What changed in this filing

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Item 1. Financial Statements

2020-11-12 compared with 2020-05-11 · 100 added, 627 removed, 404 unchanged (64% of the section changed)

3 unchanged sentences

(in thousands, except par value data)

September 30,

Current assets:

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Restricted cash

Accounts receivable, less allowance for doubtful accounts of $429 and $320 as of March 31, 2020 and June 30, 2019, respectively

Accounts receivable, less allowance for doubtful accounts of $383 and $384 as of September 30, 2020 and June 30, 2020, respectively

Costs capitalized to obtain revenue contracts, net

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50,000 shares;

30,689 shares as of March 31, 2020 and 30,478 shares as of June 30, 2019

30,924 shares as of September 30, 2020 and 30,821 shares as of June 30, 2020

Additional paid-in capital

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Three Months Ended

Nine Months Ended

September 30,

Professional services

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Income from operations

Interest income (expense), net

Interest income, net

Other income (expense), net

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Three Months Ended

Nine Months Ended

September 30,

Other comprehensive income, net of taxes:

Foreign currency translation adjustments

Comprehensive income

See accompanying notes to condensed consolidated financial statements

EGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(in thousands)

Three Months Ended March 31, 2020

Additional Paid-in

Notes Receivable From

Accumulated Other Comprehensive

Total Stockholders'

Income (Loss)

Balances as of December 31, 2019

Issuance of common stock upon exercise of stock options

Stock-based compensation

Foreign currency translation adjustments

Balances as of March 31, 2020

Three Months Ended March 31, 2019

Additional Paid-in

Notes Receivable From

Accumulated Other Comprehensive

Total Stockholders'

Income (Loss)

Balances as of December 31, 2018

Issuance of common stock upon exercise of stock options

Issuance of common stock from public offering, net of issuance costs

Stock-based compensation

Foreign currency translation adjustments

Balances as of March 31, 2019

*Accrued liabilities of $185,000 included for stock issuance costs

Total comprehensive income

See accompanying notes to condensed consolidated financial statements

EGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

EQUITY (cont.)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Nine Months Ended March 31, 2020

Three Months Ended September 30, 2020

Additional Paid-in

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Issuance of common stock upon exercise of stock options

Issuance of common stock in connection with employee stock purchase plan

True up of issuance costs related to public offering

Stock-based compensation

Foreign currency translation adjustments

Balances as of March 31, 2020

Nine Months Ended March 31, 2019

Balances as of September 30, 2020

Three Months Ended September 30, 2019

Additional Paid-in

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Balances as of June 30, 2019

Cumulative-effect adjustment upon the modified retrospective

adoption of ASU No.

Interest on stockholder notes

Issuance of common stock upon exercise of stock options

Issuance of common stock from public offering, net of issuance costs

True up of issuance costs related to public offering

Stock-based compensation

Foreign currency translation adjustments

Balances as of March 31, 2019

*Accrued liabilities of $185,000 included for stock issuance costs

Balances as of September 30, 2019

See accompanying notes to condensed consolidated financial statements

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(in thousands)

Nine Months Ended

Three Months Ended

September 30,

Cash flows from operating activities:

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Amortization of costs capitalized to obtain revenue contracts

Amortization of deferred financing costs

Amortization of right-of-use assets

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Stock-based compensation

Loss (gain) on disposal of property and equipment

Loss on disposal of property and equipment

Changes in operating assets and liabilities:

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Proceeds from bank borrowings

Payments on capital lease obligations

Proceeds from exercise of employee stock options

Proceeds from employee stock purchase plan

Proceeds from follow-on public offering, net of issuance costs

Net cash provided by financing activities

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Cash paid for taxes, net of tax refunds

Non-cash items:

Purchases of equipment through trade accounts payable

See accompanying notes to condensed consolidated financial statements

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eGain Corporation (“eGain”, the “Company”, “our”, “we” or “us”) is a leading provider of cloud-based customer engagement software with operations in the United States, United Kingdom and India.

We help B2C brands operationalize digital customer engagement strategy.

We help business-to-consumer (B2C) brands operationalize digital customer engagement strategy.

Our suite includes rich applications for digital interaction, knowledge management, and AI-based process guidance.

We also provide advanced, integrated analytics for contact centers and digital properties to holistically measure, manage and optimize resources.

We believe the benefits of our products include reduced customer effort, customer satisfaction, connected service processes, converted upsell opportunities, and improved compliance—across mobile, social, web, and phone.

Hundreds of global enterprises rely on eGain to transform fragmented customer service systems into unified Customer Engagement Hubs.

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Basis of Presentation

The accompanying condensed consolidated balance sheet as of March 31, 2020 and the condensed consolidated statements of operations, comprehensive income, stockholders’

equity, and cash flows for the three and nine months ended March 31, 2020 and 2019, are unaudited.

The accompanying condensed consolidated balance sheet as of September 30, 2020 and the condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the three months ended September 30, 2020 and 2019, are unaudited.

The consolidated balance sheet as of June 30, 2020 included herein was derived from the audited financial statements as of that date.

Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), have been condensed or omitted pursuant to such rules and regulations although we believe that the disclosures made are adequate to make the information not misleading.

Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles (GAAP), have been condensed or omitted pursuant to such rules and regulations although we believe that the disclosures made are adequate to make the information not misleading.

In our opinion, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial position, results of operations and cash flows for the periods presented.

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The results of our operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 30, 2021.

The Company adopted Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842) , on a modified retrospective basis, as discussed below.

As a result, the condensed consolidated balance sheet as of March 31, 2020 is not comparable with that as of June 30, 2019.

Principles of Consolidation

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● Lease term and incremental borrowing rate for lease liabilities.

Follow-On Public Offering

In March 2019, we completed a follow-on public offering, in which we issued 2.0 million shares of our common stock at a public offering price of $11.00 per share.

In April 2019, the underwriters exercised an over-allotment option to purchase 149,000 additional shares of our common stock.

We received net proceeds of $21.7 million after deducting underwriting discounts and commissions of $1.6 million and other offering expenses of $282,000.

Recent Accounting Pronouncements

Pronouncements Not Yet Adopted

In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) .

This update requires a customer in a cloud computing service arrangement to follow the internal-use software guidance to determine which implementation costs to recognize and defer as an asset.

This update is effective for fiscal years beginning after December 15, 2019 (our fiscal year 2021).

We are currently evaluating the impact of this update on our consolidated financial statements and related disclosures.

In December 2019, FASB issued ASU 2019-12, Income Taxes (Topic 740):

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

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Pronouncements Recently Adopted

In February 2016, the FASB issued ASU 2016-02, Topic 842, which requires that we recognize lease assets and liabilities on the balance sheet, but recognize the expenses on our statement of operations in a manner similar to previous accounting guidance.

Topic 842 generally requires that lessees recognize operating and financing liabilities for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term.

We adopted this guidance as of our first fiscal quarter of fiscal year 2020.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

This update provides the option to reclassify tax effects to retained earnings relating to items in accumulated other comprehensive income that the FASB refers to as having been stranded in accumulated other comprehensive income as a result of the U.S.

We adopted this guidance as of our first quarter of fiscal year 2020 without a significant impact on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718)—Improvements to Nonemployee Share-Based Payment Accounting .

This update expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based awards granted to non-employees in exchange for goods or services.

The accounting for employees and non-employees will be substantially aligned.

We adopted this guidance as of our first quarter of fiscal year 2020 without a significant impact on our consolidated financial statements.

In July 2018, the FASB issued ASU No.

2018-11, Leases (Topic 842):

Targeted Improvements , which provides an alternative transition method by allowing companies to initially apply the new leases guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

We adopted this guidance as of our first quarter of fiscal year 2020.

In February 2019, the FASB issued ASU No.

2019-01 Leases (Topic 842) Codification Improvements , which aligns the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance.

As a result, the fair value of the underlying asset at lease commencement is its cost.

We adopted this guidance as of our first quarter of fiscal year 2020.

Effective July 1, 2019, the Company adopted the provisions and expanded disclosure requirements described in Topic 842.

The Company adopted the standard under a modified retrospective approach, using the provision of ASU 2018-11, Leases (Topic 842) Targeted Improvements , which allows for the adoption of Topic 842 to be applied at the beginning of the fiscal year of adoption.

As a result, the condensed consolidated balance sheet and statement of operations for prior periods are not comparable to fiscal year 2020.

In addition, the Company elected the package of practical expedients permitted under the transition guidance, which among other things, allowed the Company to not reassess prior conclusions on lease classifications or initial direct costs, or on whether contracts are or contain a lease.

The Company did not use hindsight when determining the lease term.

Upon adoption, operating leases are now reported on the condensed consolidated balance sheet, which has materially increased total assets and liabilities.

As a result, the Company recorded operating lease right-of-use assets of approximately $4.5 million and corresponding operating lease liabilities of $4.8 million on its opening condensed consolidated balance sheet.

Balance at June 30, 2019

Adjustments due to ASC 842

Balance at July 1, 2019

Balance sheet captions:

Prepaid expenses

Total current assets

Operating lease right-of-use assets (Note 6)

Accrued liabilities

Operating lease liabilities (Note 6)

Total current liabilities

Operating lease liabilities, net of current portion (Note 6)

Other long-term liabilities

Total liabilities

Total liabilities and stockholders' equity

Represents prepaid rent reclassified to operating lease right-of-use assets.

Represents capitalization of operating lease right-of-use assets.

Represents reclassification of deferred rent reclassified to operating lease right-of-use assets.

Represents recognition of operating lease liabilities.

In August 2018, FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) .

This update requires a customer in a cloud computing service arrangement to follow the internal-use software guidance to determine which implementation costs to recognize and defer as an asset.

We adopted this guidance as of our first quarter of fiscal year 2021 with no impact on our consolidated financial statements.

Revenue Recognition

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Invoiced amounts are recorded in accounts receivable, deferred revenue or revenue, depending if control transferred to our customers based on each arrangement.

The Company has a royalty revenue agreement with a customer related to the Company’s embedded intellectual property.

Under the terms of the agreement, the customer is to remit a percentage of sales to the Company.

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Our consulting and implementation service contracts are bid either on a time-and-materials basis or on a fixed-fee basis.

Fixed fees are generally paid upon milestone billing or acceptance at pre-determined points in the contract.

Fixed fees are generally paid upon milestone billing or acceptance at pre-determined points in the

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.

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Amortization of costs to obtain revenue contracts is included as a component of sales and marketing expenses in our condensed consolidated statements of operations.

During the three and nine months ended March 31, 2020, we capitalized $459,000 and $1.0 million of costs to obtain revenue contracts, respectively, and amortized $210,000 and $607,000 to sales and marketing expense, respectively.

During the three and nine months ended March 31, 2019, we capitalized $227,000 and $742,000 of costs to obtain revenue contracts, respectively, and amortized $179,000 and $481,000 to sales and marketing expense, respectively.

Capitalized costs to obtain revenue contracts, net were $2.9 million and $2.5 million as of March 31, 2020 and June 30, 2019, respectively.

During the three months ended September 30, 2020 and 2019, we capitalized $14,000 and $300,000 of costs to obtain revenue contracts, respectively, and amortized $250,000 and $196,000 to sales and marketing expense, respectively.

Capitalized costs to obtain revenue contracts, net were $3.3 million and $3.4 million as of September 30, 2020 and June 30, 2020, respectively.

Deferred Revenue

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the development, license, implementation and support of our customer interaction software solutions.

Operating segments are identified as components of an enterprise for which discrete financial information is available and regularly reviewed by the Company’s chief operating decision-makers in order to make decisions about resources to be allocated to the segment and assess its performance.

Our chief operating decision-makers, under ASC 280, Segment Reporting , are our executive management team.

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Revenue by geography is generally determined on the region of our contracting entity rather than the region of our customer.

Information relating to our geographic areas for the three and nine months ended March 31, 2020 and 2019 is as follows (in thousands):

Information relating to our geographic areas for the three months ended September 30, 2020 and 2019 is as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30,

North America

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Income from operations

In addition, long-lived assets, which consist primarily of property and equipment and operating lease right-of-use assets, corresponding to our geographic areas are as follows (in thousands):

In addition, long-lived assets, which consist primarily of property and equipment, corresponding to our geographic areas are as follows (in thousands):

September 30,

Long-lived Assets:

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Receivables are written off against the allowance when we have exhausted collection efforts without success.

Two customers, who are also our partners, accounted for 18% and 10%, respectively, of total revenue during the three and nine months ended March 31, 2020.

One customer accounted for 16% and 17% of total revenue during the three and nine months ended March 31, 2019, respectively.

Two customers, who are also our partners, accounted for 19% and 11%, respectively, of total revenue during the three months ended September 30, 2020.

Two customers, who are also partners, accounted for 19% and 10% of total revenue during the three months ended September 30, 2019, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

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Our accounts receivable are derived from revenue earned from customers and are not interest bearing.

We also maintain an allowance for doubtful accounts to reserve for potential

uncollectible trade receivables.

We also maintain an allowance for doubtful accounts to reserve for potential uncollectible trade receivables.

We review our trade receivables by aging category to identify specific customers with known disputes or collectability issues.

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Unbilled accounts receivables are recorded when revenue recognized on the contract exceeds billings, pursuant to contract provisions, and become billable upon certain criteria being met.

Unbilled accounts receivables, for which the Company has the unconditional right to consideration, totaled $1.5 million and $1.4 million as of March 31, 2020, and June 30, 2019, respectively, and are included in the accounts receivable balance.

Deferred Financing Costs

Costs relating to obtaining the credit agreement (as amended from time to time, Credit Agreement) with Wells Fargo Bank, National Association, as administrative agent (Wells Fargo) were capitalized and amortized over the term of the related debt using the effective interest method.

We capitalized deferred financing costs of $981,000 in connection with our term loan that has since been fully amortized.

As of March 31, 2020, all financing costs have been removed from the related accounts and charged to operations as interest expense in the prior fiscal year, in connection with the repayment of the term loan.

Amortization of deferred financing costs recorded as interest expense was $83,000 and $242,000 for the three and nine months ended March 31, 2019, respectively.

Unbilled accounts receivables, for which the Company has the unconditional right to consideration, totaled $869,000 and $1.7 million as of September 30, 2020, and June 30, 2020, respectively, and are included in the accounts receivable balance.

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation .

Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period.

Stock-based compensation expense consists of expenses for stock options and our 2017 employee stock purchase plan (ESPP).

The ESPP provides that eligible employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the entry date of the applicable offering period or at the end of each applicable purchasing period.

The offering period, meaning a period with respect to which the right to purchase shares of our common stock may be granted under the ESPP, will not exceed twenty-seven months and consist of a series of six-month purchase periods.

Eligible employees may join the ESPP at the beginning of any six-month purchase period.

Under the terms of the ESPP, employees can choose to have between 1% and 15% of their base earnings withheld to purchase the Company’s common stock.

Determining the fair value of the stock-based awards at the grant date requires significant judgment and the use of estimates, particularly surrounding Black-Scholes valuation assumptions such as stock price volatility and expected option term.

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Three Months Ended

Nine Months Ended

September 30,

Stock-Based Compensation Expense:

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Total stock-based compensation expense

Total stock-based compensation includes expense related to non-employee awards of $14,000 and $57,000 during the three and nine months ended March 31, 2020, respectively.

Total stock-based compensation includes expense related to non-employee awards of $95,000 and $143,000 during the three and nine months ended March 31, 2019, respectively.

Total stock-based compensation includes expense related to the ESPP of $87,000 and $211,000 for the three and nine months ended March 31, 2020, respectively.

Total stock-based compensation includes expense related to the ESPP of $128,000 and $161,000 for the three and nine months ended March 31, 2019, respectively.

Total stock-based compensation includes expense related to non-employee awards of $51,000 and $23,000 during the three months ended September 30, 2020, and 2019, respectively.

Total stock-based compensation includes expense related to the ESPP of $102,000 and $28,000 for the three months ended September 30, 2020, and 2019, respectively.

We utilize the Black-Scholes valuation model for estimating the fair value of the stock-based compensation of options granted.

All shares of our common stock issued pursuant to our stock option plans are only issued out of an authorized reserve of shares of common stock which were previously registered with the SEC on Registration Statements on Form S-8.

During the three months ended March 31, 2020 and 2019, we granted options to purchase 46,550 and 24,000 shares of common stock with a weighted-average fair value of $5.12 and $7.86 per share, respectively.

During the nine months ended March 31, 2020 and 2019, we granted options to purchase 294,875 and 237,250 shares of common stock with a weighted-average fair value of $4.42 and $5.21 per share, respectively.

During the three months ended September 30, 2020 and 2019, we granted options to purchase 41,200 and 202,100 shares of common stock with a weighted-average fair value of $6.34 and $4.31 per share, respectively.

We used the following assumptions:

Three Months Ended

Nine Months Ended

September 30,

Expected volatility

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Treasury Strips rate with maturities approximating the expected lives of the awards during the period, which approximate the rate in effect at the time of the grant.

The fair value of the ESPP stock-based expense for the three and nine months ended March 31, 2020 were estimated using the following weighted-average assumptions:

Three and Nine Months Ended

March 31, 2020

Expected term (in years)

Expected dividend

Risk-free interest rate

Estimated forfeiture rate

During the three and nine months ended March 31, 2020 , employees were granted the right to purchase an aggregate of 69,368 shares under the ESPP, and compensation expense related to those purchase rights for the three and nine months ended March 31, 2020 was $87,000.

During the three and nine months ended March 31, 2019 , 94,805 grants were made pursuant to the ESPP, and compensation expense related to those purchase rights for the three and nine months ended March 31, 2019 was $267,000.

As of March 31, 2020, there were 837,978 shares of common stock available for issuance under the ESPP.

On June 1, 2020, employees were granted the right to purchase an aggregate of 58,096 shares under the ESPP, and compensation expense related to those purchase rights for the three months ended September 30, 2020 was $102,000.

On June 1, 2019, employees were granted the right to purchase an aggregate of 69,354 shares under the ESPP, and compensation expense related to those purchase rights for the three months ended September 30, 2019 was $28,000.

As of September 30, 2020, there were 773,483 shares of common stock available for issuance under the ESPP.

We base our estimate of expected life of a stock option on the historical exercise behavior and cancellations of all past option grants made by the Company during the time period which its equity shares have been publicly traded, the contractual term of the option, the vesting period and the expected remaining term of the outstanding options.

In accordance with ASU 2016-09, Compensation—Stock Compensation:

Improvements to Employee Share-Based Accounting , we elected to continue to estimate forfeitures in the calculation of stock-based compensation expense.

As of March 31, 2020 there was approximately $1.3 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over the weighted-average period of 1.17 years.

There were 52,004 and 276,354 options exercised during the three months ended March 31, 2020 and 2019, respectively.

There were 141,639 and 492,607 options exercised during the nine months ended March 31, 2020 and 2019, respectively.

As of September 30, 2020 there was approximately $1.2 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the weighted-average period of 1.09 years.

There were 102,905 and 58,470 options exercised during the three months ended September 30, 2020 and 2019 , respectively.

Lease agreements are evaluated to determine whether an arrangement is or contains a lease in accordance with ASC 842, Leases .

Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities, and noncurrent operating lease liabilities in the condensed consolidated financial statements.

ROU assets represent the Company’s right to use leased assets over the agreed upon term.

Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term.

ROU assets represent the Company’s right to use leased assets over the agreed upon term.

Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term.

For operating leases, ROU assets and lease liabilities are recognized at the commencement date of the lease.

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The Company has elected not to recognize right-of-use assets and obligations for leases with an initial term of twelve months or less, and has applied a capitalization threshold to recognize a lease on the balance sheet.

The expense associated with short-term leases and leases that do not meet the Company’s capitalization threshold are recorded to lease expense in the period it is incurred.

REVENUE RECOGNITION

Disaggregation of Revenue

The following table presents our subscription and professional services revenue during the three and nine months ended March 31, 2020 and 2019, respectively:

The following table presents our subscription and professional services revenue during the three months ended September 30, 2020 and 2019, respectively:

Three Months Ended

Nine Months Ended

Total subscription

Professional services

September 30,

Legacy revenue

Total subscription revenue

Professional services revenue

Total revenue

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Revenue by geography is generally determined on the region of our contracting entity rather than the region of our customer.

The relative proportion of our total revenue between each geographic region as presented in the table below was materially consistent across each of our operating regions’

revenue for the periods presented.

The relative proportion of our total revenue between each geographic region as presented in the table below was materially consistent across each of our operating regions’ revenue for the periods presented.

Three Months Ended

Nine Months Ended

September 30,

North America

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Contract Balances

Contract assets consist of unbilled receivables for which we have the right to consideration for completed performance obligations that have not been invoiced.

Contract assets, if any, consist of unbilled receivables for completed performance obligations which have not been invoiced, and for which we do not have an unconditional right to consideration.

Contract liabilities consist of deferred revenue for which we have an obligation to transfer services to customers and have received consideration in advance or the amount is due from customers.

Once the obligations are fulfilled, then deferred revenue is recognized to revenue in the respective period.

There were no contract assets for the period ended September 30, 2020 and 2019.

The following table presents the changes in contract liabilities (in thousands):

Balance as of June 30, 2020

Balance as of March 31, 2020

Balance as of September 30, 2020

Contract liabilities:

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Deferred revenue, net of current portion

With respect to deferred revenue balances as of June 30, 2019, $6.4 million and $28.2 million was recognized to revenue during the three and nine months ended March 31, 2020, respectively.

With respect to deferred revenue balances as of June 30, 2020, $13.9 million was recognized to revenue during the three months ended September 30, 2020.

Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that had not yet been recognized, and include deferred revenue, invoices that have been issued to customers but were uncollected and have not been recognized as revenue, and amounts that will be invoiced and recognized as revenue in future periods.

The transaction price allocated to the remaining

performance obligation is influenced by a variety of factors, including seasonality, timing of renewals, average contract terms and foreign currency exchange rates.

As of March 31, 2020, our remaining performance obligations were $64.3 million of which we expect to recognize $41.9 million and $22.4 million as revenue within one year and beyond one year, respectively.

The transaction price allocated to the remaining performance obligation is influenced by a variety of factors, including seasonality, timing of renewals, average contract terms and foreign currency exchange rates.

As of September 30, 2020, our remaining performance obligations were $64.2 million, of which we expect to recognize $44.9 million and $19.3 million as revenue within one year and beyond one year, respectively.

NET INCOME PER COMMON SHARE

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Three Months Ended

Nine Months Ended

September 30,

Per share information:

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Effect of dilutive options

Weighted-average shares of stock options to purchase 663,821 and 302,118 shares of common stock for the three months ended March 31, 2020 and 2019, respectively, and weighted-average shares of stock options to purchase 615,649 and 222,951 shares of common stock for the nine months ended March 31, 2020 and 2019, respectively, were not included in the computation of diluted net income per common share due to their anti-dilutive effect.

Weighted-average shares of stock options to purchase 232,206 and 559,134 shares of common stock for the three months ended September 30, 2020 and 2019, respectively, were not included in the computation of diluted net income per common share due to their anti-dilutive effect.

Such securities could have a dilutive effect in future periods.

BANK BORROWINGS

On January 27, 2017, we entered into Amendment Number Two to the Credit Agreement, which further amended the Credit Agreement with Wells Fargo and the lenders party thereto dated November 21, 2014 (as amended, the Credit Agreement).

The loan was secured by substantially all of our assets.

Our Credit Agreement and the obligations under the agreement matured on November 21, 2019.

All remaining principal was paid prior to that date and all remaining deferred financing costs have been amortized to interest expense.

As of March 31, 2019, the remaining deferred financing costs of $83,000 was written-off to interest expense.

Income taxes are accounted for using the asset and liability method in accordance with ASC 740, Income Taxes.

Under this method, deferred tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

For the legacy eGain business in the United States, based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets.

For the legacy eGain business in the United Kingdom, based on the positive evidence, we have determined we would be able to utilize the deferred tax assets and do not have a valuation allowance against the deferred tax assets.

The remaining eGain foreign operations as well as Exony’s business have historically been profitable, and we believe it is more likely than not that those assets will be realized.

For the legacy eGain business in the United States, based upon the weight of available evidence, which includes our historical operating performance, our future investment plans, and the uncertainty in the current market environment due to COVID-19, we have provided a full valuation allowance against our net deferred tax assets.

For the legacy eGain business in the United Kingdom, based on the positive evidence, the Company has determined it would be able to utilize the deferred tax assets and does not have a valuation allowance against the deferred tax assets.

The remaining eGain foreign operations as well as Exony’s business have historically been profitable and we believe it is more likely than not that those assets will be realized.

Our tax provision primarily relates to foreign activities as well as state income taxes.

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We consider many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

As of March 31, 2020, we have not completed a 382 study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our company’s formation due to the complexity and cost associated with such a study, and the fact that an additional change in ownership can occur in future periods.

If the Company has experienced an ownership change at any time since its formation, utilization of the NOL or tax credit carryforwards to offset future taxable income and taxes, respectively, would be subject to an annual limitation under the Internal Revenue Code of 1986 and similar state provisions.

Any limitation may result in expiration of all or a portion of our NOL and or tax credit carryforwards before utilization.

Until a study is completed and limitations are known, no amounts of federal and state NOL and tax credit carryforwards are being considered as an uncertain tax position or disclosed as unrecognized tax benefits since no benefits have been realized to date.

As a result, the deferred tax assets related to these domestic loss and tax credit carryforwards and the offsetting valuation allowances have also been removed from our consolidated financial statements with no impact on earnings.

These amounts are no longer recognized until they can be measured after an ownership change analysis is completed.

As of June 30, 2020, we have completed a study under Section 382 of the Internal Revenue Code, and have determined there was no loss of NOLs as a result of any ownership changes since eGain’s formation.

Utilization of the NOL or tax credit carryforwards to offset future taxable income and taxes, respectively, are subject to an annual limitation under the Internal Revenue Code of 1986 and similar state provisions, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments such as built in gain or built in loss, as required.

Any limitation may result in expiration of all or a portion of its NOL and or tax credit carryforwards before utilization.

The 2017 Tax Cuts and Jobs Act includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries.

As of March 31, 2020, we estimate $2.0 million of GILTI income inclusion and used our net operating losses to offset our taxable income.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law.

The CARES Act includes income tax provisions relating to net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.

These provisions did not have a material effect on our consolidated financial statements.

As of September 30, 2020, we estimate $2.7 million of GILTI income inclusion and used our net operating losses to offset our taxable income.

We lease our office facilities under non-cancelable operating leases that expire on various dates through fiscal year 2024.

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The following tables present information about leases on our consolidated balance sheet (in thousands):

As of March 31, 2020

Three Months Ended

September 30,

Operating lease right-of-use assets

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The following table presents information about the weighted average lease term and discount rate as follows:

As of March 31, 2020

Three Months Ended

September 30,

Weighted average remaining lease term (in years)

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Three Months Ended

Nine Months Ended

March 31, 2020

September 30,

Operating lease expense

Short-term lease expense

Sublease income

Our short-term leases consist of leases for small office equipment.

Short-term lease expense for the three months ended September 30, 2020 and 2019 was not significant.

The following table presents supplemental cash flow information about our leases (in thousands):

Three Months Ended

Nine Months Ended

March 31, 2020

September 30,

Operating cash outflows from operating leases

Right-of-use assets obtained in exchange for new operating lease liabilities

As of March 31, 2020, remaining maturities of lease liabilities are as follows (in thousands):

As of September 30, 2020, remaining maturities of lease liabilities are as follows (in thousands):

Fiscal Period:

Remaining three months of fiscal year 2020

Remaining nine months of fiscal 2021

Total minimum lease payments

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Generally, the maximum obligation is the amount permitted by law.

Historically, costs related to these warranties have not been significant.

Historically, cost related to these warranties have not been significant.

However, we cannot guarantee that a warranty reserve will not become necessary in the future.

Indemnification

We have agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request.

Transfer Pricing

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Contractual Commitments

We have contractual agreements with third parties that consist of software licenses, maintenance and support for our operations.

As of March 31, 2020 and June 30, 2019, future payments for non-cancelable contractual agreements were $205,000 and $1.3 million, respectively.

The contractual agreements will expire in our fiscal year 2020.

Our principal contractual commitments consist of obligations under leases for office space.

Lease agreements are evaluated to determine whether an arrangement is or contains a lease in accordance with ASC 842, Leases .

FAIR VALUE MEASUREMENT

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Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.

The fair value hierarchy consists of the following three levels:

Level 1 –

instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Level 2 –

instrument valuations are obtained from readily-available pricing sources for comparable instruments.

Level 3 –

instrument valuations are obtained without observable market value and require a high level of judgment to determine the fair value.

Level 1 – instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Level 2 – instrument valuations are obtained from readily-available pricing sources for comparable instruments.

Level 3 – instrument valuations are obtained without observable market value and require a high level of judgment to determine the fair value.

Our money market funds are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as level 1 within the fair value hierarchy.

As of March 31, 2020 and June 30, 2019, cash equivalents classified as level 1 instruments were measured at $38.3 million and $29.2 million, respectively.

As of September 30, 2020 and June 30, 2020, cash equivalents classified as level 1 instruments were measured at $44.4 million and $41.8 million, respectively.

INTANGIBLE ASSETS

Intangible assets will be amortized over the estimated lives, as follows (in thousands, except expected life):

Intangible assets are amortized over their estimated lives, as follows (in thousands, except expected life):

Intangible Asset

Carrying Amount

Net Balance March 31, 2020

Net Balance September 30, 2020

Income Statement Category

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Cost of revenue

Amortization expense incurred for intangible assets for the three months ended March 31, 2020 and 2019 was $67,000 and $67,000, respectively.

Amortization expense incurred for intangible assets for the nine months ended March 31, 2020 and 2019 was $201,000 and $371,000, respectively.

Estimated future amortization expense remaining as of March 31, 2020 for intangible assets acquired is as follows:

Year Ending June 30,

Total future amortization expense

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the year ended June 30, 2019.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements may be identified by the use of the words such as “anticipates,”

“believes,”

“continue,”

“could,”

“would,”

“estimates,”

“expects,”

“intends,”

“may,”

“might,”

“plans,”

“potential,”

“should,”

or “will”

and similar expressions or the negative of those terms.

The forward-looking statements include, but are not limited to, statements regarding:

the impact of the COVID-19 pandemic on our employees and customers;

our SaaS only business model and that our belief that it affords recurring revenue visibility, more predictability and 50% faster time to value to SaaS clients;

our belief that SaaS revenue better reflects business momentum;

our expectations regarding increase in SaaS revenue and decrease in legacy support fees;

the effect of changes in macroeconomic factors beyond our control;

our lengthy sales cycles and the difficulty in predicting timing of sales or delays;

competition in the markets in which we do business and our competitive advantages;

our expectations regarding the composition of our customers and the result of a loss of a significant customer;

our beliefs regarding our prospects for our business;

the adequacy of our capital resources and our ability to raise additional financing;

the development and expansion of our strategic and third party distribution partnerships and relationships with systems integrators;

legal liability or the effect of negative publicity for the services provided to consumers through our technology platforms;

our ability to compete;

the operational integrity and maintenance of our systems;

the effect of unauthorized access to a customer’s data or our data or our IT systems and cybersecurity attacks;

the uncertainty of demand for our products;

our beliefs regarding the attributes and anticipated customer benefits of our products;

our ability to increase the profitability of our subscription services;

our ability to hire additional personnel and retain key personnel;

our ability to expand and improve our sales performance and marketing activities, and expectations regarding sales and marketing expenses;

our ability to manage our expenditures and estimate future expenses, revenue, and operational requirements;

the effect of changes to management judgments and estimates;

the impact of any modification to our pricing practices in the future;

our beliefs regarding our international operations;

our ability to timely adapt and comply with changing European regulatory and political environments;

uncertainty relating to the implementation and effect of Brexit;

the effect of recent changes in U.S.

tax legislation;

our inability to successfully detect weaknesses or errors in our internal controls;

our ability to take adequate precautions against claims or lawsuits made by third parties, including alleged infringement of proprietary rights;

the potential impact of foreign currency fluctuations;

the impact of accounting pronouncements and our critical accounting policies, judgments, estimates, models and assumptions on our financial results;

and our expectations with respect to revenue, cost of revenue, expenses and other financial metrics.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected.

These risks and uncertainties include, but are not limited to, those risks discussed in Item 1A “Risk Factors”

in this report, as well as:

the effect of the COVID-19 pandemic on our business;

our ability to manage our business plans, strategies and outlooks and any business-related forecasts or projections;

our ability to effectively implement and improve our current products;

our ability to innovate and respond to rapid technological change and competitive challenges;

customer acceptance of our existing and future products;

the impact of new legislation or regulations, or of judicial decisions, on our business;

legal and regulatory uncertainties and other risks related to protection of our intellectual property assets;

our ability to compete against third parties;

the success of our partnerships;

our ability to obtain capital when needed;

the economic environment;

our history of operating losses;

our ability to manage future growth;

the market price of our common stock;

and foreign currency fluctuations .

These forward looking statements speak only as of the date hereof.

We expressly disclaim any obligation or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

All references to “eGain”, the “Company”, “our”, “we”

or “us”

mean eGain Corporation and its subsidiaries, except where it is clear from the context that such terms mean only the parent company and excludes its subsidiaries.

eGain and the eGain®

are trademarks of eGain Corporation.

We also refer to trademarks of other corporations and organizations in this Quarterly Report on Form 10-Q.

eGain is an innovative software-as-a service (SaaS) provider of customer engagement solutions for a digital world.

We have operations in the United States (U.S.), the United Kingdom (UK), and India.

Some of the largest business-to-consumer (B2C) brands in the world—especially in the financial services, telecommunications, retail, government, healthcare, and utilities industries—rely on eGain to quickly operationalize their digital transformation strategies for customer engagement.

With our mantra of AX + BX + CX = DX™

, we guide them to effortless DX (digital experiences) by optimizing not just CX (customer experience), but also AX (agent experience) and BX (business experience).

A unified customer engagement hub from eGain gives them connected artificial intelligence (AI), knowledge, and analytics capabilities to automate self-service across touch points and augment a digital-first, omnichannel agent desktop to reduce service cost, increase upsell, and improve business agility.

We have transitioned from a hybrid model, where we sold both SaaS and perpetual license solutions, to a SaaS only business model.

Today, we only sell SaaS to new clients and are actively migrating our remaining perpetual license clients to SaaS.

As we continue to migrate our legacy perpetual license clients to SaaS, we expect our non-SaaS recurring revenue, primarily comprising annual maintenance and support fees for legacy perpetual license clients to continue to decline.

We believe our go-forward SaaS business model affords us recurring revenue visibility and more predictability.

Fiscal year 2019 affirmed our view that SaaS clients adopt our product innovation much faster than the perpetual license model and get better service levels.

We believe SaaS clients enjoy up to 50% faster time to value from their eGain investment.

We have operations in the US, UK, and India.

In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, China.

In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, and the virus continues to spread in areas where we operate and sell our products and services.

Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of COVID-19, including shelter-in-place and social distancing orders, which has resulted in a significant deterioration of economic conditions in the countries in which we operate.

The impact of COVID-19 and the related disruptions caused to the global economy and our business did not have a material adverse impact on our business during the quarter ended March 31, 2020.

However, the spread of the COVID-19 virus caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees, among other things.

In response to the outbreak of COVID-19, we have taken the following measures to date:

Implemented work-from-home and social distancing policies throughout our organization;

Suspended all employee travel;

Cancelled certain sales and marketing events;

Looked to our customer’s needs to best support their operations during this crisis.

The effect of the COVID-19 pandemic, may not be fully reflective in our results of operations and overall financial performance until further periods, if at all.

The impact, if any, of operational changes we may implement is uncertain, but changes we have implemented as of the filing date have not affected and are not expected to affect our ability to maintain operations.

We will continuously monitor the situation to determine what actions may be necessary or appropriate to address the impact of the COVID-19 pandemic, which may include actions mandated or recommended by federal, state or local government authorities.

See our “Risk Factors”

for further discussion of the possible impact of the COVID-19 pandemic on or business.

Key Financial Measures

We monitor the key financial performance measures set forth below as well as cash and cash equivalents and available debt capacity, which are discussed in Liquidity and Capital Resources, to help us evaluate trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational effectiveness and efficiencies.

With our transition to a SaaS only business model, we believe SaaS revenue better reflects our business momentum and to analyze progress, we disaggregate our subscription revenue growth between:

SaaS, which is defined as revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support;

Legacy revenue, which is defined as revenue from maintenance and support contracts on perpetual license arrangements that we no longer offer.

The following table presents a break out of subscription revenue between SaaS revenue and legacy revenue for each of the following periods:

Three Months Ended

Nine Months Ended

(in thousands)

Legacy revenue

Total subscription revenue

As we continue to migrate our legacy perpetual license clients to SaaS, we expect our legacy revenue to continue to decline.

SaaS and Professional Services Revenue

As we continue to shift to a SaaS only business model, substantially all of professional services revenue is now generated from our SaaS customer base.

We believe the combination of SaaS and professional services revenue is a useful measure to value our business on a forward-looking basis.

The following table presents total SaaS and professional services revenue for each of the following periods:

Three Months Ended

Nine Months Ended

(in thousands)

Professional services

Total SaaS and professional services revenue:

Non-GAAP Operating Income

Non-GAAP operating income is defined as operating income, adjusted for the impact of stock-based compensation expense and amortization of acquired intangible assets.

Management believes that it is useful to exclude certain non-cash charges and non-core operational charges from non-GAAP operating income because (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations;

and (ii) such expenses can vary significantly between periods as a result of the timing of new stock-based awards and acquisition.

The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with generally accepted accounting principles in the United States of America (GAAP).

The following table presents a reconciliation of GAAP income from operations to non-GAAP income from operations for each of the following periods:

Three Months Ended

Nine Months Ended

Income from operations

Stock-based compensation

Amortization of acquired intangibles

Non-GAAP income from operations

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with GAAP.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, allowance for doubtful accounts, the valuation of goodwill and intangible assets, the valuation of deferred tax allowance, and legal contingencies have the greatest potential impact on our condensed consolidated financial statements.

We evaluate these estimates on an ongoing basis.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are disclosed in our Notes to Condensed Consolidated Financial Statements in our Annual Report on Form 10-K for fiscal year ended June 30, 2019.

We have not had any material changes to our critical accounting policies and estimates during the nine months ended March 31, 2020 as compared to those disclosed on our 10-K for fiscal year ended June 30, 2019 except for the adoption of ASC Topic 842 as discussed in this Quarterly Report on Form 10-Q.

We believe these policies are critical to the discussion of our financial condition and results of operations.

Sources of Revenue

Our revenue is comprised of two categories, subscription and professional services.

Subscription includes SaaS revenue and legacy revenue.

SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support.

Legacy revenue is revenue associated with support contracts on perpetual license arrangements that we no longer offer.

Professional services include consulting, implementation and training.

Subscription Revenue

For our cloud delivery arrangements, our maintenance and support arrangements and our term license subscriptions that incorporate substantial cloud functionality, the combined performance obligation is recognized ratably over the contract term as the obligation is delivered.

For contracts involving distinct software licenses, the license performance obligation is satisfied at a point in time when control is transferred to the customer.

We typically invoice our customers in advance upon execution of the contract or subsequent renewals.

Invoiced amounts are recorded in accounts receivable, deferred revenue or revenue, depending on control transferred to our customers based on each arrangement.

The Company has a royalty revenue agreement with a customer related to the Company’s embedded intellectual property.

Under the terms of the agreement, the customer is to remit a percentage of sales to the Company.

These embedded OEM royalties are included as subscription revenue.

Under Topic 606-10-55-65 revenue guidance, since these arrangements are for sales-based licenses of intellectual property, the Company recognizes revenue only as the subsequent sale occurs.

However, since such sales are reported by the customer with a quarter in arrears, such revenue is recognized at the time it is reported and paid by the customer given that any estimated variable consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable risk that it may lead to significant revenue reversals.

Professional Services Revenue

Professional services revenue includes system implementation, consulting and training.

The transaction price is allocated to various performance obligations based on their stand-alone selling prices.

Revenue allocated to each performance obligation is recognized as work is performed.

Our consulting and implementation service contracts are bid either on a time-and-materials basis or on a fixed-fee basis.

Fixed fees are generally paid on milestone billing at pre-determined points in the contract.

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred .

Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.

Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that had not yet been recognized, and include billed deferred revenue, consisting of amounts invoiced to customers whether collected or uncollected which have not been recognized as revenue, as well as unbilled amounts that will be invoiced and recognized as revenue in future periods.

As of March 31, 2020, our remaining performance obligations were $64.3 million, of which we expect to recognize $41.9 million and $22.4 million as revenue within one year and beyond one year, respectively.

We expect our remaining performance obligations to change quarterly for several reasons including the timing of new contracts and renewals, duration and size of our subscription and support arrangements, variable billing cycles and foreign exchange rate fluctuation.

We typically issue renewal invoices in advance of the renewal service period.

Depending on timing, the initial invoice and subsequent renewal invoices may occur in different quarters.

This may result in an increase or decrease to our accounts receivable and deferred revenue.

Costs Capitalized to Obtain Revenue Contracts

Under Topic 606, we capitalize incremental costs to obtain non-cancelable subscription and maintenance and support revenue contracts with amortization periods that may extend longer than the non-cancelable subscription and maintenance and support revenue contract terms.

We capitalize incremental costs of obtaining a non-cancelable subscription and maintenance and support revenue contract with amortization periods of one year or more.

The capitalized amounts consist primarily of sales commissions paid to our direct sales force.

Capitalized amounts also include (i) amounts paid to employees other than the direct sales force who earn incentive payouts under annual compensation plans that are tied to the value of contracts acquired and (ii) the associated payroll taxes and fringe benefit costs associated with the payments to our employees.

Costs capitalized related to new revenue contracts are generally deferred and amortized on a straight-line basis over a period of benefit that we estimate to be five years.

We determine the period of benefit by taking into consideration the

period from initial contract through renewal, which constitutes the length of our customer relationship or customer life.

Amortization of costs capitalized related to new revenue contracts is included as a component of sales and marketing expense in our operating results.

Under Topic 605, we capitalized only commissions earned on initial software and support sales which were amortized ratably over the initial contract period averaging two years.

Results of Operations

The following table sets forth certain items reflected in our condensed consolidated statements of operations expressed as a percent of total revenue for the periods indicated:

Three Months Ended

Nine Months Ended

Professional services

Total revenue

Cost of revenue:

Cost of subscription

Cost of professional services

Total cost of revenue

Operating expenses:

Research and development

Sales and marketing

General and administrative

Total operating expenses

Income from operations

We classify our revenue into two categories:

subscription and professional services revenue.

We further break down subscription revenue into SaaS revenue and legacy revenue, with SaaS revenue being a key metric.

The following table presents our subscription and professional services revenue during the three and nine months ended March 31, 2020 and 2019, respectively:

Three Months Ended

Nine Months Ended

(in thousands)

Professional services

Total revenue

Total revenue increased $1.4 million and $3.3 million during the three and nine months ended March 31, 2020, compared to the same periods in fiscal year 2019, respectively, due to an increase in SaaS revenue of $3.0 million and $8.1 million during the three and nine months ended March 31, 2020, compared to the same periods in fiscal year 2019.

This increase was partially offset by a decline in our legacy revenue as we continue to migrate legacy perpetual license customers to our SaaS model and a decline in professional service revenue as we continue to see a reduction in time required for an average implementation project, as a result of the improvements to our product deployment process.

Our revenue was impacted by foreign exchange rate fluctuation between the U.S.

Dollar, Euro, and British Pound.

We recalculate our current period results using the comparable prior period exchange rates to exclude the impact of foreign exchange rate fluctuation.

Foreign exchange rate fluctuation resulted in an increase of $61,000 and a decrease of $449,000

in total revenue during the three months ended March 31, 2020 and 2019, respectively.

Foreign exchange rate fluctuation resulted in decreases of $534,000 and $792,000 for the nine months ended March 31, 2020 and 2019, respectively.

Subscription Revenue

Three Months Ended

Nine Months Ended

(in thousands)

Percentage of total revenue

SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support.

Revenue from SaaS increased by $3.0 million and $8.1 million during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

SaaS revenue represents 81% and 77% of total revenue for the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

This represented an increase in SaaS revenue of 26% and 24% for the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

Excluding an increase of $152,000 due to foreign exchange rate fluctuation, SaaS revenue increased by $2.9 million during the three months ended March 31, 2020 as compared to the same periods in fiscal year 2019.

Excluding a decrease of $265,000 due to foreign exchange fluctuation, SaaS revenue increased by $8.3 million during the nine months ended March 31, 2020 as compared to the same periods in fiscal year 2019.

In connection with our SaaS transition, we are actively migrating our remaining perpetual license clients to SaaS and continue to sell SaaS to new customers.

We expect our SaaS revenue to increase on a year over year basis.

Legacy Revenue

Three Months Ended

Nine Months Ended

(in thousands)

Legacy revenue

Percentage of total revenue

Legacy revenue is associated with license, maintenance and support contracts on perpetual license arrangements that we no longer offer.

We experienced decreases of $1.4 million and $4.1 million during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

This decrease was primarily due to our focus in migrating our legacy customers to SaaS.

We expect these legacy fees to continue to decline in future quarters.

Excluding decreases of $59,000 and $203,000 due to foreign exchange rate fluctuation, legacy revenue decreased by $1.4 million and $3.9 million during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

Professional Services Revenue

Three Months Ended

Nine Months Ended

(in thousands)

Professional services revenue

Percentage of total revenue

Professional services revenue includes consulting, implementation and training.

Revenue from professional services decreased by $251,000 and $675,000 during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

These decreases were primarily due to continued improvements in our product deployment process resulting in a reduction in the time required for an average implementation project.

As we continue to onboard new customers and migrate legacy customers to SaaS, we expect the time required for product deployment and implementation projects to decrease.

Excluding decreases of $31,000 and $66,000 due to foreign exchange rate fluctuation, professional services revenue decreased by $220,000 and $609,000 during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

Revenue by Geography

Three Months Ended

Nine Months Ended

(in thousands)

International

Total revenue

Revenue from domestic sales increased by 19% from $9.7 million during the three months ended March 31, 2019 to $11.5 million during the three months ended March 31, 2020 due to increases of (i) $3.0 million in SaaS revenue and (ii) $28,000 in professional services revenue;

partially offset by a decrease of $1.2 million in legacy revenue.

Revenue from domestic sales increased by 14% from $28.2 million during the nine months ended March 31, 2019 to $32.0 million during the nine months ended March 31, 2020 due to an increase of $7.3 million in SaaS revenue;

partially offset by decreases of (i) $3.2 million in legacy revenue, and (ii) $272,000 in professional services revenue.

Revenue from international sales decreased by 6% from $7.3 million for the three months ended March 31, 2019 to $6.9 million during the three months ended March 31, 2020, due to decreases of (i) $279,000 in professional services revenue, (ii) $178,000 in legacy revenue, and (iii) $9,000 in SaaS revenue.

Revenue from international sales decreased by 2% from $22.2 million for the nine months ended March 31, 2019 to $21.7 million during the nine months ended March 31, 2020, due to decreases of (i) $898,000 in legacy revenue and (ii) $403,000 in professional services revenue;

partially offset by an increase of $751,000 in SaaS revenue.

Cost of Revenue

Three Months Ended

Nine Months Ended

(in thousands)

Professional services

Total cost of revenue

Percentage of total revenue

Cost of subscription revenue consists primarily of expenses related to our cloud services and providing support to our customers.

These expenses are comprised of cloud computing costs, personnel-related costs directly associated with cloud operations, and customer support, including salaries, benefits, bonuses and stock-based compensation and allocated overhead.

Cost of subscription revenue increased by $114,000 and $335,000 during the three and nine months ended March 31, 2020, respectively, from the same periods in fiscal year 2019.

Cloud-computing costs increased $404,000 and $1.1 million during the three and nine months ended March 31, 2020, respectively, from the same periods in fiscal year 2019.

This was partially offset by decreases in personnel-related costs of $276,000 and $754,000 during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

Excluding decreases of $30,000 and $48,000 due to foreign exchange rate fluctuation, cost of subscription revenue increased by $144,000 and $383,000 during the three and nine months ended March 31, 2020, respectively, from the same periods in fiscal year 2019.

Excluding any future foreign exchange rate fluctuation, we expect our cost of subscription revenue to increase in absolute dollar terms but expect subscription revenue gross margins to improve.

Professional Services

Cost of professional services consists primarily of personnel-related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses, and stock based-compensation and allocated overhead.

Cost of professional services increased $89,000 and decreased by $350,000 during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

The increase for the three months ended March 31, 2020 was primarily due to an increase in personnel-related costs of $100,000.

The decrease for the nine months ended March 31, 2020 was primarily due to decreases of (i) $160,000 in outside consulting costs and (ii) $140,000 in personnel-related costs.

Excluding decreases of $19,000 and $50,000 due to foreign exchange rate fluctuation, cost of professional services revenue increased by $108,000 and decreased by $300,000 during the three and nine months ended March 31, 2020, respectively, compared to the same periods in fiscal year 2019.

Operating Expenses

Research and Development

Three Months Ended

Nine Months Ended

(in thousands)

Research and development

Percentage of total revenue

Research and development expense primarily consists of personnel-related expenses directly associated with our engineering, product management and development, and quality assurance staff.

Included in these costs are salaries, benefits, bonuses, and stock-based compensation and allocated overhead.

Research and development expense also includes outside consulting services contracted for research and development, and amortization of intangible assets.

Research and development expense increased 16% to $4.2 million for the three months ended March 31, 2020, from $3.6 million in the same period in 2019.

Excluding a decrease of $40,000 due to foreign exchange rate fluctuation between the U.S.

Dollar, Euro, British Pound and Indian Rupee, research and development expense increased primarily due to increases of (i) $593,000 in personnel-related costs and (ii) $30,000 of outside consulting costs.

Research and development expense increased 14% to $12.3 million for the nine months ended March 31, 2020, from $10.8 million in the same period in fiscal year 2019.

Excluding a decrease of $78,000 due to foreign exchange rate fluctuation between the U.S.

Dollar, Euro, British Pound and Indian Rupee, research and development expense increased primarily due to increases of (i) $1.7 million in personnel-related expenses and (ii) $41,000 of outside consulting costs;

partially offset by a decrease of $170,000 from intangible asset amortization.

Excluding any future foreign exchange rate fluctuation, we expect our research and development expense to remain relatively consistent as a percentage of total revenue in future quarters based on our product development plans.

Sales and Marketing

Three Months Ended

Nine Months Ended

(in thousands)

Sales and marketing

Percentage of total revenue

Sales and marketing expense primarily consists of personnel-related expenses directly associated with our sales, marketing and business development staff.

Included in these costs are salaries, benefits, bonuses, and stock-based compensation and allocated overhead.

Sales and marketing expenses also include amortization of commissions paid to our sales staff, lead generation activities, advertising, trade show and other promotional costs and, to a lesser extent, occupancy costs and related overhead.

Sales and marketing expenses increased 17% to $5.1 million for the three months ended March 31, 2020, from $4.3 million in the same period in 2019.

Excluding a decrease of $37,000 due to foreign exchange rate fluctuation between the U.S.

Dollar, Euro, British Pound and Indian Rupee, sales and marketing expense increased primarily due to increases of (i) $747,000 in personnel-related expenses and (ii) $24,000 in marketing program expenses.

Sales and marketing expenses increased 15% to $14.6 million for the nine months ended March 31, 2020, from $12.7 million in the same period in fiscal year 2019.

Excluding a decrease of $114,000 due to foreign exchange rate fluctuation between the U.S.

Dollar, Euro, British Pound and Indian Rupee, sales and marketing expense increased primarily due to increases of (i) $1.8 million in personnel-related expenses, (ii) $155,000 in marketing program expenses, and (iii) $85,000 in outside consulting costs.

Excluding any future foreign exchange rate fluctuation, we expect our sales and marketing expense to increase as a percentage of total revenue in future quarters based on our current business plan.

General and Administrative

Three Months Ended

Nine Months Ended

(in thousands)

General and administrative

Percentage of total revenue

General and administrative expense primarily consists of personnel-related expenses directly associated with our finance, human resources, administrative and legal personnel.

Included in these costs are salaries, benefits, bonuses, and stock-based compensation and allocated overhead.

General and administrative expenses also include fees for professional services, provision for doubtful accounts and, to a lesser extent, occupancy costs and related overhead.

General and administrative expenses decreased 7% to $1.8 million for the three months ended March 31, 2020, from $2.0 million in the same period in 2019.

Excluding a decrease of $50,000 due to foreign exchange rate fluctuation between the U.S.

Dollar, Euro, British Pound and Indian Rupee, general and administrative expense decreased primarily due to decreases of (i) $145,000 in legal costs, and (ii) $70,000 in bad debt expenses;

partially offset by increases of (x) $75,000 in personnel-related costs, (y) $31,000 in accounting and audit expenses, and (z) $21,000 in outside consulting costs.

General and administrative expenses decreased 4% to $5.9 million for the nine months ended March 31, 2020, from $6.2 million in the same period in fiscal year 2019.

Excluding a decrease of $41,000 due to foreign exchange rate fluctuation between the U.S.

Dollar, Euro, British Pound and Indian Rupee, general and administrative expense decreased primarily due to decreases of (i) $135,000 in bad debt expenses, (ii) $129,000 in legal costs, (iii) $26,000 in accounting and audit expenses, and (vi) $22,000 in outside consulting costs;

partially offset by an increase of $87,000 in personnel-related costs.

Excluding any future foreign exchange rate fluctuation, we expect our general and administrative expense to increase or remain relatively consistent as a percentage of total revenue in future quarters based on our current business plan.

Income from Operations

Three Months Ended

Nine Months Ended

(in thousands)

Income from operations

Operating margin

Income from operations was $1.8 million with an operating margin of 10% during the three months ended March 31, 2020.

Income from operations during the three months ended March 31, 2020 included (i) $460,000 of stock-based compensation;

(ii) $210,000 of amortization of costs capitalized to obtain revenue contracts;

and (iii) $67,000 of amortization of intangible assets.

Income from operations was $4.9 million with an operating margin of 9% during the nine months ended March 31, 2020.

Income from operations during the nine months ended March 31, 2020 included (i) $1.4 million of stock-based compensation;

(ii) $607,000 of amortization of costs capitalized to obtain revenue contracts;

and (iii) $201,000 of amortization of intangible assets.

Interest Income (Expense), Net

Interest income (expense), net consists of interest earned on money market accounts and interest paid on bank borrowings.

Interest income (expense), net was income of $113,000 and expense of $120,000 during the three months ended March 31, 2020 and 2019, respectively.

Interest income (expense), net was income of $384,000 and expense of $449,000 during

the nine months ended March 31, 2020 and 2019, respectively.

Interest income (expense), net changed from expense to income in the three and nine months ended March 31, 2020, compared to the same periods in fiscal year 2019, primarily due to interest earned from money market accounts and absence of interest paid on bank borrowings which have since been repaid.

We expect interest income in future quarters to remain relatively constant, as we continue to see volatility in interest rates for the duration of and possibly beyond the COVID-19 pandemic.

Other Income (Expense), Net

Other income (expense), net was income of $65,000 and expense of $199,000 during the three months ended March 31, 2020 and 2019, respectively.

Other income (expense), net was income of $44,000 and expense of $189,000 during the nine months ended March 31, 2020 and 2019, respectively.

Other income (expense), net primarily included foreign exchange rate fluctuations on international trade receivables.

Income Tax Provision

Provision for income taxes consists of federal, state and foreign income taxes.

Due to cumulative losses, we maintain a valuation allowance against U.S.

deferred tax assets as of March 31, 2020.

We consider all available evidence, both positive and negative, including but not limited to earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets.

We recorded income tax provisions of $68,000 and $72,000 for the three months ended March 31, 2020 and 2019, respectively.

We recorded income tax provisions of $224,000 and $32,000 for the nine months ended March 31, 2020 and 2019, respectively.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law and we are continuing to analyze the impact on our financial statements but do not expect a material impact on our provision for income taxes.

Liquidity and Capital Resources

At March 31, 2020 and 2019, our principal sources of liquidity were cash and cash equivalents, and accounts receivable totaling $54.0 million and $52.3 million, respectively.

Our cash, cash equivalents and restricted cash were $40.7 million and $31.9 million as of March 31, 2020 and June 30, 2019, respectively.

Our expectations as to our future cash flows and our future cash balances are subject to a number of assumptions and uncertainties, including, but not limited to, the effects of COVID-19 pandemic, assumptions regarding anticipated increases in our revenue, our ability to retain existing customers and customer purchasing and payment patterns.

We anticipate our current cash and cash equivalent balances and anticipated cash flow from operations will be sufficient to meet our liquidity needs.

For the nine months ended March 31, 2020 and 2019, our cash flows were as follows (in thousands):

Nine Months Ended

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Cash provided by operating activities mainly consists of net income adjusted for non-cash expense items such as depreciation and amortization, expense associated with stock-based awards, the timing of employee related costs including commissions and bonus payments, and changes in operating assets and liabilities during the year.

Net cash provided by operating activities increased by $482,000 during the nine months ended March 31, 2020, from the same period in fiscal year 2019, driven primarily by the timing of customer payments for accounts receivable received from customers for new cloud arrangements and the renewal of existing cloud and support arrangements for the nine months ended March 31, 2020.

Net cash used in investing activities increased by $67,000 during the nine months ended March 31, 2020, from the same period in fiscal year 2019, driven primarily by activities related to the purchase of equipment for new employees and facility expenditures.

Historically, cash used in investing activities has been used to purchase equipment and software to support our business and growth.

Net cash provided by financing activities decreased by $11.1 million during the nine months ended March 31, 2020, from the same period in fiscal year 2019 primarily due to net proceeds of $20.4 million in a follow-on public offering in 2019;

partially offset by bank payments, net of bank borrowings of $9.4 million.

Our current proceeds consist primarily of proceeds from the exercise of employee stock options and our employee stock purchase plan.

There was no significant change to our contractual obligations since June 30, 2019.

Off-Balance Sheet Arrangements

As of March 31, 2020, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

New Accounting Pronouncements

See Note 1 “Summary of Business and Significant Accounting Policies”

to the condensed financial statements for our discussion of new accounting pronouncements adopted and those pending.

Amortization expense incurred for intangible assets for the three months ended September 30, 2020 and 2019 was $26,000 and $67,000, respectively.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements