What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-10 compared with 2020-09-11 · 67 added, 64 removed, 336 unchanged (28% of the section changed)

8 unchanged sentences

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.

One hundred fifty leading brands use eGain’s 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.

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

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 June 30, 2020.

Since early 2020, 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 year ended June 30, 2021.

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.

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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.

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Legacy revenue

Total subscription revenue

Total SaaS and legacy revenue

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

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Invoiced amounts are recorded in accounts receivable, deferred revenue or revenue, depending on when control is 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, per agent, for each software license sold containing the embedded software to the Company.

We have a royalty revenue agreement with a customer related to our embedded intellectual property.

Under the terms of the agreement, the customer is to provide a combined fixed fee, per agent, for each software license sold containing the embedded software to us.

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.

Under Topic 606-10-55-65 revenue guidance (Topic 606), since these arrangements are for sales-based licenses of intellectual property, we recognize 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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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.

Stock-Based Compensation

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The provisions of the Tax Act are complex and likely will be subject to regulatory and administrative guidance.

The Tax Act includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries and a base erosion anti-

abuse tax (BEAT) measure that taxes certain payments between a U.S.

The Tax Act includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries and a base erosion anti-abuse tax (BEAT) measure that taxes certain payments between a U.S.

corporation and its foreign subsidiaries.

For the fiscal year ended June 30, 2020, we have $3.2 million of GILTI income inclusion and used our net operating losses to offset our taxable income.

fiscal year ended June 30, 2021, we have $923,000 of GILTI income inclusion and used our net operating losses to offset our taxable income.

For the fiscal year ended June 30, 2021, we did not incur any BEAT tax.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L.

116-136,was passed into law, amending portions of certain relevant US tax laws.

The CARES Act included a number of federal income tax law changes, including, but not limited to:

(i) permitting net operating loss carrybacks to offset 100% of taxable income for taxable years beginning before 2021, (ii) accelerating alternative minimum tax credit refunds, (iii) temporarily increasing the allowable business interest deduction from 30% to 50% of adjusted taxable income, and (iv) providing a technical correction for depreciation related to qualified improvement property.

The CARES Act had no impact on our consolidated financial statements.

On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA).

The CAA contains numerous individual, business, payroll, disaster, and energy-related tax provisions, as well as tax extenders.

Many of the provisions, including $600 stimulus payments, and an extension of payroll credits, relate to the COVID-19 pandemic.

The COVID-related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), both part of the CAA, contains numerous provisions related to businesses.

We continue to examine the elements of the CARES Act and CAA and the impact they may have on our future business.

Fiscal Year 2021 Compared with Fiscal Year 2020

Our effective tax rate for fiscal years 2020 and 2019 was a tax provision rate of 9.7% and 16.7%, respectively.

The change in our effective tax rate for fiscal year 2020 as compared to fiscal year 2019 was primarily due to the expiration of tax attributes, the change in valuation allowance, foreign rate differential, stock-based compensation and the research and development tax credit.

Our effective tax rate for fiscal years 2021 and 2020 was a tax benefit of 2.4% and a tax provision of 9.7%, respectively.

The change in our effective tax rate for fiscal year 2021 as compared to fiscal year 2020 was primarily due to the expiration of tax attributes, the change in valuation allowance, foreign rate differential, GILTI inclusion, stock-based compensation and the research and development tax credit.

The income before income tax provision between the U.S.

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We have not recorded a deferred tax liability related to the U.S.

state income taxes and foreign withholding taxes on approximately $17.1 million of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States.

state income taxes and foreign withholding taxes on approximately $18.7 million of undistributed earnings of foreign

subsidiaries indefinitely invested outside the United States.

If we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.

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Total revenue increased $5.6 million during the fiscal year ended June 30, 2021, from the comparable period in 2020, largely due to increased revenues from SaaS of $10.1 million in fiscal year 2021.

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.

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.

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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 a decrease of $722,000 and a decrease of $1.2 million in total revenue during the fiscal years ended June 30, 2020 and 2019, respectively.

Foreign exchange rate fluctuation resulted in an increase of $2.0 million and a decrease of $722,000 in total revenue during the fiscal years ended June 30, 2021 and 2020, respectively.

Subscription Revenue

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SaaS revenue represents 85% and 78% of total revenue for the fiscal years ended June 30, 2021 and 2020, respectively.

Excluding a decrease of $493,000 due to foreign exchange rate fluctuation, SaaS revenue increased by $12.5 million during the fiscal year ended June 30, 2020, as compared to the comparable period in 2019.

Excluding an increase of $1.3 million due to foreign exchange rate fluctuation, SaaS revenue increased by $8.8 million during the fiscal year ended June 30, 2021, as compared to the comparable period in 2020.

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.

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Legacy revenue represents 7% and 13% of total revenue for the fiscal years ended June 30, 2021 and 2020, respectively.

Excluding a decrease of $153,000 due to foreign exchange rate fluctuation, legacy revenue decreased by $5.7 million during the fiscal year ended June 30, 2020, as compared to the comparable period in 2019.

Excluding an increase of $433,000 due to foreign exchange rate fluctuation, legacy revenue decreased by $4.3 million during the fiscal year ended June 30, 2021, as compared to the comparable period in 2020.

Professional Services Revenue

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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 further.

Professional services revenue was $6.6 million during the fiscal year ended June 30, 2020, which represented a decrease of 9% or $619,000 from the comparable period in 2019.

Professional services revenue was $5.9 million during the fiscal year ended June 30, 2021, which represented a decrease of 10% or $684,000.

Professional services revenue represents 8% and 9% of total revenue for the fiscal years ended June 30, 2021 and 2020, respectively.

Excluding a decrease of $76,000 due to foreign exchange rate fluctuation, professional services revenues decreased by $543,000 during the fiscal year ended June 30, 2020, as compared to the comparable period in 2019.

Excluding an increase of $204,000 due to foreign exchange rate fluctuation, professional services revenues decreased by $888,000 during the fiscal year ended June 30, 2021, as compared to the comparable period in 2020.

Revenue by Geography

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Total revenue

Revenue from domestic sales increased by 20% from $37.4 million during the fiscal year ended June 30, 2019 to $44.8 million during the fiscal year ended June 30, 2020 due to increases of (i) $11.6 million in SaaS revenue and (ii) $136,000 in professional services;

offset by a decrease of $4.4 million in legacy revenue.

Revenue from international sales decreased by 6% from $29.8 million during the fiscal year ended June 30, 2019 to $27.9 million during the fiscal year ended June 30, 2020 due to decreases of (i) $1.5 million in legacy revenue and (ii) $756,000 in professional services revenue;

offset by an increase of $381,000 in SaaS revenue.

Revenue from domestic sales increased by 21% from $44.8 million during the fiscal year ended June 30, 2020 to $54.4 million during the fiscal year ended June 30, 2021 due to increases of (i) $8.4 million in SaaS revenue, (ii) $885,000 in legacy revenue, and (iii) $322,000 in professional service revenue.

Revenue from international sales decreased by 14% from $27.9 million during the fiscal year ended June 30, 2020 to $23.9 million during the fiscal year ended June 30, 2021 due to decreases of (i) $4.8 million in legacy revenue and (ii) $1.0 million in professional services revenue;

offset by an increase of $1.8 million in SaaS revenue.

Cost of Revenue

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Cost of subscription revenues decreased by $891,000 during the fiscal year ended June 30, 2021.

The decrease is primarily due to a decrease in personnel related costs of $1.1 million during the fiscal year ended June 30, 2020, from the comparable period in 2019, partially offset by an increase in cloud computing costs of $576,000 during the fiscal year ended June 30, 2020.

Excluding a decrease of $106,000 due to foreign exchange rate fluctuation, cost of subscription revenues decreased by $472,000 during the fiscal year ended June 30, 2020, from the comparable period in 2019.

The decrease is primarily due to a decrease in (i) personnel related costs of $609,000, (ii) cloud computing cost of $344,000 and (iii) intangible asset amortization of $242,000, partially offset with an increase in outside consulting cost of $173,000 during the fiscal year ended June 30, 2021, from the comparable period in 2020.

Excluding an increase of $131,000 due to foreign exchange rate fluctuation, cost of subscription revenues decreased by $1.0 million during the fiscal year ended June 30, 2021, from the comparable period in 2020.

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

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Cost of professional services decreased $923,000 during the fiscal year ended June 30, 2021 from the comparable period in 2020.

This decrease is primarily due to a decrease in outside consulting costs of $196,000 for the fiscal year ended June 30, 2020, partially offset by an increase in personnel-related costs of $101,000 during the fiscal year ended June 30, 2020.

Excluding a decrease of $86,000 due to foreign exchange rate fluctuation, cost of professional services revenue decreased by $96,000 for the fiscal year ended June 30, 2020, from the comparable period in 2019.

This decrease is primarily due to a decrease in personnel-related costs of $902,000 and outside consulting costs of $158,000 for the fiscal year ended June 30, 2021.

Excluding an increase of $137,000 due to foreign exchange rate fluctuation, cost of professional services revenue decreased by $1.1 million for the fiscal year ended June 30, 2021, from the comparable period in 2020.

Operating Expenses

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Research and development expense increased 8% to $17.9 million during the fiscal year ended June 30, 2021, from $16.6 million in the comparable period in 2020.

Excluding a decrease of $160,000 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) $2.5 million in personnel-related costs and (ii) $69,000 in outside consulting costs;

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

Excluding an increase of $195,000 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 $1.4 million in personnel-related costs;

partially offset by a decrease of $277,000 in outside consulting costs.

Excluding any future foreign exchange rate fluctuation, we expect our research and development expense to increase in future periods based on our product development plans.

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Sales and marketing expenses increased 32% to $26.0 million during the fiscal year ended June 30, 2021, from $19.6 million in the comparable period in 2020.

Excluding a decrease of $171,000 due to foreign exchange rate fluctuation between the U.S.

Excluding an increase of $423,000 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) $6.2 million in personnel-related costs and (ii) $16,000 outside consulting services;

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General and administrative expense decreased 3% to $7.7 million during the fiscal year ended June 30, 2021, from $8.0 million in the comparable period in 2020.

Excluding a decrease of $61,000 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) $290,000 in legal expenses;

Excluding an increase of $131,000 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) $349,000 in personnel-related expenses;

(ii) $108,000 in accounting, audit, and administrative expenses;

and (iii) $31,000 in outside consulting costs;

partially offset by increases of (a) $224,000 in personnel-related expenses;

and (b) $70,000 in bad debt expenses.

(iii) $106,000 in legal expenses;

partially offset by increases of (a) $90,000 in outside consulting costs;

(b) $69,000 in bad debt expenses;

and (c) $42,000 in investor relations expense.

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 periods based on our current business plan.

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The increase in our stock-based compensation expense in fiscal year 2021 compared to fiscal year 2020 was primarily due to an increase in option grant activity.

We expect our stock-based compensation expense to increase or remain relatively constant in fiscal year 2021.

We expect our stock-based compensation expense to increase in fiscal year 2022.

Income from Operations

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We recorded a positive operating margin of 9% in fiscal year 2021, and 10% in fiscal year 2020.

The increase in operating income in fiscal year 2020 was primarily due to the growth of our cloud delivery business and the decline of costs associated with professional services, as we focused to reduce the time involved in implementation projects.

The increase in operating income in fiscal year 2021 was primarily due to the growth of our cloud delivery business and improvement in our gross margins.

During the fiscal year ended June 30, 2021, SaaS revenue increased by $10.1 million to $66.9 million compared to $56.8 million in fiscal year 2020.

Excluding a decrease from foreign exchange fluctuation of $584,000 the increase in total costs and operating expenses in fiscal year 2020 was primarily due to increases of (i) $4.3 million in personnel-related expenses;

(ii) $576,000 in cloud computing costs;

(iii) $70,000 in bad debt expenses;

and (iv) $54,000 in outside consulting costs;

partially offset by a decrease of (a) $290,000 in legal expenses;

(b) $179,000 in marketing program costs;

Excluding a decrease from foreign exchange fluctuation of $1.0 million the increase in total costs and operating expenses in fiscal year 2021 was primarily due to increases of (i) $5.7 million in personnel-related expenses;

(ii) $69,000 in bad debt expenses;

and (iii) $42,000 in investor relations cost;

partially offset by a decrease of (a) $344,000 in cloud computing costs;

(b) $258,000 in marketing costs;

and (d) $131,000 in accounting, audit and administrative services.

Interest Income (Expense), Net

Interest income (expense), net consists primarily of interest earned on money market funds.

Interest income (expense), net was income of $395,000 and expense of $319,000 in the fiscal years ended June 30, 2020 and 2019, respectively.

In fiscal year 2020 we recognized interest income primarily due to interest earned on money market funds invested from our follow-on public offering from fiscal year 2019.

(d) $156,000 in outside consulting costs;

(e) $108,000 in accounting, audit and administrative services and;

(f) $106,000 in legal expenses.

Interest Income, Net

Interest income, net consists primarily of interest earned on money market funds.

Interest income, net was income of $13,000 and $395,000 in the fiscal years ended June 30, 2021 and 2020, respectively.

We expect interest income to remain relatively constant in future periods.

Other Income (Expense), Net

Other income (expense), net was income of $185,000 and expense of $202,000 for the fiscal years ended June 30, 2020 and 2019, respectively.

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

Other (Expense) Income, Net

Other (expense) income, net was expense of $559,000 and income of $185,000 for the fiscal years ended June 30, 2021 and 2020, respectively.

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

Income Tax Provision

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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 an income tax provision of $778,000 and $833,000 in the fiscal years ended June 30, 2020 and 2019, respectively, due to income taxes in profitable jurisdictions outside of the United States.

We recorded an income tax benefit of $166,000 and an income tax provision of $778,000 in the fiscal years ended June 30, 2021 and 2020, respectively.

New Accounting Pronouncements

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As of June 30, 2021, our deferred revenue was $49.5 million as compared to $41.5 million as of June 30, 2020.

In 2019, we sold 2.1 million shares of our common stock in a follow-on public offering.

Shares were offered at a public offering price of $11.00 per share and we raised an aggregate $23.6 million before underwriter’s commission and expenses of $1.9 million.

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.

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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 costs capitalized to obtain revenue contracts, amortization of right-of-use assets, and changes in operating assets and liabilities during the year.

Cash provided by operating activities increased by $7.1 million during the fiscal year ended June 30, 2020, driven primarily by the timing of prepayments received from customers for new cloud arrangements and the renewal of existing cloud and support arrangements, which is our largest source of operating cash flows, as well as higher net income.

Cash provided by operating activities decreased by $196,000 during the fiscal year ended June 30, 2021, driven primarily by the timing of prepayments received from customers for new cloud arrangements and the renewal of existing cloud and support arrangements, which is our largest source of operating cash flows, as well as higher net income.

Net cash used in investing activities increased by $112,000 during the fiscal year ended June 30, 2021, 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 $12.4 million during the fiscal year ended June 30, 2020, driven primarily by net proceeds received from the sale of our common stock in a follow-on public offering in fiscal year 2019;

partially offset by an increase in bank borrowing payments in fiscal year 2019.

Cash provided by financing activities in fiscal year 2020 principally consisted of proceeds from employee stock plans.

Net cash provided by financing activities increased by $942,000 during the fiscal year ended June 30, 2021, principally consisted of proceeds from employee stock plans.

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

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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-K

Item 7. Management’s Discussion and Analysis