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MODN > SEC Filings for MODN > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for MODEL N, INC.


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 (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 "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "continues," "endeavors," "strives," "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 provider of revenue management solutions for the life science and technology industries. Our solutions enable our customers to maximize revenues and reduce revenue compliance risk by transforming their revenue lifecycle from a series of tactical, disjointed operations into a strategic end-to-end process. We believe our solutions serve as the system of record for our customers' revenue management processes and can provide a competitive advantage for them.

Our solutions are comprised of two complementary suites of software applications: Revenue Management Enterprise and Revenue Management Intelligence. Sales of our solutions range from individual applications to complete suites, and deployments may vary from specific divisions or territories to enterprise-wide implementations.

We derive revenues primarily from the sale of our on-premise and cloud-based solutions and related implementation services, as well as maintenance and support and application support. 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 implementation services, which revenues are recognized over the implementation period, which commences when implementation work begins and typically ranges from one to three years. 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 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 of larger projects.

On March 25, 2013, we closed our initial public offering (IPO) whereby 7,751,000 shares of common stock were sold to the public (inclusive of 1,011,000 shares of common stock pursuant to the full exercise of an overallotment option granted to the underwriters and 740,000 shares of common stock sold by a selling stockholder). The aggregate net proceeds received by us from the IPO were $101.1 million, net of underwriting discounts and commissions.

For the three months ended March 31, 2013 and 2012, our revenues were $24.6 million and $20.2 million, respectively, representing year-over-year growth of approximately 21%. For the three months ended March 31, 2013, approximately 8% of our revenues were derived from customers located outside the United States.

Key Business Metrics

In addition to the measures of financial performance presented in our consolidated financial statements, we use certain key metrics to evaluate and manage our business, including four-quarter revenues from current customers and Adjusted EBITDA. We use these key metrics internally to manage the business, and we believe they are useful for investors to compare key financial data from various periods.

Four-Quarter Revenues From Existing Customers

We derive a large majority of revenues from existing customers, which we define as customers from which we have generated revenues in each of the preceding four quarters, which would exclude historical customers of LeapFrogRx. We measure four-quarter revenues from our existing license and subscription customers by calculating the sum of revenues recognized during the last four quarters from any customer that has contributed revenue in each of the preceding four quarters. We believe four-quarter revenues from existing customers provides us and investors with a metric to measure the historical revenue visibility in our business. We also use this metric internally to understand the proportion of revenues being generated in any period from existing customers as compared to entirely new customers or customers with whom we have not been recently engaged. This measure helps us guide our sales activities and establish budgets and operational goals for our sales function.

Our four-quarter revenues from existing customers for the periods presented were as follows:

                                                                             Four Quarters Ended
                                      December 30,       March 31,      June 30,       September 30,       December 31,       March 31,
                                          2011             2012           2012             2012                2012             2013
                                                                                 (unaudited)
                                                                               (in thousands)
Four-quarter revenues                $       66,459     $    66,785     $  73,157     $        76,892     $       77,633     $    82,956


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Non-GAAP Financial Measure

Adjusted EBITDA

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

We understand that, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. These limitations include:

Adjusted EBITDA does not include the effect of the LeapFrogRx compensation charges, which are a cash expense;

Adjusted EBITDA does not reflect stock-based compensation expense;

Depreciation and amortization are non-cash charges, and the assets being depreciated or amortized will often have to be replaced in the future; Adjusted EBITDA does not reflect any cash requirements for these replacements;

Adjusted EBITDA does not reflect cash requirements for income taxes and the cash impact of other income or expense; and

Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following tables provide a reconciliation of Adjusted EBITDA to net loss:

                                             Three Months                 Six Months
                                                Ended                       Ended
                                              March 31,                   March 31,
                                          2013          2012          2013          2012
                                                          (in thousands)
   Reconciliation of Adjusted EBITDA:
   Net loss                             $ (1,896 )    $ (4,155 )    $ (3,209 )    $ (4,830 )
   Adjustments:
   LeapFrogRx compensation charges            25         1,789           414         1,789
   Stock-based compensation                  942         1,086         1,499         1,594
   Depreciation and amortization             578           459         1,102           772
   Interest expense, net                     115           170           241           354
   Other expense, net                        660           179           712           585
   Provision for income taxes                 88            68           149           139

   Adjusted EBITDA                      $    512      $   (404 )    $    908      $    403

Adjusted EBITDA was $0.5 million, $(0.4) million, $0.9 million and $0.4 million for the three months ended March 31, 2013 and 2012 and six months ended March 31, 2013 and 2012, respectively. Our Adjusted EBITDA for the three and six months ended March 31, 2013 increased primarily due to increases in total revenues, which were partially offset by increased expenses. The increase in expenses was primarily due to increases in personnel costs arising principally from headcount increases.

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 implementation services.

SaaS and Maintenance

SaaS and maintenance revenues primarily include subscription and related implementation 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 application support, training and customer-reimbursed expenses. Prior to 2012, revenues from subscriptions for our cloud-based solutions were not material; however, following our acquisition of LeapFrogRx in January 2012, they have increased but remain less than 15% of our total revenues. Over time, we expect that SaaS revenues will increase as a percentage of total revenues.

Cost of Revenues

Our total cost of revenues is comprised of the following:

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 and overhead allocation as well as third-party contractors, royalty fees paid to third parties for rights to their intellectual property and travel-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 application support for our on-premise solutions and training. Cost of SaaS and maintenance revenues primarily consists of personnel-related costs including salary, bonus, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as 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 as we continue to focus on building infrastructure for our cloud-based solutions.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses.

Research and Development

Our research and development expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation and overhead allocation as well as third-party contractors and travel-related expenses. 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 to cease capitalization of development costs when we have completed all final testing of this product, at which time amortization charges related to such capitalized costs will be included in cost of revenues. As of March 31, 2013, we had $2.9 million of capitalized software development costs. We have not begun to amortize any of these capitalized software development costs as the development of the product is not completed. We expect our research and development expenses to continue to increase in absolute dollars as we continue to develop new applications and enhance our existing software solutions.


Table of Contents

Sales and Marketing

Our sales and marketing expenses consist primarily of personnel-related costs including salary, bonus, commissions, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as third-party contractors, travel-related expenses and marketing programs. We recognize sales commission expense upon contract signing, while we recognize revenue over the period the services are provided. We expect our sales and marketing expenses to continue to increase in absolute dollars as we increase the number of our sales and marketing employees to support the growth in our business.

General and Administrative

Our general and administrative expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation, LeapFrogRx compensation charges and overhead allocation as well as third-party contractors and travel-related expenses. We expect to incur significant accounting and legal costs related to becoming a public company, as well as additional insurance, investor relations and other costs. In addition, we expect to incur additional costs related to the implementation of a new enterprise resource planning (ERP) system.

LeapFrogRx Compensation Charges

In January 2012, we acquired LeapFrogRx for initial cash consideration of $3.0 million as well as potential additional payments to former LeapFrogRx stockholders totaling up to $8.3 million which are expected to be incurred through January 2015. These additional payments are, among other things, subject to future continued employment and are therefore considered compensatory in nature and are being recognized as compensation expense (LeapFrogRx compensation charges) over the term of each component. As of March 31, 2013, we had expensed an aggregate of $5.3 million of LeapFrogRx compensation charges.

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.



                                       Three Months Ended March 31,               Six Months Ended March 31,
                                       2013                   2012                 2013                 2012
                                                                  (in thousands)
Revenues:
License and implementation         $      14,481          $      11,659        $      26,943          $  23,024
SaaS and maintenance                      10,078                  8,581               19,957             15,273

Total revenues                            24,559                 20,240               46,900             38,297

Cost of Revenues:
License and implementation(1)              6,800                  5,515               12,360             10,543
SaaS and maintenance(1)                    4,781                  5,168                9,304              7,664

Total cost of revenues                    11,581                 10,683               21,664             18,207

Gross profit                              12,978                  9,557               25,236             20,090

Operating Expenses:
Research and development(1)                4,483                  4,817                8,602              8,990
Sales and marketing(1)                     5,770                  5,705               11,106              9,686
General and administrative(1)              3,758                  2,773                7,635              5,166

Total operating expenses                  14,011                 13,295               27,343             23,842

Loss from operations                      (1,033 )               (3,738 )             (2,107 )           (3,752 )
Interest expense, net                        115                    170                  241                354
Other expense, net                           660                    179                  712                585

Loss before income taxes                  (1,808 )               (4,087 )             (3,060 )           (4,691 )
Provision for income taxes                    88                     68                  149                139

Net loss                           $      (1,896 )        $      (4,155 )      $      (3,209 )        $  (4,830 )

(1) Includes stock-based compensation as follows:

                                       Three Months Ended March 31,               Six Months Ended March 31,
                                      2013                   2012                 2013                 2012
Cost of services:
License and implementation         $        90         $             69       $         130        $         146
SaaS and maintenance                       114                      368                 188                  392
Research and development                    98                       73                 152                  170
Sales and marketing                        454                      529                 713                  774
General and administrative                 186                       47                 316                  112

Total stock-based compensation     $       942         $          1,086       $       1,499        $       1,594


Table of Contents
                                      Three Months Ended March 31,                   Six Months Ended March 31,
                                     2013                      2012                  2013                    2012
                                                                (as of % of revenues)
Revenues:
License and implementation                 59 %                      58 %                  57 %                  60 %
SaaS and maintenance                       41                        42                    43                    40

Total revenues                            100                       100                   100                   100

Cost of Revenues:
License and implementation                 28                        27                    26                    28
SaaS and maintenance                       19                        26                    20                    20

Total cost of revenues                     47                        53                    46                    48

Gross profit                               53                        47                    54                    52

Operating Expenses:
Research and development                   18                        24                    18                    24
Sales and marketing                        24                        28                    24                    25
General and administrative                 15                        13                    16                    13

Total operating expenses                   57                        65                    58                    62

Loss from operations                       (4 )                     (18 )                  (4 )                 (10 )
Interest expense                            1                         1                     1                     1
Other expense, net                          3                         1                     2                     2

Loss before income taxes                   (8 )                     (20 )                  (7 )                 (13 )
Provision for income taxes                 -                         -                     -                     -

Net loss                                   (8 )%                    (20 )%                 (7 )%                (13 )%

Comparison of the Three Months Ended March 31, 2013 and 2012

Revenues



                                                      Three Months Ended March 31,
                                                  2013                           2012                      Change
                                                      % of Total                     % of Total
                                         Amount        Revenues         Amount        Revenues          ($)       (%)
                                                              (in thousands, except percentages)
Revenues:
License and implementation              $ 14,481               59 %    $ 11,659               58 %    $ 2,822       24 %
SaaS and maintenance                      10,078               41         8,581               42        1,497       17

Total revenues                          $ 24,559              100 %    $ 20,240              100 %    $ 4,319       21


Table of Contents

License and Implementation

License and implementation revenues increased by $2.8 million, or 24%, to $14.5 million for the three months ended March 31, 2013 from $11.7 million for the three months ended March 31, 2012. Our revenues from existing customers were $11.7 million for the three months ended March 31, 2013 and $9.9 million for the three months ended March 31, 2012. The increase was primarily due to an increase in sales volume.

SaaS and Maintenance

SaaS and maintenance revenues increased by $1.5 million, or 17%, to $10.1 million for the three months ended March 31, 2013 from $8.6 million for the three months ended March 31, 2012. The increase in SaaS and maintenance revenues was primarily due to an increase in maintenance and support, and application support revenues of $1.1 million due to an increase in the number of service contracts and an increase in SAAS and related implementation revenues of $0.7 million.

Cost of Revenues



                                                     Three Months Ended March 31,
                                                   2013                         2012                     Change
                                                          % of                         % of
                                          Amount        Revenues        Amount       Revenues         ($)        (%)
                                                              (in thousands, except percentages)
Cost of revenues:
License and implementation               $   6,800             28 %    $  5,515             27 %    $ 1,285        23 %
SaaS and maintenance                         4,781             19         5,168             26         (387 )      (7 )

Total cost of revenues                   $  11,581             47      $ 10,683             53      $   898         8

Gross profit:
License and implementation               $   7,681             31 %    $  6,144             31 %    $ 1,537        25 %
SaaS and maintenance                         5,297             22         3,413             16        1,884        55

Total gross profit                       $  12,978             53      $  9,557             47      $ 3,421        36

License and Implementation

Cost of license and implementation revenues increased by $1.3 million, or 23%, to $6.8 million during the three months ended March 31, 2013 from $5.5 million for the three months ended March 31, 2012. The increase in the cost of license and implementation revenues was primarily the result of increases in personnel costs primarily due to increased headcount.

SaaS and Maintenance

Cost of SaaS and maintenance revenues decreased by $0.4 million, or 7%, to $4.8 million during the three months ended March 31, 2013 from $5.2 million for the three months ended March 31, 2012. The decrease in the cost of SaaS and maintenance revenues was primarily the result of a decrease in LeapFrogRx compensation charge of $1.0 million offset by an increase in personnel costs of $0.6 million primarily due to increased headcount.

Operating Expenses



                                         Three Months Ended
                                             March 31,
                                         2013            2012            Change
                                        Amount          Amount       ($)        (%)
                                           (in thousands, except percentages)
. . .
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