UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2016
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 |
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77-0528806 |
(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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1600 Seaport Boulevard, Suite 400 Pacific Shores Center-Building 6 South Redwood City, California |
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94063 |
(Address of Principal Executive Offices) |
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(Zip Code) |
(650) 610-4600
(Registrant’s Telephone Number, Including Area Code)
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 checkmark 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 during the preceding 12 months (or for such shorter time 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, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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(Do not check if a smaller reporting company) |
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Smaller reporting company |
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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 January 27, 2017, the registrant had 28,173,684 shares of common stock issued and outstanding.
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets as of December 31, 2016 and September 30, 2016 |
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3 |
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4 |
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6 |
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7 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
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Item 3. |
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24 |
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Item 4. |
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25 |
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Item 1. |
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26 |
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Item 1A. |
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26 |
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Item 2. |
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48 |
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Item 3. |
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48 |
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Item 4. |
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48 |
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Item 5. |
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48 |
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Item 6. |
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48 |
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49 |
2
MODEL N, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(Unaudited)
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As of |
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As of |
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December 31, |
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September 30, |
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2016 |
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2016 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
52,446 |
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$ |
66,149 |
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Accounts receivable, net of allowance for doubtful accounts of $0 as of December 31, 2016 and September 30, 2016 |
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19,263 |
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19,925 |
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Deferred cost of implementation services, current portion |
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1,201 |
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1,630 |
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Prepaid expenses |
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4,093 |
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4,845 |
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Other current assets |
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376 |
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283 |
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Total current assets |
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77,379 |
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92,832 |
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Property and equipment, net |
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5,748 |
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6,141 |
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Goodwill |
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6,939 |
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6,939 |
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Intangible assets, net |
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5,320 |
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5,684 |
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Other assets |
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5,715 |
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1,371 |
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Total assets |
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$ |
101,101 |
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$ |
112,967 |
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Liabilities And Stockholders' Equity |
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Current liabilities: |
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Accounts payable |
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$ |
3,793 |
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$ |
3,334 |
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Accrued employee compensation |
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7,403 |
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8,349 |
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Accrued liabilities |
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2,324 |
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3,707 |
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Deferred revenue, current portion |
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25,591 |
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28,854 |
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Total current liabilities |
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39,111 |
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44,244 |
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Deferred revenue, net of current portion |
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926 |
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1,924 |
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Other long-term liabilities |
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663 |
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597 |
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Total liabilities |
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40,700 |
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46,765 |
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Commitments and contingencies |
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Stockholders' equity: |
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Common Stock, $0.00015 par value; 200,000 shares authorized; 28,144 and 27,891 shares issued and outstanding at December 31, 2016 and September 30, 2016, respectively |
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4 |
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4 |
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Preferred Stock, $0.00015 par value; 5,000 shares authorized; no shares issued and outstanding |
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— |
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— |
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Additional paid-in capital |
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204,419 |
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202,506 |
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Accumulated other comprehensive loss |
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(676 |
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(562 |
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Accumulated deficit |
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(143,346 |
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(135,746 |
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Total stockholders' equity |
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60,401 |
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66,202 |
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Total liabilities and stockholders' equity |
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$ |
101,101 |
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$ |
112,967 |
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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)
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Three Months Ended December 31, |
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2016 |
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2015 |
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Revenues: |
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License and implementation |
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$ |
5,423 |
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$ |
4,562 |
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SaaS and maintenance |
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22,640 |
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19,925 |
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Total revenues |
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28,063 |
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24,487 |
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Cost of revenues: |
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License and implementation |
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3,614 |
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3,417 |
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SaaS and maintenance |
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10,208 |
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9,012 |
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Total cost of revenues |
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13,822 |
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12,429 |
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Gross profit |
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14,241 |
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12,058 |
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Operating expenses: |
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Research and development |
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5,975 |
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5,284 |
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Sales and marketing |
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8,734 |
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7,707 |
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General and administrative |
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7,185 |
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6,720 |
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Total operating expenses |
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21,894 |
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19,711 |
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Loss from operations |
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(7,653 |
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(7,653 |
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Interest income |
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33 |
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1 |
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Other (income) expenses, net |
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(154 |
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57 |
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Loss before income taxes |
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(7,466 |
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(7,709 |
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Provision for income taxes |
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134 |
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90 |
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Net loss |
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$ |
(7,600 |
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$ |
(7,799 |
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Net loss per share attributable to common stockholders: |
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Basic and diluted |
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$ |
(0.27 |
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$ |
(0.29 |
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Weighted average number of shares used in computing net loss per share attributable to common stockholders: |
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Basic and diluted |
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28,008 |
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26,827 |
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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)
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Three Months Ended December 31, |
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2016 |
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2015 |
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Net loss |
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$ |
(7,600 |
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$ |
(7,799 |
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Other comprehensive (loss) income, net |
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Change in foreign currency translation adjustment |
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(114 |
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(25 |
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Total comprehensive loss |
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$ |
(7,714 |
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$ |
(7,824 |
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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)
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Three Months Ended December 31, |
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2016 |
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2015 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(7,600 |
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$ |
(7,799 |
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Adjustments to reconcile net loss to net cash used in operating activities |
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Depreciation and amortization |
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1,094 |
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1,319 |
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Stock-based compensation |
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1,895 |
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2,550 |
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Other non-cash charges |
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49 |
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46 |
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Changes in assets and liabilities, net of acquisition: |
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Accounts receivable |
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655 |
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(4,984 |
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Prepaid expenses and other assets |
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843 |
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84 |
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Deferred cost of implementation services |
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701 |
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(85 |
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Accounts payable |
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591 |
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(222 |
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Accrued employee compensation |
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(898 |
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(1,425 |
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Other accrued and long-term liabilities |
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(1,298 |
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496 |
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Deferred revenue |
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(4,261 |
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2,730 |
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Net cash used in operating activities |
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(8,229 |
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(7,290 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(194 |
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(357 |
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Acquisition of business |
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— |
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(12,615 |
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Capitalization of software development costs |
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(275 |
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(532 |
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Cash held in escrow |
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(5,000 |
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— |
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Net cash used in investing activities |
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(5,469 |
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(13,504 |
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Cash flows from financing activities: |
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Proceeds from exercise of stock options |
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17 |
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135 |
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Net cash provided by financing activities |
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17 |
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135 |
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Effect of exchange rate changes on cash and cash equivalents |
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(22 |
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(7 |
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Net decrease in cash and cash equivalents |
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(13,703 |
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(20,666 |
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Cash and cash equivalents |
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Beginning of period |
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66,149 |
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91,019 |
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End of period |
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$ |
52,446 |
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$ |
70,353 |
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Supplemental Disclosure of Cash Flow Data: |
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Non-cash Investing and Financing Activities: |
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Capitalized stock compensation expense in software development costs |
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— |
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— |
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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 revenue management solutions for the life science 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, incentives and rebates. The Company’s corporate headquarters are located in Redwood City, California, with additional offices in the United States, India, the United Kingdom and Switzerland.
Fiscal Year
The Company’s fiscal year ends on September 30. References to fiscal year 2017, for example, refer to the fiscal year ending September 30, 2017.
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, 2016. 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, 2016 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 three months ended December 31, 2016 were not necessarily indicative of the operating results for the full fiscal year 2017 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) No. 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 No. 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 recently issued several amendments to the new standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations. The amendments include ASU No. 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 No. 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 No. 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. We do not plan to early adopt, and accordingly, we will adopt the new standard effective October 1, 2018.
We are currently evaluating the adoption approach. Our final determination will depend on a number of factors, such as the significance of the impact of the new standard on our financial results, system readiness, and our ability to accumulate and analyze the information necessary to assess the impact on prior period financial statements and our ability to maintain two sets of financials under current and new standards if we were to adopt the full retrospective approach.
We are in the initial stages of our evaluation of the impact of the new standard on our accounting policies, processes, and system requirements. We have assigned internal resources in addition to the engagement of third party service providers to assist in the evaluation. Furthermore, we have made and will continue to make investments in systems to enable timely and accurate reporting under the new standard. While we continue to assess all potential impacts under the new standard, there is the potential for significant impacts to the timing of recognition of subscription revenue and professional services revenue.
For certain SaaS arrangements prior to fiscal year 2016, we have historically concluded that we did not have standalone value to the customer without the implementation services. The entire arrangement consideration, including subscription fees and related implementation services fees, were accounted for as a single unit of accounting and recognized ratably beginning the day the customer was provided access to the subscription service through the end of the 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. Under the new standard, subscription service and professional services, are distinct performance obligations and, therefore, should be separately recognized over time. We estimate the potential impact would be an acceleration of revenue in general. However, we are still in the early stages of the assessment.
As part of our preliminary evaluation, we have also considered the impact of the guidance in ASC 340-40, Other Assets and Deferred Costs; Contracts with Customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition (TRG) from their November 7, 2016 meeting with respect to capitalization and amortization of incremental costs of obtaining a contract.
The Company recently announced the acquisition of Revitas, Inc. (see footnote # 9. Subsequent Event for detail) and we plan to evaluate the impact related to its various revenue streams under the new standard in the next few months.
While we continue to assess the potential impacts of the new standard, including the areas described above, and anticipate this standard could have a material impact on our consolidated financial statements, we do not know or cannot reasonably estimate quantitative information related to the impact of the new standard on our financial statements at this time.
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU 2014-15 becomes effective for annual periods beginning after December 15, 2016 and for interim reporting periods thereafter. The Company does not expect the adoption of this ASU to have a material impact on the Company’s disclosures in the footnotes to its consolidated financial statements.
8
MODEL N, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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, 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 the Company’s first quarter of fiscal 2020, 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 2016-9, guidance related to stock-based compensation, which includes the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The guidance becomes effective for the Company at the beginning of its first quarter of fiscal 2018 but permits adoption in an earlier period. The Company is currently evaluating the impact this standard will have on its 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.
In November 2016, the FASB issued ASU No. 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 is currently evaluating the impact this standard will have 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 it’s the first quarter of fiscal 2019. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.
9
MODEL N, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
2. |
Consolidated Balance Sheet Components |
Components of property and equipment, and intangible assets consisted of the following:
Property and Equipment
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As of |
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As of |
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December 31, |
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September 30, |
|
||
|
|
2016 |
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|
2016 |
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||
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(in thousands) |
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|||||
Computer software and equipment |
|
$ |
9,270 |
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$ |
9,319 |
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Furniture and fixtures |
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1,158 |
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1,117 |
|
Leasehold improvements |
|
|
1,251 |
|
|
|
1,240 |
|
Software development costs |
|
|
8,254 |
|
|
|
8,254 |
|
Total property and equipment |
|
|
19,933 |
|
|
|
19,930 |
|
Less: Accumulated depreciation and amortization |
|
|
(15,253 |
) |
|
|
(14,582 |
) |
Property and equipment, net |
|
|
4,680 |
|
|
|
5,348 |
|
Add: Capital projects in progress |
|
|
1,068 |
|
|
|
793 |
|
Total property and equipment, net |
|
$ |
5,748 |
|
|
$ |
6,141 |
|
|
|
|
|
|
|
|
|
|
Depreciation expense totaled $0.7 million and $1.0 million for the three months ended December 31, 2016 and 2015, respectively.
Intangible Assets
|
|
Estimated |
|
As of December 31, 2016 |
|
|||||||||
|
|
Useful Life |
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|||
|
|
(in Years) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|||
|
|
|
|
(in thousands) |
|
|||||||||
Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
|
5 |
|
$ |
5,313 |
|
|
$ |
(3,107 |
) |
|
$ |
2,206 |
|
Backlog |
|
5 |
|
|
280 |
|
|
|
(169 |
) |
|
|
111 |
|
Customer relationships |
|
3-10 |
|
|
4,419 |
|
|
|
(1,416 |
) |
|
|
3,003 |
|
Total |
|
|
|
$ |
10,012 |
|
|
$ |
(4,692 |
) |
|
$ |
5,320 |
|
|
|
Estimated |
|
As of September 30, 2016 |
|
|||||||||
|
|
Useful Life |
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|||
|
|
(in Years) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|||
|
|
|
|
(in thousands) |
|
|||||||||
Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology |
|
5 |
|
$ |
5,313 |
|
|
$ |
(2,857 |
) |
|
$ |
2,456 |
|
Backlog |
|
5 |
|
|
280 |
|
|
|
(149 |
) |
|
|
131 |
|
Non-competition agreement |
|
3 |
|
|
100 |
|
|
|
(100 |
) |
|
|
— |
|
Customer relationships |
|
3-10 |
|
|
4,419 |
|
|
|
(1,331 |
) |
|
|
3,088 |
|
Trade name |
|
1 |
|
|
110 |
|
|
|
(101 |
) |
|
|
9 |
|
Total |
|
|
|
$ |
10,222 |
|
|
$ |
(4,538 |
) |
|
$ |
5,684 |
|
The Company recorded amortization expense related to the acquired intangible assets of $0.4 million and $0.3 million for the three months ended December 31, 2016 and 2015, respectively.
10
MODEL N, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Estimated future amortization expense for the intangible assets as of December 31, 2016 is as follows:
2017 (remaining 9 months) |
|
$ |
892 |
|
2018 |
|
|
1,175 |
|
2019 |
|
|
1,120 |
|
2020 |
|
|
405 |
|
2021 and thereafter |
|
|
1,728 |
|
Total future amortization |
|
$ |
5,320 |
|
|
|
|
|
|
Other Assets
As of December 31, 2016, the Company had $5.0 million included in other assets exclusively for the initial escrow deposit held with a third party in connection with the Revitas acquisition. See Note 9, "Subsequent Event", for further information about the acquisition of Revitas.
3. |
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, 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 money market funds. These instruments are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
11
MODEL N, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below sets forth the Company’s cash equivalents as of December 31, 2016 and September 30, 2016, 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 December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund deposits |
|
$ |
45,577 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
45,577 |
|
Total |
|
$ |
45,577 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
45,577 |
|
As of September 30, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market fund deposits |
|
$ |
45,550 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
45,550 |
|
Total |
|
$ |
45,550 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
45,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s cash equivalents as of December 31, 2016 and September 30, 2016 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 December 31, 2016 and September 30, 2016. As of December 31, 2016 and September 30, 2016, amounts of $6.0 million and $20.6 million, respectively, were held in bank deposits.
4. |
Stock-based Compensation |
As of December 31, 2016, 5.5 million shares were available for future stock awards under the Company’s equity plans. There were no stock options granted during three months ended December 31, 2016 and 2015, respectively.
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, 2016 |
|
|
806 |
|
|
$ |
6.31 |
|
|
|
3.56 |
|
|
$ |
4,103 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Exercised |
|
|
(9 |
) |
|
|
1.82 |
|
|
|
— |
|
|
|
|
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Expired |
|
|
(4 |
) |
|
|
12.08 |
|
|
|
— |
|
|
|
|
|
Balance at December 31, 2016 |
|
|
793 |
|
|
$ |
6.36 |
|
|
|
3.23 |
|
|
$ |
2,707 |
|
Options exercisable as of December 31, 2016 |
|
|
792 |
|
|
$ |
6.35 |
|
|
|
3.22 |
|
|
$ |
2,707 |
|
Options vested and expected to vest as of December 31, 2016 |
|
|
793 |
|
|
$ |
6.36 |
|
|
|
3.23 |
|
|
$ |
2,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
MODEL N, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The following table summarizes the Company’s restricted stock and restricted stock units activity under all equity award plans:
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Restricted Stock |
|
|
Grant Date |
|
||
|
|
Units Outstanding |
|
|
Fair Value |
|
||
|
|
(in thousands) |
|
|
|
|
|
|
Balance at September 30, 2016 |
|
|
3,117 |
|
|
$ |
11.81 |
|
Granted |
|
|
60 |
|
|
|
8.31 |
|
Released |
|
|
(244 |
) |
|
|
8.81 |
|
Forfeited |
|
|
(535 |
) |
|
|
10.67 |
|
Balance at December 31, 2016 |
|
|
2,398 |
|
|
$ |
12.28 |
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation
Stock-based compensation recorded in the statements of operations is as follows:
|
|
Three Months Ended December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands) |
|
|||||
Cost of revenues: |
|
|
|
|
|
|
|
|
License and implementation |
|
$ |
234 |
|
|
$ |
200 |
|
SaaS and maintenance |
|
|
246 |
|
|
|
226 |
|
Total stock-based compensation in cost of revenue |
|
|
480 |
|
|
|
426 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
Research and development |
|
|
404 |
|
|
|
401 |
|
Sales and marketing |
|
|
553 |
|
|
|
593 |
|
General and administrative |
|
|
458 |
|
|
|
1,130 |
|
Total stock-based compensation in operating expense |
|
|
1,415 |
|
|
|
2,124 |
|
Total stock-based compensation |
|
$ |
1,895 |
|
|
$ |
2,550 |
|
|
|
|
|
|
|
|
|
|
5. |
Income Taxes |
The Company recorded an income tax expense of $134,000 and $90,000, representing effective income tax rates of 2% and 1%, for the three months ended December 31, 2016 and 2015, respectively. The Company’s effective income-tax rates during these periods differ from the Company’s federal statutory rate of 34% primarily due to permanent differences for stock-based compensation and the impact of state income taxes and foreign tax rate differences. The Company realized no benefit for current period losses due to maintaining a full valuation allowance against the U.S. and foreign net deferred tax assets.
13
MODEL N, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. |
Net Loss per Share |
The following table sets forth the computation of the Company’s basic and diluted net loss per share attributable to common stockholders during the periods presented:
|
|
Three Months Ended December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands, except per share data) |
|
|||||
Numerator: |
|
|
|
|
|
|
|
|
Basic and diluted: |
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders |
|
$ |
(7,600 |
) |
|
$ |
(7,799 |
) |
Denominator: |
|
|
|
|
|
|
|
|
Basic and diluted: |
|
|
|
|
|
|
|
|
Weighted Average Shares Used in Computing Net Loss per Share Attributable to Common Stockholders |
|
|
28,008 |
|
|
|
26,827 |
|
Net Loss per Share Attributable to Common Stockholders: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.27 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
The following shares of common stock equivalents were excluded from the computation of diluted net loss per share attributable to common stockholders as the effect would have been anti-dilutive:
|
|
Three Months Ended December 31, |
|
|||||
|
|
2016 |
|
|
2015 |
|
||
|
|
(in thousands) |
|
|||||
Stock options |
|
|
542 |
|
|
|
830 |
|
Performance-based restricted stock units and restricted stock units |
|
|
784 |
|
|
|
599 |
|
|
|
|
|
|
|
|
|
|
7. |
Litigation and Contingencies |
Legal Proceedings
We are not currently a party to any pending material legal proceedings. From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other factors.
8. |
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 of the United States were 9% and 8% of total revenues for the three months ended December 31, 2016 and 2015, respectively.
14
MODEL N, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Long-Lived Assets
The following table sets forth the Company’s property and equipment, net by geographic region:
|
|
As of |
|
|
As of |
|
||
|
|
December 31, |
|
|
September 30, |
|
||
|
|
2016 |
|
|
2016 |
|
||
|
|
(in thousands) |
|
|||||
United States |
|
$ |
4,603 |
|
|
$ |
4,817 |
|
India |
|
|
1,145 |
|
|
|
1,324 |
|
Total property and equipment, net |
|
$ |
5,748 |
|
|
$ |
6,141 |
|
|
|
|
|
|
|
|
|
|
9. |
Subsequent Event |
On December 12, 2016, the Company signed a definitive agreement with Sapphire Stripe Holdings, Inc., the parent company of Revitas, Inc. (“Revitas”), and LLR Equity Partners III, L.P.(“LLR”), as the stockholders’ agent, to acquire Revitas. The acquisition of Revitas provides the Company with a broader portfolio of technology solutions for life science companies. The Company acquired Revitas, for cash consideration of $52.8 million, $42.8 million of which was paid at closing and $10 million of which is payable 60 days following the closing absent an antitrust investigation (or at a later date if an antitrust investigation is subsequently resolved favorably). In addition, $10 million was paid in the form of two promissory notes from LLR, one which matures 18 months after the closing and the other which mature 36 months after the closing. These 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 Revitas’ stockholders under the merger agreement. The merger transaction closed on January 5, 2017. The accounting for the acquisition is in process, including the valuation of the acquired intangible assets.
On January 5, 2017, the Company borrowed $50.0 million under a financing agreement that the Company entered into with various lenders to fund the cash portion of the acquisition of Revitas, Inc. The rate on the term loans is based on (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 matures on January 5, 2022. The Company must repay 0.625% of the aggregate principal amount of the term loans on the last business day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2019. The Company may voluntarily prepay the terms loans, subject to a 3% premium during the first 24 months and 1% premium after the first 24 months and prior to 36 months.
15
Forward-Looking Statements
This report contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. Words such as “anticipates,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements are based only on our current expectations and projections and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below under “Part II, Item 1A. Risk Factors,” and elsewhere in this report. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
As used in this report, the terms “we,” “us,” “our,” and “the Company” mean Model N, Inc. and its subsidiaries unless the context indicates otherwise.
Overview
We are a leader in Revenue Management solutions for life science and technology companies. Driving mission critical business processes such as configure, price and quote (CPQ), rebates management and regulatory compliance, 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 unique business needs of the world’s leading brands in life science and technology companies across tens of thousands of users in more than 120 countries.
Our solutions are comprised of several complementary software applications: Revenue Enterprise Cloud, Revenue Intelligence Cloud and Revvy Revenue Management. Sales of our solutions range from individual applications to complete suites and deployments may vary from specific divisions or territories to enterprise-wide implementations. Our portfolio includes several complementary software applications:
|
• |
Revenue Enterprise Cloud—a broad set of transactional applications that serve as a system of record for, and automate the execution of, revenue management processes such as pricing, contracting, compliance, incentive and rebate management. |
|
• |
Revenue Intelligence Cloud—a broad set of intelligence applications that provide the analytical tools and insights to define and optimize revenue management strategies. |
|
• |
Revvy Revenue Management—a broad set of multi-tenant cloud applications natively built on the Salesforce1 Platform from salesforce.com. |
We derive revenues primarily from the sale of our cloud-based and on premise solutions and related professional services, as well as maintenance and support and managed support services. We price our solutions based on a number of factors, including revenues under management and number of users. Our license and implementation revenues are comprised of sales of perpetual license and related professional services. 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 implementation and professional services. 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 science and technology industries. While we have historically generated the substantial majority of our revenues from companies in the life science industry, we have also grown our base of technology customers and intend to continue to focus on increasing the revenues from customers in the technology industry. Our most significant customers in any given period generally vary from period to period due to the timing of implementation and related revenue recognition over those periods for larger projects.
16
For the three months ended December 31, 2016 and 2015, our total revenues were $28.1 million and $24.5 million, respectively, representing a year-over-year increase of approximately 15%, primarily due to past improvements in sales execution and new product offerings.
On December 12, 2016, the Company signed a definitive agreement with Sapphire Stripe Holdings, Inc., the parent company of Revitas, Inc. (Revitas), and LLR Equity Partners III, L.P., as the stockholders’ agent, to acquire Revitas, a provider of life sciences revenue management software. The Company acquired Revitas, for cash consideration of $52.8 million, $42.8 million of which was paid at closing and $10 million of which is payable 60 days following the closing absent an antitrust investigation (or at a later date if an antitrust investigation is subsequently resolved favorably). In addition, $10 million was paid in the form of two promissory notes, one which matures 18 months after the closing and the other which matures 36 months after the closing. These 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 Revitas’ stockholders under the merger agreement. The merger transaction closed on January 5, 2017.
On January 5, 2017, the Company borrowed $50.0 million under a financing agreement that the Company entered into with various lenders to fund the cash portion of the acquisition of Revitas, Inc. The rate on the term loans is based on (i) the Base Rate plus 9.25% or (ii) the LIBOR Rate plus 8.25%, as selected by the Company. The term loan matures on January 5, 2022. The Company must repay 0.625% of the aggregate principal amount of the term loans on the last business day of each fiscal quarter, beginning with the fiscal quarter ending March 31, 2019. The Company may voluntarily prepay the terms loans, subject to a 3% premium for 24 months and 1% premium after 24 months and prior to 36 months.
Key Business Metric
In addition to the measures of financial performance presented in our Condensed Consolidated Financial Statements, we use adjusted EBITDA to evaluate and manage our business. We use this key metric internally to manage our business, and we believe it is useful for investors to compare key financial data from various periods. See “Adjusted EBITDA” below.
Key Components of Results of Operations
Revenues
Revenues are comprised of license and implementation revenues and SaaS and maintenance revenues.
License and Implementation
License and implementation revenues are generated from the sale of software licenses for our on-premise solutions and related professional services. We expect our license and implementation revenues for the fiscal year 2017 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, 2016, due to increased focus on subscription revenues, which are included in SaaS and maintenance revenues, and which have been gaining wider acceptance as a delivery model by our customers.
SaaS and Maintenance
SaaS and maintenance revenues primarily include subscription and related professional fees from customers accessing our cloud-based solutions and revenues associated with maintenance contracts from license customers. Also included in SaaS and maintenance revenues are other revenues, including revenues related to maintenance and support, managed support services, revenue management as a service, training and customer-reimbursed expenses. In previous years, we took several steps to transform our business model in order to increase the percentage of our business from SaaS and maintenance revenues. We believe the SaaS model has gained wider acceptance as a delivery model. Accordingly, we expect that SaaS and maintenance revenues for the fiscal year 2017 will be higher both in absolute dollars and as a percentage of total revenues than fiscal year 2016 as we continue to acquire new SaaS customers and expand our SaaS offerings within our existing customers and convert our existing on-premise customers to Cloud based solutions.
17
Cost of Revenues
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, bonus, stock-based compensation, third-party contractors, and other-related expenses. 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.
SaaS and Maintenance
Cost of SaaS and maintenance revenues includes those costs related to the implementation of our cloud-based solutions, maintenance and support and managed support services for our on-premise solutions, revenue management as a service, training and customer-reimbursed expenses. Cost of SaaS and maintenance revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation, royalty, facility expense, and depreciation related to server equipment and capitalized software, reimbursable expenses, third-party contractors and data center-related expenses. We believe that cost of SaaS and maintenance revenues will continue to increase in absolute dollars and a percentage of the total revenues as we continue to sell more Cloud based products.
Operating Expenses
Research and Development
Our research and development expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation, third-party contractors. Our software development costs for new software solutions and enhancements to existing software solutions are generally expensed as incurred. However, we capitalize development costs incurred in connection with the development of certain additional service offerings that will only be offered through the cloud. We expect our research and development expenses to increase in absolute dollars as we continue to develop new applications and enhance our existing software solutions.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs including salary, bonus, commissions, stock-based compensation, third-party contractors, travel-related expenses and marketing programs. We expect our sales and marketing expenses to increase in absolute dollars as we continue to invest in our sales and marketing organization, increase the number of sales and marketing employees and increase market program spend to grow business.
General and Administrative
Our general and administrative expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation, audit and legal fees as well as third-party contractors, facilities, costs associated with business acquisitions and travel-related expenses.
18
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.
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Three Months Ended December 31, |
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2016 |
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2015 |
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(in thousands) |
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Consolidated Statements of Operations Data: |
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Revenues: |
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License and implementation |
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$ |
5,423 |
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$ |
4,562 |
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