<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
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.
EGAIN COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 77-0466366
-------- ----------
<S> <C>
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</TABLE>
455 W. MAUDE AVENUE, SUNNYVALE, CA
- --------------------------------------------------------------------------------
(Address of principal executive offices)
94086
- --------------------------------------------------------------------------------
(Zip Code)
(408) 212-3400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(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 at least the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MARCH 31, 2000
----- -----------------------------
<S> <C>
Common Stock $0.001 par value 29,596,566
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EGAIN COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I-- FINANCIAL INFORMATION......................................... 3
Item 1. Financial Statements.......................................... 3
Condensed Consolidated Balance Sheets as of March 31, 2000 and
June 30, 1999................................................ 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended March 31, 2000 and March 31, 1999...... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2000 and March 31, 1999............... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
PART II-- OTHER INFORMATION............................................. 26
Item 1. Legal Proceedings............................................. 26
Item 2. Changes in Securities and Use of Proceeds..................... 26
Item 3. Defaults Upon Senior Securities
Not Applicable............................................... 26
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable............................................... 26
Item 5. Other Information
Not Applicable............................................... 26
Item 6. Exhibits and Reports on Form 8-K.............................. 27
Signatures............................................................... 28
</TABLE>
2
<PAGE>
EGAIN COMMUNICATIONS CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
2000 1999*
----------- --------
(unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.............................. $ 25,459 $ 1,265
Short-term investments, held as available for sale..... 14,936 --
Accounts receivable.................................... 1,926 705
Prepaid and other current assets....................... 2,859 513
-------- --------
Total Current Assets................................. 45,180 2,483
Property and equipment, net.............................. 6,679 1,133
Goodwill and other intangibles, net...................... 48,580 20,195
Other assets............................................. 1,694 154
-------- --------
Total Assets....................................... $102,133 $ 23,965
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Bank borrowings-line of credit......................... $ 1,000 $ 1,000
Accounts payable....................................... 3,286 684
Accrued compensation................................... 4,616 343
Accrued liabilities.................................... 3,220 475
Deferred revenue....................................... 2,324 302
Current portion of notes payable and capital leases.... 708 435
-------- --------
Total Current Liabilities............................ $ 15,154 $ 3,239
Non-current portion of notes payable and capital
leases............................................ 1,182 243
Stockholders' Equity
Preferred stock........................................ -- 16,987
Common stock........................................... 30 7,289
Paid in capital........................................ 153,258 17,549
Notes receivable from stockholders..................... (482) (144)
Deferred stock compensation............................ (10,325) (8,956)
Accumulated other comprehensive income (loss).......... (207) 1
Accumulated deficit.................................... (56,477) (12,243)
-------- --------
Total stockholders equity............................ 85,797 20,483
======== ========
Total liabilities and stockholders' equity......... $102,133 $ 23,965
======== ========
</TABLE>
* The balance sheet at June 30, 1999 has been derived from the audited
consolidated financial statements at that date, but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
3
<PAGE>
EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
----------------- -----------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue:
Hosting............................... $ 988 $ 18 $ 1,930 $ 21
License fees.......................... 1,268 201 2,487 280
Service............................... 1,047 34 2,657 99
-------- ------- -------- -------
Total Revenue....................... 3,303 253 7,074 400
Cost of revenue....................... 4,138 460 9,447 899
-------- ------- -------- -------
Gross profit........................ (835) (207) (2,373) (499)
Operating Expenses:
Research and development.............. 3,005 584 7,051 1,153
Sales and marketing................... 7,013 1,078 15,998 2,515
General and administrative............ 1,779 296 4,785 726
Amortization of goodwill.............. 2,614 -- 6,265 --
Amortization of deferred
compensation......................... 2,944 387 8,851 666
-------- ------- -------- -------
Total Operating Expenses............ 17,355 2,345 42,950 5,060
-------- ------- -------- -------
Loss from operations................ (18,190) (2,552) (45,323) (5,559)
Non-operating income (expense),
net.................................. 461 (18) 1,089 8
-------- ------- -------- -------
Net Loss............................ $(17,729) $(2,570) $(44,234) $(5,551)
======== ======= ======== =======
Net loss per share:
Pro forma basic and diluted (i)....... $ -- $ (0.18) $ (1.77) $ (0.49)
======== ======= ======== =======
Basic and diluted..................... $ (0.63) $ (0.40) $ (2.03) $ (1.09)
======== ======= ======== =======
Weighted-average shares outstanding used
in per share calculation:
Pro forma (i)......................... -- 13,911 25,047 11,233
======== ======= ======== =======
Basic................................. 27,986 6,445 21,783 5,100
======== ======= ======== =======
</TABLE>
(i) Pro forma basic and diluted shares outstanding include convertible stock
using the if-converted method from the original date of issuance.
4
<PAGE>
EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended March 31,
-----------------
2000 1999
-------- -------
<S> <C> <C>
Operating Activities:
Net loss.................................................. $(44,234) $(5,551)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation............................................ 1,084 133
Amortization............................................ 15,132 682
Other................................................... 2 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,170) (231)
Prepaid expenses and other current assets............... (2,346) (160)
Other non-current assets................................ (1,540) (84)
Accounts payable........................................ 2,534 190
Accrued compensation.................................... 4,088 146
Other current liabilities............................... 2,183 139
Deferred revenues....................................... 1,922 138
Other................................................... 37 20
-------- -------
Net cash used in operating expenses................... (22,308) (4,578)
-------- -------
Investing Activities:
Purchases of property and equipment....................... (5,358) (810)
Cash paid net of cash assumed in the acquisition of Big
Science Company.......................................... (1,320) --*
Purchases of short-term investments....................... (26,546) --
Proceeds from sales of investments........................ 11,400 --
-------- -------
Net cash used in investing activities................. (21,824) (810)
-------- -------
Financing Activities:
Proceeds from loans....................................... 408 1,357
Payments on notes payable and capital leases.............. (601) (42)
Net proceeds from issuance of common stock................ 63,367 7
Net proceeds from issuance of preferred stock............. 5,152 5,076
-------- -------
Net cash provided by financing activities............. 68,326 6,398
-------- -------
Net increase in cash and cash equivalents................. 24,194 1,010
Cash and cash equivalents at beginning of period.......... 1,265 3,831
-------- -------
Cash and cash equivalents at end of period................ $ 25,459 $ 4,841
======== =======
Non-Cash Information:
Equipment acquired under capital lease obligations........ $ 1,306 $ --
Issuance of stock in acquisition of Big Science Company... 31,704 --
</TABLE>
5
<PAGE>
EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by eGain
Communications Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission and include the accounts of eGain
Communications Corporation and its wholly-owned subsidiaries (collectively, the
"Company" or "eGain"). All significant intercompany balances and transactions
have been eliminated.
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. While in the opinion of the Company, the unaudited financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position at
March 31, 2000 and the operating results and cash flows for the three and nine
months ended March 31, 2000 and 1999, these financial statements and notes
should be read in conjunction with the Company's audited consolidated financial
statements and notes thereto, included in the Company's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission. The condensed
balance sheet at June 30, 1999 has been derived from audited financial
statements as of that date. The results of operations for the three months and
nine months ended March 31, 2000 are not necessarily indicative of results that
may be expected for any other interim period or for the full fiscal year ending
June 30, 2000.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents, and Short-Term Investments
eGain considers all highly liquid investment securities with maturities from
date of purchase of three months or less to be cash equivalents. Cash
equivalents consist primarily of money market accounts and commercial paper
with maturities less than 90 days. Realized gains have been recorded in
interest income.
Short-term investments are securities with maturities of more than 90 days
but less than one year. Management determines the appropriate classification of
debt and equity securities at the time of purchase and evaluates such
designation as of each balance sheet date. To date, all debt securities have
been classified as available-for-sale and are carried at fair value with
material unrealized gains and losses, if any, included in stockholders' equity.
Unrealized losses were approximately $84,000 for the nine months ended March
31, 2000. Realized gains and losses and declines in value of securities judged
to be other than temporary are included in interest income. Interest and
dividends on all securities are included in interest income.
Revenue Recognition
Revenue from hosting services is recognized ratably over the period of the
agreement as services are provided. Hosting agreements are typically for a
period of one year and automatically renew unless either party cancels the
agreement.
Revenue from license fees and from sales of software products is recognized
when persuasive evidence of an agreement exists, delivery of the product has
occurred, no significant eGain obligations remain, the fee is fixed or
determinable, and collectibility is probable. License fee revenue in multiple
element contracts is recognized using the residual method when there is vendor
specific appropriate evidence of the fair value of all undelivered elements in
an arrangement but vendor specific appropriate evidence of fair value does not
exist for one or more of the delivered elements in an arrangement. Under the
residual method, the total fair value of the undelivered elements, as indicated
by vendor specific objective evidence, is deferred and the difference between
6
<PAGE>
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements, regardless of any
separate prices stated within the contract for each element. If sufficient
vendor-specific objective evidence does not exist for undelivered elements in
an arrangement, all revenue from the arrangement is deferred until the earlier
of the point at which (a) such sufficient vendor-specific objective evidence
does exist or (b) all elements of the arrangement have been delivered.
Service revenue is primarily comprised of revenue from consulting fees,
maintenance agreements, and training. Service revenue from consulting and
training billed on a time and materials basis is recognized as performed.
Service revenue on fixed price service arrangements is recognized upon
completion of specific contractual milestone events, or based on an estimated
percentage of completion as work progresses. Maintenance agreements include the
right to software updates on an if-and-when-available basis. Maintenance
revenue is deferred and recognized on a straight-line basis as service revenue
over the life of the related agreement, which is typically one year.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.
Net Loss Per Share
In accordance with FAS 128, basic and diluted net loss per share has been
computed using the weighted-average number of shares of common stock
outstanding during the period, less the weighted-average number of shares of
common that are subject to repurchase. The pro forma basic and diluted net loss
per share has been computed using the weighted-average number of shares of
common stock outstanding during the period which includes convertible stock
using the if-converted method from the original date of issuance, less the
weighted-average number of shares of common that are subject to repurchase.
The following table presents the calculation of basic and diluted net loss
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
--------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Net Loss................................................ $(17,729) $(2,570)
Basic and diluted:
Weighted-average shares of common stock outstanding... 28,958 8,701
Less: weighted-average shares subject to repurchase... (972) (2,256)
-------- -------
Weighted-average shares used in computing basic and
diluted net loss per share........................... 27,986 6,445
-------- -------
Basic and diluted net loss per share.................... $ (0.63) $ (0.40)
Pro forma:
Shares used above..................................... -- 6,445
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock.... -- 7,466
-------- -------
Shares used in computing pro forma basic and diluted
net loss per share................................... -- 13,911
Pro forma basic and diluted net loss per share........ $ -- $ (0.18)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Net Loss................................................ $(44,234) $(5,551)
Basic and diluted:
Weighted-average shares of common stock outstanding... 23,295 8,356
Less: weighted-average shares subject to repurchase... (1,512) (3,256)
-------- -------
Weighted-average shares used in computing basic and
diluted net loss per share........................... 21,783 5,100
-------- -------
Basic and diluted net loss per share.................... $ (2.03) $ (1.09)
Pro forma:
Shares used above..................................... 21,783 5,100
Pro forma adjustment to reflect weighted effect of
assumed conversion of convertible preferred stock.... 3,264 6,133
-------- -------
Shares used in computing pro forma basic and diluted
net loss per share................................... 25,047 11,233
Pro forma basic and diluted net loss per share........ $ (1.77) $ (0.49)
</TABLE>
Note: Pro forma basic and diluted shares outstanding include convertible stock
using the if-converted method from the original date of issuance
Segment Information
eGain operates in one segment. Operating losses generated by the foreign
operations of eGain were approximately $2.3 million for the nine months ended
March 31, 2000, and their corresponding identifiable assets were not material
in any period presented. eGain's export revenue was $393,000 for the nine
months ended March 31, 2000.
Comprehensive Income
Comprehensive loss for the three and nine months ended March 31, 2000 was
approximately $17.8 million and $44.4 million and was not materially different
from net loss as reported in the income statement.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Recognition in Financial Statements", or SAB 101
summarizing certain of the SEC Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company is currently evaluating the impact of SAB 101. The Company believes
their current practices comply with SAB 101; however, should the Company
determine that a change in accounting policy is necessary such a change will be
made July 1, 2000 and would result in a charge to results of operations for the
cumulative effect of the change. This amount, if recognized, would be recorded
as deferred revenue and recognized as revenue in future periods. Financial
statements for prior periods would not be restated.
NOTE 3. INITIAL PUBLIC OFFERING
On September 28, 1999, the Company completed an initial public offering in
which it sold 5,000,000 shares of Common Stock at $12.00 per share for net
proceeds of $54.7 million. Upon the closing of the offering, all the Company's
Preferred Stock converted to Common Stock. After the offering, the Company's
authorized capital consisted of 50,000,000 shares of Common Stock of which
approximately 27,977,000 shares were outstanding at September 30, 1999 and
5,000,000 shares of preferred stock, none of which were issued or outstanding
at September 30, 1999. In October 1999, the underwriters exercised an over-
allotment option of 750,000 shares resulting in net proceeds of $8.3 million.
8
<PAGE>
NOTE 4. DEFERRED STOCK-BASED COMPENSATION
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price exceeds the fair value of
the underlying common stock as of the grant date. With respect to the stock
options granted to employees since inception through March 31, 2000, the
Company recorded deferred stock-based compensation of $14.7 million for the
difference at the grant date between the exercise price and the fair value of
the common stock underlying the options. This amount is being amortized in
accordance with Financial Accounting Standards Board (FASB) Interpretation No.
28 over the vesting period of the individual options, generally 4 years.
In accordance with the Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation. ("SFAS 123"), stock options issued to
non-employees are accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measured. With respect to the stock options granted to non-employees
since inception through March 31, 2000, the Company recorded deferred stock-
based compensation of $5.2 million for the difference between the exercise
price and the fair value of the common stock underlying the options.
NOTE 5. BUSINESS ACQUISTION
On March 7, 2000, eGain acquired all the assets and liabilities of Big
Science Company (Big Science), developer of software designed to improve the
internet customer experience through pre-sales and post-sales assistance, for
approximately $34.2 million. The results of Big Science's operations have been
combined with those of eGain since the date of acquisition.
The Big Science merger has been accounted for using the purchase method of
accounting. The purchase price was determined as follows:
<TABLE>
<CAPTION>
Big
Science Fair Value
Shares eGain Shares (In Thousands)
---------- ------------ -------------
<S> <C> <C> <C>
Shares................................ 34,254,962 739,583 $30,496
Options............................... 2,314,052 49,961 $ 1,790
Cash consideration.................... 0 0 681
Transaction costs..................... 0 5,917 250
0 0 944
---------- ------- -------
Totals.............................. 36,569,014 795,461 $34,161
========== ======= =======
</TABLE>
Certain items affecting the purchase price allocation are preliminary. The
actual allocation of such consideration may differ after valuations and other
procedures are performed. eGain does not expect that the final allocation of
the purchase price will differ materially from the preliminary allocations.
The total amount allocated to goodwill and other intangible assets is being
amortized on a straight-line basis over a period of three years from the date
of acquisition. Below is a table of the estimated acquisition cost, purchase
price allocation and annual amortization of the intangible assets acquired (in
thousands):
<TABLE>
<CAPTION>
Annual
Amortization Amortization
Life of Intangibles
------------ --------------
<S> <C> <C>
Purchase price................................. $34,161
=======
Purchase Price Allocation:
Net tangible assets (liabilities) of Big
Science at March 7, 2000.................... $ (362)
Intangible Assets Acquired:
Goodwill and other intangible assets......... 34,523 $11,508
-------
$34,161
=======
</TABLE>
9
<PAGE>
For the three months ended March 31, 2000, a total of $788,205 was amortized
as goodwill and other intangible assets.
Unaudited proforma combined results of operations for the nine months ended
March 31, 2000 and 1999 have been prepared as if the acquisition occurred at
the beginning of each period.
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
(in thousands
except per share
amounts)
------------------
2000 1999
-------- --------
<S> <C> <C>
Total revenue........................................... $ 7,147 $ 611
======== ========
Net loss................................................ $(53,389) $(20,893)
======== ========
Basic and diluted net loss per share.................... $ (2.37) $ (2.96)
======== ========
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995
This discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, product releases,
objectives, expectations and intentions, and the assumptions underlying or
relating to any of these statements. These statements may be identified by the
use of words such as "expect," "anticipate," "intend," "plan," "will,"
"believe" and similar expressions. Our actual results could differ materially
from those discussed in these statements. Factors that could contribute to such
differences include those discussed in "Factors That May Affect Future Results"
and elsewhere in this document and those discussed in our registration
statement on Form S-1 (File No. 333-83439).
Overview
eGain is a leading provider of intelligent customer communications solutions
for companies engaged in ecommerce. eGain's products and services help
businesses deliver a superior customer experience and establish more
profitable, lasting customer relationships. eGain offers licensed and hosted
applications for email management, interactive Web and voice collaboration,
intelligent self-help agents, and proactive online marketing. eGain's software
solutions are built using a Web-native architecture, thereby providing
scalability, global access, diverse integration, and rapid deployment. Over 60%
of eGain's current customers access its applications through the eGain Hosted
Network. eGain's customers include both dedicated Internet companies, such as
AOL, CNBC.com and Monster.com, and traditional companies engaged in ecommerce,
such as Mazda USA, 3Com and Home Depot.
eGain was incorporated in September 1997. From inception to September 1998,
eGain's operating activities related primarily to planning and developing
eGain's proprietary technological solutions, recruiting personnel, raising
capital and purchasing operating assets. In September 1998, eGain commenced
commercial shipment of eGain Mail, and established the eGain Hosted Network.
On April 30, 1999, eGain acquired Sitebridge Corporation and added its real-
time Web collaboration product to eGain's platform. The product, eGain Live, is
an application that allows ecommerce companies to interact in real-time with
visitors to their Web sites.
In November 1999, eGain announced the eGain Commerce 2000 platform, which
integrates its suite of customer communications solutions. The eGain Commerce
2000 platform enables companies to integrate their customer communications
solutions around common databases and processes and across all points of
customer contact. eGain intends to release three products for general sale and
distribution in calendar 2000, eGain Campaign, eGain Inform and eGain Voice,
which will further build on the eGain Commerce 2000 platform.
On March 7, 2000, eGain acquired Big Science Company and added its Web-
native self-service product to eGain's platform. The product, eGain Assistant,
enables personalized customer assistance on Web sites through virtual service
agents. Customers interact in natural language dialogue with a life-like
character, which answers questions and leads customers through problem
resolution and sales situations.
On March 16, 2000 eGain announced a definitive agreement under which it will
acquire Inference Corporation in exchange for eGain common stock. The
acquisition brings together eGain's strength in Web- native, multi-channel
customer communications with Inference's powerful customer profiling and
contact center support capabilities. It will also significantly expand eGain's
European business, and add critical new product and technology components to
the eGain Commerce 2000 platform. The merger will be accounted for as a
purchase transaction.
eGain expects to make significant investments in product development and
technology to enhance its current products and services, develop new products
and services and further advance its solution offerings. In
11
<PAGE>
addition, an important part of eGain's strategy is to expand its operations and
employee base and build sales, marketing, customer support, technical and
operational resources. eGain also intends to expand its strategic distribution,
hosting and solution relationships to add capabilities to its current product
offerings and to help market products to new customers. eGain has incurred
significant losses since its inception, and as of March 31, 2000, had an
accumulated deficit of approximately $56.5 million. eGain has not achieved
profitability on a quarterly or annual basis. eGain expects to continue to
incur substantial operating losses for the foreseeable future. In view of the
rapidly evolving nature of eGain's business and limited operating history,
eGain believes that period-to-period comparisons of its revenue and operating
results are not meaningful and should not be relied upon as indications of
future performance.
Goodwill And Other Non-cash Charges
We recorded goodwill and other purchased intangible assets of approximately
$21.4 million associated with our acquisition of Sitebridge and $34.5 million
associated with the acquisition of Big Science. Goodwill and other purchased
intangible assets are being amortized on a straight-line basis over the
estimated useful lives of three years. We currently expect to record
amortization of goodwill and other intangible assets of approximately $11.2
million in fiscal 2000, $44.0 million in fiscal 2001 and $42.8 million in
fiscal 2002.
In connection with the grant of stock options to employees and consultants,
we recorded deferred stock compensation totaling approximately $234,000 in
fiscal 1998, $10.6 million in fiscal 1999, $2.9 million in the three months
ended March 31, 2000 and $8.3 million in the nine months ended March 31, 2000.
Deferred compensation for options granted to employees has been determined as
the difference between the deemed fair value of our common stock on the date
these options were granted and the exercise price. Deferred compensation for
options granted to consultants has been determined in accordance with SFAS 123
as the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. Deferred compensation
for options granted to consultants is periodically remeasured as the underlying
options vest. These amounts were initially recorded through stockholders'
equity and are being amortized by charges to operations. eGain recorded
amortization of deferred stock compensation of approximately $58,000 in fiscal
1998, $1.8 million in fiscal 1999, $2.9 million in the quarter ended March 31,
2000, and $8.9 million in the nine months ended March 31, 2000. We expect to
record amortization expense relating to deferred stock compensation
approximately as follows: $11.3 million in fiscal 2000, $5.7 million in fiscal
2001, $2.9 million in fiscal 2002 and $1.0 million in fiscal 2003. The
amortization expense relates to options awarded to employees and consultants in
all operating expense categories.
RESULTS OF OPERATIONS
Net Revenue
Net revenue was $3.3 million, for the quarter ended March 31, 2000, an
increase of $3.1 million over the comparable quarter of 1999. Net revenue was
$7.1 million, for the nine months ended March 31, 2000, an increase of $6.7
million over the nine months ended March 31, 1999. This increase was primarily
due to the increase in our customer base. Factors that contributed to the
increase include: expanded direct sales and marketing efforts both domestically
and internationally, expanded channel partnerships, and the introductions of
new products. For the quarter ended March 31, 2000, we added 86 new customers
including GTE, Televisa, Quick & Reilly, MP3 and Electronic Arts. For the three
and nine months ended March 31, 2000, no single customer contributed more than
10% of net revenue. Although revenues have increased in prior periods, we
cannot be certain that they will grow in future periods or that they will grow
at similar rates as in the past.
Revenue from application hosting was $988,000, or 30% of revenue, for the
quarter ended March 31, 2000, an increase of $970,000 over the comparable
quarter of 1999. Revenue for the nine months ended March 31, 2000 was $1.93
million, an increase of $1.91 million over the nine months ended March 31,
1999. The increase was primarily attributable to the increase in the number of
hosted customers. Contributing to this growth was the launch of the eGain ASP
Network and the expansion of the eGain Hosted Network domestically, and across
Europe, Asia and Latin America. As of March 31, 2000, over 60% of our customers
were using our hosted solution.
12
<PAGE>
Revenue from software license fees was $1.3 million, or 38% of revenue, for
the quarter ended March 31, 2000, an increase of $1.1 million over the
comparable quarter of 1999. Revenue for the nine months ended March 31, 2000
was $2.5 million, an increase $2.2 million over the nine months ended March 31,
1999. The increase in the three months ended March 31, 2000 versus the same
period in 1999 was primarily attributable to the increase in sales of software
licenses.
Revenue from consulting and support services was $1.05 million, or 32% of
revenues, for the quarter ended March 31, 2000, an increase of $1.01 million
over the comparable quarter of 1999. Revenue for the nine months ended March
31, 2000 was $2.7 million, an increase of $2.6 million over the nine months
ended March 31, 1999. Consulting and support revenue increased primarily due to
the increase in the customer base and their need for our professional services.
Cost of Revenue
Cost of revenue was $4.1 million for the quarter ended March 31, 2000, an
increase of $3.7 million over the comparable quarter of 1999. Cost of revenue
for the nine months ended March 31, 2000 was $9.4 million, an increase of $8.5
million over the nine months ended March 31, 1999. The increase is primarily
attributable to a significant increase in headcount and expansion of the eGain
Hosted Network. Cost of revenue includes personnel costs for our hosting
services, consulting services and customer support. It also includes
depreciation of capital equipment used in our hosted network, cost of third-
party products and lease costs paid to remote co-location centers. Costs
associated with the eGain Hosted Network support the following services:
performance monitoring, database backup/restore and disaster recovery
solutions, 24x7 network and operations support, high reliability and
scalability, metrics and business process re-engineering. We expect cost of
revenues to increase in absolute dollars in future periods as we continue to
expand our business operations.
Research and Development Expenses
Research and development expenses were $3.0 million for the quarter ended
March 31, 2000, an increase of $2.4 million over the comparable quarter of
1999. Research and development expenses for the nine months ended March 31,
2000 were $7.1 million, an increase of $5.9 million or over the nine months
ended March 31, 1999. The increase was primarily attributable to a significant
increase in headcount and related personnel costs. We expect research and
development expenses to increase in absolute dollars in future periods.
Sales and Marketing Expenses
Sales and marketing expenses were $7.0 million for the quarter ended March
31, 2000, an increase of $5.9 million over the comparable quarter of 1999.
Sales and marketing expenses for the nine months ending March 31, 2000 were
$16.0 million, an increase of $13.5 million over the nine months ended March
31, 1999. The increase was due primarily to an increase in headcount and
related personnel costs, increased spending on marketing programs, European
sales and marketing operations and the launch of operations in Australia. We
expect to continue hiring sales and marketing personnel and expect to increase
marketing program spending. Therefore, we expect sales and marketing expenses
to increase in absolute dollars in future periods.
General and Administrative Expenses
General and administrative expenses were $1.8 million for the quarter ended
March 31, 2000, an increase of $1.5 million, over the comparable quarter of
1999. General and administrative expenses for the nine months ending March 31,
2000 were $4.8 million, an increase of $4.1 million over the nine months ended
March 31, 1999. The increase was due primarily to an increase in headcount and
the related personnel costs and fees for outside professional services. We
expect general and administrative expenses to increase in absolute dollars in
future periods as a result of our growth.
13
<PAGE>
Amortization Of Goodwill
For the quarter ended March 31, 2000, we amortized goodwill totaling $2.6
million. No goodwill was amortized during the comparable quarter ended March
31, 1999. For the nine months ended March 31, 2000, we amortized goodwill
totaling $6.3 million. No goodwill was amortized during the nine months ended
March 31, 1999. Goodwill represents the excess of the purchase price over the
estimated fair market value of tangible and intangible net assets acquired in a
business combination. As of March 31, 2000, goodwill and other purchased
intangible assets related to our April 1999 acquisition of Sitebridge
Corporation totaled $21.4 million and goodwill and other purchased intangible
assets related to our March 2000 acquisition of Big Science Company totaled
$34.5 million.
Amortization of Deferred Stock Compensation
During the quarter ended March 31, 2000, amortization of stock-based
compensation increased to $2.9 million from $387,000 over the quarter ended
March 31, 1999. Amortization of stock-based compensation for the nine months
ending March 31, 2000 was $8.9 million, an increase of $8.2 million over the
nine months ended March 31, 1999. Deferred stock-based compensation represents
the difference between the exercise price and the deemed fair value of certain
stock options granted to employees. Options granted to consultants are
periodically revalued as they vest in accordance with SFAS 123 and EITF 96-18.
Deferred compensation is being amortized on a graded vesting method over the
vesting period of the individual options.
Non-Operating Income (Expense), Net
For the quarter ended December 31, 1999, non-operating income was $461,000.
For the comparable quarter in 1998, non-operating loss was $18,000. For the
nine months ending March 31, 2000, non-operating income was $1.09 million, an
increase of $1.08 million over the nine months ended March 31, 1999. Non-
operating income includes realized gains on cash and short-term investments and
interest income partially offset by expense on financing obligations, use-tax
expense, and a provision for sales tax expense. The increase was primarily
attributable to interest earned on our cash balances on hand as a result of our
public offering in September 1999.
Liquidity and Capital Resources
Prior to our initial public offering, we financed operations primarily
through the private placement of convertible preferred stock, a bank line of
credit, and financing for capital purchases. On September 28, 1999, we
completed our initial public offering of common stock, in which we sold
5,750,000 shares of common stock (including exercise of an over-allotment
option in October 1999), at a price of $12.00 per share. Proceeds to eGain from
the offering, before offering expenses, were approximately $69.0 million.
At March 31, 2000, we had cash and cash equivalents of $25.5 million. We
regularly invest excess funds in short-term money market funds, commercial
paper, and short-term notes. At March 31, 2000, we had short-term investments
held as available for sale of $14.9 million.
Net cash used in operating activities for the nine months ended March 31,
2000 and 1999 was $22.3 million and $4.6 million, respectively. Cash used in
operating activities in each period was primarily the result of net losses, an
increase in accounts receivable and other current and non-current assets,
partially offset by the increase in accounts payable, accrued compensation,
other current and non-current liabilities deferred revenues, and increases in
non-cash charges.
Net cash used in investing activities for the nine months ended March 31,
2000 was $21.8 million, and was approximately $810,000 in the nine months ended
March 31, 1999. Cash used in investing activities in the nine months ended
March 31, 2000 was due to the purchase of short-term available-for-sale
investments, the purchase of fixed assets and leasehold improvements and the
expenses incurred in connection with the purchase of Big Science Company in
March 2000.
14
<PAGE>
Net cash provided by financing activities for the nine months ended March
31, 2000 and 1999 was $68.3 million and $6.4 million, respectively. Cash
provided by financing activities in the nine months ended March 31, 2000 was
due to proceeds from loans off-set by loan payments, the issuance of preferred
stock and common stock, including net proceeds of $63.0 million from the
initial public offering. Cash provided by financing activities in the nine
months ended March 31, 2000 was primarily due to proceeds from a bank line of
credit and the issuance of common stock.
We expect to devote substantial capital resources to expand the eGain Hosted
Network, to hire and expand the research and development organization, to hire
and expand the sales, marketing and general and administrative organizations,
to expand marketing programs, to establish additional facilities worldwide and
for other general corporate activities. Although we believe that current cash
balances will be sufficient to fund operations for the next 12 months, there
can be no assurance that we will not require additional financing within this
time frame or that such additional funding, if needed, will be available on
acceptable terms, if at all. In March we entered into an agreement to acquire
Inference Corporation in exchange for approximately $73 million in eGain common
stock. The acquisition is expected to close by the end of June 2000.
Year 2000 Issues
We have completed our Year 2000 compliance project, and we have experienced
no significant problems relating to the change from 1999 to 2000 with either
our own products and technology or that of our infrastructure providers. We
will continue to monitor Year 2000 issues closely as the Year 2000 "leap year"
and the change from calendar year 2000 to 2001 takes place, and our prior
contingency plans will remain in place throughout 2000. The costs incurred by
the Company in connection with our Year 2000 compliance program have been and
are expected to remain immaterial to our financial position, results of
operations and cash flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks Related to eGain's Business
eGain expects continuing losses and may never achieve profitability, which in
turn may harm its future operating performance and may cause the market price
of eGain common stock to decline
eGain incurred net losses of approximately $11.3 million for the fiscal year
ended June 30, 1999, and approximately $44.2 million for the nine months ended
March 31, 2000. As of March 31, 2000, eGain had an accumulated deficit of
approximately $56.5 million. eGain expects to continue to incur net losses for
the foreseeable future. If eGain continues to incur net losses, it may not be
able to increase its number of employees or its investment in capital
equipment, sales, marketing, customer support and research and development
programs in accordance with its present plans. eGain does not know when or if
it will become profitable. If eGain does not become profitable within the
timeframe expected by financial analysts or investors, the market price of
eGain common stock will likely decline. If eGain does achieve profitability, it
may not sustain or increase profitability in the future.
eGain's operating expenses may increase as eGain builds its business, and this
increase may harm its operating results and financial condition
eGain has spent heavily on technology and infrastructure development. eGain
expects to continue to spend substantial financial and other resources on
developing and introducing product and service offerings, and expanding its
sales, marketing and customer support organizations and operating
infrastructure. eGain expects that its operating expenses will continue to
increase in absolute dollars and may increase as a percentage of revenue. If
eGain's revenue does not correspondingly increase, its business and operating
results could suffer.
15
<PAGE>
eGain's quarterly operating results are subject to fluctuations caused by many
factors, which could cause eGain to not meet quarterly financial expectations,
which could cause eGain's common stock price to decline
eGain was incorporated in September 1997 and shipped its first product in
September 1998. Because of this limited operating history and other factors,
eGain's quarterly revenue and operating results are difficult to predict. In
addition, due to the emerging nature of the ecommerce customer communications
market and other factors, eGain's quarterly revenue and operating results may
fluctuate from quarter to quarter. It is likely that eGain's operating results
in some quarters will be below the expectations of financial analysts or
investors. In this event, the market price of eGain common stock is likely to
decline.
A number of factors are likely to cause fluctuations in eGain's operating
results, including, but not limited to, the following:
. the growth rate of ecommerce;
. demand for ecommerce customer communications applications;
. eGain's ability to attract and retain customers and maintain customer
satisfaction;
. eGain's ability to upgrade, develop and maintain its systems and
infrastructure;
. the amount and timing of operating costs and capital expenditures
relating to expansion of eGain's business and infrastructure;
. technical difficulties or system outages;
. eGain's ability to attract and retain qualified personnel with software
and Internet industry expertise, particularly sales and marketing
personnel;
. the announcement or introduction of new or enhanced products and services
by eGain's competitors;
. changes in eGain's pricing policies and those of its competitors;
. litigation relating to proprietary rights;
. seasonal trends in technology purchases;
. timing of large contracts;
. assuming completion of the merger with Inference, integration of products
between Inference and eGain as planned;
. changes in market conditions may limit eGain's ability to raise capital;
. general business conditions in the industry;
. failure to increase eGain's international sales; and
. governmental regulation regarding the Internet and ecommerce in
particular.
eGain bases its expense levels in part on its expectations regarding future
revenue levels. If eGain's revenue for a particular quarter is lower than it
expects, it may be unable to proportionately reduce its operating expenses for
that quarter. For example, eGain's hosting agreements are typically for a
period of one year and automatically renew unless terminated by either party
with 60 days' prior notice. In addition, some of eGain's hosting agreements
give the customer the right to terminate the contract at any time. Period-to-
period comparisons of eGain's operating results are not a good indication of
its future performance.
eGain's business is premised on a novel business model that is largely untested
eGain's business is premised on novel business assumptions that are largely
untested. Customer communications historically have been conducted primarily in
person or over the telephone. eGain's business
16
<PAGE>
model assumes that companies engaged in ecommerce will continue to elect to
communicate with customers mainly through the Internet rather than by
telephone. eGain's business model also assumes that many companies recognize
the benefits of a hosted delivery model and will seek to have their customer
communications applications hosted by eGain. If any of these assumptions is
incorrect, eGain's business will be seriously harmed.
eGain's revenues are currently dependent on sales of the eGain Mail product
To date, eGain has derived substantially all of its revenue from sales of
the eGain Mail product and related services. eGain has recently expanded its
product offerings. eGain expects to continue to derive a majority of its
revenue from sales of the eGain Mail product for at least the next fiscal
quarter. Implementation of eGain's strategy depends upon the eGain Mail
platform being able to solve the customer communications needs of businesses
engaging in ecommerce. If eGain's existing or future customers are not
satisfied with the eGain Mail platform, eGain's business and operating results
will be seriously harmed.
In addition to the pending Inference acquisition, eGain may engage in future
acquisitions or investments that could dilute eGain's existing stockholders,
cause eGain to incur significant expenses or harm its business
eGain may review acquisition or investment prospects that might complement
its current business or enhance its technological capabilities. Integrating any
newly acquired businesses, or their technologies or products may be expensive
and time-consuming. For example, eGain entered into an agreement to acquire Big
Science Company in February 2000, which transaction closed in March 2000, and
has entered into an agreement to acquire Inference, which transaction is
expected to close in June 2000. There can be no assurance that eGain can
effectively integrate Big Science's product, now called eGain Assistant,
successfully with the eGain platform. Similarly, there can be no assurance that
eGain will complete the acquisition of Inference, or if such acquisition is
completed, that the integration of Inference's technologies and products will
be successful. To finance any acquisitions, it may be necessary for eGain to
raise additional funds through public or private financings. Additional funds
may not be available at all, or on terms that are favorable to eGain and, in
the case of equity financings, may result in dilution to eGain's stockholders.
eGain may not be able to operate any acquired businesses profitably or
otherwise implement its growth strategy successfully. If eGain is unable to
integrate any newly acquired entities or technologies effectively, eGain's
operating results could suffer. Future acquisitions by eGain could also result
in large and immediate write-offs, incurrence of debt and contingent
liabilities, or amortization of expenses related to goodwill and other
intangibles, any of which could harm eGain's operating results.
eGain could incur additional non-cash charges associated with stock-based
compensation arrangements
eGain's operating results may be impacted if it incurs significant non-cash
charges associated with stock-based compensation arrangements with employees
and non-employees. eGain has issued options to non-employees which are subject
to various vesting schedules of up to 48 months. For deferred compensation
purposes, non-employee options are required to be remeasured at each vesting
date, which may require eGain to record additional non-cash accounting
expenses. These expenses may result in eGain incurring net losses or increased
net losses for a given period, and this could seriously harm eGain's operating
results and common stock price.
If eGain fails to expand its sales, marketing and customer support activities,
it may be unable to expand its business
If eGain does not successfully expand its sales, marketing and customer
support activities, eGain may not be able to expand its business, and eGain's
common stock price could decline. The complexity of eGain's ecommerce customer
communications platform and related products and services requires it to have
highly trained sales, marketing and customer support personnel, to educate
prospective customers regarding the use
17
<PAGE>
and benefits of eGain's services, and provide effective customer support. With
eGain's relatively brief operating history and its plans for expansion, eGain
has considerable need to recruit, train, and retain qualified staff. Any delays
or difficulties eGain encounters in these staffing efforts could impair its
ability to attract new customers and to enhance its relationships with existing
customers. This in turn would adversely affect the timing and extent of eGain's
revenue. Because the majority of eGain's current sales, marketing and customer
support personnel have recently joined eGain and have limited experience
working together, and because the new Inference employees in these areas will
also be new to eGain, the combined company's sales, marketing and customer
support organization may not be able to compete successfully against bigger and
more experienced organizations of its competitors.
eGain must recruit and retain its key employees to expand its business
eGain's success will depend on the skills, experience and performance of
eGain's senior management, engineering, sales, marketing and other key
personnel, many of whom have worked together for only a short period of time.
Recently, eGain has hired a number of senior executives. The loss of the
services of any of eGain's senior management or other key personnel, including
eGain's Chief Executive Officer and co-founder, Ashutosh Roy, and eGain's
President and co-founder, Gunjan Sinha, could harm its business. Similarly,
assuming the acquisition of Inference is completed, the loss of the senior
management of Inference could be harmful to the business of the combined
company. eGain does not have employment agreements with, or life insurance
policies on, most of its key employees. Most of these employees may terminate
their employment with eGain at any time. eGain's success also will depend on
its ability to recruit, retain and motivate other highly skilled engineering,
sales, marketing and other personnel. Competition for these personnel is
intense, especially in the San Francisco Bay Area, and eGain has had difficulty
hiring employees in its desired timeframes. In particular, eGain may be unable
to hire a sufficient number of qualified software engineers and information
technology professionals. If eGain fails to retain and recruit necessary
engineering, sales and marketing, customer support or other personnel, eGain's
business and its ability to develop new products and services and to provide
acceptable levels of customer service could suffer. In addition, companies in
the software industry whose employees accept positions with competitors
frequently claim that competitors have engaged in unfair hiring practices.
eGain could incur substantial costs in defending itself against any of these
claims, regardless of the merits of such claims.
eGain's failure to expand third-party distribution channels would impede its
revenue growth
To increase eGain's revenue, it must increase the number of its marketing
and distribution partners, including software and hardware vendors and
resellers. eGain's existing or future marketing and distribution partners may
choose to devote greater resources to marketing and supporting the products of
competitors, which could also harm eGain.
Similarly, to increase eGain's revenue and implementation capabilities,
eGain must develop and expand relationships with systems integrators. eGain
relies on systems integrators to recommend eGain's products to their customers
and to install and support eGain's products for their customers. Systems
integrators may develop, market or recommend software applications that compete
with eGain's products. Moreover, if these firms fail to implement eGain's
products successfully for their customers, eGain may not have the resources to
implement its products on the schedule required by its customers.
Unknown software defects could disrupt eGain's products and services, which
could harm eGain's business and reputation
eGain's product and service offerings depend on complex software, both
internally developed and licensed from third parties. Complex software often
contains defects, particularly when first introduced or when new versions are
released. eGain may not discover software defects that affect its new or
current services or enhancements until after they are deployed. It is possible
that, despite testing by eGain, defects may occur in
18
<PAGE>
the software. These defects could result in damage to eGain's reputation, lost
sales, product liability claims, delays in or loss of market acceptance of
eGain's products, product returns and unexpected expenses and diversion of
resources to remedy errors.
eGain may face liability associated with its management of sensitive customer
information
eGain's applications manage sensitive customer information, and eGain may be
subject to claims associated with invasion of privacy or inappropriate
disclosure, use or loss of this information. Any imposition of liability,
particularly liability that is not covered by insurance or is in excess of
insurance coverage, could harm eGain's reputation and its business and
operating results.
If eGain's system security is breached, eGain's business and reputation could
suffer
A fundamental requirement for online communications and transactions is the
secure transmission of confidential information over public networks. Third
parties may attempt to breach eGain's security or that of eGain's customers.
eGain may be liable to its customers for any breach in its security and any
breach could harm its business and reputation. Although eGain has implemented
network security measures, eGain's servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays or loss of data. eGain may be required to expend
significant capital and other resources to license encryption technology and
additional technologies to protect against security breaches or to alleviate
problems caused by any breach.
Due to the lengthy sales cycles of some of eGain's products, the timing of its
sales is difficult to predict and may cause eGain to miss its revenue
expectations
eGain's sales cycle for its ecommerce customer communications applications
can be as long as three months or more, and varies substantially from customer
to customer. While eGain's potential customers are evaluating eGain's products
and before they place an order with it, eGain may incur substantial sales and
marketing expenses and spend significant management effort. Consequently, if
revenue forecasted from a specific customer for a particular quarter is not
realized in that quarter, eGain may incur significant expenses that are not
offset by corresponding revenue.
If eGain does not successfully address the risks inherent in the expansion of
its international operations, its business could suffer
eGain intends to continue to expand into international markets and to spend
significant financial and managerial resources to do so. For example, eGain has
established subsidiaries in the United Kingdom and Australia. If eGain's
revenue from international operations does not exceed the expense associated
with establishing and maintaining these operations, eGain's business and
operating results will suffer. eGain has limited experience in international
operations and may not be able to compete effectively in international markets.
eGain faces various risks inherent in conducting business internationally, such
as the following:
.unexpected changes in international regulatory requirements;
. difficulties and costs of staffing and managing international operations;
. differing technology standards;
. difficulties in collecting accounts receivable and longer collection
periods;
. political and economic instability;
. fluctuations in currency exchange rates;
. imposition of currency exchange controls;
19
<PAGE>
. potentially adverse tax consequences;
. reduced protection for intellectual property rights in foreign countries;
. general business conditions; and
. ability to integrate Inference's international operations.
eGain's recent growth has placed a strain on its resources and if eGain fails
to manage its future growth, its business could suffer
eGain recently began to expand its operations rapidly and intends to
continue this expansion. The completed acquisition of Big Science and the
pending acquisition of Inference are two examples of this expansion. This rapid
expansion has placed, and is expected to continue to place, a significant
strain on eGain's managerial, operational and financial resources. To manage
any further growth, eGain will need to improve or replace its existing
operational, customer support and financial systems, procedures and controls.
Any failure by eGain to properly manage these system and procedural transitions
could impair its ability to attract and service customers, and could cause it
to incur higher operating costs and delays in the execution of its business
plan. eGain will also need to continue the expansion of its operations and
employee base. eGain's management may not be able to hire, train, retain,
motivate and manage required personnel. In addition, eGain's management may not
be able to successfully identify, manage and exploit existing and potential
market opportunities.
eGain may not be able to upgrade its systems and the eGain Hosted Network to
accommodate growth in ecommerce
eGain faces risks related to the ability of the eGain Hosted Network to
operate with higher activity levels while maintaining expected performance. As
the volume and complexity of ecommerce customer communications increases, eGain
will need to expand its systems and hosted network infrastructure. The
expansion and adaptation of eGain's network infrastructure will require
substantial financial, operational and management resources. Due to the limited
deployment of eGain's products and services to date, eGain's ability to connect
and manage a substantially larger number of customers is unknown.
Customer demand for eGain's products and services could be greatly reduced
if eGain fails to maintain high capacity data transmission. In addition, as
eGain upgrades its network, and as it integrates the systems and network of
Inference, eGain is likely to encounter equipment or software incompatibility.
eGain may not be able to expand or adapt the eGain Hosted Network to meet
additional demand or eGain's customers' changing requirements in a timely
manner or at all.
Unplanned system interruptions and capacity constraints could reduce eGain's
ability to provide hosting services and could harm its business and reputation
eGain's customers have in the past experienced some interruptions with the
eGain Hosted Network. eGain believes that these interruptions will continue to
occur from time to time. These interruptions could be due to hardware and
operating system failures. eGain expects a substantial portion of its revenue
to be derived from customers who use the eGain Hosted Network. As a result,
eGain's business will suffer if it experiences frequent or long system
interruptions that result in the unavailability or reduced performance of the
eGain Hosted Network or reduce eGain's ability to provide remote management
services. eGain expects to experience occasional temporary capacity constraints
due to sharply increased traffic, which may cause unanticipated system
disruptions, slower response times, impaired quality and degradation in levels
of customer service. If this were to continue to happen, eGain's business and
reputation could be seriously harmed.
eGain's success largely depends on the efficient and uninterrupted operation
of its computer and communications hardware and network systems. Substantially
all of eGain's computer and communications systems are located in Sunnyvale,
California. eGain's systems and operations are vulnerable to damage or
interruption from fire, earthquake, power loss, telecommunications failure and
similar events.
20
<PAGE>
eGain has entered into service agreements with some of its customers that
require minimum performance standards, including standards regarding the
availability and response time of eGain's remote management services. If eGain
fails to meet these standards, eGain's customers could terminate their
relationships with eGain, and eGain could be subject to contractual monetary
penalties. Any unplanned interruption of services may harm eGain's ability to
attract and retain customers.
eGain relies on relationships with, and the system integrity of, hosting
partners for the eGain Hosted Network
The eGain Hosted Network consists of virtual data centers co-located in the
physical data centers of eGain's hosting partners. Accordingly, eGain relies on
the speed and reliability of the systems and networks of these hosting
partners. If eGain's hosting partners experience system interruptions or
delays, or if eGain does not maintain or develop relationships with reliable
hosting partners, eGain's business could suffer.
Problems arising from use of eGain's products with other vendors' products
could cause eGain to incur significant costs, divert attention from eGain's
product development efforts and cause customer relations problems
eGain's customers generally use eGain products together with products from
other companies, such as Inference. As a result, when problems occur in the
network, it may be difficult to identify the source of the problem. Even when
these problems are not caused by eGain's products, they may cause it to incur
significant warranty and repair costs, divert the attention of eGain's
engineering personnel from product development efforts and cause significant
customer relations problems.
eGain may be unable to protect its intellectual property and proprietary rights
eGain regards its copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to its success, and relies on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with eGain employees, customers and partners to protect its
proprietary rights. eGain's trademarks include eGain, eGain Mail, eGain Live,
eGain Campaign, eGain Inform, eGain Voice, eGain Commerce 2000, eGain
Assistant, eGain Hosted Network and eGain Commerce Bridge. Despite eGain's
efforts to protect its proprietary rights through confidentiality and license
agreements, unauthorized parties may attempt to copy or otherwise obtain and
use eGain's products or technology. These precautions may not prevent
misappropriation or infringement of eGain's intellectual property.
In addition, the status of United States patent protection in the software
industry is not well defined and will evolve as the U.S. Patent and Trademark
Office grants additional patents. eGain has one patent application pending in
the United States, and may seek additional patents in the future. eGain does
not know if its patent application or any future patent application will result
in a patent being issued with the scope of the claims eGain seeks, if at all,
or whether any patents eGain may receive will be challenged or invalidated. It
is difficult to monitor unauthorized use of technology, particularly in foreign
countries, where the laws may not protect eGain's proprietary rights as fully
as in the United States. Furthermore, eGain's competitors may independently
develop technology similar to eGain's technology.
eGain may face intellectual property infringement claims that could be costly
to defend
Third parties may infringe or misappropriate eGain's copyrights, trademarks
and similar proprietary rights. In addition, other parties may assert
infringement claims against eGain. Although eGain has not received notice of
any alleged infringement, eGain's products may infringe issued patents that may
relate to its products. In addition, because the contents of patent
applications in the United States are not publicly disclosed until the patent
is issued, applications may have been filed which relate to eGain's software
products. eGain may be subject to legal proceedings and claims from time to
time in the ordinary course of its business, including claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties.
21
<PAGE>
Intellectual property litigation is expensive and time-consuming and could
divert management's attention away from running eGain's business. This
litigation could also require eGain to develop non-infringing technology or
enter into royalty or license agreements. These royalty or license agreements,
if required, may not be available on acceptable terms, if at all, in the event
of a successful claim of infringement. eGain's failure or inability to develop
non-infringing technology or license the proprietary rights on a timely basis
would harm its business.
eGain may need to license third-party technologies and may be unable to do so
To the extent eGain needs to license third-party technologies, it may be
unable to do so on commercially reasonable terms or at all. In addition, eGain
may fail to successfully integrate any licensed technology into its services.
Third-party licenses may expose eGain to increased risks, including risks
associated with the integration of new technology, the diversion of resources
from the development of eGain's own proprietary technology, and eGain's
inability to generate revenue from new technology sufficient to offset
associated acquisition and maintenance costs. eGain's inability to obtain any
of these licenses could delay product and service development until equivalent
technology can be identified, licensed and integrated. This in turn would harm
eGain's business and operating results.
eGain's stock price may be volatile
The price at which eGain common stock will trade has been and will likely
continue to be highly volatile and fluctuate substantially due to factors such
as the following:
. actual or anticipated fluctuations in eGain's operating results;
. changes in or failure to meet securities analysts' expectations;
. announcements of technological innovations;
. introduction of new services by eGain or its competitors;
. developments with respect to intellectual property rights;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions.
eGain may become involved in securities class action litigation which could
divert management's attention and harm its business
The stock market has from time to time experienced significant price and
volume fluctuations that have affected the market prices for the common stocks
of technology companies, particularly Internet companies. These broad market
fluctuations may cause the market price of eGain common stock to decline. In
the past, following periods of volatility in the market price of a particular
company's securities, securities class action litigation has often been brought
against that company. eGain may become involved in this type of litigation in
the future. Litigation is often expensive and diverts management's attention
and resources, which could harm eGain business and operating results.
eGain may need additional capital, and raising additional capital may dilute
existing stockholders
eGain believes that its existing capital resources will enable it to
maintain its current and planned operations for the next 12 months. However,
eGain may choose to, or be required to, raise additional funds due to
unforeseen circumstances. If eGain's capital requirements vary materially from
those currently planned, it may require additional financing sooner than
anticipated. This financing may not be available in sufficient amounts or on
terms acceptable to us and may be dilutive to existing stockholders.
22
<PAGE>
Risks Related to eGain's Industry
eGain must compete successfully in the ecommerce customer communications market
The ecommerce customer communications market is relatively new, growing
rapidly, and intensely competitive. There are no substantial barriers to entry
in this market, and established or new entities may enter this market in the
near future. eGain competes with companies that develop and maintain internally
developed customer communications software applications. eGain also competes
directly with companies that provide licensed software products to assist in
handling customer communications, including AskJeeves, Inc., Brightware, Inc.,
Kana Communications, Inc., which recently acquired Silknet Software, Inc.,
LivePerson, Inc., Primus Knowledge Solutions, Inc., Quintus Corp. (which
recently agreed to acquire Mustang Software, Inc.), Servicesoft, and WebLine
Communications Corp. (which was recently acquired by Cisco Systems, Inc.). In
addition, some of eGain's competitors who currently offer licensed software
products are now beginning to offer hosted approaches. eGain also faces actual
or potential competition from larger, front office software companies such as
Clarify, Inc., (recently acquired by Nortel Networks Corp.), and PeopleSoft,
Inc. Furthermore, established enterprise software companies, including Hewlett-
Packard Company, IBM, Microsoft Corporation and similar companies may seek to
leverage their existing relationships and capabilities to offer ecommerce
customer communications applications.
eGain believes competition will increase as its current competitors increase
the sophistication of their offerings and as new participants enter the market.
Many of eGain's current and potential competitors have:
. longer operating histories;
. larger customer bases;
. greater brand recognition;
. more diversified lines of products and services; and
. significantly greater financial, marketing and other resources.
These competitors may enter into strategic or commercial relationships with
larger, more established and better-financed companies. These competitors may
be able to:
. undertake more extensive marketing campaigns;
. adopt more aggressive pricing policies; and
. make more attractive offers to businesses to induce them to use their
products or services.
Further, any delays in the general market acceptance of ecommerce customer
communications applications and eGain's hosted delivery model would likely harm
its competitive position. Any delay would allow eGain's competitors additional
time to improve their service or product offerings, and also provide time for
new competitors to develop ecommerce customer communications applications and
solicit prospective customers within eGain's target markets. Increased
competition could result in pricing pressures, reduced operating margins and
loss of market share.
eGain depends on broad market acceptance of Web-based ecommerce customer
communications applications
eGain depends on the widespread acceptance and use of Web-based customer
communications applications as an effective solution for businesses seeking to
manage high volumes of customer communication over the Internet. eGain cannot
estimate the size or growth rate of the potential market for its product and
service offerings, and does not know whether its products and services will
achieve broad market acceptance. The market for Web-based ecommerce customer
communications is new and rapidly evolving, and concerns over the security and
reliability of online transactions, the privacy of users and quality of service
or
23
<PAGE>
other issues may inhibit the growth of the Internet and commercial online
services. If the market for ecommerce customer communications applications
fails to grow or grows more slowly than eGain currently anticipates, its
business will be seriously harmed.
eGain may be unable to develop or enhance products or services that address the
changing needs of the ecommerce customer communications market
To be competitive in the ecommerce customer communications market, eGain
must continually improve the performance, features and reliability of eGain
products and services, including eGain existing ecommerce customer
communications applications, and develop new products, services, functionality
and technology that address changing industry standards and customer needs. For
example, eGain has announced that it intends to introduce three new products,
eGain Campaign, eGain Inform and eGain Voice, during calendar 2000. If eGain
cannot bring these products to market in a timely and effective way, its
business and operating results will suffer. More generally, if eGain cannot
adapt or respond in a cost-effective and timely manner to changing industry
standards, market conditions or customer requirements, eGain's business and
operating results will suffer.
eGain will only be able to execute its business plan if Internet usage
continues to grow
eGain's business will be seriously harmed if Internet usage does not
continue to grow or grows at significantly lower rates compared to current
trends. The continued growth of the Internet depends on various factors, most
of which are outside eGain's control. These factors include the following:
. the Internet infrastructure may be unable to support the demands placed
on it;
. the performance and reliability of the Internet may decline as usage
grows;
. security and authentication concerns with respect to transmission over
the Internet of confidential information, such as credit card numbers,
and attempts by unauthorized computer users, so-called hackers, to
penetrate online security systems; and
. privacy concerns, including those related to the ability of Web sites to
gather user information without the user's knowledge or consent.
Because eGain provides its customer communications applications to companies
conducting business over the Internet, eGain's business could suffer if
efficient transmission of data over the Internet is interrupted
The recent growth in the use of the Internet has caused frequent
interruptions and delays in accessing the Internet and transmitting data over
the Internet. Because eGain provides Internet-based ecommerce customer
communications applications, interruptions or delays in Internet transmissions
will harm eGain customers' ability to receive and respond to email messages.
Therefore, eGain's market depends on improvements being made to the entire
Internet infrastructure to alleviate overloading and congestion.
Governmental regulation and legal uncertainties could impair the growth of the
Internet and decrease demand for eGain's services or increase eGain's cost of
doing business
Governmental regulation may impair the growth of the Internet or commercial
online services. This could decrease the demand for eGain's products and
services, increase its cost of doing business or otherwise harm its business
and operating results. Although there are currently few laws and regulations
directly applicable to the Internet and the use of the Internet as a commercial
medium, a number of laws have been proposed involving the Internet. These
proposed laws include laws addressing user privacy, pricing, content,
copyrights, distribution, antitrust and characteristics and quality of products
and services. Further, the growth and development of the market for commercial
online transactions may prompt calls for more stringent consumer protection
laws that may impose additional burdens on those companies engaged in
ecommerce. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales and
other taxes, libel and personal privacy is uncertain and may take years to
resolve.
24
<PAGE>
eGain may be liable for activities of its customers or others using the eGain
Hosted Network
As a provider of ecommerce customer communications applications, eGain faces
potential liability for defamation, negligence, copyright, patent or trademark
infringement and other claims based on the actions of eGain customers or others
using the eGain Hosted Network. This liability could result from the nature and
content of the communications transmitted by eGain customers through the eGain
Hosted Network. eGain does not and cannot screen all of the communications
generated by its customers, and eGain could be exposed to liability with
respect to this content. Furthermore, some foreign governments have enforced
laws and regulations related to content distributed over the Internet that are
more strict than those currently in place in the United States.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Changes in Securities
During the quarter ended March 31, 2000 we granted options to purchase
927,300 shares of common stock to employees and consultants under our 1998
Stock Plan.
During the quarter ended March 31, 2000, employees and consultants of the
Company exercised options for 129,865 shares of common stock. Also during the
period, the company repurchased 23,646 shares of common stock from employees.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act of 1933 ("the Act") in reliance upon Section 4(2) of
the Act or Rule 701 promulgated under Section 3(b) of the Act.
Use of Proceeds
On September 28, 1999, eGain completed the initial public offering of its
common stock. The managing underwriters in the offering were BancBoston
Robertson Stephens, Donaldson, Lufkin & Jenrette, and Volpe Brown Whelan &
Company. The shares of the common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration Statement on
Form S-1 (No. 333-83439). The Securities and Exchange Commission declared the
Registration Statement effective on September 22, 1999.
The offering commenced on September 23, 1999 and terminated on September 28,
1999 after we had sold all of the 5,000,000 shares of common stock registered
under the Registration Statement. In October 1999, the underwriters exercised
an over-allotment option of 750,000. The initial public offering price was $12
per share for an aggregate initial public offering of $69,000,000.
eGain paid a total of $4.83 million in underwriting discounts and
commissions. In addition, eGain incurred costs and expenses, other than
underwriting discounts and commissions, totaling $1.15 million in connection
with the offering. After deducting the underwriting discounts and commissions
and the offering expenses, the estimated net proceeds to eGain from the
offering were approximately $63.0 million.
The proceeds from the sale of the securities referenced above are used for
working capital and other general corporate purposes, including product and
services development and expansion of our hosted network.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 22, 2000 by eGain reporting an event
under Item 2, the closing of the acquisition of Big Science Company. This
report was subsequently amended by a filing on Form 8-K/A on May 5, 2000 and
reported under Item 7, the financial statements required by Paragraph (a) of
Item 7 on Form 8-K, which financial statements were incorporated by reference
from eGain's Form S-4 (File No. 333-34848) on April 14, 2000.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
eGain Communications Corporation
Date: February 11, 2000 /s/ Harpreet Grewal
By___________________________________
Harpreet Grewal
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 25,459
<SECURITIES> 14,936
<RECEIVABLES> 2,561
<ALLOWANCES> 635
<INVENTORY> 0
<CURRENT-ASSETS> 45,180
<PP&E> 8,049
<DEPRECIATION> 1,370
<TOTAL-ASSETS> 102,133
<CURRENT-LIABILITIES> 15,154
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 85,767
<TOTAL-LIABILITY-AND-EQUITY> 102,133
<SALES> 3,303
<TOTAL-REVENUES> 3,303
<CGS> 4,138
<TOTAL-COSTS> 4,138
<OTHER-EXPENSES> 17,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 461
<INCOME-PRETAX> (17,729)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,729)
<EPS-BASIC> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
