REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
eGain Corporation
Sunnyvale, California
We have audited the accompanying consolidated balance sheets of eGain Corporation and its subsidiaries (the “Company”) as of June 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended June 30, 2017. Our audits also included the financial statement schedule listed in the index to this Annual Report on Form 10-K at Part IV Item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eGain Corporation and its subsidiaries as of June 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2017 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ BPM LLP
San Jose, California
September 26, 2017
eGAIN CORPORATION
C
ONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,627
|
|
$
|
11,780
|
Restricted cash
|
|
|
6
|
|
|
5
|
Accounts receivable, less allowance for doubtful accounts of $357 and $756 as of June 30, 2017 and 2016, respectively
|
|
|
7,201
|
|
|
11,876
|
Deferred commissions
|
|
|
690
|
|
|
787
|
Prepaid expenses
|
|
|
1,737
|
|
|
1,480
|
Other current assets
|
|
|
370
|
|
|
426
|
Total current assets
|
|
|
20,631
|
|
|
26,354
|
Property and equipment, net
|
|
|
1,059
|
|
|
1,688
|
Deferred commissions, net of current portion
|
|
|
694
|
|
|
325
|
Intangible assets, net
|
|
|
2,748
|
|
|
4,839
|
Goodwill
|
|
|
13,186
|
|
|
13,186
|
Other assets
|
|
|
1,433
|
|
|
1,671
|
Total assets
|
|
$
|
39,751
|
|
$
|
48,063
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,363
|
|
$
|
2,099
|
Accrued compensation
|
|
|
4,339
|
|
|
5,642
|
Accrued liabilities
|
|
|
2,364
|
|
|
5,670
|
Deferred revenue
|
|
|
18,332
|
|
|
12,672
|
Capital lease obligations
|
|
|
108
|
|
|
329
|
Bank borrowings
|
|
|
805
|
|
|
828
|
Total current liabilities
|
|
|
28,311
|
|
|
27,240
|
Deferred revenue, net of current portion
|
|
|
4,887
|
|
|
3,045
|
Capital lease obligations, net of current portion
|
|
|
42
|
|
|
153
|
Bank borrowings, net of current portion
|
|
|
14,802
|
|
|
20,223
|
Other long term liabilities
|
|
|
1,330
|
|
|
1,679
|
Total liabilities
|
|
|
49,372
|
|
|
52,340
|
Commitments and contingencies (Notes 7 and 8)
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
Common stock, $0.001 par value - authorized: 50,000 shares; outstanding: 27,127 and 27,108 shares as of June 30, 2017 and 2016, respectively
|
|
|
27
|
|
|
27
|
Additional paid-in capital
|
|
|
343,367
|
|
|
342,689
|
Notes receivable from stockholders
|
|
|
(83)
|
|
|
(81)
|
Accumulated other comprehensive loss
|
|
|
(1,663)
|
|
|
(1,663)
|
Accumulated deficit
|
|
|
(351,269)
|
|
|
(345,249)
|
Total stockholders' deficit
|
|
|
(9,621)
|
|
|
(4,277)
|
Total liabilities and stockholders' deficit
|
|
$
|
39,751
|
|
$
|
48,063
|
The accompanying notes are an integral part of these consolidated financial statements
eGAIN CORPORATION
C
ONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
43,585
|
|
$
|
42,783
|
|
$
|
42,311
|
Legacy license
|
|
|
4,557
|
|
|
14,466
|
|
|
18,325
|
Professional services
|
|
|
10,073
|
|
|
12,126
|
|
|
15,277
|
Total revenue
|
|
|
58,215
|
|
|
69,375
|
|
|
75,913
|
Cost of recurring
|
|
|
11,956
|
|
|
12,401
|
|
|
12,082
|
Cost of legacy license
|
|
|
50
|
|
|
29
|
|
|
61
|
Cost of professional services
|
|
|
9,193
|
|
|
11,259
|
|
|
16,998
|
Total cost of revenue
|
|
|
21,199
|
|
|
23,689
|
|
|
29,141
|
Gross profit
|
|
|
37,016
|
|
|
45,686
|
|
|
46,772
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
13,753
|
|
|
16,063
|
|
|
16,042
|
Sales and marketing
|
|
|
20,436
|
|
|
27,722
|
|
|
32,703
|
General and administrative
|
|
|
6,552
|
|
|
7,774
|
|
|
9,313
|
Total operating expenses
|
|
|
40,741
|
|
|
51,559
|
|
|
58,058
|
Loss from operations
|
|
|
(3,725)
|
|
|
(5,873)
|
|
|
(11,286)
|
Interest expense, net
|
|
|
(1,730)
|
|
|
(1,958)
|
|
|
(834)
|
Other income (expense), net
|
|
|
(32)
|
|
|
728
|
|
|
11
|
Loss before income tax benefit (provision)
|
|
|
(5,487)
|
|
|
(7,103)
|
|
|
(12,109)
|
Income tax benefit (provision)
|
|
|
(533)
|
|
|
863
|
|
|
(320)
|
Net loss
|
|
$
|
(6,020)
|
|
$
|
(6,240)
|
|
$
|
(12,429)
|
Per share information:
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.22)
|
|
$
|
(0.23)
|
|
$
|
(0.47)
|
Weighted average shares used in computing basic and diluted net loss per common share
|
|
|
27,108
|
|
|
27,056
|
|
|
26,609
|
Below is a summary of stock-based compensation included in the costs and expenses above:
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
131
|
|
$
|
249
|
|
$
|
476
|
Research and development
|
|
$
|
281
|
|
$
|
472
|
|
$
|
736
|
Sales and marketing
|
|
$
|
80
|
|
$
|
169
|
|
$
|
574
|
General and administrative
|
|
$
|
175
|
|
$
|
298
|
|
$
|
531
|
The accompanying notes are an integral part of these consolidated financial statements
eGAIN CORPORATION
C
ONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Net loss
|
|
$
|
(6,020)
|
|
$
|
(6,240)
|
|
$
|
(12,429)
|
Other comprehensive loss, net of taxes:
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
—
|
|
|
(493)
|
|
|
159
|
Cumulative translation adjustments from liquidation of inactive subsidiaries
|
|
|
—
|
|
|
—
|
|
|
(359)
|
Other comprehensive loss, net of taxes:
|
|
|
—
|
|
|
(493)
|
|
|
(200)
|
Total comprehensive loss
|
|
$
|
(6,020)
|
|
$
|
(6,733)
|
|
$
|
(12,629)
|
The accompanying notes are an integral part of these consolidated financial statements
eGAIN CORPORATION
C
ONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Receivable
|
|
Other
|
|
|
|
|
Total
|
|
|
Common Stock
|
|
Paid-in
|
|
From
|
|
Comprehensive
|
|
Accumulated
|
|
Stockholders'
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stockholders
|
|
Loss
|
|
Deficit
|
|
Equity (Deficit)
|
BALANCES AS OF JUNE 30, 2014
|
|
25,471
|
|
|
25
|
|
|
330,657
|
|
|
(83)
|
|
|
(970)
|
|
|
(326,580)
|
|
|
3,049
|
Repayment on stockholder notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
Interest on stockholder notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
(3)
|
Exercise of stock options
|
|
341
|
|
|
1
|
|
|
338
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
339
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
2,317
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,317
|
Share issuance related to business combination
|
|
1,210
|
|
|
1
|
|
|
8,017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,018
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,429)
|
|
|
(12,429)
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
159
|
|
|
—
|
|
|
159
|
Cumulative translation adjustment from liquidation of inactive subsidiaries
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(359)
|
|
|
—
|
|
|
(359)
|
BALANCES AS OF JUNE 30, 2015
|
|
27,022
|
|
|
27
|
|
|
341,329
|
|
|
(78)
|
|
|
(1,170)
|
|
|
(339,009)
|
|
|
1,099
|
Interest on stockholder notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
(3)
|
Exercise of stock options
|
|
86
|
|
|
—
|
|
|
172
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
172
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
1,188
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,188
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,240)
|
|
|
(6,240)
|
Foreign currency translation adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(493)
|
|
|
—
|
|
|
(493)
|
BALANCES AS OF JUNE 30, 2016
|
|
27,108
|
|
|
27
|
|
|
342,689
|
|
|
(81)
|
|
|
(1,663)
|
|
|
(345,249)
|
|
|
(4,277)
|
Interest on stockholder notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
(2)
|
Exercise of stock options
|
|
19
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
667
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
667
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,020)
|
|
|
(6,020)
|
BALANCES AS OF JUNE 30, 2017
|
|
27,127
|
|
$
|
27
|
|
$
|
343,367
|
|
$
|
(83)
|
|
$
|
(1,663)
|
|
$
|
(351,269)
|
|
$
|
(9,621)
|
The accompanying notes are an integral part of these consolidated financial statements
eGAIN CORPORATION
CON
SOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,020)
|
|
$
|
(6,240)
|
|
$
|
(12,429)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,108
|
|
|
2,057
|
|
|
2,503
|
Deferred income taxes
|
|
|
18
|
|
|
(1,406)
|
|
|
(268)
|
Loss on disposal of property and equipment
|
|
|
—
|
|
|
47
|
|
|
—
|
Amortization of deferred financing costs
|
|
|
207
|
|
|
231
|
|
|
79
|
Amortization of acquired intangibles
|
|
|
2,091
|
|
|
2,781
|
|
|
2,510
|
Stock-based compensation
|
|
|
667
|
|
|
1,188
|
|
|
2,317
|
Provision for doubtful accounts
|
|
|
303
|
|
|
264
|
|
|
194
|
Amortization of deferred commissions
|
|
|
884
|
|
|
728
|
|
|
1,006
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
4,209
|
|
|
(272)
|
|
|
(116)
|
Deferred commissions
|
|
|
(1,168)
|
|
|
(1,049)
|
|
|
(794)
|
Prepaid expenses
|
|
|
(267)
|
|
|
(586)
|
|
|
(515)
|
Other current assets
|
|
|
54
|
|
|
248
|
|
|
448
|
Other non-current assets
|
|
|
(216)
|
|
|
48
|
|
|
44
|
Accounts payable
|
|
|
262
|
|
|
429
|
|
|
(1,093)
|
Accrued compensation
|
|
|
(1,285)
|
|
|
(864)
|
|
|
(1,454)
|
Accrued liabilities
|
|
|
(3,281)
|
|
|
3,208
|
|
|
(1,113)
|
Deferred revenue
|
|
|
7,711
|
|
|
825
|
|
|
(1,566)
|
Other long term liabilities
|
|
|
124
|
|
|
230
|
|
|
(256)
|
Net cash provided by (used in) operating activities
|
|
|
5,401
|
|
|
1,867
|
|
|
(10,503)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
—
|
|
|
—
|
|
|
(1,905)
|
Purchases of property and equipment
|
|
|
(492)
|
|
|
(547)
|
|
|
(741)
|
Decrease (increase) in restricted cash
|
|
|
—
|
|
|
621
|
|
|
(779)
|
Net cash provided by (used in) investing activities
|
|
|
(492)
|
|
|
74
|
|
|
(3,425)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments on bank borrowings
|
|
|
(14,000)
|
|
|
(9,510)
|
|
|
(12,200)
|
Payments on capital lease obligation
|
|
|
(329)
|
|
|
(498)
|
|
|
(434)
|
Proceeds from bank borrowings
|
|
|
8,479
|
|
|
11,837
|
|
|
26,450
|
Payments made for debt issue costs
|
|
|
(130)
|
|
|
(270)
|
|
|
(550)
|
Proceeds from exercise of stock options
|
|
|
11
|
|
|
172
|
|
|
339
|
Repayments on related party notes receivable
|
|
|
—
|
|
|
—
|
|
|
8
|
Net cash provided by (used in) financing activities
|
|
|
(5,969)
|
|
|
1,731
|
|
|
13,613
|
Effect of exchange rate differences on cash and cash equivalents
|
|
|
(93)
|
|
|
(525)
|
|
|
163
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,153)
|
|
|
3,147
|
|
|
(152)
|
Cash and cash equivalents at beginning of year
|
|
|
11,780
|
|
|
8,633
|
|
|
8,785
|
Cash and cash equivalents at end of year
|
|
$
|
10,627
|
|
$
|
11,780
|
|
$
|
8,633
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,537
|
|
$
|
1,748
|
|
$
|
362
|
Cash paid for income taxes
|
|
$
|
268
|
|
$
|
282
|
|
$
|
412
|
Non-cash items:
|
|
|
|
|
|
|
|
|
|
Purchases of equipment through trade accounts payable
|
|
$
|
15
|
|
$
|
11
|
|
$
|
40
|
Property and equipment acquired under a capital lease
|
|
$
|
—
|
|
$
|
250
|
|
$
|
208
|
Issuance of common stock in connection with business acquisition
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8,018
|
The accompanying notes are an integral part of these consolidated financial statements
eGAIN CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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. We help 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. Benefits 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.
We have operations in the United States, United Kingdom and India.
Principles of Consolidation
The consolidated financial statements include the accounts of eGain and our wholly-owned subsidiaries, eGain Communications Ltd., Exony Limited (Exony), eGain Communications Pvt. Ltd., eGain Communications (SA), eGain France S.A.R.L and eGain Deutschland GmbH. All significant intercompany balances and transactions have been eliminated.
In fiscal year 2016, we closed our Italy (eGain Communications SrL), Netherlands (eGain Communications B.V. and Ireland (eGain Communications Ltd.) offices.
In fiscal year 2015, we liquidated our Inference, SiteBridge and Australia (eGain Communications Pty Ltd) subsidiaries and recorded a reclassification adjustment from accumulated other comprehensive loss on the consolidated balance sheets to other expense on the consolidated statements of operations.
Reclassification
Certain reclassifications were made to the consolidated financial statements to conform to the current period presentation. As of June 30, 2017, we classify subscription and support revenue as recurring revenue due to the strategic decision to move to a ratable or cloud delivery business model from the hybrid model that included legacy perpetual licenses. These reclassifications did not result in any change in previously reported net losses, total assets or stockholders’ equity (deficit).
Business Combinations
Business combinations are accounted for at fair value under the purchase method of accounting. Acquisition costs are expensed as incurred and recorded in general and administrative expenses and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense. The accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, or require acceleration of the amortization expense of finite-lived intangible assets.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The estimates are based upon information available as of the date of the consolidated financial statements. Actual results could differ from those estimates.
We evaluate our significant estimates, including those related to revenue recognition, provision for doubtful accounts, valuation of stock-based compensation, valuation of long-lived assets, valuation of deferred tax assets, and litigation, among others. We base our estimates on historical experience and on various other assumptions 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. We refer to accounting estimates of this type as “critical accounting estimates.”
Foreign Currency
The functional currency of each of our international subsidiaries is the local currency of the country in which it operates. Assets and liabilities of our foreign subsidiaries are translated at month-end exchange rates, and revenue and expenses are translated at the average monthly exchange rates. The resulting cumulative translation adjustments are recorded as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in “other income (expense), net” in the consolidated statements of operations, and resulted in a gain of $14,000, a gain of $697,000, and a loss of $400,000 in fiscal years 2017, 2016 and 2015, respectively.
Cash and Cash Equivalents, Restricted Cash and Investments
We consider all highly liquid investments with an original purchase to maturity date of three months or less to be cash equivalents. Time deposits held for investments that are not debt securities are included in short-term investments in the consolidated balance sheets. Investments in time deposits with original maturities of more than three months but remaining maturities of less than one year are considered short-term investments. Investments held with the intent to reinvest or hold for longer than a year, or with remaining maturities of one year or more, are considered long-term investments. As of June 30, 2017 and 2016 we did not have any short-term or long-term investments.
Cash earmarked for a specific purpose and therefore not available for immediate and general use by the Company is considered restricted cash. Expected usage of restricted cash within one year is classified as a current asset; expected usage more than a year is considered a non-current asset. As of June 30, 2017 and 2016, our restricted cash was nominal.
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. The carrying value of our bank borrowings and capital lease obligations approximates fair value based on the borrowing rates currently available to us for loans and capital leases with similar terms.
Concentration of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents and investments are deposited with high credit quality institutions. We are exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. We invest excess cash primarily in money market funds, which are highly liquid securities that bear minimal risk. In addition, we have investment policies and procedures that are reviewed periodically to minimize credit risk. Our cash, cash equivalents and restricted cash were $10.6 million as of June 30, 2017 which exceeded the FDIC (Federal Deposit Insurance Corporation) limit.
Our customer base extends across many different industries and geographic regions. Revenue is allocated to individual countries and geographic region by customer, based on where the product is shipped to and location of services performed. One customer accounted for 13% of total revenue in fiscal year 2017. There were two customers that accounted for 10% and 14%, respectively, of total revenue in fiscal years 2016. One customer accounted for 10% of total revenue in fiscal year 2015.
We perform ongoing credit evaluations of our customers with outstanding receivables and generally do not require collateral. In addition, we established an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. Two customers accounted for 20% and 11% of accounts receivable as of June 30, 2017. There were two customers that accounted for 23% and 14% of accounts receivable as of June 30, 2016. Two customers accounted for approximately 16% and 12%, respectively, of accounts receivable as of June 30, 2015.
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 collectibility 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 made different judgments or utilized different estimates, 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.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the respective assets, which typically is between three to five years. Leasehold improvements and leased equipment are depreciated on straight-line basis over the shorter of the lease term or useful life of the asset, which is typically three to five years.
Goodwill and Other Intangible Assets
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 early adopted Accounting Standards Update (ASU) 2017-04,
Intangibles—Goodwill and Other
, in fiscal year 2017 and had no impairment due to a negative carrying amount of our reporting unit. We performed an annual impairment review in June 2016 and identified no impairment.
Impairment of Long-Lived Assets
We review long-lived assets for impairment, including property and equipment, whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. During fiscal years 2017, 2016 and 2015, we did not have any such losses.
Revenue Recognition
We enter into arrangements to deliver multiple products or services (multiple-elements). We apply software revenue recognition rules and multiple-elements arrangement revenue guidance. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in
changes to the amount and timing of our revenue for any period if different conditions were to prevail. We present revenue, net of taxes collected from customers and remitted to governmental authorities.
We derive revenue from three sources:
|
i.
|
|
Recurring fees (previously referred to as subscription and support) primarily consist of cloud revenue from customers accessing our enterprise cloud computing services, term and ratable license revenue, and maintenance and support revenue;
|
|
ii.
|
|
Legacy license fees primarily consist of perpetual software license revenue which we no longer sell to new customers;
|
|
iii.
|
|
Professional services primarily consist of consulting, implementation services and training.
|
Revenues are recognized when all of the following criteria are met:
|
·
|
|
Persuasive evidence of an arrangement exists:
Evidence of an arrangement consists of a written contract signed by both the customer and management prior to the end of the period. We use signed software license, services agreements and order forms as evidence of an arrangement for sales of software, cloud, maintenance and support. We use signed statement of work as evidence of arrangement for professional services.
|
|
·
|
|
Delivery or performance has occurred
: Software is delivered to customers electronically, and license files are delivered electronically. Delivery is considered to have occurred when we provide the customer access to the software along with a license file and/or login credentials.
|
|
·
|
|
Fees are fixed or determinable:
We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. Arrangements where a significant portion of the fee is due beyond 90 days from delivery are generally not considered to be fixed or determinable.
|
|
·
|
|
Collectibility is probable:
We assess collectibility based on a number of factors, including the customer’s past payment history and its current creditworthiness. Payment terms generally range from 30 to 90 days from invoice date. If we determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment.
|
Revenue from sales to resellers is generally recognized upon delivery to the reseller dependent on the facts and circumstances of the transaction, such as our understanding of the reseller’s plans to sell the software, existence of return provisions, price protection or other allowances, the reseller’s financial status and our experience with the reseller. Historically sales to resellers have not included any return provisions, price protections or other allowances.
We apply the provisions of Accounting Standards Codification, or ASC, 985-605,
Software Revenue Recognition
, to all transactions involving the licensing of software products. In the event of a multiple element arrangement for a license transaction, we evaluate the transaction as if each element represents a separate unit of accounting taking into account all factors following the accounting standards. We apply ASC 605,
Revenue Recognition,
for cloud transactions to determine the accounting treatment for multiple elements. We also apply ASC 605-35 for fixed fee arrangements in which we use the percentage of completion method to recognize revenue when reliable estimates are available for the costs and efforts necessary to complete the implementation services. When such estimates are not available, the completed contract method is utilized. Under the completed contract method, revenue is recognized only when a contract is completed or substantially complete.
When legacy perpetual licenses were sold together with system implementation and consulting services, legacy license fees were recognized upon shipment, provided that (i) payment of the license fees were not dependent upon the performance of the consulting and implementation services, (ii) the services were available from other vendors, (iii) the services qualified for separate accounting as we have sufficient experience in providing such services, had the ability to estimate cost of providing such services, and we had vendor-specific objective evidence, or VSOE, of fair value, and (iv) the services were not essential to the functionality of the software.
We enter into arrangements with multiple-deliverables that generally include subscription, maintenance and support, and professional services. We evaluate whether each of the elements in these arrangements represents a separate unit of accounting, as defined by ASC 605, using all applicable facts and circumstances, including whether (i) we sell or could readily sell the element unaccompanied by the other elements, (ii) the element has stand-alone value to the customer, and (iii) there is a general right of return. For revenue recognition with multiple-deliverable elements, we apply the selling price hierarchy, which includes VSOE, third-party evidence of selling price, or TPE, and best estimate of selling price, or BESP. We determine the relative selling price for a deliverable based on VSOE, if available, or BESP, if VSOE is not available. We determined that TPE is not a practical alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing information.
We determine BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken into consideration include our discounting practices, the size and volume of our transactions, customer demographic, the geographic area where services are sold, price lists, its go-to-market strategy, historical standalone sales and contract prices. The determination of BESP is made through consultation with and approval by our management, taking into consideration the go-to-market strategy. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling prices, including both VSOE and BESP.
Recurring Revenue
Cloud Revenue
Cloud revenue consists of subscription fees along with bundled maintenance and support revenue from customers accessing our cloud-based service offerings. We recognize cloud services revenue ratably over the period of the applicable agreement as services are provided. Cloud agreements typically have an initial term of 12 to 36 months and automatically renew unless either party cancels the agreement. The majority of the cloud services customers purchase a combination of our cloud service and professional services. In some cases, the customer may also acquire a license for our software.
We consider the applicability of ASC 985-605, on a contract-by-contract basis. In cloud based agreements, where the customer does not have the contractual right to take possession of the software, the revenue is recognized on a monthly basis over the term of the contract. Invoiced amounts are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met. We consider a software element to exist when we determine that the customer has the contractual right to take possession of our software at any time during the cloud period without significant penalty and can feasibly run the software on its own hardware or enter into another arrangement with a third party to host the software. Additionally, we have established VSOE for the cloud and maintenance and support elements of perpetual license sales, based on the prices charged when sold separately and substantive renewal terms. Accordingly, when a software element exists in a cloud services arrangement, license revenue for the perpetual software license element is determined using the residual method and is recognized upon delivery. Revenue for the cloud and maintenance and support elements is recognized ratably over the contractual time period. Professional services are recognized as described below under Professional Services Revenue. If VSOE of fair value cannot be established for the undelivered elements of an agreement, the entire amount of revenue from the arrangement is recognized ratably over the period that these elements are delivered.
Term and Ratable License Revenue
Term and ratable license revenue includes arrangements where our customers receive license rights to use our software along with bundled maintenance and support services for the term of the contract or the Company has not established VSOE for the bundled multi-year maintenance and support services. The majority of our contracts provide customers with the right to use one or more products up to a specific license capacity. Certain terms of our license agreements stipulate that customers can exceed pre-determined base capacity levels, in which case additional fees are specified in the license agreement. Term license revenue is recognized ratably over the term of the license contract, and ratable license revenue is recognized over the term of the associated bundled maintenance and support contract.
Version 15.5 and future releases of the perpetual license is a cloud and perpetual license hybrid software which represents a service contract under ASC 605-25. The cloud components are essential to the functionality of version 15.5 and future releases, and we have a contractual obligation to deliver these cloud components. Per ASC 605-25, a delivered
item is considered a separate unit of accounting only if (i) the delivered item has standalone value; and (ii) if the service contract has a general right of return, then delivery and performance of the undelivered item is probable and substantially within the vendor’s control. We cannot separate the cloud components because there is no standalone value of the cloud components. The perpetual license revenue is recognized over the economic life of the software which was determined to be three years.
Maintenance and Support Revenue
Maintenance and support revenue consists of customers purchasing maintenance and support for our on-premise software. We use VSOE of fair value for maintenance and support to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Maintenance and support is renewable by the customer on an annual basis. Maintenance and support rates, including subsequent renewal rates, are typically established based upon a specified percentage of net license fees as set forth in the arrangement.
Legacy License Revenue
Legacy license revenue consists of perpetual license rights sold to customers to use our software in conjunction with related maintenance and support services. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period. In software arrangements that include rights to multiple software products and/or services, we use the residual method for perpetual licenses released as version 15 or prior under which revenue is allocated to the undelivered elements based on VSOE of the fair value of such undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue, assuming all other criteria for revenue recognition have been met. Such undelivered elements in these arrangements typically consist of software maintenance and support, implementation and consulting services and, in some cases, cloud services.
Professional Services Revenue
Professional services revenue includes system implementation, consulting and training. For license transactions, the majority of our consulting and implementation services qualify for separate accounting. We use VSOE of fair value for the services to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our consulting and implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. Substantially all of our contracts are on a time-and-materials basis. For time-and-materials contracts, where the services are not essential to the functionality, we recognize revenue as services are performed. If the services are essential to functionality, then both the product license revenue and the service revenue are recognized under the percentage of completion method. For a fixed-fee contract, we recognize revenue based upon the costs and efforts to complete the services in accordance with the percentage of completion method, provided we are able to estimate such cost and efforts.
Under ASC 605-25, in order to account for deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must have standalone value upon delivery. For cloud services, in determining whether professional services have standalone value, we consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work.
We have standalone value for consulting and implementation services. For those contracts that have standalone value, we recognized the services revenue when rendered for time and material contracts, when the milestones are achieved and accepted by the customer for fixed price contracts or by percentage of completion basis if there is no acceptance criteria.
Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.
Deferred Revenue
Deferred revenue primarily consists of payments received in advance of revenue recognition from cloud, term and ratable license, and maintenance and support services and is recognized as the revenue recognition criteria are met. We
generally invoice customers in annual or quarterly installments. The deferred revenue balance does not represent the total contract value of annual or multi-year, non-cancelable cloud or maintenance and support agreements. Deferred revenue is influenced by several factors, including seasonality, the compounding effects of renewals, invoice duration, invoice timing and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent.
Deferred Commissions
Deferred commissions are the direct and incremental costs directly associated with cloud and term license contracts with customers and consist of sales commissions to our direct sales force.
The commissions are deferred and amortized over the terms of the related customer contracts, which are typically 12 to 36 months. The commission payments are paid based on contract terms in the month following the quarter in which the commissions are earned. The deferred commission amounts are recognized as sales and marketing expense in the consolidated statements of operations over the terms of the related customer contracts, in proportion to the recognition of the associated revenue.
Deferred Financing Costs
Costs relating to obtaining the credit agreement with Wells Fargo Bank are capitalized and amortized over the term of the related debt using the effective interest method. As of June 30, 2017 and 2016, deferred financing costs were $950,000 and $820,000, respectively, and accumulated amortization was $501,000 and $294,000, respectively. Deferred financing costs are included net of bank borrowings in the accompanying consolidated balance sheets. Amortization of deferred financing costs recorded as interest expense was $207,000, $231,000 and $79,000 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations as interest expense.
Leases
Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with ASC 840,
Leases
. When any one of the four test criteria in ASC 840 is met, the lease then qualifies as a capital lease.
Capital leases are capitalized at the lower of the net present value of the total amount payable under the leasing agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with our normal depreciation policy for tangible fixed assets, but not exceeding the lease term. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.
Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.
Software Development Costs
We account for software development costs in accordance with ASC 985,
Software
, for costs of the software to be sold, leased or marketed, whereby costs for the development of new software products and substantial enhancements to existing software products are included in research and development expense as incurred until technological feasibility has been established, at which time any additional costs are capitalized. Technological feasibility is established upon completion of a working model. To date, software development costs incurred in the period between achieving technological feasibility and general availability of software have not been material and have been charged to operations as incurred.
Advertising Costs
We expense advertising costs as incurred. Total advertising expenses for the fiscal years ended June 30, 2017, 2016 and 2015 were $52,000, $121,000, and $68,000 respectively.
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. 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.
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 and the reported cumulative net losses in all prior years, 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.
Comprehensive Loss
We report comprehensive loss and its components in accordance with ASC 220,
Comprehensive Income
. Under the accounting standards, comprehensive loss includes all changes in equity during a period except those resulting from investments by or distributions to owners. Total comprehensive loss for each of the three years in the period ended June 30, 2017 is shown in the accompanying statements of comprehensive loss. Accumulated other comprehensive loss presented in the accompanying consolidated balance sheets as of June 30, 2017 and 2016 consist of accumulated foreign currency translation adjustments.
Net Loss Per Common Share
Basic net loss 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 loss per common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Net loss applicable to common stockholders
|
|
$
|
(6,020)
|
|
$
|
(6,240)
|
|
$
|
(12,429)
|
Basic net loss per common share
|
|
$
|
(0.22)
|
|
$
|
(0.23)
|
|
$
|
(0.47)
|
Weighted average common shares used in computing basic net loss per common share
|
|
|
27,108
|
|
|
27,056
|
|
|
26,609
|
Effect of dilutive options and warrants outstanding
|
|
|
—
|
|
|
—
|
|
|
—
|
Weighted average common shares used in computing diluted net loss per common share
|
|
|
27,108
|
|
|
27,056
|
|
|
26,609
|
Diluted net loss per common share
|
|
$
|
(0.22)
|
|
$
|
(0.23)
|
|
$
|
(0.47)
|
Weighted average shares of stock options to purchase 2,404,591, 2,661,609, and 2,718,069 shares of common stock as of June 30, 2017, 2016, and 2015, respectively, were not included in the computation of diluted net income (loss) per common share due to their anti-dilutive effect. Such securities could have a dilutive effect in future periods.
Segment Information
We operate in one segment, the development, license, implementation and support of our customer service infrastructure software solutions. Operating segments are identified as components of an enterprise for which discrete financial information is available and regularly reviewed by our chief operating decision-maker 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.
Information relating to our geographic areas for the fiscal years ended June 30, 2017, 2016 and 2015 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
Total
|
|
Income
|
|
Long-Lived
|
|
|
Revenue
|
|
(Loss)
|
|
Assets
|
Year ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
28,711
|
|
$
|
(4,515)
|
|
$
|
463
|
EMEA
|
|
|
28,106
|
|
|
4,283
|
|
|
497
|
Asia Pacific
|
|
|
1,398
|
|
|
(3,493)
|
|
|
99
|
|
|
$
|
58,215
|
|
$
|
(3,725)
|
|
$
|
1,059
|
Year ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
34,922
|
|
$
|
(6,078)
|
|
$
|
925
|
EMEA
|
|
|
32,157
|
|
|
3,162
|
|
|
627
|
Asia Pacific
|
|
|
2,296
|
|
|
(2,957)
|
|
|
136
|
|
|
$
|
69,375
|
|
$
|
(5,873)
|
|
$
|
1,688
|
Year ended June 30, 2015:
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
36,551
|
|
$
|
(7,382)
|
|
|
|
EMEA
|
|
|
37,666
|
|
|
204
|
|
|
|
Asia Pacific
|
|
|
1,696
|
|
|
(4,108)
|
|
|
|
|
|
$
|
75,913
|
|
$
|
(11,286)
|
|
|
|
For the purposes of entity-wide geographic area disclosures, we define long-lived assets as hard assets that cannot be easily removed, such as property and equipment.
New Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-09,
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a shared-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017 (our fiscal 2019), including interim reporting periods within those annual reporting periods. Early adoption is permitted. We are currently assessing the future impact of this update on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which eliminates Step 2 from goodwill impairment testing. The Board also eliminated requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019 (our fiscal 2021), including interim reporting periods within those annual reporting periods. Early adoption is permitted. We early adopted this guidance in fiscal year 2017.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
(Topic 230): Restricted Cash
, which provides specific guidance on how to classify restricted cash. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017 (our fiscal 2019), including interim reporting periods within those annual reporting periods. Early adoption is permitted. We are currently assessing the future impact of this update on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
, which provides that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017 (our fiscal 2019), including interim reporting periods within those annual reporting periods. Early adoption is permitted. We are currently assessing the future impact of this update on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017 (our fiscal 2019), and interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the future impact of this update on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09), which simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 (our fiscal 2018), and interim periods within those annual periods. Early adoption is permitted. We are currently assessing the future impact of this update on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires that we recognize lease assets and liabilities on the balance sheet. This standard is effective for annual periods beginning after December 15, 2018 (our fiscal 2020), and interim periods within those annual periods. Early adoption is permitted. We are currently assessing the future impact of this update on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this update are effective for annual reporting periods beginning after December 15, 2017 (our fiscal 2019), including interim periods within that reporting
period, with early application permitted for periods beginning after December 31, 2016. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers
(Topic 606) Principal versus Agent Considerations (Reporting Revenue Gross versus Net
), which clarifies how to apply the implementation guidance on principal versus agent considerations related to the sale of goods or services to a customer as updated by ASU 2014-09. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers
(
Topic 606
)
Identifying Performance Obligations and Licensing,
which clarifies two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas, as updated by ASU 2014-09. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
, which makes narrow scope amendments to Topic 606 including implementation issues on collectability, non-cash consideration and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which provides technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to ASU 2014-09. The effective date and transition requirements for the amendments are equivalent to those for Topic 606.
Topic 606 is effective for our fiscal year 2019 beginning on July 1, 2018 using either one of two transition methods including several practical expedients: (i) full retrospective method, in which the new standard would be applied to each prior reporting period presented; or (ii) the modified retrospective method, in which the cumulative effect of initially applying the new standard would be recognized at the date of initial application and providing certain additional disclosures as defined in the guidance. We have not selected a transition method yet. We are still evaluating the overall effect that the standard will have on our consolidated financial statements and accompanying notes to the consolidated financial statements.
2. BALANCE SHEET COMPONENTS
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Computers and equipment
|
|
$
|
1,382
|
|
$
|
2,215
|
Leased equipment
|
|
|
475
|
|
|
1,473
|
Furniture and fixtures
|
|
|
255
|
|
|
249
|
Leasehold improvements
|
|
|
412
|
|
|
553
|
Total
|
|
|
2,524
|
|
|
4,490
|
Accumulated depreciation and amortization
|
|
|
(1,465)
|
|
|
(2,802)
|
Property and equipment, net
|
|
$
|
1,059
|
|
$
|
1,688
|
Depreciation and amortization expense was $1.1 million, $2.1 million and $2.5 million for the years ended June 30, 2017, 2016 and 2015, respectively. Accumulated depreciation relating to computers, equipment and software under capital leases totaled $863,000 and $1.0 million as of June 30, 2017 and 2016, respectively. Amortization of assets under capital leases is included in depreciation and amortization expense. Disposals of fixed assets were $14.0 million and $1.2 million and for the years ended June 30, 2017, and 2016, respectively. Fully depreciated equipment of $6.1 million and $17.6 million as of June 30, 2017 and 2016, respectively, is not included in the table above.
Accrued compensation consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Accrued bonuses
|
|
$
|
1,326
|
|
$
|
1,514
|
Accrued vacation
|
|
|
1,794
|
|
|
1,834
|
Payroll and other employee related costs
|
|
|
752
|
|
|
891
|
Accrued commissions
|
|
|
467
|
|
|
1,403
|
Accrued compensation
|
|
$
|
4,339
|
|
$
|
5,642
|
Accrued liabilities consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Accrued other liabilities
|
|
$
|
980
|
|
|
907
|
VAT liability
|
|
|
364
|
|
|
602
|
Sales tax payable
|
|
|
558
|
|
|
193
|
Customer advances
|
|
|
462
|
|
|
3,968
|
Accrued liabilities
|
|
$
|
2,364
|
|
$
|
5,670
|
3. BANK BORROWINGS
On November 21, 2014, we entered into a Credit Agreement (the Credit Agreement) with Wells Fargo Bank, as administrative agent and the lenders party thereto. The Credit Agreement provides for the extension of revolving loans (Revolving Loans) in an aggregate principal amount not to exceed $10.0 million, and a term loan (Term Loan) in an aggregate principal amount not to exceed $10.0 million, but in each case limited by an amount not to exceed 60% of our trailing twelve month recurring revenues from subscription and support fees attributable to software, as calculated under the Credit Agreement. The obligations under the Credit Agreement mature on November 21, 2019.
Borrowings under the Credit Agreement bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus 4.75%. Borrowings under the Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to (i) the greatest of (A) the Federal Funds Rate plus 0.50%, (B) the one month LIBOR rate plus 1.00% per annum, and (C) the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus (ii) 3.75%.
We will pay certain recurring fees with respect to the Credit Agreement, including servicing fees to the administrative agent. Prior to the first anniversary of the closing date of the Credit Agreement voluntary repayments of the Term Loan, voluntary permanent reductions of the commitment related to the Revolving Loans and certain mandatory prepayments are subject a prepayment premium of 1.0% of the amount prepaid or reduced.
Subject to certain exceptions, the loans extended under the Credit Agreement are subject to customary mandatory prepayment provisions with respect to the following: net proceeds from certain asset sales; net proceeds from certain issuances or incurrences of debt (other than debt permitted to be incurred under the terms of the Credit Agreement); net proceeds of certain judgments, settlements and other claims or causes of action of us; and a portion with step-downs based upon the achievement of a financial covenant linked to the Leverage Ratio; as such term is defined in the Credit Agreement of our annual excess cash flow and our subsidiaries, and with such required prepayment amount to be reduced dollar-for-dollar by any voluntary prepayments of term loans.
The Credit Agreement contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting our ability and our subsidiaries to: incur additional indebtedness; incur liens; engage in mergers or other fundamental changes; consummate acquisitions; sell certain property or assets; change the nature of their business; prepay or amend certain indebtedness; pay dividends, other distributions or repurchase our equity interests or our subsidiaries; make investments; or engage in certain transactions with affiliates. In addition, the Credit Agreement contains financial covenants which initially require us to achieve minimum EBITDA and liquidity levels. However, subject to the conditions of the Credit Agreement, once we have achieved a minimum Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of 1.50 to 1.00 and a Leverage Ratio of less than 2.50 to 1.00, we will be required to comply with a minimum Fixed Charge Coverage Ratio and a specific Leverage Ratio.
The Credit Agreement contains customary events of default, including with respect to: nonpayment of principal, interest, fees or other amounts; failure to perform or observe covenants; monetary judgment defaults; bankruptcy, insolvency and dissolution events; cross-default to other material indebtedness; material inaccuracy of a representation or warranty when made; failure to perfect a lien; actual or asserted invalidity or impairment of any definitive loan documentation or repudiation of guaranties; or a change of control.
As a condition to entering into the Credit Agreement, we pledged substantially all assets such as accounts receivable and property and equipment as collateral for the benefit of Wells Fargo Bank.
On September 2, 2015, the Company entered into Amendment Number One (the Amendment) to that certain Credit Agreement, dated as of November 21, 2014 (as further amended, restated, supplemented or otherwise modified from time to time), among us, the lenders, and Wells Fargo Bank, as administrative agent. Pursuant to the Amendment, we increased the total maximum revolving loan commitments thereunder from $10.0 million to $15.0 million and increased the quarterly amortization payments of the term loan under the Credit Agreement to $187,500 for the quarters ended September 30, 2015 through December 31, 2015 and $250,000 in each quarter ending thereafter.
Borrowings under the Amendment bear interest, in the case of LIBOR rate loans, at a per annum rate equal to the applicable LIBOR rate, plus 7.0%. Borrowings under the Credit Agreement that are not LIBOR rate loans bear interest at a per annum rate equal to the rate of interest announced, from time to time, by Wells Fargo Bank, National Association as its “prime rate,” plus 6.0%.
In connection with the Amendment, certain fees were also modified such that prior to the first anniversary of the Amendment, voluntary repayments of the Term Loan, voluntary permanent reductions of the commitment related to the Revolving Loans and certain mandatory prepayments will be subject a prepayment premium of 1.0% of the amount prepaid or reduced. The financial covenants concerning minimum EBITDA and liquidity levels contained in the Credit Agreement were modified in the Amendment as follows:
1. We were
required to achieve minimum EBITDA of not more negative than $1.68 million for the three (3) month period ended September 30, 2015 and not more negative than $2.228 million for the six (6) month period ended December 31, 2015. Thereafter, minimum EBITDA levels will be based on amounts agreed to by us and the requisite lenders based upon annual projections delivered to the agent, and the failure to reach an agreement on reset minimum EBITDA levels acceptable to the agent in its sole discretion shall constitute an event of default under the Credit Agreement; and
2. We were required to achieve minimum liquidity of at least $10.0 million for the month ended December 31, 2015 and at all times thereafter.
On January 27, 2017, the Company entered into Amendment Number Two to the Credit Agreement (the Amendment No. 2), which amends the Credit Agreement dated as of November 21, 2014, among the Company, Wells Fargo Bank, National Association, as agent, and the lenders party thereto (as amended, the Credit Agreement). Pursuant to the Amendment, the Applicable Margin (as defined in the Credit Agreement) at which LIBOR loans advanced under the Credit Agreement bear interest may be either the applicable LIBOR rate plus 5.5% per annum or 7.0% per annum, depending on the Company’s “TTM Recurring Revenue Calculation” (as defined in the Credit Agreement). The TTM Recurring Revenue Calculation is based on the Company’s consolidated trailing twelve months of revenue relating to recurring revenue attributable to the Company’s software. Loans may also bear interest under the Credit Agreement at the applicable Base Rate (as defined in the Credit Agreement) and the corresponding Applicable Margin for Base Rate loans is 1.0% per annum less than for LIBOR loans. Under the Amendment No. 2, a 1.0% fee will also be payable until the first anniversary of the Amendment No. 2 on the amount of any voluntary prepayment of the term loan advanced under the Credit Agreement or the amount of any voluntary reduction of revolving commitments provided under the Credit Agreement.
The Amendment No. 2 modifies the two financial covenants the Company is required to comply with until the Financial Covenant Replacement Date (as defined in the Credit Agreement) has occurred. The Financial Covenant Replacement Date is the first day of the fiscal quarter following the date on which the Company has achieved (i) a Fixed Charge Coverage Ratio equal to or greater than 1.50 to 1.00 and (ii) a Leverage Ratio of less than 2.50 to 1.00 for the immediately preceding two consecutive fiscal quarters (as such terms are defined in the Credit Agreement). In addition, the Financial Covenant Replacement Date will not be deemed to occur unless the Company is in compliance with the applicable Leverage Ratio as of the last day of the fiscal quarter preceding the test date. As of June 30, 2017, the Fixed Charge Coverage Ratio and Leverage Ratio financial covenants were not met, and the Financial Covenant Replacement Date was not deemed to have occurred.
Under the Amendment No. 2 the minimum EBITDA (as defined in the Credit Agreement and specific to Wells Fargo) levels the Company is required to achieve on and prior to the Financial Covenant Replacement Date were modified to be, as of the end of each fiscal quarter, at the least the amount set forth in the table below for the applicable period opposite such amount:
|
|
|
|
For the four quarter period ending
|
|
Applicable Amount
|
December 31, 2016
|
|
$
|
(900,000)
|
March 31, 2017
|
|
|
(2,000,000)
|
June 30, 2017
|
|
|
(4,500,000)
|
September 30, 2017
|
|
|
(6,100,000)
|
December 31, 2017
|
|
|
(5,100,000)
|
March 31, 2018
|
|
|
(3,800,000)
|
June 30, 2018
|
|
|
(3,000,000)
|
September 30, 2018
|
|
|
(1,500,000)
|
December 31, 2018
|
|
|
—
|
March 31, 2019
|
|
|
1,500,000
|
June 30, 2019
|
|
|
3,000,000
|
September 30, 2019
|
|
|
4,000,000
|
In addition, the amount of Liquidity (as defined in the Credit Agreement) the Company is required to maintain on and prior to the Financial Covenant Replacement Date was reduced from $10 million to $4 million.
As of June 30, 2017, we were in compliance with these financial covenant terms.
If the Leverage Ratio is greater than 3.00 to 1:00 as of the end of the fiscal year, then we are contractually obligated to repay an amount equivalent to 50% of the Excess Cash Flow as specified in the Credit Agreement. As of June 30, 2017, our Leverage Ratio was above this threshold, and 50% of Excess Cash Flow was determined to be the amount of $729,000. We obtained a bank waiver and were not required to pay this amount.
As of June 30, 2017, balances on the Term Loan, Revolving Loans and debt maturities during each of the next five years on an aggregate basis were (in thousands):
|
|
|
|
|
|
Bank
|
Year Ending June 30,
|
|
Borrowings
|
2018
|
|
$
|
1,000
|
2019
|
|
|
1,000
|
2020
|
|
|
14,056
|
2021
|
|
|
—
|
2022
|
|
|
—
|
Total bank borrowings
|
|
|
16,056
|
Less amounts representing deferred financing costs, net
|
|
|
(449)
|
Total bank borrowings
|
|
|
15,607
|
Less current debt maturities
|
|
|
(805)
|
Bank borrowings, net of current portion
|
|
$
|
14,802
|
Amortization expense related to deferred financing costs amounted to $207,000 and $231,000 and $79,000 for the years ended June 30, 2017, 2016 and 2015, respectively.
4. INCOME TAXES
Loss before income tax benefit (provision) consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
(5,148)
|
|
$
|
(11,823)
|
|
$
|
(24,621)
|
Foreign
|
|
|
(339)
|
|
|
4,720
|
|
|
12,512
|
Loss before income tax benefit (provision)
|
|
$
|
(5,487)
|
|
$
|
(7,103)
|
|
$
|
(12,109)
|
The following table reconciles the federal statutory tax rate to the effective tax rate of the income tax provision:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
Current state taxes
|
|
(0.2)
|
|
(0.1)
|
|
—
|
|
Foreign rate differential
|
|
(8.9)
|
|
(0.8)
|
|
(4.9)
|
|
Research and development credits
|
|
3.1
|
|
3.5
|
|
1.5
|
|
Foreign withholding tax
|
|
(4.3)
|
|
(5.4)
|
|
(2.2)
|
|
Other items
|
|
(5.7)
|
|
(2.4)
|
|
1.8
|
|
Net change in valuation allowance
|
|
(27.7)
|
|
(16.7)
|
|
(32.8)
|
|
Effective tax rate
|
|
(9.7)
|
%
|
12.1
|
%
|
(2.6)
|
%
|
The components of the income tax (benefit) provision are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Current provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
$
|
—
|
|
$
|
23
|
Foreign
|
|
|
505
|
|
|
533
|
|
|
560
|
State
|
|
|
10
|
|
|
10
|
|
|
5
|
Total current:
|
|
|
515
|
|
|
543
|
|
|
588
|
Deferred (benefit):
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
18
|
|
|
(1,406)
|
|
|
(268)
|
Total deferred:
|
|
|
18
|
|
|
(1,406)
|
|
|
(268)
|
Income tax (benefit) provision
|
|
$
|
533
|
|
$
|
(863)
|
|
$
|
320
|
As of June 30, 2017, we had federal and state net operating loss carryforwards of approximately $218.3 million and $32.7 million, respectively. The net operating loss carryforwards will expire at various dates beginning in fiscal year ending June 30, 2018 through June 30, 2037, if not utilized. Partial amounts of the net operating losses are generated from the exercise of options and the tax benefit would be credited directly to stockholders’ equity (deficit). We also had federal research and development credit carryforwards of approximately $2.8 million as of June 30, 2017 which will expire at various dates beginning in fiscal year ending June 30, 2019 through June 30, 2037, if not utilized. The California research and development credit carryforwards are approximately $4.3 million as of June 30, 2017 and have an indefinite carryover period. We also have U.K. net operating loss carryforwards, which do not expire, of approximately $1.5 million as of June 30, 2017.
Utilization of the Federal and California net operating losses and credits may be subject to a substantial limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
Deferred tax assets and liabilities reflect the net tax effects of net operating loss and credit carryforwards and of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.
We early adopted ASU 2015-17,
Income Taxes—Balance Sheet Classification of Deferred Taxes
, as of June 30, 2016 on a prospective basis. Periods presented in the consolidated financial statements reflect the adoption of the guidance.
Significant components of our deferred tax assets and liabilities for federal, state and foreign income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
74,806
|
|
$
|
74,751
|
Research credits
|
|
|
5,658
|
|
|
5,289
|
Deferred revenue
|
|
|
886
|
|
|
372
|
Stock-based compensation
|
|
|
1,564
|
|
|
111
|
Accruals and reserves
|
|
|
1,260
|
|
|
1,199
|
Other
|
|
|
376
|
|
|
411
|
Gross deferred tax assets
|
|
|
84,550
|
|
|
82,133
|
Less valuation allowance
|
|
|
(83,747)
|
|
|
(80,863)
|
Deferred tax assets, included in other assets
|
|
|
803
|
|
|
1,270
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Foreign, primarily intangible assets
|
|
|
(256)
|
|
|
(705)
|
Deferred tax liabilities, included in other long term liabilities
|
|
|
(256)
|
|
|
(705)
|
Net deferred tax assets
|
|
$
|
547
|
|
$
|
565
|
ASC 740,
Income Taxes
, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. For the legacy eGain business in the United States, based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, 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 carryforwards which had previously been valued against as well as our foreign operations.
The net valuation allowance increased by $2.9 million for the year ended June 30, 2017, compared to the increase of $2.3 million for year ended June 30, 2016.
Deferred tax liabilities have not been recognized for $11.2 million of undistributed earnings of our foreign subsidiaries as of June 30, 2017. It is our intention to reinvest such undistributed earnings indefinitely in our foreign subsidiaries. If we distribute these earnings, in the form of dividends or otherwise, we would be subject to both United States income taxes (net of applicable foreign tax credits) and withholding taxes payable to the foreign jurisdiction.
Uncertain Tax Positions
The aggregate changes in the balance of our gross unrecognized tax benefits during fiscal years 2017, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
1,413
|
|
$
|
1,346
|
|
$
|
1,290
|
Increases in balances related to tax positions taken during current periods
|
|
|
52
|
|
|
67
|
|
|
56
|
Decrease in balances related to tax positions taken during prior periods
|
|
|
—
|
|
|
—
|
|
|
—
|
Ending balance
|
|
$
|
1,465
|
|
$
|
1,413
|
|
$
|
1,346
|
No accrued interest and penalties have been recognized related to unrecognized tax (benefit) in the provision for income tax until the credits have been utilized.
We do not anticipate the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12 months. We file income tax returns in the United States, and various state and foreign jurisdictions. In these jurisdictions tax years 1994-2015 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.
5. STOCKHOLDERS’ EQUITY
Common Stock
We have reserved shares of common stock for issuance as of June 30, 2017 as follows:
|
|
|
|
|
Reserved
|
|
|
Stock
|
|
|
Options
|
Stock options outstanding
|
|
2,273,660
|
Reserved for future grants of stock options
|
|
2,097,918
|
Total reserved shares of common stock for issuance
|
|
4,371,578
|
Preferred Stock
We are authorized to issue 5,000,000 shares of preferred stock with a par value of $0.001 per share, and no shares of preferred stock are outstanding. Our board of directors has the authority, without further action by our stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of the common stock.
2005 Management Stock Option Plan
In May 2005, our board of directors adopted the 2005 Management Stock Option Plan, or the 2005 Management Plan, which provides for the grant of non-statutory stock options to directors, officers and key employees of eGain and its subsidiaries. The Plan was increased by 500,000 shares of common stock in November 2007, 500,000 shares of common stock in September 2011 and 1.0 million shares of common stock in September 2014. Our board also extended the expiration date of the 2005 Management Stock Option Plan to September 30, 2024. Options under the 2005 Management Plan are granted at a price not less than 100% of the fair market value of the common stock on the date of grant. Options granted under the 2005 Management Plan are subject to eGain’s right of repurchase, whose right shall lapse with respect to one-forty-eighth (1/48
th
) of the shares granted to a director, officer or key employee for each month of continuous service provided by such director, officer or key employee to eGain. The options granted under this plan are exercisable for up to ten years from the date of grant.
The following table represents the activity under the 2005 Management Stock Option Plan:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
Available for
|
|
Options
|
|
Weighted
|
|
|
Grant
|
|
Outstanding
|
|
Average Price
|
Balance as of June 30, 2014
|
|
352,481
|
|
537,207
|
|
$
|
2.92
|
Shares Authorized for Issuance
|
|
1,000,000
|
|
—
|
|
$
|
—
|
Options Granted
|
|
(670,200)
|
|
670,200
|
|
$
|
6.10
|
Options Exercised
|
|
—
|
|
(218,691)
|
|
$
|
0.91
|
Options Forfeited / Expired
|
|
40,709
|
|
(40,709)
|
|
$
|
5.95
|
Balance as of June 30, 2015
|
|
722,990
|
|
948,007
|
|
$
|
5.50
|
Options Granted
|
|
(98,875)
|
|
98,875
|
|
$
|
3.99
|
Options Exercised
|
|
—
|
|
(38,307)
|
|
$
|
3.08
|
Options Forfeited / Expired
|
|
132,534
|
|
(132,534)
|
|
$
|
6.29
|
Balance as of June 30, 2016
|
|
756,649
|
|
876,041
|
|
$
|
5.33
|
Options Granted
|
|
(68,750)
|
|
68,750
|
|
$
|
1.92
|
Options Exercised
|
|
—
|
|
—
|
|
$
|
—
|
Options Forfeited / Expired
|
|
107,139
|
|
(107,139)
|
|
$
|
4.33
|
Balance as of June 30, 2017
|
|
795,038
|
|
837,652
|
|
$
|
5.16
|
2005 Stock Incentive Plan
In March 2005, our board of directors adopted the 2005 Stock Incentive Plan, the 2005 Incentive Plan, which provides for the grant of stock options to eGain’s employees, officers, directors and consultants. The 2005 Stock Incentive Plan was subsequently amended in February 2009, September 2011, and in September 2014. In September 2014, our board of directors approved an increase in the 2005 Incentive Plan by 1.0 million shares of common stock, extend the expiration date of the 2005 Stock Incentive Plan to September 30, 2024 and made certain other changes. Options granted under the 2005 Incentive Plan are either incentive stock options or non-statutory stock options. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock on the date of grant. The options generally vest ratably over a period of four years and expire no later than ten years from the date of grant.
The following table represents the activity under the 2005 Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
Available for
|
|
Options
|
|
Average
|
|
|
Grant
|
|
Outstanding
|
|
Price
|
Balance as of June 30, 2014
|
|
200,624
|
|
1,632,435
|
|
$
|
4.96
|
Shares Authorized for Issuance
|
|
1,000,000
|
|
—
|
|
$
|
—
|
Options Granted
|
|
(257,800)
|
|
257,800
|
|
$
|
4.77
|
Options Exercised
|
|
—
|
|
(73,510)
|
|
$
|
1.47
|
Options Forfeited / Expired
|
|
150,730
|
|
(150,730)
|
|
$
|
7.83
|
Balance as of June 30, 2015
|
|
1,093,554
|
|
1,665,995
|
|
$
|
4.83
|
Options Granted
|
|
(199,775)
|
|
199,775
|
|
$
|
3.98
|
Options Exercised
|
|
—
|
|
(39,320)
|
|
$
|
0.92
|
Options Forfeited / Expired
|
|
259,915
|
|
(259,915)
|
|
$
|
6.45
|
Balance as of June 30, 2016
|
|
1,153,694
|
|
1,566,535
|
|
$
|
4.55
|
Options Granted
|
|
(138,675)
|
|
138,675
|
|
$
|
2.08
|
Options Exercised
|
|
—
|
|
(8,550)
|
|
$
|
0.75
|
Options Forfeited / Expired
|
|
287,861
|
|
(287,861)
|
|
$
|
6.10
|
Balance as of June 30, 2017
|
|
1,302,880
|
|
1,408,799
|
|
$
|
4.01
|
2000 Non-Management Stock Option Plan
In July 2000, our board of directors adopted the 2000 Non-Management Stock Option Plan, or the 2000 Plan, which provided for the grant of non-statutory stock options to our employees, advisors and consultants of eGain. Options under the 2000 Plan were granted at a price not less than 85% of the fair market value of the common stock on the date of grant. Our board of directors determines the fair market value (as defined in the 2000 Plan) of the common stock, date of grant and vesting schedules of the options granted. The options generally vest ratably over 4 years and expire no later than 10 years from the date of grant. This plan expired in July 2010 and there are no further options available to grant under the 2000 Plan.
The following table represents the activity under the 2000 Non-Management Stock Option Plan:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
Available for
|
|
Options
|
|
Average
|
|
|
Grant
|
|
Outstanding
|
|
Price
|
Balance as of June 30, 2014
|
|
—
|
|
21,180
|
|
$
|
0.68
|
Options Exercised
|
|
—
|
|
(9,030)
|
|
$
|
0.65
|
Options Forfeited / Expired
|
|
—
|
|
—
|
|
$
|
—
|
Balance as of June 30, 2015
|
|
—
|
|
12,150
|
|
$
|
0.71
|
Options Exercised
|
|
—
|
|
(900)
|
|
$
|
1.09
|
Options Forfeited / Expired
|
|
—
|
|
(1,250)
|
|
$
|
0.86
|
Balance as of June 30, 2016
|
|
—
|
|
10,000
|
|
$
|
0.66
|
Options Exercised
|
|
—
|
|
—
|
|
$
|
—
|
Options Forfeited / Expired
|
|
—
|
|
—
|
|
$
|
—
|
Balance as of June 30, 2017
|
|
—
|
|
10,000
|
|
$
|
0.66
|
1998 Stock Plan
In June 1998, our board of directors adopted the 1998 Stock Plan, or the 1998 Plan, which provides for grant of stock options to eligible participants. Options granted under the 1998 Plan are either incentive stock options or non-statutory stock options. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock and non-statutory options may be granted to eligible participants at exercise prices of no less than 85% of the fair value of the common stock on the date of grant. Our board of directors determines the fair market value (as defined in the 1998 Plan) of the common stock, date of grant and vesting schedules of the options granted. The options generally vest ratably over a period of four years and expire no later than 10 years from the date of grant. Options are generally exercisable upon grant, subject to our repurchase rights until vested. This plan expired in November 2010 and there are no further options available to grant under the 1998 Plan.
The following table represents the activity under the 1998 Stock Plan:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Weighted
|
|
|
Available for
|
|
Options
|
|
Average
|
|
|
Grant
|
|
Outstanding
|
|
Price
|
Balance as of June 30, 2014
|
|
—
|
|
91,568
|
|
$
|
0.66
|
Options Exercised
|
|
—
|
|
(39,809)
|
|
$
|
0.64
|
Options Forfeited / Expired
|
|
—
|
|
(12,800)
|
|
$
|
0.67
|
Balance as of June 30, 2015
|
|
—
|
|
38,959
|
|
$
|
0.67
|
Options Exercised
|
|
—
|
|
(3,750)
|
|
$
|
0.65
|
Options Forfeited / Expired
|
|
—
|
|
—
|
|
$
|
—
|
Balance as of June 30, 2016
|
|
—
|
|
35,209
|
|
$
|
0.67
|
Options Exercised
|
|
—
|
|
(15,000)
|
|
$
|
0.68
|
Options Forfeited / Expired
|
|
—
|
|
(3,000)
|
|
$
|
0.60
|
Balance as of June 30, 2017
|
|
—
|
|
17,209
|
|
$
|
0.67
|
The following table summarizes information about stock options outstanding and exercisable under all stock option plans as of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
|
Average
|
|
Weighted
|
|
|
|
Weighted
|
|
Exercise
|
|
|
|
Remaining
|
|
Average
|
|
|
|
Average
|
|
Prices
|
|
Number
|
|
Contractual Life
|
|
Exercise
Price
|
|
Number
|
|
Exercise
Price
|
|
$0.30-$0.30
|
|
3,000
|
|
1.45
|
|
$
|
0.30
|
|
3,000
|
|
$
|
0.30
|
|
$0.50-$0.74
|
|
446,913
|
|
2.09
|
|
$
|
0.74
|
|
446,913
|
|
$
|
0.74
|
|
$0.75-$1.80
|
|
275,493
|
|
4.08
|
|
$
|
1.36
|
|
192,059
|
|
$
|
1.20
|
|
$2.10-$3.74
|
|
235,039
|
|
7.65
|
|
$
|
3.12
|
|
102,462
|
|
$
|
3.55
|
|
$3.85-$5.28
|
|
416,885
|
|
5.78
|
|
$
|
4.75
|
|
323,627
|
|
$
|
4.94
|
|
$5.31-$6.25
|
|
67,063
|
|
4.73
|
|
$
|
5.55
|
|
66,438
|
|
$
|
5.54
|
|
$6.29-$6.29
|
|
429,000
|
|
7.20
|
|
$
|
6.29
|
|
292,852
|
|
$
|
6.29
|
|
$6.36-$7.94
|
|
247,117
|
|
6.63
|
|
$
|
7.63
|
|
195,960
|
|
$
|
7.63
|
|
$8.02-$13.58
|
|
148,050
|
|
5.97
|
|
$
|
10.39
|
|
132,704
|
|
$
|
10.42
|
|
$15.50-$15.50
|
|
5,100
|
|
6.25
|
|
$
|
15.50
|
|
4,675
|
|
$
|
15.50
|
|
$0.30-$15.50
|
|
2,273,660
|
|
5.38
|
|
$
|
4.39
|
|
1,760,690
|
|
$
|
4.36
|
The summary of options vested and exercisable as of June 30, 2017 comprised:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Weighted
|
|
Aggregate
|
|
Remaining
|
|
|
Number of
|
|
Average
|
|
Intrinsic
|
|
Contractual
|
|
|
Shares
|
|
Exercise
Price
|
|
Value
|
|
Term
|
Options outstanding
|
|
2,273,660
|
|
$
|
4.39
|
|
$
|
501,634
|
|
5.38
|
Fully vested and expected to vest options
|
|
2,190,876
|
|
$
|
4.41
|
|
$
|
501,103
|
|
5.26
|
Options exercisable
|
|
1,760,690
|
|
$
|
4.36
|
|
$
|
499,669
|
|
4.57
|
The aggregate intrinsic value in the preceding table represents the total intrinsic value based on stock options with a weighted average exercise price less than our closing stock price of $1.65 as of June 30, 2017 that would have been received by the option holders, had they exercised their options on June 30, 2017. The total intrinsic value of stock options exercised during fiscal years 2017, 2016 and 2015 was $21,000, $53,000, and $1.0 million, respectively.
Stock-Based Compensation
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. All of our stock-based compensation is accounted for as an equity instrument.
The table below summarizes the effect of stock-based compensation (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Non-cash stock-based compensation expense
|
|
$
|
(667)
|
|
$
|
(1,188)
|
|
$
|
(2,317)
|
Income tax benefit
|
|
|
—
|
|
|
—
|
|
|
—
|
Net income effect
|
|
$
|
(667)
|
|
$
|
(1,188)
|
|
$
|
(2,317)
|
Net effect on income (loss) per share, basic and diluted
|
|
$
|
(0.02)
|
|
$
|
(0.04)
|
|
$
|
(0.09)
|
We utilized 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 Securities and Exchange Commission on a registration statement on Form S-8.
During the fiscal years ended June 30, 2017, 2016 and 2015 there were 207,425, 298,650, and 928,000 options granted, respectively, with a weighted average fair value of $1.20, $2.06, and $3.50, per share, respectively, using the following assumptions:
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Dividend yield
|
|
—
|
|
—
|
|
—
|
|
Expected volatility
|
|
56
|
%
|
61
|
%
|
79
|
%
|
Average risk-free interest rate
|
|
1.70
|
%
|
1.53
|
%
|
1.66
|
%
|
Expected life (in years)
|
|
5.89
|
|
5.01
|
|
4.50
|
|
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.
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.
Total compensation cost, net of forfeitures, for all options granted but not yet vested as of June 30, 2017 was $323,000 which is expected to be recognized over the weighted average period of 1.17 years.
6. ACQUISITION
On July 30, 2014, we entered into a Share Purchase Agreement (Purchase Agreement) with Exony Limited, a privately held United Kingdom company (Exony), and certain of its shareholders (collectively, the Shareholders), pursuant to which we agreed to acquire all the outstanding share capital of Exony for (A) an aggregate of 1,209,308 shares of the Company’s common stock, $0.001 par value per share (Company Stock), with a value of $8.02 million as of August 6, 2014, the closing date of the acquisition (based on the closing price of the Company’s common stock as of such date) and (B) an aggregate of $8.13 million in cash (collectively “Acquisition Consideration”), with 15% of each of the cash and Company Stock being held in an escrow account to secure certain indemnification obligations of the Shareholders. The Acquisition Consideration is subject to an adjustment based on Exony’s working capital as of the closing. The other purchase consideration relates to two shareholders of Exony who have the right to exercise their options within six months
from the acquisition date which entitles them to $299,000 (45,119 shares) of Company Stock and $341,000 of cash acquisition consideration. The cash portion of the transaction was funded from eGain’s existing cash and its available credit facility. We have incurred acquisition costs of approximately $844,000 through June 30, 2015, which are included in general and administrative expenses.
The purchase price for this acquisition had been allocated based on estimates of the fair values of the acquired assets and assumed liabilities at the date of acquisition as follows (in thousands):
|
|
|
|
|
|
|
Purchase consideration:
|
|
|
|
|
|
|
Cash
|
|
$
|
7,841
|
|
|
|
Stock (1,164,189 shares of Company Stock)
|
|
|
7,719
|
|
|
|
Other purchase consideration (includes 45,119 shares of Company Stock)
|
|
|
640
|
|
|
|
Working capital adjustment
|
|
|
1,355
|
|
|
|
Total purchase price
|
|
|
|
|
$
|
17,555
|
Fair value of assets acquired and liabilities assumed:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,751
|
|
|
|
Restricted cash
|
|
|
3,185
|
|
|
|
Accounts receivable
|
|
|
2,850
|
|
|
|
Prepaid and other current assets
|
|
|
281
|
|
|
|
Property and equipment
|
|
|
315
|
|
|
|
Total assets acquired
|
|
|
|
|
|
9,382
|
Accounts payable
|
|
|
(786)
|
|
|
|
Accrued compensation
|
|
|
(3,139)
|
|
|
|
Accrued liabilities
|
|
|
(352)
|
|
|
|
Deferred revenue
|
|
|
(4,185)
|
|
|
|
Other liabilities
|
|
|
(326)
|
|
|
|
Total liabilities assumed
|
|
|
|
|
|
(8,788)
|
Fair value of identifiable intangibles at acquisition-date:
|
|
|
|
|
|
|
Developed technology
|
|
|
6,990
|
|
|
|
Customer relationships
|
|
|
2,990
|
|
|
|
Trade name
|
|
|
150
|
|
|
|
Total identifiable intangibles at acquisition-date
|
|
|
|
|
|
10,130
|
Deferred tax liability:
|
|
|
|
|
|
(1,475)
|
Goodwill
|
|
|
|
|
$
|
8,306
|
The allocation of the purchase price consideration was based on estimates of fair value; such estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). As of June 30, 2015, we finalized the working capital adjustment and other purchase consideration, adjusting goodwill down by $44,000. Such values were updated in the purchase consideration noted in the table above.
Included in the acquisition of Exony are operating lease commitments for office space in Newbury, England. The annual lease payment for a 5 year term lease is approximately $260,000 and $91,000 for a 2 year term lease.
The goodwill of
$8.3 million
arising from the Exony acquisition largely reflects the expansion of our service offerings complementary to our existing products. As Exony is considered
an innovative contact center software provider, t
he acquisition was intended to
extend eGain's platform with contact center management, reporting and analytics capabilities
to our customers.
Intangible assets will be amortized over the estimated lives, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Carrying
|
|
Accumulated
|
|
Net Balance
|
|
|
|
Statements of Operations
|
Intangible Asset
|
|
Amount
|
|
Amortization
|
|
June 30, 2017
|
|
Life
|
|
Category
|
Developed technology
|
|
$
|
6,990
|
|
$
|
(5,073)
|
|
$
|
1,917
|
|
4
|
|
Research and development
|
Customer relationships - software contracts
|
|
|
1,380
|
|
|
(1,380)
|
|
|
—
|
|
2
|
|
Sales and marketing
|
Customer relationships - maintenance contracts
|
|
|
1,610
|
|
|
(779)
|
|
|
831
|
|
6
|
|
Cost of recurring
|
Trade name
|
|
|
150
|
|
|
(150)
|
|
|
—
|
|
2
|
|
General and administrative
|
|
|
$
|
10,130
|
|
$
|
(7,382)
|
|
$
|
2,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Carrying
|
|
Accumulated
|
|
Net Balance
|
|
|
|
Statements of Operations
|
Intangible Asset
|
|
Amount
|
|
Amortization
|
|
June 30, 2016
|
|
Life
|
|
Category
|
Developed technology
|
|
$
|
6,990
|
|
$
|
(3,325)
|
|
$
|
3,665
|
|
4
|
|
Research and development
|
Customer relationships - software contracts
|
|
|
1,380
|
|
|
(1,313)
|
|
|
67
|
|
2
|
|
Sales and marketing
|
Customer relationships - maintenance contracts
|
|
|
1,610
|
|
|
(510)
|
|
|
1,100
|
|
6
|
|
Cost of recurring
|
Trade name
|
|
|
150
|
|
|
(143)
|
|
|
7
|
|
2
|
|
General and administrative
|
|
|
$
|
10,130
|
|
$
|
(5,291)
|
|
$
|
4,839
|
|
|
|
|
Amortization expense related to the above intangible assets for fiscal year ended June 30, 2017, 2016 and 2015 was $2.1 million, $2.8 million and $2.5 million, respectively.
Estimated future amortization expense remaining as of June 30, 2017 for intangible assets acquired is as follows:
|
|
|
|
|
|
Year Ending
|
|
|
June 30,
|
2018
|
|
$
|
2,016
|
2019
|
|
|
438
|
2020
|
|
|
268
|
2021
|
|
|
26
|
Total future amortization expense
|
|
$
|
2,748
|
The operating results for this acquisition are included in the consolidated results of operations from August 6, 2014 (the date of acquisition). The Company determined that it is impracticable to provide comparative pro forma financial information related to the acquisition. Exony, a private company, did not historically prepare financial statements in accordance with U.S. GAAP for interim financial reporting. Accordingly, significant estimates of amounts to be included in pro forma financial information would be required and subject to an inordinate level of subjectivity. For fiscal years ended 2017, 2016 and 2015, Exony contributed revenues of $10.4 million, $11.2 million and $11.0 million, respectively. Exony contributed a net loss of $227,000 during fiscal year 2017 and net income of $3.7 million and $793,000 during fiscal years 2016 and 2015, respectively.
7. COMMITMENTS AND CONTINGENCIES
Leases
We lease our facilities under non-cancelable operating leases that expire on various dates through fiscal year 2022.
On May 14, 2014, we entered into the First Amendment to the office lease for our Sunnyvale facility to extend the term of the lease through March 2022 and lease additional space in the current premises. The term of the additional space commenced on August 5, 2015 and is scheduled to expire on March 31, 2022. As part of the lease extension, the landlord provided the Company with a tenant improvement allowance during 2015 through 2016 of $411,000. Our lease agreements provide us with the option to renew. We recognize rent expense, which includes fixed escalation amounts in addition to minimum lease payment, on a straight-line basis over each lease term. The difference between the amount paid for rent and the amount recognized under the straight-line basis is recorded as a deferred rent liability. The deferred
rent liability was $406,000 and $364,000 as of June 30, 2017 and 2016, respectively. We lease certain equipment and software under operating and capital leases with various expiration dates.
For the fiscal years ended June 30, 2017, 2016 and 2015, rent expense for facilities under operating leases was $1.0 million, $1.9 million, and $1.4 million, net of rental income of $521,000, $466,000 and $83,000, respectively.
We entered into a sublease agreement that commenced on August 8, 2015 and that expired on August 31, 2016. Rental income from the sublease was approximately $426,000 for the year ended June 30, 2016. The sublease tenant did not renew and in accordance with ASC 420 Exit or Disposal Cost Obligations, we recorded a $305,000 lease exit liability and related rent expense on June 30, 2016 for an expected loss on the sublease for approximately 22,000 square feet of space as we will not receive sublease payments until another sublease tenant is found. The sublease is under our master lease agreement for our Sunnyvale facility. We classified the $305,000 lease exit liability in current liabilities in the accompanying consolidated balance sheet as of June 30, 2016. We expect the future minimum lease payments under non-cancellable operating leases to be offset with sub-lease income, once a tenant is secured.
In December 2016, we entered into a two year sublease agreement for the 22,000 square feet of space with a subtenant that commenced on January 1, 2017. As a result, the remaining lease exit liability was reversed as a credit to rent expense during the three months ended December 31, 2016
.
A summary of future minimum lease payments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Capital
|
|
Fiscal Year June 30,
|
|
Leases
|
|
Leases
|
|
2018
|
|
$
|
1,172
|
|
|
119
|
|
2019
|
|
|
967
|
|
|
43
|
|
2020
|
|
|
1,002
|
|
|
—
|
|
2021
|
|
|
597
|
|
|
—
|
|
2022
|
|
|
469
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
4,207
|
|
|
162
|
|
Less amounts representing interest
|
|
|
|
|
|
(12)
|
|
Total lease obligations
|
|
|
|
|
|
150
|
|
Less current capital lease obligation
|
|
|
|
|
|
(108)
|
|
Capital lease obligation, net of current portion
|
|
|
|
|
$
|
42
|
|
Cloud Services
We have agreements with third parties to provide co-location services for cloud operations that expire on various dates through fiscal year 2017. The agreements require payment of a minimum amount per month in return for which the cloud services provider provides co-location services with certain guarantees of network availability. Rental expense for co-location centers was $888,000, $1.1 million, and $1.2 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. Our commitment for minimum payments under the leases as of June 30, 2017 is $121,000 through year 2017.
Contractual Obligations and Commitments
Contractual agreements with third parties consist of software licenses, maintenance and support for our operations. As of June 30, 2017, future payments for non-cancellable contractual agreements are $860,000, $1.5 million and $1.4 million in fiscal years 2018, 2019 and 2020, respectively.
Employee benefit plans
Defined Contribution Plans
We sponsor an employee savings and retirement plan, the 401(k) Plan, as allowed under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is available to all domestic employees who meet minimum age and service requirements, and provides employees with tax deferred salary deductions and alternative investment options. Employees
may contribute up to 60% of their salary, subject to certain limitations. We, at the discretion of our board of directors, may contribute to the 401(k) Plan. In fiscal years 2017, 2016 and 2015, we contributed approximately $376,000, $446,000 and $391,000 to the 401(k) Plan, respectively. We also have a defined contribution plan related to our foreign subsidiaries. Amounts expensed under this plan were $385,000, $636,000, and $1.1 million for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Gratuity Plan—India
In accordance with Gratuity Act of 1972, we sponsor a defined benefit plan, or the Gratuity Plan, for all of our Indian employees. The Gratuity Plan is required by local law, which provides a lump sum payment to vested employees upon retirement or termination of employment in an amount based on each employee’s salary and duration of employment with the company. The Gratuity Plan benefit cost for the year is calculated on an actuarial basis. Current service costs and actuarial gains or losses, or prior service cost, for the Gratuity Plan were insignificant for the fiscal years 2017, 2016 and 2015.
Severance Pay – Italy
We accrue a severance provision and pay related taxes to local governmental agencies consistent with local regulatory requirements. There were no severance plan expenses for fiscal year 2016 and insignificant plan expenses for fiscal year 2015.We closed the Italy office during fiscal year 2016.
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, costs related to these warranties have not been significant. However, we cannot guarantee that a warranty reserve will not become necessary in the future.
Indemnification
We have also 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.
8. LITIGATION
In the ordinary course of business, we are involved in various legal proceedings and claims related to alleged infringement of third-party patents and other 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. 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.
9. FAIR VALUE MEASUREMENT
ASC 820,
Fair Value Measurement and Disclosures,
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.
As of June 30, 2017 and 2016, we did not have any Level 1, 2 or 3 assets or liabilities.
10. SHARE REPURCHASE PROGRAM
On September 14, 2009, we announced that our board of directors approved a repurchase program under which we may purchase up to 1,000,000 shares of our common stock. The duration of the repurchase program is open-ended. Under the program, we purchase shares of common stock from time to time through the open market and privately negotiated transactions at prices deemed appropriate by management. The repurchase is funded by cash on hand. There were no shares repurchased during fiscal years 2017, 2016 and 2015.
11. QUARTERLY FINANCIAL DATA (Unaudited)
Following is a summary of quarterly operating results and share data for the years ended June 30, 2017 and 2016, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Fiscal Year
|
|
|
(in thousands, except per share data)
|
Fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,745
|
|
$
|
14,999
|
|
$
|
13,850
|
|
$
|
14,621
|
|
$
|
58,215
|
Gross profit
|
|
$
|
9,681
|
|
$
|
9,936
|
|
$
|
8,191
|
|
$
|
9,208
|
|
$
|
37,016
|
Loss from operations
|
|
$
|
(1,265)
|
|
$
|
(298)
|
|
$
|
(1,831)
|
|
$
|
(331)
|
|
$
|
(3,725)
|
Net loss
|
|
$
|
(2,411)
|
|
$
|
(1,049)
|
|
$
|
(2,515)
|
|
$
|
(45)
|
|
$
|
(6,020)
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.09)
|
|
$
|
(0.04)
|
|
$
|
(0.09)
|
|
$
|
(0.00)
|
|
$
|
(0.22)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
16,476
|
|
$
|
18,986
|
|
$
|
16,291
|
|
$
|
17,622
|
|
$
|
69,375
|
Gross profit
|
|
$
|
10,004
|
|
$
|
13,010
|
|
$
|
10,570
|
|
$
|
12,102
|
|
$
|
45,686
|
Income (loss) from operations
|
|
$
|
(2,810)
|
|
$
|
(516)
|
|
$
|
(2,656)
|
|
$
|
109
|
|
$
|
(5,873)
|
Net income (loss)
|
|
$
|
(3,237)
|
|
$
|
(1,379)
|
|
$
|
(3,001)
|
|
$
|
1,377
|
|
$
|
(6,240)
|
Basic and diluted net loss per share
|
|
$
|
(0.12)
|
|
$
|
(0.05)
|
|
$
|
(0.11)
|
|
$
|
0.05
|
|
$
|
(0.23)
|
12. SUBSEQUENT EVENT
On September 19, 2017, our board of directors approved a repricing to $2.50 of certain outstanding options under our 2005 Stock Incentive Plan held by employees who are not executive officers or directors of the Company. The repricing applied to options held by such employees with an exercise price greater than $2.50 per share which was the closing stock price as reported on Nasdaq on September 19, 2017.