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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 March 31, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-35840
Model N, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0528806
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer
Identification No.)
   
777 Mariners Island Boulevard,Suite 300 94404
San Mateo,California
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (650) 610-4600
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.00015 per shareMODNNew York Stock Exchange
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  ý    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerýAccelerated filer
Non-accelerated filer☐  Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  ý
As of April 26, 2024, the registrant had 39,422,997 shares of common stock outstanding.
1

  Page
  
PART I. FINANCIAL INFORMATION 
  
Item 1.
  
 
   
 
   
 
   
 
   
 
  
Item 2.
  
Item 3.
  
Item 4.
  
PART II. OTHER INFORMATION 
  
Item 1.
  
Item 1A.
  
Item 2.
  
Item 3.
  
Item 4.
  
Item 5.
  
Item 6.
  
 
1

PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
MODEL N, INC.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
(Unaudited)
As of March 31, 2024As of September 30, 2023
Assets  
Current assets  
Cash and cash equivalents$334,559 $301,355 
Funds held for customers86 91 
Accounts receivable, net of allowance for credit losses of $516 as of March 31, 2024, and $496 as of September 30, 2023
79,260 61,761 
Prepaid expenses4,610 5,922 
Other current assets8,462 14,777 
Total current assets426,977 383,906 
Property and equipment, net1,125 1,242 
Operating lease right-of-use assets7,707 9,885 
Goodwill65,665 65,665 
Intangible assets, net26,795 30,176 
Other assets10,131 9,221 
Total assets$538,400 $500,095 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$4,483 $3,888 
Customer funds payable86 91 
Accrued employee compensation14,257 14,645 
Accrued liabilities5,485 8,700 
Operating lease liabilities, current portion4,151 4,408 
Deferred revenue, current portion82,074 61,745 
Total current liabilities110,536 93,477 
Long term debt281,203 280,358 
Operating lease liabilities, less current portion4,705 6,755 
Other long-term liabilities4,933 4,042 
Total liabilities401,377 384,632 
Commitments and contingencies
Stockholders’ equity
Common Stock, $0.00015 par value; 200,000 shares authorized; 39,423 and 38,764 shares issued and outstanding at March 31, 2024, and September 30, 2023, respectively
6 6 
Preferred Stock, $0.00015 par value; 5,000 shares authorized; no shares issued and outstanding
  
Additional paid-in capital439,297 414,562 
Accumulated other comprehensive loss(2,235)(2,245)
Accumulated deficit(300,045)(296,860)
Total stockholders’ equity137,023 115,463 
Total liabilities and stockholders’ equity$538,400 $500,095 
The accompanying notes are an integral part of these condensed consolidated financial statements.
2

MODEL N, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
 Three Months Ended March 31,Six Months Ended March 31,
 2024202320242023
Revenues    
Subscription$49,182 $44,925 $96,837 $89,139 
Professional services15,929 17,679 31,765 32,619 
Total revenues65,111 62,604 128,602 121,758 
Cost of revenues
Subscription16,833 16,121 33,544 31,727 
Professional services11,040 11,499 22,198 22,164 
Total cost of revenues27,873 27,620 55,742 53,891 
Gross profit37,238 34,984 72,860 67,867 
Operating expenses
Research and development12,588 12,403 25,268 25,167 
Sales and marketing15,157 14,222 29,117 27,199 
General and administrative12,118 11,481 23,767 22,172 
Total operating expenses39,863 38,106 78,152 74,538 
Loss from operations(2,625)(3,122)(5,292)(6,671)
Interest expense1,836 1,508 3,670 2,942 
Loss on extinguishment of debt 29,493  29,493 
Interest income$(3,842)(1,789)(7,382)(3,089)
Other expenses (income), net(10)83 107 18 
Loss before income taxes(609)(32,417)(1,687)(36,035)
Provision for income taxes778 902 1,498 1,334 
Net loss$(1,387)$(33,319)$(3,185)$(37,369)
Net loss per share attributable to common stockholders:
Basic and diluted$(0.04)$(0.88)$(0.08)$(0.99)
Weighted average number of shares used in computing net loss per share attributable to common stockholders:
Basic and diluted39,225 37,917 39,062 37,719 

The accompanying notes are an integral part of these condensed consolidated financial statements.
3

MODEL N, INC.
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(Unaudited)
 Three Months Ended March 31,Six Months Ended March 31,
 2024202320242023
Net loss$(1,387)$(33,319)$(3,185)$(37,369)
Other comprehensive gain (loss), net of tax
Change in unrealized gain on cash flow hedges   239 
Change in unrealized gain on investments (18) 8 
Change in foreign currency translation gain (loss)(103)72 10 6 
Total comprehensive loss$(1,490)$(33,265)$(3,175)$(37,116)

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

4

MODEL N, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Six Months Ended March 31,
 20242023
Cash flows from operating activities:  
Net loss$(3,185)$(37,369)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization3,816 4,262 
Stock-based compensation22,187 20,767 
Amortization of debt issuance costs845 629 
Loss on extinguishment of debt 29,493 
Deferred income taxes249 (156)
Amortization of capitalized contract acquisition costs2,642 2,416 
Other non-cash charges(4)1,077 
Changes in assets and liabilities, net of acquisition
Accounts receivable(17,519)(27,963)
Prepaid expenses and other assets6,325 8,471 
Accounts payable582 (1,300)
Accrued employee compensation(390)(9,890)
Other current and long-term liabilities (5,051)(5,150)
Deferred revenue20,493 8,563 
Net cash provided by (used in) operating activities30,990 (6,150)
Cash flows from investing activities:
Purchases of property and equipment(339)(106)
Net cash used in investing activities(339)(106)
Cash flows from financing activities:
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan2,548 2,555 
Proceeds from issuance of 2028 Notes 253,000 
Payment of debt issuance cost for Notes 2028 (6,958)
Repayments of 2025 Notes (165,210)
Net changes in customer funds payable(5)(374)
Net cash provided by financing activities2,543 83,013 
Effect of exchange rate changes on cash and cash equivalents5 (12)
Net increase in cash and cash equivalents33,199 76,745 
Cash and cash equivalents
Beginning of period301,446 194,127 
End of period$334,645 $270,872 

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

5

MODEL N, INC.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.The Company and Significant Accounting Policies and Estimates
Model N, Inc. (“Model N,” “we,” “us,” “our,” and “the Company”) was incorporated in Delaware on December 14, 1999. The Company is a provider of cloud revenue management solutions for the life sciences and high tech industries. The Company’s software and business services enable its customers to maximize revenues and reduce revenue compliance risk by transforming their revenue life cycle from a series of tactical, disjointed operations into a strategic end-to-end process, which enables them to manage the strategy and execution of pricing, contracting, incentives and rebates. The Company’s corporate headquarters are located in San Mateo, California, with additional offices in the United States, India and Switzerland.
Fiscal Year
The Company’s fiscal year ends on September 30. References to fiscal year 2024, for example, refer to the fiscal year ending September 30, 2024.

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 balance sheet as of September 30, 2023 has been derived from the audited financial statements which are included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (the “Annual Report”) on file with the SEC. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Annual Report.

In the opinion of management, the unaudited interim consolidated financial statements include all the normal recurring adjustments necessary to present fairly our condensed consolidated financial statements. The results of operations for the six months ended March 31, 2024 are not necessarily indicative of the operating results for the full fiscal year 2024 or any future periods.

The condensed consolidated financial statements include the accounts of Model N and its wholly owned subsidiaries. All 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
Recently Adopted Accounting Guidance
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impacted the diluted EPS computation. The Company adopted this ASU on October 1, 2022 on a modified retrospective basis. As a result, the Company no longer separately presents in equity an embedded conversion feature for such debt. Similarly, the discount is no longer amortized into
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income as interest expense over the life of the instrument. The cumulative effect of the ASU adoption was as follows (in thousands):
Balance at September 30, 2022Adjustments from Adoption of ASU 2020-06Balance at October 1, 2022
Liabilities
Long term debt$135,417 $33,720 $169,137 
Stockholders’ Equity
Additional paid-in capital421,473 (55,227)366,246 
Accumulated deficit(284,445)21,507 (262,938)

In October 2021, the FASB issued Accounting Standards Update No. 2021-08, “Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with ASC 606, Revenue from Contracts with Customers. ASU 2021-08 is effective for interim and annual periods beginning after December 15, 2022 on a prospective basis. The Company adopted this guidance on October 1, 2023, which did not have a material effect on its consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued Accounting Standards Update 2023-09, “Income Taxes - Improvements to Income Tax Disclosures” requiring enhancements and further transparency to certain income tax disclosures, most notably the tax rate reconciliation and income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024 on a prospective basis and retrospective application is permitted. We are currently evaluating the impact of the adoption of this standard.

Significant Accounting Policies
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, 2023 included in the Annual Report.

2.     Revenues from Contracts with Customers

Revenue Recognition

The Company derives revenues primarily from subscription revenues and professional services revenues. Revenues are recorded at a net basis which exclude sales taxes that are collected from customers.

Disaggregation of Revenues

See Note 14, Geographic Information, for information on revenue by geography.

Customer Contract Balances

The following table reflects contract balances related to contracts with customers (in thousands):
As of March 31, 2024As of September 30, 2023
Accounts receivable, net$51,779 $46,314 
Unbilled accounts receivable, net27,481 15,447 
Total accounts receivable, net$79,260 $61,761 
Contract asset$2,440 $9,294 
Deferred revenue$82,691 $62,198 
Capitalized contract acquisition costs$12,955 $11,803 

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Accounts Receivable
Accounts receivable represents the Company’s right to consideration that is unconditional, net of allowances for credit losses. The allowance for credit losses is based on management’s assessment of the collectability of accounts receivable amounts.

Unbilled Accounts Receivable

Unbilled accounts receivable consists of a receivable primarily for the revenue recognized for services performed but not yet billed.

Contract Asset
Contract asset represents revenue that has been recognized for satisfied performance obligations for which the Company does not have an unconditional right to consideration.

Deferred Revenue
Deferred revenue, which is a contract liability, consists of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred.

The non-current portion of deferred revenue is included in other long-term liabilities in the condensed consolidated balance sheets. During the three and six months ended March 31, 2024, the Company recognized revenue of $31.9 million and $46.7 million, respectively, that was included in the deferred revenue balances at the beginning of the periods. During the three and six months ended March 31, 2023, the Company recognized revenue of $28.4 million and $45.8 million, respectively, that was included in the deferred revenue balances at the beginning of the periods.

Capitalized Contract Acquisition Costs

The Company capitalizes incremental costs incurred to acquire contracts with customers, primarily sales commissions, for which the associated revenue is expected to be recognized in future periods. The Company incurs these costs in connection with both initial contracts and renewals. Such costs for renewals are not considered commensurate with those for initial contracts given the substantive difference in commission rates in proportion to their respective contract values. The costs in connection with initial contracts and renewals are deferred and amortized over an expected customer life of five years and over the renewal term, respectively, which corresponds to the period of benefit to the customer. The Company determined the period of benefit by considering the Company’s history of customer relationships, length of customer contracts, technological development and obsolescence, and other factors. The current and non-current portion of capitalized contract acquisition costs are included in other current assets and other assets on the condensed consolidated balance sheets. Amortization expense is included in sales and marketing expenses on the condensed consolidated statements of operations.
As of March 31, 2024, the current and non-current portions of capitalized contract acquisition costs were $4.7 million and $8.3 million, respectively. As of September 30, 2023, the current and non-current portions of capitalized contract acquisition costs were $4.5 million and $7.3 million, respectively. The Company amortized $1.4 million and $2.6 million of contract acquisition costs during the three and six months ended March 31, 2024, respectively. The Company amortized $1.2 million and $2.4 million of contract acquisition costs during the three and six months ended March 31, 2023, respectively.
    
For the three and six months ended March 31, 2024 and 2023, there was no impairment related to capitalized contract acquisition costs.

Customer Deposits

Customer deposits primarily relate to payments received from customers which could be refundable pursuant to the terms of the related arrangement. These amounts are included in accrued liabilities on the condensed consolidated balance sheets. Customer deposits were immaterial as of March 31, 2024 and September 30, 2023.

Standard payment terms to customers generally range from thirty to ninety days; however, payment terms and conditions in our customer contracts may vary. In some cases, customers prepay for subscription and services in advance of the delivery; in other cases, payment is due as services are performed or in arrears following the delivery.

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Remaining Performance Obligations
    
Remaining performance obligations represent non-cancelable contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. As of March 31, 2024, the aggregate amount of the transaction price allocated to performance obligations either unsatisfied or partially unsatisfied was $367.9 million, 46% of which we expect to recognize as revenue over the next 12 months, 44% between months 13 and 36 and the remainder 10% after the month 36.

We estimate our remaining performance obligations at a point in time. Actual amounts and timing of revenue recognition may differ from these estimates largely due to timing of contract renewals and modification.

3.     Leases

The Company leases facilities under noncancellable operating leases with lease terms between three years and eleven years. Certain leases include options to extend or terminate the lease. The Company factored into the determination of lease payments the options that it is reasonably certain to exercise.

Operating lease costs were $1.2 million and $2.4 million for the three and six months ended March 31, 2024, respectively, and $1.2 million and $2.5 million for the three and six months ended March 31, 2023, respectively. Short-term lease costs, variable lease costs, and sublease income were immaterial for the three and six months ended March 31, 2024, and 2023.

Cash flow information related to operating leases is as follows (in thousands):
Six Months Ended March 31, 2024Six Months Ended March 31, 2023
Cash paid for amounts included in the measurement of operating lease liabilities$2,433 $2,393 
Operating lease ROU assets obtained in exchange for new operating lease liabilities  

The weighted-average remaining lease term is 2.1 years and the weighted-average discount rate is 2.7% as of March 31, 2024.

Maturities of operating lease liabilities as of March 31, 2024 are as follows (in thousands):
Fiscal Year
Remaining fiscal 2024$2,210 
20254,276 
20262,347 
2027276 
2028 and thereafter 
Total operating lease payments9,109 
Less imputed interest253 
Total operating lease liabilities$8,856 


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4.     Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, funds held for customers, accounts receivable, accounts payable, customer funds payable, debt and certain accrued liabilities. The Company regularly reviews its financial instruments portfolio to identify and evaluate such instruments that have indications of possible impairment. The Company estimates the fair value of its financial instruments when there is no readily available market data, 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.
The table below sets forth the Company’s marketable securities which are measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
Reported as:
 Amortized CostUnrealized GainsUnrealized LossesFair ValueCash and Cash Equivalents
As of March 31, 2024    
Level 1:
Money market funds$289,502 $ $ $289,502 $289,502 
Total$289,502 $ $ $289,502 $289,502 
As of September 30, 2023
Level 1:
Money market funds$243,251 $ $ $243,251 $243,251 
Total $243,251 $ $ $243,251 $243,251 

The Company’s financial instruments not measured at fair value on a recurring basis include cash, funds held for customers, accounts receivable, accounts payable, customer funds payable, convertible senior notes and certain accrued liabilities. These financial instruments are reflected in the financial statements at cost and approximate their fair value due to their short-term nature.

See Note 7, Derivative Instruments and Hedging, for the fair value measurement of the Company’s derivative contracts and Note 8, Convertible Senior Notes, for the fair value measurement of the Company’s convertible senior notes.


5. Goodwill, and Intangible Assets

Goodwill
The following table summarizes the changes in the carrying amount of goodwill (in thousands):
Balance at September 30, 2023
$65,665 
Additions 
Balance at March 31, 2024
$65,665 
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Intangible Assets

Intangible assets consisted of the following (in thousands):
 EstimatedAs of March 31, 2024
Useful Life
(in Years)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Intangible Assets:    
Customer relationships
3-15
$52,109 $(30,572)$21,537 
Developed technology
5-6
22,333 (17,635)4,698 
Non-compete agreements51,600 (1,040)560 
Trade name3850 (850) 
Total $76,892 $(50,097)$26,795 
 EstimatedAs of September 30, 2023
Useful Life
(in Years)
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Intangible Assets:    
Customer relationships
3-15
$52,109 $(28,276)$23,833 
Developed technology
5-6
22,333 (16,781)5,552 
Non-compete agreements51,600 (880)720 
Trade name3850 (779)71 
Total $76,892 $(46,716)$30,176 
The Company recorded amortization expense related to acquired intangible assets of $1.7 million and $3.4 million for the three and six months ended March 31, 2024, respectively, and $1.7 million and $3.7 million for the three and six months ended March 31, 2023, respectively.

Estimated future amortization expense for the intangible assets as of March 31, 2024 is as follows (in thousands):
Fiscal Year
Remaining fiscal 2024$3,310 
20256,620 
20266,069 
20272,266 
20281,034 
2029 and thereafter7,496 
Total future amortization$26,795 


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6.     Cash, Cash Equivalents, and Funds Held for Customers

The Company has contractual obligations to remit funds to various third parties on behalf of customers to which the Company provides payment processing services. Funds received from these customers represent cash and cash equivalents and are reflected in the “Funds held for customers” line item on the condensed consolidated balance sheets.

The table below reconciles the cash and cash equivalents and funds held for customers as reported on the condensed consolidated balance sheets to the cash and cash equivalents on the condensed consolidated statements of cash flows (in thousands):
As of March 31, 2024As of September 30, 2023
Cash and cash equivalents$334,559 $301,355 
Funds held for customers86 91 
Total cash and cash equivalents$334,645 $301,446 

7.     Derivative Instruments and Hedging

The Company uses foreign currency forward contracts to hedge a portion of the forecasted foreign currency-denominated expenses incurred in the normal course of business. These contracts are designated as cash flows hedges. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign exchange rate movements. The Company does not use any of the derivative instruments for trading or speculative purposes. These contracts have maturities of 12 months or less. The Company records changes in the fair value of cash flow hedges in accumulated other comprehensive loss in the condensed consolidated balance sheets, until the forecasted transaction occurs, at which point, the related gain or loss on the cash flow hedge is reclassified to the financial statement line item to which the derivative relates. The amounts reclassified to expenses related to the hedged transactions were immaterial for the periods presented. The Company had no outstanding non-deliverable foreign currency forward contracts as of September 30, 2023 or March 31, 2024.

Notional Amounts of Derivative Contracts
Derivative transactions are measured in terms of the notional amount but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged but is used only as the basis on which the value of foreign exchange payments under these contracts are determined. The Company had no outstanding non-deliverable foreign currency forward contracts as of March 31, 2024 and 2023.

8.     Convertible Senior Notes

In May 2020, the Company issued $172.5 million aggregate principal amount of 2.625% convertible senior notes due in 2025 (the “2025 Notes”). In March 2023, the Company issued $253.0 million aggregate principal amount of 1.875% convertible senior notes due in 2028 (the “2028 Notes”, and together with the 2025 Notes the “Convertible Senior Notes”). Each series of the Convertible Senior Notes is governed by an indenture between the Company, as the issuer, and U.S. Bank National Association, as Trustee (individually, each an “Indenture,” and together, the “Indentures”). The applicable Indenture governing each series of the convertible senior notes does not contain any financial covenants or any restrictions on the payment of dividends, the occurrence of senior debt or other indebtedness, or the issuance or repurchase of the Company's other securities by the Company.

In May 2020, the Company issued $172.5 million aggregate principal amount of 2025 Notes in a private placement, including $22.5 million which represents the exercise in full of the initial purchasers’ option to purchase additional notes. The net proceeds from the issuance of the 2025 Notes was $166.4 million, net of initial purchasers’ discounts and debt issuance costs of $6.1 million. The Company used $40.0 million of the net proceeds to repay in full the debt outstanding under, and terminated the Credit Agreement dated May 4, 2018, as amended, by and among the Company, Wells Fargo, as administrative agent, and the lenders party thereto.

The 2025 Notes are senior, unsecured obligations of the Company and bear an interest rate of 2.625% per year payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The 2025 Notes mature on June 1, 2025 unless repurchased, redeemed or converted in accordance with their terms prior to such date.

Pursuant to the term of the Indenture, the 2025 Notes are convertible into cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of 30.0044 shares of common stock per $1,000
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principal amount of the 2025 Notes, which is equal to an initial conversion price of approximately $33.33 per share of common stock subject to adjustment for standard anti-dilution provision and the make-whole feature described below.

During the second quarter of fiscal 2023, the Company made an irrevocable election to settle the principal amount of the 2025 Notes using Combination Settlement (as defined in the applicable Indenture). Generally, under this settlement method, the conversion value will be settled in cash in an amount up to the principal amount being converted, and any excess of the conversion value over the principal amount will be settled, at the Company’s election, in cash or shares of the Company’s common stock.

Prior to the close of business on the scheduled trading day immediately preceding March 1, 2025, holders of the 2025 Notes may convert all or a portion of their 2025 Notes in multiples of $1,000 principal amount, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
if the Company calls any or all of the 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
upon the occurrence of specified corporate events.

On or after March 1, 2025 and prior to the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2025 Notes may convert all or a portion of their 2025 Notes in multiples of $1,000 principal amount regardless of the foregoing conditions.

Holders of the 2025 Notes who convert their 2025 Notes in connection with a make-whole fundamental change (as defined in the applicable Indenture) or in connection with any optional redemption are, under certain circumstances, entitled to an increase in the conversion rate with a maximum conversion rate of 38.2555 share of common stock per $1,000 principal amount of the 2025 Notes. Additionally, in the event of a fundamental change (as defined in the applicable Indenture), holders of the 2025 Notes may require the Company to repurchase all or a portion of their 2025 Notes at a price equal to 100% of the principal amount of 2025 Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date.

The Company may not redeem the 2025 Notes prior to June 6, 2023. The Company may redeem for cash all or part of the 2025 Notes, at its option, on or after June 6, 2023 and on or before the 41st scheduled trading day immediately before the maturity date, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. No sinking fund is provided for the 2025 Notes.

In initial accounting for the issuance of the 2025 Notes prior to the adoption of ASU 2020-06 on October 1, 2022, the Company separated the 2025 Notes into liability and equity components. The carrying amount of the liability component of $115.3 million was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $57.2 million and was determined by deducting the fair value of the liability component from the principal amount of the 2025 Notes. The excess of the principal amount of the 2025 Notes over the carrying amount of the liability component represent a debt discount that was amortized to interest expense at an effective interest rate over the contractual terms of the 2025 Notes. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

In initial accounting for the issuance costs related to the 2025 Notes prior to the adoption of ASU 2020-06 on October 1, 2022, the Company allocated the total amount incurred to the liability and equity components of the 2025 Notes based on the
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proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were $4.1 million and are amortized to interest expense using the effective interest method over the contractual terms of the 2025 Notes. Issuance costs attributable to the equity component of $2.0 million were netted with the equity component in stockholders’ equity.

As a result of the adoption of ASU 2020-06 on October 1, 2022, the Company no longer separately presents in equity an embedded conversion feature for such debt. Similarly, the debt discount, which was equal to the carrying value of the embedded conversion feature upon issuance, is no longer amortized into income as interest expense over the life of the instrument. For the impact of adoption see Note 1, The Company and Significant Accounting Policies and Estimates.

In March 2023, the Company issued $253.0 million aggregate principal amount of 2028 Notes in a private placement, including $33.0 million which represents the exercise in full of the initial purchasers’ option to purchase additional notes. The net proceeds from the issuance of the 2028 Notes was $245.5 million, net of initial purchasers’ discounts and debt issuance costs of $7.6 million. The Company used $165.2 million of the net proceeds from this issuance to repurchase approximately $138.0 million in aggregate principal amount of its 2025 Notes concurrently with the issuance. The repurchase of the 2025 Notes was accounted for as a debt extinguishment. The Company recorded a $29.5 million loss on extinguishment of debt on its consolidated statements of operations during the fiscal quarter ended March 31, 2023 which includes a write-off of related deferred issuance costs of $2.3 million. After giving effect to the repurchase, the total remaining principal amount outstanding under the 2025 Notes was $34.5 million.

The 2028 Notes are senior, unsecured obligations of the Company and bear an interest rate of 1.875% per year payable semi-annually in arrears on September 15 and March 15 of each year, beginning on September 15, 2023. The Notes mature on March 15, 2028 unless repurchased, redeemed or converted in accordance with their terms prior to such date.

The 2028 Notes are convertible into cash, shares of the Company’s common stock or a combination thereof, at the Company’s election, at an initial conversion rate of 23.2364 shares of common stock per $1,000 principal amount of the 2028 Notes, which is equal to an initial conversion price of approximately $43.04 per share of common stock subject to adjustment, with a maximum conversion rate of 30.7881. The conversion value will be settled in cash in an amount no less than the principal amount being converted, and any excess of the conversion value over the principal amount will be settled, at the Company’s election, in cash or shares of the Company’s common stock. Prior to the close of business on the scheduled trading day immediately preceding December 15, 2027, holders of the 2028 Notes may convert all or a portion of their 2028 Notes in multiples of $1,000 principal amount, only under the following circumstances:

during any calendar quarter commencing after the calendar quarter ending on June 30, 2023 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2028 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
if the Company calls any or all of the 2028 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
upon the occurrence of specified corporate events.

On or after December 15, 2027 and prior to the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the 2028 Notes may convert all or a portion of their Notes in multiples of $1,000 principal amount regardless of the foregoing conditions.

Holders of the 2028 Notes who convert their 2028 Notes in connection with a make-whole fundamental change (as defined in the applicable Indenture) or in connection with any optional redemption are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a fundamental change (as defined in the applicable Indenture), holders of the 2028 Notes may require the Company to repurchase all or a portion of their 2028 Notes at a price equal to 100% of the principal amount of 2028 Notes, plus any accrued and unpaid interest to, but excluding, the repurchase date.

The Company may not redeem the 2028 Notes prior to March 20, 2026. The Company may redeem for cash all or part of the 2028 Notes, at its option, on or after March 20, 2026 and on or before the 41st scheduled trading day immediately before the maturity date, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest if the last
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reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. No sinking fund is provided for the 2028 Notes.

The Company intends to use the remaining net proceeds from the issuance of 2028 Notes for general corporate purposes, including working capital and to fund growth and potential strategic projects.

During the three months ended March 31, 2024, the conditions allowing holders of the Convertible Senior Notes to convert were not met. The Convertible Senior Notes were classified as long-term debt on the condensed consolidated balance sheets as of March 31, 2024.

In accordance with ASU 2020-06, the 2028 Notes are accounted for as a single liability.

The net carrying amounts of the liability for the 2025 Notes were as follows (in thousands):
As of March 31, 2024As of September 30, 2023
Principal amount$34,530 $34,530 
Unamortized issuance costs(303)(428)
Net carrying amount$34,227 $34,102 

The net carrying amounts of the liability for the 2028 Notes were as follows (in thousands):

As of March 31, 2024As of September 30, 2023
Principal amount$253,000 $253,000 
Unamortized issuance costs(6,024)(6,744)
Net carrying amount$246,976 $246,256 



The following table sets forth the interest expense recognized related to the Convertible Senior Notes (in thousands):
Three Months Ended March 31,Six Months Ended March 31,
2024202320242023
Coupon interest expense$1,412 $1,181 $2,825 $2,313 
Amortization of debt issuance costs424 327 845 629 
Total interest expense related to the Notes$1,836 $1,508 $3,670 $2,942 

The issuance costs related to the 2025 Notes and the 2028 Notes are being amortized to interest expense over the respective contractual term, at effective interest rates of 3.4% and 2.5%, respectively. As of March 31, 2024 unamortized debt issuance costs will be amortized over the remaining life of the 2025 Notes and the 2028 Notes which is approximately 14 months, and 48 months, respectively.

As of March 31, 2024, the total estimated fair value of the 2025 Notes and 2028 Notes was approximately $38.1 million, and $242.8 million, respectively. The fair value was determined based on the closing trading price per $100 of the applicable series of the Convertible Senior Notes as of the last day of trading for the period. The fair value of the Convertible Senior Notes is primarily affected by the trading price of the Company’s common stock and market interest rates. The fair value of the Convertible Senior Notes is considered a Level 2 measurement as they are not actively traded.

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9.     Stockholders’ Equity

The following tables present the changes in the components of stockholders’ equity (in thousands):
Three Months Ended March 31, 2024
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at December 31, 202339,032 $6 $425,127 $(2,132)$(298,658)$124,343 
  Issuance of common stock upon exercise of stock options
— — — — — — 
Issuance of common stock upon release of restricted stock units
275 — — — — — 
Issuance of common stock upon ESPP purchase116 — 2,548 — — 2,548 
  Stock-based compensation— — 11,622 — — 11,622 
  Other comprehensive income— — — (103)— (103)
  Net loss— — — — (1,387)(1,387)
Balance at March 31, 202439,423 $6 $439,297 $(2,235)$(300,045)$137,023 


Three Months Ended March 31, 2023
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at December 31, 202237,734 $6 $381,733 $(2,214)$(266,988)$112,537 
  Issuance of common stock upon exercise of stock options
2 27 — 27 
Issuance of common stock upon release of restricted stock units
274 — — — 
Issuance of common stock upon ESPP purchase96 2,500 — 2,500 
  Stock-based compensation— 10,362 — 10,362 
  Other comprehensive loss— — 54 — 54 
  Net loss— — (33,319)(33,319)
Balance at March 31, 202338,106 $6 $394,622 $(2,160)$(300,307)$92,161 


















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Six Months Ended March 31, 2024
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at September 30, 202338,764 $6 $414,562 $(2,245)$(296,860)$115,463 
  Issuance of common stock upon exercise of stock options— — — — — — 
  Issuance of common stock upon release of restricted stock units543 — — — — — 
Issuance of common stock upon ESPP purchase116 — 2,548 — — 2,548 
  Stock-based compensation— — 22,187 — — 22,187 
  Other comprehensive income— — — 10 — 10 
  Net loss— — — — (3,185)(3,185)
Balance at March 31, 202439,423 $6 $439,297 $(2,235)$(300,045)$137,023 



Six Months Ended March 31, 2023
Common StockAdditional
Paid-In Capital
Accumulated
Other Comprehensive Loss
Accumulated DeficitTotal
Stockholders’ Equity
SharesAmount
Balance at September 30, 202237,358 $6 $421,473 $(2,413)$(284,445)$134,621 
  Cumulative effect of ASU 2020-06 adoption— (55,227)21,507 (33,720)
Balance at October 1, 202237,358 6 366,246 (2,413)(262,938)100,901 
  Issuance of common stock upon exercise of stock options4 — 54 — — 54 
  Issuance of common stock upon release of restricted stock units648 — — — — — 
Issuance of common stock upon ESPP purchase96 — 2,500 — — 2,500 
  Stock-based compensation— — 25,822 — — 25,822 
  Other comprehensive loss— — — 253 — 253 
  Net loss— — — — (37,369)(37,369)
Balance at March 31, 202338,106 $6 $394,622 $(2,160)$(300,307)$92,161 

For the six months ended March 31, 2023, additional paid-in capital included $5.1 million, related to RSU grants for the portion of the bonus recorded as stock-based compensation for the year ended September 30, 2022.



10.     Stock-based Compensation

As of March 31, 2024, the Company had approximately 2.9 million shares available for future stock awards under its equity plans and any additional releases resulting from an over-achievement relating to performance-based restricted stock units.
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The following table summarizes our RSU activity which includes performance-based RSUs under all equity plans for the six months ended March 31, 2024:
Restricted 
Stock Units
Outstanding
(in thousands)
Weighted
Average
Grant Date
Fair Value
Balance at September 30, 20232,080 $36.29 
Granted1,732 23.86 
Released(543)35.72 
Forfeited(258)37.64 
Balance at March 31, 20243,011 $29.13 

Stock-based compensation recorded in the condensed consolidated statements of operations is as follows (in thousands):
 Three Months Ended March 31,Six Months Ended March 31,
 2024202320242023
Cost of revenues    
Subscription $1,208 $1,307 $2,443 $2,644 
Professional services967 1,063 1,947 2,203 
Total stock-based compensation in cost of revenues2,175 2,370 4,390 4,847 
Operating expenses
Research and development1,818 1,831 3,537 3,653 
Sales and marketing3,209 2,561 5,770 4,949 
General and administrative4,420 3,600 8,490 7,318 
Total stock-based compensation in operating expenses9,447 7,992 17,797 15,920 
Total stock-based compensation$11,622 $10,362 $22,187 $20,767 



11.     Income Taxes

The Company recorded income tax provisions of $0.8 million and $1.5 million representing effective income tax rates of (127.8)% and (88.8)% for the three and six months ended March 31, 2024, respectively, and $0.9 million and $1.3 million representing effective income tax rates of (2.8)% and (3.7)% for the three and six months ended March 31, 2023, respectively. The income tax provision for the three and six months ended March 31, 2024, and 2023 was primarily related to foreign taxes on the Company’s profitable foreign operations, foreign withholding taxes on dividends, and deferred taxes on goodwill resulting from the Acquisition.

The Company elected to partially reinvest foreign earnings in certain foreign jurisdictions and expects to repatriate future foreign earnings in certain foreign jurisdictions over time. As a result, the Company will record a deferred tax liability for the additional non-U.S. taxes that are expected to be incurred related to the repatriation of these earnings.

The Company elected to record global intangible low-taxed income (“GILTI”) as a period cost. The Company realized no benefit for current period losses due to maintaining a full valuation allowance against the U.S. net deferred tax assets.


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12.     Net Loss per Share

The following table sets forth the computation of the basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except per share data):
 Three Months Ended March 31,Six Months Ended March 31,
 2024202320242023
Numerator    
Basic and diluted    
Net loss attributable to common stockholders$(1,387)$(33,319)$(3,185)$(37,369)
Denominator
Basic and diluted
Weighted average shares used in computing net loss per share attributable to common stockholders39,225 37,917 39,062 37,719 
Net loss per share attributable to common stockholders:
Basic and diluted$(0.04)(0.88)$(0.08)$(0.99)
Potentially dilutive securities that were not included in the calculation of diluted net loss per share for the six months ended March 31, 2024 because their effect would have been an anti-dilutive are as follows (in thousands):
 As of March 31, 2024
 20242023
Stock options 1 
Performance-based RSUs and RSUs3,011 2,658 
Shares issuable pursuant to the employee stock purchase plan84 74 
Convertible senior notes 4 

Because the Convertible Senior Notes principal amount will always be settled in cash, the conversion spread has a dilutive impact on diluted net income per share of common stock when the average market price of the Company’s common stock for a given period exceeds the conversion price of $33.33 per share for the 2025 Notes and $43.04 per share for the 2028 Notes. The number of shares relating to convertible senior notes represents potentially dilutive securities relating to the conversion premium (if any) of Convertible Senior Notes outstanding as of period-end, calculated using the Company’s period-end common stock price.
Upon adoption of ASU 2020-06 on October 1, 2022 and prior to an irrevocable election to settle the Company’s conversion obligations with respect to the 2025 Notes using Combination Settlement on March 30, 2023, we used if-converted method to calculate potentially dilutive shares from conversion of the 2025 Notes, under this method the assumption is made that the entire amount of 2025 Notes is converted at the beginning of the reporting period.

13.     Litigation and Contingencies

Legal Proceedings
The Company is not currently a party to any pending material legal proceedings. From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. Regardless of outcome, litigation can have an adverse impact on the Company due to defense and settlement costs, diversion of management resources, negative publicity and reputational harm and other factors.


14.     Geographic Information

The Company has one operating segment with one business activity — developing and monetizing revenue management solutions.

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Revenues

The Company disaggregates the revenues by geographic regions based on the bill to location of its customers. Revenues from customers outside of the United States were 5% and 5% of total revenues for the three and six months ended March 31, 2024, and 2023.

Long-Lived Assets

The following table sets forth the Company’s property and equipment, net, by geographic region (in thousands):
As of March 31, 2024As of September 30, 2023
United States$567 $624 
India558 618 
Total property and equipment, net$1,125 $1,242 

15.     Subsequent Events

On April 7, 2024, the Company entered into an Agreement and Plan of Merger Agreement (the “Merger Agreement”) with Mountain Parent, LLC, a Delaware limited liability company (“Parent”), and Mountain Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver (if waiver is permitted by applicable law) of the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent. Parent and Merger Sub are each affiliates of Vista Equity Partners. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger and as a result of the Merger, among other things, each share of the Company’s common stock issued and outstanding immediately prior to the effective time (but excluding any cancelled shares and any dissenting shares) shall be cancelled and extinguished and automatically converted into and shall thereafter represent the right to receive an amount in cash equal to $30.00 per share, payable to the holder thereof, without interest and less any applicable withholding of taxes, in accordance with the Merger Agreement.

The Company’s Board of Directors unanimously determined the Merger Agreement and the transactions contemplated thereby (including the Merger) are fair to, advisable and in the best interests of the Company and its stockholders, approved and declared advisable the Merger Agreement and the transactions contemplated thereby (including the Merger), directed that the Merger Agreement be submitted to the stockholders of the Company for adoption, and resolved to recommend adoption of the Merger Agreement to the Company’s stockholders.

Either party may terminate the Merger Agreement if the Merger is not consummated on or before October 4, 2024. The Merger Agreement further provides that the Company shall be required to pay Parent a termination fee of approximately $43.2 million under certain specified circumstances.

The transaction is expected to close in mid-2024, subject to customary closing conditions and approvals.

The full text of the Merger Agreement is included as an exhibit to this Quarterly Report on Form 10-Q, and described in more detail in Item 1.01 of the Company’s Form 8-K filed with the SEC on April 8, 2024.
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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, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“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 leading provider of cloud revenue management solutions for life sciences and high tech companies. Our software and business services help companies drive mission critical business processes such as pricing, quoting, contracting, regulatory compliance, rebates and incentives. With deep industry expertise, Model N supports the complex business needs of the world’s leading brands in life sciences and high tech including Johnson & Johnson, AstraZeneca, Stryker, Seagate Technology, Broadcom and Microchip Technology.

Historically, companies tended to rely on a disjointed patchwork of manual processes, spreadsheets, point applications, and legacy systems to manage their revenue processes. These processes and systems operated in isolation from one another and were labor intensive, error prone, inflexible, and costly, often resulting in missed revenue opportunities, suboptimal margins, incentive overpayments, and increased revenue compliance risk. Current industry trends, which include shortening product lifecycles, tightening compliance and regulatory controls, increasing channel complexity and growing volumes of transactional data, are causing these outdated processes and legacy systems to become increasingly ineffective.

Our expertise in cloud-based revenue management solutions, combined with our knowledge of the life sciences and high tech industries, has enabled us to develop software designed to meet the unique, strategic needs of these industries, such as managed care and government pricing for life sciences companies and channel incentives management for high tech companies. Model N Revenue Cloud transforms the revenue lifecycle into a strategic, end-to-end process aligned across the enterprise. Our industry specific solution suites – Revenue Cloud for Life Sciences and Revenue Cloud for High Tech – offer a range of solutions from individual products to complete product suites.

Pending Merger

On April 7, 2024, we entered into an Agreement and Plan of Merger Agreement (the “Merger Agreement”) with Mountain Parent, LLC, a Delaware limited liability company (“Parent”), and Mountain Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to the satisfaction or waiver (if waiver is permitted by applicable law) of the conditions set forth therein, Merger Sub will merge with and into Model N, with Model N continuing as the surviving corporation and a wholly owned subsidiary of Parent. Parent and Merger Sub are each affiliates of Vista Equity Partners. Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, and as a result of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time (but excluding any cancelled shares and any dissenting shares) shall be cancelled and extinguished and automatically converted into and shall thereafter represent the right to receive an amount in cash equal to
21

$30.00 per share, payable to the holder thereof, without interest and less any applicable withholding of taxes, in accordance with the Merger Agreement.

Our Board of Directors unanimously determined the Merger Agreement and the transactions contemplated thereby (including the Merger) are fair to, advisable and in the best interests of the Company and its stockholders, approved and declared advisable the Merger Agreement and the transactions contemplated thereby (including the Merger), directed that the Merger Agreement be submitted to the stockholders of the Company for adoption, and resolved to recommend adoption of the Merger Agreement to our stockholders.

Either party may terminate the Merger Agreement if the Merger is not consummated on or before October 4, 2024. The Merger Agreement further provides that we shall be required to pay Parent a termination fee of approximately $43.2 million under certain specified circumstances.

The transaction is expected to close in mid-2024, subject to customary closing conditions and approvals.

The description of the Merger Agreement throughout this Form 10-Q does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed on April 8, 2024 and incorporated by reference as exhibit 2.1 hereto.

Key Business Metrics

In addition to the measures of financial performance presented in our condensed consolidated financial statements, we use adjusted EBITDA, Software-as-a-service (“SaaS”) Annual Recurring Revenue (“SaaS ARR”) and Net Dollar Retention to establish budgets and operational goals and to evaluate and manage our business internally. We believe adjusted EBITDA, SaaS ARR and Net Dollar Retention provides investors with consistency and comparability with our past financial performance and facilitates period-to-period comparisons of our operating results. For more information on Adjusted EBITDA, see “Adjusted EBITDA” below.

SaaS ARR and Net Dollar Retention

We use SaaS ARR as a measure of our SaaS revenue trend and an indicator of our future revenue opportunity from existing recurring customer contracts, assuming zero cancellations. SaaS ARR is the annualized value of our SaaS revenue, which is derived by taking the SaaS portion of our recurring subscription revenue for the quarter, dividing it by the number of days in the quarter, and multiplying it by 365 to get an annualized number. SaaS ARR is not adjusted for the impact of any known or projected future customer cancellations, service upgrades or downgrades or price increases or decreases. The amount of actual SaaS revenue that we recognize over any 12-month period is likely to differ from SaaS ARR at the beginning of that period, sometimes significantly. This may occur due to new bookings, subsequent changes in our pricing, service cancellations, upgrades or downgrades and acquisitions or divestitures. Our calculation of SaaS ARR may differ from similarly-titled metrics presented by other companies.

We believe that our ability to retain and expand our revenue generated from our existing customers is an indicator of the long-term value of our customer relationships and our potential future business opportunities. SaaS Net Dollar Retention uses the same SaaS ARR calculations to measure the percentage change in SaaS ARR from customers that are in the current period and the year-ago period. SaaS ARR that has been added from new customers that were not in the year-ago calculation is excluded from the SaaS Net Dollar Retention calculation. SaaS Net Dollar Retention has been reduced by any amount of churn for the customers that were in the year-ago period. Our SaaS Net Dollar Retention Rate will fluctuate in future periods due to a number of factors, including the level of SaaS ARR, the level of penetration within our customer base, expansion of products and features, and our ability to retain our customers. SaaS ARR and SaaS Net Dollar Retention should be viewed independently of revenue, deferred revenue, and remaining performance obligations, and are not intended to be a substitute for, or combined with, any of these items.

For the quarters ended March 31, 2024 and 2023, SaaS revenue was 53% and 50% of total revenue, respectively. For the quarter ended March 31, 2024, SaaS ARR was $139.1 million, which reflects a 11% year-over-year increase from $125.8 million for the quarter ended March 31, 2023. SaaS Net Dollar Retention decreased to 108% for the 12 months ended March 31, 2024 from 138% for the 12 months ended March 31, 2023. The main reason for SaaS Net Dollar Retention decrease was comparatively high growth in SaaS ARR in the prior period, 12 months ended March 31, 2023, due to an increase in SaaS transition deals.

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Key Components of Results of Operations

Revenues

Subscription

Subscription revenues primarily include contractual arrangements with customers accessing our cloud-based solutions. These arrangements, on average, are for committed three-year terms. Included in subscription revenues are revenues associated with managed support services and maintenance and support which generally renew on a one year or three year basis. Managed support services revenue includes supporting, managing and administering our software solutions and providing additional end user support including the support provided by business services. Maintenance and support revenues include post-contract customer support and the right to unspecified software updates and enhancements on a when and if available basis from customers using on-premise solutions. Term-based licenses for current products with the right to use unspecified future versions of the software and maintenance and support during the coverage period are also included in subscription revenues. Subscription revenue is generally recognized ratably over the contractual term of the arrangement beginning on the date our service is made available to the customer. The SaaS model is the primary way we sell to our customers in our vertical markets.


Professional Services

Professional services revenues primarily include fees generated from implementation, cloud configuration, on-site support, and other consulting services. Also included in professional services revenues are revenues related to training and customer-reimbursed expenses, as well as services related to software licenses for our on-premise solutions and solutions provided by business services. Professional services revenues are generally recognized as the services are rendered for time and materials contracts or recognized using a proportional performance method as hours are incurred relative to total estimated hours for the engagement for fixed price contracts. The majority of our professional services contracts are on a time and materials basis. The revenue from training and customer-reimbursed expenses is recognized as we deliver these services.

Cost of Revenues

Subscription
Cost of subscription revenues includes costs related to our cloud-based solutions, managed support services and support provided by business services, and maintenance and support for our on-premise solutions. Cost of subscription revenues primarily consists of personnel-related costs including salary, bonus, and stock-based compensation as well as costs for cloud hosting infrastructure, royalties, facilities expense, amortization, depreciation, and third-party contractors.

Professional Services
Cost of professional services revenues includes costs related to the set-up of our cloud-based solutions, services for on-premise and business services solutions, training and customer-reimbursed expenses. Cost of professional services revenues primarily consists of personnel-related costs including salary, bonus, and stock-based compensation as well as costs for third-party contractors and other expenses. Cost of professional services 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.

Operating Expenses

Research and Development

Our research and development expenses consist primarily of personnel-related costs including salary, bonus, stock-based compensation and costs related to third-party contractors. Our software development costs are generally expensed as incurred. We capitalize certain development costs incurred in connection with the cloud-based software platform for internal use.

Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs including salary, bonus, commissions, stock-based compensation, as well as amortization of intangibles, travel-related expenses and marketing programs.

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General and Administrative
Our general and administrative expenses consist primarily of personnel-related costs including salary, bonus, and stock-based compensation, as well as audit and legal fees, costs related to third-party contractors, facilities expenses, costs associated with corporate transactions and travel-related expenses.


Results of Operations

The following tables set forth our consolidated results of operations for the periods presented. 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,
 2024202320242023
 (in thousands)
Revenues    
Subscription$49,182 $44,925 $96,837 $89,139 
Professional services15,929 17,679 31,765 32,619 
Total revenues65,111 62,604 128,602 121,758 
Cost of revenues  
Subscription16,833 16,121 33,544 31,727 
Professional services11,040 11,499 22,198 22,164 
Total cost of revenues27,873 27,620 55,742 53,891 
Gross profit37,238 34,984 72,860 67,867 
Operating expenses  
Research and development12,588 12,403 25,268 25,167 
Sales and marketing15,157 14,222 29,117 27,199 
General and administrative12,118 11,481 23,767 22,172 
Total operating expenses39,863 38,106 78,152 74,538 
Loss from operations(2,625)(3,122)(5,292)(6,671)
Interest expense1,836 1,508 3,670 2,942 
Loss on extinguishment of debt— 29,493 $— 29,493 
Interest income$(3,842)(1,789)(7,382)(3,089)
Other expenses (income), net(10)83 107 18 
Loss before income taxes(609)(32,417)(1,687)(36,035)
Provision for income taxes778 902 1,498 1,334 
Net loss$(1,387)$(33,319)$(3,185)$(37,369)
Comparison of the Three Months Ended March 31, 2024 and 2023
Revenues
 Three Months Ended March 31, 
 20242023
Amount% of Total
Revenues
Amount% of Total
Revenues
Change ($)Change (%)
 (in thousands, except percentages)
Revenues      
Subscription$49,182 76 %$44,925 72 %$4,257 %
Professional services15,929 24 %17,679 28 %(1,750)(10)%
Total revenues$65,111 100 %$62,604 100 %$2,507 %
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Subscription

Subscription revenues increased by $4.3 million, or 9%, to $49.2 million for the three months ended March 31, 2024 from $44.9 million for the same period last year. The increase in our subscription revenues was due primarily to increased SaaS revenue relating to an increase in subscriptions for our cloud-based solutions, but partially offset by declines in maintenance revenue relating to our on-premise solutions. The increase in subscriptions for our cloud-based solutions is primarily due to more existing customers transitioning to SaaS solutions and the acquisition of new customers. We intend to continue to focus on growing our recurring revenue from SaaS subscriptions in future periods. While we expect our subscription revenues to increase for fiscal year 2024, we expect maintenance revenue to continue to decline in fiscal year 2024 as we continue to transition our business model from on-premise to SaaS.

Professional services
Professional services revenues decreased by $1.8 million, or 10%, to $15.9 million for the three months ended March 31, 2024 from $17.7 million for the same period last year. The decrease in our professional services revenue was primarily driven by the decrease in number of professional service hours performed in the second quarter of fiscal year 2024.

Cost of Revenues
 Three Months Ended March 31, 
 20242023
Amount% of
Revenues
Amount% of
Revenues
Change ($)Change (%)
 (in thousands, except percentages)
Cost of revenues      
Subscription$16,833 34 %$16,121 36 %$712 %
Professional services11,040 69 %11,499 65 %(459)(4)%
Total cost of revenues$27,873 43 %$27,620 44 %$253 %

Subscription

Cost of subscription revenues increased by $0.7 million, or 4%, to $16.8 million during the three months ended March 31, 2024 from $16.1 million for the same period last year. The increase in cost of subscription primarily pertains to a $0.8 million increase in employee-related costs, which was partially offset by a $0.1 million decrease due to achieved cost efficiencies. As a percentage of subscription revenues, cost of subscription revenues decreased from 36% to 34% primarily due to achieved cost efficiencies.

Professional services
Cost of professional services revenues decreased by $0.5 million, or 4%, to $11.0 million during the three months ended March 31, 2024 from $11.5 million for the same period last year. The decrease in cost primarily pertains to a $0.5 million decrease in employee-related costs driven by an approximately 1% decrease in average headcount. As a percentage of professional services revenue, cost of professional services revenues increased from 65% to 69% primarily due to outside service costs and increased employee-related costs.

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Operating Expenses
 Three Months Ended March 31, 
 20242023Change ($)Change (%)
 (in thousands, except percentages)
Operating expenses    
Research and development$12,588 $12,403 $185 %
Sales and marketing15,157 14,222 935 %
General and administrative12,118 11,481 637 %
Total operating expenses$39,863 $38,106 $1,757 %
Research and Development
Research and development expenses increased by $0.2 million, or 1%, to $12.6 million during the three months ended March 31, 2024 from $12.4 million for the same period last year. The increase in cost primarily pertains to a increase in employee-related costs compared to the same period last year.
Sales and Marketing
Sales and marketing expenses increased by $0.9 million, or 7%, to $15.2 million during the three months ended March 31, 2024 from $14.2 million for the same period last year. The increase was primarily due to a $1.1 million increase in employee-related costs primarily driven by an approximately 1% increase in average headcount, partially offset by a $0.1 million decrease in marketing expenses and $0.1 million decrease in equipment and related expenses.
General and Administrative
General and administrative expenses increased by $0.6 million, or 6%, to $12.1 million during the three months ended March 31, 2024 from $11.5 million for the same period last year. The increase was primarily due to a $0.9 million increase in employee-related costs, a $0.5 million increase in outside service costs, a $0.1 million increase in equipment and related costs, partially offset by a $0.9 million decrease in office and other operating expenses compared to the same period last year.

Interest and Other (Income) Expense
 Three Months Ended March 31,  
 20242023Change ($)Change (%)
 (in thousands, except percentages)
Interest expense$1,836 $1,508 $328 22 %
Loss on extinguishment of debt— 29,493 (29,493)— %
Interest income(3,842)(1,789)(2,053)115 %
Other expense (income), net(10)83 (93)(112)%

Interest expense increased by $0.3 million to $1.8 million during the three months ended March 31, 2024, from $1.5 million for the same period last year. The increase was primarily driven by a $0.2 million increase in interest expense and $0.1 million increase in amortization expenses of debt issuance costs on account of issuance of the 2028 Notes in March 2023.

The Company repurchased the 2025 Notes approximately $138.0 million in aggregate principal amount for $165.2 million during the three months ended March 31, 2023 and incurred $29.5 million loss on extinguishment of debt. See Note 8 to the Notes to Condensed Consolidated Financial Statements. No such transaction was entered during the three months ended March 31, 2024.

Interest income increased by $2.1 million to $3.8 million during the three months ended March 31, 2024, from $1.8 million for the same period last year. The increase was primarily due to increased marketable securities portfolio and higher interest rate in the year 2024 compared to the year 2023.

The change in other expense (income), net, was primarily due to foreign currency fluctuations.

Provision for Income Taxes
26

 Three Months Ended March 31,  
 20242023Change ($)Change (%)
 (in thousands, except percentages)
Provision for income taxes$778 $902 $(124)(14)%

The income tax provision for the three months ended March 31, 2024 and 2023 was primarily related to foreign taxes on our profitable foreign operations, foreign withholding taxes on dividends, and deferred taxes on goodwill resulting from the acquisition.

Comparison of the Six Months Ended March 31, 2024 and 2023
Revenues
 Six Months Ended March 31, 
 20242023
Amount% of Total
Revenues
Amount% of Total
Revenues
Change ($)Change (%)
 (in thousands, except percentages)
Revenues      
Subscription$96,837 75 %$89,139 73 %$7,698 %
Professional services31,765 25 %32,619 27 %$(854)(3)%
Total revenues$128,602 100 %$121,758 100 %$6,844 %

Subscription

Subscription revenues increased by $7.7 million, or 9%, to $96.8 million for the six months ended March 31, 2024 from $89.1 million for the same period last year. The increase in our subscription revenues was due primarily to increased SaaS revenue relating to an increase in subscriptions for our cloud-based solutions, but partially offset by declines in maintenance revenue relating to our on-premise solutions and term licenses. The increase in subscriptions for our cloud-based solutions is primarily due to more existing customers transitioning to SaaS and new customers. We intend to continue to focus on growing our recurring revenue from SaaS subscriptions in future periods. While we expect our subscription revenues to increase for fiscal year 2024, we expect maintenance revenue to continue to decline in fiscal year 2024 as we continue to transition our business model.

Professional services

Professional services revenues decreased by $0.9 million, or 3%, to $31.8 million for the six months ended March 31, 2024 from $32.6 million for the same period last year. The decrease in our professional services revenues was due to the decrease in professional service hours during the six months ended March 31, 2024.

Cost of Revenues
 Six Months Ended March 31, 
 20242023
Amount% of
Revenues
Amount% of
Revenues
Change ($)Change (%)
 (in thousands, except percentages)
Cost of revenues      
Subscription$33,544 35 %$31,727 36 %$1,817 %
Professional services22,198 70 %22,164 68 %$34 — %
Total cost of revenues$55,742 43 %$53,891 44 %$1,851 %
Subscription
Cost of subscription revenues increased by $1.8 million, or 6%, to $33.5 million during the six months ended March 31, 2024 from $31.7 million for the same period last year. The increase in cost primarily pertains to employee-related costs including stock-based compensation driven by an approximately 1% increase in average headcount, cloud hosting and related
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services and outside service costs but partially offset by a $0.3 million decrease in amortization of intangibles. As a percentage of subscription revenues, cost of subscription revenues decreased from 36% to 35% during the six months ended March 31, 2024 primarily due to improved cost efficiency.

Professional services
Cost of professional services revenues increased by $0.03 million, or 0.2%, to $22.2 million during the six months ended March 31, 2024 from $22.2 million for the same period last year. The increase in cost primarily pertains to employee-related costs including stock-based compensation. As a percentage of professional services revenue, cost of professional services revenues increased from 68% to 70% primarily due to employee-related costs.

Operating Expenses
 Six Months Ended March 31, 
 20242023Change ($)Change (%)
 (in thousands, except percentages)
Operating expenses    
Research and development$25,268 $25,167 $101 — %
Sales and marketing29,117 27,199