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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-05-14 · 152 added, 155 removed, 222 unchanged (58% of the section changed)

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

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, 2021.

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 a novel strain of coronavirus (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;

These statements relate to future periods, future events or our future operating or financial plans or performance.

Often, these statements include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” “potential,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may,” or the negative of these terms, and other similar expressions.

These forward-looking statements that involves risks and uncertainties include statements as to:

● the benefits of our SaaS only business model, including 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;

● expected benefits of our solutions to our clients and partners;

● customer and market expectations in the market in which we operate;

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

● our expectations regarding innovation in cloud and growing API economy;

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

● our business plan and growth strategies;

● 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;

● changes in demand for our solutions;

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

● our reliance on strategic and third party distribution partnerships;

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

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

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tax legislation;

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

● the effect of compliance with privacy laws and regulations on our business and our customers;

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

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

● the effect of our international operations;

● the potential impact of foreign currency fluctuations;

● the potential impact of the COVID-19 pandemic on our business, employees and customers.

These forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties.

These risks and uncertainties could cause actual results to differ materially from those projected and include, but are not limited to:

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

● our ability to improve our current solutions;

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

● our ability to execute our sales and marketing strategy;

● customer acceptance of our existing and future solutions;

● our ability to predict subscription renewals;

● the impact of new legislation or regulations on our business;

● 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:

● our ability to compete against third parties with greater resources than ours ;

● the success of our partnerships;

● our ability to obtain capital when needed;

● our ability to manage future growth;

● our ability to retain key personnel and hire additional personnel;

● risks related to protection of our intellectual property;

● foreign currency fluctuations;

● the global economic environment;

● risks related to public health pandemics such as the COVID-19 pandemic;

● the risks set forth under “Risk Factors.”

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.

Except as required by federal securities laws, we undertake no obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

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 eGain and exclude its subsidiaries.

eGain and the eGain® are trademarks of eGain Corporation.

We also refer to trademarks of other corporations and organizations 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 business is subject to numerous risks and uncertainties that could affect our ability to successfully implement our business strategy and affect our financial results.

You should carefully consider all of the information in this report and, in particular, the following principal risks and all of the other specific factors described in Item 1A.

of this report, “Risk Factors,” before deciding whether to invest in our company:

● Our business is influenced by a range of factors that are beyond our control and that we have no comparative advantage in forecasting.

● We face risks related to health epidemics, 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.

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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 General Data Protection Regulation (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.

● Unplanned system interruptions, delays in service or inability to increase capacity, including internationally, at our third-party data center facilities could impair the use or functionality of our cloud operations and harm our business.

● Software errors could be costly and time-consuming for us to correct, and could harm our reputation and impair our ability to sell our solutions.

● The terms we agree to in our Service Level Agreements or other contracts may result in increased costs or liabilities, which would in turn affect our results of operations.

● If we are unable to increase the profitability of subscription revenue, if we experience significant customer attrition, or if we are required to delay recognition of revenue, our operating results could be adversely affected.

● We depend on broad market acceptance of our applications and of our business model.

If our expectations regarding the market for our applications are not met, our business could be seriously harmed.

● We may be unable to respond to the rapid technological change and changing customer preferences in the online sales, marketing, customer service, and/or online consumer services industries and this may cause our business to suffer.

● We employ third-party technologies for use in or with our platform and the inability to license such technologies on commercially reasonable terms or the inability to maintain these licenses or errors in the software we license could result in increased costs, or reduced service levels, which could adversely affect our business.

● Our offshore product development, support and professional services may prove difficult to manage or may not allow us to realize our cost reduction goals, produce effective new solutions and provide professional services to drive growth

eGain automates customer engagement with an innovative software as a service (SaaS) platform, powered by deep digital, artificial intelligence (AI), and knowledge capabilities.

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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).

Approximately one hundred seventy-five 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.

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

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 legacy 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.

Our transition affirmed our view that SaaS clients adopt our product innovation much faster than our perpetual license clients and get better service levels.

Fiscal year 2021 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, 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 three and nine months ended March 31, 2021.

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 has not had a material adverse impact on our business.

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:

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● Suspended all employee travel;

● Moved certain sales and marketing events to a virtual platform;

● Cancelled certain sales and marketing events;

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

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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.

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.

SaaS Revenues

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:

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● 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:

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

Three Months Ended

Nine Months Ended

September 30,

(in thousands)

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Total subscription revenue

As we continue to migrate our legacy perpetual license customers to SaaS only model, we expect our legacy revenue to continue to decline.

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

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Three Months Ended

Nine Months Ended

September 30,

(in thousands)

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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 (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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Three Months Ended

Nine Months Ended

September 30,

Income from operations

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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 royalty revenue agreements with two partners related to the Company’s embedded intellectual property.

Under the terms of these agreements, the partners are to provide to the Company a combined fixed fee and per agent fee, for each software license sold containing the embedded software.

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, certain sales from one partner are reported 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.

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.

Professional Services Revenue

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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, 2021, our remaining performance obligations were $62.3 million, of which we expect to recognize $50.1 million and $12.2 million as revenue within one year and beyond one year, respectively.

As of September 30, 2021, our remaining performance obligations were $71.9 million, of which we expect to recognize $52.8 million and $19.1 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.

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Three Months Ended

Nine Months Ended

September 30,

Professional services

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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, 2021 and 2020, respectively:

The following table presents our subscription and professional services revenue during the three months ended September 30, 2021 and 2020, respectively:

Three Months Ended

Nine Months Ended

September 30,

(in thousands, except percentages)

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Total revenue

Total revenue increased $1.4 million and $4.3 million during the three and nine months ended March 31, 2021, compared to the same periods in fiscal year 2020, respectively, due to an increase in SaaS revenue of $2.1 million and $7.7 million during the three and nine months ended March 31, 2021, compared to the same periods in fiscal year 2020.

The increase for the three months ended March 31, 2021 was primarily due to an increase in SaaS revenue that was partially offset by a decline in our legacy revenue as we continue to migrate legacy perpetual license customers to our SaaS model.

The increase for the nine months ended March 31, 2021 was primarily due to an increase in SaaS revenue that was partially offset by a decline in our legacy revenue 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.

Total revenue increased $2.4 million during the three months ended September 30, 2021, compared to the same period in 2020, respectively, due to an increase in SaaS revenue of $3.2 million during the three months ended September 30, 2021, compared to the same period in 2020.

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 increases of $475,000 and $61,000 in total revenue during the three months ended March 31, 2021 and 2020, respectively.

Foreign exchange rate fluctuation resulted in an increase of $885,000 and a decrease of $534,000 for the nine months ended March 31, 2021 and 2020, respectively.

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 $356,000 and $233,000 in total revenue during the three months ended September 30, 2021 and 2020, respectively.

Subscription Revenue

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(in thousands, except percentages)

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

Revenue from SaaS increased by $2.1 million and $7.7 million during the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

Revenue from SaaS increased by $3.2 million during the three months ended September 30, 2021, compared to the same period in 2020.

SaaS revenue represents 89% and 84% of total revenue for the three months ended September 30, 2021 and 2020, respectively.

This represented an increase in SaaS revenue of 20% for the three months ended September 30, 2021 as compared to the comparable period in 2020.

Excluding an increase of $296,000 due to foreign exchange rate fluctuation, SaaS revenue increased by $2.9 million during the three months ended September 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.

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

SaaS revenue represents 85% and 84% of total revenue for the three and nine months ended March 31, 2021, respectively, compared to 81% and 77% during the same periods in fiscal year 2020.

This represented an increase in SaaS revenue of 14% and 19% for the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

Excluding increases of $380,000 and $732,000 due to foreign exchange rate fluctuation, SaaS revenue increased by $1.7 million and $7.0 million during the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

Legacy Revenue

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Nine Months Ended

September 30,

(in thousands, except percentages)

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

We experienced decreases of $899,000 and $3.1 million during the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

We experienced decreases of $826,000 during the three months ended September 30, 2021, compared to the same period in 2020.

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 increases of $52,000 and $77,000 due to foreign exchange rate fluctuation, legacy revenue decreased by $951,000 and $3.1 million during the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

Excluding an increase of $39,000 due to foreign exchange rate fluctuation, legacy revenue decreased by $865,000 during the three months ended September 30, 2021, as compared to the comparable period in 2020.

Professional Services Revenue

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(in thousands, except percentages)

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Professional services revenue includes consulting, implementation and training.

Revenue from professional services increased by $230,000 and decreased by $351,000 during the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

The increase for three months ended March 31, 2021 compared to the prior year was due to new customer implementations.

The nine months ended March 31, 2021 compared to the prior year was decrease primarily due to continued improvements in our product deployment process resulting in a reduction in the time required for an average implementation project.

Excluding increases of $43,000 and $76,000 due to foreign exchange rate fluctuation, professional services revenue increased by $187,000 and decreased by $427,000 during the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

Revenue from professional services decreased by $10,000 during the three months ended September 30, 2021, compared to the same period in 2020.

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 an increase of $21,000 due to foreign exchange rate fluctuation, professional services revenue decreased by $31,000 during the three months ended September 30, 2021, as compared to the comparable period in 2020.

Revenue by Geography

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(in thousands, except percentages)

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Total revenue

Revenue from domestic sales increased by 19% from $11.5 million during the three months ended March 31, 2020 to $13.6 million during the three months ended March 31, 2021 due to increases of (i) $1.3 million in SaaS revenue, (ii) $452,000 in professional services revenue, and (iii) $348,000 in legacy revenue.

Revenue from domestic sales increased by 27% from $32 million during the nine months ended March 31, 2020 to $40.6 million during the nine months ended March 31, 2021 due to increases of (i) $7.4 million in SaaS revenue, (ii) $618,000 in legacy revenue, and (iii) $478,000 in professional services revenue.

Revenue from international sales decreased by 11% from $6.9 million for the three months ended March 31, 2020 to $6.1 million during the three months ended March 31, 2021, due to decreases of $1.2 million in legacy revenue and $222,000 in professional services revenue;

offset by an increase of $714,000 in SaaS revenue.

Revenue from international sales decreased by 19% from $21.7 million for the nine months ended March 31, 2020 to $17.5 million during the nine months ended March 31, 2021, due to decreases of $3.7 million in legacy revenue and $830,000 in professional services revenue;

offset by an increase of $323,000 in SaaS revenue.

Revenue from domestic sales increased by 11% from $13.8 million during the three months ended September 30, 2020 to $15.2 million during the three months ended September 30, 2021, due to increases of $2.1 million in SaaS revenue;

partially offset by a decrease of (i) $98,000 in professional services revenue and (ii) $579,000 in legacy revenue.

Revenue from international sales increased by 18% from $5.3 million for the three months ended September 30, 2020 to $6.2 million during the three months ended September 30, 2021, due to increases of (i) $1.1 million in Saas revenue and (ii) $88,000 in professional services revenue;

partially offset by a decrease in $247,000 in legacy revenue.

Cost of Revenue

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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 decreased by $398,000 during the three months ended March 31, 2021, from the same period in fiscal year 2020.

This decrease was primarily due to decreases of (i) $196,000 in cloud-computing costs, (ii) $149,000 in personnel-related costs, (iii) $67,000 in intangible amortization cost, and (iv) $22,000 in outside consulting costs.

Cost of subscription revenue decreased by $1.2 million during the nine months ended March 31, 2021, from the same period in fiscal year 2020.

This decrease was primarily due to decreases of (i) $670,000 in cloud-computing costs, (ii) $608,000 in personnel-related costs, and (iii) $175,000 in intangible amortization costs;

primarily offset by an increase of $179,000 in outside consulting costs.

Excluding increases of $37,000 and $39,000 due to foreign exchange rate fluctuation, cost of subscription revenue decreased by $435,000 and $1.3 million during the three and nine months ended March 31, 2021, respectively, from the same periods in fiscal year 2020.

Cost of subscription revenues increased by $265,000 during the three months ended September 30, 2021, from the comparable period in 2020.

This increase was primarily due to increases of (i) $283,000 in personnel-related costs and (ii) $125,000 in cloud-computing costs during the three months ended September 30, 2021, from the comparable period in 2020.

This was partially offset by a decrease of (i) $144,000 in outside consulting costs and (ii) $26,000 in intanglible amortization costs during the three months ended September 30, 2021, from the comparable period in 2020.

Excluding an increase of $28,000 due to foreign exchange rate fluctuation, cost of subscription revenue increased by $237,000 during the three months ended September 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 but expect subscription revenue gross margins to improve.

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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 $256,000 during the three months ended March 31, 2021, from the same period in fiscal year 2020.

This decrease was primarily due to decreases of $233,000 in personnel-related costs and $50,000 in outside consulting costs.

Cost of professional services decreased by $634,000 during the nine months ended March 31, 2021, from the same period in fiscal year 2020.

This decrease was primarily due to decreases of $527,000 in personnel-related costs which was cross charge to other departments and $142,000 in outside consulting costs.

Excluding increases of $27,000 and $34,000 due to foreign exchange rate fluctuation, cost of professional services revenue decreased by $283,000 and $668,000 during the three and nine months ended March 31, 2021, respectively, compared to the same periods in fiscal year 2020.

Cost of professional services increased by $402,000 during the three months ended September 30, 2021, from the comparable period in 2020.

The increase for the three months ended September 30, 2021 was primarily due to increases in personnel-related costs of $397,000 and partially offset by a decrease of $15,000 in outside consulting costs.

Excluding an increase of $20,000 due to foreign exchange rate fluctuation, cost of professional services increased by $382,000 during the three months ended September 30, 2021, from the comparable period in 2020.

Operating Expenses

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

Research and development expense increased 4% to $4.4 million for the three months ended March 31, 2021, from $4.2 million in the same period in fiscal year 2020.

Excluding an increase of $56,000 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 $192,000 in personnel-related costs;

offset by a decrease of $81,000 from outside consulting costs.

Research and development expense increased 9% to $13.4 million for the nine months ended March 31, 2021, from $12.3 million in the same period in fiscal year 2020.

Excluding an increase of $39,000 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 $1.3 million in personnel-related costs and cross charges from other departments;

offset by a decrease of $213,000 from outside consulting costs.

Research and development expense increased 25% to $5.6 million for the three months ended September 30, 2021, from $4.5 million in the comparable period in 2020.

Excluding a increase of $48,000 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 (i) $1.1 million in personnel-related costs and (ii) $19,000 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.

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Nine Months Ended

September 30,

(in thousands, except percentages)

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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 37% to $6.9 million for the three months ended March 31, 2021, from $5.1 million in the same period in fiscal year 2020.

Excluding an increase of $137,000 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) $1.7 million in personnel-related expenses and cross charges from other departments, (ii) $37,000 in outside consulting expenses, and (iii) $18,000 in marketing program expenses.

Sales and marketing expenses increased 29% to $18.8 million for the nine months ended March 31, 2021, from $14.6 million in the same period in fiscal year 2020.

Sales and marketing expenses increased 31% to $7.4 million for the three months ended September 30, 2021, from $5.6 million in the comparable period in 2020.

Excluding an increase of $107,000 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 $4.1 million in personnel-related expenses and cross charges from other departments and $51,000 in outside consulting expenses;

Dollar, Euro, British Pound and Indian Rupee, sales and marketing expense increased primarily due to increases of (i) $1.8 in personnel-related expenses and (ii) $37,000 in outside consulting costs;

offset by a decrease of $136,000 in marketing program expenses.

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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 increased 11% to $2.0 million for the three months ended March 31, 2021, from $1.8 million in the same period in fiscal year 2020.

Excluding an increase of $27,000 due to foreign exchange rate fluctuation between the U.S.

Dollar, Euro, British Pound and Indian Rupee, general and administrative expense increased primarily due to increases of (i) $109,000 in bad debt expenses, (ii) $76,000 in legal expenses, (iii) $72,000 in outside consulting expenses, and (iv) $17,000 in accounting, audit, and administrative expenses;

primarily offset by a decrease of $118,000 in personnel-related expenses.

General and administrative expenses decreased 2% to $5.8 million for the nine months ended March 31, 2021, from $5.9 million in the same period in fiscal year 2020.

General and administrative expenses increased 26% to $2.4 million for the three months ended September 30, 2021, from $1.9 million in the same period in 2020.

Excluding an increase of $26,000 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) $285,000 in personnel-related expenses, (ii) $95,000 in accounting, audit, and administrative expenses, and (iii) $15,000 in legal expenses;

primarily offset by increases of $194,000 in bad debt expenses and $41,000 in outside consulting expenses.

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

Dollar, Euro, British Pound and Indian Rupee, general and administrative expense increased primarily due to increases of (i) $574,000 in personnel-related expenses, (ii) $38,000 in legal expenses, (iii) $37,000 in outside consulting costs, (iv) $11,000 in investor relations expenses;

partially offset by a decrease (i) $158,000 in bad debt expenses and (ii) $22,000 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

Nine Months Ended

September 30,

(in thousands, except percentages)

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Operating margin

Income from operations was $1.6 million with an operating margin of 8% during the three months ended March 31, 2021.

Income from operations during the three months ended March 31, 2021 included $368,000 of stock-based compensation and $309,000 of amortization of costs capitalized to obtain revenue contracts.

Income from operations was $5.8 million with an operating margin of 10% during the nine months ended March 31, 2021.

Income from operations during the nine months ended March 31, 2021 included (i) $1.3 million of stock-based compensation;

(ii) $872,000 of amortization of costs capitalized to obtain revenue contracts;

and (iii) $26,000 of amortization of intangible assets.

Income from operations was $691,000 with an operating margin of 3% during the three months ended September 30, 2021.

Income from operations during the three months ended September 30, 2021 included (i) $2.1 million of stock-based compensation and (ii) $356,000 of amortization of costs capitalized to obtain revenue contracts.

Interest Income, Net

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

Interest income, net was income of $5,000 and $113,000 during the three months ended March 31, 2021 and 2020, respectively.

Interest income, net was income of $10,000 and $384,000 during the nine months ended March 31, 2021 and 2020, respectively.

Interest income, net decreased in the three and nine months ended March 31, 2021, compared to the same periods in fiscal year 2020, primarily due to an unfavorable shift of interest rates from money market accounts.

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

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

Interest income, net was income of $2,000 and $3,000 during the three months ended September 30, 2021 and 2020, respectively.

Interest income, net decreased in the three months ended September 30, 2021, as compared to comparable period in 2020, 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 $378,000 and income of $65,000 during the three months ended March 31, 2021 and 2020, respectively.

Other income (expense), net was expense of $700,000 and income of $44,000 during the nine months ended March 31, 2021 and 2020, respectively.

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

Income Tax (Provision) Benefit

Other income (expense), net was income of $10,000 and expense of $163,000 during the three months ended September 30, 2021 and 2020, respectively.

Other 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, 2021.

deferred tax assets as of September 30, 2021.

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 benefit of $57,000 and provision of $223,000 for the three and nine months ended March 31, 2021, respectively.

We recorded income tax provisions of $68,000 and $224,000 for the three and nine months ended March 31, 2020, respectively.

We recorded income tax provisions of $152,000 and $148,000 for the three months ended September 30, 2021 and 2020, respectively.

Liquidity and Capital Resources

At March 31, 2021 and June 30, 2020, our principal sources of liquidity were cash and cash equivalents, and accounts receivable totaling $69.4 million and $69.3 million, respectively.

Our cash, cash equivalents and restricted cash were $53.4 million and $46.6 million as of March 31, 2021 and June 30, 2020, respectively.

For the nine months ended March 31, 2021 and 2020, our cash flows were as follows (in thousands):

Nine Months Ended

As of September 30, 2021 and 2020, our principal sources of liquidity were cash and cash equivalents and accounts receivable, totaling $81.8 million and $89.5 million, respectively.

Our cash, cash equivalents and restricted cash were $70.4 million and $63.2 million as of September 30, 2021 and June 30, 2021, 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.

For the three months ended September 30, 2021 and 2020, our cash flows were as follows (in thousands):

Three Months Ended

September 30,

Net cash provided by operating activities

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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 commissions and bonus payments, and changes in operating assets and liabilities during the year.

Net cash provided by operating activities decreased by $3.4 million during the nine months ended March 31, 2021, from the same period in fiscal year 2020, driven primarily by the timing of prepayments received from customers for new cloud arrangements and the renewal of existing cloud and support arrangements, as well as the timing of accrued liability payouts.

Net cash used in investing activities increased by $15,000 during the nine months ended March 31, 2021, from the same period in fiscal year 2020, driven primarily by activities related to the purchase of equipment for new employees and facility expenditures.

Net cash provided by operating activities increased by $1.4 million during the three months ended September 30, 2021, from the comparable period in 2020, 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.

Net cash used in investing activities increased by $52,000 during the three months ended September 30, 2021, from the comparable period in 2020, 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 $670,000 during the nine months ended March 31, 2021, from the same period in fiscal year 2020.

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

Net cash provided by financing activities decreased by $77,000 during the three months ended September 30, 2021, from the comparable period in 2020.

Our current proceeds consist primarily of proceeds from the exercise of employee stock options.

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 March 31, 2021, the future non-cancelable minimum payments under these commitments were approximately $2.8 million.

As of September 30, 2021, the future non-cancelable minimum payments under these commitments were approximately $2.9 million.

Off-Balance Sheet Arrangements

As of March 31, 2021, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

As of September 30, 2021, we had no significant off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.

New Accounting Pronouncements

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Item 2. Management’s Discussion and Analysis