Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - EGAIN CorpFinancial_Report.xls
EX-32.2 - EX-32.2 - EGAIN Corpegan-20150331ex3220ee601.htm
EX-31.2 - EX-31.2 - EGAIN Corpegan-20150331ex31246f925.htm
EX-31.1 - EX-31.1 - EGAIN Corpegan-20150331ex311fdf5db.htm
EX-32.1 - EX-32.1 - EGAIN Corpegan-20150331ex32128aeba.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 


 

(Mark One)

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

For the quarterly period ended March 31, 2015

OR

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

For the transition period from              to             

Commission File No. 001-35314

 


 

eGAIN CORPORATION

(Exact name of registrant as specified in its charter)


 

 

 

 

Delaware

 

77-0466366

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

1252 Borregas Avenue, Sunnyvale, CA

 

94089

(Address of principal executive offices)

 

(Zip Code)

 

(408) 636-4500

(Registrant’s telephone number, including area code)

 

 

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


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes      No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No   

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

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

    (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

Class

  

Outstanding at May 4, 2015

Common Stock $0.001 par value

  

26,769,132

 

 

 

 

 

 


 

eGAIN CORPORATION

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2015

TABLE OF CONTENTS

 

 

 

 

Page

 

 

    

 

PART I. 

FINANCIAL INFORMATION

 

2

Item 1. 

Financial Statements (Unaudited)

 

2

 

Condensed Consolidated Balance Sheets as of March 31, 2015 and June 30, 2014

 

2

 

Condensed Consolidated Statements of Operations for the Three and Nine  Months ended March 31, 2015 and 2014

 

3

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine  Months ended March 31, 2015 and 2014

 

4

 

Condensed Consolidated Statements of Cash Flows for the Nine  Months Ended March 31, 2015 and 2014

 

5

 

Notes to Condensed Consolidated Financial Statements

 

6

Item 2. 

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

 

19

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

31

Item 4. 

Controls and Procedures

 

32

PART II. 

OTHER INFORMATION

 

33

Item 1. 

Legal Proceedings

 

33

Item 1A. 

Risk Factors

 

33

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

Item 6. 

Exhibits

 

46

 

Signatures

 

47

 

 

 

 

1


 

PART I.  FINANCIAL INFORMATION

 

Item 1. Financial Statements

eGAIN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except par value data)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

June 30,

 

 

    

2015

    

2014

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,190 

 

$

8,785 

 

Restricted cash

 

 

766 

 

 

30 

 

Accounts receivable, less allowance for doubtful accounts of $726 and $574 as of March 31, 2015 and June 30, 2014, respectively

 

 

12,220 

 

 

11,163 

 

Deferred commissions

 

 

544 

 

 

865 

 

Prepaid and other current assets

 

 

1,825 

 

 

1,348 

 

Total current assets

 

 

24,545 

 

 

22,191 

 

Property and equipment, net

 

 

3,435 

 

 

4,489 

 

Deferred commissions, net of current portion

 

 

150 

 

 

337 

 

Intangible assets, net

 

 

8,315 

 

 

 

Goodwill

 

 

13,230 

 

 

4,880 

 

Other assets

 

 

1,317 

 

 

750 

 

Total assets

 

$

50,992 

 

$

32,647 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

1,909 

 

$

2,162 

 

Accrued compensation

 

 

7,483 

 

 

5,729 

 

Accrued liabilities

 

 

2,791 

 

 

1,456 

 

Deferred revenue

 

 

14,569 

 

 

12,920 

 

Capital lease obligations

 

 

451 

 

 

392 

 

Bank borrowings

 

 

562 

 

 

1,417 

 

Total current liabilities

 

 

27,765 

 

 

24,076 

 

Deferred revenue, net of current portion

 

 

1,377 

 

 

793 

 

Capital lease obligations, net of current portion

 

 

342 

 

 

625 

 

Bank borrowings, net of current portion

 

 

16,312 

 

 

3,583 

 

Other long term liabilities

 

 

2,033 

 

 

521 

 

Total liabilities

 

 

47,829 

 

 

29,598 

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.001 par value - authorized: 50,000 shares; outstanding: 26,765 shares as of March 31, 2015 and 25,471 as of June 30, 2014

 

 

27 

 

 

25 

 

Additional paid-in capital

 

 

340,402 

 

 

330,657 

 

Notes receivable from stockholders

 

 

(77)

 

 

(83)

 

Accumulated other comprehensive loss

 

 

(1,113)

 

 

(970)

 

Accumulated deficit

 

 

(336,076)

 

 

(326,580)

 

Total stockholders' equity

 

 

3,163 

 

 

3,049 

 

Total liabilities and stockholders' equity

 

$

50,992 

 

$

32,647 

 

 

See accompanying notes to condensed consolidated financial statements

2


 

eGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

    

2015

    

2014

    

2015

    

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscription and support

 

$

10,840 

 

$

10,608 

 

$

32,241 

 

$

30,320 

 

License

 

 

5,230 

 

 

2,519 

 

 

15,541 

 

 

9,422 

 

Professional services

 

 

3,162 

 

 

4,899 

 

 

11,057 

 

 

11,631 

 

Total revenue

 

 

19,232 

 

 

18,026 

 

 

58,839 

 

 

51,373 

 

Cost of subscription and support

 

 

3,021 

 

 

2,238 

 

 

9,164 

 

 

6,160 

 

Cost of license

 

 

 

 

28 

 

 

58 

 

 

80 

 

Cost of professional services

 

 

4,525 

 

 

3,716 

 

 

13,556 

 

 

11,111 

 

Total cost of revenue

 

 

7,550 

 

 

5,982 

 

 

22,778 

 

 

17,351 

 

Gross profit

 

 

11,682 

 

 

12,044 

 

 

36,061 

 

 

34,022 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,142 

 

 

2,668 

 

 

12,043 

 

 

7,164 

 

Sales and marketing

 

 

7,883 

 

 

8,628 

 

 

25,987 

 

 

24,640 

 

General and administrative

 

 

1,812 

 

 

1,436 

 

 

7,327 

 

 

5,572 

 

Total operating expenses

 

 

13,837 

 

 

12,732 

 

 

45,357 

 

 

37,376 

 

Loss from operations

 

 

(2,155)

 

 

(688)

 

 

(9,296)

 

 

(3,354)

 

Interest expense, net

 

 

(310)

 

 

(17)

 

 

(578)

 

 

(146)

 

Other income (expense), net

 

 

15 

 

 

(77)

 

 

168 

 

 

(355)

 

Loss before income tax benefit (provision)

 

 

(2,450)

 

 

(782)

 

 

(9,706)

 

 

(3,855)

 

Income tax benefit (provision)

 

 

51 

 

 

(225)

 

 

210 

 

 

(373)

 

Net loss

 

$

(2,399)

 

$

(1,007)

 

$

(9,496)

 

$

(4,228)

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share

 

$

(0.09)

 

$

(0.04)

 

$

(0.36)

 

$

(0.17)

 

Weighted average shares used in computing basic and diluted net loss per common share

 

 

26,709 

 

 

25,418 

 

 

26,516 

 

 

25,316 

 

 

See accompanying notes to condensed consolidated financial statements 

3


 

eGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

 

2015

    

2014

    

2015

    

2014

 

Net loss

 

$

(2,399)

 

$

(1,007)

 

$

(9,496)

 

$

(4,228)

 

Other comprehensive loss, net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

43 

 

 

23 

 

 

(143)

 

 

171 

 

Comprehensive loss

 

$

(2,356)

 

$

(984)

 

$

(9,639)

 

$

(4,057)

 

 

See accompanying notes to condensed consolidated financial statements

 

4


 

eGAIN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

March 31, 

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(9,496)

 

$

(4,228)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,898 

 

 

1,537 

 

Amortization of acquired intangibles

 

 

1,815 

 

 

 

Amortization of deferred commissions

 

 

808 

 

 

1,468 

 

Amortization of deferred financing costs

 

 

41 

 

 

 

Stock-based compensation

 

 

1,830 

 

 

1,210 

 

Provisions for doubtful accounts

 

 

236 

 

 

493 

 

Accrued interest on related party notes payable

 

 

 —

 

 

19 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(928)

 

 

2,858 

 

Deferred commissions

 

 

(372)

 

 

(360)

 

Prepaid expenses and other current assets

 

 

(455)

 

 

827 

 

Accounts payable

 

 

(896)

 

 

(598)

 

Accrued compensation

 

 

(581)

 

 

(50)

 

Accrued liabilities

 

 

(910)

 

 

(1,246)

 

Deferred revenue

 

 

337 

 

 

(4,333)

 

Other long term liabilities

 

 

(207)

 

 

(112)

 

Net cash used in operating activities

 

 

(6,880)

 

 

(2,515)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisition, net of cash acquired

 

 

(1,905)

 

 

 

Purchases of property and equipment

 

 

(512)

 

 

(1,585)

 

Increase in restricted cash

 

 

(980)

 

 

(1)

 

Net cash used in investing activities

 

 

(3,397)

 

 

(1,586)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payment on related party notes payable

 

 

 

 

(2,916)

 

Payments on bank borrowings

 

 

(12,076)

 

 

(2,000)

 

Payments on capital lease obligations

 

 

(359)

 

 

(119)

 

Proceeds from bank borrowings

 

 

23,950 

 

 

 

Payments made for debt issue costs

 

 

(550)

 

 

 

Proceeds from exercise of stock options

 

 

205 

 

 

557 

 

Net cash provided by (used in) financing activities

 

 

11,170 

 

 

(4,478)

 

Effect of change in exchange rates on cash and cash equivalents

 

 

(488)

 

 

142 

 

Net increase (decrease) in cash and cash equivalents

 

 

405 

 

 

(8,437)

 

Cash and cash equivalents at beginning of period

 

 

8,785 

 

 

16,206 

 

Cash and cash equivalents at end of period

 

$

9,190 

 

$

7,769 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

 

Cash paid for interest

 

$

298 

 

$

176 

 

Cash paid for taxes

 

$

304 

 

$

231 

 

Non-cash items:

 

 

 

 

 

 

 

Purchases of equipment through trade accounts payable

 

$

59 

 

$

154 

 

Property and equipment acquired under a capital lease

 

$

185 

 

$

482 

 

Issuance of common stock in connection with business acquisition

 

$

7,719 

 

$

 

 

See accompanying notes to condensed consolidated financial statements

5


 

eGAIN CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 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 and on-site customer engagement software solutions. For over a decade, our solutions have helped improve customer experience, grow sales, and optimize service processes across the web, social, and phone channels. Hundreds of global enterprises rely on us to transform fragmented sales engagement and customer service operations into unified customer engagement hubs. We provide advanced analytics and management software that help enterprises use their customer contact and call center resources more effectively, improving their customers’ experience, reducing churn and enhancing productivity.  Our products enable organizations to move away from legacy contact center infrastructure and consolidate in cloud environments, which enhances productivity and improves customer experience. We have operations in the United States, United Kingdom, Netherlands, Ireland, Germany, France, South Africa, and India.

 

Principles of Consolidation

 

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

 

These condensed consolidated financial statements and notes should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2014, included in our Annual Report on Form 10-K. The condensed consolidated balance sheet as of June 30, 2014 was derived from audited financial statements as of that date but does not include all the information and footnotes required by GAAP for complete financial statements. The results of our operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending June 30, 2015.

 

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.

 

Segment Information

 

We operate in one segment, the development, license, implementation and support of our customer interaction software solutions. Operating segments are identified as components of an enterprise for which discrete financial

6


 

information is available and regularly reviewed by the Company’s chief operating decision-makers in order to make decisions about resources to be allocated to the segment and assess its performance. Our chief operating decision-makers, under Accounting Standards Codification, or ASC, 280, Segment Reporting, are our executive management team. Our chief operating decision-makers review financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. The Company operates in one operating segment and all required financial segment information can be found in the condensed consolidated financial statements.

 

Information relating to our geographic areas for the three and nine months ended March 31, 2015 and 2014 is as follows (unaudited, in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

 

2015

    

2014

    

2015

    

2014

 

Total Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

9,171 

 

$

9,562 

 

$

29,795 

 

$

27,435 

 

EMEA

 

 

9,620 

 

 

8,127 

 

 

27,870 

 

 

22,783 

 

Asia Pacific

 

 

441 

 

 

337 

 

 

1,174 

 

 

1,155 

 

 

 

$

19,232 

 

$

18,026 

 

$

58,839 

 

$

51,373 

 

Operating Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

(1,215)

 

$

(569)

 

$

(3,691)

 

$

(1,607)

 

EMEA

 

 

32 

 

 

1,118 

 

 

(2,271)

 

 

1,474 

 

Asia Pacific*

 

 

(972)

 

 

(1,237)

 

 

(3,334)

 

 

(3,221)

 

 

 

$

(2,155)

 

$

(688)

 

$

(9,296)

 

$

(3,354)

 

 

*Includes costs associated with corporate support.

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2015, there were no customers that accounted for greater than 10% of total revenue. For the three months ended March 31, 2014, there was one customer that accounted for 16% and another for 10% of total revenue. For the nine months ended March 31, 2015, there were two different customers that accounted for 10% of total revenue, respectively. For the nine months ended March 31, 2014, there was one customer that accounted for 17% of total revenue.

 

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)

Subscription and support fees primarily consist of cloud revenue from customers accessing our enterprise cloud computing services, term license revenue, and maintenance and support revenue;

 

(ii)

License fees primarily consist of perpetual software license revenue;

 

(iii)

Professional services primarily consist of consulting, implementation services and training.

 

Revenue is 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,

7


 

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 or on a CD-ROM, and license files are delivered electronically. Delivery is considered to have occurred when we provide the customer access to the software along with 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. 

 

We apply the provisions of 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 licenses are sold together with system implementation and consulting services, license fees are recognized upon shipment, provided that (i) payment of the license fees is not dependent upon the performance of the consulting and implementation services, (ii) the services are available from other vendors, (iii) the services qualify for separate accounting as we have sufficient experience in providing such services, have the ability to estimate cost of providing such services, and we have vendor-specific objective evidence (“VSOE”), of fair value, and (iv) the services are not essential to the functionality of the software.

 

We enter into arrangements with multiple-deliverables that generally include subscription, 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. We use VSOE, of fair value for each of those units, when available. For revenue recognition with multiple-deliverable elements, in certain limited circumstances when VSOE of fair value does not exist, we apply the selling price hierarchy, which includes VSOE, third-party evidence of selling price (“TPE”), and best estimate of selling price (“BESP”). We determine the relative selling price for a deliverable based on VSOE, if available, or BESP, if VSOE is not available. We have 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, 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.

 

8


 

Subscription and Support Revenue

 

Cloud Revenue

 

Cloud services revenue consists of fees from customers subscribing to 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 services 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 term 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 License Revenue

 

Term 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. The majority of our contracts provide customers with the right to use one or more products up to a specific license volume. Certain of our license agreements specify 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.

 

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.

 

License Revenue

 

License revenue includes perpetual licenses 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 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.

 

We periodically sell to resellers. License sales to resellers as a percentage of total revenue were approximately 10% and 6% for the three months ended March 31, 2015 and 2014, respectively. License sales to resellers as a percentage of total revenue were approximately 17% and 8% for the nine months ended March 31, 2015 and 2014, respectively.

9


 

Revenue from sales to resellers is generally recognized upon delivery to the reseller but depends on the facts and circumstances of the transaction, such as our understanding of the reseller’s plans to sell the software, if there are any return provisions, price protection or other allowances, the reseller’s financial status and our experience with the particular reseller. Historically sales to resellers have not included any return provisions, price protections or other allowances.

 

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 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 determined at or around July 1, 2013 that we had established standalone value for consulting and implementation services under cloud contracts. This was primarily due to the change in our business focus, the growing number of partners we trained and certified to perform these deployment services and the consequential sale of subscription services without bundled implementation service. Revenues earned from professional services related to consulting and implementation of a majority of our core subscription services are being accounted for separately from revenues earned from subscription services beginning July 1, 2013 when the standalone value was established for those professional 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.

 

For cloud, consulting and implementation services that do not qualify for separate accounting, we recognize the services revenue ratably over the estimated life of the customer cloud relationship, once the cloud has gone live or is system ready. We currently estimate the life of the customer cloud relationship to be approximately 28 months, based on the average life of all cloud customer relationships.

 

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 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.

 

10


 

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 contracts with customers and consist of sales commissions to the Company’s 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 under “Sales and marketing” expense in the condensed consolidated statements of operations over the terms of the related customer contracts, in proportion to the recognition of the associated revenue.

 

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.

 

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. Deferred financing costs for the quarter and accumulated amortization as of March 31, 2015 was $508,726 and $40,897, respectively and are included in other assets in the accompanying condensed consolidated balance sheets. Amortization of deferred financing costs recorded as interest expense was $30,672 and $40,897 for three and nine months ended March 31, 2015. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.

 

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.

 

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

11


 

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

    

2015

    

2014

    

2015

    

2014

 

Stock-Based Compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

106 

 

$

92 

 

$

409 

 

$

244 

 

Research and development

 

 

184 

 

 

102 

 

 

594 

 

 

201 

 

Sales and marketing

 

 

102 

 

 

179 

 

 

421 

 

 

472 

 

General and administrative

 

 

130 

 

 

97 

 

 

406 

 

 

293 

 

Total stock-based compensation expense:

 

$

522 

 

$

470 

 

$

1,830 

 

$

1,210 

 

 

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 three months ended March 31, 2015 and 2014, there were 13,500 and 274,650 shares of common stock granted with a weighted-average fair value of $2.64 and $5.08, per share, respectively. During the nine months ended March 31, 2015 and 2014 there were 733,900 and 536,500 shares of common stock granted with a weighted-average fair value of $3.75 and $6.09 per share respectively, using the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

    

2015

    

2014

    

2015

    

2014

 

Dividend yield

 

 —

 

 —

 

 —

 

 —

 

Expected volatility

 

80 

%  

80 

%  

80 

%  

80 

%

Average risk-free interest rate

 

1.45 

%  

1.60 

%  

1.69 

%  

1.52 

%

Expected life (in years)

 

4.50 

 

4.50 

 

4.40 

 

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, of all options granted but not yet vested as of March 31, 2015 was $2,392,299, which is expected to be recognized over the weighted-average period of 1.53 years. There were 90,933 and 129,470 options exercised for the three and nine months ended March 31, 2015 and 58,899 and 347,381 options exercised for the three and nine months ended March 31, 2014.

 

New Accounting Pronouncements

 

In April 2015, the Financial Accounting and Standards Board, or the FASB, issued Accounting Standards Update, or ASU 2015-05, Intangibles—Goodwill and Other— Internal-Use Software, which provides guidance on customer’s accounting for fees paid in a cloud computing arrangement. The amendments in this update are effective for fiscal years,

12


 

and interim periods within those years, beginning after December 15, 2015 (our fiscal 2017). We do not anticipate the adoption of this amendment to have a material impact on our consolidated financial statements.

 

In April 2015, the FASB, issued ASU 2015-03, Interest—Imputation of Interest, which simplifies the presentation of debt issuance costs. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 (our fiscal 2017). We do not anticipate the adoption of this amendment to have a material impact on our consolidated financial statements.

 

In January 2015, the FASB, issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items, which eliminates the requirement to consider whether an event or transaction is extraordinary. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 (our fiscal 2017). We do not anticipate the adoption of this amendment to have a material impact on our consolidated financial statements.

 

In June 2014, the FASB, issued ASU 2014-12, Compensation-Stock Compensation which applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 (our fiscal 2017). We do not anticipate the adoption of this amendment to have a material impact on our consolidated financial statements.

 

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, 2016 (our fiscal 2018), including interim periods within that reporting period, with early application not permitted. In April 2015, FASB has issued for public comment a proposed Accounting Standards Update, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which would defer the effective date of this new revenue recognition standard by one year. This will change the effective date to annual reporting periods beginning after December 15, 2017.  The Company is currently evaluating the effects that the adoption of this guidance will have on the Company’s financial position, results of operations and cash flows.

 

Note 2. 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 outstanding 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 (unaudited, in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

 

2015

 

2014

 

2015

 

2014

 

Net loss applicable to common stockholders

    

$

(2,399)

    

$

(1,007)

    

$

(9,496)

    

$

(4,228)

 

Basic net loss per common stock

 

$

(0.09)

 

$

(0.04)

 

$

(0.36)

 

$

(0.17)

 

Weighted-average common shares used in computing basic net loss per common share

 

 

26,709 

 

 

25,418 

 

 

26,516 

 

 

25,316 

 

Effect of dilutive options

 

 

 

 

 

 

 

 

 

Weighted-average common shares used in computing diluted net loss per common share

 

 

26,709 

 

 

25,418 

 

 

26,516 

 

 

25,316 

 

Diluted net loss per common stock

 

$

(0.09)

 

$

(0.04)

 

$

(0.36)

 

$

(0.17)

 

 

13


 

Weighted-average shares of stock options to purchase 2,833,206 and 2,722,293 shares of common stock for the three and nine months ended March 31, 2015 and 2,152,759 and 2,191,672 shares of common stock for the three and nine months ended March 31, 2014 were not included in the computation of diluted net loss per common share due to their anti-dilutive effect. Such securities could have a dilutive effect in future periods.

 

Note 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 (but in any event no earlier than June 30, 2016) 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 of March 31, 2015, balances on the Term Loan and Revolving Loans were $9.9 million and $7.0 million, respectively.

 

As a condition to entering into the Credit Agreement, the Company pledged certain property and assets as collateral for the benefit of Wells Fargo Bank.

 

Concurrently with our entry into the Credit Agreement described above, we paid in full and terminated that certain Loan and Security Agreement dated June 7, 2011, as amended, between us and Comerica Bank.

 

14


 

 

Note 4. Income Taxes

 

Income taxes are accounted for using the asset and liability method in accordance with ASC 740, Income Tax. 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 and United Kingdom, 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. 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 benefit primarily relates to foreign operations and realized benefits of amortized book intangibles 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.

 

The Company accounts 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. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. No material changes have occurred in the Company’s tax positions taken as of June 30, 2014 and in the nine months ended March 31, 2015.  

 

Note 5. Commitments and Contingencies

 

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. Accordingly, we have no liabilities recorded for these costs as of March 31, 2015 and June 30, 2014. 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 believe that such assessments are without merit and would not have a significant impact on our consolidated financial statements.

 

15


 

Litigation

 

In the ordinary course of business, we are from time to time 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.

 

Note 6. 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.

 

The following table summarizes the fair value hierarchy of our financial assets and liabilities measured (unaudited, in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2015

 

As of June 30, 2014

 

 

    

Level 1

    

Total Balance

    

Level 1

    

Total Balance

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

 —

 

$

 —

 

$

1,622 

 

$

1,622 

 

Total assets

 

$

 —

 

$

 —

 

$

1,622 

 

$

1,622 

 

 

The Company uses quoted prices in active markets for identical assets or liabilities to determine fair value of Level 1 investments.

 

As of March 31, 2015 and June 30, 2014, we did not have any Level 2 or 3 assets or liabilities.

 

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt. 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 condensed consolidated balance sheet dates. Based on borrowing rates currently available to the Company for loans and capital leases with similar terms, the carrying value of the bank borrowings and capital lease obligations approximates fair value.

 

16


 

Note 7. 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. For the nine months ended March 31, 2015 and 2014, there were no shares repurchased.

 

Note 8. 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 $289,000 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 March 31, 2015, which are included in general and administrative expenses.

 

The purchase price for this acquisition had been allocated based on preliminary 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)

 

588 

 

 

 

 

Estimated working capital adjustment

 

1,451 

 

 

 

 

Total purchase price

 

 

 

$

17,599 

 

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

 

 

 

$

8,350 

 

 

17


 

The allocation of the purchase price consideration was based on preliminary 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 we finalize the working capital adjustment and continue to gather additional information regarding the assets acquired and the liabilities assumed.

 

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, the 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible Asset

     

Gross Carrying Amount

    

Accumulated Amortization

  

Net Balance

 

Life

    

Income Statement Category  

Developed technology

 

$      6,990

 

$      (1,141)

 

$      5,849

 

 4

 

Research and development expense

Customer relationships - software license

 

1,380 

 

(450)

 

930 

 

 2

 

Sales and marketing expense 

Customer relationships - maintenance license

 

1,610 

 

(175)

 

1,435 

 

 6

 

Cost of sales 

Trade name

 

150 

 

(49)

 

101 

 

 2

 

General and administrative expense 

 

 

$    10,130

 

$      (1,815)

 

$      8,315

 

 

 

 

 

Amortization expense related to the above intangible assets for the three and nine months ended March 31, 2015 was approximately $0.7 million and $1.8 million, respectively.

 

Estimated future amortization expense remaining at March 31, 2015 for intangible assets acquired is as follows:

 

 

 

 

 

 

 

 

 

Year Ending

 

 

    

June 30,

 

2015

 

$

696 

 

2016

 

 

2,781 

 

2017

 

 

2,090 

 

2018

 

 

2,016 

 

2019

 

 

438 

 

Thereafter

 

 

294 

 

Total future amortization expense

 

$

8,315 

 

 

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.  Exony contributed revenues of $3.3 million and $7.1 million for the three and nine month periods ended March 31, 2015, respectively. Net income of $0.4 million and net loss of $1.5 million was incurred from Exony in the three and nine month periods ended March 31, 2014.

 

Note 9. Subsequent Events

 

None.

18


 

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

 

The following discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by the use of the words such as “expects”, “aims”, “anticipates,” “believes,” “continue,” “could,” “would,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential”, ”projects”, “seeks” “assumes”,  “should,” or “will” and similar expressions or the negative of those terms. The forward-looking statements include, but are not limited to, statements regarding: the effect of changes in macroeconomic factors beyond our control; our hybrid revenue model and its potential impact on our total revenue; our ability to predict subscription renewals; the result of our failure to comply with the covenants under the Wells Fargo Bank Facility; our lengthy sales cycles and the difficulty in predicting timing of sales or delays; as we acquire companies or technologies, we may not realize the expected business benefits; competition in the markets in which we do business and our failure to compete successfully therein; our expectations regarding the composition of our customers and the result of a loss of a significant customer; the adequacy of our capital resources and need for additional financing and the effect of failing to obtain adequate funding; the development and expansion of our strategic and third party distribution partnership and relationships with systems integrators; our ability to effectively implement and improve our current products; our ability to innovate and respond to rapid technological change and competitive challenges; legal liability or the effect of negative publicity for the services provided to consumers via our technology platforms; legal and regulatory uncertainties and other risks related to protection of our intellectual property assets; our ability to anticipate our competitors; the operational integrity and maintenance of our systems; the effect of unauthorized access to a customer’s data or our data or our IT systems; the uncertainty of demand for our products; the anticipated customer benefits from our products; the actual mix in new business between cloud and license transactions when compared with management’s projections; our ability to develop and expand strategic and third party distribution channels; the ability to increase revenue as a result of the increased investment in sales and marketing; our ability to hire additional personnel and retain key personnel; the effect of any future changes to our sales organization on our revenue growth rate; our ability to expand and improve our sales performance and marketing activities; our ability to manage our expenditures and estimate future expenses, revenue, and operational requirements; the expenses associated with new data centers, additional data center capacity, real estate and office facilities space; our ability to manage our business plans, strategies and outlooks and any business-related forecasts or projections; the effect of changes to management judgments and estimates; the impact of any modification to our pricing practices in the future; risks from our substantial international operations; our ability to manage future growth; the trading price of our common stock; geographical and currency fluctuations; and our expectations in fiscal 2015 with respect to revenue, cost of revenue, expenses and other financial metrics. Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks discussed in “Risk Factors” Item 1A in this report and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 which is incorporated herein by reference. Our actual results could differ materially from those discussed in statements relating to our future plans, product releases, objectives, expectations and intentions, and other assumptions underlying or relating to any of these statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below, under “Risk Factors” and elsewhere in this report, for factors that may cause actual results to be different than those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.

 

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

 

Overview

 

eGain Corporation is a leading provider of cloud-based and on-site customer engagement software solutions. For over a decade, our solutions have helped improve customer experience, grow sales, and optimize service processes across the web, social, and phone channels. Hundreds of global enterprises rely on eGain to transform fragmented sales engagement and customer service operations into unified Customer Interaction Hubs. We provide advanced analytics

19


 

and management software that helps enterprises use their customer contact and call center resources more effectively, improving their customers’ experience, reducing churn and enhancing productivity. Our products enable organizations to move away from legacy contact center infrastructure and consolidate in cloud environments, which enhances productivity and improves customer experience.

 

We have operations in the United States, United Kingdom, Netherlands, Ireland, Germany, South Africa and India.

 

We provide advanced analytics and management software that help enterprises use their customer contact and call center resources more effectively, improving their customers’ experience, reducing churn and enhancing productivity. Our products enable organizations to move away from legacy contact center infrastructure and consolidate in cloud environments, which enhances productivity and improves customer experience.

 

Unbilled Deferred Revenue

 

Unbilled deferred revenue represents business that is contracted but not yet invoiced or collected and off–balance-sheet and, accordingly, is not recorded in deferred revenue. As such, the deferred revenue balance on our condensed consolidated balance sheets does not represent the total contract value of annual or multi-year, non-cancelable subscription agreements. As of March 31, 2015, unbilled deferred revenue decreased to $22.1 million, from approximately $22.6 million as of June 30, 2014.

 

Key Financial Measures

 

We monitor the key financial performance measures set forth below as well as cash and cash equivalents and available debt capacity, which are discussed in “Liquidity and Capital Resources,” to help us evaluate trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational effectiveness and efficiencies. These key financial performance measures include certain non-GAAP metrics, including Adjusted EBITDA as defined below. The presentation of the non-GAAP financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

 

Adjusted EBITDA, a non-GAAP financial measure, is defined as net income (loss), adjusted for the impact of purchase accounting adjustments to deferred revenue related to acquisitions, depreciation and amortization, stock-based compensation expense, interest expense, net, income tax provision (benefit), amortization of acquired intangibles, and acquisition-related expenses. 

 

Management believes that it is useful to exclude certain non-cash charges and non-core operational charges from Adjusted EBITDA because (1) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (2) such expenses can vary significantly between periods as a result of the timing of new stock-based awards and acquisitions.

 

Adjusted EBITDA was income of $0.4 million and a loss of $1.1 million for the three and nine months ended March 31, 2015, respectively. For the three and nine months ended March 31, 2014, adjusted EBITDA was income of $0.3 million and a loss of $1.0 million, respectively.

 

20


 

The following table presents our key financial measures, including a reconciliation of Adjusted EBITDA to net loss for each of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31, 

 

March 31, 

 

 

 

2015

    

2014

    

2015

    

2014

 

Revenue

    

$

19,232 

 

$

18,026 

 

$

58,839 

 

$

51,373 

 

Gross Profit

 

 

11,682 

 

 

12,044 

 

 

36,061 

 

 

34,022 

 

Adjusted EBITDA 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,399)

 

$

(1,007)

 

$

(9,496)

 

$

(4,228)

 

Add:

Purchase accounting adjustments to deferred revenue related to acquisitions

 

 

71 

 

 

 

 

319 

 

 

 

 

Depreciation and amortization 

 

 

607 

 

 

553 

 

 

1,898 

 

 

1,537 

 

 

Stock-based compensation expense

 

 

522 

 

 

470 

 

 

1,830 

 

 

1,210 

 

 

Interest expense, net

 

 

310 

 

 

17 

 

 

578 

 

 

146 

 

 

Income tax provision (benefit)

 

 

(51)

 

 

225 

 

 

(210)

 

 

373 

 

 

Amortization of acquired intangible assets

 

 

695 

 

 

 

 

1,815 

 

 

 

 

Acquisition-related expenses

 

 

 —

 

 

 

 

844 

 

 

 

 

Severance and related charges

 

 

590 

 

 

 

 

1,294 

 

 

 

Adjusted EBITDA

 

$

345 

 

$

258 

 

$

(1,128)

 

$

(962)

 

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, our management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, deferred tax, valuation allowance and accrued liabilities, long-lived assets, stock-based compensation goodwill and intangible assets and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

There have been no material changes to these estimates for the periods presented in this Quarterly Report on Form 10-Q. For a detailed explanation of the judgments made in these areas, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report on Form 10-K for the year ended June 30, 2014, which we filed with the Securities and Exchange Commission, or SEC, on September 12, 2014.

 

We have reassessed the critical accounting policies as disclosed in our Annual Report on Form 10-K filed with the SEC on September 12, 2014 and determined that there were no significant changes to our critical accounting policies in the nine months ended March 31, 2015.  

 

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,

21


 

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.

 

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)

Subscription and support fees primarily consist of cloud revenue from customers accessing our enterprise cloud computing services, term license revenue, and maintenance and support revenue;

 

(ii)

License fees primarily consist of perpetual software license revenue;

 

(iii)

Professional services primarily consist of consulting, implementation services and training.

 

Revenue is 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 or on a CD-ROM, and license files are delivered electronically. Delivery is considered to have occurred when we provide the customer access to the software along with 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.

 

We apply the provisions of 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 licenses are sold together with system implementation and consulting services, license fees are recognized upon shipment, provided that (i) payment of the license fees is not dependent upon the performance of the consulting and implementation services, (ii) the services are available from other vendors, (iii) the services qualify for separate

22


 

accounting as we have sufficient experience in providing such services, have the ability to estimate cost of providing such services, and we have vendor-specific objective evidence, or VSOE, of fair value, and (iv) the services are not essential to the functionality of the software.

 

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. We use VSOE, of fair value for each of those units, when available. For revenue recognition with multiple-deliverable elements, in certain limited circumstances when VSOE of fair value does not exist, 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 have 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.

 

Subscription and Support Revenue

 

Cloud Revenue

 

Cloud services revenue consists of fees from customers subscribing to 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 services 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 License Revenue

 

Term 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. The majority of our contracts provide customers with the right to use one or more products up to a specific license volume. Certain of our license agreements specify that customers can exceed pre-determined base volume 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.

23


 

 

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.

 

License Revenue

 

License revenue includes perpetual licenses 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