Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Opera tions
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, 2020.
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 described in the summary below, as well as those risks which are further discussed in Item 1A “Risk Factors” in this report:
Summary Risk Factors
● We face risks related to health epidemic, including the COVID-19 pandemic, which could have a material adverse effect on our business, financial condition and results of operations. Our revenue and operating results have fluctuated in the past and are likely to fluctuate in the future, and because we recognize revenue from subscriptions over a period of time, downturns in revenue may not be immediately reflected in our operating results.
● We cannot accurately predict subscription renewal rates and the impact these rates may have on our future revenue and operating results.
● Our lengthy sales cycles and the difficulty in predicting timing of sales or delays may impair our operating results.
● Because we depend on a relatively small number of customers for a substantial portion of our revenue, the loss of any of these customers or our failure to attract new significant customers could adversely impact our revenue and harm our business.
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● The market for customer engagement software is intensely competitive, and our business will be adversely affected if we are unable to successfully compete.
● If we fail to expand and improve our sales performance and marketing activities, or retain our sales and marketing personnel, we may be unable to grow our business, which could negatively impact our operating results and financial condition.
● Our failure to maintain, develop or expand strategic and third-party distribution channels would impede our revenue growth.
● Difficulties and delays in customers implementing our products could harm our revenue and margins.
● We conduct a significant portion of our business and operations outside of the United States, which exposes us to additional risks that may not exist in the United States. These risks in turn could cause our operating results and financial condition to suffer.
● Unplanned system interruptions and capacity constraints and failure to effect efficient transmission of customer communications and data over the Internet could harm our business and reputation.
● If our cybersecurity systems or the systems of our vendors, partners and suppliers are breached and unauthorized access is obtained to a customer’s data or our data or IT systems, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
● Changes in the European regulatory environment regarding privacy and data protection regulations, such as the European Union’s GDPR, could expose us to risks of noncompliance and costs associated with compliance.
● Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.
● We rely on trademark, copyright, trade secret laws, contractual restrictions and patent rights to protect our intellectual property and proprietary rights and if these rights are impaired, then our ability to generate revenue will be harmed.
● Our insiders who are significant stockholders have the ability to exercise significant control over matters requiring stockholder approval, including the election of our board of directors, and may have interests that conflict with those of other stockholders.
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. You should, however, review additional disclosures we make in the reports we file with the SEC, including but not limited to the Risk Factors associated with our business.
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.
Overview
eGain automates customer engagement with an innovative Software as a service (SaaS) platform, powered by deep digital, Artificial intelligence (AI), and knowledge capabilities. We are headquartered in the United States. We also operate in United Kingdom and India. We sell mostly to large enterprises across financial services, telecommunications, retail, government, healthcare, and utilities. With our mantra of AX + BX + CX = DX™ , we guide clients to effortless Digital experience (DX) by holistically optimizing Agent experience (AX), Business experience (BX) and Customer experience (CX). One hundred fifty leading brands use eGain cloud software to improve customer satisfaction, empower agents, reduce service cost and boost sales.
We have transitioned from a hybrid model, where we sold both SaaS and perpetual license solutions, to a SaaS only business model. Today, we sell only 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 legacy revenue, primarily comprising annual maintenance and support fees for legacy perpetual license clients to continue to decline.
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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 our perpetual license clients 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.
COVID-19
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 September 30, 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; and
● 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, 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.
SaaS Revenue
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 revenue, which is defined as revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support; and
● Legacy revenue, which is defined as revenue from maintenance and support contracts on perpetual license arrangements that we no longer offer.
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The following table presents a break out of subscription revenue between SaaS and legacy revenue for each of the following periods:
Three Months Ended
September 30,
(in thousands)
2020
2019
Change
SaaS revenue
$
15,970
$
12,418
$
3,552
29
%
Legacy revenue
1,777
3,154
(1,377)
(44)
%
Total subscription revenue
$
17,747
$
15,572
$
2,175
14
%
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
September 30,
(in thousands)
2020
2019
Change
SaaS revenue
$
15,970
$
12,418
$
3,552
29
%
Professional services revenue
1,316
1,618
(302)
(19)
%
Total SaaS and professional services revenue:
$
17,286
$
14,036
$
3,250
23
%
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 of intangible assets. 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).
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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
September 30,
2020
2019
Income from operations
$
2,352
$
1,095
Add:
Stock-based compensation
470
451
Amortization of intangibles assets
26
67
Non-GAAP income from operations
$
2,848
$
1,613
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 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.
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 provide a combined fixed fee and per agent fee, for each software license sold containing the embedded software to the Company. These embedded OEM royalties are included as subscription revenue. Under Topic 606-10-55-65 revenue guidance (Topic 606), 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.
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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. 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.
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.
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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
September 30,
2020
2019
Revenue:
Subscription
93
%
91
%
Professional services
7
%
9
%
Total revenue
100
%
100
%
Cost of revenue:
Cost of subscription
17
%
22
%
Cost of professional services
7
%
9
%
Total cost of revenue
24
%
31
%
Gross profit
76
%
69
%
Operating expenses:
Research and development
24
%
23
%
Sales and marketing
30
%
28
%
General and administrative
10
%
12
%
Total operating expenses
64
%
63
%
Income from operations
12
%
6
%
Revenue
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 months ended September 30, 2020 and 2019, respectively:
Three Months Ended
September 30,
(in thousands, except percentages)
2020
2019
Change
Subscription
$
17,747
$
15,572
$
2,175
14
%
Professional services
1,316
1,618
(302)
(19)
%
Total revenue
$
19,063
$
17,190
$
1,873
11
%
Total revenue increased $1.9 million during the three months ended September 30, 2020, compared to the same period in 2019, respectively, due to an increase in SaaS revenue of $3.6 million during the three months ended September 30, 2020, compared to the same period in 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 $233,000 and a decrease of $432,000 in total revenue during the three months ended September 30, 2020 and 2019, respectively.
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Subscription Revenue
SaaS Revenue
Three Months Ended
September 30,
(in thousands, except percentages)
2020
2019
Change
SaaS revenue
$
15,970
$
12,418
$
3,552
29
%
Percentage of total revenue
84
%
72
%
SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support. Revenue from SaaS increased by $3.6 million during the three months ended September 30, 2020, compared to the same period in 2019.
SaaS revenue represents 84% and 72% of total revenue for the three months ended September 30, 2020 and 2019, respectively. This represented an increase in SaaS revenue of 29% for the three months ended September 30, 2020 as compared to the comparable period in 2019.
Excluding an increase of $251,000 due to foreign exchange rate fluctuation, SaaS revenue increased by $3.3 million during the three months ended September 30, 2020 as compared to the comparable period in 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
September 30,
(in thousands, except percentages)
2020
2019
Change
Legacy revenue
$
1,777
$
3,154
$
(1,377)
(44)
%
Percentage of total revenue
9
%
18
%
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 during the three months ended September 30, 2020, compared to the same period in 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 an increase of $24,000 due to foreign exchange rate fluctuation, legacy revenue decreased by $1.4 million during the three months ended September 30, 2020, as compared to the comparable period in 2019.
Professional Services Revenue
Three Months Ended
September 30,
(in thousands, except percentages)
2020
2019
Change
Professional services revenue
$
1,316
$
1,618
$
(302)
(19)
%
Percentage of total revenue
7
%
9
%
Professional services revenue includes consulting, implementation and training. Revenue from professional services decreased by $302,000 during the three months ended September 30, 2020, compared to the same period in 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 a decrease of $42,000 due to foreign exchange rate fluctuation, professional services revenue decreased by $260,000 during the three months ended September 30, 2020, as compared to the comparable period in 2019.
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Revenue by Geography
Three Months Ended
September 30,
(in thousands, except percentages)
2020
2019
Change
Domestic
$
13,768
$
9,591
$
4,177
44
%
International
5,295
7,599
(2,304)
(30)
%
Total revenue
$
19,063
$
17,190
$
1,873
11
%
Revenue from domestic sales increased by 44% from $9.6 million during the three months ended September 30, 2019 to $13.8 million during the three months ended September 30, 2020, due to increases of (i) $4.1 million in SaaS revenue and (ii) $252,000 in professional services revenue; partially offset by a decrease of $133,000 in legacy revenue.
Revenue from international sales decreased by 30% from $7.6 million for the three months ended September 30, 2019 to $5.3 million during the three months ended September 30, 2020, due to decreases of (i) $1.2 million in legacy revenue, (ii) $506,000 in SaaS revenue, and (iii) $555,000 in professional services revenue.
Cost of Revenue
Three Months Ended
September 30,
(in thousands, except percentages)
2020
2019
Change
Subscription
$
3,222
$
3,750
$
(528)
(14)
%
Professional services
1,409
1,565
(156)
(10)
%
Total cost of revenue
$
4,631
$
5,315
$
(684)
(13)
%
Percentage of total revenue
24
%
31
%
Gross margin
76
%
69
%
Subscription
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 revenues decreased by $528,000 during the three months ended September 30, 2020, from the comparable period in 2019. This decrease was primarily due to decreases of (i) $397,000 in cloud-computing costs, (ii) $222,000 in personnel-related costs, and (iii) $41,000 in intangible amortization costs during the three months ended September 30, 2020, from the comparable period in 2019. This was partially offset by an increase in outside consulting costs of $130,000 during the three months ended September 30, 2020, from the comparable period in 2019.
Excluding an increase of $2,000 due to foreign exchange rate fluctuation, cost of subscription revenue decreased by $530,000 during the three months ended September 30, 2020, from the comparable period in 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.
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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 decreased by $156,000 during the three months ended September 30, 2020, from the comparable period in 2019. The decrease for the three months ended September 30, 2020 was primarily due to decreases in personnel-related costs of $112,000 and $43,000 in outside consulting costs. Foreign exchange rate fluctuation did not have a significant impact on the decrease from cost of professional service.
Operating Expenses
Research and Development
Three Months Ended
September 30,
(in thousands, except percentages)
2020
2019
Change
Research and development
$
4,505
$
3,998
$
507
13
%
Percentage of total revenue
24
%
23
%
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 13% to $4.5 million for the three months ended September 30, 2020, from $4.0 million in the comparable period in 2019. Excluding a decrease of $7,000 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 an increase of $568,000 in personnel-related costs; offset by a decrease of $54,000 in outside consulting costs.
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
September 30,
(in thousands, except percentages)
2020
2019
Change
Sales and marketing
$
5,631
$
4,738
$
893
19
%
Percentage of total revenue
30
%
28
%
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 19% to $5.6 million for the three months ended September 30, 2020, from $4.7 million in the comparable period in 2019. Excluding an increase of $63,000 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) $692,000 in personnel-related expenses and (ii) $160,000 in marketing program expenses; offset by a decrease of $21,000 in outside consulting expenses.
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.
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General and Administrative
Three Months Ended
September 30,
(in thousands, except percentages)
2020
2019
Change
General and administrative
$
1,944
$
2,044
$
(100)
(5)
%
Percentage of total revenue
10
%
12
%
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 5% to $1.9 million for the three months ended September 30, 2020, from $2.0 million in the same period in 2019. Excluding an increase of $12,000 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) $84,000 in personnel-related expenses, (ii) $76,000 in bad debt expenses, (iii) $19,000 in outside consulting expenses, and (iv) $16,000 in legal costs; primarily offset by an increase of $78,000 in accounting, audit, and administrative expenses.
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
September 30,
(in thousands, except percentages)
2020
2019
Change
Income from operations
$
2,352
$
1,095
$
1,257
115
%
Operating margin
12
%
6
%
Income from operations was $2.4 million with an operating margin of 12% during the three months ended September 30, 2020. Income from operations during the three months ended September 30, 2020 included (i) $470,000 of stock-based compensation; (ii) $250,000 of amortization of costs capitalized to obtain revenue contracts; and (iii) $26,000 of amortization of intangible assets.
Interest Income, Net
Interest income, net primarily consists of interest earned on money market accounts. Interest income, net was income of $3,000 and $147,000 during the three months ended September 30, 2020 and 2019, respectively. Interest income, net decreased in the three months ended September 30, 2020, as compared to comparable period in 2019, primarily due to an unfavorable shift in interest rates from money market accounts. 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 expense of $163,000 and income of $164,000 during the three months ended September 30, 2020 and 2019, respectively. Other expense, net primarily included foreign exchange rate fluctuations on international trade receivables.
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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 September 30, 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 $148,000 and $189,000 for the three months ended September 30, 2020 and 2019, respectively.
Liquidity and Capital Resources
Overview
At September 30, 2020 and 2019, our principal sources of liquidity were cash and cash equivalents and accounts receivable, totaling $68.6 million and $69.3 million, respectively. Our cash, cash equivalents and restricted cash were $53.1 million and $46.6 million as of September 30, 2020 and June 30, 2020, respectively.
Based upon our current business plan, we believe that existing capital resources will enable us to maintain current and planned operations for at least the next 12 months. From time to time, however, we may consider opportunities for raising additional capital. We can make no assurances that such opportunities will be available to us on economic terms we consider favorable, if at all. Our expectations as to our future cash flows and our future cash balances are subject to a number of assumptions, including assumptions regarding anticipated increases in our revenue, our ability to retain existing customers and customer purchasing and payment patterns, many of which are beyond our control.
Cash Flows
For the three months ended September 30, 2020 and 2019, our cash flows were as follows (in thousands):
Three Months Ended
September 30,
2020
2019
Net cash provided by operating activities
$
5,734
$
2,724
Net cash used in investing activities
(79)
(70)
Net cash provided by financing activities
488
86
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 $3.0 million during the three months ended September 30, 2020, from the comparable period in 2019, driven primarily by the timing of payments for accounts receivable received from customers for new cloud arrangements and the renewal of existing cloud and support arrangements for the three months ended September 30, 2020.
Net cash used in investing activities increased by $9,000 during the three months ended September 30, 2020, from the comparable period in 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 increased by $402,000 during the three months ended September 30, 2020, from the comparable period in 2019. Our current proceeds consist primarily of proceeds from the exercise of employee stock options.
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Commitments
Our principal 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 . As September 30, 2020, the future non-cancelable minimum payments under these commitments were approximately $2.9 million.
Off-Balance Sheet Arrangements
As of September 30, 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.