acquisition of Revitas in fiscal year 2017, the Company recognized goodwill of $32.3 million. See Note
3, “Business Combination”, for additional details.
69
MODEL N, INC.
Notes to Consolidated Financial Statements
6. Debt
Term Loan
In connection with the Revitas acquisition, on January 5, 2017, the Company entered into a Financing Agreement (Financing
Agreement) by and among the Company,yy the Subsidiaries, as guarantors, Crystal Financial SPV,VV LLC and TC Lending, LLC,
pursuant to which the lenders extended a term loan to the Company in an aggregate principle amount of $50.0 million.
In May 2018, this term loan was extinguished and repaid in full in part from the proceeds of the refinancing with Wells
Fargo Bank, N. A. (WellsWW Fargo), as discussed below.
The term loan made pursuant to the Financing Agreement bore interest at a rate of either (i) the Base Rate (as defined in
the Financing Agreement) plus 9.25% or (ii) the LIBOR Rate (as defined in the Financing Agreement) plus 8.25%, as selected by
the Company. The term loans would have matured on January 5, 2022. The Company selected the LIBOR Rate plus 8.25% except
for the quarter beginning on April 1, 2018 through the payoffff of the loan in May 2018, the Company selected the Base Rate plus
9.25%. The loan required quarterly payments of interest only and quarterly principal payments of 0.625% of the aggregate principal
amount of the term loan beginning with the fiscal quarter ending March 31, 2019.
The Financing Agreement required the Company and the subsidiaries to maintain certain financial covenants and,,also
contains certain non-financial covenants, including restricting our ability to dispose of assets, changing our organizational
documents or amending our material agreements in a manner adverse to the lender, changing a method of accounting, merging
with or acquiring other entities, incurring other indebtedness and making certain investments.
The Company was in compliance with all of the covenants described in the Financing Agreements through the payoffff on
May 4, 2018, discussed below.
The balance of this term loan of $50.0 million was repaid in full in connection with a new facility under Wells Fargo in the
third quarter of 2018. The Company recorded in the third quarter of fiscal year 2018, a loss on debt extinguishment of approximately
of $3.1 million, of which $1.5 million was a pre-payment penalty and $1.6 million was the remaining non-cash unamortized
discount and deferred financing costs write-off.ff
Term Loan - Wells Fargo
On May 4, 2018, the Company and certain of its subsidiaries entered into a Credit Agreement (Credit Agreement) by and
among the Company,yy Wells Fargo Bank, National Association, as Administrative Agent, and the lenders party thereto (Lenders),
pursuant to which the Lenders extended a term loan to the Company in an aggregate principal amount of $50.0 million and agreed
to establish an additional revolving line of credit up to an aggregate principal amount of $5.0 million. In part from the proceeds
of this refinancing, the Company repaid in full the existing term loan under the Financing Agreement dated January 5, 2017.
The term loan will mature on May 4, 2023. The Company is required to repay the principal of the term loan in quarterly
installments follows:
•
•
•
$250,000 on September 30, 2018 and the last day of each fiscal quarter thereafter up to June 30, 2019;
$625,000 on September 30, 2019 and the last day of each fiscal quarter thereafter up to June 30, 2020;
$937,500 on September 30, 2020 and the last day of each fiscal quarter thereafter up to March 31, 2023; and the
remaining principal amount at maturity.
The loans will bear interest, at the Company’s option, at (i) the Base Rate (as defined in the Credit Agreement) plus applicable
margin or (ii) the LIBOR Rate (as defined in the Credit Agreement) plus applicable margin. LIBOR interest is payable quarterly
and margin varies based upon our leverage ratio. See the table below of applicable margin rates:
Level
I
II
III
Leverage Ratio
Calculation
<2.0:1.0
>=2.0:1.0 but less than
3.5:1.0
>=3.5:1.0
Applicable Margin Relative to
Base Rate
2.0%
Applicable Margin Relative to
LIBOR Rate
3.0%
2.5%
3.5%
3.5%
4.5%
For the period ended as of September 30, 2018, the Company’s interest rate is at the LIBOR Rate plus 4.5%.
70
MODEL N, INC.
Notes to Consolidated Financial Statements
Certain United States subsidiaries of the Company (Guarantors) and the Company have entered into a guaranty and security
agreement pursuant to which the Guarantors have agreed to guarantee the Company’s payment of its obligations under the Credit
Agreement, and pursuant to which the Company’s and Guarantors’ obligations under the Credit Agreement and the guaranty and
security agreement are secured by substantially all of their assets.
The Company may voluntarily prepay the term loan, with any such prepayment applied against the remaining installments
of principal of the term loan on a pro rata basis; provided, that at the election of the Company,yy one such prepayment made during
the fiscal quarter ending December 31, 2018 in an amount not to exceed $5.0 million may be applied against the remaining
installments of principal in the direct order of maturity. The Company is required to repay the term loan with proceeds from the
sale of assets, the receipt of certain insurance proceeds, litigation proceeds or indemnity payments, or the incurrence of debt (in
each case subject to certain exceptions).
The Credit Agreement requires the Company and its subsidiaries to maintain certain financial covenants, including
maintaining consolidated liquidity (cash in the United States plus revolving credit line availability) of at least $15 million, minimum
levels of maintenance and subscription fee revenue and, if liquidity is less than $30 million for 90 consecutive days, leverage ratio
not greater than 3.50 to 1.00. The Credit Agreement also requires the Company and Guarantors to maintain certain non-financial
covenants, including covenants that restrict their ability to dispose of assets, change the Company's organizational documents,
merge with or acquire (or make investments in) other entities, or incur other indebtedness or liens. The Credit Agreement also
provides for customary events of default, including failure to pay amounts due or to comply with covenants, default on other
indebtedness, or a change of control with respect to the Company.
The Company was in compliance with the financial covenant requirements as of September 30, 2018.
Promissory Notes
Also, in connection with the Revitas acquisition, the Company incurred $10.0 million in debt in the form of two promissory
notes with the sellers, one which matured on July 5, 2018 and the other which will mature on January 5, 2020. The Company paid
the first promissory note of $5.0 million on July 5, 2018. The remaining promissory notes bears interest at the rate of 3% per
annum, and is subject to a right of set-offff as partial security for the indemnification obligations of the target’s stockholders under
the Merger Agreement. The remaining promissory notes is subordinate to the term loan with Wells Fargo. The fair value of the
promissory notes of $8.6 million was determined based on a discounted future cash flow at 9.96% interest rate, which represents
an arm’s length interest rate.
As of September 30, 2018, the term loan with Wells Fargo and promissory note consisted of the following:
Principal
Unamortized debt discount and issuance costs
Net carrying amount
Amount
(in thousands)
54,750
(1,046)
53,704
$
$
As of September 30, 2018, the carrying value of the of the debt approximates the fair value basis. The Company classified
the debt under Level 2 of the fair value measurement hierarchy as the borrowings are not actively traded.
The Company incurred approximately $0.7 million in transaction costs in connection with the term loan with Wells Fargo
interest rate for the
in the third quarter of fiscal year 2018. These costs are included as part of the Company’s debt. The effective
term loan with Wells Fargo is 7.2% and the 36 month promissory note is 9.89%.
ff
The future scheduled principal payments for the term loan and promissory note as of September 30, 2018 were as follows
(in thousands):
71
MODEL N, INC.
Notes to Consolidated Financial Statements
$
$
1,375
7,813
3,750
3,750
38,062
54,750
Fiscal Year:
2019
2020
2021
2022
2023
Total
7. Financial Instruments
The table below sets forth the Company’s cash equivalents as of September 30, 2018 and 2017, which are measured at fair
value on a recurring basis by level within the fair value hierarchy. The assets are classified based on the lowest level of input that
is significant to the fair value measurement. The Company had no liabilities measured at fair value on a recurring basis.
As of September 30, 2018:
Assets:
Cash equivalents
Total
As of September 30, 2017:
Assets:
Cash equivalents
Total
Level 1
Level 2
Level 3
TotTT al
(in thousands)
$
$
$
$
43,741
43,741
47,754
47,754
$
$
$
$
— $
— $
— $
— $
— $
— $
43,741
43,741
— $
— $
47,754
47,754
The Company’s cash equivalents as of September 30, 2018 and 2017 consisted of money market funds with original maturity
dates of less than three months from the date of their respective purchase. Cash equivalents are classified as Level 1. The fair value
of the Company’s money market funds approximated amortized cost and, as such, there were no unrealized gains or losses on
money market funds as of September 30, 2018 and 2017. The Company’s financial instruments not measured at fair value on a
recurring basis include cash, accounts receivable, accounts payable and accrued liabilities, and are reflected in the financial
statements at cost and approximates their fair value due to their short-term nature. The term loan with Wells Fargo carrying value
is approximately fair value since the term loan bears interest at rates that fluctuate with the changes in the Base Rate or the Libor
Rate as selected by the Company. The promissory notes carrying value approximate its fair value as of September 30, 2018. As
of September 30, 2018 and 2017, amounts of $13.0 million and $9.8 million, respectively,yy were held in bank deposits.
8. Commitments and Contingencies
Leases
The Company leases facilities under noncancelable operating leases. As of September 30, 2018, future minimum payments
under operating leases were as follows:
(in thousands)
Contractual Payment Obligations Due by Period
Total
Less than
1 Year
1 to 3
Years
3 to 5
Years
More than 5
Years
Operating lease obligations(1)
$
8,900
$
3,200
$
4,600
$
1,100
$
—
(1) Operating lease obligations represent our obligations to make payments under the lease agreements for our facilities leases.
Rent expense under noncancelable operating leases for the fiscal years ended September 30, 2018, 2017 and 2016 was $3.4
million, $3.2 million and $2.7 million, respectively.
Indemnification Obligations
72
MODEL N, INC.
Notes to Consolidated Financial Statements
Each of the Company’s software licenses contains the terms of the contractual arrangement with the customer and generally
includes certain provisions for defending the customer against any claims that the Company’s software infringes upon a patent,
copyright, trademark, or other proprietary right of a third party. The software license also provides for indemnification by the
Company of the customer against losses, expenses, and liabilities from damages that may be assessed against the customer in the
event the Company’s software is found to infringe upon such third party rights.
The Company has not had to reimburse any of its customers for losses related to indemnification provisions, and there were
no material claims against the Company outstanding as of September 30, 2018 and 2017. For several reasons, including the lack
of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the software license,
the Company cannot estimate the amount of potential future payments, if any,yy related to indemnification provisions.
As permitted under Delaware law,ww the Company has indemnification arrangements with respect to its officers
and directors,
indemnifying them for certain events or occurrences while they serve as officers
ff
ff
or directors of the Company.
Legal Proceedings
We are not currently a party to any pending material legal proceedings. From time to time, we may become involved in
legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on
us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other
factors.
9. Stock-Based Compensation
2000 Stock Plan
The 2000 Stock Plan (2000 Plan) authorized the board of directors to grant incentive share options and non-statutory share
options to employees, directors and other eligible participants. Stock purchase rights may also be granted under the 2000 Plan.
The exercise price of the stock options shall not be less than the estimated fair value of the underlying shares of the common stock
on the grant date. Options generally vest over four years and expire ten years from the date of grant. In connection with the adoption
of the 2010 Equity Incentive Plan (2010 Plan) in June 2010, the 2000 Plan was terminated and all shares of common stock previously
reserved but unissued were transferred to 2010 Plan.
2010 Equity Incentive Plan
On June 15, 2010, the Company’s Board adopted the 2010 Equity Incentive Plan under which employees, directors, and
other eligible participants of the Company or any subsidiary of the Company may be granted incentive stock options, nonstatutory
stock options and all other types of awards to purchase shares of the Company’s common stock. The total number of shares reserved
and available for grant and issuance pursuant to this 2010 Plan consists of (a) any authorized shares not issued or subject to
outstanding grants under the 2000 Plan on the adoption date, (b) shares that are subject to issuance upon exercise of options granted
under the Plan but cease to exist for any reason other than exercise of such options; and (c) shares that were issued under the Plan
which are repurchased by the Company at the original issue price or forfeited. In connection with the adoption of the 2013 Equity
Incentive Plan in February 2013, the 2010 Plan was terminated and all shares of common stock previously reserved but unissued
were transferred to 2013 Plan.
2013 Equity Incentive Plan
The Company’s board of directors (Board) adopted the 2013 Equity Incentive Plan (2013 Plan) in February 2013, and the
stockholders approved the 2013 Plan in March 2013. The 2013 Plan became effective
on March 18, 2013 and will terminate in
February 28, 2023. The 2013 Plan serves as the successor equity compensation plan to the 2010 Equity Incentive Plan (2010 Plan).
The 2013 Plan was approved with a reserve of 8.0 million shares, which consists of 2.5 million shares of the Company’s common
stock reserved for future issuance under the 2013 Plan and shares of common stock previously reserved but unissued under the
2010 Plan.
ff
Additionally,yy the 2013 Plan provides for automatic increases in the number of shares available for issuance under it on
October 1 of each of the first four calendar years during the term of the 2013 Plan by the lesser of 5% of the number of shares of
common stock issued and outstanding on each September 30 immediately prior to the date of increase or the number determined
by our board of directors. In fiscal year 2018, 2.0 million additional shares were approved by the Company's stockholders for
issuance under the 2013 Plan No further grants will be made under the 2010 Plan, and the balances under the 2010 Plan have been
transferred to the 2013 Plan. The 2013 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted
73
MODEL N, INC.
Notes to Consolidated Financial Statements
stock awards, stock appreciation rights, performance stock awards, restricted stock units and stock bonuses. Awards generally vest
over four years and expire ten years from the date of grant. As of September 30, 2018, 5.2 million shares were available for future
stock awards under the plans and any additional releases resulting from an over-achievement relating to performance-based
restricted stock units.
Stock Options
There were no stock options granted in fiscal years 2018, 2017 and 2016, respectively. The expected terms of options
granted were calculated using the simplified method, determined as the average of the contractual term and the vesting period.
Estimated volatility is derived from the historical closing prices of common shares of similar entities whose share prices are publicly
available for the expected term of the option. The risk-free interest rate is based on the U.S. treasury constant maturities in effect
at the time of grant for the expected term of the option. We use historical data to estimate the number of future stock option
forfeitures.
ff
The following table summarized the stock option activity and related information under all stock option plans:
Balance at September 30, 2015
Exercised
Forfeited
Expired
Balance at September 30, 2016
Exercised
Forfeited
Expired
Balance at September 30, 2017
Exercised
Forfeited
Expired
Balance at September 30, 2018
Options exercisable as of September 30, 2018
Options vested and expected to vest as of
September 30, 2018
Number of
Shares
(in thousands)
1,119
$
(233)
(12)
(68)
806
(329)
—
(24)
453
(179)
—
(47)
227
227
227
$
$
$
Weighted
Average
Exercised
Price
6.29
3.96
13.70
12.72
6.31
4.06
—
11.69
7.71
8.61
—
4.65
7.64
7.64
7.64
Weighted
Average
Remaining
Contract
Term (in years)
4.68
Aggregate
Intrinsic
Value
(in thousands)
$
4,904
—
—
—
3.56
$
4,103
—
—
—
3.53
$
3,281
—
—
—
2.94
2.94
2.94
$
$
$
1,861
1,861
1,861
The intrinsic value of options exercised during 2018, 2017 and 2016 was $1.5 million, $2.5 million and $1.7 million,
respectively. The total estimated fair value of options vested during 2018, 2017 and 2016 was zero, $22 thousand and $0.4 million
respectively.
Employee Stock Purchase Plan
The 2013 Employee Stock Purchase Plan (ESPP) became effective
on March 19, 2013. The ESPP allows eligible employees
ff
to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible
compensation, at not less than 85% of the fair market value, as defined in the ESPP,PP subject to any plan limitations. Except for the
ff
initial offering
periods, starting on February 20 and August 20 of each year.
period, the ESPP provides for six-month offering
ff
74
MODEL N, INC.
Notes to Consolidated Financial Statements
The following table summarizes the weighted-average assumptions used to estimate the fair value of rights to acquire stock
granted under the Company’s ESPP plan during the periods presented:
Risk-free interest rate
Dividend yield
Volatility
Expected term (in years)
Restricted Stock Units and Performance-based Restricted Stock Units
Fiscal Years Ended September 30,
2018
2017
2016
1.73%
—%
28%
0.50
0.75%
—%
29%
0.50
0.38%
—%
34%
0.50
ff
including the Chief Executive Officer
During the years ending September 30, 2018, 2017 and 2016, the Compensation Committee of the Board approved grants
and
ff
of performance-based restricted stock units to the Company’s certain senior officers,
the Chief Financial Officer
. Under the terms of these grants, the actual number of shares that will vest and be released will range
from 0% to 250% of the grant based on the performance of the Company’s TSR relative to the TSR of the Index over a three-year
period. No shares will vest and be released in the first year. In any of the two remaining years, no shares will vest and be released
if the TSR of the Company’s common stock is below the 30th percentile relative to the Index; 100% of the grant will vest and be
released if the Company’s TSR is at the 50th percentile relative to the Index; and 200% or 250% of the grant will vest and be
released if the Company’s TSR is over the 90th percentile relative to the Index. These grants vest over a three-year period with
50% vesting on each of the second and the third annual anniversary of the vesting commencing date. In addition, these grants
have a “catch-up” provision such that if the Company’s TSR relative to the Index for the three-year period exceeds that of the two-
year period, additional shares for the two-year period will vest and be released based on the three-year achievement level. These
grants have a ten-year term, subject to their earlier termination upon certain events including the awardee’s termination of
employment.As of September 30, 2018, 0.6 million shares were reserved for any additional release resulting from over-achievement
relating to performance-based restricted stock units.
ff
The fair value of these grants with a market condition is recognized using the graded-vesting attribution method over the
requisite service period. The Company used the Monte-Carlo simulation model to calculate the fair value of these awards on the
grant date. The Monte-Carlo simulation model takes into account the same input assumptions as the Black-Scholes model; however,
it also further incorporates into the fair value determination the possibility that the performance criteria may not be satisfied.
The grant date fair values of these awards were determined using the following assumptions:
Fiscal Year Ended September 30,
Risk-free interest rate
Dividend yield
Volatility
2018
2017
2.42%-2.57% 1.32%-1.45% 0.86%-1.15%
2016
—
—
39%-40%
38%-40%
—
45%
75
MODEL N, INC.
Notes to Consolidated Financial Statements
The following table summarizes the Company’s restricted stock unit activity (including performance based restricted stock
awards) under all equity award plans:
Balance at September 30, 2015
Granted
Released
Forfeited
Balance at September 30, 2016
Granted
Released
Forfeited
Balance at September 30, 2017
Granted
Released
Forfeited
Balance at September 30, 2018
Restricted Stock
Units Outstanding
(in thousands)
Weighted
Average
Grant Date
Fair Value
$
$
$
2,302
2,064
(720)
(529)
3,117
1,817
(813)
(1,204)
2,917
1,355
(1,137)
(822)
2,313
$
12.32
10.61
10.50
11.24
11.81
11.67
10.58
10.65
12.55
22.92
13.99
18.57
15.78
On June 7, 2018, the Company issued Mr. Rinat 572,601 common shares, with fair value approximately $10.5 million, in
connection with his transition agreement when he resigned as Chief Executive Officer
and Chairman of the Board. The related
tax withholding portion was later reimbursed by Mr. Rinat to the Company. Mr. Rinat’s 375,234 performance-based restricted
stock units, were cancelled due to his departure and the previously recorded expense of approximately $2.0 million was
reversed in general administrative expenses.
ff
The total fair value of restricted stock and performance based restricted stock awards vested for the years
ended September 30, 2018, 2017 and 2016 was $19.8 million, $8.6 million and $7.6 million, respectively.
The following table summarizes certain information of the unvested awards as of September 30, 2018:
Total compensation cost for unvested (in millions)
Weighted-average period to recognize (in years)
Restricted Stock
Units (1)
ESPP
$
22.5
$
2.2
0.4
0.4
(1): Includes restricted stock units and performance-based restricted stock awards.
76
MODEL N, INC.
Notes to Consolidated Financial Statements
Stock-based Compensation
Stock-based compensation recorded in the statements of operations is as follows:
Cost of revenues:
SaaS and maintenance
License and implementation
Total stock-based compensation in cost of revenues
Operating expenses:
Research and development
Sales and marketing
General and administrative
Total stock-based compensation in operating expenses
Total stock-based compensation
10. Income Taxes
The components of loss before income taxes are as follows:
Domestic
Foreign
Loss before taxes
Fiscal Years Ended September 30,
2018
2017
2016
(in thousands)
1,269
1,387
2,656
2,983
3,524
14,161
20,668
23,324
$
$
1,007
1,015
2,022
1,744
2,651
4,143
8,538
10,560
$
$
1,032
918
1,950
1,393
3,307
6,418
11,118
13,068
Fiscal Years Ended September 30,
2018
2017
2016
(in thousands)
(31,312) $
3,078
(28,234) $
(43,753) $
921
(42,832) $
(34,527)
1,751
(32,776)
$
$
$
$
The components of the provision (benefit) for income taxes are as follows:
Current
Federal
State
Foreign
Deferred
Federal
State
Total provision (benefit) for income taxes
Fiscal Years Ended September 30,
2018
2017
2016
(in thousands)
$
$
(110) $
36
439
365
(404)
12
(392)
(27) $
— $
37
647
684
(3,436)
(533)
(3,969)
(3,285) $
—
23
140
163
150
22
172
335
77
MODEL N, INC.
Notes to Consolidated Financial Statements
Reconciliation of the statutory federal income tax to the Company’s effective
ff
tax:
Tax at statutory federal rate
State tax, net of federal benefit
Permanent differences
ff
Stock based compensation
Foreign tax rate differential
Change in valuation allowance
Research and development tax credits
Change in deferred tax liabilities
Change in federal statutory tax rate
Other
ff
Total provision (benefit) for income taxes
Fiscal Years Ended September 30,
2018
2017
(in thousands)
2016
(6,854) $
36
1,006
(3,761)
(308)
(13,785)
(725)
(392)
24,828
(72)
(27) $
(14,563) $
37
692
(596)
334
15,279
(656)
(3,390)
—
(422)
(3,285) $
(11,147)
23
370
201
(453)
12,008
(834)
173
—
(6)
335
$
$
On December 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the Tax Legislation) was enacted in the
United States (U.S.). The Tax Legislation significantly revises the U.S. corporate income tax by,yy among other things, lowering the
corporate income tax rate to 21%, implementing a modified territorial tax system and imposing a one-time repatriation tax on
deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the Toll Charge), and limiting the deductibility of
certain expenses, such as interest expense. As a fiscal-year taxpayer, certain provisions of the Tax Legislation impact the Company
in fiscal year 2018, including the change in the corporate income tax rate and the Toll Charge, while other provisions will be
effective
as of January 1,
ff
2018. Accordingly,yy the Company’s federal statutory income tax rate for fiscal year 2018 reflects a blended rate of
approximately 24.3%.
starting at the beginning of fiscal year 2019. The U.S. federal income tax rate reduction was effective
ff
On December 22, 2017, the SEC issued Staffff Accounting Bulletin No.118 (SAB 118), which addresses how a company
recognizes provisional estimates when a company does not have the necessary information available, prepared or analyzed
(including computations) in reasonable detail to complete its accounting for the effect
of the changes in the Tax Legislation. The
measurement period ends when a company has obtained, prepared, and analyzed the information necessary to finalize its accounting,
but cannot extend beyond one year. The final impact of the Tax Legislation may differ
from the above provisional estimates due
to changes in interpretations of the Tax Legislation, any legislative action to address questions that arise because of the Tax
Legislation, by changes in accounting standard for income taxes and related interpretations in response to the Tax Legislation, and
any updates or changes to estimates used in the provisional amounts.
ff
ff
The Company's provision for income taxes does not include provisions for foreign withholding taxes associated with the
repatriation of undistributed earnings of certain foreign subsidiaries that we intend to reinvest indefinitely in our foreign subsidiaries.
The Company is subject to income taxes in U.S. federal and various state, local and foreign jurisdictions. The tax years
ended from September 2000 to September 2018 remain open to examination due to the carryover of unused net operating losses
or tax credits.
Deferred tax assets and liabilities consisted of the following:
78
MODEL N, INC.
Notes to Consolidated Financial Statements
Deferred tax assets:
Depreciation and amortization
Accruals and other
Deferred revenue
NOL carry-forward
Stock compensation
Research and development tax credits
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Intangibles
Net deferred tax liabilities
As of September 30,
2018
2017
(in thousands)
$
1,087
3,098
152
58,245
2,701
11,895
77,178
(67,879)
9,299
(9,398)
(99) $
842
5,541
3,288
68,190
4,840
9,792
92,493
(78,003)
14,490
(14,983)
(493)
$
$
A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The
Company has established a full valuation allowance to offset
net deferred tax assets at September 30, 2018, 2017, and 2016 due
to the uncertainty of realizing future tax benefits from its net operating loss carry-forwards and other deferred tax assets. The net
decrease in the total valuation allowance for the year ended September 30, 2018 was approximately $10.1 million. Due to the
reduction in the U.S. federal income tax rate, deferred tax balances decreased by approximately $24.9 million.
ff
At September 30, 2018, the Company has federal and state net operating loss carry-forwards of approximately $232.0
million and $606.2 million, respectively. The federal and state net operating losses will begin expiring in 2021 and 2019, respectively.
At September 30, 2018, the Company had federal and state research and development credit carry forwards of approximately $6.1
million and $7.4 million, respectively. The federal research and development credit carry-forwards will begin expiring in 2020.
The California and Massachusetts tax credit can be carried forward indefinitely.
The Company adopted ASU 2015-17 in the beginning of fiscal year 2018. The adoption of ASU 2015-17 did not have a
material impact on the Company's consolidated financial statements.
The Company has adopted ASU 2016-09 in fiscal year 2018 and has elected to continue to estimate its forfeiture rate. The
from the beginning of the year of adoption. In the year of adoption, the ASU requires that
adjustment be recorded to retained earnings. Due to full valuation allowance, there is no cumulative effect
ASU 2016-09 is considered effective
the cumulative effect
adjustment to record and the adoption of this ASU has no material impact in the Company’s consolidated financial statements.
ff
ff
ff
As of September 30, 2018, the Company had unrecognized tax benefits of approximately $3.5 million. It is unlikely that
the amount of liability for unrecognized tax benefits will significantly change over the next twelve months. The Company's policy
is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of
September 30, 2018, there was a liability of $0.1 million related to uncertain tax positions recorded on the financial statements.
Internal Revenue Code section 382 places a limitation (Section 382 Limitation) on the amount of taxable income can be
by net operating (NOL) carry-forwards after a change in control (generally greater than 50% change in ownership) of a loss
ff
offset
corporation. California has similar rules. Generally,yy after a control change, a loss corporation cannot deduct NOL carry-forwards
in excess of the Section 382 limitation. An IRC Section 382 analysis has been performed as of September 30, 2018 and determined
there would be no effect
on the NOL deferred tax asset if ownership changes occurred.
ff
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
79
MODEL N, INC.
Notes to Consolidated Financial Statements
Unrecognized tax benefits at the beginning of the period
Gross decrease based on tax positions during the prior period
Gross increase based on tax positions during the prior period
Gross increase based on tax positions during the
current period
Unrecognized tax benefits at the end of the period
11. Net Loss Per Share
Fiscal Years Ended September 30,
2018
3,143
(143)
94
$
2017
(in thousands)
3,310
(584)
—
375
3,469
$
417
3,143
2016
3,119
(147)
—
338
3,310
$
$
$
$
The Company’s basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable
to common stockholders by the weighted average number of shares of common stock outstanding for the period, which excludes
unvested restricted stock awards. The diluted net loss per share attributable to common stockholders is computed by giving effect
to all potentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase
common stock, unvested restricted stock awards and unvested restricted stock units are considered to be common stock equivalents.
ff
Numerator:
Basic and diluted:
Net loss attributable to common stockholders
$
(28,207) $
(39,547) $
(33,111)
Fiscal Years Ended September 30,
2018
2017
2016
(in thousands, except per share data)
Denominator:
Basic and diluted:
Weighted Average Shares Used in Computing Net
Loss per Share Attributable to Common
Stockholders
Net Loss per Share Attributable to Common Stockholders:
Basic and diluted
30,370
28,649
27,379
$
(0.93) $
(1.38) $
(1.21)
The following weighted average shares of common stock equivalents were excluded from the computation of diluted net
loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
Stock options
Performance-based restricted stock units and restricted
stock units
Fiscal Years Ended September 30,
2018
2017
2016
(in thousands)
414
1,074
164
1,709
650
736
80
MODEL N, INC.
Notes to Consolidated Financial Statements
12. Geographic Information
The Company has one operating segment with one business activity - developing and monetizing revenue management
solutions.
Revenues from External Customers
Revenues from customers outside the United States were 12%, 11% and 10% of total revenues for the fiscal years ended
September 30, 2018, 2017 and 2016, respectively. No single jurisdiction outside of the United States had revenues in excess of
10%.
Long-Lived Assets
The following table sets forth the Company’s property and equipment, net by geographic region:
As of September 30,
2018
2017
United States
India
Total property and equipment, net
$
$
$
(in thousands)
1,809
337
2,146
$
3,867
744
4,611
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
ff
and our Chief Financial Officer
Our management, with the participation of our Chief Executive Officer
, evaluated the
effectiveness
of our disclosure controls and procedures as of September 30, 2018. The term “disclosure controls and procedures,”
ff
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 September 30, 2018, our
Chief Executive Officer
concluded that, as of such date, our disclosure controls and procedures were
ff
effective
at the reasonable assurance level.
and Chief Financial Officer
ff
ff
ff
ff
Management’s’’ Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management,
of our internal
including our Chief Executive Officer
—
control over financial reporting as of September 30, 2018 using the criteria established in Internal Control—rr
Integrated
Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
, we conducted an evaluation of the effectiveness
and Chief Financial Officer
ff
ff
ff
Based on our evaluation under the COSO framework, our management has concluded that our internal control over financial
as of September 30, 2018 to provide reasonable assurance regarding the reliability of financial reporting
reporting was effective
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
ff
The effectiveness
ff
of our internal control over financial reporting as of September 30, 2018 has been audited by
PricewaterhouseCoopers LLP,PP an independent registered public accounting firm, as stated in their report which appears herein.
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 Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2018 that has
materially affected,
our internal control over financial reporting.
or is reasonably likely to materially affect,
ff
ff
81
Inherent Limitations on Effectiveness
ff
of Controls
ff
ff
ff
and Chief Financial Officer
Our management, including our Chief Executive 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,yy have been detected. These inherent
limitations include the realities that judgments in decision making can be faulty,yy and that breakdowns can occur because of a
simple error or mistake. Additionally,yy controls can be circumvented by the individual acts of some persons, by collusion of two
or more people or by management override of the controls. The design of any system of controls also is 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.
ff
ITEM 9B.
Other Information
None.
82
ITEM 10.
Directors, Executive Officers and Corporate Governance
PART III
Information about our Executive Officers
and our Directors is incorporated by reference to information contained in the
Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2018.
ff
We have adopted a code of business conduct for directors and a code of business conduct for all of our employees, including
our executive officers,
and those employees responsible for financial reporting. Both codes of business conduct are available on
the investor relations portion of our website at investor.modeln.com. A copy may also be obtained without charge by contacting
Investor Relations, Model N, Inc., 777 Mariners Island Boulevard, Suite 300, San Mateo, CA 94404 or by calling (650) 610-4998.
ff
We plan to post on our website at the address described above any future amendments or waivers of our codes of business
conduct.
ITEM 11.
Executive Compensation
The information required by this item is incorporated by reference to information contained in the Proxy Statement for the
2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2018.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to information contained in the Proxy Statement for the
2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2018.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to information contained in the Proxy Statement for the
2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2018.
ITEM 14.
Principal Accountant Fees and Services
The information required by this item is incorporated by reference to information contained in the Proxy Statement for the
2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2018.
83
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
(a)
(1)
The following documents filed as a part of the report:
Financial Statements
The financial statements are set forth in Item 8 of this Annual Report on Form 10-K.
(2)
Financial Statement Schedule
Schedule II - Valuation and qualifying accounts
y g
q
The table below presents the changes in the allowance for doubtful accounts for the fiscal years ended September 30, 2018,
2017, and 2016, respectively.
Description
Allowance for doubtful receivables
For the Year Ended September 30, 2018
For the Year Ended September 30, 2017
For the Year Ended September 30, 2016
Valuation allowance for deferred tax
assets
For the Year Ended September 30, 2018
For the Year Ended September 30, 2017
For the Year Ended September 30, 2016
(3)
Exhibits
Balance at
Beginning of
Period
Additions
Charges to
Costs and
Expenses
Write-offs
and
Deductions
Balance at
End of
Period
$
$
$
$
$
$
85
—
—
78,003
56,113
42,128
172
85
—
10,708
21,890
13,985
85
$
— $
— $
20,832
$
— $
— $
172
85
—
67,879
78,003
56,113
The following exhibits are included herein or incorporated herein by reference:
Exhibit
Number
3.1
3.2
4.1
4.2
10.1
10.2†
10.3†
10.4†
10.5†
10.6†
Exhibit Description
Form
File No.
Exhibit
Filing Date
Filed
Herewith
Incorporated by Reference
Amended and Restated Certificate of
Incorporation of the Registrant
Amended and Restated Bylaws of the Registrant
Form of Registrant’s Common Stock certificate
Amended and Restated Investor Rights Agreement
dated December 12, 2003 by and among
Registrant and certain of its stockholders
Form of Indemnity Agreement to be entered into
between Registrant and each of its officers
directors
and
ff
2000 Stock Plan and forms of stock option
agreement and stock option exercise agreement
2010 Equity Incentive Plan and forms of stock
option agreement and stock option exercise
agreement
2013 Equity Incentive Plan and forms of stock
option agreement and stock option exercise
agreement
2013 Employee Stock Purchase Plan
Employment offer
Amendment 1 dated May 8, 2017 by and between
Registrant and David Barter.
letter dated May 7, 2017 and
ff
10-Q
10-Q
S-1
001-35840
001-35840
333-186668
3.1
3.2
4.01
5/10/2013
5/10/2013
3/7/2013
S-1
333-186668
4.02
2/13/2013
S-1
333-186668
10.01
3/12/2013
S-1
333-186668
10.02
2/13/2013
S-1
333-186668
10.03
2/13/2013
S-1
S-8
333-186668
333-187388
10.04
99.4
3/7/2013
3/20/2013
10-K
001-35840
10.07
11/15/2017
84
10.7†
10.8†
10.9
10.10†
10.11†
10.1
21.1
23.1
24.1
31.1
31.2
32.1*
32.2*
ff
letter dated December 9, 2016
Employment offer
by and between Registrant and Russell Mellott.
Form of Restricted Stock Unit Agreement
Sublease by and between Dynatrace LLC and
Registrant dated August 8, 2017
Transition agreement dated May 7, 2018 and
Amendment 1 dated June 29, 2018 by and between
Registrant and Zack Rinat
Employment agreement dated May 7, 2018 by and
between Registrant and Jason Blessing
Credit Agreement by and between Wells Fargo
Bank, National Association and Registrant dated
May 4, 2018
List of Subsidiaries of Registrant
Consent of PricewaterhouseCoopers LLP,PP
independent registered public accounting firm
Power of Attorney (included on the signature page
to this report)
Certification of Periodic Report by Principal
Executive Officer
Sarbanes-Oxley Act of 2002
under Section 302 of the
ff
Certification of Periodic Report by Principal
Financial Officer
Sarbanes-Oxley Act of 2002
under Section 302 of the
ff
Certification of Chief Executive Officer
Pursuant
to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
ff
Certification of Chief Financial Officer
18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
ff
Pursuant to
101.INS
XBRL Instance Document
y
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase
y
Document
y
101.DEF XBRL Taxonomy Extension Definition Linkbase
Document
y
101.LAB XBRL Taxonomy Extension Label Linkbase
Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase
y
Document
10-K
10-K
001-35840
001-35840
10.08
10.12
11/15/2017
12/6/2013
10-K
001-35840
10.10
11/15/2017
10-Q
001-35840
10.1
8/8/2018
10-Q
001-35840
10.2
8/8/2018
10-Q
001-35840
10.3
8/8/2018
X
X
X
X
X
X
X
X
X
X
X
X
X
†
*
Indicates a management contract or compensatory plan.
These exhibits are furnished with this Annual Report on Form 10-K and are not deemed filed with the Securities and
Exchange Commission and are not incorporated by reference in any filing of the Registrant under the Securities Act of
1933 or the ExchangeAct of 1934, whether made before or after the date hereof and irrespective of any general incorporation
language in such filings.
85
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in San Mateo, State
of California, on this 16th day of November 2018.
AA
SIGNATURES
MODEL N, INC.
By:
/S/ DAVID BARTERRR
David Barter
Chief Financial Officer
ff
86
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Jason Blessing or David Barter, or any of them, his attorneys-in-fact, for such person in any and all capacities, to sign
any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
JASON BLESSING
/S/
Jason Blessing
/S/ DAVID BARTERRR
David Barter
Additional Directors:
/S/ CHARLES J. ROBEL
Charles J. Robel
/S/ MELISSA FISHER
Melissa Fisher
/S/ DAVID BONNETTE
David Bonnette
/S/ TIM ADAMS
Tim Adams
/S/ ALAN HENRICKS
Alan Henricks
/S/ BALJIT DAIL
Baljit Dail
Chief Executive Officer
(Principal Executive Officer)
ff
November 16, 2018
Chief Financial Officer
(Principal Financial Officer and Accounting Officer)
ff
November 16, 2018
November 16, 2018
November 16, 2018
November 16, 2018
November 16, 2018
November 16, 2018
November 16, 2018
Director
Director
Director
Director
Director
Director
87
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