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Section 1: 10-Q (10-Q)

modn-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-35840

 

Model N, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

77-0528806

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

777 Mariners Island Boulevard, Suite 300

San Mateo, California

 

94404

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (650) 610-4600

 

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.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  

As of July 27, 2018, the registrant had  31,250,449 shares of common stock, $0.00015 par value per share, outstanding.

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2018 and September 30, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended June 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2018 and 2017

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

 

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

 

20

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

30

 

 

 

 

Item 4.

 

Controls and Procedures

 

31

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

32

 

 

 

 

Item 1A.

 

Risk Factors

 

32

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

52

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

52

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

52

 

 

 

 

Item 5.

 

Other Information

 

52

 

 

 

 

Item 6.

 

Exhibits

 

52

 

 

 

 

 

 

Signatures

 

53

 

2


 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

MODEL N, INC.

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(Unaudited)

 

 

 

As of

 

 

As of

 

 

 

June 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,645

 

 

$

57,558

 

Accounts receivable, net of allowance for doubtful accounts of $17 as of June 30, 2018

   and $85 as of September 30, 2017

 

 

31,707

 

 

 

24,784

 

Prepaid expenses

 

 

3,307

 

 

 

3,733

 

Other current assets

 

 

405

 

 

 

1,013

 

Total current assets

 

 

93,064

 

 

 

87,088

 

Property and equipment, net

 

 

2,496

 

 

 

4,611

 

Goodwill

 

 

39,283

 

 

 

39,283

 

Intangible assets, net

 

 

35,977

 

 

 

40,156

 

Other assets

 

 

996

 

 

 

798

 

Total assets

 

$

171,816

 

 

$

171,936

 

Liabilities And Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,383

 

 

$

3,002

 

Accrued employee compensation

 

 

12,376

 

 

 

14,996

 

Accrued liabilities

 

 

4,041

 

 

 

4,979

 

Deferred revenue, current portion

 

 

54,902

 

 

 

49,186

 

Long term debt, current portion

 

 

5,995

 

 

 

4,753

 

Total current liabilities

 

 

78,697

 

 

 

76,916

 

Long term debt

 

 

52,846

 

 

 

52,452

 

Other long-term liabilities

 

 

1,651

 

 

 

1,307

 

Total liabilities

 

 

133,194

 

 

 

130,675

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common Stock, $0.00015 par value; 200,000 shares authorized; 31,250

   and 29,323 shares issued and outstanding at June 30, 2018 and

   September 30, 2017, respectively

 

 

5

 

 

 

4

 

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

   outstanding

 

 

 

 

 

 

Additional paid-in capital

 

 

239,372

 

 

 

217,052

 

Accumulated other comprehensive loss

 

 

(874

)

 

 

(502

)

Accumulated deficit

 

 

(199,881

)

 

 

(175,293

)

Total stockholders' equity

 

 

38,622

 

 

 

41,261

 

Total liabilities and stockholders' equity

 

$

171,816

 

 

$

171,936

 

 

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

 

 

3


 

MODEL N, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SaaS and maintenance

 

$

35,623

 

 

$

28,530

 

 

$

100,943

 

 

$

78,427

 

License and implementation

 

 

3,994

 

 

 

5,714

 

 

 

16,975

 

 

 

17,137

 

Total revenues

 

 

39,617

 

 

 

34,244

 

 

 

117,918

 

 

 

95,564

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SaaS and maintenance

 

 

14,599

 

 

 

12,439

 

 

 

40,489

 

 

 

34,527

 

License and implementation

 

 

1,846

 

 

 

3,333

 

 

 

10,018

 

 

 

11,106

 

Total cost of revenues

 

 

16,445

 

 

 

15,772

 

 

 

50,507

 

 

 

45,633

 

Gross profit

 

 

23,172

 

 

 

18,472

 

 

 

67,411

 

 

 

49,931

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

7,746

 

 

 

8,393

 

 

 

24,861

 

 

 

23,302

 

Sales and marketing

 

 

9,338

 

 

 

10,739

 

 

 

26,845

 

 

 

31,081

 

General and administrative

 

 

17,044

 

 

 

8,096

 

 

 

33,099

 

 

 

26,949

 

Total operating expenses

 

 

34,128

 

 

 

27,228

 

 

 

84,805

 

 

 

81,332

 

Loss from operations

 

 

(10,956

)

 

 

(8,756

)

 

 

(17,394

)

 

 

(31,401

)

Interest expense (income), net

 

 

4,478

 

 

 

1,442

 

 

 

7,350

 

 

 

2,789

 

Other expenses (income), net

 

 

(344

)

 

 

3

 

 

 

(306

)

 

 

77

 

Loss before income taxes

 

 

(15,090

)

 

 

(10,201

)

 

 

(24,438

)

 

 

(34,267

)

(Benefit) provision for income taxes

 

 

345

 

 

 

234

 

 

 

150

 

 

 

(3,742

)

Net loss

 

$

(15,435

)

 

$

(10,435

)

 

$

(24,588

)

 

$

(30,525

)

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.50

)

 

$

(0.36

)

 

$

(0.82

)

 

$

(1.07

)

Weighted average number of shares used in computing

   net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

30,749

 

 

 

28,936

 

 

 

30,042

 

 

 

28,464

 

 

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

 

4


 

MODEL N, INC.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(15,435

)

 

$

(10,435

)

 

$

(24,588

)

 

$

(30,525

)

Other comprehensive (loss) income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation

   adjustment

 

 

(391

)

 

 

50

 

 

 

(372

)

 

 

97

 

Total comprehensive loss

 

$

(15,826

)

 

$

(10,385

)

 

$

(24,960

)

 

$

(30,428

)

 

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

 

 

5


 

MODEL N, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(24,588

)

 

$

(30,525

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,410

 

 

 

5,866

 

Stock-based compensation

 

 

19,312

 

 

 

6,935

 

Amortization of debt discount and issuance cost

 

 

686

 

 

 

502

 

Deferred income taxes

 

 

(581

)

 

 

(4,019

)

Other non-cash charges

 

 

(30

)

 

 

239

 

Loss on debt extinguishment

 

 

3,142

 

 

 

 

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,833

)

 

 

(7,561

)

Prepaid expenses and other assets

 

 

(102

)

 

 

2,592

 

Deferred cost of implementation services

 

 

488

 

 

 

1,289

 

Accounts payable

 

 

(1,752

)

 

 

(854

)

Accrued employee compensation

 

 

(2,541

)

 

 

1,482

 

Other accrued and long-term liabilities

 

 

(639

)

 

 

(1,085

)

Deferred revenue

 

 

6,386

 

 

 

8,875

 

Net cash used in operating activities

 

 

(642

)

 

 

(16,264

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(165

)

 

 

(290

)

Acquisition of businesses, net of cash acquired

 

 

 

 

 

(47,773

)

Capitalization of software development costs

 

 

 

 

 

(335

)

Net cash used in investing activities

 

 

(165

)

 

 

(48,398

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options and issuance of employee stock purchase plan

 

 

3,008

 

 

 

2,457

 

Proceeds from term loan

 

 

49,588

 

 

 

48,686

 

Debt issuance costs

 

 

(145

)

 

 

(806

)

Principal payments on loan

 

 

(50,000

)

 

 

 

Early payment penalty

 

 

(1,500

)

 

 

 

Net cash provided by financing activities

 

 

951

 

 

 

50,337

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(57

)

 

 

7

 

Net decrease in cash and cash equivalents

 

 

87

 

 

 

(14,318

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of period

 

 

57,558

 

 

 

66,149

 

End of period

 

$

57,645

 

 

$

51,831

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Data:

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Promissory notes issued for acquisition

 

$

 

 

$

8,643

 

 

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

 

 

 

6


 

MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

The Company and Significant Accounting Policies and Estimates

Model N, Inc. (Company) was incorporated in Delaware on December 14, 1999. The Company is a provider of cloud revenue management solutions for the pharmaceutical, medical device, high tech, manufacturing and semiconductor 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, incentives and rebates. The Company’s corporate headquarters are located in San Mateo, California, with additional offices in the United States, India and Switzerland.

Fiscal Year

The Company’s fiscal year ends on September 30. References to fiscal year 2018, for example, refer to the fiscal year ending September 30, 2018.

Basis for Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2017. There have been no changes in the significant accounting policies from those that were disclosed in the audited consolidated financial statements for the fiscal year ended September 30, 2017 included in the Annual Report on Form 10-K.

In the opinion of management, the unaudited interim consolidated financial statements include all the normal recurring adjustments necessary to present fairly the condensed consolidated financial statements. The results of operations for the nine months ended June 30, 2018 were not necessarily indicative of the operating results for the full fiscal year 2018 or any future periods.

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

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates include revenue recognition, 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.

New Accounting Pronouncements    

In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard, Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as amended, which will supersede nearly all existing revenue recognition guidance. Under ASU 2014-09, an entity is required to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the expected consideration received in exchange for those goods or services. ASU 2014-09 defines a five-step process in order to achieve this core principle, which may require the use of judgment and estimates, and 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.

 

7


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The FASB has issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The amendments include ASU 2016-08, Revenue from Contracts with Customers (Topic 606)—Principal versus Agent Considerations, which was issued in March 2016, and clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09, and ASU 2016-10, Revenue from Contracts with Customers (Topic 606)—Identifying Performance Obligations and Licensing, which was issued in April 2016, and amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property.

The new standard permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach with the cumulative effect of initially applying the new standard recognized at the date of initial application and providing certain additional disclosures. The new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The Company does not plan to early adopt, and accordingly, the Company will adopt the new standard effective October 1, 2018. The Company will adopt the standard using the modified retrospective method.

The Company has identified, and is in the process of implementing, appropriate changes to its business processes, systems and controls to support recognition and disclosure under the new standard. Based on the Company’s ongoing evaluation, the Company believes the impacts of this ASU will be primarily related to the capitalization and amortization of sales commissions, the timing of revenue recognition for certain sales contracts, and related disclosures. The Company expects that under this ASU it will now be required to capitalize sales commissions and amortize them over the period which the sales commissions are expected to benefit the Company. Sales commissions are currently expensed as incurred. In addition, there will be a change in relation to the timing of revenue recognition for certain sales contracts, due primarily to the removal of the current limitation on contingent revenue. These changes are being evaluated to determine the potential impact to the financial statements and disclosures. While the Company continues to assess the potential impacts of the new standard, including the areas described above, our preliminary conclusions may change.

In February 2016, the FASB issued ASU 2016-02, Lease (Topic 842), guidance on the recognition and measurement of leases. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. The guidance retains the current accounting for lessors and does not make significant changes to the recognition, measurement, and presentation of expenses and cash flows by a lessee. Enhanced disclosures will also be required to give financial statement users the ability to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance will require modified retrospective application at the beginning of October 1, 2019 for the Company, 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 March 2016, FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 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, 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 its 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.  

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow (Topic 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 2019. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact this standard will have on its consolidated financial statements, but does not believe this will have material impact on its consolidated financial statements.

8


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (Topic 230), clarifying the classification and presentation of restricted cash in the statement of cash flows. The standard requires that restricted cash and restricted cash equivalents are included in the cash and cash 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 becomes effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not plan to early adopt, and accordingly the Company will adopt the new standard effective October 1, 2018. The Company is currently evaluating the impact this standard, but does not believe this will have material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805): clarifying the definition of a business. The amendments in this guidance change the definition of a business to assist with evaluating when a set of transferred assets and activities is a business. The guidance becomes effective for the Company at the beginning of its first quarter of fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of this standard, but does not believe this will have material impact on its consolidated financial statements.

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

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): providing clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this standard, but does not believe this will have material impact on its consolidated financial statements.

 

 

2.

Business Combination

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.

In connection with Revitas acquisition, the Company funded, in part, the cash portion of the purchase price with a five year term loan in the aggregate amount of $50.0 million. See Note 5, “Debt”, for additional information.

 

9


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Purchase Price Allocation

The total purchase price for Revitas was approximately $61.5 million, which was comprised of $52.8 million in cash and the fair value of the promissory note of $8.6 million, see Note 5, “Debt”, for additional details. The allocation of the purchase price is based on valuations derived from estimated fair value assessments and assumptions used by the Company. As of the acquisition date, the final allocation of the purchase price is as follows:

 

 

 

Fair Value

(in thousands)

 

Cash and cash equivalents

 

$

5,067

 

Accounts receivable

 

 

6,184

 

Prepaid expenses

 

 

1,067

 

Other current assets

 

 

47

 

Property, plant and equipment

 

 

1,506

 

Intangible assets

 

 

39,100

 

Goodwill

 

 

32,344

 

Other assets

 

 

25

 

Total assets acquired

 

 

85,340

 

 

 

 

 

 

Accounts payable

 

 

(1,352

)

Accrued employee compensation

 

 

(3,983

)

Accrued liabilities

 

 

(1,410

)

Deferred revenue liability

 

 

(12,856

)

Other liabilities

 

 

(4,256

)

Total liabilities assumed

 

 

(23,857

)

Net acquired assets

 

$

61,483

 

 

The following table presents certain information on the acquired identifiable assets:

 

Intangible assets

 

Fair value

(in thousands)

 

 

Estimated

useful lives

(years)

 

 

Weighted-average

estimated useful

lives (years)

 

Developed technology

 

$

6,770

 

 

 

6

 

 

 

6

 

Customer relationship

 

$

32,180

 

 

10

 

 

10

 

Trade name

 

$

150

 

 

 

1

 

 

 

1

 

 

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.  

We do not expect the goodwill recognized as a part of the acquisition to be deductible for income tax purposes. See Note 4, “Goodwill” for additional information.

Unaudited Pro 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.  

10


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following unaudited pro forma combined consolidated financial information has been prepared by the Company using the acquisition method of accounting to give effect to the Revitas acquisition as if it had occurred on October 1, 2015. The following table sets forth the unaudited pro forma consolidated combined results of operations:

 

 

 

Three Months Ended June 30,

 

 

Nine Months Ended June 30,

 

 

 

2017

 

 

2017

 

 

 

(in thousands, except per share data)

 

 

(in thousands, except per share data)

 

Revenue

 

$

34,244

 

 

$

104,622

 

Net loss

 

 

(10,343

)

 

 

(36,527

)

Net loss per shares-basic and diluted

 

$

(0.36

)

 

$

(1.28

)

 

 

3.

Consolidated Balance Sheet Components

Components of property and equipment, and intangible assets consisted of the following:

Property and Equipment

 

 

 

As of

 

 

As of

 

 

 

June 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Computer software and equipment

 

$

9,762

 

 

$

10,274

 

Furniture and fixtures

 

 

1,234

 

 

 

1,284

 

Leasehold improvements

 

 

1,377

 

 

 

1,466

 

Software development costs

 

 

9,416

 

 

 

9,416

 

Total property and equipment

 

 

21,789

 

 

 

22,440

 

Less: Accumulated depreciation and amortization

 

 

(19,293

)

 

 

(17,829

)

Total property and equipment, net

 

$

2,496

 

 

$

4,611

 

 

 

Depreciation expense totaled $0.6 million and $1.0 million for the three months ended June 30, 2018 and 2017, respectively; and $2.2 million and $2.7 million for the nine months ended June 30, 2018 and 2017, respectively.

Intangible Assets

 

 

 

Estimated

 

As of  June 30, 2018

 

 

 

Useful Life

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

(in Years)

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

(in thousands)

 

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

5-6

 

$

12,083

 

 

$

(5,972

)

 

$

6,111

 

Backlog

 

5

 

 

280

 

 

 

(260

)

 

 

20

 

Customer relationships

 

3-10

 

 

36,599

 

 

 

(6,753

)

 

 

29,846

 

Trade name

 

1

 

 

260

 

 

 

(260

)

 

 

 

Total

 

 

 

$

49,222

 

 

$

(13,245

)

 

$

35,977

 

11


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

Estimated

 

As of  September 30, 2017

 

 

 

Useful Life

 

Gross Carrying

 

 

Accumulated

 

 

Net Carrying

 

 

 

(in Years)

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

 

 

(in thousands)

 

Intangible Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

5-6

 

$

12,083

 

 

$

(4,545

)

 

$

7,538

 

Backlog

 

5

 

 

280

 

 

 

(215

)

 

 

65

 

Non-competition agreement

 

3

 

 

100

 

 

 

(100

)

 

 

 

Customer relationships

 

3-10

 

 

36,599

 

 

 

(4,084

)

 

 

32,515

 

Trade name

 

1

 

 

260

 

 

 

(222

)

 

 

38

 

Total

 

 

 

$

49,322

 

 

$

(9,166

)

 

$

40,156

 

 

The Company recorded amortization expense related to the acquired intangible assets of $1.4 million and $1.4 million for the three months ended June 30, 2018 and 2017, respectively; and $4.2 million and $3.2 million for the nine months ended June 30, 2018 and 2017, respectively.  

Estimated future amortization expense for the intangible assets as of June 30, 2018 is as follows (in thousands):

 

2018 (remaining 3 months)

 

$

1,380

 

2019

 

 

5,466

 

2020

 

 

4,751

 

2021

 

 

4,686

 

2022 and thereafter

 

 

19,694

 

Total future amortization

 

$

35,977

 

 

4.

Goodwill

The changes in the carrying amount of goodwill for the nine months ended June 30, 2018 consisted of the following (in thousands):

 

Balance as at September 30, 2016

 

$

6,939

 

Add: Goodwill from acquisition of business

 

 

32,344

 

Balance as at September 30, 2017

 

$

39,283

 

Add: Goodwill from acquisition of business

 

 

 

Balance as at June 30, 2018

 

$

39,283

 

 

As a result of the acquisition of Revitas in the second quarter of fiscal year 2017, the Company recognized goodwill of $32.3 million.  See Note 2, “Business Combination”, for additional details.

 

5.

Debt

Term Loan

In connection with the Revitas acquisition, on January 5, 2017, the Company entered into a Financing Agreement (the “Financing Agreement”) by and among the Company, the Subsidiaries, as guarantors, Crystal Financial SPV, 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. (“Wells Fargo”), as discussed below.

12


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 loan would have matured on January 5, 2022. For the quarter beginning on April 1, 2018 through the payoff the loan, 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 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.

 

The Company was in compliance with all of the covenants described in the Financing Agreements as of March 31, 2018 and through the payoff in conjunction with the new term loan with Wells Fargo Bank entered into 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.

Term Loan – Wells Fargo

 

On May 4, 2018, the Company and certain of its subsidiaries entered into a Credit Agreement (the “Credit Agreement”) by and among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders party thereto (the “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

Leverage Ratio

Calculation

Applicable Margin Relative to

Base Rate

Applicable Margin Relative to

LIBOR Rate

I

<2.0:1.0

2.0%

3.0%

II

>=2.0:1.0 but less than 3.5:1.0

2.5%

3.5%

III

>=3.5:1.0

3.5%

4.5%

 

For the quarter ended as of June 30, 2018, the Company’s interest rate is at the LIBOR Rate plus 4.5%.

 

Certain United States subsidiaries of the Company (the “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.

13


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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, 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 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 June 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 will mature 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. These promissory notes bear interest at the rate of 3% per annum, and are subject to a right of set-off as partial security for the indemnification obligations of target’s stockholders under the Merger Agreement. These promissory notes are 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 June 30, 2018, the term loan with Wells Fargo and promissory notes consisted of the following:

 

 

 

Amount

 

 

 

(in thousands)

 

Principal

 

$

60,000

 

Unamortized debt discount and issuance costs

 

 

(1,159

)

Net carrying amount

 

$

58,841

 

 

The Company incurred approximately $0.7 million in transaction costs in connection with the term loan with Wells Fargo in the third quarter of fiscal 2018 and $0.8 million in transaction costs in connection with the term loan with Wells Fargo in fiscal year 2017. These costs are included as part of the Company’s debt. The effective interest rate for the term loan with Wells Fargo is 6.67%, the 18 month promissory note is 9.74% and the 36 month promissory note is 9.89%.

The future scheduled principal payments for the term loan with Wells Fargo and promissory notes as of June 30, 2018 were as follows (in thousands):

 

Fiscal Year

 

 

 

 

2018 (remaining 3 months)

 

 

5,250

 

2019

 

 

1,375

 

2020

 

 

7,813

 

2021

 

 

3,750

 

2022 and thereafter

 

 

41,812

 

Total

 

$

60,000

 

 

14


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

6.

Fair Value of Financial Instruments

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

Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value instruments defines 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 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs for similar assets and liabilities that are observable or can be corroborated by observable market data; and

Level 3—Unobservable inputs that are supported by little or no market activity, which requires 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.

The table below sets forth the Company’s cash equivalents as of June 30, 2018 and September 30, 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.

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

 

(in thousands)

 

As of  June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

$

48,331

 

 

$

 

 

$

 

 

$

48,331

 

Total

 

$

48,331

 

 

$

 

 

$

 

 

$

48,331

 

As of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

$

47,754

 

 

$

 

 

$

 

 

$

47,754

 

Total

 

$

47,754

 

 

$

 

 

$

 

 

$

47,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company’s cash equivalents as of June 30, 2018 and September 30, 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 June 30, 2018 and September 30, 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 values approximate their fair value as of June 30, 2018.

 

 

7.

Stock-based Compensation

As of June 30, 2018, 5.2 million shares were available for future stock awards under the Company’s equity plans and any additional releases resulting from an over-achievement relating to performance-based restricted stock units.  There were no stock options granted during the three and nine months ended June 30, 2018 and 2017, respectively.  

15


MODEL N, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table summarizes the stock option activity and related information under all equity plans:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

Number of

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Shares

 

 

Exercised

 

 

Contract

 

 

Intrinsic

 

 

 

(thousands)

 

 

Price

 

 

Term (in Years)

 

 

Value (in thousands)

 

Balance at September 30, 2017

 

 

453

 

 

$

7.71

 

 

 

3.53

 

 

$

3,281

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(178

)

 

 

8.59

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

(47

)

 

 

4.65

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

228

 

 

$

7.66

 

 

 

3.27