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, 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 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;
● 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 beliefs regarding our prospects for our business;
● 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;
● uncertainty relating to the implementation and effect of Brexit;
● the effect of recent changes in U.S. tax legislation;
● 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; and
● the potential impact of the COVID-19 pandemic on our business, employees and customers.
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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;
● 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; and
● 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
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:
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● 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.
● 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.
● 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, 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.
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● 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
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’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 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. 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.
COVID-19
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:
● 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.
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Key Financial Measures
We monitor the key financial performance measures set forth below as well as cash and cash equivalents and available debt capacity, which are discussed in “Liquidity and Capital Resources,” to help us evaluate trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational effectiveness and efficiencies.
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:
● 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.
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)
2021
2020
Change
SaaS revenue
$
19,194
$
15,970
$
3,224
20
%
Legacy revenue
951
1,777
(826)
(46)
%
Total subscription revenue
$
20,145
$
17,747
$
2,398
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)
2021
2020
Change
SaaS revenue
$
19,194
$
15,970
$
3,224
20
%
Professional services revenue
1,306
1,316
(10)
(1)
%
Total SaaS and professional services revenue:
$
20,500
$
17,286
$
3,214
19
%
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
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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).
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,
2021
2020
Income from operations
$
691
$
2,352
Add:
Stock-based compensation
2,107
470
Amortization of intangibles assets
—
26
Non-GAAP income from operations
$
2,798
$
2,848
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-
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based licenses of intellectual property, the Company recognizes revenue only as the subsequent sale occurs. However, since such sales are reported by the customer with a quarter in arrears, such revenue is recognized at the time it is reported and paid by the customer given that any estimated variable consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable risk that it may lead to significant revenue reversals.
Professional Services Revenue
Professional services revenue includes system implementation, consulting and training. The transaction price is allocated to various performance obligations based on their stand-alone selling prices. Revenue allocated to each performance obligation is recognized as work is performed. Our consulting and implementation service contracts are bid either on a time-and-materials basis or on a fixed-fee basis. Fixed fees are generally paid on milestone billing at pre-determined points in the contract. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.
Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.
Remaining Performance Obligations
Remaining performance obligations represent contracted revenue that had not yet been recognized, and include billed deferred revenue, consisting of amounts invoiced to customers whether collected or uncollected which have not been recognized as revenue, as well as unbilled amounts that will be invoiced and recognized as revenue in future periods. 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, 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. 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,
2021
2020
Revenue:
Subscription
94
%
93
%
Professional services
6
%
7
%
Total revenue
100
%
100
%
Cost of revenue:
Cost of subscription
16
%
17
%
Cost of professional services
9
%
7
%
Total cost of revenue
25
%
24
%
Gross profit
75
%
76
%
Operating expenses:
Research and development
26
%
24
%
Sales and marketing
35
%
30
%
General and administrative
11
%
10
%
Total operating expenses
72
%
64
%
Income from operations
3
%
12
%
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, 2021 and 2020, respectively:
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
Subscription
$
20,145
$
17,747
$
2,398
14
%
Professional services
1,306
1,316
(10)
(1)
%
Total revenue
$
21,451
$
19,063
$
2,388
13
%
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
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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
SaaS Revenue
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
SaaS revenue
$
19,194
$
15,970
$
3,224
20
%
Percentage of total revenue
89
%
84
%
SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support. 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.
Legacy Revenue
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
Legacy revenue
$
951
$
1,777
$
(826)
(46)
%
Percentage of total revenue
4
%
9
%
Legacy revenue is associated with license, maintenance and support contracts on perpetual license arrangements that we no longer offer. 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 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
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
Professional services revenue
$
1,306
$
1,316
$
(10)
(1)
%
Percentage of total revenue
6
%
7
%
Professional services revenue includes consulting, implementation and training. 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
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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
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
Domestic
$
15,228
$
13,768
$
1,460
11
%
International
6,223
5,295
928
18
%
Total revenue
$
21,451
$
19,063
$
2,388
13
%
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
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
Subscription
$
3,487
$
3,222
$
265
8
%
Professional services
1,811
1,409
402
29
%
Total cost of revenue
$
5,298
$
4,631
$
667
14
%
Percentage of total revenue
25
%
24
%
Gross margin
75
%
76
%
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 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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Professional Services
Cost of professional services consists primarily of personnel-related costs directly associated with our professional services and training departments, including salaries, benefits, bonuses, and stock based-compensation and allocated overhead.
Cost of professional services increased 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
Research and Development
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
Research and development
$
5,609
$
4,505
$
1,104
25
%
Percentage of total revenue
26
%
24
%
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 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.
Sales and Marketing
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
Sales and marketing
$
7,404
$
5,631
$
1,773
31
%
Percentage of total revenue
35
%
30
%
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 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 (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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Excluding any future foreign exchange rate fluctuation, we expect our sales and marketing expense to increase as a percentage of total revenue in future quarters based on our current business plan.
General and Administrative
Three Months Ended
September 30,
(in thousands, except percentages)
2021
2020
Change
General and administrative
$
2,449
$
1,944
$
505
26
%
Percentage of total revenue
11
%
10
%
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 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 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
September 30,
(in thousands, except percentages)
2021
2020
Change
Income from operations
$
691
$
2,352
$
(1,661)
(71)
%
Operating margin
3
%
12
%
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 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 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.
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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, 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 provisions of $152,000 and $148,000 for the three months ended September 30, 2021 and 2020, respectively.
Liquidity and Capital Resources
Overview
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.
Cash Flows
For the three months ended September 30, 2021 and 2020, our cash flows were as follows (in thousands):
Three Months Ended
September 30,
2021
2020
Net cash provided by operating activities
$
7,170
$
5,734
Net cash used in investing activities
(131)
(79)
Net cash provided by financing activities
411
488
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 $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 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.
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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 of September 30, 2021, the future non-cancelable minimum payments under these commitments were approximately $2.9 million.
Off-Balance Sheet Arrangements
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
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.