Dear stockholders, customers, partners, and employees,
Fiscal 2014 was a year of strong investment and good progress for eGain. We enhanced our product
leadership, expanded sales and distribution, and developed strategic partnerships to capitalize on
the significant customer engagement market opportunity. These investments have already begun to
show results, with more expected in fiscal 2015.
In fiscal 2014, we generated record revenue of $70 million, a 19 percent increase over the prior
year. Cloud software revenue was up 36 percent year over year, and total recurring revenue was up
25 percent year over year. After a bookings slowdown in the first three quarters, our fourth quarter
bookings increased 100 percent sequentially and 9 percent year over year. We look forward to
building on this momentum in fiscal 2015.
Products
Over the past couple of years, we have seen growing interest from clients to innovate and add
value to our platform. In response, we delivered in fiscal 2014 a full set of knowledge management
APIs that are now being used by leading clients such as LexisNexis and Vodafone. Another key area
of investment for us has been mobile, with all our customer-facing capabilities now mobile-ready.
We also delivered the eGain SDK for mobile apps which allows our clients to easily embed our
engagement capabilities inside their mobile apps. In-app customer engagement is an emerging area
of innovation, and our solution enables businesses to differentiate their customer experience with
this capability.
Earlier in the year, we launched eGain OneTag™, a capability to easily track customer journeys on
the web (and other touch points). As we engaged with clients, especially in the context of our
growing Cisco partnership, we discovered that while they loved the notion of analytics and
intervention for digital engagement, they really wanted it for digital and voice channels. We
evaluated the build versus buy option around this opportunity and decided to acquire Exony for
three reasons: their talented, energetic team,
their market-leading capability in call center
operation management and analytics, and the time-to-market acceleration of our converged
customer engagement vision.
This acquisition also provides significant short-term opportunity to cross-sell and scale across the
two client bases. Moreover, both eGain and Exony are successful SolutionsPlus partners of Cisco.
Working as one, we will deliver even more innovative and unique solutions to the Cisco ecosystem.
Cloud
We increased our investment in improving the security and reliability of our cloud offering. We
launched the eGain Enhanced Security Network (eGain ESN™) to service the security needs of our
largest cloud clients. Moving forward, this level of security will be available as part of our premium
cloud offering, consistent with our strategy to offer more and more value out of the box. We also
invested in enhancing the disaster recovery (DR) capability of eGain Cloud. Finally, we expanded
our compliance and certification around industry standards like PCI and HIPAA.
Sales and marketing
We increased our sales and marketing spend in fiscal 2014. Specifically, we added new sales reps in
existing regions and entered new markets, Germany and France. These investments will yield
results in fiscal 2015. Also, in early fiscal 2015, we promoted AJ Berkeley to Senior VP of Worldwide
Sales. In this new role, he will oversee all aspects of global sales, including customer and partner
relationships, sales strategy and execution. AJ uniquely combines a wealth of industry experience,
proven sales leadership skills, and eGain context. Over the last couple of years, he led the team
that successfully negotiated, launched, and grew our Cisco SolutionsPlus partnership.
Partnerships
At the beginning of fiscal 2014, we announced our Cisco SolutionsPlus partnership to resell eGain
on-premises products. From this standing start, we successfully acquired four new customers in the
first half of fiscal 2014 and another 12 customers in the second half. Later in the year, we also
added the eGain cloud solution to the Cisco SolutionsPlus portfolio. We believe that our continued
investment in this partnership will yield even better results in fiscal 2015 and beyond.
Looking ahead, we see two powerful trends. The convergence of voice and digital into omnichannel,
and the contact center refresh cycle. Together, they create a market disruption that favors
comprehensive platform providers like eGain. We intend to seize this opportunity with easy-to-use,
unified, and innovative solutions that can be flexibly consumed.
Making “Omnichannel Easy” for our clients is fun, fulfilling and hard work. For this our employees
and partners deserve all credit. I am privileged to lead them as we build the future to help
businesses easily deliver omnichannel customer experiences.
Sincerely,
Ashu Roy
Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2014
or
(cid:133) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35314
eGain Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
77-0466366
(I.R.S. Employer
Identification No.)
1252 Borregas Avenue, California 94089
(Address of principal executive offices, including zip code)
(408) 636-4500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.001 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:133) No (cid:95)
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:133) No (cid:95)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes (cid:95) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes (cid:95) No (cid:133).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company”, in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
(cid:133)
(cid:3)
Accelerated filer
Non-accelerated filer
(cid:133) (Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes (cid:133) No (cid:95).
(cid:95)
(cid:3)
(cid:133)
The aggregate market value of the voting and non-voting common equity held by non-affiliates (based on the closing price on the Nasdaq Capital
Market) on December 31, 2013, was approximately $158.3 million. For purposes of the foregoing calculation only, the registrant has included in the shares
owned by affiliates the beneficial ownership of voting and non-voting common equity of officers and directors, and affiliated entities, of the registrant and
members of their families. Such inclusion shall not be construed as an admission that any such person is an affiliate for any other purpose.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Common Stock $0.001 par value ......................................................................................................................................................
Outstanding at
September 9, 2014
25,481,643
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12, 13 and 14 of Part III incorporate by reference information from the registrant’s proxy statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2014 Annual Meeting of Stockholders.
Item
No.
eGAIN CORPORATION
TABLE OF CONTENTS
2014 FORM 10-K
PART I
Page
1.
Business ..................................................................................................................................................................................
4
1A.
Risk Factors ............................................................................................................................................................................ 10
1B.
Unresolved Staff Comments ................................................................................................................................................... 20
2.
3.
4.
5.
6.
7.
Properties ................................................................................................................................................................................ 21
Legal Proceedings ................................................................................................................................................................... 21
Mine and Safety Disclosures .................................................................................................................................................. 21
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .............. 22
Selected Financial Data ........................................................................................................................................................... 24
Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................................. 25
7A.
Quantitative and Qualitative Disclosures About Market Risk ................................................................................................ 41
8.
9.
Financial Statements and Supplementary Data ....................................................................................................................... 42
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ................................................ 70
9A.
Controls and Procedures ......................................................................................................................................................... 70
9B.
Other Information ................................................................................................................................................................... 70
PART III
10.
Directors, Executive Officers and Corporate Governance ...................................................................................................... 72
11.
Executive Compensation ........................................................................................................................................................ 72
12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ............................... 72
13.
Certain Relationships and Related Transactions and Director Independence ......................................................................... 72
14.
Principal Accountant Fees and Services ................................................................................................................................. 73
PART IV
15.
Exhibits and Financial Statement Schedule ............................................................................................................................ 74
Signatures ............................................................................................................................................................................... 75
2
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” (“MD&A”) in Item 7, contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). These statements may be identified by the use of the words such as “anticipates,” “believes,” “continue,”
“could,” “would,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “should,” or “will” and similar
expressions or the negative of those terms. The forward-looking statements include, but are not limited to, statements regarding: the
effect of changes in macroeconomic factors beyond our control; our hybrid revenue model and its potential impact on our total
revenue; our ability to predict subscription renewals or upgrade rates; our lengthy sales cycles and the difficulty in predicting timing
of sales or delays; competition in the markets in which we do business and our failure to compete successfully therein; our
expectations regarding the composition of our customers and the result of a loss of a significant customer; the adequacy of our capital
resources and need for additional financing and the effect of failing to obtain adequate funding; the result of our failure to comply
with the covenants under the Comerica Loan; statements referring to the Company’s recent acquisition; the development and
expansion of our strategic and third party distribution partnerships and relationships with systems integrators; our ability to
effectively implement and improve our current products; our ability to innovate and respond to rapid technological change and
competitive challenges; legal liability or the effect of negative publicity for the services provided to consumers via our technology
platforms; legal and regulatory uncertainties and other risks related to protection of our intellectual property assets; our ability to
anticipate our competitors; the operational integrity and maintenance of our systems; the effect of unauthorized access to a
customer’s data or our data or our IT systems; the uncertainty of demand for our products; the anticipated customer benefits from our
products; the actual mix in new business between subscription and license transactions when compared with management’s
projections; the anticipated revenue to us from the Cisco Partnership; the ability to increase revenue as a result of the increased
investment in sales and marketing; our ability to hire additional personnel and retain key personnel; our ability to expand and
improve our sales performance and marketing activities; our ability to manage our expenditures and estimate future expenses,
revenue, and operational requirements; our ability to manage our business plans, strategies and outlooks and any business-related
forecasts or projections; the effect of changes to management judgments and estimates; the impact of any modification to our pricing
practices in the future; risks from our substantial international operations; our inability to successfully detect weaknesses or errors in
our internal controls; our ability to manage future growth; the trading price of our common stock; geographical and currency
fluctuations; and our expectations with respect to revenue, cost of revenue, expenses and other financial metrics. Forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. These risks
and uncertainties include, but are not limited to, those risks discussed in Item 1A “Risk Factors” in this report. Our actual results
could differ materially from those discussed in statements relating to our future plans, product releases, objectives, expectations and
intentions, and other assumptions underlying or relating to any of these statements. These forward-looking statements are subject to
risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from
those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified below, under “Risk
Factors” and elsewhere in this report, for factors that may cause actual results to be different than those expressed in these forward-
looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking
statements for any reason.
All references to “eGain”, the “Company”, “our”, “we” or “us” mean eGain Corporation and its subsidiaries, except where it is
clear from the context that such terms mean only this parent company and excludes subsidiaries.
3
BUSINESS
ITEM 1.
Overview
PART I
eGain is a leading provider of cloud-based and on-site customer engagement software solutions. eGain’s customer engagement
solutions power digital transformation strategies for leading brands. Our top-rated applications for social, mobile, web, and contact
centers help clients deliver connected customer journeys in a multichannel world.
Industry Background
As products get commoditized in a global economy, differentiation increasingly depends on customer engagement. For
businesses that sell to consumers, or B2C, one poor customer experience can be amplified and spread overnight through social
networks. Consumers expect businesses to serve them conveniently and intelligently across all touch points. Furthermore,
multichannel customers are more demanding and spend more than the average customer. Not surprisingly, businesses are looking for
efficient, scalable solutions to deliver smart multichannel customer interactions.
Traditional customer relationship management, or CRM, solutions are not designed for the multichannel world. Mostly, they see
the phone as the primary customer contact channel. Other channels like web and social are seen as secondary and are often not
designed in the solution from the start. As a result, customer experience delivered through these platforms tends to be fragmented and
inconsistent across channels. For instance, unified customer history across channels requires solution integration and user interface
patchwork.
The eGain Solution
Our solution is designed to provide clients with the following benefits:
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Build profitable long-term customer relationships. Customers are spending more time conducting business on the web and
social channels. Our solution helps businesses design brand-aligned, multichanneled customer journeys. Whether a
customer is looking to buy, ask a question, or pay a bill, our solution helps businesses provide customers personalized,
consistent responses.
Increase revenue through intelligent assistance offers and contextual promotions. In addition to strengthening customer
relationships, our solution helps businesses convert website visitors into buyers. It also enables agents to contextually up-
sell and cross-sell products in the course of customer engagements. A visitor to a website that uses eGain can be
proactively offered personalized promotional content or real-time assistance based on configurable business rules
informed by visitor behavior and history. Visitors can collaborate with a customer service agent live over the web through
click-to-Call, text and video chat and cobrowse to inquire about and buy a product. Customers calling into a service center
can be offered powerful cross-sell offers by agents using the expert reasoning capability of eGain.
Reduce operating costs through improved agent productivity and self-service automation. Our solution helps companies
provide highly effective customer service while reducing operating costs. Our intelligent routing, auto-response, tracking,
and reporting features, complemented with agent-facing knowledge tools, measurably enhance the productivity of service
agents. Our robust online self-service tools, with integrated escalation paths and sophisticated artificial intelligence, help
resolve customer inquiries without human assistance.
Reduce total cost of ownership through an open architecture, integration adapters, and scalable design. Our solution is
designed to easily integrate with business data and processes residing in legacy systems and other enterprise data sources.
By integrating “out of the box” solutions with leading business applications, our platform allows clients to leverage
existing data, content, and communication assets.
Offer rapid time to value through flexible deployment options. Our solution can be deployed in a number of ways,
including in the cloud, on-site, or as a managed service. In addition, we offer eGain Solution-as-a-Service™, or SLaaS™,
a package that enables clients to use our solution without a long-term contract or upfront implementation fee. Moreover,
our clients have the flexibility to move from one deployment model to another when they need a change.
4
Products and Services
eGain Suite
Recognized by industry analysts and trusted by leading companies worldwide, eGain 11 helps businesses engage, acquire, and
serve customers through multiple engagement channels. It offers modular, best-of-breed applications built on a one-of-a-kind
customer engagement hub platform that provides 360-degree customer context and actionable knowledge to enhance every customer
interaction. Built for rapidly implementing next-generation customer engagement strategies, eGain 11 consists of:
(cid:120) Mobile applications to engage customers through smartphones and tablets.
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Social applications to extend the company’s customer engagement strategies to social channels.
(cid:120) Web applications to transform B2C websites into interactive shopping destinations.
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Desktop applications to help traditional call centers evolve into knowledge-powered multichannel customer
engagement hubs.
(cid:120) Messaging applications provide a rich set of secure, personalized communication options.
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eGain CEH™, a multichannel customer engagement hub, or CEH, platform that provides centralized business rules
and workflows, knowledge, interactions, analytics, administration, and integrations to all applications.
eGain Connectors™ for integrating with leading CRM, content, CTI, and eCommerce systems.
Mobile Applications
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eGain Mobile™ makes mobile engagement easy. It extends the reach of an eGain deployment by enabling the business to
offer all its eGain-enabled engagement options to mobile users through existing or new phone and tablet apps on the
Android and iOS platforms. Capabilities include mobile virtual assistant, offers, chat, click-to-call, cobrowsing, self-
service, and notifications.
Social Applications
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eGain Social™ is an application for social customer service knowledge harvesting and single-sourced social publishing,
and reputation management. It enables businesses to monitor social networks such as Facebook, Twitter and blogs for
customer queries, analyze their content, analyze search results for sentiment, route them intelligently, and post responses
privately or back to the social cloud in media appropriate format.
eGain Community™ enables the creation and management of online communities or forums, community knowledge
harvesting, and single-sourced publishing. Forum posts are searchable from portals, and can be submitted as content for
the Knowledge Base Connectors allow integration with existing forums.
Web Applications
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eGain Offers™ helps businesses engage visitors on the company website and Facebook fan pages with proactive,
targeted offers. Using browsing behavior and other attributes, the solution anticipates visitor needs and proactively serves
a personalized offer. It leapfrogs existing proactive chat “point” solutions by providing coupons, promotions, surveys,
relevant content and contextual help in the form of FAQ, virtual assistant, chat, click to call, and cobrowse options.
eGain Virtual Assistant™ enables businesses to offer text and speech chat interactions with one or more virtual
assistants (chatbots). Multilingual, as well as emotionally and culturally intelligent, the eGain virtual assistants are capable
of understanding natural language. They can be deployed on websites and mobile devices and support seamless
integration with assisted chat channels.
eGain Cobrowse™ enables phone and chat reps to show customers around the website, help locate information, and
“hand-hold” them during complex, anxiety-ridden tasks such as completing forms or checking out shopping carts. It offers
true collaborative browsing without any customer download requirement. Access to web page views and actions is
controlled through user roles and business rules.
eGain Chat™ enables website visitors to conduct text and video chats with agents. It gives representatives a
comprehensive set of tools for serving customers in real-time. eGain Chat supports two-way, “follow me” web browsing
so that agents and customers can lead each other to specific web pages for faster issue resolution. The system’s powerful,
query-specific routing and workflow maximize both agent productivity and interaction quality.
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eGain ClickToCall™ provides website visitors the ability to request a callback while browsing. Callbacks can be
scheduled according to the customer’s convenience or be established in real-time.
eGain SelfService™ is a comprehensive solution supporting what we believe to be the broadest set of self-service access
options in the industry—dynamic FAQs, topic-based browsing, natural language search, guided help, virtual assistant
technology, and case tracking. eGain SelfService offers a unique combination of rich, multi-access self-service
capabilities built on a collaborative knowledge management framework within eGain OpenCEH™ Platform. This
framework makes it easy for organizations to create, maintain, and enhance common content in a distributed manner, as
well as leverage existing content from across the enterprise. The key modules of this application are:
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eGain Portals™ enables organizations to provide distinctive, productive and brand-aligned self-service
experiences. Powered by eGain Multisearch™ knowledge access technology, it brings together the power of a broad
set of knowledge access methods, federated search, process intelligence, multilingual capabilities, and flexible look
and feel—all behind a single search box—for distinctive, on-target self-service. Customers can also view frequently
asked questions, manage their own accounts, review open tickets, and review their communications with the
company within a secure, personalized environment.
eGain Guided Help™ gives customers interactive access to the company’s knowledge base, allowing them to find
answers and troubleshoot problems by themselves at their convenience. It uses patented search and reasoning
technology, coupled with natural language and advanced linguistic processing to search, suggest additional
questions, and recommend solutions.
eGain Widgets™ enable contextual access to knowledge and account information through mobile devices and web
pages.
eGain Survey™ helps contact centers, ecommerce sites, and customer portals connect with their customers in a
vital and immediate way by eliciting feedback at various points of contact. It enables them to measure and improve
the quality of service across all engagement channels, thereby maximizing customer retention.
Desktop Applications
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eGain CaseManager™ is a comprehensive and a flexible case logging system. Together with eGain Knowledge™, it
provides an integrated application for logging, tracking, and resolution as well as follow-on task management for service
fulfillment.
eGain Mail™ is an industry-leading application for processing inbound customer emails and providing mission-critical
email customer response, incorporating hundreds of best practices developed over years of serving innovative global
enterprises. Secure messaging, lifecycle audits, and real-time archival are some of the features that provide our customers
a next-generation email management platform for their enterprises. Designed to process very high volumes of email and
web form requests, eGain Mail allows companies to deliver consistent, high-quality service through flexible process
automation, optimized user interface, and powerful reports. Additional modules include:
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eGain SecureMail™ for authenticated web-based access to confidential emails. It is widely used in the financial
services sector and other regulated industries.
eGain EncryptedMail™ for encrypted email payload delivered to the customer’s mailbox (push), complementing
eGain SecureMail (invitation to secure website to share payload).
eGain Fax™ and eGain SMS™ to enable timely responses to faxes (and postal mail) and Short Message Service,
or SMS, with the same infrastructure that is used to handle emails. Optical Character Recognition, or OCR,
technology is used to process faxes and postal mail.
eGain Knowledge™ empowers contact center agents with best-practice knowledge management and is designed to
make every agent as productive and capable as the enterprise’s best agent. This application delivers fast, consistent,
and accurate answers to agents as they use the rich conversational interface while engaging customers over the
phone. eGain Knowledge uses patented search and reasoning technology coupled with natural language and
advanced linguistic processing to search, suggest additional questions, and recommend solutions. eGain Multisearch
enables simple search-based access to various types of federated content and guided help.
Messaging Applications
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eGain SecureMessaging™ enables secure and authenticated messaging between a business and its customers. It is a
secure web-based portal for customers to read confidential messages, including attachments.
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eGain Notify™ is a flexible, easy-to-use application for managing and delivering automatic reminders, alerts, and updates
at all stages of the customer journey. It is used to provide proactive customer service by sending alerts to customers
through multiple engagement channels across the web, email, SMS, voice, and fax. Designed for high-volume usage, this
application can easily scale to deliver millions of messages per day in the eGain Cloud.
Flexible Deployment Options
eGain’s deployment options, we believe, are unmatched in the industry. Our customers can choose from multiple options: on-
site, cloud, managed, and solution as a service. They can even choose a hybrid model or switch from one deployment type to another.
Cloud Operations
We serve our customers and end users from several secure data centers worldwide. Physical security features at these facilities
include 24x7 on-site security, three physical barriers and multiple access controls. The systems at these facilities are protected by
firewalls and encryption technology we utilize. Operational redundancy features include redundant power, on-site backup generators,
multiple carrier entrance facilities, and robust environmental controls and monitoring.
We employ a wide range of security features, including two-factor authentication, data encryption, encoded session
identifications and passwords. We contract with specialized security vendors to conduct regular security audits of our infrastructure.
We also employ outside vendors for 24x7 managed network security and monitoring. Every page we serve is delivered encrypted to
the end user via a Secure Socket Layer, or SSL, transaction. We also use encryption in our storage systems and backup technology.
We continuously monitor the performance of our application suite using a variety of automated tools. We designed our
infrastructure with built-in redundancy for all key components. Our network includes redundant firewalls, switches and intrusion
detection systems, and incorporates failover backup for maximum uptime. We load balance at each tier in the network infrastructure.
We also designed our application server clusters so that servers can fail without interrupting the user experience, and our database
servers are clustered for failover. We regularly back up and store customer data both on and off-site in secure locations to minimize
the risk of data loss at any facility.
Customers
We serve a worldwide customer base across a wide variety of industry sectors, including retail, telecommunications, financial
services, insurance, outsourced services, technology, utilities, government, manufacturing and consumer electronics. Our product is
sold primarily to large enterprises (over $500 million in annual revenue). For the fiscal year ended June 30, 2014, international
revenue accounted for 45% and domestic revenue for 55% of total revenue, compared to 40% and 60% respectively for fiscal year
2013 and 44% and 56% respectively for fiscal year 2012.
There were two different customers that accounted for 16% and 10% of total revenue in fiscal year 2014. Two different
customers accounted for 18% and 10% of total revenue in fiscal years 2013 and 2012, respectively.
Competition
We compete with other application software vendors including Avaya, Inc., Genesys Telecommunications, Live Person, Inc.,
and Moxie Software, Inc. In addition, we face actual or potential competition from larger software companies such as Microsoft
Corporation, Oracle Corporation, and Salesforce.com, Inc. that may attempt to sell customer engagement software to their installed
base. We also compete with internally developed applications within large enterprises. Finally, we face, or expect to face, competition
from software vendors who may develop toolsets and products that allow customers to build new applications that run on the
customers’ infrastructure or as hosted services.
We believe the principal competitive factors in our market include the following:
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proven track record of customer success;
speed and ease of implementation;
product functionality;
financial stability and viability of the vendor;
product adoption;
7
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ease of use and rates of user adoption;
low total cost of ownership and demonstrable cost-effective benefits for customers;
performance, security, scalability, flexibility and reliability of the service;
ease of integration with existing applications;
quality of customer support;
availability and quality of implementation, consulting and training services; and
vendor reputation and brand awareness.
Sales and Marketing
Sales Strategy
Our sales strategy is to pursue targeted accounts, mostly B2C enterprises, through a combination of our direct sales force and
partners. We target our sales efforts at enterprise companies. Our North American direct sales organization is based at our corporate
headquarters in Sunnyvale, California, with field sales presence throughout the United States. Internationally, we have field offices in
France, Germany, Ireland, Italy, India, the Netherlands and the United Kingdom.
The direct sales force is organized into teams that include sales representatives and sales consultants. Our direct sales force is
made up of two components, field sales and inside sales representatives. It is complemented by lead generation representatives.
We also complement our direct sales force with reseller and sales alliances. We believe we are able to leverage additional sales,
marketing and deployment capabilities through these alliances.
Marketing and Partner Strategy
Our marketing strategy is to build our brand around innovative and robust products trusted by leading enterprises. Our
marketing organization focuses on public relations, analyst relations, marketing communications and demand generation. We employ
a wide range of marketing avenues to deliver our message, including print and Internet advertising, targeted electronic and postal
mailing, email newsletters, and a variety of trade shows, seminars, webinars, and interest groups.
Our marketing group also produces sales tools, including product collateral, customer case studies, demonstrations,
presentations, and competitive analyses. In addition, the group performs market analyses and customer reviews to identify and develop
key partnership opportunities and product capabilities.
We believe that our partners help extend the breadth and depth of our product offerings, drive market penetration, and augment
our professional service capabilities. We believe these relationships are important to delivering successful, integrated products and
services to our customers, and scaling our business. Our partner portal, EcoNet™, enables us to provide comprehensive sales, support
and services information for channel partners, while enabling them to collaborate with one another through an online forum. Partner
enablement is a key focus area for our consulting and training teams too.
As of fiscal year ended June 30, 2014, there were 189 employees engaged in worldwide sales and marketing activities.
Consulting and Education
Our worldwide professional services organization provides consulting and education services designed to facilitate customer
success and build customer loyalty.
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Consulting Services. Our consulting services group offers rapid implementation services, custom solution development,
and systems integration services. Consultants work with customers to understand their specific requirements, analyze their
business needs, and implement integrated solutions. We provide these services independently or in partnership with
system integrators who have developed consulting expertise on our platform.
Education Services. Our education services group provides a comprehensive set of basic and customized training
programs to our customers and partners in addition to online tutorial modules for ongoing refresher courses. Training
programs are offered either in-person at the customer site, or at one of our worldwide training centers.
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As of fiscal year ended June 30, 2014, we had 191 professionals providing worldwide services for systems installation, solutions
development, application management, and education.
Customer Success
We offer a comprehensive collection of support services designed to rapidly respond to inquiries. Our technical support services
are available to customers worldwide under maintenance agreements. Our customer success strategy is to provide dedicated customer
support account managers for large enterprise customers. The customer success team uses eGain’s own software suite to provide
world-class service to all our customers through support centers located in California, the United Kingdom, and India.
As of fiscal year ended June 30, 2014, there were 49 employees engaged in worldwide customer support services.
Research and Development
The market for our products changes rapidly and is characterized by evolving industry standards, swift changes in customer
requirements, and frequent new product introductions and enhancements. We believe that strong product development capabilities are
essential to our strategy of maintaining technology leadership. This includes enhancing current technology, providing excellent
quality, performance, and functionality, as well as developing additional applications, and maintaining the competitiveness of our
product and service offerings. We have invested significant time and resources to set up a comprehensive software development
process that involves several functional groups at all levels within our organization and is designed to provide a framework for
defining and addressing the activities required in bringing product concepts and development projects to market successfully.
In addition, we continuously analyze market and customer requirements and evaluate technology that we believe will enhance
platform acceptance in the market. As a result of this process, we acquired Exony Limited in August 2014.
As of fiscal year ended June 30, 2014, there were 158 employees engaged in worldwide product development activities. We
spent approximately $10.0 million on research and development in fiscal year 2014, and $8.4 million and $6.1 million, respectively, in
fiscal years 2013 and 2012.
Intellectual Property
We regard our intellectual property as critical to our success. We rely on intellectual property and other laws, in addition to
confidentiality procedures and licensing arrangements, to protect the proprietary aspects of our technology and business.
We continually assess the propriety of seeking intellectual property protection for those aspects of our technology that we
believe constitute innovations providing significant competitive advantages. Future applications may or may not receive the issuance
of valid patents or registered trademarks.
We routinely require our employees, customers, and potential business partners to enter into confidentiality and nondisclosure
agreements before we will disclose any sensitive aspects of our products, technology, or business plans. In addition, we require
employees to agree to surrender to us any proprietary information, inventions or other intellectual property they generate or come to
possess while employed by us. 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, some of our license agreements with certain customers and
partners require us to place the source code for our products into escrow. These agreements typically provide that some party will have
a limited, non-exclusive right to access and use this code as authorized by the license agreement if there is a bankruptcy proceeding
instituted by or against us, or if we materially breach a contractual commitment to provide support and maintenance to the party.
Employees
As of fiscal year ended June 30, 2014, we had 681 full-time employees, of which 158 were in product development, 274 in
services and support, 189 in sales and marketing, and 60 in finance and administration.
None of our employees are covered by collective bargaining agreements. While we believe our relations with our employees are
good, our future performance depends largely upon the continued service of our key technical, sales and marketing, and senior
management personnel, none of whom are bound by employment agreements requiring service for a defined period of time.
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ITEM 1A. RISK FACTORS
The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or
that we currently deem immaterial also may affect our results of operations, cash flows and financial condition.
Our business is influenced by a range of factors that are beyond our control and that we have no comparative advantage in
forecasting. These include:
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general economic and business conditions;
currency exchange rate fluctuations;
the overall demand for enterprise software and services;
customer acceptance of cloud-based solutions;
governmental budgetary constraints or shifts in government spending priorities; and
general political developments.
The global economic climate continues to influence our business such as, a general tightening in the credit markets, lower levels
of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. These
macroeconomic developments negatively affected, and could continue to negatively affect, our business, operating results or financial
condition which, in turn, could adversely affect our stock price. A general weakening of, and related declining corporate confidence
in, the global economy or the curtailment in government or corporate spending could cause current or potential customers to reduce
their technology budgets or be unable to fund software or services purchases, which could cause customers to delay, decrease or
cancel purchases of our products and services or cause customers not to pay us or to delay paying us for previously purchased
products and services.
Our hybrid revenue model may affect our operating results.
We have a hybrid delivery model meaning that we offer our solutions on a subscription or perpetual license basis to our
customers. For perpetual license transactions, the license revenue amount is generally recognized in the quarter delivery and
acceptance of our software takes place. Whereas, for subscription transactions, the revenue is recognized ratably over the term of the
contract, which is typically one to two years. As a result, our total revenue may increase or decrease in future quarters as a result of the
timing and mix of license and subscriptions transactions. This could be exacerbated as more customers select our subscription solution
over our perpetual licensed solution; causing us to increase the amount of revenue recognized ratably over the life of the contract
therefore resulting in a decrease in our total revenue in the short-term.
Because we recognize revenue from subscriptions for our service over the term of the subscription, downturns or upturns in
new business may not be immediately reflected in our operating results.
We generally recognize subscription revenue from customers ratably over the terms of their subscription agreements, which are
typically 12 to 36 months. As a result, most of the revenue we report in each quarter is the result of subscription agreements entered into
during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter may not be reflected in our revenue
results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters. Accordingly, the effect of
significant downturns in sales and market acceptance of our service, and potential changes in our rate of renewals may not be fully
reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to rapidly increase our
revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
We cannot accurately predict subscription renewal or upgrade rates and the impact these rates may have on our future
revenue and operating results.
Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription
period, which is typically 12 to 36 months, and in fact, some customers have elected not to renew. In addition, our customers may
renew for fewer subscriptions, renew for shorter contract lengths, or renew for lower cost editions of our service. We cannot
accurately predict renewal rates given our varied customer base of enterprise and small and medium size business customers and the
number of multiyear subscription contracts. Our renewal rates may decline or fluctuate as a result of a number of factors, including
customer dissatisfaction with our service, customers’ spending levels, decreases in the number of users at our customers, pricing
changes and deteriorating general economic conditions. If our customers do not renew their subscriptions for our service or reduce the
number of paying subscriptions at the time of renewal, our revenue will decline and our business will suffer.
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Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced
editions of our service to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted
at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors,
including general economic conditions and that our customers do not react negatively to any price changes related to these additional
features and services. If our efforts to upsell to our customers are not successful and negative reaction occurs, our business may suffer.
Our lengthy sales cycles and the difficulty in predicting timing of sales or delays may impair our operating results.
The long sales cycle for our products may cause license revenue and operating results to vary significantly from period to
period. The sales cycle for our products can be six months or more and varies substantially from customer to customer. Because we
sell complex and deeply integrated solutions, it can take many months of customer education to secure sales. Because our potential
customers may evaluate our products before, if ever, executing definitive agreements, we may incur substantial expenses and spend
significant management effort in connection with the potential customer. Our multi-product offering and the increasingly complex
needs of our customers contribute to a longer and unpredictable sales cycle. Consequently, we often face difficulty predicting the
quarter in which expected sales will actually occur. This contributes to the uncertainty and fluctuations in our future operating results.
In particular, the corporate decision-making and approval process of our customers and potential customers has become more
complicated. This has caused our average sales cycle to further increase and, in some cases, has prevented the closure of sales that we
believed were likely to close. In addition, historically our license sales have comprised a relatively small number of high value
transactions; consequently, we may miss our revenue forecasts and may incur expenses that are not offset by corresponding revenue
from the delay in even one transaction.
We may need additional capital, and raising such additional capital may be difficult or impossible and will likely significantly
dilute existing stockholders.
We believe that existing capital resources will enable us to maintain current and planned operations for the next 12 months.
However, our working capital requirements in the foreseeable future are subject to numerous risks and will depend on a variety of
factors, in particular, whether we maintain or exceed the level of revenue achieved in fiscal year 2015 and that customers continue to
pay on a timely basis. We may need to secure additional financing due to unforeseen or unanticipated market conditions. We may try
to raise additional funds through public or private financings, strategic relationships, or other arrangements. Such financing may be
difficult to obtain on terms acceptable to us, if at all. If we succeed in raising additional funds through the issuance of equity or
convertible securities, then the issuance could result in substantial dilution to existing stockholders. If we raise additional funds
through the issuance of debt securities or preferred stock, these new securities would have rights, preferences, and privileges senior to
those of the holders of our common stock. The terms of these securities could impose restrictions on our operations.
Failure to comply with covenants in our loan facility may restrict our access to credit which could negatively impact our
operations
There are a number of affirmative and negative covenants under the Comerica Credit Facility, with the primary covenants being
that we are required to maintain a minimum cash balance of seventy percent (70%) of our consolidated cash at Comerica and we must
maintain a liquidity to debt ratio of at least 2.00 to 1.00. If we fail to comply with our covenants, Comerica can declare any
outstanding amounts immediately due and payable and stop extending credit to us. If our access to credit were restricted in this way,
our operations would suffer and negatively impact our business.
Because we depend on a relatively small number of customers for a substantial portion of our revenue, the loss of any of these
customers or our failure to attract new significant customers could adversely impact our revenue and harm our business
We have in the past and expect in the future to derive a substantial portion of our revenue from sales to a relatively small
number of customers. The composition of these customers has varied in the past, and we expect that it will continue to vary over time.
As a result, the loss of any significant customer or a decline in business with any significant customer would materially and adversely
affect our financial condition and results of operations.
Our revenue and operating expenses are unpredictable and may fluctuate, which may harm our operating results and
financial condition.
Due to the emerging nature of the multichannel contact center market and other similar factors, our revenue and operating
results may fluctuate from quarter to quarter. Our revenue could fall short of expectations if we experience delays or cancellations of
even a small number of orders. It is possible that our operating results in some quarters will be below the expectations of financial
analysts or investors. In this event, the market price of our common stock is also likely to decline.
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A number of factors are likely to cause fluctuations in our operating results, including, but not limited to, the following:
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demand for our software and budget and spending decisions by information technology departments of our customers;
the mix of subscription and perpetual license transactions;
seasonal trends in technology purchases;
our ability to attract and retain customers;
product offerings and pricing of our competitors; and
litigation relating to our intellectual proprietary rights.
In addition, we base our expense levels in part on expectations regarding future revenue levels. In the short term, expenses, such
as employee compensation and rent, are relatively fixed. If revenue for a particular quarter is below expectations, we may be unable to
reduce our operating expenses proportionately for that quarter. Accordingly, such a revenue shortfall would have a disproportionate
effect on expected operating results for that quarter. For this reason, period-to-period comparisons of our operating results may also
not be a good indication of our future performance.
As we acquire companies or technologies, we may not realize the expected business benefits, the acquisitions could prove
difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operations.
As part of our business strategy, we periodically make investments in, or acquisitions of, complementary businesses, joint
ventures, services and technologies and intellectual property rights, and we expect that we will continue to make such investments and
acquisitions in the future. In August 2014, we acquired Exony Ltd. Acquisitions and investments involve numerous risks, including:
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the potential failure to achieve the expected benefits of the combination or acquisition;
difficulties in and the cost of integrating operations, technologies, services and personnel;
diversion of financial and managerial resources from existing operations;
risk of entering new markets in which we have little or no experience or where competitors may have stronger market
positions;
potential write-offs of acquired assets or investments, and potential financial and credit risks associated with acquired
customers;
potential loss of key employees;
inability to generate sufficient revenue to offset acquisition or investment costs;
the inability to maintain relationships with customers and partners of the acquired business;
the difficulty of transitioning the acquired technology onto our existing platforms and maintaining the security standards
consistent with our other services for such technology;
potential unknown liabilities associated with the acquired businesses;
unanticipated expenses related to acquired technology and its integration into existing technology;
negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired
intangible assets, fixed assets and deferred compensation, and the loss of acquired deferred revenue and unbilled deferred
revenue;
delays in customer purchases due to uncertainty related to any acquisition;
the need to implement controls, procedures and policies at the acquired company;
challenges caused by distance, language and cultural differences;
in the case of foreign acquisitions, the challenges associated with integrating operations across different cultures and
languages and any currency and regulatory risks associated with specific countries; and
the tax effects of any such acquisitions.
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In addition, if we finance acquisitions by issuing equity or convertible or other debt securities or loans, our existing stockholders
may be diluted, or we could face constraints related to the terms of repayment obligations related to the incurrence of indebtedness
which could affect the market price of our common stock. Further, if we fail to properly evaluate and execute acquisitions or
investments, our business operations and prospects may be seriously harmed.
We must compete successfully in our market segment.
The market for customer engagement software is intensely competitive. Other than product innovation and existing customer
relationships, there are no substantial barriers to entry in this market, and established or new entities may enter this market in the
future. While software internally developed by enterprises represents indirect competition, we also compete directly with packaged
application software vendors, including Avaya, Inc., Genesys Telecommunications, LivePerson, Inc., and Moxie Software, Inc. In
addition, we face actual or potential competition from larger software companies such as Microsoft Corporation, Oracle Corporation,
Salesforce.com, Inc. and similar companies that may attempt to sell customer engagement software to their installed base.
We believe competition will continue to be fierce as current competitors increase the sophistication of their offerings and as new
participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases,
broader brand recognition, and significantly greater financial, marketing and other resources. With more established and better-
financed competitors, these companies 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.
If we fail to expand and improve our sales performance and marketing activities, we may be unable to grow our business,
negatively impacting our operating results and financial condition.
Expansion and growth of our business is dependent on our ability to expand our sales force and on the ability of our sales force
to increase sales. If we are not able to effectively develop and maintain awareness of our products in a cost-effective manner, we may
not achieve widespread acceptance of our existing and future products. This may result in a failure to expand and attract new
customers and enhance relationships with existing customers. This may impede our efforts to improve operations in other areas of the
Company and may result in declines in the market price of our common stock.
Due to the complexity of our customer engagement hub platform and related products and services, we must utilize highly
trained sales personnel to educate prospective customers regarding the use and benefits of our products and services as well as provide
effective customer support. If we have turnover in our sales and marketing teams, we may not be able to successfully compete with
those of our competitors.
Our failure to develop and expand strategic and third party distribution channels would impede our revenue growth.
Our success and future growth depends in part upon the skills, experience, performance and continued service of our distribution
partners, including software and hardware vendors and resellers. We engage with distribution partners in a number of ways, including
assisting us to identify prospective customers, to distribute our products in geographies where we do not have a physical presence and
to distribute our products where they are considered complementary to other third party products distributed by the partner. We
believe that our future success depends in part upon our ability to develop and expand strategic, long term and profitable partnerships
and reseller relationships. If we are unable to do so, or if any existing or future distribution partners fail to successfully market, resell,
implement or support our products for their customers, or if distribution partners represent multiple providers and devote greater
resources to market, resell, implement and support competing products and services, our future revenue growth could be impeded. Our
failure to develop and expand relationships with systems integrators could harm our business.
We sometimes rely on system integrators to recommend our products to their customers and to install and support our products
for their customers. We likewise depend on broad market acceptance by these system integrators of our product and service offerings.
Our agreements generally do not prohibit competitive offerings and system 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 their customers. To the extent we devote
resources to these relationships and the partnerships do not proceed as anticipated or provide revenue or other results as anticipated,
our business may be harmed. Once partnerships are forged, there can be no guarantee that such relationships will be renewed in the
future or available on acceptable terms. If we lose strategic third party relationships, fail to renew or develop new relationships, or fail
to fully exploit revenue opportunities within such relationships, our results of operations and future growth may suffer.
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Our international operations involve various risks.
We derived 45% of our revenue from international sales for the fiscal year 2014 compared to 40% for the fiscal year 2013, and
44% for fiscal year 2012. Including those discussed above, our international sales operations are subject to a number of specific risks,
such as:
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general economic conditions in each country or region in which we do or plan to do business;
foreign currency fluctuations and imposition of exchange controls;
expenses associated with complying with differing technology standards and language translation issues;
difficulty and costs in staffing and managing our international operations;
difficulties in collecting accounts receivable and longer collection periods;
health or similar issues, such as a pandemic or epidemic;
various trade restrictions and tax consequences;
hostilities in various parts of the world; and
reduced intellectual property protections in some countries.
As of June 30, 2014, approximately 49% of our workforce was employed in India. Of these employees, 33% are allocated to
research and development. Although the movement of certain operations internationally was principally motivated by cost cutting, the
continued management of these remote operations requires significant management attention and financial resources that could
adversely affect our operating performance. In addition, with the significant increase in the numbers of foreign businesses that have
established operations in India, the competition to attract and retain employees there has increased significantly. As a result of the
increased competition for skilled workers, we experienced increased compensation costs and expect these costs to increase in the
future. Our reliance on our workforce in India makes us particularly susceptible to disruptions in the business environment in that
region. In particular, sophisticated telecommunications links, high-speed data communications with other eGain offices and
customers, and overall consistency and stability of our business infrastructure are vital to our day-to-day operations, and any
impairment of such infrastructure will cause our financial condition and results to suffer. The maintenance of stable political relations
between the United States, European Union and India are also of great importance to our operations.
Any of these risks could have a significant impact on our product development, customer support, or professional services. To
the extent the benefit of maintaining these operations abroad does not exceed the expense of establishing and maintaining such
activities, our operating results and financial condition will suffer.
Difficulties in implementing our products could harm our revenue and margins.
We generally recognize license revenue from a customer sale when persuasive evidence of an arrangement exists, the product
has been delivered, the arrangement does not involve significant customization of the software, the license fee is fixed or determinable
and collection of the fee is probable. If an arrangement requires significant customization or implementation services from us,
recognition of the associated license and service revenue could be delayed. The timing of the commencement and completion of these
services is subject to factors that may be beyond our control, as this process requires access to the customer’s facilities and
coordination with the customer’s personnel after delivery of the software. In addition, customers could cancel or delay product
implementations. Implementation typically involves working with sophisticated software, computing and communications systems. If
we experience difficulties with implementation or do not meet project milestones in a timely manner, we could be obligated to devote
more customer support, engineering and other resources to a particular project. Some customers may also require us to develop
customized features or capabilities. If new or existing customers cancel or have difficulty deploying our products or require significant
amounts of our professional services, support, or customized features, revenue recognition could be cancelled or further delayed and
our costs could increase, causing increased variability in our operating results.
Our reserves may be insufficient to cover receivables we are unable to collect.
We assume a certain level of credit risk with our customers in order to do business. Conditions affecting any of our customers
could cause them to become unable or unwilling to pay us in a timely manner, or at all, for products or services we have already
provided them. In the past, we have experienced collection delays from certain customers, and we cannot predict whether we will
continue to experience similar or more severe delays in the future. Although we have established reserves to cover losses due to delays
or inability to pay, there can be no assurance that such reserves will be sufficient to cover our losses. If losses due to delays or inability
to pay are greater than our reserves, it could harm our business, operating results and financial condition.
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We may be subject to legal liability and/or negative publicity for the services provided to consumers via our technology
platforms.
Our technology platforms enable representatives of our customers as well as individual service providers to communicate with
consumers and other persons seeking information or advice on the Internet. The law relating to the liability of online platform
providers such as us for the activities of users of their online platforms is often challenged in the U.S. and internationally. We may be
unable to prevent users of our technology platforms from providing negligent, unlawful or inappropriate advice, information or
content via our technology platforms, or from behaving in an unlawful manner, and we may be subject to allegations of civil or
criminal liability for negligent, fraudulent, unlawful or inappropriate activities carried out by users of our technology platforms.
Claims could be made against online services companies under both U.S. and foreign law such as fraud, defamation, libel,
invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the
materials disseminated by users of our technology platforms. In addition, domestic and foreign legislation has been proposed that
could prohibit or impose liability for the transmission over the Internet of certain types of information. Our defense of any of these
actions could be costly and involve significant time and attention of our management and other resources.
The Digital Millennium Copyright Act, or DMCA, is intended, among other things, to reduce the liability of online service
providers for listing or linking to third party web properties that include materials that infringe copyrights or rights of others.
Additionally, portions of The Communications Decency Act, or CDA, are intended to provide statutory protections to online service
providers who distribute third party content. A safe harbor for copyright infringement is also available under the DMCA to certain
online service providers that provide specific services, if the providers take certain affirmative steps as set forth in the DMCA.
Important questions regarding the safe harbor under the DMCA and the CDA have yet to be litigated, and we cannot guarantee that we
will meet the safe harbor requirements of the DMCA or of the CDA. If we are not covered by a safe harbor, for any reason, we could
be exposed to claims, which could be costly and time-consuming to defend.
Unplanned system interruptions and capacity constraints and failure to effect efficient transmission of customer
communications and data over the Internet could harm our business and reputation.
Our customers have in the past experienced some interruptions with eGain cloud operations. We believe that these interruptions
will continue to occur from time to time. These interruptions could be due to hardware and operating system failures. 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 operations or reduce our ability to provide remote management services. We expect to experience occasional temporary
capacity constraints due to sharply increased traffic or other Internet-wide disruptions, 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,
our business and reputation could be seriously harmed.
The growth in the use of the Internet has caused interruptions and delays in accessing the Internet and transmitting data over the
Internet. Interruptions also occur due to systems burdens brought on by unsolicited bulk email or “Spam,” malicious service attacks
and hacking into operating systems, viruses, worms and a “Trojan” horse, the proliferation of which is beyond our control and may
seriously impact our and our customers’ businesses.
Because we provide Cloud-based software, interruptions or delays in Internet transmissions will harm our customers’ ability to
receive and respond to online interactions. Therefore, our market depends on ongoing improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion.
Our success largely depends on the efficient and uninterrupted operation of our computer and communications hardware and
network systems. A significant amount of our computer and communications systems are located in Sunnyvale, California. Due to our
location, our systems and operations are vulnerable to damage or interruption from fire, earthquake, power loss, telecommunications
failure and similar events.
We do maintain a business continuity plan for our customers in the event of an outage. We maintain other co-locations for the
purposes of disaster recovery as well as maintaining back up’s of our customer’s information. We provide premium disaster recovery
and standard disaster recovery to our customers. If a customer opts not to pay for premium disaster recovery, we will only assure that
their data is available within 72 hours. This delay could cause severe disruptions to our customers’s customers and may result in our
customers termination of our solutions. Our premium disaster recovery service provides for an alternative data center and a return to
operations within one business day.
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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 refunds and service credits to customers.
Any unplanned interruption of services may harm our ability to attract and retain customers.
If our security measures are breached and unauthorized access is obtained to a customer’s data or our data or our IT systems,
our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant
legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers’ proprietary information, and security breaches could expose us
to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party
action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise and result in someone
obtaining unauthorized access to our customers’ data or our data, including our intellectual property and other confidential business
information, or our IT systems. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing
sensitive information such as user names, passwords or other information in order to gain access to our customers’ data or our data or
IT systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are
not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative
measures. In addition, our customers may authorize third party access to their customer data located in our cloud environment.
Because we do not control the transmissions between customer authorized third parties, or the processing of such data by customer
authorized third parties, we cannot ensure the integrity or security of such transmissions or processing. Any security breach could
result in a loss of confidence in the security of our service, damage our reputation, negatively impact our future sales, disrupt our
business and lead to legal liability.
The terms we agree to in our Service Level Agreements or other contracts may result in increased costs or liabilities, which
would in turn affect our results of operations.
Our Service Level Agreement (SLA) includes indemnification provisions and provides for service credits for system
unavailability, and loss, damage or costs resulting from use of our system. If we were required to provide any of these in a material
way, our results of operations would suffer.
We have been and may in the future be sued by third parties for various claims including alleged infringement of proprietary
rights.
We are involved in various legal matters arising from the normal course of business activities. These may include claims, suits,
and other proceedings involving alleged infringement of third-party patents and other intellectual property rights, and commercial,
labor and employment, and other matters.
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and
by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past
and may receive in the future communications from third parties claiming that we or our customers have infringed the intellectual
property rights of others. In addition we have been, and may in the future be, sued by third parties for alleged infringement of their
claimed proprietary rights. Our technologies and those of our customers may be subject to injunction if they are found to infringe the
rights of a third party or we may be required to pay damages, or both. Many of our agreements require us to indemnify our customers for
third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim.
The outcome of any litigation, regardless of its merits, is inherently uncertain. Any claims and lawsuits, and the disposition of
such claims and lawsuits, could be time-consuming and expensive to resolve, divert management attention from executing our
business plan, lead to attempts on the part of other parties to pursue similar claims and, in the case of intellectual property claims,
require us to change our technology, change our business practices or pay monetary damages, or enter into short- or long-term royalty
or licensing agreements.
Any adverse determination related to intellectual property claims or other litigation could prevent us from offering our service to
others, could be material to our financial condition or cash flows, or both, or could otherwise adversely affect our operating results. In
addition, depending on the nature and timing of any such dispute, a resolution of a legal matter could materially affect our future
results of operation or cash flows or both.
16
We rely on trademark, copyright, trade secret laws, contractual restrictions and patent rights to protect our intellectual
property and proprietary rights and if these rights are impaired, then our ability to generate revenue will be harmed.
If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology, and our
business might be harmed. In addition, defending our intellectual property rights might entail significant expense. Any of our
trademarks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation.
While we have some U.S. patents and pending U.S. patent applications, we may be unable to obtain patent protection for the
technology covered in our patent applications. In addition, our existing patents and any patents issued in the future may not provide us
with competitive advantages, or may be successfully challenged by third parties. Furthermore, legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade
secret protection may not be available to us in every country in which our service is available. The laws of some foreign countries may
not be as protective of intellectual property rights as those in the U.S., and mechanisms for enforcement of intellectual property rights
may be inadequate. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or
misappropriating our intellectual property.
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate
claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights.
Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical
and management personnel.
Our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis would harm
our business.
Our products may infringe issued patents that may relate to our products because 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 claims from time to time in the ordinary course of our business, including claims of alleged
infringement of the patents and other intellectual property rights of third parties. Intellectual property litigation is expensive, 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.
Unknown software defects could disrupt our products and services and problems arising from our vendors’ products or
services could disrupt operations, 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 or errors in translation or integration, particularly when first introduced or when new
versions are released or localized for international markets. 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 and
we can give no assurance that our products and services will not experience such defects in the future. Furthermore, our customers
generally use our products together with products from other companies. As a result, when problems occur in the integration or
network, it may be difficult to identify the source of the problem. Even when our products do not cause these problems, these
problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from product
development efforts and cause significant customer relations problems. These defects or problems 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.
Our stock price has demonstrated volatility and continued market conditions may cause declines or fluctuations.
The price at which our common stock trades has been and will likely continue to be highly volatile and show wide fluctuations
due to factors such as the following:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
concerns related to liquidity of our stock;
actual or anticipated fluctuations in our operating results, our ability to meet announced or anticipated profitability goals
and changes in or failure to meet securities analysts’ expectations;
announcements of technological innovations and/or the introduction of new services by us or our competitors;
developments with respect to intellectual property rights and litigation, regulatory scrutiny and new legislation;
17
(cid:120)
(cid:120)
conditions and trends in the Internet and other technology industries; and
general market and economic conditions.
Furthermore, the stock market has recently and in the past experienced significant price and volume fluctuations that have
affected the market prices for the common stock of technology companies, regardless of the specific operating performance of the
affected company. These broad market fluctuations may cause the market price of our common stock to decline.
Our insiders who are significant stockholders may control the election of our board and may have interests that conflict with
those of other stockholders.
Our directors and executive officers, together with their affiliates and members of their immediate families, beneficially owned,
in the aggregate, approximately 41% of our outstanding capital stock as of our record date, September 9, 2014. As a result, acting
together, this group has the ability to exercise significant control over most matters requiring our stockholders’ approval, including the
election and removal of directors and significant corporate transactions.
If we are unable to hire and retain key personnel, our business and results of operations would be negatively affected.
Our success will also depend in large part on the skills, experience and performance of our senior management, engineering,
sales, marketing and other key personnel. 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, could harm our business. Additionally, an increase in attrition in the
Indian workforce on which we rely for research and development would have significant negative effects on us and our results of
operations. If we cannot hire and retain qualified personnel, our ability to expand our business would be impaired and our results of
operations would suffer.
Privacy concerns and laws, evolving regulation of cloud computing, cross-border data transfer restrictions and other domestic
or foreign regulations may limit the use and adoption of our solutions and adversely affect our business.
Regulation related to the provision of services on the Internet is increasing, as federal, state and foreign governments continue to
adopt new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information. In
some cases foreign data privacy laws and regulations, such as the European Union’s Data Protection Directive, and the country-
specific regulations that implement that directive, also govern the processing of personal information. Further, laws are increasingly
aimed at the use of personal information for marketing purposes, such as the European Union’s e-Privacy Directive, and the country-
specific regulations that implement that directive. Such laws and regulations are subject to differing interpretations and may be
inconsistent among jurisdictions. These and other requirements could reduce demand for our solutions or restrict our ability to store
and process data or, in some cases, impact our ability to offer our services and solutions in certain locations.
In addition to government activity, privacy advocacy and other industry groups have established or may establish new self-
regulatory standards that may place additional burdens on us. Our customers expect us to meet voluntary certification or other
standards established by third parties, such as TRUSTe. If we are unable to maintain these certifications or meet these standards, it
could adversely affect our ability to provide our solutions to certain customers and could harm our business.
The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of
our service and reduce overall demand for it, or lead to significant fines, penalties or liabilities for any noncompliance.
Furthermore, concerns regarding data privacy may cause our customers’ customers to resist providing the data necessary to
allow our customers to use our service effectively. Even the perception that the privacy of personal information is not satisfactorily
protected or does not meet regulatory requirements could inhibit sales of our products or services, and could limit adoption of our
subscription solution.
18
Industry-specific regulation is evolving and unfavorable industry-specific laws, regulations or interpretive positions could
harm our business.
Our customers and potential customers do business in a variety of industries, including financial services, the public sector,
healthcare and telecommunications. Regulators in certain industries have adopted and may in the future adopt regulations or
interpretive positions regarding the use of cloud computing and other outsourced services. The costs of compliance with, and other
burdens imposed by, industry-specific laws, regulations and interpretive positions may limit customers’ use and adoption of our
services and reduce overall demand for our services. For example, some financial services regulators have imposed guidelines for use
of cloud computing services that mandate specific controls or require financial services enterprises to obtain regulatory approval prior
to outsourcing certain functions. If we are unable to comply with these guidelines or controls, or if our customers are unable to obtain
regulatory approval to use our service where required, our business may be harmed. In addition, an inability to satisfy the standards of
certain voluntary third-party certification bodies that our customers may expect, such as an attestation of compliance with the Payment
Card Industry (PCI) Data Security Standards, may have an adverse impact on our business. If in the future we are unable to achieve or
maintain these industry-specific certifications or other requirements or standards relevant to our customers, it may harm our business.
In some cases, industry-specific laws, regulations or interpretive positions may also apply directly to us as a service provider.
Any failure or perceived failure by us to comply with such requirements could have an adverse impact on our business.
We may need to license third-party technologies and may be unable to do so on commercially reasonable terms.
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 products or services. Third-party licenses may
expose us to increased risks, including risks associated with the integration of new technology, the diversion of resources from the
development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset
associated acquisition and maintenance costs. Our inability to obtain and successfully integrate 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.
Changes to current accounting policies could have a significant effect on our reported financial results or the way in which we
conduct our business.
Generally accepted accounting principles and the related accounting pronouncements, implementation guidelines and
interpretations for some of our significant accounting policies are highly complex and require subjective judgments and assumptions.
Some of our more significant accounting policies that could be affected by changes in the accounting rules and the related
implementation guidelines and interpretations include:
(cid:120)
(cid:120)
(cid:120)
recognition of revenue;
contingencies and litigation; and
accounting for income taxes.
Changes in these or other rules, or scrutiny of our current accounting practices, or a determination that our judgments or
assumptions in the application of these accounting principles were incorrect, could have a significant adverse effect on our reported
operating results or the way in which we conduct our business.
We depend on broad market acceptance of our applications and of our business model.
We depend on the widespread acceptance and use of our applications as an effective solution for businesses seeking to manage
high volumes of customer interactions across multiple channels, including Web, phone, email, print and in-person. While we believe
the potential to be very large, we cannot accurately estimate the size or growth rate of the potential market for such product and
service offerings generally, and we do not know whether our products and services in particular will achieve broad market acceptance.
The market for customer engagement software is 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 our applications fails to grow or grows more slowly than we currently anticipate, our business will be
seriously harmed.
19
Furthermore, our business model is premised on business assumptions that are still evolving. Our business model assumes that
both customers and companies will increasingly elect to communicate via multiple channels, as well as demand integration of the
online channels into the traditional telephone-based call center. Our business model also assumes that many companies recognize the
benefits of a hosted delivery model and will seek to have their customer engagement software applications hosted by us. If any of
these assumptions is incorrect or if customers and companies do not adopt digital technology in a timely manner, our business will be
seriously harmed and our stock price will decline.
We may be unable to respond to the rapid technological change and changing customer preferences in the online sales,
marketing, customer service, and/or online consumer services industries and this may harm our business.
If we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions
in the online sales, marketing, customer service and/or e-commerce industry or our customers’ or Internet users’ requirements or
preferences, our business, results of operations and financial condition would be materially and adversely affected. Business on the
Internet is characterized by rapid technological change. In addition, the market for online sales, marketing, customer service and
expert advice solutions is relatively new. Sudden changes in customer and Internet user requirements and preferences, frequent new
product and service introductions embodying new technologies, such as broadband communications, and the emergence of new
industry standards and practices such as but not limited to security standards could render the LivePerson services and our proprietary
technology and systems obsolete. The rapid evolution of these products and services will require that we continually improve the
performance, features and reliability of our services. Our success will depend, in part, on our ability to:
(cid:120)
(cid:120)
(cid:120)
enhance the features and performance of our services;
develop and offer new services that are valuable to companies doing business online as well as Internet users; and
respond to technological advances and emerging industry standards and practices in a cost-effective and timely manner.
If any of our new services, including upgrades to our current services, do not meet our customers’ or Internet users’
expectations, our business may be harmed. Updating our technology may require significant additional capital expenditures and could
materially and adversely affect our business, results of operations and financial condition.
If new services require us to grow rapidly, this could place a significant strain on our managerial, operational, technical and
financial resources. In order to manage our growth, we could be required to implement new or upgraded operating and financial
systems, procedures and controls. Our failure to expand our operations in an efficient manner could cause our expenses to grow, our
revenue to decline or grow more slowly than expected and could otherwise have a material adverse effect on our business, results of
operations and financial condition
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 we believe may complement our current business or enhance our
technological capabilities. Integrating any newly acquired businesses or their technologies or products may be expensive and time-
consuming, and may not result in benefits to our business. 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, if at all, and, in the
case of equity financings, may result in dilution to our existing stockholders. We may not be able to operate acquired businesses
profitably. If we are unable to integrate newly acquired entities or technologies effectively, our operating results could suffer. Future
acquisitions by us 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
20
PROPERTIES
ITEM 2.
We lease all facilities used in our business. The following table summarizes our principal properties:
Location
Sunnyvale, California
Pune, India
Noida, India
Slough, England
Principal Use
Corporate Headquarters
Corporate Offices
Corporate Offices
Corporate Headquarters
Approximate Square
Footage
20,640
33,262
11,755
14,173
Lease Expiration
Date
2022
2017
2018
2016
ITEM 3.
LEGAL PROCEEDINGS
On May 20, 2013, we filed suit against Pragmatus Telecom, LLC (“Pragmatus”) in the United States District of Delaware
seeking a declaratory judgment that our products and services do not infringe directly or indirectly three patents purportedly owned by
Pragmatus and that the claims of the Pragmatus patents are invalid. Pragmatus previously asserted these patents against certain of our
customers. Discovery continues and the matter is currently pending.
On May 17, 2013, we filed suit against Lodsys Group, LLC (“Lodsys”) in the United States District Court for the Eastern
District of Texas seeking a declaratory judgment that our products and services do not infringe directly or indirectly two patents
purportedly owned by Lodsys and that the claims of the Lodsys patents are invalid. Lodsys previously asserted these patents against
certain of our customers. The matter was settled on December 18, 2013. We entered into a settlement agreement which among other
items provides a license to the Lodsys patents.
In the ordinary course of business, we are involved in various legal proceedings and claims related to alleged infringement of
third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour,
and other claims. We have been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their
proprietary rights, including patent infringement.
We evaluate all claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, settlement or
litigation potential and the expected effect on us. Our technologies may be subject to injunction if they are found to infringe the rights
of a third party. In addition, our agreements require us to indemnify our customers for third-party intellectual property infringement
claims, which could increase the cost to us of an adverse ruling on such a claim.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The following table sets forth, for the periods indicated, high and low bid prices for eGain’s common stock as reported by the
NASDAQ Stock Market LLC.
Year Ended June 30, 2014
High
Low
First Quarter .................................................................................... $
Second Quarter ............................................................................... $
Third Quarter .................................................................................. $
Fourth Quarter................................................................................. $
Year Ended June 30, 2013
First Quarter .................................................................................... $
Second Quarter ............................................................................... $
Third Quarter .................................................................................. $
Fourth Quarter................................................................................. $
15.70 (cid:3)$
15.75 (cid:3)$
11.04 (cid:3)$
7.49 (cid:3)$
(cid:3)(cid:3) (cid:3)(cid:3)
5.47 $
4.87 $
9.06 $
9.82 $
9.31
9.89
6.95
5.75
4.24
3.72
4.20
7.32
(b) Holders
As of September 9, 2014, there were approximately 233 stockholders of record. This number does not include stockholders
whose shares are held in trust by other entities. We estimate that there were approximately 3,700 beneficial stockholders of our
common stock as of September 9, 2014.
(c) Dividends
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain all
available funds for use in the operation of our business and do not intend to pay any cash dividends in the foreseeable future.
(d) Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of June 30, 2014:
Number of securities
to be issued upon
exercise
of outstanding options
and rights
(a)
Weighted-average
exercise price of
outstanding options
and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities
reflected in column (a)
(c)
Plan Category
Equity compensation plans approved by
security holders
1998 Stock Plan ..............................................
2005 Stock Incentive Plan ..............................
91,568 $
1,632,435 $
Equity compensation plans not approved
by security holders
2000 Non-Management Stock Option Plan ....
2005 Management Stock Option Plan ............
Total ..........................................................
21,180 $
537,207 $
2,282,390 $
0.66
4.96
0.68
2.92
4.27
—
200,624
—
352,481
553,105
22
Equity Compensation Plans Not Approved By Security Holders
2000 Non-Management Stock Option Plan
In July 2000, our board of directors adopted the 2000 Non-Management Stock Option Plan, which provides for the grant of non-
statutory stock options and stock purchase rights to employees of eGain. A total of 200,000 shares of common stock were reserved for
issuance under the 2000 Non-Management Stock Option Plan. This plan expired in July 2010 and there are no further options
available to grant under the 2000 Plan.
2005 Management Stock Option Plan
In May 2005, our board of directors adopted the 2005 Management Stock Option Plan, or the 2005 Management Plan, pursuant
to which the Compensation Committee may grant non-qualified stock options to purchase up to 962,400 shares of eGain common
stock, at an exercise price of not less than 100% of the fair market value of such common stock, to directors, officers and key
employees of the Company and its subsidiaries. In both November 2007 and September 2011, our board of directors approved an
increase of 500,000 shares for issuance under the 2005 Management Plan. Options granted under the 2005 Management Plan are
subject to vesting as determined by the Compensation Committee. The options are exercisable for up to ten years from the date of
grant.
(e) Issuer Repurchases of Equity Securities
On September 14, 2009, we announced that our board of directors approved a repurchase program under which we may
purchase up to 1,000,000 shares of our common stock. The duration of the repurchase program is open-ended. Under the program, we
purchase shares of common stock from time to time through the open market and privately negotiated transactions at prices deemed
appropriate by management. The repurchase is funded by cash on hand. There were no shares repurchased during fiscal years 2014
and 2013.
23
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with the information under “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements, the related notes
and the accompanying independent registered public accounting firm’s report, which are included in “Item 8. Financial Statements
and Supplementary Data.”
(cid:3)
(cid:3)
Revenue
Subscription and support .................................................. $
License ..............................................................................
Professional services .........................................................
Total revenue ...............................................................
Cost of subscription and support ......................................
Cost of license ..................................................................
Cost of professional services ............................................
Total cost of revenue..............................................
Gross profit ............................................................
Operating Expenses
Research and development ...............................................
Sales and marketing ..........................................................
General and administrative ...............................................
Total operating expenses .............................................
Income / (loss) from operations .............................................
Interest expense, net ...............................................................
Other income / (expense), net ................................................
Income / (loss) before income tax provision ..........................
Income tax provision ..............................................................
Net income / (loss) ................................................................. $
Per share information
Basic net income / (loss) per common share ................... $
Diluted net income / (loss) per common share ................ $
Weighted average shares used in computing basic
net income / (loss) per common share ..........................
Weighted average shares used in computing diluted
net income / (loss) per common share ..........................
Below is a summary of stock - based compensation
included in the costs and expenses above:
2014
40,477 $
14,800
14,985
70,262
8,518
104
14,840
23,462
46,800
9,963
33,367
7,529
50,859
(4,059)
(181)
(415)
(4,655)
(591)
(5,246) $
Year ended June 30,
2012
(in thousands, except per share information)
2011
2013
32,281 $
12,853
13,755
58,889
5,495
151
12,360
18,006
40,883
8,419
24,434
6,787
39,640
1,243
(483)
303
1,063
(379)
684 $
(cid:3) (cid:3) (cid:3) (cid:3)
23,594 $
11,067
8,703
43,364
5,363
(39 )
8,112
13,436
29,928
6,132
20,086
5,743
31,961
(2,033 )
(722 )
(677 )
(3,432 )
(390 )
(3,822 ) $
20,040 $
17,371
6,654
44,065
5,273
34
5,609
10,916
33,149
5,551
14,071
3,974
23,596
9,553
(1,230)
245
8,568
(196)
8,372 $
2010
16,617
7,389
5,871
29,877
4,492
168
5,048
9,708
20,169
5,510
10,184
3,211
18,905
1,264
(1,123)
(67)
74
(159)
(85)
(0.21) $
(0.21) $
0.03 $
0.03 $
(0.16 ) $
(0.16 ) $
0.37 $
0.34 $
(0.00)
(0.00)
25,353
24,780
24,329
22,709
22,180
25,353
26,089
24,329
24,289
22,180
Cost of revenues .............................................................. $
Research and development .............................................. $
Sales and marketing ......................................................... $
General and administrative .............................................. $
280 $
386 $
464 $
397 $
121 $
261 $
360 $
339 $
(cid:3)
(cid:3)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments
(including restricted cash) .................................................. $
Working capital ..................................................................... $
Total assets ............................................................................ $
Deferred revenue ................................................................... $
Long-term debt ...................................................................... $
2014
2013
(cid:3) (cid:3) (cid:3) (cid:3)
77 $
180 $
274 $
325 $
June 30,
2012
(cid:3) (cid:3) (cid:3) (cid:3)
32 $
52 $
46 $
88 $
35
78
49
82
2011
2010
8,815 $
(1,885) $
32,647 $
13,713 $
4,208 $
17,235 $
2,021 $
43,536 $
19,736 $
2,000 $
10,946 $
2,860 $
27,943 $
8,083 $
7,230 $
13,096 $
4,251 $
28,727 $
5,824 $
3,333 $
5,733
(490)
15,958
5,103
8,752
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of eGain’s financial condition and results of operations should be read together with the
consolidated financial statements and related notes in this Annual Report on Form 10-K. This discussion may contain forward-
looking statements based upon current expectations that involve risks and uncertainties. These risks and uncertainties may cause
actual results to differ materially from those discussed in the forward-looking statements.
Overview
eGain was incorporated in Delaware in September 1997. We are a leading provider of cloud-based and on-site customer
engagement solutions. For over a decade, our solutions have helped improve customer experience, grow sales, and optimize service
processes across the web, social, and phone channels. Hundreds of global enterprises rely on us to transform fragmented sales
engagement and customer service operations into unified customer engagement hubs.
In fiscal year 2014, we recorded annual revenue of $70.3 million and loss from operations of $4.1 million, compared to annual
revenue of $58.9 million and income from operations of $1.2 million in fiscal year 2013. The year-over-year increase in total revenue
was primarily driven by the 36% increase in subscription revenue as our business has shifted more toward a cloud delivery model.
Subscription and support revenue was $40.5 million in fiscal year 2014, an increase of 25% from fiscal year 2013. Professional
services revenue was $15.0 million in fiscal year 2014, an increase of 9% from fiscal year 2013. Cash used in operations was $4.7
million for fiscal year 2014, compared to cash provided by operations of $10.0 million for fiscal year 2013.
Based upon the strong increase in the demand for our products and services we continued to increase our investment in sales and
marketing and expand our distribution capability during fiscal year 2014. If the demand continues for our products and services, we
intend to continue to increase our sales and marketing investments and the expansion of distribution capability in fiscal year 2015. In
addition, we intend to make further investments in product development and technology to enhance our current products and services,
develop new products and services and further advance our solution offerings. We believe that existing capital resources will enable us
to maintain current and planned operations for the next 12 months. Due to fluctuations in our business, we believe that period-to-
period comparisons of our revenue and operating results may not be meaningful and should not be relied upon as indications of future
performance, but we anticipate an increase in revenue in fiscal year 2015.
Unbilled Deferred Revenue
Unbilled deferred revenue represents business that is contracted but not yet invoiced or collected and off–balance-sheet and,
accordingly, is not recorded in deferred revenue. As such, the deferred revenue balance on our consolidated balance sheet does not
represent the total contract value of annual or multi-year, non-cancelable subscription agreements. As of June 30, 2014, unbilled
deferred revenue decreased to $22.6 million, down from approximately $24.8 million as of June 30, 2013.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, allowance for doubtful accounts, goodwill, deferred tax valuation
allowance and accrued liabilities, long-lived assets and stock-based compensation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We enter into arrangements to deliver multiple products or services (multiple-elements). We apply software revenue recognition
rules and multiple-elements arrangement revenue guidance. Significant management judgments and estimates are made and used to
determine the revenue recognized in any accounting period. Material differences may result in changes to the amount and timing of
our revenue for any period if different conditions were to prevail. We present revenue net of taxes collected from customers and
remitted to governmental authorities.
25
We derive revenue from three sources:
(i) Subscription and support fees primarily consist of cloud revenue from customers accessing our enterprise cloud computing
services, term license revenue, and maintenance and support revenue;
(ii) License fees primarily consist of perpetual software license revenue;
(iii) Professional services primarily consist of consulting, implementation services and training.
Revenues are recognized when all of the following criteria are met:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Persuasive evidence of an arrangement exists: Evidence of an arrangement consists of a written contract signed by both
the customer and management prior to the end of the period. We use signed software license, services agreements and
order forms as evidence of an arrangement for sales of software, cloud, maintenance and support. We use a signed
statement of work as evidence of arrangement for professional services.
Delivery or performance has occurred: Software is delivered to customers electronically or on a CD-ROM, and license
files are delivered electronically. Delivery is considered to have occurred when we provide the customer access to the
software along with login credentials.
Fees are fixed or determinable: We assess whether the fee is fixed or determinable based on the payment terms associated
with the transaction. Arrangements where a significant portion of the fee is due beyond 90 days from delivery are
generally not considered to be fixed or determinable.
Collectibility is probable: We assess collectibility based on a number of factors, including the customer’s past payment
history and its current creditworthiness. Payment terms generally range from 30 to 90 days from invoice date. If we
determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection
becomes reasonably assured, which is generally upon receipt of cash payment.
We apply the provisions of Accounting Standards Codification, or ASC, 985-605, Software Revenue Recognition, to all
transactions involving the licensing of software products. In the event of a multiple element arrangement for a license transaction, we
evaluate the transaction as if each element represents a separate unit of accounting taking into account all factors following the
accounting standards. We apply ASC 605, Revenue Recognition, for cloud transactions to determine the accounting treatment for
multiple elements. We also apply ASC 605-35 for fixed fee arrangements in which we use the percentage of completion method to
recognize revenue when reliable estimates are available for the costs and efforts necessary to complete the implementation services.
When such estimates are not available, the completed contract method is utilized. Under the completed contract method, revenue is
recognized only when a contract is completed or substantially complete.
When licenses are sold together with system implementation and consulting services, license fees are recognized upon shipment,
provided that (i) payment of the license fees is not dependent upon the performance of the consulting and implementation services,
(ii) the services are available from other vendors, (iii) the services qualify for separate accounting as we have sufficient experience in
providing such services, have the ability to estimate cost of providing such services, and we have vendor specific objective evidence,
or VSOE, of fair value, and (iv) the services are not essential to the functionality of the software.
We enter into arrangements with multiple-deliverables that generally include subscription, maintenance and support, and
professional services. We evaluate whether each of the elements in these arrangements represents a separate unit of accounting, as
defined by ASC 605, using all applicable facts and circumstances, including whether (i) we sell or could readily sell the element
unaccompanied by the other elements, (ii) the element has stand-alone value to the customer, and (iii) there is a general right of return.
We use VSOE, of fair value for each of those units, when available. For revenue recognition with multiple-deliverable elements, in
certain limited circumstances when VSOE of fair value does not exist, we apply the selling price hierarchy, which includes VSOE,
third-party evidence of selling price, or TPE, and best estimate of selling price, or BESP. We determine the relative selling price for a
deliverable based on its VSOE, if available, or its BESP, if VSOE is not available. We determined that TPE is not a practical
alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing
information.
We determine BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken
into consideration include our discounting practices, the size and volume of our transactions, the customer demographic, the
geographic area where services are sold, price lists, its go-to-market strategy, historical standalone sales and contract prices. The
determination of BESP is made through consultation with and approval by our management, taking into consideration the go-to-
market strategy. As our go-to-market strategies evolve, we may modify its pricing practices in the future, which could result in
changes in relative selling prices, including both VSOE and BESP.
26
Subscription and Support Revenue
Cloud Revenue
Cloud revenue consists of subscription fees from customers accessing our cloud-based service offerings. We recognize cloud
revenue ratably over the period of the applicable agreement as services are provided. Cloud agreements typically have an initial term
of one or two years and automatically renew unless either party cancels the agreement. The majority of the cloud services customers
purchase a combination of our cloud service and professional services. In some cases, the customer may also acquire a license for our
software.
We consider the applicability of ASC 985-605, on a contract-by-contract basis. In cloud-based agreements, where the customer
does not have the contractual right to take possession of the software, the revenue is recognized on a monthly basis over the term of
the contract. Invoiced amounts are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the
revenue recognition criteria have been met. We consider a software element to exist when we determine that the customer has the
contractual right to take possession of our software at any time during the cloud period without significant penalty and can feasibly
run the software on its own hardware or enter into another arrangement with a third party to host the software. Additionally, we have
established VSOE for the cloud and maintenance and support elements of perpetual license sales, based on the prices charged when
sold separately and substantive renewal terms. Accordingly, when a software element exists in a cloud services arrangement, license
revenue for the perpetual software license element is determined using the residual method and is recognized upon delivery. Revenue
for the cloud and maintenance and support elements is recognized ratably over the contractual time period. Professional services are
recognized as described below under “Professional Services Revenue.” If VSOE of fair value cannot be established for the
undelivered elements of an agreement, the entire amount of revenue from the arrangement is recognized ratably over the period that
these elements are delivered.
Term License Revenue
Term license revenue includes arrangements where our customers receive license rights to use our software along with bundled
maintenance and support services for the term of the contract. The majority of our contracts provide customers with the right to use
one or more products up to a specific license capacity. Certain of our license agreements stipulate that customers can exceed pre-
determined base capacity levels, in which case additional fees are specified in the license agreement. Term license revenue is
recognized ratably over the term of the license contract.
Maintenance and Support Revenue
Maintenance and support revenue consists of customers purchasing maintenance and support for our on-premise software. We
use VSOE of fair value for maintenance and support to account for the arrangement using the residual method, regardless of any
separate prices stated within the contract for each element. Maintenance and support revenue is recognized ratably over the term of the
maintenance contract, which is typically one year. Maintenance and support is renewable by the customer on an annual basis.
Maintenance and support rates, including subsequent renewal rates, are typically established based upon a specified percentage of net
license fees as set forth in the arrangement.
License Revenue
License revenue consists of perpetual license rights sold to customers to use our software in conjunction with related
maintenance and support services If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or
the expiration of the acceptance period. In software arrangements that include rights to multiple software products and/or services, we
use the residual method under which revenue is allocated to the undelivered elements based on VSOE of the fair value of such
undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue, assuming all
other criteria for revenue recognition have been met. Such undelivered elements in these arrangements typically consist of software
maintenance and support, implementation and consulting services and in some cases cloud services.
License sales to resellers as a percentage of total revenue were approximately 11%, 6% and 2% in fiscal years 2014, 2013 and
2012, respectively. Revenue from sales to resellers is generally recognized upon delivery to the reseller dependent on the facts and
circumstances of the transaction. These include items such as our understanding of the reseller’s plans to sell the software, existence of
return provisions, price protection or other allowances, the reseller’s financial status and our past experience with the reseller.
Historically sales to resellers have not included any return provisions, price protections or other allowances.
27
Professional Services Revenue
Professional services revenue includes system implementation, consulting and training. For license transactions, the majority of
our consulting and implementation services qualify for separate accounting. We use VSOE of fair value for the services to account for
the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our
consulting and implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. Substantially all
of our contracts are on a time-and-materials basis. For time-and-materials contracts, where the services are not essential to the
functionality, we recognize revenue as services are performed. If the services are essential to functionality, then both the product
license revenue and the service revenue are recognized under the percentage of completion method. For a fixed-fee contract, we
recognize revenue based upon the costs and efforts to complete the services in accordance with the percentage of completion method,
provided we are able to estimate such cost and efforts.
Under ASC 605-25, in order to account for deliverables in a multiple-deliverable arrangement as separate units of accounting,
the deliverables must have standalone value upon delivery. For cloud services, in determining whether professional services have
standalone value, we consider the following factors for each professional services agreement: availability of the services from other
vendors, the nature of the professional services, the timing of when the professional services contract was signed in comparison to the
subscription service start date and the contractual dependence of the subscription service on the customer’s satisfaction with the
professional services work.
We determined at or around July 1, 2013 that we had established standalone value for consulting and implementation services.
This was primarily due to the change in our business focus, the growing number of partners we trained and certified to perform these
deployment services and the consequential sale of subscription services without bundled implementation service. Revenues earned
from professional services related to consulting and implementation of a majority of our core subscription services are being
accounted for separately from revenues earned from subscription services beginning July 1, 2013 when the standalone value was
established for those professional services.
For those contracts that have standalone value, we recognized the services revenue when rendered for time and material
contracts, when the milestones are achieved and accepted by the customer for fixed price contracts or by percentage of completion
basis if there is no acceptance criteria.
For cloud, consulting and implementation services that do not qualify for separate accounting, we recognize the services
revenue ratably over the estimated life of the customer cloud relationship, once cloud has gone live or system ready. We currently
estimate the life of the customer cloud relationship to be approximately 28 months, based on the average life of all cloud customer
relationships.
Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.
Deferred Revenue
Deferred revenue primarily consists of payments received in advance of revenue recognition from cloud, term license, and
maintenance and support services and is recognized as the revenue recognition criteria are met. We generally invoice customers in
annual or quarterly installments. The deferred revenue balance does not represent the total contract value of annual or multi-year, non-
cancelable cloud or maintenance and support agreements. Deferred revenue is influenced by several factors, including seasonality, the
compounding effects of renewals, invoice duration, invoice timing and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue and
the remaining portion is recorded as noncurrent. In June 30, 2014, deferred revenue decreased to $13.7 million, compared to $19.7
million at June 30, 2013.
Deferred Commissions
Deferred commissions are the direct and incremental costs directly associated with cloud contracts with customers and consist
of sales commissions to our direct sales force.
The commissions are deferred and amortized over the terms of the related customer contracts, which are typically one or two
years. The commission payments are paid based on contract terms in the month following the quarter in which the commissions are
earned. The deferred commission amounts are recognized as sales and marketing expense in the consolidated statements of operations
over the terms of the related customer contracts, in proportion to the recognition of the associated revenue.
28
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation. Under the fair
value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the
award and is recognized as an expense over the vesting period. Determining the fair value of the stock-based awards at the grant date
requires significant judgment and the use of estimates, particularly surrounding Black-Scholes valuation assumptions such as stock
price volatility and expected option lives. We determine the appropriate measure of expected volatility by reviewing historic volatility
in the share price of our common stock, as adjusted for certain events that management deems to be non-recurring and non-indicative
of future events. We base our estimate of expected life on the historical exercise behavior, cancellations of all past option grants made
by us during the time period in which our equity shares have been publicly traded, the contractual term, the vesting period and the
expected remaining term of the option. Based on our historical experience of option pre-vesting cancellations, we have assumed an
annualized 8% forfeiture rate for our options. We record additional expense if the actual forfeiture rate is lower than we estimated, and
record a recovery of prior expense if the actual forfeiture is higher than what we estimated.
Goodwill and Other Intangible Assets
In accordance with ASC 350, Goodwill and Other Intangible Assets, we review goodwill annually for impairment or sooner
whenever events or changes in circumstances indicate that they may be impaired. These events or circumstances could include a
significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a
significant portion of a reporting unit. In addition, we evaluate purchased intangible assets to determine that all such assets have
determinable lives. We operate under a single reporting unit and accordingly, all of our goodwill is associated with the entire
company. We performed annual impairment reviews for fiscal years 2014, 2013 and 2012 and found no impairment.
Accounts Receivable and Allowance for Doubtful Accounts
We extend unsecured credit to customers on a regular basis. Our accounts receivable are derived from revenue earned from
customers and are not interest bearing. We also maintain an allowance for doubtful accounts to reserve for potential uncollectible trade
receivables. We review our trade receivables by aging category to identify specific customers with known disputes or collectability
issues. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general
economic conditions in the U.S. and internationally, and changes in customer financial conditions. If we make different judgments or
utilize different estimates, then material differences may result in additional reserves for trade receivables, which would be reflected
by charges in general and administrative expenses for any period presented. We write-off a receivable after all collection efforts have
been exhausted and the amount is deemed uncollectible.
Leases
Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with ASC 840, Leases.
When any one of the four test criteria in ASC 840 is met, the lease then qualifies as a capital lease.
Capital leases are capitalized at the lower of the net present value of the total amount payable under the leasing agreement
(excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis,
over a period consistent with our normal depreciation policy for tangible fixed assets, but not exceeding the lease term. Interest
charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.
Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease
payments, is recognized on a straight-line basis over the duration of each lease term.
Deferred Tax Valuation Allowance
When we prepare our consolidated financial statements, we estimate our income tax liability for each of the various jurisdictions
where we conduct business. This requires us to estimate our actual current tax exposure and to assess temporary differences that result
from differing treatment of certain items for tax and accounting purposes. The net deferred tax assets are reduced by a valuation
allowance if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized. We must make significant judgments to determine our provision for income taxes, our deferred tax assets and liabilities and
any valuation allowance to be recorded against our net deferred tax assets. As of June 30, 2014, we had a valuation allowance of
approximately $74.1 million of which approximately $69.2 million was attributable to U.S. and state net operating losses and research
and development credit carryforwards.
29
We apply ASC 740, Income Taxes, in determining any uncertain tax positions. The guidance seeks to reduce the diversity in
practice associated with certain aspects of measurement and recognition in accounting for income taxes and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position that an entity takes or
expects to take in a tax return. Additionally, ASC 740 provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. Under ASC 740, an entity may only recognize or continue to recognize tax
positions that meet a “more likely than not” threshold. In accordance with our accounting policy, we recognize accrued interest and
penalties related to unrecognized tax benefits as a component of “other income and expense, net” in the consolidated statements of
operations.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and debt,
including related party debt. We do not have any derivative financial instruments. We believe the reported carrying amounts of these
financial instruments approximate fair value, based upon their short-term nature and comparable market information available at the
respective balance sheet dates.
Results of Operations
The following table sets forth certain items reflected in our consolidated statements of operations expressed as a percent of total
revenue for the periods indicated.
Revenue:
Subscription and support ................................................................
License ...........................................................................................
Professional services ......................................................................
Total revenue ............................................................................
Cost of subscription and support ....................................................
Cost of license ................................................................................
Cost of professional services ..........................................................
Total cost of revenue .................................................................
Gross profit ...............................................................................
Operating Expenses:
Research and development ............................................................
Sales and marketing .......................................................................
General and administrative ............................................................
Total operating expenses ..........................................................
Income / (loss) from operations .....................................................
2014
2013
2012
58%
21%
21%
100%
12%
0%
21%
33%
67%
14%
48%
11%
73%
(6)%
55 %
22 %
23 %
100 %
10 %
0 %
21 %
31 %
69 %
14 %
41 %
12 %
67 %
2 %
54%
26%
20%
100%
12%
0%
19%
31%
69%
14%
47%
13%
74%
(5)%
Revenue
Total revenue, which consists of subscription and support, license and professional services revenue, was $70.3 million, $58.9
million, and $43.4 million, in fiscal years 2014, 2013, and 2012, respectively.
In fiscal year 2014, total revenue increased 19% or $11.4 million, from the prior year. Our international sales accounted for
approximately 45% of total revenue in fiscal year 2014, an increase from 40% of total revenue in fiscal year 2013. The impact of the
foreign exchange fluctuation between the U.S. dollar, the Euro and British pound in total revenue was $1.3 million in fiscal year 2014
and was minimal in fiscal year 2013. There were two different customers that accounted for 16% and 10% of total revenue in fiscal
year 2014. Two different customers accounted for 18% and 10% of total revenue in fiscal years 2013 and 2012, respectively.
30
Subscription and Support Revenue
(cid:3)(cid:3)
(cid:3)(cid:3)
Revenue
Fiscal Year Ended June 30
Year-Over-Year Change
2014
2013
2012
2013 to 2014
2012 to 2013
(in thousands)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)
Cloud .................................................................. $ 26,010 $ 19,056 $ 11,196 $ 6,954 36% $ 7,860 70%
Maintenance and support .................................... $ 14,467 $ 13,225 $ 12,398 $ 1,242 9%
827
7%
$
Total subscription and support revenue ......... $ 40,477 $ 32,281 $ 23,594 $ 8,196 25% $ 8,687 37%
Percentage of total revenue ...........................
54%
55%
58%
Subscription and support revenue includes cloud and software maintenance and support revenue. Subscription and support
revenue was $40.5 million, $32.3 million, and $23.6 million in fiscal years 2014, 2013, and 2012, respectively. This represented an
increase of 25% or $8.2 million, in fiscal year 2014 compared to fiscal year 2013 and an increase of 37%, or $8.7 million, in fiscal
year 2013 compared to fiscal year 2012. Subscription and support revenue represented 58%, 55%, and 54% of total revenue for the
fiscal years 2014, 2013 and 2012, respectively.
Cloud revenue was $26.0 million, $19.1 million and $11.2 million in fiscal years 2014, 2013 and 2012, respectively. This
represented an increase of 36%, or $7.0 million in fiscal year 2014 compared to fiscal year 2013 and an increase of 70%, or $7.9
million, in fiscal year 2013 compared to fiscal year 2012.
The increase in fiscal year 2014 was primarily due to the increase in new cloud contracts from prior year enterprise customers
that are recognized ratably over an average contractual term of 24 months. The impact from the foreign currency fluctuations on cloud
revenue was an increase of $280,000 in fiscal year 2014.
The increase in fiscal year 2013 was primarily due to the continued shift from license to our cloud model. The increase in new
cloud contracts with current enterprise customers included two new cloud contracts totaling approximately $13.1 million that are
recognized ratably over the contractual term. The impact from the foreign currency fluctuations on cloud revenue was minimal in
fiscal year 2013.
Excluding the impact from any further foreign currency fluctuations, we expect cloud revenue to increase in fiscal year 2015
based upon current renewal rates for existing cloud customers and the projected levels of new cloud agreements.
Maintenance and support revenue consists of technical support and software upgrades and enhancements. Maintenance and
support revenue was $14.5 million, $13.2 million and $12.4 million in fiscal years 2014, 2013 and 2012, respectively. This
represented an increase of 9% or $1.2 million in fiscal year 2014 compared to fiscal year 2013 and an increase of 7%, or $827,000 in
fiscal year 2013 compared to fiscal year 2012.
Excluding the impact from any future foreign currency fluctuation, we expect maintenance and support revenue to increase in
fiscal year 2015 based upon the current renewal rates for existing maintenance and support customers and the projected levels of new
license sales.
License Revenue
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Revenue
Fiscal Year Ended June 30
Year-Over-Year Change
2014
2013
2012
2013 to 2014
2012 to 2013
(in thousands)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)
License ................................................................ $ 14,800 $ 12,853 $ 11,067 $ 1,947 15% $ 1,786 16%
Percentage of total revenue .................................
26%
21%
22%
License revenue was $14.8 million, $12.9 million, and $11.1 million in fiscal years 2014, 2013, and 2012, respectively. This
represents an increase of 15% or $1.9 million, in fiscal year 2014 from fiscal year 2013, compared to an increase of 16% or $1.8
million, in fiscal year 2013 from fiscal year 2012. License revenue represented 21%, 22%, and 26% of total revenue for the fiscal
years 2014, 2013, and 2012, respectively.
31
The increase in license revenue is primarily attributable to increased demand from new and existing customers. New license and
support transactions in fiscal year 2014 included approximately $19.7 million from numerous transactions with an average deal size of
$170,000. The impact from the foreign currency fluctuations on license revenue was an increase of $290,000 in fiscal year 2014.
New license and support transactions in fiscal year 2013 included approximately $7.6 million from five transactions with an
average deal size of $1.5 million from new and existing customers. The impact from the foreign currency fluctuations on license
revenue was minimal in fiscal year 2013.
Given the general unpredictability in the length of current sales cycles, the mix between cloud and license transactions, the
uncertainty in the global economy and the volatility of the value of the British pound and Euro in relation to the U.S. dollar, license
revenue may increase or decrease in future periods, but we anticipate total license revenue to increase in fiscal year 2015.
Professional Services Revenue
(cid:3)(cid:3)
(cid:3)(cid:3)
Revenue
Professional services ........................................... $ 14,985 $ 13,755 $
23%
Percentage of total revenue .................................
21%
Fiscal Year Ended June 30
Year-Over-Year Change
2014
2013
2012
2013 to 2014
2012 to 2013
(in thousands)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
8,703 $ 1,230 9%
20%
(cid:3)(cid:3)(cid:3)(cid:3)
$ 5,052 58%
Professional services revenue was $15.0 million, $13.8 million and $8.7 million in fiscal years 2014, 2013 and 2012,
respectively. This represented an increase of 9%, or $1.2 million in fiscal year 2014 compared to fiscal year 2013 and an increase of
58%, or $5.1 million, in fiscal year 2013 compared to fiscal year 2012.
The increase in fiscal year 2014 was primarily due to the increase in demand for our services and increase in managed
customers who migrated from on-premise to the cloud. The impact from the foreign currency fluctuations between the U.S. dollar and
the British pound on professional services revenue was an increase of $395,000 in fiscal year 2014.
The increase in fiscal year 2013 was primarily due to the increase in demand for our services and increase in managed
customers who migrated from on-premise to the cloud. The impact from the foreign currency fluctuations between the U.S. dollar and
the British pound on professional services revenue was an increase of $202,000 in fiscal year 2013.
Excluding the impact from any future foreign currency fluctuations, we expect professional services revenue to increase in fiscal
year 2015 based upon our current sales pipeline and current sales trend.
Cost of Revenue
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Cost of revenue .............................................. $23,462 $18,006 $ 13,436 $5,456 30% $ 4,570
33%
67%
Percentage of total revenue ........................
Gross margin ..............................................
31%
69%
Fiscal Year Ended June 30
31%
69%
(in thousands)
2013 to 2014
2014
2012
2013
Year-Over-Year Change
2012 to 2013
34%
Total cost of revenue was $23.5 million, $18.0 million and $13.4 million in fiscal years 2014, 2013 and 2012, respectively. This
represented an increase of 30%, or $5.5 million, in fiscal year 2014 compared to fiscal year 2013 and an increase of 34%, or $4.6
million, in fiscal year 2013 compared to fiscal year 2012.
Total cost of revenue as a percentage of total revenue was 33% for fiscal year 2014 and 31% for fiscal years 2013 and 2012.
The increase in fiscal year 2014 was primarily due to increases of (i) $4.0 million in personnel and personnel-related expenses
from the increased headcount and Company-wide compensation increases, (ii) $1.2 million in cloud related expenses, (iii) $343,000 in
outside consulting expense, and (iv) international subsidiaries’ expenses of approximately $78,000 related to the strengthening of the
U.S. dollar against the Euro, British pound, and Indian rupee partially offset by a decrease of $47,000 in license related expenses.
32
The increase in fiscal year 2013 was primarily due to increases of (i) $3.9 million in personnel and personnel-related expenses
from the increased headcount and Company-wide compensation increases, (ii) $414,000 in outside consulting expense, (iii) 288,000 in
cloud related expenses, and (iv) 190,000 in license related expenses partially offset by decreases in (i) international subsidiaries’
expenses of approximately $245,000 related to the strengthening of the U.S. dollar against the Euro, British pound, and Indian rupee.
Gross margin was 67% in fiscal year 2014 and 69% for fiscal years 2013 and 2012.
In order to better understand the changes within our cost of revenue and resulting gross margins, we have provided the
following discussion of the individual components of our cost of revenue.
Cost of Subscription and Support
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Cost of subscription and support ................. $ 8,518 $ 5,495 $
2014
2013
Fiscal Year Ended June 30
Year-Over-Year Change
2012
2013 to 2014
2012 to 2013
(in thousands)
5,363 $3,023 55% $ 132
2%
Percentage of subscription and support
revenue ....................................................
Gross margin ..............................................
21%
79%
17%
83%
23%
77%
Cost of subscription and support revenue includes personnel costs for our cloud services and maintenance and support. It also
includes depreciation of capital equipment used in our hosted network, cost of support for the third-party software, and lease costs
paid to remote co-location centers.
Total cost of subscription and support revenue was $8.5 million, $5.5 million and $5.4 million in fiscal years 2014, 2013 and
2012, respectively. This represented an increase of 55%, or $3.0 million, in fiscal year 2014 compared to fiscal year 2013 and an
increase of 2%, or $132,000, in fiscal year 2013 compared to fiscal year 2012. Total cost of subscription and support revenue as a
percentage of total subscription and support revenue was 21% (a gross margin of 79%) in fiscal year 2014 compared to 17% (a gross
margin of 83%) in fiscal year 2013 and 23% (a gross margin of 77%) in fiscal year 2012.
The increase in cost of subscription and support revenue in fiscal year 2014 was primarily due to increases of (i) $1.8 million in
personnel and personnel-related expenses, (ii) $1.2 million in cloud related expenses, and (iii) international subsidiaries’ expenses of
approximately $52,000 from the foreign exchange fluctuation between the U.S. dollar, the Euro, British pound and Indian rupee
partially offset by a decrease of $51,000 in outside consulting services.
The increase in cost of subscription and support revenue in fiscal year 2013 was primarily due to increases of (i) $288,000 in
cloud related expenses and (ii) $35,000 in outside consulting services partially offset by decreases of (i) international subsidiaries’
expenses of approximately $104,000 from the foreign exchange fluctuation between the U.S. dollar, the Euro, British pound and
Indian rupee, and (ii) $77,000 in personnel and personnel-related expenses, and (iii) $10,000 in support of third party software.
Excluding the impact from any future foreign currency fluctuations, we anticipate cost of subscription and support revenue to
increase in fiscal year 2015 and the gross margin to decrease when compared to fiscal year 2014, as we continue to invest in our cloud
infrastructure.
Cost of License
(cid:3)(cid:3)
(cid:3)(cid:3)
Cost of license ................................................. $
Percentage of license revenue .....................
Gross margin ...............................................
Fiscal Year Ended June 30
Year-Over-Year Change
2014
2013
2012
2013 to 2014
2012 to 2013
(in thousands)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
104 $
1%
99%
151 $
1%
99%
(39) $
0%
100%
(47) (31)% $ 190
487%
33
Cost of license primarily includes third-party software royalties and delivery costs for shipments to customers. Total cost of
license was $104,000, $151,000 and $(39,000) in fiscal years 2014, 2013 and 2012, respectively. This represented a decrease of 31%,
or $47,000 in fiscal year 2014 compared to 2013 and an increase of 487%, or $190,000, in fiscal year 2013 compared to 2012. Total
cost of license as a percentage of total license revenue was approximately 1% (a gross margin of 99%) in fiscal years 2014 and 2013
compared to 0% (a gross margin of 100%) in fiscal year 2012.
The decrease in cost of license in fiscal years 2014 was primarily due to decrease in third party royalties expense. The increase
in cost of license in fiscal year 2013 was primarily due to increases in third party royalty expense.
We anticipate cost of license as a percentage of total license revenue to increase slightly in future periods.
Cost of Professional Services
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Cost of professional services .......................... $14,840 $12,360 $
90%
10%
Percentage of professional services ............
Gross margin ...............................................
99%
1%
2014
2013
Fiscal Year Ended June 30
Year-Over-Year Change
2012
2013 to 2014
2012 to 2013
(in thousands)
8,112 $2,480 20% $ 4,248
52%
93%
7%
Cost of professional services includes personnel costs for consulting services. Total cost of professional services was $14.8
million, $12.4 million and $8.1 million in fiscal years 2014, 2013, and 2012, respectively. This represented an increase of 20% or $2.5
million, in fiscal year 2014 compared to fiscal year 2013 and an increase of 52%, or $4.2 million, in fiscal year 2013 compared to
fiscal year 2012. Total cost of professional services as a percentage of total professional services revenue was 99% (a gross margin of
1%) in fiscal year 2014 compared to 90% (a gross margin of 10%) in fiscal year 2013 and 93% (a gross margin of 7%) in fiscal year
2012.
The increase in cost of professional services in fiscal year 2014 was primarily due to increases of (i) $2.0 million in personnel
and personnel-related expense from the increased headcount and Company-wide compensation increases, (ii) $395,000 in outside
consulting expenses, and (iii) international subsidiaries’ expenses of approximately $25,000 from the foreign exchange fluctuation
between the U.S. dollar, the Euro, British pound and Indian rupee.
The increase in cost of professional services in fiscal year 2013 was primarily due to increases of (i) $4.0 million in personnel
and personnel-related expense from the increased headcount and Company-wide compensation increases and (ii) $379,000 in outside
consulting expenses partially offset by a decrease in international subsidiaries’ expenses of approximately $142,000 from the foreign
exchange fluctuation between the U.S. dollar, the Euro, British pound and Indian rupee.
Excluding the impact from any future foreign currency fluctuations, we anticipate cost of professional services to increase in
absolute dollars and gross margin to remain relatively constant in future periods.
Research and Development
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Research and development .................................... $ 9,963 $ 8,419 $
14%
Percentage of total revenue .................................
14%
2013
2014
Fiscal Year Ended June 30
Year-Over-Year Change
2012
2013 to 2014
2012 to 2013
(in thousands)
6,132 $ 1,544 18% $ 2,287 37%
14%
Research and development expenses primarily consist of compensation and benefits for our engineering, product management
and quality assurance personnel, and, to a lesser extent, occupancy costs and related overhead. Research and development expense
was $10.0 million, $8.4 million and $6.1 million in fiscal years 2014, 2013 and 2012, respectively. This represented an increase of
18% or $1.5 million in the fiscal year 2014 compared to fiscal year 2013 and an increase of 37%, or $2.3 million, in fiscal year 2013
compared to fiscal year 2012. Total research and development expenses as a percentage of total revenue was 14% in the fiscal years
2014, 2013 and 2012.
34
The increase in research and development expense in fiscal year 2014 was primarily due to an increase of $1.9 million in
personnel and personnel-related expenses from the increased headcount and Company-wide compensation increases partially offset by
decreases of (i) international subsidiaries’ expenses of approximately $254,000 from the foreign exchange fluctuation between the
U.S. dollar, the Euro, British pound and Indian rupee and (ii) $89,000 in outside consulting expenses.
The increase in research and development expense in fiscal year 2013 was primarily due to an increase of $2.6 million in
personnel and personnel-related expenses from the increased headcount and Company-wide compensation increases partially offset by
decreases of (i) international subsidiaries’ expenses of approximately $171,000 from the foreign exchange fluctuation between the
U.S. dollar, the Euro, British pound and Indian rupee and (ii) $128,000 in outside consulting expenses.
Excluding any fluctuation of foreign exchange rates in the Euro, British pound, and Indian rupee against the U.S. dollar, we
anticipate research and development expense to increase as a percentage of total revenue in fiscal year 2015 based upon our current
product development plans.
Sales and Marketing
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Sales ......................................................................... $ 28,607 $ 21,053 $ 16,483 $ 7,554 36% $ 4,570
Marketing ............................................................... $ 4,760 $ 3,381 $
Total sales and marketing ..................................... $ 33,367 $ 24,434 $ 20,086 $ 8,933 37% $ 4,348
48%
Percentage of total revenue .................................
3,603 $ 1,379 41% $ (222)
Fiscal Year Ended June 30
Year-Over-Year Change
(in thousands)
2013 to 2014
47%
41%
2014
2013
2012
2012 to 2013
28%
(6)%
22%
Sales and marketing expenses primarily consist of compensation and benefits for our sales, marketing and business development
personnel, lead generation activities, advertising, trade show and other promotional costs and, to a lesser extent, occupancy costs and
related overhead. Sales and marketing expense was $33.4 million, $24.4 million and $20.1 million in fiscal years 2014, 2013 and 2012
respectively. This represented an increase of 37%, or $8.9 million, in fiscal year 2014 compared to fiscal year 2013 and an increase of
22%, or $4.3 million, in fiscal year 2013 compared to fiscal year 2012. Total sales and marketing expenses as a percentage of total
revenue was 48% in fiscal year 2014 compared to 41% in fiscal year 2013 and 47% in fiscal year 2012.
Total sales expense was $28.6 million for fiscal 2014, an increase of 36% or $7.6 million, from $21.1 million for fiscal year
2013. The increase in fiscal year 2014 was primarily due to increases of (i) $7.3 million in personnel and personnel-related expense
related to the increased headcount and compensation increase in our worldwide sales force, (ii) $520,000 in sales commission
expense, and (iii) international subsidiaries’ expenses of approximately $533,000 primarily from the foreign exchange fluctuation
between the U.S. dollar, the Euro, British pound, and (iv) $86,000 in outside consulting services partially offset by a decrease of
$891,000 in third party partner fees.
Total marketing expenses was $4.8 million for fiscal 2014, an increase of 41% or $1.4 million, from $3.4 million for fiscal year
2013. The increase in fiscal year 2014 was primarily due to increases of (i) $749,000 in marketing programs expenses, (ii) $632,000 in
personnel and personnel-related expenses, and (iii) $55,000 in outside consulting expenses partially offset by a decrease in
international subsidiaries’ expenses of approximately $56,000 primarily from the foreign exchange fluctuation between the U.S.
dollar, the Euro, British pound and Indian rupee.
Total sales expense was $21.1 million for fiscal 2013, an increase of 28% or $4.6 million, from $16.5 million for fiscal year
2012. The increase in fiscal year 2013 was primarily due to increases of (i) $2.6 million in personnel and personnel-related expense
related to the increased headcount and compensation increase in our worldwide sales force, (ii) $1.7 million in sales commission
expense, and (iii) $642,000 in third party partner fees, partially offset by decreases of (i) $346,000 in outside consulting services and
(ii) international subsidiaries’ expenses of approximately $58,000 primarily from the foreign exchange fluctuation between the U.S.
dollar, the Euro, British pound.
Total marketing expenses was $3.4 million for fiscal 2013, a decrease of 6% or $222,000, from $3.6 million for fiscal year
2012. The decrease in fiscal year 2013 was primarily due to decreases of (i) $395,000 in marketing programs expenses, and
(ii) international subsidiaries’ expenses of approximately $66,000 primarily from the foreign exchange fluctuation between the U.S.
dollar, the Euro, British pound and Indian rupee, partially offset by increases of (i) $89,000 in other promotional costs, (ii) $78,000 in
personnel and personnel-related expenses, and (iii) $72,000 in outside consulting expenses.
Excluding any fluctuation of foreign exchange rates in the Euro, British pound, and Indian rupee against the U.S. dollar, we
anticipate sales and marketing expense to decrease or remain relatively constant as a percentage of total revenue in fiscal year 2015.
35
General and Administrative
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
General and administrative ................................... $ 7,529 $ 6,787 $
12%
Percentage of total revenue .................................
11%
2013
2014
Fiscal Year Ended June 30
Year-Over-Year Change
2012
2013 to 2014
2012 to 2013
(in thousands)
(cid:3)(cid:3)
5,743 $
13%
742 11% $ 1,044
18%
General and administrative expenses primarily consist of compensation and benefits for our finance, human resources,
administrative and legal services personnel, fees for outside professional services, provision for doubtful accounts and, to a lesser
extent, occupancy costs and related overhead. General and administrative expense was $7.5 million, $6.8 million and $5.7 million in
the fiscal years 2014, 2013 and 2012, respectively. This represented an increase of 11% or $742,000 in fiscal year 2014 compared to
fiscal year 2013 and an increase of 18%, or $1.0 million, in fiscal year 2013 compared to fiscal year 2012. Total general and
administrative expenses as a percentage of total revenue was 11% in fiscal year 2014 compared to 12% in the fiscal year 2013 and
13% in fiscal year 2012.
The increase in fiscal year 2014 was primarily due to increases of (i) $529,000 in legal fees, (ii) $397,000 in personnel and
personnel-related expense from the increased headcount and Company-wide compensation increases, (iii) $49,000 in bad debt
expense, and (iv) international subsidiaries’ expenses of approximately $16,000 primarily from the foreign exchange fluctuation
between the U.S. dollar, the Euro, British pound and Indian rupee partially offset by a decrease of $250,000 in other outside consulting
expenses.
The increase in fiscal year 2013 was primarily due to increases of (i) $318,000 in one-time charges related to the secondary
offering of shares of our common stock, (ii) $256,000 in personnel and personnel-related expense from the increased headcount and
Company-wide compensation increases, (iii) $245,000 in accounting and other outside consulting expenses, (iv) $242,000 in legal and
outside consulting fees related to investigation and recovery efforts of the unauthorized wire transfers, and (v) $58,000 in bad debt
expense, partially offset by a decrease in our international subsidiaries’ expenses of approximately $76,000 primarily from the foreign
exchange fluctuation between the U.S. dollar, the Euro, British pound and Indian rupee.
We anticipate general and administrative expenses to decrease as a percentage of total revenue in fiscal year 2015 based upon
current revenue expectations excluding the fluctuation of foreign exchange rates in the Euro, British pound, and Indian rupee against
the U.S. dollar.
Amortization of Stock-Based Compensation
Fiscal Year Ended June 30
Year-Over-Year Change
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Cost of revenue ........................................................ $
Research and development .......................................
Sales and marketing .................................................
General and administrative ......................................
Total stock-based compensation ........................... $ 1,527 $ 1,081 $
2%
Percentage of total revenue .................................
121 $
261
360
339
280 $
386
464
397
2%
2013
2014
2012
2013 to 2014
2012 to 2013
(in thousands)
77 $
180
274
325
856 $
2%
159 131% $
125 48%
104 29%
58 17%
446 41% $
44
81
86
14
225
57%
45%
31%
4%
26%
Stock-based compensation expenses include the amortization of the fair value of share-based payments made to employees,
members of our board of directors and consultants, primarily in the form of stock options. The fair value of stock options granted is
recognized as an expense, as the underlying stock options vest. The increase of our stock-based compensation expense in fiscal 2013
was primarily due to the increased Company-wide headcount, increase in option grant activity and the increase in our stock price.
We value our share-based payments under ASC 718, and record compensation expense for all share-based payments made to
employees based on the fair value at the date of the grant.
We expect our stock-based compensation expense to increase in fiscal year 2015 based on our anticipated hiring and also, if the
stock price increases.
36
Income / (Loss) from Operations
(cid:3)(cid:3)
(cid:3)(cid:3)
(cid:3)(cid:3)
Operating income / (loss) .............................. $ (4,059) $ 1,243 $ (2,033) $(5,302 ) (427)% $ 3,276 (161)%
Fiscal Year Ended June 30
Year-Over-Year Change
(in thousands)
2012 to 2013
2013 to 2014
2014
2012
2013
Operating margin / (loss) ...........................
(6)%
2%
(5)%
Loss from operations was $4.1 million in fiscal year 2014 compared to the income from operations of $1.2 million in fiscal year
2013 and loss from operations of $2.0 million in fiscal year 2012. We recorded an operating loss of 6% in fiscal year 2014 compared
to an operating margin of 2% in fiscal year 2013 and operating loss of 5% in the fiscal year 2012.
The decrease in operating income (loss) in fiscal year 2014 was due to an increase in revenue of $11.4 million and an increase in
total costs and operating expenses of $16.7 million. The increase in revenue was primarily due to an increase in cloud transactions.
The impact of any fluctuation of foreign currencies against the U.S. dollar on revenue was an increase of $1.3 million. The increase in
total costs and operating expenses was primarily due to increases of (i) $14.8 million in personnel-related costs including an increase
of $520,000 in sales commission, (ii) $1.0 million in cloud related expenses, (iii) $749,000 in marketing programs expenses,
(iv) $532,000 in legal fees, (v) $318,000 in international expenses from the foreign exchange fluctuation between the U.S. dollar, the
Euro, British pound and Indian rupee, (vi) $141,000 in accounting and other outside consulting expenses, and (vii) $49,000 in bad
debt expense partially offset by decreases of (i) $891,000 in third party partner fees, and (ii) $47,000 in license related expenses.
The increase in operating income in fiscal year 2013 was due to an increase in revenue of $15.5 million and an increase in total
costs and operating expenses of $12.2 million. The increase in revenue was primarily due to a growing interest in the eGain cloud. The
impact of any fluctuation of foreign currencies against the U.S. dollar on revenue was minimal. The increase in total costs and
operating expenses was primarily due to increases of (i) $11.2 million in personnel-related costs including an increase of $1.7 million
in sales commission, (ii) $642,000 in third party partner fees, (iii) $318,000 in one-time charges related to the secondary offering of
shares of our common stock, (iv) $288,000 in cloud related expenses, (v) $242,000 in legal and outside consulting fees related to
investigation and recovery efforts of the unauthorized wire transfers, (vi) $245,000 in accounting and other outside consulting
expenses, (vii) $190,000 in third party license royalty expense, (viii) 89,000 in marketing promotional costs, and (ix) $58,000 in bad
debt expense partially offset by decreases of (i) $616,000 in international expenses from the foreign exchange fluctuation between the
U.S. dollar, the Euro, British pound and Indian rupee, (ii) $395,000 in marketing programs expenses, and (iii) $10,000 in support of
third party software.
Interest Expense, Net
Net interest expense was $181,000, $483,000 and $722,000 in fiscal years 2014, 2013 and 2012, respectively. This represents a
decrease of 63% or $302,000 in fiscal year 2014, compared to fiscal year 2013 and a decrease of 33% or $239,000 in fiscal year 2013,
compared to fiscal year 2012. Interest income was not significant in any year.
The decrease in interest expense in fiscal year 2014 and 2013 was primarily due to repayment of related party notes principal
balance.
Other Income (Expense), Net
Other expense was $415,000 in fiscal year 2014, compared to other income of $303,000 in fiscal year 2013 and other expense of
$677,000 in fiscal year 2012. Other expense and income in fiscal years 2014 and 2013 primarily included the foreign exchange loss
and gain on international trade receivables.
Income Tax Provision
Income tax provision was $591,000, $379,000 and $390,000 in fiscal years 2014, 2013 and 2012, respectively. Income tax
provision was primarily due to the income tax provision for foreign subsidiaries.
37
Related Party Transactions
We had an interest bearing subordinated loan, or the Note, from our Chief Executive Officer, Ashutosh Roy, which originated in
2002 and previously had a maturity date of March 31, 2012. On March 31, 2012, we entered into Amendment No.1 to the Note
agreement with Mr. Roy. Pursuant to the Amendment and subject to the terms and conditions contained therein, we agreed that (i) the
maturity date of the Note would be extended 90 days to June 29, 2012; (ii) as of April 1, 2012 the “Face Amount” of the Note would
be $5.6 million, which includes $109,000 of interest for the 90 day extension. The face amount of $5.6 million reflected the reduced
interest rate on the Note of 8% beginning April 1, 2012, prior to which the interest rate was 12%; and (iii) we could prepay the Note in
full or in part at any time prior to the maturity date without interest penalty.
On June 29, 2012, we entered into Amendment No. 2 to the Note with Mr. Roy. Pursuant to the Amendment and subject to the
terms and conditions contained therein, we agreed to extend the maturity date of the Note to July 31, 2013. We could prepay the Note
in full or in part at any time prior to the maturity date without interest penalty. The interest expense on the related party notes was
$19,000, $334,000 and $588,000 for fiscal years 2014, 2013 and 2012, respectively.
On July 31, 2013, we repaid the outstanding amounts of $2.9 million to Mr. Roy. Such amounts equaled $2.9 million.
New Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated
financial statements, see Note 1 of Notes to Consolidated Financial Statements included in Item 8 Financial Statements and
Supplementary Data of this Annual Report.
Liquidity and Capital Resources
Overview
As of June 30, 2014 and 2013, our cash and cash equivalents was $8.8 million and $16.2 million, respectively. Our working
capital was a negative $1.9 million at June 30, 2014, a decrease from working capital of $2.0 million at June 30, 2013. As of June 30,
2014, our deferred revenue was $13.7 million, compared to $19.7 million at June 30, 2013. Unbilled deferred revenue, representing
business that is contracted but not yet invoiced or collected and off balance sheet, was $22.6 million at June 30, 2014, down from
$24.8 million at June 30, 2013.
Based upon our fiscal year 2015 plan, we believe that existing capital resources will enable us to maintain current and planned
operations for at least the next 12 months. From time to time, however, we may consider opportunities for raising additional capital
and/or exchanging all or a portion of our existing debt for equity. We can make no assurances that such opportunities will be available
to us on economic terms we consider favorable, if at all.
If adequate funds are not available on acceptable terms, our ability to achieve or sustain positive cash flows, maintain current
operations, fund any potential expansion, take advantage of unanticipated opportunities, develop or enhance products or services, or
otherwise respond to competitive pressures would be significantly limited. Our expectations as to our future cash flows and our future
cash balances are subject to a number of assumptions, including assumptions regarding anticipated increases in our revenue, the mix
of new cloud and license business, our ability to retain existing customers and customer purchasing and payment patterns, many of
which are beyond our control.
Cash Flows
Net cash used by operating activities was $4.7 million in fiscal year 2014 compared to net cash provided by operating activities
of $10.0 million in fiscal year 2013. In fiscal year 2014, net cash used by operating activities increased $14.7 million over fiscal year
2013 primarily due lower net income after adjusting for depreciation and amortization, amortization of deferred commissions, stock-
based compensation, and changes in working capital accounts specifically, decreases in deferred revenue, accounts receivable and
prepaid and other current assets.
Net cash provided by operating activities was $10.0 million in fiscal year 2013 compared to $1.0 million in fiscal year 2012. In
fiscal year 2013, net cash provided by operating activities increased $9.0 million over fiscal year 2012 primarily due to higher net
income after adjusting for depreciation and amortization, stock-based compensation, and changes in working capital accounts
specifically, increases in deferred revenue, accounts receivable and deferred commissions.
38
Net cash used in investing activities was $1.8 million in fiscal year 2014 compared to $2.5 million in fiscal year 2013 and $1.2
million in 2012. Cash used in investing activities in fiscal year 2014 primarily related to purchases of equipment and software of $1.8
million to support the increase in investment for cloud infrastructure and equipment for new employees. Net cash used in investing
activities in fiscal year 2013 primarily related to purchases of equipment and software of $2.5 million to support the increase in our
cloud business and for new employees. Net cash used in investing activities in fiscal year 2012 primarily related to purchases of
equipment and software of $1.8 million partially offset by $605,000 from the sale proceeds of short-term investments.
Net cash used in financing activities was $1.1 million in fiscal year 2014 compared to $936,000 in fiscal year 2013 and $2.4
million in 2012. Net cash used in financing activities in fiscal year 2014 primarily included the repayment of $2.9 million of related
party notes, payments of $2.7 million on existing bank borrowings, and payments of $144,000 on capital lease obligations partially
offset by proceeds from new bank borrowings of $3.0 million, proceeds from exercise of stock options of $578,000 and a $1.0 million
decrease in restricted cash. Net cash used in financing activities in fiscal year 2013 primarily included the repayment of $3.0 million
of related party notes, payments of $1.7 million on existing bank borrowings partially offset by proceeds from new bank borrowings
of $3.0 million and proceeds from exercise of stock options of $730,000. Net cash used in financing activities in fiscal year 2012
primarily included payments of $1.7 million on existing bank borrowings, and increase of $1.0 million in restricted cash and payment
of $28,000 on capital lease obligations partially offset by proceeds from exercise of stock options of $317,000.
Related Party Notes Payable and Bank Borrowings
On December 31, 2012, we used the proceeds from the new bank borrowings to make a $3.0 million partial repayment to
Mr. Roy which reduced the remaining indebtedness to Mr. Roy to $2.8 million.
On July 31, 2013, we repaid the outstanding amounts of $2.9 million to Mr. Roy.
Accounting for Unauthorized Wire Transfers
On February 15, 2013, our U.K. subsidiary discovered that three unauthorized wire transfers, or the Unauthorized Transactions,
in the amount of approximately $3.9 million were made from our bank account on February 14, 2013. We promptly obtained a court
order freezing the funds, contacted law enforcement and obtained an independent third-party investigation firm to investigate the
matter.
With the assistance of the independent third-party investigation firm and our bank, approximately $2.7 million was recovered
and re-deposited to our bank account in March 2013. We filed an insurance claim for approximately $1.2 million of the remaining
outstanding funds and had reported the pending insurance recovery net of a $25,000 deductible as a receivable from our insurance
carrier under “Prepaid and other current assets” on our consolidated balance sheet as of June 30, 2013.
On September 6, 2013, we received insurance proceeds of $1.2 million for the pending claim we filed with our insurance carrier.
Commitments
The following table summarizes our contractual obligations as of June 30, 2014 and the effect such obligations are expected to
have on its liquidity and cash flow in future periods (in thousands):
Total
1 Year
2-3 Years
4-5 Years
More than
5 Years
Payments Due by Period
Operating leases ........................................... $
Capital leases ................................................ $
Bank borrowings .......................................... $
Cloud services .............................................. $
Total ........................................................ $
10,551 $
1,131 $
5,000 $
1,483 $
18,165 $
1,533 $
456 $
1,417 $
610 $
4,016 $
3,351 $
675
3,000 $
873
7,899 $
2,340 $
—
583
—
2,923 $
3,327
—
—
—
3,327
Off-Balance Sheet Arrangements
As of June 30, 2014, we had no significant off-balance-sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K.
39
Quarterly Results of Operations
The following tables set forth certain unaudited consolidated statement of operations data for the eight quarters ended June 30,
2014. This data has been derived from unaudited consolidated financial statements that, in the opinion of management, include all
adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in
conjunction with the Consolidated Financial Statements and Notes thereto.
The unaudited quarterly information should be read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere in this Form 10-K. We believe that period-to-period comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of future performance.
(cid:3)
Consolidated Statements of Operations
Data:
Revenue:
(cid:3) (cid:3)
(cid:3) (cid:3)
Jun. 30,
2014
Mar. 31,
2014
Dec. 31,
2013
(in thousands, except per share information)
Jun. 30,
2013
Sep. 30,
2013
Mar. 31,
2013
Dec. 31,
2012
Sep. 30,
2012
(cid:3) (cid:3) (cid:3) (cid:3)
(cid:3) (cid:3) (cid:3) (cid:3)
(cid:3) (cid:3) (cid:3)
(cid:3) (cid:3) (cid:3)
Subscription and support ......................... $ 10,157 $10,608 $10,246 $ 9,466 $ 8,955 $ 8,346 $ 7,806 $ 7,174
713
License .................................................... 5,378
2,836
Professional services ............................... 3,354
10,723
Total revenue ..................................... 18,889
1,396
Cost of subscription and support ............. 2,358
Cost of license .........................................
45
24
2,903
Cost of professional services ................... 3,729
4,344
Total cost of revenue.......................... 6,111
6,379
Gross profit ........................................ 12,778
4,616 4,098 3,426
4,398 3,016 3,505
17,969 15,460 14,737
1,536 1,355 1,208
46
3,265 3,180 3,012
4,827 4,569 4,266
13,142 10,891 10,471
2,519
4,899
18,026
2,238
28
3,716
5,982
12,044
3,838
2,378
15,682
1,971
26
3,536
5,533
10,149
3,065
4,354
17,665
1,951
26
3,859
5,836
11,829
26
34
Operating Expenses:
Research and development ...................... 2,799
Sales and marketing ................................ 8,727
General and administrative ...................... 1,957
Total operating expenses ................... 13,483
2,668
8,628
1,436
12,732
2,390
8,617
1,930
12,937
2,106
7,395
2,206
11,707
911
Income / (loss) from operations .........................
(99 )
(92)
Interest expense, net ...........................................
256
(260)
Other income / (expense), net ............................
(782) (1,163) (1,910) 2,036 1,068
Income / (loss) before income tax ......................
Income tax (provision) .......................................
(38 )
(94)
(225)
Net income / (loss) ............................................. $ (1,018) $ (1,007) $ (1,217) $ (2,004) $ 1,897 $ 1,030 $
Per share information:
(688) (1,108) (1,558) 2,146
(107 )
(3 )
(705)
(35)
(60)
(800)
(218)
(17)
(77)
(37)
(18)
(139 )
(54)
1,950
2,226 2,101 2,142
5,549
6,912 6,027 5,946
1,507
1,858 1,852 1,570
9,006
10,996 9,980 9,658
(2,627)
813
(141)
(136)
(43)
93
(2,811)
770
(129)
(73)
641 $ (2,884)
Basic net income / (loss) per
common share ............................................ $ (0.04) $ (0.04) $ (0.05) $ (0.08) $
Diluted net income / (loss) per
common share ............................................ $ (0.04) $ (0.04) $ (0.05) $ (0.08) $
Weighted average shares used in
computing basic net income / (loss)
per common share ......................................... 25,462
Weighted average shares used in
computing diluted net income / (loss)
per common share ......................................... 25,462
25,418
25,418
25,356
25,356
25,178
25,178
0.08 $ 0.04 $
0.03 $
(0.12)
0.07 $ 0.04 $
0.02 $
(0.12)
25,050 24,889 24,670
26,504 26,373 26,099
24,516
24,516
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and India and sell these products in the United States and internationally. Generally,
international sales are made in local currency. As a result, our financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. Identifiable assets denominated in foreign currency at
June 30, 2014 totaled approximately $13.3 million. We do not currently use derivative instruments to hedge against foreign exchange
risk. As such we are exposed to market risk from fluctuations in foreign currency exchange rates, principally from the exchange rate
between the U.S dollar and the Euro and the British pound and the Indian rupee. An unfavorable change in the foreign currency
exchange rates may cause an adverse effect on our financial position or results of operations.
41
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
eGain Corporation
Consolidated Financial Statements
As of June 30, 2014 and 2013 and for the years ended June 30, 2014, 2013, and 2012
42
eGain Corporation
Index to Consolidated Financial Statements
Report of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm ................................................................
Consolidated Financial Statements:
Page
Number
44
Consolidated Balance Sheets, June 30, 2014 and 2013 .....................................................................................................
Consolidated Statements of Operations for the years ended June 30, 2014, 2013 and 2012 .............................................
Consolidated Statements of Comprehensive Income / (Loss) for the years ended June 30, 2014, 2013 and 2012 ...........
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2014, 2013 and 2012 .............................
Consolidated Statements of Cash Flows for the years ended June 30, 2014, 2013 and 2012 ............................................
Notes to Consolidated Financial Statements .....................................................................................................................
45
46
47
48
49
50
43
REPORT ON INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
eGain Corporation
Sunnyvale, California
We have audited the accompanying consolidated balance sheets of eGain Corporation and its subsidiaries (the “Company”) as
of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive income/(loss), stockholders’ equity,
and cash flows for each of the three years in the period ended June 30, 2014. Our audits also included the financial statement schedule
listed in the index to this Annual Report on Form 10-K at Part IV Item 15(a)(2). These consolidated financial statements and the
financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of eGain Corporation and its subsidiaries as of June 30, 2014 and 2013, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 2014 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of June 30, 2014, based on criteria established in Internal Control — Integrated
Framework (1992 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated September 12, 2014 expressed an unqualified opinion thereon.
/s/ Burr Pilger Mayer, Inc.
San Jose, California
September 12, 2014
44
eGAIN CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents .......................................................................................... $
Restricted cash ............................................................................................................
Accounts receivable, less allowance for doubtful accounts
of $574 and $392 at June 30, 2014 and 2013, respectively ......................................
Deferred commissions ................................................................................................
Prepaid and other current assets ..................................................................................
Total current assets ................................................................................................
Property and equipment, net .............................................................................................
Deferred commission, net of current portion ....................................................................
Goodwill ...........................................................................................................................
Restricted cash, net of current portion ..............................................................................
Other assets ......................................................................................................................
Total assets ............................................................................................................ $
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................................................ $
Accrued compensation ................................................................................................
Accrued liabilities .......................................................................................................
Deferred revenue .........................................................................................................
Capital lease obligation ...............................................................................................
Bank borrowings .........................................................................................................
Related party notes payable ........................................................................................
Total current liabilities ..........................................................................................
Deferred revenue, net of current portion ..........................................................................
Capital lease obligation, net of current portion ................................................................
Bank borrowings, net of current portion ..........................................................................
Other long term liabilities .................................................................................................
Total liabilities .......................................................................................................
Commitments and contingencies (Notes 7 and 8) ............................................................
Stockholders' equity:
Common stock, $0.001 par value - authorized: 50,000 shares;
outstanding: 25,471 and 25,106 shares at June 30, 2014 and
2013, respectively .....................................................................................................
Additional paid-in capital .................................................................................................
Notes receivable from stockholders .................................................................................
Accumulated other comprehensive loss ...........................................................................
Accumulated deficit .........................................................................................................
Total stockholders' equity ......................................................................................
Total liabilities and stockholders' equity ............................................................... $
June 30,
2014
2013
8,785 $
30
11,163
865
1,348
22,191
4,489
337
4,880
—
750
32,647 $
2,162 $
5,729
1,456
12,920
392
1,417
—
24,076
793
625
3,583
521
29,598
16,206
29
12,307
1,745
2,377
32,664
3,544
776
4,880
1,000
672
43,536
2,583
4,624
2,193
15,679
—
2,667
2,897
30,643
4,057
—
2,000
848
37,548
25
330,657
(83 )
(970 )
(326,580 )
3,049
32,647 $
25
328,552
(87)
(1,168)
(321,334)
5,988
43,536
The accompanying notes are an integral part of these consolidated financial statements
45
eGAIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
Revenue:
Subscription and support .......................................................... $
License .....................................................................................
Professional services ................................................................
Total revenue ......................................................................
Cost of subscription and support ..............................................
Cost of license ..........................................................................
Cost of professional services ....................................................
Total cost of revenue ................................................................
Gross profit .........................................................................
Operating expenses:
Research and development ............................................................
Sales and marketing .......................................................................
General and administrative ............................................................
Total operating expenses .....................................................
Income (loss) from operations .............................................................
Interest expense, net ............................................................................
Other income (expense), net ................................................................
Income (loss) before income tax provision .........................................
Income tax provision ...........................................................................
Net income (loss) ................................................................................ $
Per share information:
Basic net income (loss) per common share .............................. $
Diluted net income (loss) per common share ........................... $
Weighted average shares used in computing
basic net income (loss)
per common share..................................................................
Weighted average shares used in computing
diluted net income (loss)
per common share..................................................................
Below is a summary of stock-based compensation
included in the costs and expenses above:
2014
Years Ended June 30,
2013
2012
40,477 $
14,800
14,985
70,262
8,518
104
14,840
23,462
46,800
9,963
33,367
7,529
50,859
(4,059)
(181)
(415)
(4,655)
(591)
(5,246) $
(0.21) $
(0.21) $
32,281 $
12,853
13,755
58,889
5,495
151
12,360
18,006
40,883
8,419
24,434
6,787
39,640
1,243
(483 )
303
1,063
(379 )
684 $
0.03 $
0.03 $
23,594
11,067
8,703
43,364
5,363
(39)
8,112
13,436
29,928
6,132
20,086
5,743
31,961
(2,033)
(722)
(677)
(3,432)
(390)
(3,822)
(0.16)
(0.16)
25,353
24,780
24,329
25,353
26,089
24,329
Cost of revenue .............................................................................. $
Research and development ............................................................ $
Sales and marketing ....................................................................... $
General and administrative ............................................................ $
280 $
386 $
464 $
397 $
121 $
261 $
360 $
339 $
77
180
274
325
The accompanying notes are an integral part of these consolidated financial statements
46
eGAIN CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
(in thousands)
Net income (loss) ................................................................................. $
Other comprehensive income / (loss), net of taxes:
Foreign currency translation adjustments .......................................
Cumulative translation adjustments from liquidation of
Singapore subsidiary ....................................................................
Other comprehensive income / (loss), net of taxes: ..............................
Total comprehensive income / (loss) .................................................... $
2014
Years Ended June 30,
2013
2012
(5,246) $
684 $
(3,822)
198
(418 )
(195)
—
198
(5,048) $
—
(418 )
266 $
245
50
(3,772)
The accompanying notes are an integral part of these consolidated financial statements
47
eGAIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
238
—
—
—
BALANCES AT JUNE 30, 2011................ 24,062 $
—
Interest on stockholder notes .......................
185
Exercise of stock options ............................
Issuance of common stock due to exercise
of warrants ..................................................
Stock-based compensation ..........................
Net loss .......................................................
Foreign currency translation adjustments ...
Cumulative translation adjustment from
liquidation of Singapore subsidiary ............
—
BALANCES AT JUNE 30, 2012................ 24,485
—
Interest on stockholder notes .......................
621
Exercise of stock options ............................
—
Stock-based compensation ..........................
—
Net income ..................................................
Foreign currency translation adjustments ...
—
BALANCES AT JUNE 30, 2013................ 25,106
—
Repayment on stockholder notes ................
—
Interest on stockholder notes .......................
365
Exercise of stock options ............................
—
Stock-based compensation ..........................
—
Net loss .......................................................
Foreign currency translation adjustments ...
—
BALANCES AT JUNE 30, 2014................ 25,471 $
Common Stock
Shares Amount
Notes
Receivable
From
Stockholders
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
Additional
Paid-in
Capital
24 $ 325,569 $
—
—
317
—
—
—
—
—
—
856
—
—
—
—
24 326,742
—
—
729
1
1,081
—
—
—
—
—
25 328,552
—
—
—
—
578
—
1,527
—
—
—
—
—
25 $ 330,657 $
Accumulated
Deficit
(318,196) $
—
—
(800 ) $
—
—
—
—
—
(195 )
—
—
(3,822)
—
245
(750 )
—
—
—
—
(418 )
(1,168 )
—
—
—
—
—
198
(970 ) $
—
(322,018)
—
—
—
684
—
(321,334)
—
—
—
—
(5,246)
—
(326,580) $
6,515
(3)
317
—
856
(3,822)
(195)
245
3,913
(2)
730
1,081
684
(418)
5,988
6
(2)
578
1,527
(5,246)
198
3,049
(82) $
(3)
—
—
—
—
—
—
(85)
(2)
—
—
—
—
(87)
6
(2)
—
—
—
—
(83) $
The accompanying notes are an integral part of these consolidated financial statements
48
eGAIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2014
Years Ended June 30,
2013
2012
(5,246) $
684 $
(3,822)
Cash flows from operating activities:
Net income (loss) ................................................................................. $
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................................
Stock-based compensation .............................................................
Provision for doubtful accounts ......................................................
Amortization of deferred commissions ..........................................
Accrued interest on related party notes payable .............................
Changes in operating assets and liabilities
Accounts receivable, net ...........................................................
Deferred commissions ...............................................................
Prepaid and other current assets ................................................
Other assets ...............................................................................
Accounts payable ......................................................................
Accrued compensation ..............................................................
Accrued liabilities .....................................................................
Deferred revenue .......................................................................
Other long term liabilities .........................................................
Net cash provided by (used in) operating activities ...................................
Cash flows from investing activities:
Purchases of property and equipment ..................................................
Sale of short-term investments .............................................................
Decrease (increase) in restricted cash ...................................................
Net cash used in investing activities ..........................................................
Cash flows from financing activities:
Payments on related party notes payable .............................................
Payments on bank borrowings .............................................................
Decrease (increase) in restricted cash ..................................................
Payments on capital lease obligation ...................................................
Proceeds from bank borrowings ..........................................................
Proceeds from exercise of stock options ..............................................
Repayments on related party notes receivable .....................................
Net cash used in financing activities .........................................................
Effect of exchange rate differences on cash and
cash equivalents ......................................................................................
Net increase / (decrease) in cash and cash equivalents ........................
Cash and cash equivalents at beginning of year ........................................
Cash and cash equivalents at end of year ............................................. $
2,108
1,527
258
1,926
19
1,542
(568)
1,168
(88)
(514)
922
(798)
(6,558)
(357)
(4,659)
(1,772)
—
(1)
(1,773)
(2,916)
(2,667)
1,000
(144)
3,000
578
6
(1,143)
154
(7,421)
16,206
8,785 $
1,254
1,081
272
1,641
334
(6,147 )
(2,565 )
(1,434 )
31
648
970
942
11,720
594
10,025
(2,465 )
—
5
(2,460 )
(3,000 )
(1,666 )
—
—
3,000
730
—
(936 )
(334(cid:12)
6,295
9,911
16,206 $
Supplemental cash flow disclosures:
Cash paid for interest ........................................................................... $
Cash paid for income taxes .................................................................. $
216 $
480 $
1,919 $
297 $
Non-cash items:
Purchases of equipment through trade accounts payable ..................... $
Property and equipment acquired under a capital lease ....................... $
Cashless exercise of warrants for shares of common stock .................
22 $
1,148 $
-
76 $
- $
-
The accompanying notes are an integral part of these consolidated financial statements
49
846
856
200
628
588
1,350
(1,723)
(250)
(527)
625
197
(246)
2,313
(34)
1,001
(1,827)
605
(2)
(1,224)
—
(1,667)
(1,000)
(28)
—
317
—
(2,378)
88
(2,513)
12,424
9,911
166
186
367
-
238
eGAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
eGain Corporation (“eGain”, the “Company”, “our”, “we” or “us”) is a leading provider of cloud-based and on-site customer
engagement software solutions. For over a decade, our solutions have helped improve customer experience, grow sales, and optimize
service processes across the web, social, and phone channels. Hundreds of global enterprises rely on us to transform fragmented sales
engagement and customer service operations into unified customer engagement hubs. We have operations in the United States, United
Kingdom, Netherlands, Ireland, Italy, Germany, France, South Africa, and India.
Principles of Consolidation
The consolidated financial statements include the accounts of eGain and our wholly-owned subsidiaries, eGain Communications
Ltd., eGain Communications Pvt. Ltd., eGain Communications SrL, eGain Communications B.V., eGain Communications (SA),
eGain France S.A.R.L and eGain Deutschland GmbH. All significant intercompany balances and transactions have been eliminated.
In fiscal year 2012, we liquidated our Singapore subsidiary (eGain Communications Pacific Pte. Ltd) and recorded a
reclassification adjustment from accumulated other comprehensive loss on the consolidated balance sheet to other expense on the
consolidated statement of operations. In fiscal year 2013, we liquidated our Cayman subsidiary (eGain Cayman Ltd). There was no
financial impact to our consolidated financial statements.
Certain reclassifications have been made to the consolidated balance sheets and the consolidated statement of cash flows for the
fiscal year period ended June 30, 2013 to conform to the presentation of the fiscal year period ended June 30, 2014. There was no
effect on total assets, stockholders’ equity or net income (loss) for the year ended June 30, 2013.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The
estimates are based upon information available as of the date of the financial statements. Actual results could differ from those
estimates.
We evaluate our significant estimates, including those related to revenue recognition, provision for doubtful accounts, valuation
of stock-based compensation, valuation of long-lived assets, valuation of deferred tax assets, and litigation, among others. We base
our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. We refer to accounting estimates of this type as “critical accounting estimates.”
Foreign Currency
The functional currency of each of our international subsidiaries is the local currency of the country in which it operates. Assets
and liabilities of our foreign subsidiaries are translated at month-end exchange rates, and revenue and expenses are translated at the
average monthly exchange rates. The resulting cumulative translation adjustments are recorded as a component of accumulated other
comprehensive income/(loss). Foreign currency transaction gains and losses are included in “other income/(expense), net” in the
consolidated statements of operations, and resulted in a loss of $405,000, a gain of $317,000, and a loss of $461,000 in fiscal years
2014, 2013 and 2012, respectively.
Cash and Cash Equivalents and Investments
We consider all highly liquid investments with an original purchase to maturity date of three months or less to be cash
equivalents. Time deposits held for investments that are not debt securities are included in short-term investments in the consolidated
balance sheets. Investments in time deposits with original maturities of more than three months but remaining maturities of less than
one year are considered short-term investments. Investments held with the intent to reinvest or hold for longer than a year, or with
remaining maturities of one year or more, are considered long-term investments. Our cash equivalents at June 30, 2014 and 2013
consisted of money market funds with original maturities of three months or less, and are therefore classified as cash and cash
equivalents in the accompanying consolidated balance sheets. As of June 30, 2014 and 2013, we did not have any short-term or long-
term investments.
50
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and debt,
including related party debt. We do not have any derivative financial instruments. We believe the reported carrying amounts of these
financial instruments approximate fair value, based upon their short-term nature and comparable market information available at the
respective balance sheet dates.
Concentration of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade
accounts receivable. Cash and cash equivalents and investments are deposited with high credit quality institutions. We are exposed to
credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. We invest excess cash
primarily in money market funds, which are highly liquid securities that bear minimal risk. In addition, we have investment policies
and procedures that are reviewed periodically to minimize credit risk. Our cash, cash equivalents and restricted cash were $8.8 million
as of June 30, 2014 which exceeded the FDIC (Federal Deposit Insurance Corporation) limit.
Our customer base extends across many different industries and geographic regions. We perform ongoing credit evaluations of
our customers with outstanding receivables and generally do not require collateral. In addition, we established an allowance for
doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. There were two
different customers that accounted for 16% and 10% of total revenue in fiscal year 2014. Two different customers accounted for 18%
and 10% of total revenue in fiscal years 2013 and 2012, respectively. Two customers accounted for approximately 28% and 14%, of
accounts receivable at June 30, 2014. Two customers accounted for approximately 15% and 11%, of accounts receivable at June 30,
2013. One customer accounted for approximately 17% of accounts receivable at June 30, 2012.
Sales to customers outside of North America accounted for $31.7 million, $23.4 million, and $19.1 million of our total revenue
in the fiscal years 2014, 2013 and 2012, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
We extend unsecured credit to our customers on a regular basis. Our accounts receivable are derived from revenue earned from
customers and are not interest bearing. We also maintain an allowance for doubtful accounts to reserve for potential uncollectible trade
receivables. We review our trade receivables by aging category to identify specific customers with known disputes or collectibility
issues. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general
economic conditions in the U.S. and internationally, and changes in customer financial conditions. If we made different judgments or
utilized different estimates, material differences may result in additional reserves for trade receivables, which would be reflected by
charges in general and administrative expenses for any period presented. We write off a receivable after all collection efforts have
been exhausted and the amount is deemed uncollectible.
Receivable from Insurance Recovery
In certain circumstances, we record insurance recoveries that will be recognized during the succeeding twelve month period in
other current assets. Such amounts represent pending insurance claims and are recorded net of any insurance deductible in accordance
with the guidance in ASC 410, Asset Retirement and Environmental Obligations, and other interpretations for recognition of an asset
related to insurance recovery when probable.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful life of the respective assets, which typically is between three to five years.
Leasehold improvements and leased equipment are depreciated on straight-line basis over the shorter of the lease term or useful life of
the asset, which is typically three to five years.
Goodwill and Other Intangible Assets
We review goodwill annually for impairment or sooner whenever events or changes in circumstances indicate that they may be
impaired. These events or circumstances could include a significant change in the business climate, legal factors, operating
performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. In addition, we evaluate
purchased intangible assets to determine that all such assets have determinable lives. We operate under a single reporting unit and
accordingly, all of our goodwill is associated with the entire company. We performed annual impairment reviews for fiscal years
2014, 2013 and 2012 and found no impairment.
51
Impairment of Long-Lived Assets
We review long-lived assets for impairment, including property and equipment and intangible assets, whenever events or
changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. During fiscal years 2014, 2013, and 2012,
we did not have any such losses.
Revenue Recognition
We enter into arrangements to deliver multiple products or services (multiple-elements). We apply software revenue recognition
rules and multiple-elements arrangement revenue guidance. Significant management judgments and estimates are made and used to
determine the revenue recognized in any accounting period. Material differences may result in changes to the amount and timing of
our revenue for any period if different conditions were to prevail. We present revenue, net of taxes collected from customers and
remitted to governmental authorities.
We derive revenue from three sources:
(i) Subscription and support fees primarily consist of cloud revenue from customers accessing our enterprise cloud computing
services, term license revenue, and maintenance and support revenue;
(ii) License fees primarily consist of perpetual software license revenue;
(iii) Professional services primarily consist of consulting, implementation services and training.
Revenues are recognized when all of the following criteria are met:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
Persuasive evidence of an arrangement exists: Evidence of an arrangement consists of a written contract signed by both
the customer and management prior to the end of the period. We use signed software license, services agreements and
order forms as evidence of an arrangement for sales of software, cloud, maintenance and support. We use signed
statement of work as evidence of arrangement for professional services.
Delivery or performance has occurred: Software is delivered to customers electronically or on a CD-ROM, and license
files are delivered electronically. Delivery is considered to have occurred when we provide the customer access to the
software along with login credentials.
Fees are fixed or determinable: We assess whether the fee is fixed or determinable based on the payment terms associated
with the transaction. Arrangements where a significant portion of the fee is due beyond 90 days from delivery are
generally not considered to be fixed or determinable.
Collectibility is probable: We assess collectibility based on a number of factors, including the customer’s past payment
history and its current creditworthiness. Payment terms generally range from 30 to 90 days from invoice date. If we
determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection
becomes reasonably assured, which is generally upon receipt of cash payment.
We apply the provisions of ASC 985-605, Software Revenue Recognition, to all transactions involving the licensing of software
products. In the event of a multiple element arrangement for a license transaction, we evaluate the transaction as if each element
represents a separate unit of accounting taking into account all factors following the accounting standards. We apply ASC 605,
Revenue Recognition, for cloud transactions to determine the accounting treatment for multiple elements. We also apply ASC 605-35
for fixed fee arrangements in which we use the percentage of completion method to recognize revenue when reliable estimates are
available for the costs and efforts necessary to complete the implementation services. When such estimates are not available, the
completed contract method is utilized. Under the completed contract method, revenue is recognized only when a contract is completed
or substantially complete.
When licenses are sold together with system implementation and consulting services, license fees are recognized upon shipment,
provided that (i) payment of the license fees is not dependent upon the performance of the consulting and implementation services,
(ii) the services are available from other vendors, (iii) the services qualify for separate accounting as we have sufficient experience in
providing such services, have the ability to estimate cost of providing such services, and we have vendor-specific objective evidence,
or VSOE, of fair value, and (iv) the services are not essential to the functionality of the software.
52
We enter into arrangements with multiple-deliverables that generally include subscription, maintenance and support, and
professional services. We evaluate whether each of the elements in these arrangements represents a separate unit of accounting, as
defined by ASC 605, using all applicable facts and circumstances, including whether (i) we sell or could readily sell the element
unaccompanied by the other elements, (ii) the element has stand-alone value to the customer, and (iii) there is a general right of return.
We use VSOE, of fair value for each of those units, when available. For revenue recognition with multiple-deliverable elements, in
certain limited circumstances when VSOE of fair value does not exist, we apply the selling price hierarchy, which includes VSOE,
third-party evidence of selling price, or TPE, and best estimate of selling price, or BESP. We determine the relative selling price for a
deliverable based on VSOE, if available, or BESP, if VSOE is not available. We have determined that TPE is not a practical
alternative due to differences in our service offerings compared to other parties and the availability of relevant third-party pricing
information.
We determine BESP by considering our overall pricing objectives and market conditions. Significant pricing practices taken
into consideration include our discounting practices, the size and volume of our transactions, customer demographic, the geographic
area where services are sold, price lists, its go-to-market strategy, historical standalone sales and contract prices. The determination of
BESP is made through consultation with and approval by our management, taking into consideration the go-to-market strategy. As our
go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in relative selling
prices, including both VSOE and BESP.
Subscription and Support Revenue
Cloud Revenue
Cloud revenue consists of subscription fees from customers accessing our cloud-based service offerings. We recognize cloud
services revenue ratably over the period of the applicable agreement as services are provided. Cloud agreements typically have an
initial term of one or two years and automatically renew unless either party cancels the agreement. The majority of the cloud services
customers purchase a combination of our cloud service and professional services. In some cases, the customer may also acquire a
license for our software.
We consider the applicability of ASC 985-605, on a contract-by-contract basis. In cloud based agreements, where the customer
does not have the contractual right to take possession of the software, the revenue is recognized on a monthly basis over the term of
the contract. Invoiced amounts are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the
revenue recognition criteria have been met. We consider a software element to exist when we determine that the customer has the
contractual right to take possession of our software at any time during the cloud period without significant penalty and can feasibly
run the software on its own hardware or enter into another arrangement with a third party to host the software. Additionally, we have
established VSOE for the cloud and maintenance and support elements of perpetual license sales, based on the prices charged when
sold separately and substantive renewal terms. Accordingly, when a software element exists in a cloud services arrangement, license
revenue for the perpetual software license element is determined using the residual method and is recognized upon delivery. Revenue
for the cloud and maintenance and support elements is recognized ratably over the contractual time period. Professional services are
recognized as described below under “Professional Services Revenue.” If VSOE of fair value cannot be established for the
undelivered elements of an agreement, the entire amount of revenue from the arrangement is recognized ratably over the period that
these elements are delivered.
Term License Revenue
Term license revenue includes arrangements where our customers receive license rights to use our software along with bundled
maintenance and support services for the term of the contract. The majority of our contracts provide customers with the right to use
one or more products up to a specific license capacity. Certain of our license agreements stipulate that customers can exceed pre-
determined base capacity levels, in which case additional fees are specified in the license agreement. Term license revenue is
recognized ratably over the term of the license contract.
Maintenance and Support Revenue
Maintenance and support revenue consists of customers purchasing maintenance and support for our on-premise software. We
use VSOE of fair value for maintenance and support to account for the arrangement using the residual method, regardless of any
separate prices stated within the contract for each element. Maintenance and support revenue is recognized ratably over the term of the
maintenance contract, which is typically one year. Maintenance and support is renewable by the customer on an annual basis.
Maintenance and support rates, including subsequent renewal rates, are typically established based upon a specified percentage of net
license fees as set forth in the arrangement.
53
License Revenue
License revenue consists of perpetual license rights sold to customers to use our software in conjunction with related
maintenance and support services. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance
or the expiration of the acceptance period. In software arrangements that include rights to multiple software products and/or services,
we use the residual method under which revenue is allocated to the undelivered elements based on VSOE of the fair value of such
undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue, assuming all
other criteria for revenue recognition have been met. Such undelivered elements in these arrangements typically consist of software
maintenance and support, implementation and consulting services and in some cases, cloud services.
License sales to resellers as a percentage of total revenue were approximately 11%, 6%, and 2% in fiscal years 2014, 2013 and
2012, respectively. Revenue from sales to resellers is generally recognized upon delivery to the reseller but depends on the facts and
circumstances of the transaction, such as our understanding of the reseller’s plans to sell the software, if there are any return
provisions, price protection or other allowances, the reseller’s financial status and our experience with the particular reseller.
Historically sales to resellers have not included any return provisions, price protections or other allowances.
Professional Services Revenue
Professional Services Revenue includes system implementation, consulting and training. For license transactions, the majority
of our consulting and implementation services qualify for separate accounting. We use VSOE of fair value for the services to account
for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our
consulting and implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. Substantially all
of our contracts are on a time-and-materials basis. For time-and-materials contracts, where the services are not essential to the
functionality, we recognize revenue as services are performed. If the services are essential to functionality, then both the product
license revenue and the service revenue are recognized under the percentage of completion method. For a fixed-fee contract, we
recognize revenue based upon the costs and efforts to complete the services in accordance with the percentage of completion method,
provided we are able to estimate such cost and efforts.
In order to account for deliverables in a multiple-deliverable arrangement as separate units of accounting, the deliverables must
have standalone value upon delivery. For cloud services, in determining whether professional services have standalone value, we
consider the following factors for each professional services agreement: availability of the services from other vendors, the nature of
the professional services, the timing of when the professional services contract was signed in comparison to the subscription service
start date and the contractual dependence of the subscription service on the customer’s satisfaction with the professional services work.
We determined at or around July 1, 2013 that we had established standalone value for consulting and implementation services.
This was primarily due to the change in our business focus, the growing number of partners we trained and certified to perform these
deployment services and the consequential sale of subscription services without bundled implementation service. Revenues earned
from professional services related to consulting and implementation of a majority of our core subscription services are being
accounted for separately from revenues earned from subscription services beginning July 1, 2013 when the standalone value was
established for those professional services.
For those contracts that have standalone value, we recognized the services revenue when rendered for time and material
contracts, when the milestones are achieved and accepted by the customer for fixed price contracts or by percentage of completion
basis if there is no acceptance criteria. For cloud, consulting and implementation services that do not qualify for separate accounting,
we recognize the services revenue ratably over the estimated life of the customer cloud relationship, once cloud has gone live or
system ready. We currently estimate the life of the customer cloud relationship to be approximately 28 months, based on the average
life of all cloud customer relationships.
Training revenue that meets the criteria to be accounted for separately is recognized when training is provided.
Deferred Revenue
Deferred revenue primarily consists of payments received in advance of revenue recognition from cloud, term license, and
maintenance and support services and is recognized as the revenue recognition criteria are met. We generally invoice customers in
annual or quarterly installments. The deferred revenue balance does not represent the total contract value of annual or multi-year, non-
cancelable cloud or maintenance and support agreements. Deferred revenue is influenced by several factors, including seasonality, the
compounding effects of renewals, invoice duration, invoice timing and new business linearity within the quarter.
Deferred revenue that will be recognized during the succeeding twelve-month period is recorded as current deferred revenue and
the remaining portion is recorded as noncurrent.
54
Deferred Commissions
Deferred commissions are the direct and incremental costs directly associated with cloud and term license contracts with
customers and consist of sales commissions to our direct sales force.
The commissions are deferred and amortized over the terms of the related customer contracts, which are typically one or two
years. The commission payments are paid based on contract terms in the month following the quarter in which the commissions are
earned. The deferred commission amounts are recognized as “sales and marketing” expense in the consolidated statements of
operations over the terms of the related customer contracts, in proportion to the recognition of the associated revenue.
Deferred Costs
Deferred costs are included in other assets. Such amounts include fees we pay to third party partners for technology and are
deferred and amortized over the related customer contract term. Amortization of deferred third party partner fees is included in sales
and marketing expense in the accompanying consolidated statements of operations.
Leases
Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with ASC 840,
Accounting for Leases. When any one of the four test criteria in ASC 840 is met, the lease then qualifies as a capital lease.
Capital leases are capitalized at the lower of the net present value of the total amount payable under the leasing agreement
(excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis,
over a period consistent with our normal depreciation policy for tangible fixed assets, but not exceeding the lease term. Interest
charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.
Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease
payments, is recognized on a straight-line basis over the duration of each lease term.
Software Development Costs
We account for software development costs in accordance with ASC 985, Software, for costs of the software to be sold, leased
or marketed, whereby costs for the development of new software products and substantial enhancements to existing software products
are included in research and development expense as incurred until technological feasibility has been established, at which time any
additional costs are capitalized. Technological feasibility is established upon completion of a working model. To date, software
development costs incurred in the period between achieving technological feasibility and general availability of software have not
been material and have been charged to operations as incurred.
Advertising Costs
We expense advertising costs as incurred. Total advertising expenses for the fiscal years ended June 30, 2014, 2013 and 2012
were $120,000, $138,000, and $251,000 respectively.
Stock-Based Compensation
We account for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation. Under the fair
value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the vesting period. Determining the fair value of the stock-based awards at the grant date
requires significant judgment and the use of estimates, particularly surrounding Black-Scholes valuation assumptions such as stock
price volatility and expected option term.
Income Taxes
Income taxes are accounted for using the asset and liability method in accordance with ASC 740, Income Taxes. Under this
method, deferred tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Based upon the weight of
available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we
have provided a full valuation allowance against our net deferred tax assets except the deferred tax assets related to India, as we
believe it is more likely than not that those assets will be realized. Our provision consists of foreign and state income taxes.
55
The FASB clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statement, and prescribes a
recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a
tax return. Additionally, the FASB provides guidance under ASC 740, Income Taxes on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Comprehensive Income / (Loss)
We report comprehensive income / (loss) and its components in accordance with ASC 220, Comprehensive Income. Under the
accounting standards, comprehensive income / (loss) includes all changes in equity during a period except those resulting from
investments by or distributions to owners. Total comprehensive income / (loss) for each of the three years in the period ended June 30,
2014 is shown in the accompanying statements of comprehensive income / (loss). Accumulated other comprehensive loss presented in
the accompanying consolidated balance sheets at June 30, 2014 and 2013 consist of accumulated foreign currency translation
adjustments.
Net Income / (Loss) Per Common Share
Basic net income / (loss) per common share is computed using the weighted-average number of shares of common stock
outstanding. In periods where net income is reported, the weighted–average number of shares is increased by warrants and options in
the money to calculate diluted net income per common share.
The following table represents the calculation of basic and diluted net income (loss) per common share (in thousands, except per
share data):
Net income / (loss) applicable to common stockholders .......... $
Basic net income/(loss) per common share .............................. $
Weighted average common shares used in computing basic
net income/(loss) per common share.....................................
Effect of dilutive options and warrants outstanding ...........
Weighted average common shares used in computing diluted
net income/(loss) per common share.....................................
Diluted net income/(loss) per common share ........................... $
2014
Years Ended June 30,
2013
2012
(5,246) $
(0.21) $
684 $
0.03 $
25,353
—
24,780
1,309
25,353
(0.21) $
26,089
0.03 $
(3,822)
(0.16)
24,329
—
24,329
(0.16)
Weighted average shares of stock options to purchase 2,218,445, 593,282, and 2,612,113 shares of common stock at June 30,
2014, 2013, and 2012, respectively, were not included in the computation of diluted net income/(loss) per common share due to their
anti-dilutive effect. Such securities could have a dilutive effect in future periods.
Segment Information
We operate in one segment, the development, license, implementation and support of our customer service infrastructure
software solutions. Operating segments are identified as components of an enterprise for which discrete financial information is
available and regularly reviewed by our chief operating decision-maker in order to make decisions about resources to be allocated to
the segment and assess its performance. Our chief operating decision-makers under ASC 280, Segment Reporting, are our executive
management team. Our chief operating decision-makers review financial information presented on a consolidated basis for purposes
of making operating decisions and assessing financial performance.
56
Information relating to our geographic areas for the fiscal years ended June 30, 2014, 2013 and 2012 is as follows (in
thousands):
Year ended June 30, 2014:
North America .................................................................................. $
EMEA ...............................................................................................
Asia Pacific .......................................................................................
$
Year ended June 30, 2013:
North America .................................................................................. $
EMEA ...............................................................................................
Asia Pacific .......................................................................................
$
Year ended June 30, 2012:
North America .................................................................................. $
EMEA ...............................................................................................
Asia Pacific .......................................................................................
$
Total
Revenue
Operating
Income
(Loss)
Identifiable
Assets
38,589 $
30,198
1,475
70,262 $
35,517 $
23,025
347
58,889 $
24,254 $
18,862
248
43,364 $
(996 ) $
1,439
(4,502 )
(4,059 ) $
4,148 $
2,175
(5,080 )
1,243 $
(464 ) $
2,490
(4,059 )
(2,033 ) $
14,365
11,282
2,065
27,712
25,939
10,964
1,698
38,601
15,692
6,162
1,209
23,063
The following table provides the revenue for the fiscal years 2014, 2013 and 2012 (in thousands):
2014
Year Ended June 30,
2013
2012
Revenue:
Cloud services .................................................................... $
Maintenance and support services ......................................
License ...............................................................................
Professional services ..........................................................
$
(cid:3)
26,010 $
14,467
14,800
14,985
70,262 $
(cid:3) (cid:3) (cid:3) (cid:3)
19,056 (cid:3)$
13,225 (cid:3)
12,853 (cid:3)
13,755 (cid:3)
58,889 (cid:3)$
11,196
12,398
11,067
8,703
43,364
There were two different customers that accounted for 16% and 10% of total revenue in fiscal year 2014, 18% of total revenue
in fiscal year 2013, and 10% of total revenue in fiscal year 2012. Revenue is allocated to individual countries and geographical region
by customer, based on where the product is shipped to and location of services performed.
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes the revenue
recognition requirements in Topic 605, Revenue Recognition and requires entities to recognize revenue in a way that depicts the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The amendments in this update are effective for annual reporting periods beginning
after December 15, 2016 (our fiscal 2018), including interim periods within that reporting period, with early application not permitted.
The Company is currently evaluating the effects that the adoption of this guidance will have on the Company’s financial position,
results of operations and cash flows.
In July 2013, the FASB issued ASU 2013-11, Income Taxes, which applies to all entities that have unrecognized tax benefits
when a net operating loss, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this update
are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (our fiscal 2015). We do not
anticipate the adoption of this amendment to have a material impact on our consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters, which applies to the release of the cumulative
translation adjustment into net income, when a parent either sells a part or all of its investment in a foreign entity or no longer holds a
controlling financial interest in a subsidiary that is a nonprofit activity or business within a foreign entity. The amendments in this
update are effective for public companies prospectively beginning after December 15, 2013 (our fiscal 2015), and interim and annual
periods thereafter. We do not anticipate the adoption of this amendment to have a material impact on our consolidated financial
statements.
57
2. BALANCE SHEET COMPONENTS
Property and equipment consists of the following (in thousands):
Computers and equipment ........................................................................................ $
Leased Equipment ....................................................................................................
Furniture and fixtures ...............................................................................................
Leasehold improvements ..........................................................................................
Total ....................................................................................................................
Accumulated depreciation and amortization ............................................................
Property and equipment, net ..................................................................................... $
Year Ended June 30,
2014
2013
7,332 $
1,148
552
487
9,519
(5,030 )
4,489 $
6,207
—
316
407
6,930
(3,386)
3,544
Depreciation and amortization expense was $2.1 million, $1.3 million, and $846,000 for the years ended June 30, 2014, 2013
and 2012, respectively. Accumulated depreciation relating to computers, equipment and software under capital leases totaled $139,000
at June 30, 2014. Amortization of assets under capital leases is included in depreciation and amortization expense. Disposals of fixed
assets were $912,000, $254,000 and $75,000 at June 30, 2014, 2013 and 2012, respectively. Fully depreciated equipment of $19.2
million and $19.3 million at June 30, 2014 and 2013, respectively, is not included in the table above.
Accrued liabilities consist of the following (in thousands):
Customer refunds ..................................................................................................... $
Accrued other liabilities ...........................................................................................
VAT liability ............................................................................................................
Sales tax payable ......................................................................................................
Customer advances ...................................................................................................
Accrued rent .............................................................................................................
Accrued liabilities .................................................................................................... $
Year Ended June 30,
2014
2013
— $
626
446
243
141
—
1,456 $
1,064
454
313
119
211
32
2,193
3. RELATED PARTY NOTES PAYABLE
Related party notes payable consists of the following (in thousands):
Maturity Date
Related party notes payable .................................................... 7/31/2013
Interest Rate
8%
$
Year Ended June 30,
2013
2014
— $
2,897
We had an interest-bearing subordinated loan, or the Note, from our Chief Executive Officer, Ashutosh Roy, which originated in
2002 and previously had a maturity date of March 31, 2012. On March 31, 2012, we entered into Amendment No.1 to the Note with
Mr. Roy. Pursuant to the Amendment No.1 and subject to the terms and conditions contained therein, we agreed that (i) the maturity
date of the Note would be extended 90 days to June 29, 2012; (ii) as of April 1, 2012 the “Face Amount” of the Note would be $5.6
million, which included $109,000 of interest for the 90 day extension. The Face Amount of $5.6 million reflected the reduced interest
rate on the Note of 8% beginning April 1, 2012 prior to which the interest rate was 12%; and (iii) the Company could prepay the Note
in full or in part at any time prior to the maturity date without interest penalty.
On June 29, 2012, we entered into Amendment No. 2 to the Note with Mr. Roy. Pursuant to Amendment No. 2, and subject to
the terms and conditions contained therein, we agreed to extend the maturity date of the Note to July 31, 2013. We could prepay the
Note in full or in part at any time prior to the maturity date without interest penalty. On December 31, 2012, we made a $3.0 million
partial repayment to Mr. Roy bringing the remaining indebtedness to Mr. Roy to $2.8 million.
Interest expense on related party notes was $19,000, $334,000, $588,000 for fiscal years 2014, 2013, and 2012, respectively.
On July 31, 2013, we repaid the outstanding amount of $2.9 million owed and terminated the loan agreement.
58
4. BANK BORROWINGS
On June 27, 2011, we entered into a Loan and Security Agreement, or the Comerica Credit Facility, with Comerica Bank,
Comerica, or the Bank, as may be amended from time to time. Our obligations under the Comerica Credit Facility are collateralized by
a lien on our assets. There were a number of affirmative and negative covenants under the Comerica Credit Facility, with the primary
covenants being that we were required to maintain a minimum cash balance of $1.0 million and maintain a liquidity to debt ratio of at
least 1.50 to 1.00. If we failed to comply with our covenants, Comerica could declare any outstanding amounts immediately due and
payable and stop extending credit to us. In 2013, we accounted for the $1.0 million minimum cash balance as non-current restricted
cash as the funds were not available for immediate withdraw or use and the term of the borrowing arrangement was more than 12
months.
On December 28, 2012, we entered into a Third Amendment to Loan and Security Agreement with Comerica, which amended
the Second Loan and Security Agreement, entered into by the Company and the Bank on June 28, 2012. Subject to and upon the terms
and conditions of the Loan Amendment, the Bank agreed to make a term loan to the Company in one disbursement in the amount of
$3.0 million, which the Company was obligated to use to pay down indebtedness owed to Mr. Roy.
The Third Amendment to Loan and Security Agreement provides, in addition to other terms and conditions contained therein,
that (i) the maturity date of the term loan will be June 28, 2016; (ii) the Company shall repay the term loan in thirty-six (36) equal
monthly installments of principal in the amount of $83,333.33 each, plus all accrued interest, beginning on July 1, 2013, and
continuing on the same day of each month thereafter through the maturity date, at which time remaining amounts due shall be
immediately due and payable; (iii) the proceeds of the term loan must be used to pay-down the Note; (iv) the interest on the term loan
is the prime interest rate plus one percent and (v) there are no prepayment penalties or warrants associated with the term loan.
On December 31, 2012, the Company used the proceeds of the term loan to pay $3.0 million of the indebtedness due to
Mr. Roy.
On April 30, 2014, we entered into a Fourth Amendment to Loan and Security Agreement with Comerica, which amended the
Third Loan and Security Agreement, entered into by the Company and the Bank on December 28, 2012. Subject to and upon the terms
and conditions of this Agreement, the Bank agreed to make a term loan with a maturity date of January 30, 2018 to the Company in
one disbursement in the amount of $3.0 million. The Company shall repay the term loan in thirty-six (36) equal monthly installments
of principal in the amount of $83,333.33 each, plus all accrued interest, beginning on February 1, 2015. A revolving line was also
established whereby we may request advances up to an aggregate outstanding amount not to exceed the lesser of $7.0 million or the
borrowing base. Amounts borrowed under the revolving line may be repaid and re-borrowed at any time without penalty or premium
prior to April 30, 2016. As of June 30, 2014, there were no outstanding amounts due on the revolving line. Under the Fourth
Amendment, we are required to maintain a minimum cash balance of seventy percent of our consolidated cash at Comerica and
maintain liquidity to debt ratio of at least 2.00 to 1.00. As a result, the previously required $1.0 million minimum restricted cash
balance could be accounted for under cash and cash equivalents. As of June 30, 2014, we were in compliance with the covenants.
As of June 30, 2014 and 2013, the amount outstanding under the Comerica Term Loans was $5.0 million and $4.7 million
respectively. The interest rate on the loan was 4.25% as of June 30, 2014 and 2013.
The following table summarizes debt maturities during each of the next five fiscal years and thereafter on an aggregate basis at
June 30, 2014 (in thousands):
(cid:3)(cid:3)
2015 ..................................................................................................................................................... $
2016 .....................................................................................................................................................
2017 .....................................................................................................................................................
2018 .....................................................................................................................................................
Total bank borrowings ................................................................................................................... $
Bank
Borrowings
1,417
2,000
1,000
583
5,000
59
5. INCOME TAXES
Income / (loss) before income tax provision consisted of the following (in thousands):
United States ............................................................................
$
Foreign .....................................................................................
Income / (loss) before income tax provision ...................... $
(3,830) $
(825)
(4,655) $
(561 ) $
1,624
1,063 $
(3,441)
9
(3,432)
2014
Year Ended June 30,
2013
2012
The following table reconciles the federal statutory tax rate to the effective tax rate of the income tax provision:
2014
Year Ended June 30,
2013
2012
Federal statutory income tax rate ............................................
Current state taxes ...................................................................
Foreign rate differential ..........................................................
Permanent items ......................................................................
Expired net operating losses ...................................................
Research and development credits ..........................................
Foreign withholding tax ..........................................................
Nondeductible secondary offering expenditures .....................
Other items ..............................................................................
Net change in valuation allowance .........................................
Effective tax rate ...............................................................
34.0%
(8.3)
(7.1)
0.0
0.0
3.0
(1.0)
0.0
(2.3)
(31.0)
(12.7)%
34.0 %
56.9
24.1
0.0
313.6
(26.3 )
4.5
10.2
7.2
(388.5 )
35.7 %
34.0%
3.4
(9.4)
(0.5)
(47.9)
2.3
0.0
0.0
(2.9)
9.6
(11.4)%
The components of the income tax provision are as follows (in thousands):
Current provision:
Federal ................................................................................ $
Foreign ...............................................................................
State ....................................................................................
Total current:............................................................................
Deferred (benefit):
Foreign ...............................................................................
Total deferred: ..........................................................................
Income tax provision................................................................ $
2014
Year Ended June 30,
2013
2012
54 $
567
6
627
(36)
(36)
591 $
48 $
325
6
379
—
—
379 $
23
341
26
390
—
—
390
As of June 30, 2014, we had federal and state net operating loss carryforwards of approximately $191.3 million and $25.5
million, respectively. The net operating loss carryforwards will expire at various dates beginning in 2019 through 2033, if not utilized.
Partial amounts of the net operating loss are generated from the exercise of options and the tax benefit would be credited directly to
stockholders’ equity. We also had federal research and development credit carryforwards of approximately $2.0 million as of June 30,
2014 which will expire at various dates beginning in 2016 through 2033, if not utilized. The California research and development
credit carryforwards are approximately $3.3 million as of June 30, 2014 and have an indefinite carryover period. We also have U.K.
net operating loss carryforwards of approximately $8.0 million as of June 30, 2014.
Utilization of the net operating losses and credits may be subject to a substantial limitation due to the “change in ownership”
provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization.
Deferred tax assets and liabilities reflect the net tax effects of net operating loss and credit carryforwards and of temporary
differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes.
60
Significant components of our deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands):
(cid:3)
(cid:3)(cid:3)
Deferred tax assets:
Net operating loss carryforwards .................................................................................. $
Research credits ............................................................................................................
Deferred revenue ...........................................................................................................
Capitalized research and development ..........................................................................
Stock compensation ......................................................................................................
Accruals and Reserves ..................................................................................................
Other .............................................................................................................................
Total deferred tax assets ..........................................................................................
Valuation allowance for deferred tax assets .......................................................................
Net deferred tax assets, included in other assets................................................................. $
2014
June 30,
(cid:3)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
67,124 $
4,168
1,083
—
411
984
456
74,226
(74,130 )
96 $
2013
68,141
4,171
183
4
473
139
167
73,278
(73,216)
62
ASC 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not.
Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net
losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets except the deferred tax asset
related to India as we believe it is more likely than not that those assets will be realized.
The net valuation allowance increased by $914,000 for the year ended June 30, 2014, compared to the decrease of $5.0 million
for year ended June 30, 2013, and the increase of $924,000 for year ended June 30, 2012, respectively.
Deferred tax liabilities have not been recognized for $5.2 million of undistributed earnings of our foreign subsidiaries at
June 30, 2014. It is our intention to reinvest such undistributed earnings indefinitely in our foreign subsidiaries. If we distribute these
earnings, in the form of dividends or otherwise, we would be subject to both United States income taxes (net of applicable foreign tax
credits) and withholding taxes payable to the foreign jurisdiction.
Uncertain Tax Positions
We apply ASC 740, Income Taxes, related to uncertainty in income taxes.
The aggregate changes in the balance of our gross unrecognized tax benefits during fiscal years 2014, 2013 and 2012 were as
follows (in thousands):
Beginning balance .................................................................... $
Increases in balances related to tax positions taken during
current periods ......................................................................
Decrease in balances related to tax positions taken during
prior periods ..........................................................................
Ending balance ......................................................................... $
2014
Year Ended June 30,
2013
2012
1,778 $
1,193 $
1,163
58
585
30
(546)
1,290 $
—
1,778 (cid:3) $
—
1,193
We recognize accrued interest and penalties related to unrecognized tax benefits in the income tax provision, and the amounts
were insignificant for the last three fiscal years.
We do not anticipate the amount of existing unrecognized tax benefits will significantly increase or decrease within the next 12
months. We file income tax returns in the United States, and various state and foreign jurisdictions. In these jurisdictions tax years,
1994-2012 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.
61
6. STOCKHOLDERS’ EQUITY
Common Stock
We have reserved shares of common stock for issuance at June 30, 2014 as follows:
Stock options outstanding .................................................................................. 2,282,390
Reserved for future grants of stock options .......................................................
553,105
Total reserved shares of common stock for issuance ......................................... 2,835,495
Reserved
Stock
Options
Preferred Stock
We are authorized to issue 5,000,000 shares of preferred stock with a par value of $0.001 per share, and no shares of preferred
stock are outstanding. Our board of directors has the authority, without further action by our stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights,
preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be
greater than the rights of the common stock.
Common Stock Warrants
We had a Conversion Agreement and Amendment to Subordinated Secured Promissory Notes, or the Agreement, which
originated in 2008 with Mr. Roy, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P.,
or the lenders. A condition we and the lenders agreed to, pursuant to the Agreement, was to extend the maturity date of the remaining
outstanding indebtedness and the period for which interest was accrued, or the Note Extension. In consideration for the Note
Extension, the lenders received warrants to purchase an aggregate of 1,525,515 shares of our common stock at a price per share equal
to $0.95. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions:
an expected life of three years, an expected stock price volatility of 80%, a risk free interest rate of 2.26%, and a dividend yield of 0%.
Mr. Roy exercised his warrants to purchase 1,218,493 shares of our common stock in March 2011. In September 2011, Oak Hill
Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. exercised 307,022 warrants on a cashless
basis and received 238,393 shares of our common stock. As such, there are no warrants outstanding with the lenders as of June 30,
2014 and 2013.
2005 Management Stock Option Plan
In May 2005, our board of directors adopted the 2005 Management Stock Option Plan, or the 2005 Management Plan, which
provides for the grant of non-statutory stock options to directors, officers and key employees of eGain and its subsidiaries. The Plan
was increased by 500,000 shares of common stock in November 2007 and 500,000 shares of common stock in September 2011.
Options under the 2005 Management Plan are granted at a price not less than 100% of the fair market value of the common stock on
the date of grant. Options granted under the 2005 Management Plan are subject to eGain’s right of repurchase, whose right shall lapse
with respect to one-forty-eighth (1/48th) of the shares granted to a director, officer or key employee for each month of continuous
service provided by such director, officer or key employee to eGain. The options granted under this plan are exercisable for up to ten
years from the date of grant.
62
The following table represents the activity under the 2005 Management Plan:
Shares
Available for
Grant
(cid:3)
Options
Outstanding
(cid:3)(cid:3)
Balance at June 30, 2011 ........................................................................
Shares Authorized for Issuance .........................................................
Options Granted ................................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2012 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2013 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2014 ........................................................................
119,250
500,000
(340,000)
—
18,750
298,000
—
28,022
326,022
26,459
352,481
(cid:3)(cid:3) Weighted
584,400 (cid:3)(cid:3)$
— (cid:3)(cid:3)
340,000 (cid:3)(cid:3)$
(40,650 ) (cid:3)(cid:3)$
(18,750 ) (cid:3)(cid:3)$
865,000 (cid:3)(cid:3)$
(143,671 ) (cid:3)(cid:3)$
(28,022 ) (cid:3)(cid:3)$
693,307 (cid:3)(cid:3)$
(129,641 ) (cid:3)(cid:3)$
(26,459 ) (cid:3)(cid:3)$
537,207 (cid:3)(cid:3)$
Average Price
0.93
—
4.56
0.69
2.90
2.33
1.36
2.05
2.54
1.23
1.23
2.92
2005 Stock Incentive Plan
In March 2005, our board of directors adopted the 2005 Stock Incentive Plan, the 2005 Incentive Plan, which provides for the
grant of stock options to eGain’s employees, officers, directors and consultants. Options granted under the 2005 Incentive Plan are
either incentive stock options or non-statutory stock options. Incentive stock options may be granted to employees with exercise prices
of no less than the fair value of the common stock on the date of grant. The options generally vest ratably over a period of four years
and expire no later than ten years from the date of grant. We received stockholder approval of the 2005 Incentive Plan at our 2005
Annual Meeting of Stockholders. Our board of directors approved an increase in the 2005 Incentive Plan by 1.0 million shares of
common stock in February 2009 and 1.0 million shares of common stock in September 2011. We received stockholder approval for
the increases at our 2011 Annual Meeting of Stockholders.
The following table represents the activity under the 2005 Stock Incentive Plan:
(cid:3)(cid:3)
Balance at June 30, 2011 ........................................................................
Shares Authorized for Issuance .........................................................
Options Granted ................................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2012 ........................................................................
Options Granted ................................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2013 ........................................................................
Options Granted ................................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2014 ........................................................................
Shares
Available for
Grant
Options
Outstanding
(cid:3)(cid:3)
(cid:3)
Weighted
Average
Price
99,051
1,000,000
(380,300)
—
75,154
793,905
(338,550)
—
151,273
606,628
(583,250)
—
177,246
200,624
1,249,328 $
—
380,300 $
(54,713 ) $
(75,154 ) $
1,499,761 $
338,550 $
(321,778 ) $
(151,273 ) $
1,365,260 $
583,250 $
(138,829 ) $
(177,246 ) $
1,632,435 (cid:3)(cid:3)$
0.96
—
5.53
0.95
4.04
1.96
6.48
1.03
4.13
3.06
9.68
1.82
8.30
4.96
2000 Non-Management Stock Option Plan
In July 2000, our board of directors adopted the 2000 Non-Management Stock Option Plan, or the 2000 Plan, which provided
for the grant of non-statutory stock options to our employees, advisors and consultants of eGain. Options under the 2000 Plan were
granted at a price not less than 85% of the fair market value of the common stock on the date of grant. Our board of directors
determines the fair market value (as defined in the 2000 Plan) of the common stock, date of grant and vesting schedules of the options
granted. The options generally vest ratably over 4 years and expire no later than 10 years from the date of grant. This plan expired in
July 2010 and there are no further options available to grant under the 2000 Plan.
63
The following table represents the activity under the 2000 Plan:
(cid:3)
Balance at June 30, 2011 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2012 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2013 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2014 ........................................................................
Shares
Available for
Grant
(cid:3)
—
—
—
—
—
—
—
—
—
—
Options
Outstanding
(cid:3)(cid:3)
Weighted
Average
Price
108,521 (cid:3)(cid:3)$
(27,655 ) (cid:3)(cid:3)$
(3,389 ) (cid:3)(cid:3)$
77,477 $
(30,756 ) (cid:3)(cid:3)$
(2,631 ) (cid:3)(cid:3)$
44,090 (cid:3)(cid:3)$
(22,750 ) (cid:3)(cid:3)$
(160 ) (cid:3)(cid:3)$
21,180 (cid:3)(cid:3)$
1.68
1.59
11.46
1.28
1.68
1.60
0.99
1.26
2.40
0.68
1998 Stock Plan
In June 1998, our board of directors adopted the 1998 Stock Plan, or the 1998 Plan, which provides for grant of stock options to
eligible participants. Options granted under the 1998 Plan are either incentive stock options or non-statutory stock options. Incentive
stock options may be granted to employees with exercise prices of no less than the fair value of the common stock and non-statutory
options may be granted to eligible participants at exercise prices of no less than 85% of the fair value of the common stock on the date
of grant. Our board of directors determines the fair market value (as defined in the 1998 Plan) of the common stock, date of grant and
vesting schedules of the options granted. The options generally vest ratably over a period of four years and expire no later than 10
years from the date of grant. Options are generally exercisable upon grant, subject to our repurchase rights until vested. This plan
expired in November 2010 and there are no further options available to grant under the 1998 Plan.
The following table represents the activity under the 1998 Plan:
(cid:3)(cid:3)
Balance at June 30, 2011 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2012 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2013 ........................................................................
Options Exercised .............................................................................
Options Forfeited / Expired ..............................................................
Balance at June 30, 2014 ........................................................................
Shares
Available for
Grant
(cid:3)
Options
Outstanding
(cid:3)(cid:3)
Weighted
Average
Price
—
—
—
—
—
—
—
—
—
—
430,711 (cid:3)(cid:3)$
(79,416 ) (cid:3)(cid:3)$
(55,283 ) (cid:3)(cid:3)$
296,012 (cid:3)(cid:3)$
(124,320 ) (cid:3)(cid:3)$
(3,040 ) (cid:3)(cid:3)$
168,652 (cid:3)(cid:3)$
(73,984 ) (cid:3)(cid:3)$
(3,100 ) (cid:3)(cid:3)$
91,568 (cid:3)(cid:3)$
2.86
2.43
12.21
1.22
1.22
1.50
1.22
1.86
2.55
0.66
64
The following table summarizes information about stock options outstanding and exercisable under all stock option plans as of
June 30, 2014:
(cid:3)
(cid:3)(cid:3)
Range of
Exercise
Prices
$0.30-$0.60 ...............
$0.64-$0.64 ...............
$0.70-$0.70 ...............
$0.74-$0.74 ...............
$0.75-$1.50 ...............
$1.51-$5.00 ...............
$5.28-$5.47 ...............
$5.55-$7.94 ...............
$8.02-$10.15 .............
$10.19-$15.50............
$0.30-$15.50 .............
Number
(cid:3)(cid:3)
28,068
253,430
1,000
512,273
247,363
238,946
261,646
374,961
229,403
135,300
2,282,390
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
(cid:3)(cid:3)
Weighted
Average
Exercise
Price
Options Exercisable
(cid:3)(cid:3)
Number
(cid:3)(cid:3)
Weighted
Average
Exercise
Price
3.93
0.91
1.32
5.13
4.40
7.47
7.58
9.04
9.07
8.83
6.35
$
$
$
$
$
$
$
$
$
$
$
0.49
0.64
0.70
0.74
1.16
4.09
5.32
7.42
9.09
12.30
4.27
28,068 $
253,430 $
1,000 $
512,273 $
234,517 $
127,072 $
154,176 $
80,150 $
30,712 $
1,958 $
1,423,356 $
0.49
0.64
0.70
0.74
1.15
4.03
5.32
6.99
8.51
11.44
2.11
The summary of options vested and exercisable at June 30, 2014 comprised:
Options outstanding .................................................................... 2,282,390 $
Fully vested and expected to vest options .................................. 2,186,438 $
Options exercisable .................................................................... 1,423,356 $
4.27
4.09
2.11
Number of
Shares
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
(cid:3)$ 7,257,197
(cid:3)$ 7,223,115
(cid:3)$ 6,724,284
Weighted
Average
Remaining
Contractual
Term
6.35
6.23
4.88
The aggregate intrinsic value in the preceding table represents the total intrinsic value based on stock options with a weighted
average exercise price less than our closing stock price of $6.77 as of June 30, 2014 that would have been received by the option
holders, had they exercised their options on June 30, 2014. The total intrinsic value of stock options exercised during fiscal years
2014, 2013 and 2012 was $3.8 million, $3.0 million, and $691,000 , respectively.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense
over the vesting period. All of our stock-based compensation is accounted for as an equity instrument.
The table below summarizes the effect of stock-based compensation (in thousands, except per share amounts):
(cid:3)
Non-cash stock-based compensation expense ......................... $
Income tax benefit ..............................................................
Net income effect ............................................................... $
Net effect on income (loss) per share, basic and diluted .......... $
2014
Year Ended June 30,
2013
2012
(1,527) $
—
(1,527) $
(0.06) $
(1,081 ) $
—
(1,081 ) $
(0.04 ) $
(856)
—
(856)
(0.04)
We utilized the Black-Scholes valuation model for estimating the fair value of the stock-based compensation of options granted.
All shares of our common stock issued pursuant to our stock option plans are only issued out of an authorized reserve of shares of
common stock, which were previously registered with the Securities and Exchange Commission on a registration statement on
Form S-8.
65
During the fiscal years ended June 30, 2014, 2013 and 2012 there were 583,250, 338,550, and 720,300 options granted,
respectively, with a weighted-average fair value of $5.93, $4.05, and $3.21 , respectively, using the following assumptions:
Dividend yield .........................................................................
Expected volatility ..................................................................
Average risk-free interest rate .................................................
Expected life (in years) ...........................................................
2014
Year Ended June 30,
2013
2012
—
80%
1.55%
4.50
— (cid:3)
85 % (cid:3)
0.80 % (cid:3)
4.50
—
85%
0.97%
4.48
The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash
dividends. We determined the appropriate measure of expected volatility by reviewing historic volatility in the share price of our
common stock, as adjusted for certain events that management deemed to be non-recurring and non-indicative of future events. The
risk-free interest rate is derived from the average U.S. Treasury Strips rate with maturities approximating the expected lives of the
awards during the period, which approximate the rate in effect at the time of the grant.
We base our estimate of expected life of a stock option on the historical exercise behavior, and cancellations of all past option
grants made by the company during the time period which its equity shares have been publicly traded, the contractual term of the
option, the vesting period and the expected remaining term of the outstanding options.
Total compensation cost, net of forfeitures, for all options granted but not yet vested as of June 30, 2014 was $2.1 million,
which is expected to be recognized over the weighted average period of 1.48 years.
7. COMMITMENTS AND CONTINGENCIES
Leases
We lease our facilities under non-cancelable operating leases that expire on various dates through fiscal year 2022. On May 14,
2014, we entered into the First Amendment to the office lease for our Sunnyvale facility to extend the term of the lease through
March, 2022 and lease additional space in the current premises. The term of the additional space commences on August 5, 2015 and
is scheduled to expire on March 31, 2022. As part of the lease extension, the landlord will provide the company with a tenant
improvement allowance during 2015 through 2016 of $411,000. Our lease agreements provide us with the option to renew. We
recognize rent expense, which includes fixed escalation amounts in addition to minimum lease payment, on a straight-line basis over
each lease term. We lease certain equipment and software under operating and capital leases with various expiration dates.
Rent expense for facilities under operating leases was $1.4 million, $1.3 million, and $1.1 million, for the fiscal years ended
June 30, 2014, 2013 and 2012, respectively.
A summary of future minimum lease payments is as follows (in thousands):
Fiscal Year June 30,
2015................................................................................................................................... $
2016...................................................................................................................................
2017...................................................................................................................................
2018...................................................................................................................................
2019...................................................................................................................................
Thereafter ..........................................................................................................................
Total minimum lease payments ................................................................................... $
Less amounts representing interest ..............................................................................
Total capital lease obligations at June 30, 2014 ...........................................................
Operating
Leases
Capital
Leases
1,533 $
1,690
1,661
1,193
1,147
3,327
10,551
(cid:3)
(cid:3)$
456
456
219
—
—
—
1,131
(114)
1,017
Cloud Services
We have agreements with third parties to provide co-location services for cloud operations that expire on various dates through
fiscal year 2017. The agreement requires payment of a minimum amount per month in return for which the cloud services provider
provides co-location services with certain guarantees of network availability. Rental expense for co-location centers was $882,000,
$761,000, and $633,000 for the fiscal years ended June 30, 2014, 2013 and 2012, respectively.
66
A summary of future minimum payments (including an estimated new 3 year commitment for one datacenter) is as follows (in
thousands):
Fiscal Year June 30,
2015 ...................................................................................................... $
2016 ......................................................................................................
2017 ......................................................................................................
Total minimum payments ................................................................ $
Co-location
610
585
288
1,483
Employee benefit plans
Defined Contribution Plans
We sponsor an employee savings and retirement plan, the 401(k) Plan, as allowed under Section 401(k) of the Internal Revenue
Code. The 401(k) Plan is available to all domestic employees who meet minimum age and service requirements, and provides
employees with tax deferred salary deductions and alternative investment options. Employees may contribute up to 60% of their
salary, subject to certain limitations. We, at the discretion of our board of directors, may contribute to the 401(k) Plan. We have not
contributed to the 401(k) Plan since its inception. We also have a defined contribution plan related to our foreign subsidiaries.
Amounts expensed under these plans were $395,000, $356,000, and $280,000 for the fiscal years ended June 30, 2014, 2013 and
2012, respectively.
Gratuity Plan—India
In accordance with Gratuity Act of 1972, we sponsor a defined benefit plan, or the Gratuity Plan, for all of our Indian
employees. The Gratuity Plan is required by local law, which provides a lump sum payment to vested employees upon retirement or
termination of employment in an amount based on each employee’s salary and duration of employment with the company. The
Gratuity Plan benefit cost for the year is calculated on an actuarial basis. Current service costs and actuarial gains or losses, or prior
service cost, for the Gratuity Plan were insignificant for the fiscal years 2014, 2013 and 2012.
Severance Pay – Italy
We accrue a severance provision and pay related taxes to local governmental agencies consistent with local regulatory
requirements. Total severance plan expenses were insignificant for the fiscal years 2014, 2013 and 2012.
Warranty
We generally warrant that the program portion of our software will perform substantially in accordance with certain
specifications for a period up to one year from the date of delivery. Our liability for a breach of this warranty is either a return of the
license fee or providing a fix, patch, work-around or replacement of the software.
We also provide standard warranties against and indemnification for the potential infringement of third party intellectual
property rights to our customers relating to the use of our products, as well as indemnification agreements with certain officers and
employees under which we may be required to indemnify such persons for liabilities arising out of their duties to us. The terms of such
obligations vary. Generally, the maximum obligation is the amount permitted by law.
Historically, costs related to these warranties have not been significant. However, we cannot guarantee that a warranty reserve
will not become necessary in the future.
Indemnification
We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments,
fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is
threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that
person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request.
67
Transfer pricing
We have received transfer-pricing assessments from tax authorities with regard to transfer pricing issues for certain fiscal years,
which we have appealed with the appropriate authority. We review the status of each significant matter and assess its potential
financial exposure. We believe that such assessments are without merit and would not have a significant impact on our consolidated
financial statements.
8. LITIGATION
On May 20, 2013, we filed suit against Pragmatus Telecom, LLC (“Pragmatus”) in the United States District of Delaware
seeking a declaratory judgment that our products and services do not infringe directly or indirectly three patents purportedly owned by
Pragmatus and that the claims of the Pragmatus patents are invalid. Pragmatus previously asserted these patents against certain of our
customers. Discovery continues and the matter is currently pending.
On May 17, 2013, we filed suit against Lodsys Group, LLC (“Lodsys”) in the United States District Court for the Eastern
District of Texas seeking a declaratory judgment that our products and services do not infringe directly or indirectly two patents
purportedly owned by Lodsys and that the claims of the Lodsys patents are invalid. Lodsys previously asserted these patents against
certain of our customers. The matter was settled on December 18, 2013. We entered into a settlement agreement which among other
items provides a license to the Lodsys patents.
In the ordinary course of business, we are involved in various legal proceedings and claims related to alleged infringement of
third-party patents and other intellectual property rights, commercial, corporate and securities, labor and employment, wage and hour,
and other claims. We have been, and may in the future be, put on notice and/or sued by third parties for alleged infringement of their
proprietary rights, including patent infringement.
We evaluate all claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, settlement or
litigation potential and the expected effect on us. Our technologies may be subject to injunction if they are found to infringe the rights
of a third party. In addition, our agreements require us to indemnify our customers for third-party intellectual property infringement
claims, which could increase the cost to us of an adverse ruling on such a claim.
9. FAIR VALUE MEASUREMENT
ASC 820, Fair Value Measurement and Disclosures, defines fair value, establishes a framework for measuring fair value of
assets and liabilities, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability in the principal or most advantageous market for the assets or liabilities in an orderly
transaction between market participants on the measurement date. Subsequent changes in fair value of these financial assets and
liabilities are recognized in earnings or other comprehensive income when they occur. ASC 820 applies whenever other statements
require or permit assets or liabilities to be measured at fair value.
ASC 820 includes a fair value hierarchy, of which the first two are considered observable and the last unobservable, that is
intended to increase the consistency and comparability in fair value measurements and related disclosures. Valuation techniques used
to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs
reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent
sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
Level 1 – instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical
assets.
Level 2 – instrument valuations are obtained from readily-available pricing sources for comparable instruments.
Level 3 – instrument valuations are obtained without observable market value and require a high level of judgment to determine the
fair value.
68
The following table summarizes the fair value hierarchy of our financial assets and liabilities measured (in thousands):
Assets
Cash equivalents:
Money market funds ..................................................... $
Total assets .............................................................................. $
1,622
1,622
$
$
1,622 $
1,622 $
10,016 $
10,016 $
10,016
10,016
Fair Value Measurement at
June 30, 2014
Fair Value Measurement at
June 30, 2013
Level 1
Total Balance
Level 1
Total Balance
The Company uses quoted prices in active markets for identical assets or liabilities to determine fair value of Level 1
investments.
As of June 30, 2014 and 2013, we did not have any material Level 2 or 3 assets or liabilities.
10. SHARE REPURCHASE PROGRAM
On September 14, 2009, we announced that our board of directors approved a repurchase program under which we may
purchase up to 1,000,000 shares of our common stock. The duration of the repurchase program is open-ended. Under the program, we
purchase shares of common stock from time to time through the open market and privately negotiated transactions at prices deemed
appropriate by management. The repurchase is funded by cash on hand. There were no shares repurchased during fiscal years 2014
and 2013.
11. QUARTERLY FINANCIAL DATA (Unaudited)
Following is a summary of quarterly operating results and share data for the years ended June 30, 2014 and 2013, respectively:
1st Quarter
2nd Quarter
3rd Quarter 4th Quarter
Fiscal Year
(cid:3)
Fiscal 2014
Revenues ................................................................................. $
Gross profit ............................................................................. $
Loss from operations ............................................................... $
Net loss ................................................................................... $
Basic and diluted net loss per share ........................................ $
(in thousands, except per share data)
15,682 $
10,149 $
(1,558) $
(2,004) $
(0.08) $
17,665 $
11,829 $
(1,108) $
(1,217) $
(0.05) $
(cid:3) (cid:3) (cid:3) (cid:3)
18,026 $
12,044 $
(688 ) $
(1,007 ) $
(0.04 ) $
18,889 $
12,778 $
(705) $
(1,018) $
(0.04) $
Fiscal 2013
Revenues ................................................................................. $
Gross profit ............................................................................. $
Income (loss) from operations ................................................ $
Net income (loss) .................................................................... $
Basic net income (loss) per share ............................................ $
Diluted net income (loss) per share ......................................... $
10,723 $
6,379 $
(2,627) $
(2,884) $
(0.12) $
(0.12) $
14,737 $
10,471 $
813 $
641 $
0.03 $
0.02 $
15,460 $
10,891 $
911 $
1,030 $
0.04 $
0.04 $
17,969 $
13,142 $
2,146 $
1,897 $
0.08 $
0.07 $
70,262
46,800
(4,059)
(5,246)
(0.21)
58,889
40,883
1,243
684
0.03
0.03
12. SUBSEQUENT EVENTS
On August 4, 2014, we filed a Form 8-K with the Securities and Exchange Commission disclosing that we entered into a Share
Purchase Agreement (“Purchase Agreement”) with Exony Limited (“Exony”) to acquire all the outstanding share capital of Exony.
Exony is a provider of innovative contact center software and voice analytics. The acquisition of Exony extends the Company’s
platform with contact center management, reporting and analytics capabilities. Under the terms of the Purchase Agreement with
Exony described in the Form 8-K, we agreed to issue 1,209,308 shares of our common stock and approximately $8 million in cash to
the shareholders of Exony at the closing subject to adjustment as defined in the Purchase Agreement. These shares will be issued
pursuant to an exemption under Regulation S or Regulation D promulgated under the Securities Act of 1933, as amended. The
purchase price allocation for the acquisition and pro forma financial information are not yet available.
69
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures,” as such term is
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, the Exchange Act, that are designed to ensure that information
required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls
and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer
and Chief Financial Officer have concluded that, as of June 30, 2014, our disclosure controls and procedures were effective at the
reasonable assurance level.
Changes in Internal Controls. There was no change in our internal control over financial reporting (as defined in Rule 13a-
15(f) under the Exchange Act) that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-
15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections
of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control—Integrated Framework (1992 Framework) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control—Integrated Framework (1992 Framework), our management concluded that our internal control over financial reporting was
effective as of June 30, 2014.
Our independent registered public accounting firm, Burr Pilger Mayer, Inc., which audited our consolidated financial
statements in this Annual Report on Form 10-K, independently assessed the effectiveness of the Company’s internal control over
financial reporting. Burr Pilger Mayer, Inc. has issued an attestation report, which appears as part of this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
On August 4, 2014, we filed a Form 8-K with the Securities and Exchange Commission disclosing that we entered into a Share
Purchase Agreement (“Purchase Agreement”) with Exony Limited (“Exony”). Under the terms of the Purchase Agreement with
Exony described in the Form 8-K, the Company agreed to issue 1,209,308 shares of the Company’s common stock and approximately
$8 million in cash to the shareholders of Exony at the closing. These shares will be issued pursuant to an exemption under Regulation
S or Regulation D promulgated under the Securities Act of 1933, as amended.
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
eGain Corporation
Sunnyvale, California
We have audited the internal control over financial reporting of eGain Corporation and its subsidiaries (the “Company”) as of
June 30, 2014, based on criteria established in Internal Control—Integrated Framework (1992 Framework) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, eGain Corporation and its subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2014, based on criteria established in Internal Control—Integrated Framework (1992 Framework)
by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of eGain Corporation and its subsidiaries as of June 30, 2014 and 2013, and the related consolidated
statements of operations, comprehensive income / (loss), stockholders’ equity, and cash flows for each of the three years in the period
ended June 30, 2014, and the related financial statement schedule and our report dated September 12, 2014 expressed an unqualified
opinion on those consolidated financial statements and the related financial statement schedule.
/s/ Burr Pilger Mayer, Inc.
San Jose, California
September 12, 2014
71
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item (with respect to our Directors) is incorporated by reference from the information under the
caption “Election of Directors” contained in eGain’s Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Company’s 2014 Annual Meeting of Stockholders, the Proxy Statement.
The following table sets forth information regarding eGain’s current executive officers as of September 12, 2014:
Name
Ashutosh Roy
Eric Smit
Promod Narang
AJ Berkeley
Age
Position
48 Chief Executive Officer and Chairman
52 Chief Financial Officer
56 Senior Vice President of Products and Engineering
69 Senior Vice President of Worldwide Sales
Ashutosh Roy co-founded eGain and has served as Chief Executive Officer and a director of eGain since September 1997 and
President since October 2003. From May 1995 through April 1997, Mr. Roy served as Chairman of WhoWhere? Inc., an Internet-
service company co-founded by Mr. Roy. From June 1994 to April 1995, Mr. Roy co-founded Parsec Technologies, a call center
company based in New Delhi, India. From August 1988, to August 1992, Mr. Roy worked as a Software Engineer at Digital
Equipment Corp. Mr. Roy holds a B.S. in Computer Science from the Indian Institute of Technology, New Delhi, a Master’s degree in
Computer Science from Johns Hopkins University and an M.B.A. from Stanford University.
Eric Smit has served as Chief Financial Officer since August 2002. From April 2001 to July 2002, Mr. Smit served as Vice
President, Operations of eGain. From June 1999 to April 2001, Mr. Smit served as Vice President, Finance and Administration of
eGain. From June 1998 to June 1999, Mr. Smit served as Director of Finance of eGain. From December 1996 to May 1998, Mr. Smit
served as Director of Finance for WhoWhere? Inc., an Internet services company. From April 1993 to November 1996, Mr. Smit
served as Vice President of Operations and Chief Financial Officer of Velocity Incorporated, a software game developer and
publishing company. Mr. Smit holds a Bachelor of Commerce in Accounting from Rhodes University, South Africa.
Promod Narang has served as Sr. Vice President of Engineering of eGain since March 2000. Mr. Narang joined eGain in
October 1998, and served as Director of Engineering prior to assuming his current position. Prior to joining eGain, Mr. Narang served
as President of VMpro, a system software consulting company from September 1987 to October 1998. Mr. Narang holds a Bachelors
of Science in Computer Science from Wayne State University.
AJ Berkeley was appointed as Senior Vice President of Worldwide Sales on August 4, 2014. Mr. Berkeley most recently led the
Company’s strategic alliances effort since 2011 and prior to that he was an independent consultant for three years. Mr. Berkeley
started his career in sales at Hewlett Packard and has also served as CEO of various start-ups, including Interlink.
The information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive
Proxy Statement for the Company’s 2014 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading “Executive Compensation” and under the captions “Director Compensation,” and
“Recent Option Grants” in the definitive Proxy Statement for eGain’s 2014 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information contained under the heading “Security Ownership of Certain Beneficial Owners and Management” in the
definitive Proxy Statement for eGain’s 2014 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information contained under the caption “Related Party Transactions” in the definitive Proxy Statement for eGain’s 2014
Annual Meeting of Stockholders is incorporated herein by reference.
72
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the heading “Principal Accounting Fees and Services” in the definitive Proxy Statement for
eGain’s 2014 Annual Meeting of Stockholders is incorporated herein by reference.
73
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements
See Index to Financial Statements in Item 8 of this Report.
2. Financial Statement Schedule
Financial statement schedule, which is included at the end of this report:
Schedule II—Valuation and Qualifying Accounts.
All other schedules have been omitted since they are either not required, not applicable or the information has been included in
the consolidated financial statements or notes thereto.
3. Exhibits
See Item 15(b) of this report.
(b) Exhibits
The exhibits listed below are filed or incorporated by reference herein.
Description of Exhibits
Amended and Restated Certificate of Incorporation filed as Exhibit 3.1 on eGain’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2008.
Certificate of Amendment of Certificate of Incorporation filed as Exhibit 3(iii) on eGain’s Quarterly Report on Form 10-
Q for the quarter ended September 30, 2012.
Amended and Restated Bylaws filed as Exhibit 3.4 to eGain’s Registration Statement on Form S-1, File No. 333-83439,
originally filed with the Commission on July 22, 1999, as subsequently amended, and incorporated by reference herein.
Registration Rights Agreement dated as of August 8, 2000, filed as Exhibit 10.2 to eGain’s Current Report on Form 8-K
dated August 15, 2000.
Form of Warrant to Purchase Common Stock, filed as Exhibit 4.1 to eGain’s Current Report on Form 8-K dated September
24, 2008.
On July 31, 2013, in its Current Report on Form 8-K, the Company announced that it entered into a Consent to Repayment
of Subordinated Debt with Ashutosh Roy and Comerica Bank, N.A.
Exhibit
No.
3(i)
3(ii)
3(ii)
4.1
4.2
10.1
21.1
Subsidiaries of eGain Communications Corporation.
23.1
Consent of Burr Pilger Mayer, Inc., Independent Registered Public Accounting Firm.
24.1
Power of Attorney (see Signature Page).
31.1
Rule 13a-15(e)/15(d)-15(e) Certification of Chief Executive Officer.
31.2
Rule 13a-15(e) /15(d)-15(e) Certification of Chief Financial Officer.
32.1
32.2
*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 of
Ashutosh Roy, Chief Executive Officer.*
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 of
Eric Smit, Chief Financial Officer.*
The material contained in this exhibit is not deemed “filed” with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of the company under the Securities Act of 1933 or the Securities Exchange Act of
1934, whether made before or after date hereof and irrespective of any general incorporation language contained in such filing.
74
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: September 12, 2014
eGAIN COMMUNICATIONS CORPORATION
By:
/s/ ASHUTOSH ROY
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Ashutosh
Roy and Eric Smit, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this annual
report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
/s/ ASHUTOSH ROY
Ashutosh Roy
/s/ ERIC N. SMIT
Eric N. Smit
/s/ DAVID SCOTT
David Scott
/s/ GUNJAN SINHA
Gunjan Sinha
/s/ PHIROZ P. DARUKHANAVALA
Phiroz P. Darukhanavala
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
Director
Director
Director
Date
September 12, 2014
September 12, 2014
September 12, 2014
September 12, 2014
September 12, 2014
75
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at
Beginning of
Period
Additions
Charged to
Expense
Amounts
Written
Off, Net of
Recoveries
Balance at
End of
Period
Allowance for Doubtful Accounts:
Year ended June 30, 2014 ........................................ $
Year ended June 30, 2013 ........................................ $
Year ended June 30, 2012 ........................................ $
392 $
303 $
181 $
258 $
272 $
200 $
(76 ) $
(183 ) $
(78 ) $
574
392
303
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