The following discussion of eGain's financial condition and results of operations should be read together with the consolidated financial statements and related notes in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. These risks and uncertainties may cause actual results to differ materially from those discussed in the forward-looking statements.
eGain automates customer engagement with an innovative knowledge hub, powered by conversational AI and analytics. We sell mostly to large enterprises across financial services, telecommunications, retail, government, healthcare, and utilities. That is, organizations seeking to better serve customers at scale while coping with content silos, process complexity, and regulatory compliance. 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). Leading brands use eGain's cloud software to improve customer satisfaction, empower agents, reduce service cost, and boost sales. We are headquartered in
the United States. We also operate in United Kingdomand India. 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 2022 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.
Since early 2020, several public health organizations have recommended, and many local governments have implemented, certain measures to slow and limit the transmission of COVID-19, including shelter-in-place and social distancing orders, which has resulted in a significant deterioration of economic conditions in the countries in which we operate. The impact of COVID-19 and the related disruptions caused to the global economy and our business did not have a material adverse impact on our business during the year ended
June 30, 2022. However, the ongoing spread of the COVID-19 virus, including new variants, current availability of COVID-19 vaccinations, and recent lockdown orders in China, caused us to adapt and modify our business practices, including implementing hybrid work model policies and limiting travel by our employees, among other things.
In response to the continued spread of COVID-19, we have taken the following actions to date:
? Implementing a hybrid working model and social distancing policies across our
organization; ? Limited employee travel;
? Canceled some sales and marketing events; and
? Looked at the needs of our customers to better support their operations during this period
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, 33 Table of Contents
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 our business. 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.
With our transition to a SaaS-only business model, we believe SaaS revenues better reflect our business momentum and analyze progress. Therefore, we break down our subscription revenue growth between:
? SaaS revenue, which is defined as revenue from cloud delivery agreements,
term licenses and embedded OEM royalties and associated support; and
? Legacy revenue, which is defined as licensing, maintenance, and
support contracts on perpetual license agreements that we no longer sell.
The following table provides a breakdown of subscription revenue between SaaS revenue and legacy revenue for each of the following periods:
Fiscal Year Ended June 30 2022 2021 Change Revenue (in thousands, except percentages) SaaS revenue
$ 80,904 $ 66,929 $ 13,97521 % Legacy revenue 3,653 5,442
(1,789) (33)% Total SaaS and legacy revenue
As we continue to migrate our legacy perpetual license customers to SaaS, we expect our legacy revenue to continue to decline.
SaaS revenue and professional services
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 shows the total SaaS revenue and professional services for each of the following periods:
Fiscal Year Ended June 30 2022 2021 Change Revenue (in thousands, except percentages) SaaS revenue
$ 80,904 $ 66,929 $ 13,97521 % Professional services 7,394 5,916 1,478 25 % Total SaaS and professional services revenue $ 88,298 $ 72,845 $ 15,45334 Table of Contents
Non-GAAP operating profit
Non-GAAP operating income is defined as (loss) income from operations, 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 acquisitions. 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 provides a reconciliation of GAAP operating income (loss) to non-GAAP operating income for each of the following periods:
Fiscal Year Ended
June 30 20222021
(Loss) Operating Income
Add: Stock-Based Compensation
11,380 1,700 Amortization of intangible assets - 26
Non-GAAP operating profit
Significant Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States. 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 income
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 associated with license, maintenance and support contracts on perpetual license arrangements that we no longer sell. Professional services include consulting, implementation, training, and managed services. 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. 35
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 when control is transferred to our customers based on each arrangement. We have a royalty revenue agreement with a customer related to our embedded intellectual property. Under the terms of the agreement, the customer is to provide a combined fixed fee, per agent, for each software license sold containing the embedded software to us. These embedded OEM royalties are included as subscription revenue. Under revenue guidance, since these arrangements are for sales-based licenses of intellectual property, we recognize revenue only as the subsequent sale occurs. However, since such sales are reported by the customer with a quarter in arrears, such revenue is recognized at the time it is reported and paid by the customer given that any estimated variable consideration would have to be fully constrained due to the unpredictability of such estimate and the unavoidable risk that it may lead to significant revenue reversals.
Professional services income
Professional services revenue includes system implementation, consulting, training, and managed services. 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 for separate recognition is recognized when the training is provided.
Remaining performance obligations
Remaining performance obligations represent contracted revenues that have not yet been recognized, and include billed deferred revenues, consisting of amounts invoiced to customers whether collected or uncollected which have not been recognized as revenues, as well as unbilled amounts that will be invoiced and recognized as revenues in future periods. The transaction price allocated to the remaining performance obligations are influenced by a variety of factors, including seasonality, timing of renewals, average contract terms and foreign currency rates. As of
June 30, 2022, our remaining performance obligations were $100.5 millionof which we expect to recognize $63.2 millionand $37.3 millionas 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.
Capitalized costs to obtain revenue contracts
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 36 Table of Contents
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.
We account for stock-based compensation in accordance with Accounting Standards Codification (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 an expense over the vesting period. 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 lives. We determine 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 deems to be non-recurring and non-indicative of future events. We base our estimate of expected life on the historical exercise behavior, cancellations of all past option grants made by us during the time period in which our common stock has been publicly traded, the contractual term, the vesting period and the expected remaining term of the option. Based on our historical experience of option pre-vesting cancellations, we have assumed an annualized forfeiture rate for our options. We record additional expense if the actual forfeiture rate is lower than we estimated and record a recovery of prior expense if the actual forfeiture rate is higher than what we estimated.
We review goodwill annually for impairment or sooner whenever events or changes in circumstances indicate that it may be impaired. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. In addition, we evaluate purchased intangible assets to determine that all such assets have determinable lives. We operate under a single reporting unit and accordingly, all of our goodwill is associated with the entire company. We had no impairment for fiscal years ended
June 30, 2022and 2021.
Accounts receivable and allowance for doubtful accounts
We extend unsecured credit to customers on a regular basis. Our accounts receivable is 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. If we make different judgments or utilize different estimates, then material differences may result in additional reserves for trade receivables, which would be reflected by charges in general and administrative expenses for any period presented. We write-off a receivable after all collection efforts have been exhausted and the amount is deemed uncollectible. As described in Note 1 of Notes to Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data of this Annual Report, certain Company contracts have contractual billings which 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 at contractually specified dates.
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136,was passed into law, amending portions of certain relevant US tax laws. The CARES Act included a number of federal income tax law changes, including, but not limited to: (i) permitting net operating loss carrybacks to offset 100% of taxable income for taxable years beginning before 2021, (ii) accelerating alternative minimum tax credit refunds, (iii) temporarily increasing the allowable business interest deduction from 30% to 50% of adjusted taxable income, and (iv) providing a technical correction for depreciation related to qualified improvement property. The CARES Act had no impact on our consolidated financial statements. 37
December 27, 2020, President Trumpsigned the Consolidated Appropriations Act, 2021 (CAA). The CAA contains numerous individual, business, payroll, disaster, and energy-related tax provisions, as well as tax extenders. Many of the provisions, including $600stimulus payments, and an extension of payroll credits, relate to the COVID-19 pandemic. The COVID-related Tax Relief Act of 2020 (COVIDTRA) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), both part of the CAA, contains numerous provisions related to businesses.
Fiscal 2022 vs. Fiscal 2021
Our effective tax rate for fiscal years 2022 and 2021 was a tax provision of
$1.2 millionand a tax benefit of $166,000, respectively. The change in our effective tax rate for fiscal year 2022 as compared to fiscal year 2021 was primarily due to the expiration of tax attributes, the change in valuation allowance, foreign rate differential, stock-based compensation and the research and development tax credit. The income before income tax provision between the U.S.and foreign countries impacted our effective tax rate as a result of the geographic distribution and customer demand related to our products and services. In fiscal year 2022, our U.S.and foreign income before our income tax provision was a loss of $4.2 millionand income of $3.0 million, respectively. In fiscal year 2021, our U.S.and foreign income before our income tax benefit was $5.0 millionand $1.8 million, respectively.
Provision for Valuation of Deferred Tax
When we prepare our consolidated financial statements, we estimate our income tax liability for each of the various jurisdictions where we conduct business. This requires us to estimate our actual current tax exposure and to assess temporary differences that result from differing treatment of certain items for tax and accounting purposes. The net deferred tax assets are reduced by a valuation allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. We make significant judgments to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax assets. As of
June 30, 2022, we had a valuation allowance of approximately $32.4 millionof which approximately $23.0 millionwas attributable to U.S.and state net operating losses and domestic research and development credit carryforwards. We apply ASC 740, Income Taxes, in determining any uncertain tax positions. The guidance seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under ASC 740, an entity may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of other income (expense), net in the consolidated statements of operations. We consider the earnings of certain non- U.S.subsidiaries to be indefinitely invested outside the United States, on the basis of estimates, that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestments of those subsidiary earnings. We have not recorded a deferred tax liability related to state income taxes and foreign withholding taxes on approximately $21.3 millionof undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. If we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.
Fair value of financial instruments
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities. We do not have any derivative financial instruments. We believe the reported carrying amounts of these financial instruments approximate fair value, based upon their short-term nature and comparable market information available at the respective balance sheet dates. 38 Table of Contents Results of Operations The following table sets forth certain items reflected in our consolidated statements of operations expressed as a percent of total revenue for the periods indicated: 2022 2021 Revenue: Subscription 92 % 92 % Professional services 8 8 Total revenue 100 100 Cost of revenue: Cost of subscription 16 17 Cost of professional services 11 8 Total cost of revenue 27 25 Gross profit 73 75 Operating Expenses: Research and development 27 23 Sales and marketing 37 33 General and administrative 12 10 Total operating expenses 76 66 (Loss) Income from operations (2) % 9 % Revenue
We classify our income into two categories; revenue from subscriptions and professional services. We then break down subscription revenue into SaaS revenue and legacy revenue, with SaaS revenue being a key metric.
The following table shows our subscription and professional services revenues for the years indicated:
Fiscal Year Ended June 30, 2022 2021 Change Revenue (in thousands, except percentages) Subscription
$ 84,557 $ 72,371 $ 12,18617 % Professional services 7,394 5,916 1,478 25 % Total revenue $ 91,951 $ 78,287 $ 13,664Total Revenue
Total revenue increased
$13.7 millionduring the fiscal year ended June 30, 2022, from the comparable period in 2021, largely due to increased revenues from SaaS of $14.0 millionand professional service revenue of $1.5 millionin fiscal year 2022. This increase was partially offset by a decline in our legacy revenue of $1.8 millionas we continue to migrate legacy perpetual license customers to our SaaS model. 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 a decrease of $354,000and an increase of $2.0 millionin total revenue during the fiscal years ended June 30, 2022and 2021, respectively. 39 Table of Contents Subscription Revenue SaaS Revenue Fiscal Year Ended June 30, 2022 2021 Change Revenue (in thousands, except percentages) SaaS revenue $ 80,904 $ 66,929 $ 13,97521 % Percentage of total revenue 88 % 85 % SaaS revenue includes revenue from cloud delivery arrangements, term licenses and embedded OEM royalties and associated support. Revenues from SaaS increased by $14.0 millionduring the fiscal year ended June 30, 2022, as compared to the comparable period in 2021. SaaS revenue was $80.9 millionand $66.9 millionduring the fiscal years ended June 30, 2022and 2021, respectively, which represented an increase of 21% or $14.0 million. SaaS revenue represents 88% and 85% of total revenue for the fiscal years ended June 30, 2022and 2021, respectively. Excluding a decrease of $317,000due to foreign exchange rate fluctuation, SaaS revenue increased by $14.3 millionduring the fiscal year ended June 30, 2022, as compared to the comparable period in 2021. 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 in future periods. Legacy Revenue Fiscal Year Ended June 30, 2022 2021 Change Revenue (in thousands, except percentages) Legacy revenue $ 3,653 $ 5,442 $ (1,789)(33) % Percentage of total revenue 4 % 7 % Legacy revenue is associated with license, maintenance and support contracts on perpetual license arrangements that we no longer sell. We experienced a decrease of $1.8 millionfor the fiscal year ended June 30, 2022. This decrease was primarily due to our focus on migrating our legacy customers to SaaS. We expect these legacy fees to continue to decline in future periods. Legacy revenue was $3.7 millionand $5.4 millionduring the fiscal years ended June 30, 2022and 2021, respectively, which represented a decrease of 33% or $1.8 million. Legacy revenue represents 4% and 7% of total revenue for the fiscal years ended June 30, 2022and 2021, respectively. Excluding a decrease of $5,000due to foreign exchange rate fluctuation, legacy revenue decreased by $1.8 millionduring the fiscal year ended June 30, 2022, as compared to the comparable period in 2021.
Professional services income
Fiscal Year Ended June 30, 2022 2021 Change Revenue (in thousands, except percentages)
Professional services income
8 % 8 % Professional services revenue includes consulting, implementation, training, and managed services. Revenues from professional services increased by
$1.5 millionduring the fiscal year ended June 30, 2022. These increases were primarily 40
due to growth of managed services. We expect continued improvements in our product deployment process resulting in a reduction in the time required for an average implementation projects. As we continue to onboard new customers and migrate legacy customers to SaaS, we expect the time required for product deployment and implementation projects to decrease further. Professional services revenue was
$7.4 millionduring the fiscal year ended June 30, 2022, which represented an increase of 25% or $1.5 million. Professional services revenue represents 8% of total revenue for both fiscal years ended June 30, 2022and 2021.
Excluding decrease of
Revenue by Geography Fiscal Year Ended June 30, 2022 2021 Change Revenue (in thousands, except percentages) North America
$ 66,793 $ 54,380 $ 12,41323 % Europe, Middle East, & Africa 25,158 23,907 1,251 5 % Total revenue $ 91,951 $ 78,287 $ 13,664
North Americasales increased by 23% from $54.4 millionduring the fiscal year ended June 30, 2021to $66.8 millionduring the fiscal year ended June 30, 2022due to an increase of (i) $12.6 millionin SaaS revenue, and (ii) $1.3 millionin professional service revenue; offset by a decrease of (i) $1.5 millionin legacy revenue. Revenue from Europe, Middle East, and Africasales increased by 5% from $23.9 millionduring the fiscal year ended June 30, 2021to $25.2 millionduring the fiscal year ended June 30, 2022due to an increase of (i) $1.4 millionin SaaS revenue and (ii) $208,000in professional services revenue; offset by a decrease of $287,000in legacy revenue. Cost of Revenue Fiscal Year Ended June 30, 2022 2021 Change Cost of revenue (in thousands, except percentages) Subscription $ 14,780 $ 13,507 $ 1,2739 % Professional services 9,757 5,760 3,997 69 % Total cost of revenue $ 24,537 $ 19,267 $ 5,270Percentage of total revenue 27 % 25 % Gross margin 73 % 75 % Subscription
Cost of subscription revenues consist primarily of expenses related to our cloud services and support provided to 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
$1.3 millionduring the fiscal year ended June 30, 2022. The increase is primarily due to an increase in (i) cloud computing cost of $951,000, (ii) personnel related costs of $529,000; partially offset with a decrease in (i) outside consulting cost of $138,000and (ii) intangible asset amortization of $26,000during the fiscal year ended June 30, 2022, from the comparable period in 2021. 41
Excluding a decrease of
$43,000due to foreign exchange rate fluctuation between the U.S.Dollar, Euro, British Pound and Indian Rupee, cost of subscription revenues increased by $1.3 millionduring the fiscal year ended June 30, 2022, from the comparable period in 2021. Excluding any future foreign exchange rate fluctuation, we expect our cost of subscription revenue to increase in absolute dollar terms as revenues increase but expect subscription revenue gross margins to improve or remain relatively consistent.
Professional services cost primarily includes personnel costs directly associated with our professional services and training departments, including salaries, benefits, bonuses, stock-based compensation and allocated overhead.
Cost of professional services increased
$4.0 millionduring the fiscal year ended June 30, 2022from the comparable period in 2021. This increase is primarily due to an increase in personnel-related costs of $4.0 million, of which $3.1 millionis associated with stock-based compensation cost; partially offset by a decrease in outside consulting costs of $18,000for the fiscal year ended June 30, 2022. Excluding a decrease of $39,000due to foreign exchange rate fluctuation between the U.S.Dollar, Euro, British Pound and Indian Rupee, cost of professional services revenue increased by $3.9 millionfor the fiscal year ended June 30, 2022, from the comparable period in 2021. Operating Expenses Research and Development Fiscal Year Ended June 30, 2022 2021 Change (in thousands, except percentages) Research and development $ 24,387 $ 17,933 $ 6,45436 % Percentage of total revenue 27 % 23 % Research and development expense primarily consists of personnel-related expenses directly associated with our engineering, product management and development, and quality assurance staff. Included in these costs are salaries, benefits, bonuses, 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 36% to $24.4 millionduring the fiscal year ended June 30, 2022, from $17.9 millionin the comparable period in 2021. Excluding a decrease of $105,000due to foreign exchange rate fluctuation between the U.S.Dollar, Euro, British Pound and Indian Rupee, research and development expense increased by $6.6 millionprimarily due to increases of (i) $6.3 millionin personnel-related costs, of which $2.9 millionis associated with stock-based compensation cost, and (ii) $258,000in outside consulting costs. Excluding any future foreign exchange rate fluctuation, we expect our research and development expense to increase in future periods based on our product development plans. Sales and Marketing Fiscal Year Ended June 30, 2022 2021 Change (in thousands, except percentages) Sales and marketing $ 33,746 $ 25,999 $ 7,74730 % Percentage of total revenue 37 % 33 % 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 42 Table of Contents
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 30% to
$33.7 millionduring the fiscal year ended June 30, 2022, from $26.0 millionin the comparable period in 2021. Excluding a decrease of $120,000due to foreign exchange rate fluctuation between the U.S.Dollar, Euro, British Pound and Indian Rupee, sales and marketing expense increased by $7.9 millionprimarily due to increases of (i) $6.8 millionin personnel-related costs, of which $2.4 millionis associated with stock-based compensation cost, and (ii) $1.1 millionin marketing program costs; partially offset by a decrease of $4,000in outside consulting costs.
Excluding any future exchange rate fluctuations, we expect our sales and marketing expenses to increase as a percentage of total revenue over the next few quarters based on our current business plan.
General and Administrative Fiscal Year Ended June 30, 2022 2021 Change (in thousands, except percentages) General and administrative
$ 11,419 $ 7,749 $ 3,67047 % Percentage of total revenue 12 % 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 expense increased 47% to
$11.4 millionduring the fiscal year ended June 30, 2022, from $7.7 millionin the comparable period in 2021. Excluding a decrease of $39,000due to foreign exchange rate fluctuation between the U.S.Dollar, Euro, British Pound and Indian Rupee, general and administrative expense increased by $3.7 millionprimarily due to increases of (i) $3.7 millionin personnel-related expenses, of which $3.0 millionis associated with stock-based compensation cost, (ii) $147,000in legal expenses, (iii) $146,000in accounting, audit, and administrative expenses, (iv) $12,000in investor relations expense, and (v) $3,000in outside consulting cost; partially offset by a decrease of $319,000in bad debt expense.
Excluding any future fluctuations in exchange rates, we expect our general and administrative expenses to increase or remain relatively constant as a percentage of total revenue in future periods based on our current business plan.
Stock-based compensation expense is accounted for in accordance with the provisions of the accounting guidance which requires the measurement and recognition of compensation expense for all equity-based payment awards made to employees, members of our board of directors and consultants, based upon the grant-date fair value of those awards. We value our share-based payments under ASC 718, and record compensation expense for all share-based payments made to employees based on the fair value at the date of the grant. The effect of recording stock-based compensation for fiscal year 2022 and 2021 is as follows: Fiscal Year Ended June 30, 2022 2021 Stock-based compensation by type of award (in thousands) Stock options
Employee stock purchase plan 457
Total stock-based compensation
$ 11,380 $ 1,70043 Table of Contents
Determining the fair value of the equity-based payment awards at the grant date required significant judgment and the use of estimates, particularly surrounding the Black-Scholes valuation assumptions such as stock price volatility and expected option term. Below is a summary of stock-based compensation included in the cost and expenses: Fiscal Year Ended June 30, 2022 2021 Change (in thousands, except percentages) Cost of revenue
$ 3,056 $ 326 $ 2,730837 % Research and development 2,935 509 2,427 477 % Sales and marketing 2,367 657 1,710 260 % General and administrative 3,022 208
2,814 1,354% Total compensation in shares
The increase in our stock-based compensation expense in fiscal 2022 compared to fiscal 2021 is primarily due to an increase in option grant activity.
We expect our stock-based compensation expense to decrease in fiscal year 2023. (Loss) Income from Operations Fiscal Year Ended June 30, 2022 2021 Change (in thousands, except percentages) (Loss) Income from operations
$ (2,138) $ 7,339 $ (9,477)Operating (loss) margin (2) % 9 % Results from operations was loss of $2.1 millionin fiscal year 2022, compared to income of $7.3 millionin fiscal year 2021. We recorded a negative operating margin of 2% in fiscal year 2022, and a positive operating margin of 9% in fiscal year 2021.
During the year ended
Excluding a decrease from foreign exchange fluctuation of
$346,000between the U.S.Dollar, Euro, British Pound and Indian Rupee, the increase in total costs and operating expenses in fiscal year 2022 was $23.5 millionprimarily due to increases of (i) $21.4 millionin personnel-related expenses, of which $11.4 millionis associated with stock-based compensation cost, (ii) $1.1 millionin marketing costs, (iii) $951,000in cloud computing costs, (iv) $147,000in legal expenses, (v) $146,000in accounting and administrative services, (vi) $101,000in outside consulting costs, and (vii) $12,000in investor relations cost; partially offset by a decrease of (i) $319,000in bad debt expenses and (ii) $26,000in intangible asset amortization.
Interest income consists primarily of interest earned on money market funds. Interest income was
$94,000and $13,000for the fiscal years ended June 30,
2022 and 2021, respectively. 44 Table of Contents Other Income (Expense), Net Other income (expense), net primarily included foreign exchange rate fluctuations on international trade receivables. Other income (expense), net was income of
$838,000and expense of $559,000for the fiscal years ended June
30, 2022 and 2021, respectively. Income Tax Provision Provision for income taxes consists of federal, state and foreign income taxes. Due to the current economic state of the
U.S.economy, expiring tax attributes and uncertainty of future profitability, we maintain a valuation allowance against U.S.deferred tax assets as of June 30, 2022. We consider all available evidence, both positive and negative, including but not limited to earnings history, projected future outcomes, industry and market trends and the nature of each of the deferred tax assets. We recorded an income tax provision of $1.2 millionand tax benefit of $166,000in the fiscal years ended June 30, 2022
and 2021, respectively. New Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 of Notes to Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data of this Annual Report.
Cash and capital resources
June 30, 2022, our working capital was $42.1 millioncompared to $31.1 millionas of June 30, 2021. As of June 30, 2022, our deferred revenue was $49.4 millionas compared to $49.5 millionas of June 30, 2021. Based upon our current business plan, we believe that existing capital resources will enable us to maintain current and planned operations for at least the next 12 months. From time to time, however, we may consider opportunities for raising additional capital. We can make no assurances that such opportunities will be available to us on economic terms we consider favorable, if at all. Our expectations as to our future cash flows and our future cash balances are subject to a number of assumptions, including assumptions regarding anticipated increases in our revenue, our ability to retain existing customers and customer purchasing and payment patterns, many of which are beyond our control.
For closed fiscal years
Fiscal Year Ended
June 30, 20222021
Net cash flow generated by operating activities
Net cash used in investing activities
(628) (402) Net cash provided by financing activities 3,327 2,352
Cash flow from operating activities consists primarily of net income (loss) adjusted for non-cash expense items such as depreciation and amortization, expense associated with stock-based awards, timing employee-related costs, including
45 Table of Contents
capitalized costs to obtain revenue contracts, amortization of right-of-use assets and changes in operating assets and liabilities during the year.
Cash provided by operating activities decreased by
$5.7 millionduring the fiscal year ended June 30, 2022, driven primarily by the change in our net loss, stock-based compensation, the timing of prepayments received from customers for new cloud arrangements, and the renewal of existing cloud and support arrangements, which is a significant source of operating cash flows. Net cash used in investing activities decreased by $226,000during the fiscal year ended June 30, 2022, driven primarily by activities related to the purchase of equipment for new employees and facility expenditures. Historically, cash used in investing activities has been used to purchase equipment and software to support our business and growth.
Net cash provided by financing activities increased by
Our principal commitments consist of obligations under leases relating to office space. Leases are assessed to determine whether an agreement is or contains a lease in accordance with ASC 842, Leases.
The following table summarizes our contractual obligations as of
June 30, 2022and the effect such obligations are expected to have on its liquidity and cash flow in future periods (in thousands): Payments Due by Period Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years Operating leases 3,955 1,193 2,234 528 - Total $ 3,955$ 1,193 $ 2,234$ 528 $ -
Off-balance sheet arrangements
© Edgar Online, source