Market Overview

Model N Announces Third Quarter of Fiscal Year 2018 Financial Results

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Model N, Inc., (NYSE:MODN), the leading provider of revenue management
cloud solutions for the pharmaceutical, medical device, high tech,
manufacturing and semiconductor industries, today announced financial
results for the third quarter, which ended June 30, 2018.

"Model N exceeded its revenue and profitability guidance for the third
quarter of fiscal 2018. The strong Q3 performance puts us on track to
deliver record revenue, profitability and cash flow for the full year,"
said Jason Blessing, Chief Executive Officer of Model N. "Over the last
90 days, I've enjoyed meeting with our customers, employees and
investors and thank them all for their warm welcome. I'm also very proud
of our blue-chip customer portfolio and the mission critical role our
cloud solutions play in their businesses. My discussions also reinforce
my belief that Model N has a great opportunity ahead of us."

Third Quarter 2018 Financial Highlights:

  • Revenues: SaaS and maintenance revenues were $35.6 million
    compared to $28.5 million for the third quarter of fiscal 2017. Total
    revenues were $39.6 million compared to $34.2 million for the third
    quarter of fiscal 2017.
  • Gross Profit: Gross profit was $23.2 million compared to $18.5
    million for the third quarter of fiscal 2017. Gross margins were 58%
    compared to 54% for the third quarter of fiscal 2017. Non-GAAP gross
    profit was $24.3 million compared to $21.4 million for the third
    quarter of fiscal 2017. Non-GAAP gross margins were 62% compared to
    60% for the third quarter of fiscal 2017.
  • (Loss) income from operations: GAAP loss from operations was
    $(11.0) million compared to a GAAP loss from operations of $(8.8)
    million for the third quarter of fiscal 2017. Non-GAAP income from
    operations was $2.5 million compared to a Non-GAAP loss from
    operations of $(2.4) million for the third quarter of fiscal 2017.
  • Net loss: GAAP net loss was $(15.4) million, which includes
    $8.5 million of stock-based compensation expense related to the
    resignation of our former CEO and Chairman of the Board and $3.1
    million of cash and non-cash expense related to the debt re-financing,
    compared to a net loss of $(10.4) million for the third quarter of
    fiscal 2017. GAAP basic and diluted net loss per share attributable to
    common stockholders was $(0.50) based upon weighted average shares
    outstanding of 30.7 million, as compared to net loss per share of
    $(0.36) for the third quarter of fiscal 2017 based upon weighted
    average shares outstanding of 28.9 million.
  • Non-GAAP net income (loss): Non-GAAP net loss was $(2.0)
    million, which includes $3.1 million of cash and non-cash expense
    related to the debt re-financing, as compared to a Non-GAAP net loss
    of $(4.1) million for the third quarter of fiscal 2017. Non-GAAP net
    loss per share was $(0.07) based upon weighted average shares
    outstanding of 30.7 million, as compared to Non-GAAP net loss per
    share of $(0.14) for the third quarter of fiscal 2017 based upon
    weighted average shares outstanding of 28.9 million.
  • Adjusted EBITDA: Adjusted EBITDA was $3.1 million compared to
    $(1.5) million for the third quarter of fiscal 2017.

Use of Non-GAAP Financial Measures

A reconciliation of GAAP to non-GAAP financial measures has been
provided in the financial tables included in this press release.

Business Highlights:

  • Nevro Corp, a high growth medical device company with a treatment for
    chronic back and leg pain, subscribed to Model N's Provider
    Management, part of the Model N Revenue Cloud for MedTech. This
    customer win highlights that Model N Revenue Cloud is a very effective
    platform for both large companies as well as emerging companies,
    enabling Model N to serve all segments across life sciences.
  • BioMarin, Diodes, Eli Lilly, CSL Behring, Fresenius Kabi, ICU Canada,
    Johnson & Johnson, EMD Serono and Mallinckrodt, among others, recently
    completed implementation projects and went live with Revenue Cloud.
  • Model N hosted a successful Life Sciences Commercial and Pricing
    Innovation Forum which focused on understanding how global pricing
    trends are affecting the life sciences industry. The conference
    covered a variety of topics including global tender management,
    country variations in pricing, outcome-based agreements, rebates and
    compliance.
  • Model N delivered the summer release of Revenue Cloud. Our SaaS
    customers will immediately benefit from new innovation to manage
    complex use cases for pricing, quoting, and rebates including
    increasingly complex global price management, updates to support new
    government regulations, as well as several user experience
    enhancements.

Guidance:

As of August 7, 2018, we are providing guidance for the fourth quarter
of fiscal 2018 and the full fiscal year ending September 30, 2018.

       
(in $ millions, except per share outlook)     Fourth Quarter Fiscal 2018     Full Year Fiscal 2018
Total GAAP Revenues 35.2 – 35.7 153.1 – 153.6
Non-GAAP income from operations 0.5 – 1.0 7.2 – 7.7
Non-GAAP net loss per share (0.03) – (0.01) (0.05) – (0.03)
Adjusted EBITDA 1.2 – 1.7 10.2 – 10.7
 

Quarterly Results Conference Call

Model N will host a conference call today at 2:00 PM Pacific Time (5:00
PM Eastern Time) to review the company's financial results for the third
quarter, which ended June 30, 2018. The conference call can be accessed
by dialing (877) 407-4018 from the United States or (201) 689-8471
internationally with reference to the company name and conference title,
and a live webcast and replay of the conference call can be accessed
from the investor relations page of Model N's website at
investor.modeln.com. Following the completion of the call through 11:59
p.m. ET on August 14, 2018, a telephone replay will be available by
dialing (844) 512-2921 from the United States or (412) 317-6671
internationally with recording access code 13681148.

About Model N

Model N is the leader in revenue management solutions. Driving mission
critical business processes such as configure, price and quote (CPQ),
contract and rebate management, business intelligence, and regulatory
compliance, Model N solutions transform the revenue lifecycle from a
series of disjointed operations into a strategic end-to-end process.
With deep industry expertise, Model N supports the complex business
needs of the world's leading brands in pharmaceutical, medical device,
high tech, manufacturing and semiconductors across more than 120
countries, including Pfizer, AstraZeneca, Sanofi, Gilead, Abbott,
Stryker, AMD, Micron, Seagate, STMicroelectronics, NXP, Sesotec, and
Southern States. For more information, visit www.modeln.com.

Model N® is the registered trademark of Model N, Inc. Any other company
names mentioned are the property of their respective owners and are
mentioned for identification purposes only.

Forward-Looking Statements

This press release contains forward-looking statements including, among
other things, statements regarding Model N's fourth quarter and full
year fiscal year 2018 revenue, , and other financial results as well as
outlook for fiscal year 2018 and future prospects. The words "believe,"
"may," "will," "estimate," "continue," "anticipate," "intend," "expect,"
and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks,
uncertainties, and assumptions. If the risks materialize or assumptions
prove incorrect, actual results could differ materially from the results
implied by these forward-looking statements. Risks include, but are not
limited to: (i) delays in closing customer contracts; (ii) our ability
to improve and sustain our sales execution; (iii) the timing of new
orders and the associated revenue recognition; (iv) adverse changes in
general economic or market conditions; (v) delays or reductions in
information technology spending and resulting variability in customer
orders from quarter to quarter; (vi) competitive factors, including but
not limited to pricing pressures, industry consolidation, entry of new
competitors and new applications and marketing initiatives by our
competitors; (vii) our ability to manage our growth effectively; and
(viii) acceptance of our applications and services by customers; (ix)
success of new products; (x) the risk that the strategic initiatives
that we may pursue will not result in significant future revenues; (xi)
changes in health care regulation and policy and tax in the United
States and worldwide; and (xii) our ability to retain customers, and
(xiii) acquisition-related risks from our acquisition of Revitas.
Further information on risks that could affect Model N's results is
included in our filings with the Securities and Exchange Commission
("SEC"), including our most recent quarterly report on Form 10-Q and our
annual report on Form 10-K for the fiscal year ended September 30, 2017,
and any current reports on Form 8-K that we may file from time to time.
Should any of these risks or uncertainties materialize, actual results
could differ materially from expectations. Model N assumes no obligation
to, and does not currently intend to, update any such forward-looking
statements after the date of this release.

Non-GAAP Financial Measures

We have provided in this release financial information that has not been
prepared in accordance with accounting standards generally accepted in
the United States of America ("GAAP"). We use these non-GAAP financial
measures internally in analyzing our financial results and believe they
are useful to investors, as a supplement to GAAP measures, in evaluating
our ongoing operational performance. We believe that the use of these
non-GAAP financial measures provides an additional tool for investors to
use in evaluating ongoing operating results and trends and in comparing
our financial results with other companies in our industry, many of
which present similar non-GAAP financial measures to investors.

Non-GAAP financial measures should not be considered in isolation from,
or as a substitute for, financial information prepared in accordance
with GAAP. Investors are encouraged to review the reconciliation of
these non-GAAP financial measures to their most directly comparable GAAP
financial measures below. A reconciliation of our non-GAAP financial
measures to their most directly comparable GAAP measures has been
provided in the financial statement tables included below in this press
release.

Our reported results include certain non-GAAP financial measures,
including non-GAAP gross profit, non-GAAP income (loss) from operations,
non-GAAP net loss, non-GAAP net (loss) income per share, and adjusted
EBITDA. Non-GAAP gross profit excludes stock-based compensation expense,
acquisition & integration related expenses, deferred revenue adjustment
and amortization of intangible assets. Non-GAAP loss from operations and
non-GAAP net loss exclude stock-based compensation expense, amortization
of intangible assets, and acquisition & integration related expenses,
deferred revenue adjustment and valuation allowance resulting from
Revitas acquisition as they are often excluded by other companies to
help investors understand the operational performance of their business
and, in the case of stock-based compensation, can be difficult to
predict and therefore we have not provided a reconciliation of
forecasted Non-GAAP results with GAAP. In addition, stock-based
compensation expense varies from period to period and company to company
due to such things as differing valuation methodologies and changes in
stock price. Adjusted EBITDA is defined as net loss, adjusted
depreciation and amortization, stock-based compensation expense,
acquisition & integration related expenses, deferred revenue adjustment,
interest (income) expense, net, and other (income) expenses, net, and
provision (benefit) for income taxes. Reconciliation tables are provided
in this press release.

 

Model N Inc.
Condensed Consolidated Balance Sheets
(in
thousands)

(unaudited)

 
    As of
June 30,
2018
    As of
September 30,
2017
Assets
Current assets:
Cash and cash equivalents $ 57,645 $ 57,558
Accounts receivable, net 31,707 24,784
Prepaid expenses 3,307 3,733
Other current assets   405   1,013
Total current assets 93,064 87,088
Property and equipment, net 2,496 4,611
Goodwill 39,283 39,283
Intangible assets, net 35,977 40,156
Other assets   996   798
Total assets $ 171,816 $ 171,936
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,383 $ 3,002
Accrued employee compensation 12,376 14,996
Accrued liabilities 4,041 4,979
Deferred revenue, current portion 54,902 49,186
Long term debt, current portion   5,995   4,753
Total current liabilities 78,697 76,916
Long-term liabilities:
Long term debt 52,846 52,452
Other long-term liabilities   1,651   1,307
Total long-term liabilities   54,497   53,759
Total liabilities   133,194   130,675
Stockholders' equity:
Common Stock 5 4
Preferred Stock
Additional paid-in capital 239,372 217,052
Accumulated other comprehensive loss (874 ) (502 )
Accumulated deficit   (199,881 )   (175,293 )
Total stockholders' equity   38,622   41,261
Total liabilities and stockholders' equity $ 171,816 $ 171,936
 
 

Model N Inc.
Condensed Consolidated Statements of
Operations

(in thousands, except per share amounts)
(unaudited)

 
    Three Months Ended June 30,     Nine months ended June 30,
2018     2017 2018     2017
Revenues:
SaaS and maintenance $ 35,623 $ 28,530 $ 100,943 $ 78,427
License and implementation   3,994   5,714   16,975   17,137
Total revenues 39,617 34,244 117,918 95,564
Cost of Revenues:
SaaS and maintenance 14,599 12,439 40,489 34,527
License and implementation   1,846   3,333   10,018   11,106
Total cost of revenues   16,445   15,772   50,507   45,633
Gross profit 23,172 18,472 67,411 49,931
Operating Expenses:
Research and development 7,746 8,393 24,861 23,302
Sales and marketing 9,338 10,739 26,845 31,081
General and administrative   17,044   8,096   33,099   26,949
Total operating expenses   34,128   27,228   84,805   81,332
Loss from operations (10,956 ) (8,756 ) (17,394 ) (31,401 )
Interest expense (income), net 4,478 1,442 7,350 2,789
Other expenses (income), net   (344 )   3   (306 )   77
Loss before income taxes (15,090 ) (10,201 ) (24,438 ) (34,267 )
(Benefit) provision for income taxes   345   234   150   (3,742 )
Net loss $ (15,435 ) $ (10,435 ) $ (24,588 ) $ (30,525 )
Net loss per share attributable to common stockholders:
Basic and diluted $ (0.50 ) $ (0.36 )   (0.82 ) $ (1.07 )

Weighted average number of shares used in computing net
loss
per share attributable to common stockholders:

Basic and diluted   30,749   28,936   30,042   28,464
 
 

Model N Inc.
Condensed Consolidated Statements of
Cash Flows

(in thousands)
(unaudited)

   
Nine Months Ended June 30,
2018     2017
Cash Flows From Operating Activities:
Net loss $ (24,588 ) $ (30,525 )
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 6,410 5,866
Stock-based compensation 19,312 6,935
Amortization of debt discount and issuance cost 686 502
Deferred income taxes (581 ) (4,019 )
Other non-cash charges (30 ) 239
Loss on debt extinguishment 3,142
Changes in assets and liabilities, net of acquisition:
Accounts receivable (6,833 ) (7,561 )
Prepaid expenses and other assets (102 ) 2,592
Deferred cost of implementation services 488 1,289
Accounts payable (1,752 ) (854 )
Accrued employee compensation (2,541 ) 1,482
Other accrued and long-term liabilities (639 ) (1,085 )
Deferred revenue   6,386   8,875
Net cash used in operating activities   (642 )   (16,264 )
Cash Flows From Investing Activities:
Purchases of property and equipment (165 ) (290 )
Acquisition of businesses, net of cash acquired (47,773 )
Capitalization of software development costs     (335 )
Net cash used in investing activities   (165 )   (48,398 )
Cash Flows From Financing Activities:
Proceeds from exercise of stock options and issuance of employee
stock purchase plan
3,008 2,457
Proceeds from term loan 49,588 48,686
Debt issuance costs (145 ) (806 )
Principal payments on loan (50,000 )
Early payment penalty   (1,500 )  
Net cash provided by financing activities   951   50,337
Effect of exchange rate changes on cash and cash equivalents (57 ) 7
Net decrease in cash and cash equivalents 87 (14,318 )
Cash and cash equivalents
Beginning of period   57,558   66,149
End of period $ 57,645 $ 51,831
 
 
Model N Inc.
Reconciliation of GAAP to Non-GAAP
Operating Results

(in thousands, except per share
amounts)

(unaudited)
               
Three Months Ended June 30, Nine months ended June 30,
2018 2017 2018 2017
Reconciliation from GAAP net loss to adjusted EBITDA:
GAAP net loss: $ (15,435 ) $ (10,435 ) $ (24,588 ) $ (30,525 )
Reversal of non-GAAP items:
Stock-based compensation expense 12,030 2,487 19,312 6,935
Depreciation and amortization 1,983 2,373 6,410 5,866
Deferred revenue adjustment 1,710 627 3,810
Acquisition and integration related costs 711 5,476
Interest expense (income), net 4,478 1,442 7,350 2,789
Other expenses (income), net (344 ) 3 (306 ) 77
(Benefit) provision for income taxes   345   234   150   (3,742 )
Adjusted EBITDA $ 3,057 $ (1,475 ) $ 8,955 $ (9,314 )
 
Three Months Ended June 30, Nine months ended June 30,
2018 2017 2018 2017
Reconciliation from GAAP revenue to revenue before deferred revenue
adjustment:
GAAP revenue: $ 39,617 $ 34,244 $ 117,918 $ 95,564
Deferred revenue adjustment (d)     1,710   627   3,810
Revenue before deferred revenue adjustment $ 39,617 $ 35,954 $ 118,545 $ 99,374
 
Three Months Ended June 30, Nine months ended June 30,
2018 2017 2018 2017
Reconciliation from GAAP gross profit to non-GAAP gross profit:
GAAP gross profit: $ 23,172 $ 18,472 $ 67,411 $ 49,931
Reversal of non-GAAP expenses:
Stock-based compensation (a) 699 586 1,972 1,482
Amortization of intangible assets (b) 476 476 1,428 1,218
Acquisition and integration related expenses (c) 196 419
Deferred revenue adjustment (d)     1,710   627   3,810
Non-GAAP gross profit $ 24,347 $ 21,440 $ 71,438 $ 56,860
Percentage of revenue before deferred revenue adjustment 61.5 % 59.6 % 60.3 % 57.2 %
 
Three Months Ended June 30, Nine months ended June 30,
2018 2017 2018 2017
Reconciliation from GAAP loss from operations to non-GAAP

loss from operations:

GAAP net loss from operations: $ (10,956 ) $ (8,756 ) $ (17,394 ) $ (31,401 )
Reversal of non-GAAP expenses:
Stock-based compensation (a) 12,030 2,487 19,312 6,935
Amortization of intangible assets (b) 1,381 1,418 4,181 3,211
Acquisition and integration related expenses (c) 711 5,476
Deferred revenue adjustment (d)     1,710   627   3,810
Non-GAAP income (loss) from operations $ 2,455 $ (2,430 ) $ 6,726 $ (11,969 )
 
Three Months Ended June 30, Nine months ended June 30,
2018 2017 2018 2017
Numerator:
Reconciliation between GAAP and non-GAAP net loss:
GAAP net loss: $ (15,435 ) $ (10,435 ) $ (24,588 ) $ (30,525 )
Reversal of non-GAAP expenses:
Stock-based compensation (a) 12,030 2,487 19,312 6,935
Amortization of intangible assets (b) 1,381 1,418 4,181 3,211
Acquisition and integration related expenses (c) 711 5,476
Deferred revenue adjustment (d) 1,710 627 3,810
Deferred tax valuation allowances (f)         (4,165 )

Non-GAAP net income (loss) attributable to Model N Inc.
common
stockholders

$ (2,024 ) $ (4,109 ) $ (468 ) $ (15,258 )
Denominator:

Reconciliation between GAAP and non-GAAP net loss per share
attributable
to Model N Inc.
common stockholders:

Weighted average number of shares used in computing
GAAP
dilutive net loss per share

  30,749   28,936   30,042   28,464

GAAP dilutive net loss per share attributable to Model N Inc.
common
stockholders

$ (0.50 ) $ (0.36 ) $ (0.82 ) $ (1.07 )

Non-GAAP net income (loss) per share attributable to Model N Inc.
common
stockholders

  (0.07 )   (0.14 )   (0.02 )   (0.54 )
 
Three Months Ended June 30, Nine months ended June 30,
2018 2017 2018 2017
Amortization of intangibles assets recorded in the statement of
operations:
Cost of revenues:
SaaS and maintenance $ 476 $ 476 1,428 1,218
License and implementation            
Total amortization of intangibles assets in cost of revenue (b)   476   476   1,428   1,218
Operating expenses:
Research and development
Sales and marketing 905 942 2,753 1,993
General and administrative        
Total amortization of intangibles assets in operating expense (b)   905   942   2,753   1,993
Total amortization of intangibles assets (b) $ 1,381 $ 1,418 $ 4,181 $ 3,211
 
Three Months Ended June 30, Nine months ended June 30,
2018 2017 2018 2017
Stock-based compensation recorded in the statement of operations:
Cost of revenues:
SaaS and maintenance $ 326 $ 290 961 742
License and implementation   373   296   1,011   740
Total stock-based compensation in cost of revenue (a)   699   586   1,972   1,482
Operating expenses:
Research and development 744 512 2,144 1,273
Sales and marketing 986 835 2,517 1,744
General and administrative   9,601   554   12,679   2,436
Total stock-based compensation in operating expense (a)   11,331   1,901   17,340   5,453
Total stock-based compensation (a) $ 12,030 $ 2,487 $ 19,312 $ 6,935
 

Use of Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements presented
on a GAAP basis, Model N uses non-GAAP measures of adjusted EBITDA,
gross profit, loss from operations, net loss, weighted average shares
outstanding and net loss per share, which are adjusted to exclude
certain legal expenses, Channel Insight and Revitas acquisition related
costs, deferred revenue adjustment and valuation allowance resulting
from Revitas acquisition, stock-based compensation expense, amortization
of intangible assets and includes dilutive shares where applicable. We
believe these adjustments are appropriate to enhance an overall
understanding of our past financial performance and also our prospects
for the future. These adjustments to our current period GAAP results are
made with the intent of providing both management and investors a more
complete understanding of Model N's underlying operating results and
trends and our marketplace performance. The non-GAAP results are an
indication of our baseline performance that are considered by management
for the purpose of making operational decisions. In addition, these
non-GAAP results are the primary indicators management uses as a basis
for our planning and forecasting of future periods. The presentation of
this additional information is not meant to be considered in isolation
or as a substitute for operating loss, net loss or basic and diluted net
loss per share prepared in accordance with generally accepted accounting
principles in the United States. Non-GAAP financial measures are not
based on a comprehensive set of accounting rules or principles and are
subject to limitations.

While a large component of our expenses incurred in certain periods, we
believe investors may want to exclude the effects of these items in
order to compare our financial performance with that of other companies
and between time periods:

(a) Stock-based compensation is a non-cash expense accounted for in
accordance with FASB ASC Topic 718. Stock-based compensation is a
non-cash item. We believe that the exclusion of stock-based compensation
expense provides for a better comparison of our operating results to
prior periods and to our peer companies. In the third quarter of fiscal
year 2018, the Company issued the Mr. Rinat 572,601 common shares, with
fair value approximately $10.5 million, in connection with his
transition agreement when he resigned as Chief Executive Officer and
Chairman of Board. Mr. Rinat's 375,234 performance-based restricted
stock units were cancelled and the previously recorded expense of
approximately $2.0 million was reversed into general and administrative
expenses.

(b) Amortization of intangible assets resulted principally from
acquisitions. Intangible asset amortization is a non-cash item. As such,
we believe exclusion of these expenses provides for a better comparison
of our operation results to prior periods and to our peer companies.

(c) In January 2017, we acquired Revitas, as part of the acquisition we
incurred certain non-recurring integration costs. We believe that
exclusion of these acquisition related adjustments and costs provides
for a better comparison of our operation results to prior periods and to
our peer companies.

(d) Represents deferred revenue adjustment resulting from purchase price
accounting that is related to the Revitas acquisition and is a non-cash
item. As such, we believe this adjustment provides for a better
comparison of our operation results to prior periods and to our peer
companies.

(e) In the third quarter of fiscal 2018, we recorded approximately $3.1
million of expense in connection with the repayment of our first term
loan, of which approximately $1.6 million is non-cash unamortized
discounts and deferred financing costs and $1.5 million in prepayment
penalty. The charges were recorded as interest expense.

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