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 December 31, 1999
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
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(Exact name of registrant as specified in its charter)
DELAWARE 77-0466366
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
455 W. MAUDE AVENUE, SUNNYVALE, CA
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(Address of principal executive offices)
94086
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(Zip Code)
(408) 737-7400
-----------------
(Registrant's telephone number,
including area code)
N/A
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(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.
CLASS OUTSTANDING AT DECEMBER 31, 1999
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Common Stock $0.001 par value 28,714,176
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EGAIN COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PAGE
PART I -- FINANCIAL INFORMATION
Item 1 Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of December 31, 1999 1
and June 30, 1999
Condensed Consolidated Statements of Operations for the Three 2
and Six Months Ended December 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows for the Six 3
Months Ended December 31, 1999 and December 31, 1998
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable
PART II OTHER INFORMATION 22
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
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
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
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EGAIN COMMUNICATIONS CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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<TABLE>
EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<CAPTION>
December 31,
1999 June 30,
(unaudited) 1999*
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Assets
Current Assets:
Cash and cash equivalents..................................... $ 42,343 $ 1,265
Short-term investments, held as available for sale............ 14,242 --
Accounts receivable........................................... 1,605 705
Prepaid and other current assets.............................. 775 513
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Total Current Assets............................................... 58,965 2,483
Property and equipment, net........................................ 4,295 1,133
Goodwill and other intangibles, net................................ 16,544 20,195
Other assets....................................................... 492 154
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Total Assets.................................................. $ 80,296 $ 23,965
=================== ===================
Liabilities and Stockholders' Equity
Current Liabilities:
Bank borrowings-line of credit................................ $ 1,000 $ 1,000
Accounts payable.............................................. 2,099 684
Accrued compensation.......................................... 3,415 343
Accrued liabilities........................................... 2,230 475
Deferred revenue.............................................. 1,850 302
Current portion of notes payable and capital leases........... 707 435
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Total Current Liabilities.......................................... $ 11,301 $ 3,239
Non-current portion of notes payable and capital leases....... 851 243
Stockholders' Equity
Preferred stock............................................... -- 16,987
Common stock.................................................. 29 7,289
Paid in capital............................................... 120,386 17,549
Notes receivable from stockholders............................ (544) (144)
Deferred stock compensation................................... (12,853) (8,956)
Accumulated other comprehensive income (loss)................. (126) 1
Accumulated deficit........................................... (38,748) (12,243)
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Total stockholders equity.......................................... 68,144 20,483
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Total liabilities and stockholders' equity.................... $ 80,296 $ 23,965
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* 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.
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EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -------------------------------
1999 1998 1999 1998
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Revenue
Hosting.............................. $ 666 $ 3 $ 942 $ 3
License fees......................... 648 79 1,219 79
Service.............................. 1,069 65 1,610 65
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Total Revenue.................... 2,383 147 3,771 147
Cost of revenue...................... 3,107 296 5,309 439
------------- ------------- ------------- -------------
Gross profit..................... (724) (149) (1,538) (292)
Operating Expenses
Research and development............. 2,067 355 4,046 569
Sales and marketing.................. 5,261 929 8,985 1,437
General and administrative........... 1,745 205 3,006 430
Amortization of goodwill............. 1,826 -- 3,651 --
Amortization of deferred compensation 2,899 190 5,907 279
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Total Operating Expenses......... 13,798 1,679 25,595 2,715
------------- ------------- ------------- -------------
Loss from operations............. (14,522) (1,828) (27,133) (3,007)
Non-operating income (expense), net.. 704 2 628 26
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Net Loss......................... $ (13,818) $ (1,826) $ (26,505) $ (2,981)
============= ============= ============= =============
Net loss per share
Pro forma basic and diluted (i)...... $ -- $ (0.18) $ (1.12) $ (0.29)
============= ============= ============= =============
Basic and diluted.................... $ (0.51) $ (0.38) $ (1.40) $ (0.62)
============= ============= ============= =============
Weighted-average shares outstanding used in
per share calculation
Pro forma (i)........................ -- 10,345 23,630 10,253
============= ============= ============= =============
Basic................................ 26,974 4,819 18,977 4,786
============= ============= ============= =============
(i) Pro forma basic and diluted shares outstanding include convertible stock
using the if-converted method from the original date of issuance.
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EGAIN COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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Six Months Ended December 31,
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1999 1998
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OPERATING ACTIVITIES
Net loss................................................................... $ (26,505) $ (2,981)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation........................................................... 507 76
Amortization........................................................... 9,569 279
Other.................................................................. (175) --
Changes in operating assets and liabilities:
Accounts receivable.................................................... (900) (140)
Prepaid expenses and other current assets.............................. (262) (93)
Other non-current assets............................................... (338) (74)
Accounts payable....................................................... 1,415 109
Accrued compensation................................................... 3,072 79
Other current liabilities.............................................. 1,755 7
Deferred revenues...................................................... 1,548 97
Other.................................................................. 17 14
---------------------- ------------------
Net cash used in operating expenses............................... (10,297) (2,627)
---------------------- ------------------
INVESTING ACTIVITIES
Purchases of property and equipment........................................ (3,099) (542)
Purchases of short-term available-for-sale securities...................... (14,193) --
---------------------- ------------------
Net cash used in investing activities............................. (17,292) (542)
---------------------- ------------------
FINANCING ACTIVITIES
Proceeds from loans........................................................ 408 1,357
Payments on notes payable and capital leases............................... (126) (15)
Net proceeds from issuance of common stock................................. 63,233 6
Net proceeds from issuance of preferred stock.............................. 5,152 3,310
---------------------- ------------------
Net cash provided by financing activities......................... 68,667 4,658
---------------------- ------------------
Net increase in cash and cash equivalents.................................. 41,078 1,489
Cash and cash equivalents at beginning of period........................... 1,265 3,831
---------------------- ------------------
Cash and cash equivalents at end of period................................. $ 42,343 $ 5,320
====================== ==================
NON-CASH INFORMATION:
Equipment acquired under capital lease obligations......................... $ 570 $ --
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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
December 31, 1999 and the operating results and cash flows for the three and six
months ended December 31, 1999 and 1998, 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
six months ended December 31, 1999 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 $126,000 for the
three months ended December 31, 1999. 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
the total arrangement fee and
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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):
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Three Months Ended
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December 31, December 31,
1999 1998
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Net Loss............................................................... $ (13,818) $ (1,826)
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Basic and diluted:
Weighted-average shares of common stock outstanding............... 28,597 8,330
Less: weighted-average shares subject to repurchase............... (1,623) (3,511)
---------------- -----------------
Weighted-average shares used in computing basic and diluted net loss
per share......................................................... 26,974 4,819
---------------- -----------------
Basic and diluted net loss per share................................... $ (0.51) $ (0.38)
Pro forma:
Shares used above................................................. -- 4,819
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock......................... -- 5,526
Shares used in computing pro forma basic and diluted net loss per ---------------- -----------------
share............................................................. -- 10,345
Pro forma basic and diluted net loss per share.................... -- $ (0.18)
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Six Months Ended
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December 31, December 31,
1999 1998
---------------- -----------------
Net Loss............................................................... $ (26,505) $ (2,981)
---------------- -----------------
Basic and diluted:
Weighted-average shares of common stock outstanding............... 20,502 8,184
Less: weighted-average shares subject to repurchase............... (1,524) (3,398)
---------------- -----------------
Weighted-average shares used in computing basic and diluted net loss
per share......................................................... 18,977 4,786
---------------- -----------------
Basic and diluted net loss per share................................... $ (1.40) $ (0.62)
Pro forma:
Shares used above................................................. 18,977 4,786
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock......................... 4,653 5,467
Shares used in computing pro forma basic and diluted net loss per ---------------- -----------------
share............................................................. 23,630 10,253
Pro forma basic and diluted net loss per share.................... $ (1.12) $ (0.29)
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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 $1 million for the six months
ended December 31, 1999, and their corresponding identifiable assets were not
material in any period presented. eGain's export revenue was not material in any
period presented.
COMPREHENSIVE INCOME
Comprehensive loss for the three and six months ended December 31, 1999
was approximately $13.9 million and $26.6 million and was not materially
different from net loss as reported in the income statement.
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.
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 December 31, 1999,
the Company recorded deferred stock-based compensation
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of $15,294,028 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 December 31, 1999, the Company recorded deferred
stock-based compensation of $4,682,489 for the difference between the exercise
price and the fair value of the common stock underlying the options.
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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
We are a leading provider of Web-based software products and services
that help eCommerce companies manage online customer communications. Our
products and services are designed to deliver solutions for businesses to
effectively manage all the interactions with their customers, throughout the
customer lifecycle, and across all points of customer contact. In designing our
products and services, we have adopted three key strategic principles: first, to
develop and deliver our products and applications on a 100% Web-based
architecture; second, to develop an integrated multi-channel platform supporting
a comprehensive suite of customer communications applications; and third, to
offer customers the flexibility to access our solution from an external hosted
environment or to purchase and implement our solution directly in house.
Our company was incorporated in September 1997. From inception to
September 1998, our operating activities related primarily to the planning and
developing our proprietary technological solutions, recruiting personnel,
raising capital and purchasing operating assets. In September 1998, we commenced
commercial shipment of eGain Email Management System (now called "eGain Mail"),
and began our web hosting service.
On April 30, 1999, we acquired Sitebridge Corporation and added its
real-time Web collaboration product to our platform. The product, now called
"eGain Live," is an application that allows customer service representatives to
interact online with customers on the Web.
In November 1999 we announced the eGain Commerce 2000 Platform, which
integrates our suite of customer communication solutions - eGain Live and eGain
Mail. Our Commerce 2000 Platform enables our customers to integrate their
customer communication solutions around common databases and processes and
across all points of customer contact. We are developing, and intend to release
for general sale and distribution in the upcoming year, eGain Campaign, eGain
Inform and eGain Voice that will further build on the eGain Commerce 2000
Platform.
We expect to make significant investments in product development and
technology to enhance our current products and services, develop new products
and services and further advance our solution offerings. In addition, an
important part of our strategy is to expand our operations and employee base and
build our sales, marketing, customer support, technical and operational
resources. We also intend to expand our strategic distribution, hosting and
solution relationships to add capabilities to our current product offerings and
to help market our products to new customers. We have incurred significant
losses since our inception, and as of December 31, 1999, had an accumulated
deficit of approximately $38.7 million. We have not achieved profitability on a
quarterly or annual basis. We expect to continue to incur substantial operating
losses for the foreseeable future. In view of the rapidly evolving nature of our
business and our limited operating history, we believe that period-to-period
comparisons of our revenue and operating results are not meaningful and should
not be relied upon as indications of future performance.
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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.
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 $7.1 million in fiscal 2000, $7.1 million in fiscal 2001 and $6.0
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, $2.1 million in the
three months ended December 31, 1999 and $9.1 million in the six months ended
December 31, 1999. 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. We 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 December 31, 1999, and $5.9 million in the six
months ended December 31, 1999. We expect to record amortization expense
relating to deferred stock compensation approximately as follows: $11.1 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 $2.4 million, for the quarter ended December 31, 1999,
an increase of $2.2 million over the comparable quarter of 1998. Net revenue was
$3.8 million, for the six months ended December 31, 1999, an increase of $3.6
million over the comparable six months of 1998. 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 eGain
Live 3.0 and the eGain Commerce 2000 Platform. For the quarter ended December
31, 1999, we added 75 new customers including AOL, CNBC.com, Home Depot, 3COM,
McAfee.com, PetSmart.com and Freddie Mac. For the three months ended December
31, 1999, two customers contributed 25% of net revenue. For the six months ended
December 31, 1999, no single customer contributed more than 10% of net revenue.
Although revenues have increased in prior quarters, we cannot be certain that
they will grow in future quarters or that they will grow at similar rates as in
the past.
Revenue from application hosting was $666,000, or 28% of revenue, for
the quarter ended December 31, 1999, an increase of $663,000 over the comparable
quarter of 1998. Revenue for the six months ended December 31, 1999 was
$943,000, an increase of $940,000 over the comparable six months of 1998. 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 in Europe. As of
December 31, 1999, over 60% of our customers were using our hosted solution,
compared with 55% in the prior quarter.
Revenue from software license fees was $648,000, or 27% of revenue, for
the quarter ended December 31, 1999, an increase of $569,000 over the comparable
quarter of 1998. Revenue for the six months ended December 31, 1999 was $1.2
million, an increase $1.1 million over the comparable six months of 1998. The
increase in the three months ended December 31, 1999 versus the same period in
1998 was primarily attributable to the increased sales in the number of software
licenses.
Revenue from consulting and support services was $1.1 million, or 45%
of revenues, for the quarter ended December 31, 1999, an increase of $1.0
million over the comparable quarter of 1998. Revenue for the six months ended
December 31, 1999 was $1.6 million, an increase of $1.5 million over the
comparable six months of 1998.
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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 $3.1 million for the quarter ended December 31,
1999, an increase of $2.8 million over the comparable quarter of 1998. Cost of
revenue for the six months ended December 31, 1999 was $5.3 million, an increase
of $4.9 million over the comparable six months of 1998. 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 $2.1 million for the quarter
ended December 31, 1999, an increase of $1.7 million over the comparable quarter
of 1998. Research and development expenses for the six months ended December 31,
1999 were $4.0 million, an increase of $3.5 million or over the comparable six
months of 1998. 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 $5.3 million for the quarter ended
December 31, 1999, an increase of $4.4 million over the comparable quarter of
1998. Sales and marketing expenses for the six months ending December 31, 1999
were $9.0 million, an increase of $7.5 million over the comparable six months
ending in 1998. 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 $1.7 million for the quarter,
an increase of $1.5 million, over the comparable quarter of 1998. General and
administrative expenses for the six months ending December 31, 1999 were $3.0
million, an increase of $2.6 million over the comparable six months of 1998. 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 expansion of business activity.
AMORTIZATION OF GOODWILL
For the quarter ended December 31, 1999, we amortized goodwill totaling
$1.8 million. No goodwill was amortized during the comparable quarter ended
December 31, 1998. For the six months ended December 31, 1999, we amortized
goodwill totaling $3.7 million. No goodwill was amortized during the comparable
six months of 1998. 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 December 31, 1999, goodwill and other purchased
intangible assets related to our April 1999 acquisition of SiteBridge
Corporation totaled $16.5 million.
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AMORTIZATION OF DEFERRED STOCK COMPENSATION
During the quarter ended December 31, 1999, amortization of stock-based
compensation increased to $2.9 million from $190,000 over the quarter ended
December 31, 1998. Amortization of stock-based compensation for the six months
ending December 31, 1999 was $5.9 million, an increase of $5.6 million over the
comparable six months of 1998. 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
$704,000. For the comparable quarter in 1998, non-operating income was $2,000.
For the six months ending December 31, 1999 non-operating income was $628,000,
an increase of $602,000 over the comparable six months in 1998. Non-operating
income includes realized gains on cash and short-term investments partially
offset by expense on financing obligations and use-tax expense. The increase was
primarily attributable to interest earned on our cash balances on hand as a
result of our recent public offering.
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 December 31, 1999, we had cash and cash equivalents of $42.3
million. We regularly invest excess funds in short-term money market funds,
commercial paper, and short-term notes.
Net cash used in operating activities for the six months ended December
31, 1999 and 1998 was $10.3 million and $2.6 million, respectively. Cash used in
operating activities in each period was primarily the result of net losses and
an increase in accounts receivable, partially offset by the increase in deferred
revenues, accrued liabilities and increases in non-cash charges.
Net cash used in investing activities for the six months ended December
31, 1999 was $17.3 million, and was approximately $542,000 in the six months
ended December 31, 1998. Cash used in investing activities in the six months
ended December 31, 1999 was due to the purchase of fixed assets and leasehold
improvements and the purchase of short-term available-for-sale investments.
Net cash provided by financing activities for the six months ended
December 31, 1999 and 1998 was $68.7 million and $4.7 million, respectively.
Cash provided by financing activities in the six months ended December 31, 1999
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 six
months ended December 31, 1998 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 at least 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. In February we entered into an agreement
to acquire Big Science Company, a Georgia corporation, creator of "Klones," a
virtual service agent for online customer care, in exchange for approximately
$35 million in eGain common stock. The acquisition is
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expected to close by the end of February 2000. In addition, eGain has entered
into a 5 year lease agreement for additional office space.
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
COMPANY RISKS
WE EXPECT CONTINUING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY, WHICH IN TURN
MAY HARM OUR FUTURE OPERATING PERFORMANCE AND MAY CAUSE THE MARKET PRICE OF OUR
STOCK TO DECLINE
We incurred net losses of approximately $938,000 for the period from
September 10, 1997 (inception) through June 30, 1998 and approximately $11.3
million for the year ended June 30, 1999. As of December 31, 1999, we had an
accumulated deficit of approximately $38.7 million. We expect to continue to
incur net losses for the foreseeable future. If we continue to incur net losses,
we may not be able to increase our number of employees or our investment in
capital equipment, sales, marketing, customer support and research and
development programs in accordance with our present plans. We do not know when
or if we will become profitable. If we do not become profitable within the
timeframe expected by securities analysts or investors, the market price of our
stock will likely decline. If we do achieve profitability, we may not sustain or
increase profitability in the future.
OUR OPERATING EXPENSES MAY INCREASE AS WE BUILD OUR BUSINESS AND THIS INCREASE
MAY HARM OUR OPERATING RESULTS AND FINANCIAL CONDITION
We have spent heavily on technology and infrastructure development. We
expect to continue to spend substantial financial and other resources on
developing and introducing product and service offerings, and expanding our
sales, marketing and customer support organizations and operating
infrastructure. We expect that our operating expenses will continue to increase
in absolute dollars and may increase as a percentage of revenue. If our revenue
does not correspondingly increase, our business and operating results could
suffer.
WE MAY NOT MEET QUARTERLY FINANCIAL EXPECTATIONS, WHICH COULD CAUSE OUR STOCK
PRICE TO DECLINE
We were incorporated in September 1997 and shipped our first product in
September 1998. Because of this limited operating history and other factors, our
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, our quarterly revenue and operating results may fluctuate from
quarter to quarter. It is likely that our operating results in some quarters
will be below the expectations of securities analysts or investors. In this
event, the market price of our common stock is likely to decline.
A number of factors are likely to cause fluctuations in our operating
results, including, but not limited to, the following:
o the growth rate of eCommerce;
o demand for eCommerce customer communications applications;
o our ability to attract and retain customers and maintain
customer satisfaction;
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o our ability to upgrade, develop and maintain our systems and
infrastructure;
o the amount and timing of operating costs and capital
expenditures relating to expansion of our business and
infrastructure;
o technical difficulties or system outages;
o our ability to attract and retain qualified personnel with
software and Internet industry expertise, particularly sales
and marketing personnel;
o the announcement or introduction of new or enhanced products and
services by our competitors;
o changes in our pricing policies and those of our competitors;
o failure to increase our international sales; and
o governmental regulation surrounding the Internet and eCommerce
in particular.
We base our expense levels in part on our expectations regarding future
revenue levels. If our revenue for a particular quarter is lower than we expect,
we may be unable to proportionately reduce our operating expenses for that
quarter. For example, our 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 our hosting agreements give the customer the
right to terminate the contract at any time. Period-to-period comparisons of our
operating results are not a good indication of our future performance.
OUR BUSINESS IS PREMISED ON A NOVEL BUSINESS MODEL THAT IS LARGELY UNTESTED
Our business is premised on novel business assumptions that are largely
untested. Customer communications historically have been conducted primarily in
person or over the telephone. Our business model assumes that companies engaged
in eCommerce will continue to elect to communicate with customers mainly through
the Internet rather than by telephone. Our 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, our business will be seriously harmed.
OUR SUCCESS WILL DEPEND ON SALES OF THE EGAIN MAIL PRODUCT
To date, we derived substantially all of our revenue from sales of the
eGain Mail product and related services. Although we recently added eGain Live
to our product offerings, we expect to continue to derive a majority of our
revenue from sales of the eGain Mail product for at least the next fiscal
quarter. Implementation of our strategy depends upon the eGain Mail platform
being able to solve the customer communications needs of businesses engaging in
eCommerce. If our existing or future customers are not satisfied with the eGain
Mail platform, our business and operating results will be seriously harmed.
WE MAY ENGAGE IN FUTURE ACQUISITIONS OR INVESTMENTS THAT COULD DILUTE OUR
EXISTING STOCKHOLDERS, CAUSE US TO INCUR SIGNIFICANT EXPENSES OR HARM OUR
BUSINESS
We may review acquisition or investment prospects that might complement
our current business or enhance our technological capabilities. Integrating any
newly acquired businesses, technologies or products may be expensive and
time-consuming. For example, we entered into an agreement to acquire Big Science
Company ("BSC") in February. There can be no assurance that we can effectively
integrate BSC's "Klones" product successfully with our platform. To finance any
acquisitions, it may be necessary for us to raise additional funds through
public or private financings. Additional funds may not be available on terms
that are favorable to us and, in the case of equity financings, may result in
dilution to our stockholders. We may not be able to operate any acquired
businesses profitably or otherwise implement our growth strategy successfully.
If we are unable to integrate any newly acquired entities or technologies
effectively, our operating results could suffer. Future acquisitions by us
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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 our operating results.
WE COULD INCUR ADDITIONAL NON-CASH CHARGES ASSOCIATED WITH STOCK-BASED
COMPENSATION ARRANGEMENTS
Our operating results may be impacted if we incur significant non-cash
charges associated with stock-based compensation arrangements with employees and
non-employees. We have issued options to non-employees which are subject to
various vesting schedules of up to 48 months. For deferred compensation
purposes, these options are required to be remeasured at each vesting date,
which may require us to record additional non-cash accounting expenses. These
expenses may result in us incurring net losses or increased net losses for a
given period and this could seriously harm our operating results and stock
price.
IF WE FAIL TO EXPAND OUR SALES, MARKETING AND CUSTOMER SUPPORT ACTIVITIES, WE
MAY BE UNABLE TO EXPAND OUR BUSINESS
If we do not successfully expand our sales, marketing and customer
support activities, we may not be able to expand our business and our stock
price could decline. The complexity of our eCommerce customer communications
platform and related products and services requires us to have highly trained
sales, marketing and customer support personnel, to educate prospective
customers regarding the use and benefits of our services, and provide effective
customer support. With our relatively brief operating history and our plans for
expansion, we have considerable need to recruit, train, and retain qualified
staff. Any delays or difficulties we encounter in these staffing efforts could
impair our ability to attract new customers and to enhance our relationships
with existing customers. This in turn would adversely affect the timing and
extent of our revenue. Because the majority of our sales, marketing and customer
support personnel have recently joined us and have limited experience working
together, our sales, marketing and customer support organizations may not be
able to compete successfully against bigger and more experienced organizations
of our competitors.
WE MUST RECRUIT AND RETAIN OUR KEY EMPLOYEES TO EXPAND OUR BUSINESS
Our success will depend on the skills, experience and performance of
our senior management, engineering, sales, marketing and other key personnel,
many of whom have worked together for only a short period of time. In the past
quarter, we named new Vice Presidents of our Sales, Marketing, Consulting
Services, and Products Groups, and we hired a new Chief Information Officer. The
loss of the services of any of our senior management or other key personnel,
including our Chief Executive Officer and co-founder, Ashutosh Roy, and our
President and co-founder, Gunjan Sinha, could harm our business. We do not have
employment agreements with, or life insurance policies on, most of our key
employees. Most of these employees may terminate their employment with us at any
time. Our success also will depend on our 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 we have had difficulty hiring employees in the timeframe we desire. In
particular, we may be unable to hire a sufficient number of qualified software
engineers and information technology professionals. If we fail to retain and
recruit necessary engineering, sales and marketing, customer support or other
personnel, our business and our 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. We could incur substantial costs in defending ourselves against any
of these claims, regardless of the merits of such claims.
OUR FAILURE TO EXPAND THIRD-PARTY DISTRIBUTION CHANNELS WOULD IMPEDE OUR REVENUE
GROWTH
To increase our revenue, we must increase the number of our marketing
and distribution partners, including software and hardware vendors and
resellers. Our 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 us.
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FAILURE TO EXPAND OUR RELATIONSHIPS WITH SYSTEMS INTEGRATORS WOULD IMPEDE
ACCEPTANCE OF OUR PRODUCTS AND GROWTH OF OUR REVENUE
To increase our revenue and implementation capabilities, we must
develop and expand relationships with systems integrators. We rely on systems
integrators to recommend our products to their customers and to install and
support our products for their customers. Systems integrators may develop,
market or recommend software applications that compete with our products.
Moreover, if these firms fail to implement our products successfully for their
customers, we may not have the resources to implement our products on the
schedule required by our customers.
UNKNOWN SOFTWARE DEFECTS COULD DISRUPT OUR PRODUCTS AND SERVICES, WHICH COULD
HARM OUR BUSINESS AND REPUTATION
Our 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. We may not discover software defects that affect our new or current
services or enhancements until after they are deployed. It is possible that,
despite testing by us, defects may occur in the software. These defects could
result in damage to our reputation, lost sales, product liability claims, delays
in or loss of market acceptance of our products, product returns, and unexpected
expenses and diversion of resources to remedy errors.
WE MAY FACE LIABILITY ASSOCIATED WITH OUR MANAGEMENT OF SENSITIVE CUSTOMER
INFORMATION
Our applications manage sensitive customer information, and we 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 our reputation and our business and operating
results.
IF OUR SYSTEM SECURITY IS BREACHED, OUR 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 our security or that of our customers. We may be
liable to our customers for any breach in our security and any breach could harm
our business and our reputation. Although we have implemented network security
measures, our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays or
loss of data. We 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 OUR PRODUCTS, THE TIMING OF OUR SALES
ARE DIFFICULT TO PREDICT AND MAY CAUSE US TO MISS OUR REVENUE EXPECTATIONS
Our sales cycle for our eCommerce customer communications applications
can be as long as three months or more and varies substantially from customer to
customer. While our customers are evaluating our products and before they may
place an order with us, we may incur substantial sales and marketing expenses
and spend significant management effort. Consequently, if revenue forecasted
from a specific customer for a particular quarter are not realized in that
quarter, we may incur significant expenses that are not offset by corresponding
sales.
IF WE DO NOT SUCCESSFULLY ADDRESS THE RISKS INHERENT IN THE EXPANSION OF OUR
INTERNATIONAL OPERATIONS, OUR BUSINESS COULD SUFFER
We intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. For example, we have
established a subsidiary in the United Kingdom, and in November 1999 we
announced the launch of our operations in Australia, New Zealand and South East
Asia. If our revenue from international operations does not exceed the expense
associated with establishing and maintaining these operations, our business and
operating results will suffer. We have limited experience in international
operations and may not be able to compete effectively in international markets.
We face various risks inherent in conducting business internationally, such as
the following:
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o unexpected changes in regulatory requirements;
o difficulties and costs of staffing and managing international
operations;
o differing technology standards;
o difficulties in collecting accounts receivable and longer collection
periods;
o political and economic instability;
o fluctuations in currency exchange rates;
o imposition of currency exchange controls;
o potentially adverse tax consequences; and
o reduced protection for intellectual property rights in foreign
countries.
OUR RECENT GROWTH HAS PLACED A STRAIN ON OUR RESOURCES AND IF WE FAIL TO MANAGE
OUR FUTURE GROWTH, OUR BUSINESS COULD SUFFER
We recently began to expand our operations rapidly and intend to
continue this expansion. This rapid expansion has placed, and is expected to
continue to place, a significant strain on our managerial, operational and
financial resources. To manage any further growth, we will need to improve or
replace our existing operational, customer support and financial systems,
procedures and controls. Any failure by us to properly manage these system and
procedural transitions could impair our ability to attract and service
customers, and could cause us to incur higher operating costs and delays in the
execution of our business plan. We will also need to continue the expansion of
our operations and employee base. Our management may not be able to hire, train,
retain, motivate and manage required personnel. In addition, our management may
not be able to successfully identify, manage and exploit existing and potential
market opportunities.
WE MAY NOT BE ABLE TO UPGRADE OUR SYSTEMS AND THE EGAIN HOSTED NETWORK TO
ACCOMMODATE GROWTH IN ECOMMERCE
We face risks related to 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, we will
need to expand our systems and hosted network infrastructure. The expansion and
adaptation of our network infrastructure will require substantial financial,
operational and management resources. Due to the limited deployment of our
products and services to date, our ability to connect and manage a substantially
larger number of customers is unknown.
Customer demand for our products and services could be greatly reduced
if we fail to maintain high capacity data transmission. In addition, as we
upgrade our network infrastructure, we are likely to encounter equipment or
software incompatibility. We may not be able to expand or adapt our hosted
network infrastructure to meet additional demand or our customers' changing
requirements in a timely manner or at all.
UNPLANNED SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS COULD REDUCE OUR ABILITY
TO PROVIDE HOSTING SERVICES AND COULD HARM OUR BUSINESS AND OUR REPUTATION
Our customers have in the past experienced some interruptions with our
hosted network. We believe that these interruptions will continue to occur from
time to time. These interruptions could be due to hardware and operating system
failures. We expect a substantial portion of our revenue to be derived from
customers who use our hosted network. As a result, our business will suffer if
we experience frequent or long system interruptions that result in the
unavailability or reduced performance of our hosted network or reduce our
ability to provide remote management services. We expect to experience
occasional temporary capacity constraints due to sharply increased traffic,
which may cause unanticipated system disruptions, slower response times,
impaired quality and degradation
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in levels of customer service. If this were to continue to happen, our business
and reputation could be seriously harmed.
Our success largely depends on the efficient and uninterrupted
operation of our computer and communications hardware and network systems.
Substantially all of our computer and communications systems are located in
Santa Clara County, California. Our systems and operations are vulnerable to
damage or interruption from fire, earthquake, power loss, telecommunications
failure and similar events.
We have entered into service agreements with some of our customers that
require minimum performance standards, including standards regarding the
availability and response time of our remote management services. If we fail to
meet these standards, our customers could terminate their relationships with us
and we could be subject to contractual monetary penalties. Any unplanned
interruption of services may harm our ability to attract and retain customers.
WE RELY ON RELATIONSHIPS WITH, AND THE SYSTEM INTEGRITY OF, HOSTING PARTNERS FOR
OUR EGAIN HOSTED NETWORK
Our hosted network consists of virtual data centers co-located in the
physical data centers of our hosting partners. Accordingly, we rely on the speed
and reliability of the systems and networks of these hosting partners. If our
hosting partners experience system interruptions or delays, or if we do not
maintain or develop relationships with hosting partners, our business could
suffer.
PROBLEMS ARISING FROM USE OF OUR PRODUCTS WITH OTHER VENDORS' PRODUCTS COULD
CAUSE US TO INCUR SIGNIFICANT COSTS, DIVERT ATTENTION FROM OUR PRODUCT
DEVELOPMENT EFFORTS AND CAUSE CUSTOMER RELATIONS PROBLEMS
Our customers generally use our products together with products from
other companies. 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 our products, they may cause us to incur significant warranty and
repair costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations problems.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers and partners to protect our proprietary
rights. eGain, eGain Mail, eGain Live, eGain Campaign, eGain Inform, eGain
Voice, eGain Hosted Network and eGain Commerce Bridge are trademarks of eGain.
Despite our efforts to protect our proprietary rights through confidentiality
and license agreements, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. These precautions may not prevent
misappropriation or infringement of our 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. We have one patent application
pending in the United States, and we may seek additional patents in the future.
We do not know if our patent application or any future patent application will
result in a patent being issued with the scope of the claims we seek, if at all,
or whether any patents we 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 our proprietary rights as fully as in
the United States, and our competitors may independently develop technology
similar to ours.
WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO
DEFEND
Third parties may infringe or misappropriate our copyrights, trademarks
and similar proprietary rights. In addition, other parties may assert
infringement claims against us. Although we have not received notice of any
alleged infringement, our products may infringe issued patents that may relate
to our 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 our software products. We may
be subject to legal proceedings and
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claims from time to time in the ordinary course of our business, including
claims of alleged infringement of the trademarks and other intellectual property
rights of third parties. Intellectual property litigation is expensive and
time-consuming and could divert management's attention away from running our
business. This litigation could also require us 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. Our failure or inability to
develop non-infringing technology or license the proprietary rights on a timely
basis would harm our business.
WE MAY NEED TO LICENSE THIRD-PARTY TECHNOLOGIES AND MAY BE UNABLE TO DO SO
To the extent we need to license third-party technologies, we may be
unable to do so on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate any licensed technology into our services.
Third-party licenses may expose us to increased risks, including risks with the
integration of new technology, the diversion of resources from the development
of our own proprietary technology, our inability to generate revenue from new
technology sufficient to offset associated acquisition and maintenance costs.
Our 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 our business and operating results.
INDUSTRY RISKS
WE MUST COMPETE SUCCESSFULLY IN THE ECOMMERCE CUSTOMER COMMUNICATIONS MARKET
The eCommerce customer communications market is new 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. We compete
with companies that develop and maintain internally developed email management
systems. We also compete directly with companies that provide licensed software
products for email management such as Brightware, Inc., Kana Communications,
Inc., Mustang Software, Inc. and Silknet Software, Inc. (which recently agreed
to be acquired by Kana Communications), as well as Web collaboration application
companies such as Cisco Systems, Inc. (which recently acquired WebLine
Communications Corp.) and LivePerson, Inc. In addition, some of our competitors
who currently offer licensed software products are now beginning to offer hosted
approaches. We also face competition from larger, front office software
companies such as Clarify, Inc., (recently acquired by Nortel Networks Corp.),
Oracle Corporation, Siebel Systems, Inc., and PeopleSoft, Inc. (which recently
acquired The Vantive Corporation ). Furthermore, established enterprise software
companies, including IBM, Hewlett-Packard Company, Microsoft Corporation and
similar companies may seek to leverage their existing relationships and
capabilities to offer eCommerce customer communications applications.
We believe competition will increase as our current competitors
increase the sophistication of their offerings and as new participants enter the
market. Many of our current and potential competitors have:
o longer operating histories;
o larger customer bases;
o greater brand recognition;
o more diversified lines of products and services; and
o 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:
o undertake more extensive marketing campaigns;
o adopt more aggressive pricing policies; and
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o make more attractive offers to businesses to induce them to use their
products or services.
Further, any delays in the general market acceptance of the eCommerce
customer communications applications and our hosted delivery model would likely
harm our competitive position. Any delay would allow our competitors additional
time to approve their service or product offerings, and also provide time for
new competitors to develop eCommerce customer communications applications and
solicit prospective customers within our target markets. Increased competition
could result in pricing pressures, reduced operating margins and loss of market
share.
WE DEPEND ON BROAD MARKET ACCEPTANCE OF WEB-BASED ECOMMERCE CUSTOMER
COMMUNICATIONS APPLICATIONS
We depend 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. We cannot
estimate the size or growth rate of the potential market for our product and
service offerings, and we do not know whether our 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 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 we currently anticipate, our business will be
seriously harmed.
WE 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 industry, we
must continually improve the performance, features and reliability of our
products and services, including our existing eCommerce customer communications
applications, and develop new products, services, functionality and technology
that address changing industry standards and customer needs. For example, we
have announced that we intend to introduce three new products - eGain Campaign,
eGain Inform and eGain Voice - during the first calendar quarter in 2000. If we
cannot bring these products to market in a timely and effective way, our
business and operating results will suffer. More generally, if we cannot adapt
or respond in a cost-effective and timely manner to changing industry standards,
market conditions or customer requirements, our business and operating results
will suffer.
WE WILL ONLY BE ABLE TO EXECUTE OUR BUSINESS PLAN IF INTERNET USAGE CONTINUES TO
GROW
Our 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, many of
which are outside our control. These factors include the following:
o the Internet infrastructure may be unable to support the demands
placed on it;
o the performance and reliability of the Internet may decline as usage
grows;
o 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
o privacy concerns, including those related to the ability of
Web sites to gather user information without the user's
knowledge or consent.
BECAUSE WE PROVIDE OUR CUSTOMER COMMUNICATIONS APPLICATIONS TO COMPANIES
CONDUCTING BUSINESS OVER THE INTERNET, OUR 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 we provide Internet-based eCommerce customer
communications applications, interruptions or delays in Internet transmissions
will harm our customers' ability to
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<PAGE>
receive and respond to email messages. Therefore, our 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 OUR SERVICES OR INCREASE OUR COST OF DOING
BUSINESS
Governmental regulation may impair the growth of the Internet or
commercial online services. This could decrease the demand for our products and
services, increase our cost of doing business or otherwise harm our 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.
WE MAY BE LIABLE FOR ACTIVITIES OF OUR CUSTOMERS OR OTHERS USING OUR HOSTED
NETWORK
As a provider of eCommerce customer communications applications, we
face potential liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the actions of our customers or
others using our hosted network. This liability could result from the nature and
content of the communications transmitted by our customers through our hosted
network. We do not and cannot screen all of the communications generated by our
customers, and we could be exposed to liability with respect to this content.
Furthermore, some foreign governments, such as Germany, 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.
OUR STOCK PRICE MAY BE VOLATILE
The price at which our common stock will trade has been and will likely
continue to be highly volatile and fluctuate substantially due to factors such
as the following:
o actual or anticipated fluctuations in our operating results;
o changes in or our failure to meet securities analysts' expectations;
o announcements of technological innovations;
o introduction of new services by us or our competitors;
o developments with respect to intellectual property rights;
o conditions and trends in the Internet and other technology industries;
and
o general market conditions.
WE MAY BECOME INVOLVED IN SECURITIES CLASS ACTION LITIGATION WHICH COULD DIVERT
MANAGEMENT'S ATTENTION AND HARM OUR 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 our 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. We 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 our business and operating results.
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<PAGE>
WE MAY NEED ADDITIONAL CAPITAL, AND RAISING ADDITIONAL CAPITAL MAY DILUTE
EXISTING STOCKHOLDERS
We believe that our existing capital resources, will enable us to
maintain our current and planned operations for at least the next 12 months.
However, we may choose to, or be required to, raise additional funds due to
unforeseen circumstances. If our capital requirements vary materially from those
currently planned, we 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.
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<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 December 31, 1999 we granted options to
purchase 594,300 shares of common stock to employees and consultants under our
1998 Stock Plan.
During the quarter ended December 31, 1999, employees and consultants
of the Company exercised options for 7,945 shares of common stock. Also during
the period, the company repurchased 21,088 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 will be
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
-22-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are
filed or incorporated by reference (as stated therein) as part of this report on
Form 10-Q.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by eGain during the three
months ended December 31, 1999.
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<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 By /s/ Harpreet Grewal
---------------------------------------
Harpreet Grewal
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
-24-
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