Company Quick10K Filing
eGain
Price7.91 EPS0
Shares32 P/E53
MCap252 P/FCF46
Net Debt-34 EBIT5
TEV218 TEV/EBIT43
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-12
10-K 2020-06-30 Filed 2020-09-11
10-Q 2020-03-31 Filed 2020-05-11
10-Q 2019-12-31 Filed 2020-02-10
10-Q 2019-09-30 Filed 2019-11-12
10-K 2019-06-30 Filed 2019-09-12
10-Q 2019-03-31 Filed 2019-05-09
10-Q 2018-12-31 Filed 2019-02-11
10-Q 2018-09-30 Filed 2018-11-09
10-K 2018-06-30 Filed 2018-09-13
10-Q 2018-03-31 Filed 2018-05-10
10-Q 2017-12-31 Filed 2018-02-13
10-Q 2017-09-30 Filed 2017-11-13
10-K 2017-06-30 Filed 2017-09-26
10-Q 2017-03-31 Filed 2017-05-10
10-Q 2016-12-31 Filed 2017-02-09
10-Q 2016-09-30 Filed 2016-11-09
10-K 2016-06-30 Filed 2016-09-13
10-Q 2016-03-31 Filed 2016-05-06
10-Q 2015-12-31 Filed 2016-02-05
10-Q 2015-09-30 Filed 2015-11-06
10-K 2015-06-30 Filed 2015-09-14
10-Q 2015-03-31 Filed 2015-05-08
10-Q 2014-12-31 Filed 2015-02-09
10-Q 2014-09-30 Filed 2014-11-10
10-K 2014-06-30 Filed 2014-09-12
10-Q 2014-03-31 Filed 2014-05-09
10-Q 2013-12-31 Filed 2014-02-12
10-Q 2013-09-30 Filed 2013-11-08
10-K 2013-06-30 Filed 2013-09-23
10-Q 2013-03-31 Filed 2013-05-15
10-Q 2012-12-31 Filed 2013-02-11
10-Q 2012-09-30 Filed 2012-11-14
10-K 2012-06-30 Filed 2012-09-25
10-Q 2012-03-31 Filed 2012-05-14
10-Q 2011-12-31 Filed 2012-02-14
10-Q 2011-09-30 Filed 2011-11-14
10-K 2011-06-30 Filed 2011-09-27
10-Q 2011-03-31 Filed 2011-05-16
10-Q 2010-12-31 Filed 2011-02-14
10-Q 2010-09-30 Filed 2010-11-12
10-K 2010-06-30 Filed 2010-09-23
10-Q 2010-03-31 Filed 2010-05-17
10-Q 2009-12-31 Filed 2010-02-16
8-K 2020-11-10 Earnings, Exhibits
8-K 2020-10-27 Amend Bylaw, Exhibits
8-K 2020-09-02 Earnings, Exhibits
8-K 2020-08-11 Earnings, Exhibits
8-K 2020-05-07
8-K 2020-02-06
8-K 2019-12-13
8-K 2019-11-21
8-K 2019-11-06
8-K 2019-09-03
8-K 2019-05-08
8-K 2019-03-14
8-K 2019-03-13
8-K 2019-02-07
8-K 2018-11-27
8-K 2018-11-08
8-K 2018-09-06
8-K 2018-05-07
8-K 2018-02-08

EGAN 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 egan-20200930ex3117402a1.htm
EX-31.2 egan-20200930ex312838308.htm
EX-32.1 egan-20200930ex321b660db.htm
EX-32.2 egan-20200930ex3229f26dd.htm

eGain Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
806244268-102012201420172020
Assets, Equity
2518114-3-102012201420172020
Rev, G Profit, Net Income
201482-4-102012201420172020
Ops, Inv, Fin

10-Q 1 egan-20200930x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 001-35314


eGain Corporation

(Exact name of registrant as specified in its charter)


Delaware

77-0466366

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

1252 Borregas Avenue, Sunnyvale, CA

94089

(Address of principal executive offices)

(Zip Code)

(408) 636-4500

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

EGAN

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

 

  

Accelerated Filer

 

Non-accelerated Filer

 

  

Smaller Reporting Company

 

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes      No  

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, was 30,929,088 as of November 11, 2020.


EGAIN CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

Page

    

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

2

Condensed Consolidated Balance Sheets as of September 30, 2020 and June 30, 2020

2

Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2020 and 2019

3

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2020 and 2019

4

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2020 and 2019

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2020 and 2019

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

21

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 6.

Exhibits

51

 

Signatures

52

3

i


PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

EGAIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value data)

(unaudited)

September 30, 

June 30, 

    

2020

    

2020

ASSETS

Current assets:

Cash and cash equivalents

$

53,099

$

46,609

Restricted cash

 

7

 

6

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

 

15,478

 

22,708

Costs capitalized to obtain revenue contracts, net

 

1,070

 

1,066

Prepaid expenses

2,018

2,514

Other current assets

 

801

 

617

Total current assets

 

72,473

 

73,520

Property and equipment, net

 

710

 

713

Operating lease right-of-use assets (Note 5)

2,592

2,962

Costs capitalized to obtain revenue contracts, net of current portion

 

2,199

 

2,380

Intangible assets, net

 

 

26

Goodwill

 

13,186

 

13,186

Other assets

 

1,057

 

918

Total assets

$

92,217

$

93,705

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

1,116

$

2,429

Accrued compensation

 

7,261

 

7,916

Accrued liabilities

 

4,007

 

3,423

Operating lease liabilities (Note 5)

1,698

1,753

Deferred revenue

 

34,016

 

36,644

Total current liabilities

 

48,098

 

52,165

Deferred revenue, net of current portion

 

4,565

 

4,826

Operating lease liabilities, net of current portion (Note 5)

1,045

1,385

Other long-term liabilities

 

723

 

688

Total liabilities

 

54,431

 

59,064

Commitments and contingencies (Note 6)

Stockholders' equity:

Common stock, par value $0.001 - authorized: 50,000 shares; outstanding: 30,924 shares as of September 30, 2020 and 30,821 shares as of June 30, 2020

 

31

 

31

Additional paid-in capital

 

375,357

 

374,399

Notes receivable from stockholders

 

(91)

 

(90)

Accumulated other comprehensive loss

 

(1,487)

 

(1,631)

Accumulated deficit

 

(336,024)

 

(338,068)

Total stockholders' equity

 

37,786

 

34,641

Total liabilities and stockholders' equity

$

92,217

$

93,705

See accompanying notes to condensed consolidated financial statements

2


EGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

Three Months Ended

September 30, 

    

2020

    

2019

Revenue:

Subscription

$

17,747

$

15,572

Professional services

 

1,316

 

1,618

Total revenue

 

19,063

 

17,190

Cost of revenue:

Cost of subscription

 

3,222

 

3,750

Cost of professional services

 

1,409

 

1,565

Total cost of revenue

 

4,631

 

5,315

Gross profit

 

14,432

 

11,875

Operating expenses:

Research and development

 

4,505

 

3,998

Sales and marketing

 

5,631

 

4,738

General and administrative

 

1,944

 

2,044

Total operating expenses

 

12,080

 

10,780

Income from operations

 

2,352

 

1,095

Interest income, net

 

3

 

147

Other income (expense), net

 

(163)

 

164

Income before income tax provision

 

2,192

 

1,406

Income tax provision

 

(148)

 

(189)

Net income

$

2,044

$

1,217

Per share information:

Earnings per share:

Basic

$

0.07

$

0.04

Diluted

$

0.06

$

0.04

Weighted-average shares used in computation:

Basic

 

30,853

 

30,507

Diluted

 

32,508

 

31,883

See accompanying notes to condensed consolidated financial statements

3


EGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

Three Months Ended

September 30, 

    

2020

    

2019

Net income

$

2,044

$

1,217

Other comprehensive income, net of taxes:

 

Foreign currency translation adjustments

 

144

 

(157)

Total comprehensive income

$

2,188

$

1,060

See accompanying notes to condensed consolidated financial statements

4


EGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

Three Months Ended September 30, 2020

Common Stock

Additional Paid-in

Notes Receivable From

Accumulated Other Comprehensive

Accumulated

Total Stockholders'

Shares

    

Amount

    

Capital

    

Stockholders

    

Income (Loss)

    

Deficit

    

Equity

Balances as of June 30, 2020

30,821

$

31

$

374,399

$

(90)

$

(1,631)

$

(338,068)

$

34,641

Interest on stockholder notes

(1)

(1)

Issuance of common stock upon exercise of stock options

103

488

488

Stock-based compensation

470

470

Foreign currency translation adjustments

144

144

Net income

2,044

2,044

Balances as of September 30, 2020

30,924

$

31

$

375,357

$

(91)

$

(1,487)

$

(336,024)

$

37,786

Three Months Ended September 30, 2019

Common Stock

Additional Paid-in

Notes Receivable From

Accumulated Other Comprehensive

Accumulated

Total Stockholders'

Shares

    

Amount

    

Capital

    

Stockholders

    

Income (Loss)

    

Deficit

    

Equity

Balances as of June 30, 2019

30,478

$

31

$

371,099

$

(88)

$

(1,459)

$

(345,276)

$

24,307

Issuance of common stock upon exercise of stock options

58

86

86

True up of issuance costs related to public offering

29

29

Stock-based compensation

451

451

Foreign currency translation adjustments

(157)

(157)

Net income

1,217

1,217

Balances as of September 30, 2019

30,536

$

31

$

371,665

$

(88)

$

(1,616)

$

(344,059)

$

25,933

See accompanying notes to condensed consolidated financial statements

5


EGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

Three Months Ended

September 30, 

    

2020

    

2019

Cash flows from operating activities:

Net income

$

2,044

$

1,217

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of intangible assets

 

26

 

67

Amortization of costs capitalized to obtain revenue contracts

 

250

 

196

Amortization of right-of-use assets

406

382

Depreciation

 

93

 

74

Provision of doubtful accounts

 

 

65

Deferred income taxes

(78)

6

Stock-based compensation

 

470

 

451

Loss on disposal of property and equipment

(1)

(1)

Changes in operating assets and liabilities:

Accounts receivable

 

7,598

 

(145)

Costs capitalized to obtain revenue contracts

 

(14)

 

(300)

Prepaid expenses

506

451

Other current assets

 

(169)

 

(58)

Other non-current assets

(41)

80

Accounts payable

 

(1,316)

 

(2,992)

Accrued compensation

 

(750)

 

(475)

Accrued liabilities

 

521

 

1,372

Deferred revenue

 

(3,398)

 

2,601

Operating lease liabilities

(427)

(400)

Other long-term liabilities

 

14

 

133

Net cash provided by operating activities

 

5,734

 

2,724

Cash flows from investing activities:

Purchase of property and equipment

(79)

 

(70)

Net cash used in investing activities

 

(79)

 

(70)

Cash flows from financing activities:

Payments on bank borrowings

 

 

(31)

Proceeds from bank borrowings

 

 

31

Proceeds from exercise of employee stock options

 

488

 

86

Net cash provided by financing activities

 

488

 

86

Effect of change in exchange rates on cash and cash equivalents

 

348

 

(237)

Net increase in cash, cash equivalents and restricted cash

 

6,491

 

2,503

Cash, cash equivalents and restricted cash at beginning of period

 

46,615

 

31,867

Cash, cash equivalents and restricted cash at end of period

$

53,106

$

34,370

Supplemental cash flow disclosures:

Cash paid for interest

$

$

1

Cash paid for taxes, net of tax refunds

$

142

$

58

Non-cash items:

Purchases of equipment through trade accounts payable

$

$

10

See accompanying notes to condensed consolidated financial statements

6


EGAIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

eGain Corporation (“eGain”, the “Company”, “our”, “we” or “us”) is a leading provider of cloud-based customer engagement software with operations in the United States, United Kingdom and India. We help business-to-consumer (B2C) brands operationalize digital customer engagement strategy. Our suite includes rich applications for digital interaction, knowledge management, and AI-based process guidance. We also provide advanced, integrated analytics for contact centers and digital properties to holistically measure, manage and optimize resources. We believe the benefits of our products include reduced customer effort, customer satisfaction, connected service processes, converted upsell opportunities, and improved compliance—across mobile, social, web, and phone. Hundreds of global enterprises rely on eGain to transform fragmented customer service systems into unified Customer Engagement Hubs.

Fiscal Year

Our fiscal year ends on June 30. References to fiscal year 2021 refer to fiscal year ending June 30, 2021.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of September 30, 2020 and the condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for the three months ended September 30, 2020 and 2019, are unaudited. The consolidated balance sheet as of June 30, 2020 included herein was derived from the audited financial statements as of that date.

Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles (GAAP), have been condensed or omitted pursuant to such rules and regulations although we believe that the disclosures made are adequate to make the information not misleading. In our opinion, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of our financial position, results of operations and cash flows for the periods presented.

These condensed consolidated financial statements and notes should be read in conjunction with our audited consolidated financial statements and accompanying notes for the fiscal year ended June 30, 2020, included in our Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2020 was derived from audited consolidated financial statements as of that date but does not include all the information and footnotes required by GAAP for complete financial statements. The results of our operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 30, 2021.

Principles of Consolidation

We prepared the condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and included the accounts of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

7


Use of Estimates

The preparation of financial statements requires us to make estimates and assumptions in the condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from estimates. We make estimates that we believe to be reasonable based on historical experience and other assumptions. Significant estimates and assumptions made by management include the following:

Standalone selling price (SSP) of performance obligations for contracts with multiple performance obligations;
Estimate of variable consideration for performance obligations in connection with Topic 606;
Period of benefit associated with capitalized costs to obtain revenue contracts;
Valuation, measurement and recognition of current and deferred income taxes;
Fair value of stock-based awards,
Useful lives of intangible assets; and
Lease term and incremental borrowing rate for lease liabilities.

Recent Accounting Pronouncements

Pronouncements Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This update simplifies the accounting for income taxes. This update is effective for fiscal years beginning after December 15, 2020 (our fiscal year 2022). We are currently evaluating the impact of this update on our consolidated financial statements and related disclosures.

Pronouncements Recently Adopted

In August 2018, FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40). This update requires a customer in a cloud computing service arrangement to follow the internal-use software guidance to determine which implementation costs to recognize and defer as an asset. We adopted this guidance as of our first quarter of fiscal year 2021 with no impact on our consolidated financial statements.  

Revenue Recognition

Revenue Recognition Policy

Our revenue is comprised of two categories including 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 associated with license, or maintenance and support contracts on perpetual license arrangements that we no longer offer. Professional services includes consulting, implementation and training.

Significant Judgment Applied in the Determination of Revenue Recognition

We enter into contractual arrangements with customers that may include promises to transfer multiple services, such as subscription, support and professional services. With respect to our business, a performance obligation is a promise to transfer a service to a customer that is distinct. Significant judgment is required to determine whether services are distinct performance obligations that should be accounted for separately or combined as one unit of accounting. Additionally, significant judgment is required to determine the timing of revenue recognition.

8


We allocate the transaction price to each performance obligation on a relative standalone selling price (SSP). The SSP is the price at which we would sell a promised service separately to one of our customers. Judgment is required to determine the SSP for each distinct performance obligation.

We determine the SSP by considering our pricing objectives in relation to market demand. Consideration is placed based on our history of discounting prices, size and volume of transactions involved, customer demographics and geographic locations, price lists, contract prices and our market strategy.

Determination of Revenue Recognition

Under Topic 606, we recognize revenue upon the transfer of control of promised services to our customers in the amount that is commensurate with the consideration that we expect to receive in exchange for those services. If consideration includes a variable amount in the arrangement, such as service level credits or contingent fees, then we include an estimate of the amount that we expect to receive for the total transaction price.

The amount of revenue that we recognize is based on (i) identifying the contract with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract on a relative SSP basis; and (v) recognizing revenue when, or as, we satisfy each performance obligation in the contract typically through delivery or when control is transferred to the customer.

Subscription Revenue

The following customer arrangements are recognized ratably over the contract term as the performance obligations are delivered:

Cloud delivery arrangements;
Maintenance and support arrangements; and
Term license subscriptions which incorporate on-premise software licenses and substantial cloud functionality that are not distinct in the context of our arrangements as such are considered highly interrelated and represent a single combined performance obligation.

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 with payment terms between 30 and 45 days. Invoiced amounts are recorded in accounts receivable, deferred revenue or revenue, depending if control transferred to our customers based on each arrangement.

The Company has a royalty revenue agreement with a customer related to the Company’s embedded intellectual property. Under the terms of the agreement, the customer is to remit a percentage of sales to the Company. These embedded OEM royalties are included as subscription revenue. Under Topic 606, since these arrangements are for sales-based licenses of intellectual property, for which the guidance in paragraph ASC 606-10-55-65 applies, the Company recognizes revenue only as the subsequent sale occurs. However, the Company notes that 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 at the earlier of satisfaction of discrete performance obligations, or as work is performed on a time and material basis. Our consulting and implementation service contracts are bid either on a time-and-materials basis or on a fixed-fee basis. Fixed fees are generally paid upon milestone billing or acceptance at pre-determined points in the

9


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.

Costs Capitalized to Obtain Revenue Contracts

Under Topic 606, we capitalize incremental costs of obtaining a non-cancelable subscription and support revenue contracts. 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 historical and expected durations of our customer contracts, the expected useful lives of our technologies, and other factors. Commissions for renewal contracts relating to our cloud-based arrangements are expensed when incurred, as we do not consider renewal contracts to be commensurate with initial customer contracts. Historically, any commission associated with renewals have been immaterial. Amortization of costs to obtain revenue contracts is included as a component of sales and marketing expenses in our condensed consolidated statements of operations.

During the three months ended September 30, 2020 and 2019, we capitalized $14,000 and $300,000 of costs to obtain revenue contracts, respectively, and amortized $250,000 and $196,000 to sales and marketing expense, respectively. Capitalized costs to obtain revenue contracts, net were $3.3 million and $3.4 million as of September 30, 2020 and June 30, 2020, respectively.

Deferred Revenue

Deferred revenue primarily consists of payments received or invoiced in advance of revenue recognition from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support. Deferred revenue is recognized as revenue once revenue recognition criteria is met. We generally invoice our customers in annual installments. The deferred revenue balance does not represent the total transaction price of our non-cancelable cloud delivery and support arrangements as a result from the timing of revenue recognition. Deferred revenue that is expected to be recognized within one year and beyond one year is classified as current and noncurrent deferred revenue, respectively.

10


Segment Information

We operate in one segment: the development, license, implementation and support of our customer interaction software solutions. Operating segments are identified as components of an enterprise for which discrete financial information is available and regularly reviewed by the Company’s chief operating decision-makers in order to make decisions about resources to be allocated to the segment and assess its performance. Our chief operating decision-makers, under ASC 280, Segment Reporting, are our executive management team. Our chief operating decision-makers review financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Company operates in one operating segment and all required financial segment information can be found in the condensed consolidated financial statements.

Our sales are derived from North America and Europe, Middle East, and Africa. However, we incur operating expenses in the North America, Europe, Middle East, Africa and Asia Pacific regions. Revenue by geography is generally determined on the region of our contracting entity rather than the region of our customer. Information relating to our geographic areas for the three months ended September 30, 2020 and 2019 is as follows (in thousands):

Three Months Ended

September 30, 

    

2020

    

2019

Revenue:

North America

$

13,768

$

9,591

Europe, Middle East, & Africa

5,295

 

7,599

Total revenue

$

19,063

$

17,190

Income from operations:

North America

$

1,675

$

(884)

Europe, Middle East, & Africa

 

2,046

 

3,374

Asia Pacific

 

(1,369)

 

(1,395)

Income from operations

$

2,352

$

1,095

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

September 30, 

June 30, 

    

2020

    

2020

Long-lived Assets:

North America

$

385

$

401

Europe, Middle East, & Africa

 

80

 

90

Asia Pacific

 

245

 

222

Long-lived Assets

$

710

$

713

Concentration of Credit Risk and Significant Customers

Our financial instruments that are exposed to concentrations of credit risk include cash and cash equivalents and accounts receivable. We maintain an allowance for doubtful accounts which is based on historical losses and the number of days past due for collection. Receivables are written off against the allowance when we have exhausted collection efforts without success. Two customers, who are also our partners, accounted for 19% and 11%, respectively, of total revenue during the three months ended September 30, 2020. Two customers, who are also partners, accounted for 19% and 10% of total revenue during the three months ended September 30, 2019, respectively.

11


Accounts Receivable and Allowance for Doubtful Accounts

We extend unsecured credit to our customers on a regular basis. Our accounts receivable are derived from revenue earned from customers and are not interest bearing. We also maintain an allowance for doubtful accounts to reserve for potential uncollectible trade receivables. We review our trade receivables by aging category to identify specific customers with known disputes or collectability issues. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general economic conditions in the U.S. and internationally, and changes in customer financial conditions. We write off a receivable after collection efforts have been exhausted and the amount is deemed uncollectible.

In certain Company contracts, contractual billings do not coincide with revenue recognized on the contract. Unbilled accounts receivables are recorded when revenue recognized on the contract exceeds billings, pursuant to contract provisions, and become billable upon certain criteria being met. Unbilled accounts receivables, for which the Company has the unconditional right to consideration, totaled $869,000 and $1.7 million as of September 30, 2020, and June 30, 2020, respectively, and are included in the accounts receivable balance.

Stock-Based Compensation

We account for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Stock-based compensation expense consists of expenses for stock options and our 2017 employee stock purchase plan (ESPP).

The ESPP provides that eligible employees may purchase the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the fair market value at the entry date of the applicable offering period or at the end of each applicable purchasing period. The offering period, meaning a period with respect to which the right to purchase shares of our common stock may be granted under the ESPP, will not exceed twenty-seven months and consist of a series of six-month purchase periods. Eligible employees may join the ESPP at the beginning of any six-month purchase period. Under the terms of the ESPP, employees can choose to have between 1% and 15% of their base earnings withheld to purchase the Company’s common stock.  

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

Below is a summary of stock-based compensation included in the costs and expenses (in thousands):

Three Months Ended

September 30, 

    

2020

    

2019

Stock-Based Compensation Expense:

Cost of revenue

$

74

$

33

Research and development

 

158

 

176

Sales and marketing

 

133

 

148

General and administrative

 

105

 

94

Total stock-based compensation expense

$

470

$

451

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

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

12


We utilize the Black-Scholes valuation model for estimating the fair value of the stock-based compensation of options granted. All shares of our common stock issued pursuant to our stock option plans are only issued out of an authorized reserve of shares of common stock which were previously registered with the SEC on Registration Statements on Form S-8.

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

We used the following assumptions:

Three Months Ended

September 30, 

    

2020

    

2019

    

Expected volatility

72

%  

70

%  

Average risk-free interest rate

0.27

%  

1.63

%  

Expected life (in years)

4.34

4.33

Dividend yield

The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. We determined the appropriate measure of expected volatility by reviewing historic volatility in the share price of our common stock, as adjusted for certain events that management deemed to be non-recurring and non-indicative of future events. The risk-free interest rate is derived from the average U.S. Treasury Strips rate with maturities approximating the expected lives of the awards during the period, which approximate the rate in effect at the time of the grant.

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

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

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

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

In accordance with ASU 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Accounting, we elected to continue to estimate forfeitures in the calculation of stock-based compensation expense.

As of September 30, 2020 there was approximately $1.2 million of total unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the weighted-average period of 1.09 years. There were 102,905 and 58,470 options exercised during the three months ended September 30, 2020 and 2019, respectively.

13


Leases

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

Operating leases are included in operating lease right-of-use (ROU) assets, current operating lease liabilities, and noncurrent operating lease liabilities in the condensed consolidated financial statements. ROU assets represent the Company’s right to use leased assets over the agreed upon term. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term.

For operating leases, ROU assets and lease liabilities are recognized at the commencement date of the lease. The lease liability is measured as the present value of the lease payments over the lease term, using the rate implicit in the lease if readily determinable. If the rate implicit in the lease cannot be readily determined, the Company uses its incremental borrowing rate at lease commencement. The operating lease right-of-use assets are calculated as the present value of the remaining lease payments plus unamortized initial direct costs and any prepayments, less unamortized lease incentives received.

Operating leases typically include non-lease components such as common-area maintenance costs. We have elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease component payments that are not fixed are expensed as incurred as variable lease payments.

Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement. Factors considered in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of any leasehold improvements, the value of renewal rates compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option were not exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected not to recognize right-of-use assets and obligations for leases with an initial term of twelve months or less, and has applied a capitalization threshold to recognize a lease on the balance sheet. The expense associated with short-term leases and leases that do not meet the Company’s capitalization threshold are recorded to lease expense in the period it is incurred.  

2. REVENUE RECOGNITION

Disaggregation of Revenue

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

Three Months Ended

September 30, 

2020

    

    

2019

Revenue:

SaaS revenue

$

15,970

$

12,418

Legacy revenue

1,777

3,154

Total subscription revenue

17,747

15,572

Professional services revenue

 

1,316

 

1,618

Total revenue

$

19,063

$

17,190

14


The following table presents our revenue by geography. Revenue by geography is generally determined on the region of our contracting entity rather than the region of our customer. The relative proportion of our total revenue between each geographic region as presented in the table below was materially consistent across each of our operating regions’ revenue for the periods presented.

Three Months Ended

September 30, 

2020

    

    

2019

Revenue:

North America

$

13,768

$

9,591

Europe, Middle East, & Africa

5,295

7,599

Total revenue

$

19,063

$

17,190

Contract Balances

Contract assets, if any, consist of unbilled receivables for completed performance obligations which have not been invoiced, and for which we do not have an unconditional right to consideration. Contract liabilities consist of deferred revenue for which we have an obligation to transfer services to customers and have received consideration in advance or the amount is due from customers. Once the obligations are fulfilled, then deferred revenue is recognized to revenue in the respective period. There were no contract assets for the period ended September 30, 2020 and 2019.

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

    

Balance as of June 30, 2020
($)

    

Additions
($)

Deductions
($)

Balance as of September 30, 2020
($)

Contract liabilities:

Deferred revenue

36,644

15,981

(18,609)

34,016

Deferred revenue, net of current portion

 

4,826

 

 

(261)

 

4,565

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

Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that had not yet been recognized, and include deferred revenue, invoices that have been issued to customers but were uncollected and have not been recognized as revenue, and amounts that will be invoiced and recognized as revenue in future periods.  The transaction price allocated to the remaining performance obligation is influenced by a variety of factors, including seasonality, timing of renewals, average contract terms and foreign currency exchange rates. As of September 30, 2020, our remaining performance obligations were $64.2 million, of which we expect to recognize $44.9 million and $19.3 million as revenue within one year and beyond one year, respectively.

15


3. NET INCOME PER COMMON SHARE

Basic net income per common share is computed using the weighted-average number of shares of common stock outstanding. In periods where net income is reported, the weighted-average number of shares is increased by warrants and options in the money to calculate diluted net income per common share.

The following table represents the calculation of basic and diluted net income per common share (unaudited, in thousands, except per share data):

Three Months Ended

September 30, 

2020

2019

Net income

    

$

2,044

    

$

1,217

Per share information:

Earnings per share:

Basic

$

0.07

$

0.04

Diluted

$

0.06

$

0.04

Weighted-average shares used in computation:

Basic

 

30,853

 

30,507

Effect of dilutive options

1,655

1,376

Diluted

 

32,508

 

31,883

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

4. INCOME TAXES

Income taxes are accounted for using the asset and liability method in accordance with ASC 740, Income Taxes. Under this method, deferred tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. For the legacy eGain business in the United States, based upon the weight of available evidence, which includes our historical operating performance, our future investment plans, and the uncertainty in the current market environment due to COVID-19, we have provided a full valuation allowance against our net deferred tax assets. For the legacy eGain business in the United Kingdom, based on the positive evidence, the Company has determined it would be able to utilize the deferred tax assets and does not have a valuation allowance against the deferred tax assets. The remaining eGain foreign operations as well as Exony’s business have historically been profitable and we believe it is more likely than not that those assets will be realized. Our tax provision primarily relates to foreign activities as well as state income taxes. Our income tax rate differs from the statutory tax rates primarily due to the utilization of net operating loss carry-forwards which had previously been valued against as well as our foreign operations.

We account for uncertain tax positions according to the provisions of ASC 740. ASC 740 contains a two-step approach for recognizing and measuring uncertain tax positions. Tax positions are evaluated for recognition by determining if the weight of available evidence indicates that it is probable that the position will be sustained on audit, including resolution of related appeals or litigation. Tax benefits are then measured as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

16


As of June 30, 2020, we have completed a study under Section 382 of the Internal Revenue Code, and have determined there was no loss of NOLs as a result of any ownership changes since eGain’s formation. Utilization of the NOL or tax credit carryforwards to offset future taxable income and taxes, respectively, are subject to an annual limitation under the Internal Revenue Code of 1986 and similar state provisions, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments such as built in gain or built in loss, as required. Any limitation may result in expiration of all or a portion of its NOL and or tax credit carryforwards before utilization.

The 2017 Tax Cuts and Jobs Act includes a provision to tax global intangible low-taxed income (GILTI) of foreign subsidiaries. As of September 30, 2020, we estimate $2.7 million of GILTI income inclusion and used our net operating losses to offset our taxable income.

5.

LEASES

We lease our office facilities under non-cancelable operating leases that expire on various dates through fiscal year 2024. Additionally, we are the sublessor for certain office space. All of our office leases are classified as operating leases with lease expense recognized on a straight-line basis over the lease term. Lease right-of-use assets and liabilities are recognized at the commencement date at the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at the commencement date in determining the present value of lease payments.

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

Three Months Ended

September 30,

2020

2019

Assets:

Operating lease right-of-use assets

$

2,592

$

4,075

Liabilities:

Operating lease liabilities

 

1,698

1,669

Operating lease liabilities, net of current portion

 

1,045

2,653

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

Three Months Ended

September 30,

    

2020

2019

Weighted average remaining lease term (in years)

1.81

2.67

Weighted average discount rate

4.79

%

4.83

%

The following table presents information about leases on our consolidated statement of operations (in thousands):

Three Months Ended

September 30,

2020

2019

Operating lease expense

$

440

$

435

Sublease income

154

154

Our short-term leases consist of leases for small office equipment. Short-term lease expense for the three months ended September 30, 2020 and 2019 was not significant.

17


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

Three Months Ended

September 30,

2020

2019

Operating cash outflows from operating leases

$

464

$

450

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

Fiscal Period:

Remaining nine months of fiscal 2021

$

1,412

Fiscal 2022

1,173

Fiscal 2023

 

201

Fiscal 2024

 

67

Fiscal 2025

Thereafter

Total minimum lease payments

2,853

Less: Imputed interest

(110)

Total

$

2,743

6. COMMITMENTS AND CONTINGENCIES

Litigation

In the ordinary course of business, we are involved in various legal proceedings and claims related to alleged infringement of intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour, and other claims that are not expected to have a material impact on our business or our consolidated financial statements. We have been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their proprietary rights, including patent infringement.

We evaluate all claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, settlement or litigation potential and the expected effect on us. Our technologies may be subject to injunction if they are found to infringe the rights of a third party. In addition, our agreements require us to indemnify our customers for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling on such a claim.

Warranty

We generally warrant that the program portion of our software will perform substantially in accordance with certain specifications for a period up to one year from the date of delivery. Our liability for a breach of this warranty is either a return of the license fee or providing a fix, patch, work-around or replacement of the software.

We also provide standard warranties against and indemnification for the potential infringement of third party intellectual property rights to our customers relating to the use of our products, as well as indemnification agreements with certain officers and employees under which we may be required to indemnify such persons for liabilities arising out of their duties to us. The terms of such obligations vary. Generally, the maximum obligation is the amount permitted by law. Historically, cost related to these warranties have not been significant. However, we cannot guarantee that a warranty reserve will not become necessary in the future.

18


Indemnification

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

Transfer Pricing

We have received transfer-pricing assessments from tax authorities with regard to transfer pricing issues for certain fiscal years, which we have appealed with the appropriate authority. We review the status of each significant matter and assess its potential financial exposure. We believe that such assessments are without merit and would not have a significant impact on our consolidated financial statements.

Contractual Commitments

Our principal contractual commitments consist of obligations under leases for office space. Lease agreements are evaluated to determine whether an arrangement is or contains a lease in accordance with ASC 842, Leases.

7. FAIR VALUE MEASUREMENT

ASC 820, Fair Value Measurement (ASC 820), defines fair value, establishes a framework for measuring fair value of assets and liabilities, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the assets or liabilities in an orderly transaction between market participants on the measurement date. Subsequent changes in fair value of these financial assets and liabilities are recognized in earnings or other comprehensive income when they occur. ASC 820 applies whenever other statements require or permit assets or liabilities to be measured at fair value.

ASC 820 includes a fair value hierarchy, of which the first two are considered observable and the last unobservable, that is intended to increase the consistency and comparability in fair value measurements and related disclosures. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.

The fair value hierarchy consists of the following three levels:

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

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

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

Our money market funds are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as level 1 within the fair value hierarchy. As of September 30, 2020 and June 30, 2020, cash equivalents classified as level 1 instruments were measured at $44.4 million and $41.8 million, respectively.

19


8. INTANGIBLE ASSETS

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

Intangible Asset

    

Gross
Carrying Amount

    

Accumulated
Amortization

    

Net Balance September 30, 2020

    

Life

    

Income Statement Category  

Customer relationships - maintenance contracts

$

1,610

$

(1,610)

$

-

6

Cost of revenue

Intangible Asset

    

Gross
Carrying Amount

    

Accumulated
Amortization

    

Net Balance June 30, 2020

    

Life

    

Income Statement Category  

Customer relationships - maintenance contracts

$

1,610

$

(1,584)

$

26

6

Cost of revenue

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

20


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the year ended June 30, 2020.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of the words such as “anticipates,” “believes,” “continue,” “could,” “would,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “should,” or “will” and similar expressions or the negative of those terms. The forward-looking statements include, but are not limited to, statements regarding: the impact of the COVID-19 pandemic on our employees and customers; our SaaS only business model and that our belief that it affords recurring revenue visibility, more predictability and 50% faster time to value to SaaS clients; our belief that SaaS revenue better reflects business momentum; our expectations regarding increase in SaaS revenue and decrease in legacy support fees; the effect of changes in macroeconomic factors beyond our control; our lengthy sales cycles and the difficulty in predicting timing of sales or delays; competition in the markets in which we do business and our competitive advantages; our expectations regarding the composition of our customers and the result of a loss of a significant customer; our beliefs regarding our prospects for our business; the adequacy of our capital resources and our ability to raise additional financing; the development and expansion of our strategic and third party distribution partnerships and relationships with systems integrators; legal liability or the effect of negative publicity for the services provided to consumers through our technology platforms; our ability to compete; the operational integrity and maintenance of our systems; the effect of unauthorized access to a customer’s data or our data or our IT systems and cybersecurity attacks; the uncertainty of demand for our products; our beliefs regarding the attributes and anticipated customer benefits of our products; our ability to increase the profitability of our subscription services; our ability to hire additional personnel and retain key personnel; our ability to expand and improve our sales performance and marketing activities, and expectations regarding sales and marketing expenses; our ability to manage our expenditures and estimate future expenses, revenue, and operational requirements; the effect of changes to management judgments and estimates; the impact of any modification to our pricing practices in the future; our beliefs regarding our international operations; our ability to timely adapt and comply with changing European regulatory and political environments; uncertainty relating to the implementation and effect of Brexit; the effect of recent changes in U.S. tax legislation; our inability to successfully detect weaknesses or errors in our internal controls; our ability to take adequate precautions against claims or lawsuits made by third parties, including alleged infringement of proprietary rights; the potential impact of foreign currency fluctuations; the impact of accounting pronouncements and our critical accounting policies, judgments, estimates, models and assumptions on our financial results; and our expectations with respect to revenue, cost of revenue, expenses and other financial metrics.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks described in the summary below, as well as those risks which are further discussed in Item 1A “Risk Factors” in this report:

Summary Risk Factors

We face risks related to health epidemic, including the COVID-19 pandemic, which could have a material adverse effect on our business, financial condition and results of operations.  Our revenue and operating results have fluctuated in the past and are likely to fluctuate in the future, and because we recognize revenue from subscriptions over a period of time, downturns in revenue may not be immediately reflected in our operating results.
We cannot accurately predict subscription renewal rates and the impact these rates may have on our future revenue and operating results.
Our lengthy sales cycles and the difficulty in predicting timing of sales or delays may impair our operating results.
Because we depend on a relatively small number of customers for a substantial portion of our revenue, the loss of any of these customers or our failure to attract new significant customers could adversely impact our revenue and harm our business.

21


The market for customer engagement software is intensely competitive, and our business will be adversely affected if we are unable to successfully compete.
If we fail to expand and improve our sales performance and marketing activities, or retain our sales and marketing personnel, we may be unable to grow our business, which could negatively impact our operating results and financial condition.
Our failure to maintain, develop or expand strategic and third-party distribution channels would impede our revenue growth.
Difficulties and delays in customers implementing our products could harm our revenue and margins.
We conduct a significant portion of our business and operations outside of the United States, which exposes us to additional risks that may not exist in the United States. These risks in turn could cause our operating results and financial condition to suffer.
Unplanned system interruptions and capacity constraints and failure to effect efficient transmission of customer communications and data over the Internet could harm our business and reputation.
If our cybersecurity systems or the systems of our vendors, partners and suppliers are breached and unauthorized access is obtained to a customer’s data or our data or IT systems, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Changes in the European regulatory environment regarding privacy and data protection regulations, such as the European Union’s GDPR, could expose us to risks of noncompliance and costs associated with compliance.
Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.
We rely on trademark, copyright, trade secret laws, contractual restrictions and patent rights to protect our intellectual property and proprietary rights and if these rights are impaired, then our ability to generate revenue will be harmed.
Our insiders who are significant stockholders have the ability to exercise significant control over matters requiring stockholder approval, including the election of our board of directors, and may have interests that conflict with those of other stockholders.

These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. You should, however, review additional disclosures we make in the reports we file with the SEC, including but not limited to the Risk Factors associated with our business.

All references to “eGain”, the “Company”, “our”, “we” or “us” mean eGain Corporation and its subsidiaries, except where it is clear from the context that such terms mean only the parent company and excludes its subsidiaries.

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

Overview

eGain automates customer engagement with an innovative Software as a service (SaaS) platform, powered by deep digital, Artificial intelligence (AI), and knowledge capabilities. We are headquartered in the United States. We also operate in United Kingdom and India. We sell mostly to large enterprises across financial services, telecommunications, retail, government, healthcare, and utilities. With our mantra of AX + BX + CX = DX™we guide clients to effortless Digital experience (DX) by holistically optimizing Agent experience (AX), Business experience (BX) and Customer experience (CX). One hundred fifty leading brands use eGain cloud software to improve customer satisfaction, empower agents, reduce service cost and boost sales.

We have transitioned from a hybrid model, where we sold both SaaS and perpetual license solutions, to a SaaS only business model. Today, we sell only SaaS to new clients and are actively migrating our remaining perpetual license clients to SaaS. As we continue to migrate our legacy perpetual license clients to SaaS, we expect our legacy revenue, primarily comprising annual maintenance and support fees for legacy perpetual license clients to continue to decline.

22


We believe our go-forward SaaS business model affords us recurring revenue visibility and more predictability. Fiscal year 2019 affirmed our view that SaaS clients adopt our product innovation much faster than our perpetual license clients and get better service levels. We believe SaaS clients enjoy up to 50% faster time to value from their eGain investment.

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

COVID-19

In December 2019, a novel strain of coronavirus (COVID-19) was first reported in Wuhan, China. In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic, and the virus continues to spread in areas where we operate and sell our products and services. Several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of COVID-19, including shelter-in-place and social distancing orders, which has resulted in a significant deterioration of economic conditions in the countries in which we operate.

The impact of COVID-19 and the related disruptions caused to the global economy and our business did not have a material adverse impact on our business during the quarter ended September 30, 2020. However, the spread of the COVID-19 virus caused us to modify our business practices, including implementing work-from-home policies and restricting travel by our employees, among other things.

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

Implemented work-from-home and social distancing policies throughout our organization;
Suspended all employee travel;
Cancelled certain sales and marketing events; and
Looked to our customer’s needs to best support their operations during this crisis.

The effect of the COVID-19 pandemic, may not be fully reflective in our results of operations and overall financial performance until further periods, if at all. The impact, if any, of operational changes we may implement is uncertain, but changes we have implemented as of the filing date have not affected and are not expected to affect our ability to maintain operations. We will continuously monitor the situation to determine what actions may be necessary or appropriate to address the impact of the COVID-19 pandemic, which may include actions mandated or recommended by federal, state or local government authorities. See our “Risk Factors” for further discussion of the possible impact of the COVID-19 pandemic on or business.

Key Financial Measures

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

SaaS Revenue

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

SaaS revenue, which is defined as revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support; and
Legacy revenue, which is defined as revenue from maintenance and support contracts on perpetual license arrangements that we no longer offer.

23


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

Three Months Ended

 

September 30, 

 

(in thousands)

    

2020

    

2019

    

Change

SaaS revenue

$

15,970

$

12,418

$

3,552

29

%  

Legacy revenue

 

1,777

 

3,154

 

(1,377)

(44)

%  

Total subscription revenue

$

17,747

$

15,572

$

2,175

14

%  

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

SaaS and Professional Services Revenue

As we continue to shift to a SaaS only business model, substantially all of professional services revenue is now generated from our SaaS customer base. We believe the combination of SaaS and professional services revenue is a useful measure to value our business on a forward-looking basis.

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

Three Months Ended

 

September 30, 

 

(in thousands)

    

2020

    

2019

    

Change

SaaS revenue

$

15,970

$

12,418

$

3,552

29

%  

Professional services revenue

 

1,316

 

1,618

 

(302)

(19)

%  

Total SaaS and professional services revenue:

$

17,286

$

14,036

$

3,250

23

%  

Non-GAAP Operating Income

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

Management believes that it is useful to exclude certain non-cash charges and non-core operational charges from non-GAAP operating income because (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations; and (ii) such expenses can vary significantly between periods as a result of the timing of new stock-based awards and acquisition of intangible assets. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with generally accepted accounting principles in the United States of America (GAAP).

24


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

Three Months Ended

September 30, 

2020

    

2019

Income from operations

$

2,352

$

1,095

Add:

Stock-based compensation

470

451

Amortization of intangibles assets

26

67

Non-GAAP income from operations

$

2,848

$

1,613

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, allowance for doubtful accounts, the valuation of goodwill and intangible assets, the valuation of deferred tax allowance, and legal contingencies have the greatest potential impact on our consolidated financial statements. We evaluate these estimates on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Sources of Revenue

Our revenue is comprised of two categories, subscription and professional services. Subscription includes SaaS revenue and legacy revenue. SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support. Legacy revenue is revenue associated with support contracts on perpetual license arrangements that we no longer offer. Professional services include consulting, implementation and training.

Subscription Revenue

For our cloud delivery arrangements, our maintenance and support arrangements and our term license subscriptions that incorporate substantial cloud functionality, the combined performance obligation is recognized ratably over the contract term as the obligation is delivered. For contracts involving distinct software licenses, the license performance obligation is satisfied at a point in time when control is transferred to the customer.

We typically invoice our customers in advance upon execution of the contract or subsequent renewals. Invoiced amounts are recorded in accounts receivable, deferred revenue or revenue, depending on control transferred to our customers based on each arrangement.

The Company has a royalty revenue agreement with a customer related to the Company’s embedded intellectual property. Under the terms of the agreement, the customer is to provide a combined fixed fee and per agent fee, for each software license sold containing the embedded software to the Company. These embedded OEM royalties are included as subscription revenue. Under Topic 606-10-55-65 revenue guidance (Topic 606), since these arrangements are for sales-based licenses of intellectual property, the Company recognizes revenue only as the subsequent sale occurs. However, since such sales are reported by the customer with a quarter in arrears, such revenue is recognized at the time it is reported and paid by the customer given that any estimated variable consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable risk that it may lead to significant revenue reversals.

25


Professional Services Revenue

Professional services revenue includes system implementation, consulting and training. The transaction price is allocated to various performance obligations based on their stand-alone selling prices. Revenue allocated to each performance obligation is recognized as work is performed. Our consulting and implementation service contracts are bid either on a time-and-materials basis or on a fixed-fee basis. Fixed fees are generally paid on milestone billing at pre-determined points in the contract. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether transfer of control to customers has occurred.

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

Remaining Performance Obligations

Remaining performance obligations represent contracted revenue that had not yet been recognized, and include billed deferred revenue, consisting of amounts invoiced to customers whether collected or uncollected which have not been recognized as revenue, as well as unbilled amounts that will be invoiced and recognized as revenue in future periods.  The transaction price allocated to the remaining performance obligation is influenced by a variety of factors, including seasonality, timing of renewals, average contract terms and foreign currency exchange rates.

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

We expect our remaining performance obligations to change quarterly for several reasons including the timing of new contracts and renewals, duration and size of our subscription and support arrangements, variable billing cycles and foreign exchange rate fluctuation. We typically issue renewal invoices in advance of the renewal service period. Depending on timing, the initial invoice and subsequent renewal invoices may occur in different quarters. This may result in an increase or decrease to our accounts receivable and deferred revenue.

Costs Capitalized to Obtain Revenue Contracts

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

We capitalize incremental costs of obtaining a non-cancelable subscription and maintenance and support revenue contract with amortization periods of one year or more. The capitalized amounts consist primarily of sales commissions paid to our direct sales force. Capitalized amounts also include (i) amounts paid to employees other than the direct sales force who earn incentive payouts under annual compensation plans that are tied to the value of contracts acquired and (ii) the associated payroll taxes and fringe benefit costs associated with the payments to our employees.

Costs capitalized related to new revenue contracts are generally deferred and amortized on a straight-line basis over a period of benefit that we estimate to be five years. We determine the period of benefit by taking into consideration the period from initial contract through renewal, which constitutes the length of our customer relationship or customer life. Amortization of costs capitalized related to new revenue contracts is included as a component of sales and marketing expense in our operating results.

26


Results of Operations

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

Three Months Ended

 

September 30, 

 

    

2020

    

2019

    

Revenue:

Subscription

93

%  

91

%  

Professional services

7

%  

9

%  

Total revenue

100

%  

100

%

Cost of revenue:

Cost of subscription

17

%  

22

%

Cost of professional services

7

%  

9

%  

Total cost of revenue

24

%  

31

%  

Gross profit

76

%  

69

%  

Operating expenses:

Research and development

24

%  

23

%  

Sales and marketing

30

%  

28

%  

General and administrative

10

%  

12

%  

Total operating expenses

64

%  

63

%  

Income from operations

12

%

6

%

Revenue

We classify our revenue into two categories: subscription and professional services revenue. We further break down subscription revenue into SaaS revenue and legacy revenue, with SaaS revenue being a key metric.

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

Three Months Ended

 

September 30, 

 

(in thousands, except percentages)

    

2020

    

2019

    

Change

Subscription

$

17,747

$

15,572

$

2,175

14

%  

Professional services

 

1,316

 

1,618

 

(302)

(19)

%  

Total revenue

$

19,063

$

17,190

$

1,873

11

%  

Total revenue increased $1.9 million during the three months ended September 30, 2020, compared to the same period in 2019, respectively, due to an increase in SaaS revenue of $3.6 million during the three months ended September 30, 2020, compared to the same period in 2019. This increase was partially offset by a decline in our legacy revenue as we continue to migrate legacy perpetual license customers to our SaaS model and a decline in professional service revenue as we continue to see a reduction in time required for an average implementation project, as a result of the improvements to our product deployment process.

Our revenue was impacted by foreign exchange rate fluctuation between the U.S. Dollar, Euro, and British Pound. We recalculate our current period results using the comparable prior period exchange rates to exclude the impact of foreign exchange rate fluctuation. Foreign exchange rate fluctuation resulted in an increase of $233,000 and a decrease of $432,000 in total revenue during the three months ended September 30, 2020 and 2019, respectively.

27


Subscription Revenue

SaaS Revenue

Three Months Ended

 

September 30, 

 

(in thousands, except percentages)

    

2020

    

2019

    

Change

 

SaaS revenue

$

15,970

$

12,418

$

3,552

29

%

Percentage of total revenue

 

84

%  

 

72

%  

SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support. Revenue from SaaS increased by $3.6 million during the three months ended September 30, 2020, compared to the same period in 2019.

SaaS revenue represents 84% and 72% of total revenue for the three months ended September 30, 2020 and 2019, respectively. This represented an increase in SaaS revenue of 29% for the three months ended September 30, 2020 as compared to the comparable period in 2019.

Excluding an increase of $251,000 due to foreign exchange rate fluctuation, SaaS revenue increased by $3.3 million during the three months ended September 30, 2020 as compared to the comparable period in 2019. In connection with our SaaS transition, we are actively migrating our remaining perpetual license clients to SaaS and continue to sell SaaS to new customers. We expect our SaaS revenue to increase on a year over year basis.

Legacy Revenue

Three Months Ended

 

September 30, 

 

(in thousands, except percentages)

2020

    

2019

    

Change

 

Legacy revenue

$

1,777

$

3,154

$

(1,377)

(44)

%

Percentage of total revenue

 

9

%  

 

18

%  

Legacy revenue is associated with license, maintenance and support contracts on perpetual license arrangements that we no longer offer. We experienced decreases of $1.4 million during the three months ended September 30, 2020, compared to the same period in 2019. This decrease was primarily due to our focus in migrating our legacy customers to SaaS. We expect these legacy fees to continue to decline in future quarters.

Excluding an increase of $24,000 due to foreign exchange rate fluctuation, legacy revenue decreased by $1.4 million during the three months ended September 30, 2020, as compared to the comparable period in 2019.

Professional Services Revenue