e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended February 28,
2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-33634
DemandTec, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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94-3344761
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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One
Franklin Parkway, Building 910
San Mateo, California 94403
(Address
of Principal Executive Offices)
(650) 645-7100
(Registrants Telephone
Number)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.001 per share
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The NASDAQ Stock Market LLC
(NASDAQ Global Market)
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Securities registered pursuant to Section 12(g) of the
Exchange Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act 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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, if any,
every interactive data file required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
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 registrants 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a 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):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a 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 o No þ
As of August 31, 2009, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of shares of the registrants
common stock held by non-affiliates of the registrant (based
upon the closing sale price of $8.47 per share on the NASDAQ
Global Market on such date) was approximately
$154.0 million.
As of April 15, 2010, there were 29,954,740 shares of
the registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
its fiscal 2010 Annual Meeting of Stockholders (the Proxy
Statement) are incorporated by reference in Part III
of this Report on
Form 10-K.
Except with respect to information specifically incorporated by
reference in this
Form 10-K,
the Proxy Statement is not deemed to be filed as part of this
Form 10-K.
DemandTec,
Inc.
Table of
Contents
2
PART I
This Annual Report on
Form 10-K
contains forward-looking statements that involve risks and
uncertainties. Please see the section entitled
Forward-Looking Statements in Item 7 of this
Annual Report on
Form 10-K
for important information to consider when evaluating these
statements.
Overview
We are a leading provider of on-demand optimization solutions to
retailers and consumer products, or CP, companies. Our software
services enable retailers and CP companies to separately or
collaboratively define category, brand, and customer strategies
based on a scientific understanding of consumer behavior and
make actionable pricing, promotion, assortment, space and other
merchandising and marketing decisions to achieve their revenue,
profitability, sales volume, and customer loyalty objectives. We
deliver our applications by means of a software-as-a-service, or
SaaS, model, which allows us to capture and analyze the most
recent retailer and market-level data, enhance our software
services rapidly to address our customers ever-changing
merchandising and marketing needs, and connect retailers and CP
companies via collaborative, Internet-based applications. We
were incorporated in November 1999.
Our solutions consist of software services and complementary
analytical services and analytical insights derived from the
same platform that supports our software services. We offer our
solutions individually or as a suite of integrated software
services.
Our solutions for the retail and CP industries include:
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DemandTec Lifecycle Price
Optimizationtm,
which enables retailers to strategically price items at any
stage in their lifecycle, including new items, regular items,
promoted items, and clearance items.
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DemandTec
End-to-End
Promotion
Managementtm,
which enables retailers to manage the complex processes related
to retail promotions, from collaborative promotion planning and
CP vendor deal management to in-store promotion execution and
post-event analysis.
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DemandTec Assortment &
Spacetm,
which enables retailers to create localized assortments by
store, cluster, or section, based on shopper demographics, the
competitive environment, and a science-based, quantitative
understanding of each items ability to add variety and
grow incremental sales in the category.
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DemandTec Targeted
Marketingtm,
a collection of services that enable retailers and their CP
trading partners to better understand key shopper insights,
define shopper segments, and plan segment-targeted shopper
merchandising and marketing programs to build loyalty, increase
sales, and improve profitability.
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DemandTec Trade
Effectivenesstm,
a set of software and analytical services for CP companies
designed to drive CP company performance and retail trade
success.
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Connecting our solutions for both the retail and the CP
industries is the DemandTec TradePoint
Networktm,
an Internet-based platform connecting the DemandTec software
services and users from both retailers and their CP trading
partners to transact, interact, and collaborate. The DemandTec
TradePoint
Networktm
provides the infrastructure, security, connectivity and services
for retailers and CP companies to effectively collaborate on
core merchandising and marketing activities.
We have introduced our nextGEN branded strategy,
which represents the next generation of capabilities for our
industry and incorporates a unique combination of category and
item-level insights based on econometric modeling and shopper
and shopper segment-level insights. nextGEN includes standalone
products as well as upgrades to our products.
Industry
Background
Retail trade is one of the worlds most widespread
activities. There are more than 1,500 retailers worldwide that
have annual sales in excess of $500 million, and more than
250 of those retailers have annual sales in excess of
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$2 billion. Retailing is highly competitive and generally
characterized by low profit margins. Furthermore, there are more
than 1,300 CP companies worldwide that have annual revenues in
excess of $500 million that sell to retailers. The CP
industry is becoming increasingly competitive due to factors
such as retailer consolidation, more discerning and less loyal
consumers, and the growing impact of private label products. To
counter these trends, CP companies are making substantial
investments in product innovation, market research, branding,
and consumer and brand marketing.
Consumer
Demand and Pricing Challenges
Retailers compete for consumers who are becoming more
knowledgeable, more selective and, in many instances, more price
sensitive. Consumers today devote considerable time to
researching products and comparing prices prior to shopping and
have a greater array of choices in price, size, brand, color and
features. The growth of discount stores, warehouse clubs, dollar
stores and the emergence of the Internet as a viable retail
destination offer consumers further alternatives when purchasing
goods. Adverse macroeconomic conditions in recent years,
including unemployment, housing market declines, volatile fuel
prices, and an increasing shift from spending to saving for some
families, have further increased the average consumers
price sensitivity. For retailers to compete effectively, they
need to better understand and respond to these changes in
consumer demand and behavior through targeted pricing, marketing
and merchandising strategies.
A basic principle of economics is that a change in the price of
an item will affect demand for that item. Every item in a store
has a unique price elasticity, or sensitivity
between sales volume and price. Small decreases or increases in
the prices of some items may lead to significant changes in the
demand for those items, whereas larger decreases or increases in
the prices of other items may have little effect on demand. In
addition, changes in the prices of items in a store often have
an impact on the sales volumes of other items in that store.
This interdependence is referred to as the cross
elasticity of demand. Demand is influenced by a wide
variety of additional factors, including store location,
customer demographics, advertising, in-store displays, the
availability of complementary or substitute products,
seasonality, competitive activity and loyalty and marketing
programs. These variables make calculating price elasticity for
even a single item an extremely data-intensive and complex
process. Calculating the cross-elasticity of demand for
thousands of items is exponentially more difficult.
Applying these economic concepts to make
day-to-day
pricing decisions presents enormous challenges to retailers of
all sizes, particularly large retailers that sell tens of
thousands of items and have hundreds, if not thousands, of
stores. These retailers must determine how to price each
particular item and whether to vary the price among different
regions or individual locations. They also must determine the
price of each item relative to competing products and the likely
impact on their aggregate profitability if the prices of that
item or competing items are increased or decreased.
Consumer demand, though, is driven by more than just the
everyday price of an item. In addition, retailers may want to
consider whether promoting an item would result in increased
sales volume and, if so, whether that increase would represent
incremental revenue or merely cannibalize sales of other items.
Retailers must also determine which items should be stocked, by
store or store cluster. These pricing and marketing decisions
must also strike a balance between the retailers financial
goals and its desired price and brand image in order to enhance
consumer loyalty and maximize sustainable, lifetime value from
its customers.
Consumer demand also differs by consumer segment. Not all
consumers are price sensitive to certain brands or respond
similarly to particular promotions. Understanding and predicting
demand in todays market requires retailers to analyze the
differences between various segments of shoppers in their
stores. Shopper segments with descriptive names such as
budget families, young, urban, and
affluent, or foodies can reflect differences
in demographics. However, retailers now must also analyze the
purchase decisions and other shopping behaviors of individual
consumers in order to properly define consumer segments and
identify strategies and tactics to target those segments.
CP companies also must make complex decisions when pricing and
promoting their products. Like retailers, CP companies are faced
with rising costs, intense competition, less consumer loyalty
and an operating environment in which it is difficult to raise
prices. As raw ingredient costs escalate and competitive threats
intensify, predicting the relative impact that promotion and
everyday price activities will have on volume and margin
objectives is an
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essential planning requirement. CP companies must understand how
consumers will respond to promotions, how price changes will
affect sales volumes and how often to promote their brands. CP
companies also must decide when and how to use trade funds in
the form of discounts, offsets or direct cash payments to
compensate retailers for offering temporary price reductions on
their products and how competitive trade plans will impact their
own promoted items, their total portfolio and even the
retailers entire category. According to Capgemini, most CP
companies trade promotion budgets represent 15% or more of
their net sales, which is second in magnitude only to their cost
of goods sold. In 2008, CP companies in North America alone
spent over $125 billion on trade promotions according to a
2008 report by Cannondale Associates, Inc. Despite the pervasive
use of trade funds, studies suggest that over 50% of trade
promotions have negative returns on investment after taking into
consideration execution costs and unintended cannibalization.
The trade promotion process is often not only generally
unprofitable, but also highly inefficient. Submitting and
negotiating trade promotions historically have been handled
through a combination of fax, voicemail and manual, paper-based
processes. This has led to frequent inaccuracies and increasing
costs for both CP companies and retailers. CP companies and
retailers have lacked an accurate, integrated technology
platform for improving the efficiency of their trading
relationships.
In order to attain higher revenue growth, improve profit margins
and increase market share, while maintaining proper price and
brand image, retailers and CP companies must better understand
and predict consumer behavior across geographic, demographic,
gender, age, income and other segments. However, achieving these
objectives through
day-to-day
pricing and other merchandising and marketing decisions is
extremely complex.
Existing
Approaches to Understanding Consumer Demand
Retailers and CP companies have made significant investments in
information technology, or IT. Most of these IT investments have
focused on achieving cost reductions through increased
operational efficiencies and transaction automation, including
supply chain management, point of sale, or POS, systems, and
marketing automation software.
As a result of these IT investments, retailers have accumulated
vast amounts of sales data. While a number of academic
techniques exist to analyze this data, incorporating advanced
statistical analytics into a commercially-useful solution that
yields meaningful and actionable insights for retailers and CP
companies presents significant scientific, engineering,
processing and cost challenges due to the vast amounts of data
and the complexities of mathematical computing. Consequently,
existing approaches that incorporate an understanding of
consumer demand into retail and CP pricing decisions generally
have been limited to modeling sample data sets to provide
limited insights. As a result, retailers and CP companies
historically have made merchandising decisions based on simpler
approaches such as:
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cost-plus or competitor-matching pricing;
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national pricing of items, regardless of local consumer demand
and competitive dynamics;
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one-size-fits-all assortments of goods, regardless
of the unique preferences of consumers who shopped in each
location;
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habitual promotions, advertisements, mailers and other marketing
programs; and
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engaging business consultants to provide isolated category-based
analyses.
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In recent years, retailers have engaged consultants and used
internal data warehousing systems to begin analyzing market
basket information and loyalty card data in order to learn new
insights about customers, how they shop, what they buy together,
and what their lifestyles, preferences, and future behaviors
might be. These efforts have been both time- and
people-intensive, and have not sufficiently involved the
business users requiring those insights to make timely decisions.
In the current environment, retailers and CP companies need
scalable enterprise software capable of modeling the numerous
variables that affect consumer demand, processing massive data
sets in a cost-effective manner,
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presenting valuable shopper insights right at the point of
decision, and that delivers actionable merchandising and
marketing recommendations to achieve their revenue,
profitability, sales volume, and customer loyalty objectives.
DemandTec
Solution
We are a leading provider of on-demand optimization solutions to
retailers and CP companies. Our software services enable
retailers and CP companies to separately or collaboratively
define category, brand, and customer strategies based on a
scientific understanding of consumer behavior and make
actionable pricing, promotion, assortment, space and other
merchandising and marketing recommendations to achieve their
revenue, profitability, sales volume, and customer loyalty
objectives. We deliver our applications by means of a SaaS
model, which allows us to capture and analyze the most recent
retailer and market-level data and enhance our software services
rapidly to address our customers ever-changing
merchandising and marketing needs.
Understand
and predict consumer behavior to make merchandising and
marketing recommendations that achieve revenue, profitability,
sales volume, and customer loyalty objectives
Our software services enable retailers and CP companies to
incorporate a scientific understanding of consumer demand into
their
day-to-day
merchandising and marketing decision-making processes. By using
our software, our customers can achieve their revenue,
profitability, sales volume, and customer loyalty objectives,
while striking a balance with their desired price and brand
images in order to enhance consumer loyalty and maximize the
lifetime value of the consumer. Specifically, our software
services allow retailers and CP companies to:
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make daily pricing, promotion, assortment, space and other
merchandising and marketing decisions based on consumer demand;
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balance financial goals with price and brand image in order to
maximize the lifetime value of their targeted consumer segments;
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use shopper insights based on analyzing loyalty card data to
define and execute merchandising and marketing tactics targeted
and tailored to meet the needs of individual consumer segments;
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enforce pricing rules consistently;
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forecast sales more accurately;
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devise more targeted promotions based on consumer segmentation
insights;
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create, version and publish targeted advertisements to be
distributed via multiple channels and media vehicles; and
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allocate trade funds more effectively and efficiently.
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Incorporate
scalable science into merchandising and marketing
decision-making processes
We incorporate advanced econometric modeling techniques and
optimization theory into scalable software services that our
customers use to make
day-to-day
merchandising and marketing decisions. Our software automates
the process of predicting consumer response to various
merchandising and marketing activities, such as pricing,
promotion, assortment, space, loyalty programs and media. Our
proprietary demand models quantify consumer response at the
individual store and item levels based on a number of factors,
including store location, consumer demographics, advertising,
in-store displays, the availability of complementary and
substitute products, seasonality, competitive activity and
loyalty and marketing programs. Our software incorporates
optimization science that uses a combination of complex
algorithms to help our customers determine in real-time the
prices, promotions and markdowns that best accomplish their
merchandising and marketing objectives, while complying with
their business rules.
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Leverage
technological advancements through a SaaS delivery model that
enables us to adapt to our customers changing business
needs rapidly and to deliver results quickly
Our SaaS model leverages a set of pervasive technology trends
that includes the availability of greater amounts of computing
power at commercially affordable and decreasing prices, dramatic
reductions in the cost of data storage and inexpensive and
secure access to broadband communication networks. This model
represents a dramatic shift from developing and delivering
static, highly-customized software code that is installed at the
customers site. Due to the dynamic nature of consumer
demand and the changing merchandising and marketing objectives
of retailers and CP companies, we believe a solution is
delivered most effectively through a SaaS model. By delivering
our software as a service, we are able to:
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capture and analyze the most current transaction-log/loyalty
data from retailers, as well as
up-to-date
market-level data, syndicated data and other third-party
demographic content, in order to better understand the dynamic
nature of consumer behavior;
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intimately understand how our customers use our software to make
their
day-to-day
merchandising and marketing decisions so we can continuously
enhance our offering to address our customers business
needs;
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improve user productivity with more frequent but smaller
incremental updates and training courses;
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deliver technical enhancements to our software on a frequent and
predictable schedule with little or no disruption to our
customers operations;
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utilize grid computing and service-oriented-architecture, or
SOA, techniques to maximize scalability and processing
capacity; and
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enable interoperability across our customers diverse
legacy systems.
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By delivering our software as a service, we enable our customers
to make better pricing, promotion, trade funds management and
other
day-to-day
merchandising and marketing decisions. With our SaaS model, our
customers are able to achieve measurable financial results
within a matter of months.
Incorporate
shopper insights into DemandTecs software services at the
point of decision for merchants
In connection with our nextGEN strategy, we are adding advanced
shopper insights to our solutions to enable retailers and CP
companies to both analyze shopper behavior and collaboratively
define merchandising and marketing programs based on those
insights. Our model is to utilize transaction-log and loyalty
data to incorporate detailed insights regarding customer segment
and shopper behavior into the DemandTec software solutions
directly at the point where merchants and marketers are making
business decisions. This provides retailers and CP companies
with a competitive advantage as they are able to address both
category objectives for sales and profit as well as customer
objectives for loyalty, price image, shopping trips, and basket
content. Key nextGEN capabilities include:
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advanced market basket insights, including basket metrics trends
year over year and in weekly time series, as well as affinity
analyses to understand cross-promotional opportunities;
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customer segment-level insights delivered directly at the point
of decision for merchants and marketing professionals, including
insights such as penetration, buy rate, dollars per trip, trips
per household, and brand switching; and
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modeling and optimization by segment so as to enable retailers
to make targeted assortment, promotion, and pricing decisions
based on customer segment preferences and goals.
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Strategy
Our objective is to extend our position as a leading provider of
on-demand optimization solutions to retailers and CP companies.
The three key elements of our strategy to achieve this objective
include:
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Expanding our relationships with our existing retail
customers. We plan to continue to deliver
measurable business results to our existing retail customers in
order to encourage their renewals of their existing
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solutions, as well as their adoption of additional solutions. A
key element of our strategy is to leverage our domain expertise,
proprietary software platform and advanced analytical
capabilities to expand our solutions including new software
services, new analytics, and additional nextGEN functionality.
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Extending our market position with major retailers
worldwide. The retail industry is an
international business, with a significant portion of the
worlds retailers based outside of the United States. We
intend to use our market position and distribution investments
to pursue additional retail opportunities around the world,
leveraging our partnerships and
multi-language
product capabilities. We believe that our existing retail
customers have the ability to influence other retailers
worldwide by changing the competitive dynamics in their
respective markets.
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Continuing to expand our relationships with CP
companies. Developing the right trade marketing
strategies has evolved into a rigorous and important discipline
for CP companies. We intend to continue to expand the footprint
of our CP solutions that empower CP companies to forecast
promotion and pricing activity in a unified planning environment
at the account and headquarter levels. Further, the
collaborative business model enabled by the DemandTec TradePoint
Network creates ecosystems that each include a
retailer and that retailers CP trading partners. By
leveraging our ability to deliver existing and new software
services through our DemandTec TradePoint Network, we intend to
use our existing retail customer relationships to create and
expand our relationships with their CP trading partners and
believe there is a significant opportunity to expand our CP
market presence as a result of a network effect.
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Offerings
Overview
Our solutions consist of one or more software services and
complementary analytical services. We offer our solutions
individually or as a suite of integrated software services. Our
software services are configurable to accommodate individual
customer needs.
Our solutions for the retail and CP industries include:
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DemandTec Lifecycle Price
Optimizationtm,
which enables retailers to strategically price items at any
stage in their lifecycle, including new items, regular items,
promoted items, and clearance items.
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|
DemandTec
End-to-End
Promotion
Managementtm,
which enables retailers to manage the complex processes related
to retail promotions, from collaborative promotion planning and
vendor promotion offer management to in-store promotion
execution and post-event analysis.
|
|
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|
DemandTec Assortment &
Spacetm,
which enables retailers to create localized assortments by
store, cluster, or section, based on shopper demographics, the
competitive environment, and a science-based, quantitative
understanding of each items ability to add variety and
grow incremental sales in the category.
|
|
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|
DemandTec Targeted
Marketingtm,
a collection of services that enable retailers to better
understand key shopper insights, define shopper segments, and
plan shopper merchandising and marketing programs better
targeted for different consumer segments in order to build
loyalty, increase sales, and improve profitability.
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DemandTec Trade
Effectivenesstm,
a set of software and analytical services for CP companies
designed to drive their performance and better collaborate with
retailers.
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Connecting our solutions for both the retail and the CP
industries is the DemandTec TradePoint
Networktm,
an Internet-based platform of DemandTec and partner software
services used by retailers and their CP trading partners to
transact, interact, and collaborate. The DemandTec TradePoint
Networktm
provides the infrastructure, security, connectivity and services
for retailers and CP trading partners to effectively collaborate
on core merchandising and marketing activities.
Our proprietary software platform is the foundation for our
software services and analytical services. We have developed
this platform to transform vast amounts of raw and underutilized
business data into actionable insights in an efficient and
cost-effective manner. Our platform provides scalability,
advanced analytics and an integrated view of demand for each of
the DemandTec services.
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The DemandTec TradePoint Network utilizes a common, configurable
dashboard for all of the software services that connect to it.
Based on industry-standard portal technology, the DemandTec user
interface consolidates web-based content and information through
a common portal, providing users with context to make pricing,
promotion, assortment, space and other merchandising and
marketing decisions and to organize tasks. The DemandTec
TradePoint Network can incorporate third-party content within
its windows or can exist within a customers broader
corporate intranet or other portal system.
DemandTec
Lifecycle Price
Optimizationtm
for Retail
Packaged together as a solution to enable retailers to manage
pricing for new items, regularly priced items, promoted items,
and markdown/clearance items, the DemandTec Lifecycle Price
Optimizationtm
solution for the retail industry consists of one or more of the
following software services, along with complementary software,
analytical services, and analytical insights:
Everyday
Price Optimization and Everyday Price Management
Our Everyday Price Optimization and Everyday Price Management
software services enable retailers to establish everyday prices
for their products, using both optimization techniques based on
a scientific understanding of consumer behavior, as well as
rules-based pricing methods.
Everyday Price Optimization: Everyday Price
Optimization enables retailers to determine optimized prices to
achieve their sales, volume, profit, and price image objectives
for regular, everyday items. Using Everyday Price Optimization,
customers create scenarios in which they define strategic
objectives such as increased revenues, profitability
and/or sales
volume and optimize prices to best achieve these objectives. A
typical strategic objective might be to maximize net margins,
while not sacrificing more than a certain defined percentage of
sales volume.
Retailers use Everyday Price Optimization to optimize and set
retail prices in their stores based on their unique cost
structure and strategic goals. Everyday Price Optimization would
likely generate different optimized prices for the same item
carried by competing retailers in stores located in the same
geographic location, since consumer behavior varies between
competitors and each retailer has its own vendor costs and
strategic pricing objectives.
Key features of Everyday Price Optimization include:
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Store/SKU-level modeling econometric modeling
that captures the elasticity of each item, in addition to
cannibalization, halo, and cross-elasticity effects, trends,
seasonality, and a variety of other causals to deliver accuracy;
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Optimization and forecasting full category
price optimization, with store/item level forecasting, enables
retailers to develop pricing that conforms to their pricing
rules while maximizing their primary and secondary goals, such
as driving higher sales, increasing volume, and improving
profitability;
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Image item analysis determination of
effective price image items for key consumer segments;
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Natural language pricing rules and rules
management non-technical end-users can define
and enforce pricing policies by creating pricing scenarios with
pricing rules selected from a comprehensive library of retail
pricing rules, customized with a rules editor and prioritized
with rules relaxation capabilities to handle conflicts;
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Scenario management the ability to create and
evaluate multiple pricing scenarios to fine-tune pricing
strategy before prices hit shelves in order to change goals
(maximize profit, sales, or unit volume) or add, remove, modify,
or reprioritize pricing rules; and
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Benefits reporting the ability to validate
the effects of price optimization on actual sales of a
particular category and to understand the degree to which
factors such as promotions, seasonality and macroeconomic shifts
contributed to sales.
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Everyday Price Management: Everyday Price
Management enables retailers to improve execution and compliance
with their pricing strategy, and dramatically boost efficiency
by automating their most cumbersome, time-consuming pricing
tasks. Using Everyday Price Management, customers define pricing
rules and apply those
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rules-based prices to merchandise categories that are not
modeled and optimized using Everyday Price Optimization. In
addition, customers maintain both optimized and rules-based
prices using Everyday Price Management as vendor costs and
competitor prices change.
Key features of Everyday Price Management include:
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Rules-based pricing define and enforce
pricing policies by creating pricing scenarios with rules
selected from a comprehensive library of pricing rules such as
last digit rules, competitive price index rules, and cross-zone
rules, all of which are configured using
easy-to-understand
natural language;
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Rules management rules editor and rules
relaxation capabilities to handle conflicts;
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Advanced price maintenance operational price
management capabilities to handle frequent vendor cost changes,
competitive price changes, and new item introductions; and
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Advanced pricing delivery quickly review and
approve incoming data and automatically schedule when updated
pricing will be delivered to downstream systems.
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Both Everyday Price Optimization and Everyday Price Management
utilize a library of configurable business rules that act as
constraints on the optimization by limiting the set of possible
outcomes. For example, a customer can ensure that larger size
items always cost more than smaller size items but are a better
value, or that an optimized price is within a given percentage
of a competitors price.
As we continue to expand our nextGEN capabilities to include
modeling and optimization by customer segment, we intend to
incorporate shopper insights at the point of decision into our
nextGen Everyday Price Optimization software service so as to
enable merchants to make targeted pricing decisions based not
only on category objectives, but also on customer segment
preferences and goals.
Promotion
Optimization
As part of the DemandTec Lifecycle Price
Optimizationtm
solution, Promotion Optimization can help retailers quickly
determine the appropriate discounted price for any item or
promoted item group and the best type of temporary price
reduction.
Promotion Optimization uses scientific analysis that takes into
account cannibalization, halo, and cross-elasticity effects of
existing retail and markdown programs. Promotion Optimization
customers can create and simulate multiple scenarios based on
mathematical forecasts of results in order to evaluate tradeoffs
among various promotions.
Key features of Promotion Optimization as a part of DemandTec
Lifecycle Price
Optimizationtm
include:
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Store/SKU-level modeling the ability to plan
promotions that maximize total store impact on all categories by
taking into account promotional response by item and by store,
as well as cannibalization, halo, and cross-elasticity effects
of existing everyday prices; and
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Scenario management and what-if analysis the
ability to create and evaluate multiple promotion scenarios to
fine-tune promotional pricing and combinations of ad and display
support.
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Promotion Optimization is also included in the DemandTec
End-to-End
Promotion
Managementtm
solution (described below).
Markdown
Optimization
Markdown Optimization incorporates the science of consumer
demand to enable retailers to design optimal plans that set
markdown timing and depth to maximize profitability or meet
inventory objectives for every clearance item in every store.
Markdown Optimization supports a wide range of markdown types,
including seasonal, short
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product lifecycle, event and holiday, category reset, cycle
refresh, and standard discount markdowns. Key features of
Markdown Optimization include:
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Scenario management the ability to create and
forecast multiple scenarios in order to evaluate tradeoffs
between timing and depth of markdown prices, as well as other
factors such as the number of markdowns taken within a time
period;
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Science-based the ability to design markdown
plans based on the unique price elasticity and inventory
position at each store;
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Rules management the ability to configure
markdown-specific rules;
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Re-optimization the ability to re-optimize
plans and prices on a weekly basis to adjust for changes in
demand and inventory position; and
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Automated workflow process the ability to
create and initiate new markdown plans and scenarios
automatically based on category-specific rules defined by the
retailer so that merchants can simply log into the system to
review the results of planned optimizations.
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Retailers use Markdown Optimization to eliminate excess
inventory by a specified date after which an item will no longer
be sold and to maximize profitability of items sold before that
date. Retailers have the flexibility either to allow all stores
or zones to share the same schedule or to have each store
execute its own unique schedule to maximize overall plan
performance. Retailers can also create, forecast, compare, and
evaluate multiple markdown pricing scenarios to fine tune their
markdown strategy before finalizing in-store prices.
DemandTec
End-to-End
Promotion
Managementtm
for Retail
Managing retail promotions is a complex, multi-faceted process.
Successful retailers are able to collaborate internally among
senior management, merchants, marketing, advertising managers,
and others, and collaborate externally with CP trading partners
to build promotion plans that provide win-win results for all
parties. Leading retailers are also able to quickly predict the
outcome of any of the thousands of CP company trade promotion
offers they receive every month, and evaluate alternative
versions of any promotion to ensure theyre capitalizing on
the full potential of each promotion and maximizing the impact
of every category plan.
The DemandTec
End-to-End
Promotion
Managementtm
solution for the retail industry consists of the Promotion
Optimization software service discussed above
and/or the
software services listed below, along with complementary
DemandTec Analytical Insights & Solutions, or AIS.
Deal
Management
Our Deal Management software service enables retailers to
automate and streamline the presentation, negotiation and
reconciliation of trade promotion offers they receive from their
CP trading partners in a secure, Web-based environment.
Key features of Deal Management for the retailer include:
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Proprietary offer sheet mapping uses each
retailers existing paper-based offer format to ease
adoption by retailers;
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Online collaboration provides a common
platform for retailers and their CP trading partners to present
and negotiate the terms of trade promotion offers, eliminating
the large number of emails, faxes, and spreadsheets that
typically go back and forth between parties, thereby reducing
errors;
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Web portal boosts the retailers
productivity by pushing data entry work to the CP trading
partners and allowing them to enter trade promotion offer
information;
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Retailer item catalog-based entry provides CP
trading partners use of retailer-specific item catalogs in order
to eliminate data-entry errors;
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Electronic document and deal history archive
provides version control of trade promotion offers, final
contract terms, user activity and communications in order to
facilitate regulatory compliance and dispute resolution and to
eliminate the need for costly post-trade promotion offer
audits; and
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Accounting and reconciliation provides for
reconciliation of invoicing and deduction notices with CP
trading partners.
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When a retailer implements Deal Management, that retailer
requires that all of its CP trading partners submit and
negotiate their future trade promotion offers electronically
through the Deal Management software service. We offer two
editions of this service for CP companies: Deal
Management, which is offered at no charge and allows CP
trading partners to submit trade promotion offers by selecting
valid items from the retailers item catalog, and
Advanced Deal Management, which is a paid upgrade
that includes additional features specific to a CP company, such
as accounting and reconciliation, transaction and workflow
reporting, catalog management, vendor item catalog
synchronization and trade promotion offer history archiving.
Allowance
Billing
Allowance Billing automatically creates invoices and accruals
based on negotiated trade promotion offers in Deal Management
and based on transaction details from
point-of-sale,
warehouse, and store receipts. By automatically creating
invoices, retailers save labor, improve accuracy, and get their
invoices and accruals incorporated into their financial
statements sooner.
Key features of Allowance Billing include:
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Direct access to trade promotion offers in Deal
Management automatically creates accounting
entries and feeds those directly into existing accounting
systems, thereby reducing the time and labor required to enter
the data and eliminating the possibility of introducing errors
into the system;
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Robust workflow management engine provides
version control of trade promotion offers, final contract terms,
user activity and communications in order to facilitate
regulatory compliance and dispute resolution and to eliminate
the need for costly post-trade promotion offer audits;
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Interface displays transaction details allows
financial analysts to identify additional funds that should be
billed based on the trade promotion offer, reducing the required
efforts of a retailers internal audit team and allowing
retailers to invoice and collect trade promotion funds
earlier; and
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Electronic bill distribution distribute
invoices through the online Advanced Deal Management system or
via email and track undeliverable invoices and manage CP company
invoice distribution lists all in a simple, integrated interface.
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Promotion
Planning & Management
Our Promotion Planning & Management software service
enables retailers to establish a single repository for all their
information and content about promotional offers and events,
greatly improving visibility and accountability, reducing costly
errors, and increasing consistency across media channels. As the
core or base module of the DemandTec
End-to-End
Promotion
Managementtm
solution, Promotion Planning & Management allows
retailers to build, develop, and manage promotional plans with a
collaborative platform that enables versioning and
cross-functional collaboration.
Key features of Promotion Planning & Management
include:
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Central repository plan and manage all
promotions and events in a collaborative environment so as to
create a single system of record for all promotions and a
centralized data repository for merchandising product and
pricing data, ad copy and images.
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Integrated workflow controls processes and
security enables collaboration between analysts,
marketing departments, buyers/merchants, advertising
departments, and other partners;
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Centralized merchandising and marketing calendar and
integrated workflow system view all promotions
in a single, integrated calendar and plan and forecast
merchandising activities in a single collaborative system, which
enables collaboration between analysts, marketing,
buyers/merchants, advertising and other partners;
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Dynamic layout and versioning capabilities
view and select items, build and manage sophisticated
promotional offers and create multiple versions customized for
different regions, clusters of stores, customer segments, or
advertising zones;
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Highly-configurable enterprise architecture
supports complex requirements to integrate with key retail
production systems;
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Integration with DemandTecs Promotion
Optimization the ability to present promotion
analytics directly at the point of decision within the dynamic
layout and publishing process, enabling a more scientific
approach to selecting items and building promotions; and
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Enterprise integration provides multiple
integration points with the customers IT systems: large
incoming and outgoing data feeds use data-level integration to
transfer bulk files on an automated basis, and industry-standard
web services protocols communicate with customer systems and
process customer system requests.
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Retailers use Promotion Planning & Management to
manage the production process and execute more targeted
promotions across multiple channels and media vehicles while
also dynamically creating the highly-granular promotion history
required to achieve effective promotion analytics and complete
the promotion cycle with post event measurement and improved
modeling for future periods. Promotion Planning &
Management enables retailers to make better decisions about
promotional offers based on insight into past performance and
visibility to cross-channel promotions, to reduce errors and to
improve the ability to target promotions and to version products
and prices by market, zone or customer segment.
Promotion
Optimization
As part of the DemandTec
End-to-End
Promotion
Managementtm
solution, Promotion Optimization helps retailers to develop
promotional offers and placement that maximize the total store
impact on all categories. Promotion Optimization uses scientific
analysis that takes into account cannibalization, halo, and
cross-elasticity effects of existing retail and markdown
programs. Promotion Optimization customers can create and
simulate multiple scenarios based on mathematical forecasts of
results in order to evaluate tradeoffs among various promotions.
Key features of Promotion Optimization as a part of DemandTec
End-to-End
Promotion
Managementtm
include:
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Store/SKU-level modeling the ability to plan
promotions that maximize total store impact on all categories by
taking into account promotional response by item by store,
cannibalization, halo, and cross-elasticity effects of existing
everyday prices;
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Scenario management and what-if analysis the
ability to create and evaluate multiple promotion scenarios to
fine-tune promotional pricing and combinations of ad and display
support.;
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Category plan and master calendar management
the ability to generate, view and forecast multiple promotions
on one plan, taking into account factors such as cannibalization
of regular priced items, concurrent promotions and the
pantry-loading effect of successive promotions;
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Deal Management integration the ability for
all CP trade promotion offers entered into DemandTecs Deal
Management software service to flow directly into Promotion
Optimization for analysis, optimization and forecasting; and
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Promotion Planning & Management
integration Promotion Optimization is the
analytics engine providing embedded insights within the
Promotion Planning & Management workflow. The two
modules work together to enable merchants to identify the right
items to promote, forecast the impact of different pricing
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and merchandising options, build and forecast a complete
promotional calendar, and then manage the downstream execution
(integrating to Promotion Execution) to complete the end to end
process.
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Promotion Optimization is also included in the DemandTec
Lifecycle Price
Optimizationtm
solution (described above).
Promotion
Execution
Previously included as a part of what we referred to as
Advertising, Marketing & Execution, our Promotion
Execution software service enables retail users to execute the
promotion plans built in Promotion Planning &
Management with direct integration into major promotion plan
output mechanisms including
Adobe®
InDesign®
for print, signage systems and the retailers website.
Promotion Execution streamlines the promotion plan proofing
process with an online system that simplifies the process of
proofing multiple promotion plan versions, enables retail users
to proof anywhere and anytime, and manages the proofing
workflow. By simplifying promotion plan publication, retailers
are able to execute promotions more quickly, thereby gaining a
competitive advantage.
Key features of Promotion Execution include:
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Powerful version-enabled environment rapidly
build page-oriented promotions, streamline the flow of
promotional content and details to the creative team, and
automatically communicate all the versioned content, images,
prices and layout directly to Adobe
InDesign®,
where artists can quickly build pages and maintain links to
highly versioned promotional elements;
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Highly graphical and easy-to-use web-based
software automate and streamline the
collaborative advertising proofing process to accelerate the
process and reduce errors;
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Integrated signage software efficiently push
versioned signage information to existing systems both in-store
and at headquarters, thereby improving efficiencies and
eliminating errors between pricing and messaging in the
advertising circular with the information sent to the stores;
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Multi-channel/cross-media publishing create
content for planned promotional events once and then manage and
publish the content and digital assets across print, email,
website, mobile device, and other multi-channel/media
publishing; and
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iFlyer module automate the execution of
promotional flyers to targeted customer groups and distribute
them on-line through an email link, posting an electronic Flyer
on the retailers web site, or to a web device.
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As part of the ongoing integration of our services, the
Promotion Planning & Management, Promotion
Optimization, and Promotion Execution services described above
represent a repackaging and renaming of what we previously
marketed as Promotion Planning & Optimization and
Advertising, Marketing & Execution. The overall
functionality of the suite is unchanged. Each can be subscribed
for separately or as a bundle.
DemandTec
Assortment &
Spacetm
for Retail
The DemandTec Assortment &
Spacetm
solution for the retail industry consists of one or more of the
following software services, along with complementary software,
analytical services, and analytical insights:
Assortment
Optimization
Assortment Optimization enables retailers to determine which
items should be stocked, by store or store cluster, based on the
customers that shop at each store, the competitive environment,
and a quantified understanding of whether each item in a
category is merely duplicative or truly provides variety and
adds incremental sales to the category. Key features of
Assortment Optimization include:
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Advanced modeling and optimization science
enables the creation of efficient, customer-centric assortments
based on a quantitative understanding of incrementality (an
items ability to increase overall category sales) and
transferable demand (the degree to which sales volume shifts to
similar items or leaves the store when one item is delisted);
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Multiple data inputs incorporates market,
loyalty card, planogram, and cost data into the optimization
process;
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Automated processes includes automated
processes and wizards to address the assortment challenges
merchants face every day, such as performing straight
optimizations, increasing or decreasing SKU count and space, and
making
one-in-one-out
changes to assortments;
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What if analyses enables
retailers to run multiple scenarios and compare results to
identify the best strategy to meet company objectives such as
protecting private label items and image items; and
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Macro-space optimization enables retailers to
add or decrease category space within the store layout in order
to maximize category growth and customer loyalty.
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Retailers use Assortment Optimization to optimize assortments
based on sales, profit, space productivity, and gross margin
return on inventory investment (GMROII) goals. Retailers can
choose to generate these assortments by store, store cluster, or
section, and view recommended facings. With Assortment
Optimization, merchants can receive a set of specific
recommendations for assortment changes, and a highly accurate
forecast of how the addition or removal of each item will impact
category sales.
Assortment Optimization is augmented by a number of DemandTec
Analytical Insights & Solutions, including Image
Item Analysis (where we analyze item and basket-level data
to determine key items by chain, store, or customer segment in
order to enhance price image), Consumer Insights (which helps
our customers to understand which consumer purchasing behaviors
drive larger, more profitable market baskets), and Store Cluster
Analysis (where we analyze store-level demand and
geo-demographic factors to create or reconfigure ad zones that
improve volume and profit potential).
In January 2010 we launched our nextGEN Assortment Optimization
software service as part of the DemandTec suite of next
generation customer-centric merchandising and marketing
solutions. Consistent with our nextGEN strategy of integrating
the disciplines of merchandising and marketing, the nextGEN
Assortment Optimization software service now incorporates
shopper insights at the point of decision for merchants
optimizing assortments. The nextGEN version of Assortment
Optimization includes the ability for retailers to understand
the importance of each brand and item in the assortment to
individual shopper segments and then prioritize and optimize the
assortment for selected segments. By incorporating a
customer-centric approach to SKU rationalization and assortment
optimization, retailers can improve the perception of variety
while reducing duplication within categories, increasing
customer loyalty, and increasing sales.
DemandTec
Targeted
Marketingtm
for Retail
The DemandTec Targeted
Marketingtm
solution for the retail industry is a collection of services
delivered by DemandTec and its partners that enable retailers to
better understand key customer segments, align segmentation and
targeted merchandising and marketing initiatives, and create
targeted marketing programs that leverage customer insights to
build loyalty, increase sales, and improve profitability.
DemandTec
Trade
Effectivenesstm
for CP
The DemandTec Trade
Effectivenesstm
solution for the CP industry consists of one or more of the
following software services, along with complementary software,
analytical services, and analytical insights:
Trade
Planning & Optimization
Trade Planning & Optimization empowers CP company
managers to forecast promotion and pricing activity in a unified
planning environment. With this capability, CP companies can
develop and predict trade volume and profitability metrics that
will help transform the trade planning function and provide a
sustainable competitive advantage. Key features of Trade
Planning & Optimization for CP companies include:
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Optimization and forecasting accurately
predict key volume and financial metrics for brands and overall
retail category;
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Common analytical platform optimize trade
planning with unified pricing and promotion planning based on
the same underlying consumption data;
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Comprehensive trade planning use cases
create, forecast and build plans that include periodic trade
promotions (i.e., temporary discounts with or without ad or
display support) as well as price advances or buy-downs of the
retail price using trade promotion funds; and
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Demand elasticity curves for every item in the
category quantify the financial impact of
competitive trade activity against promoted items, total
portfolio and even a retailers entire category.
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CP companies use Trade Planning & Optimization to
build a total trade marketing plan that incorporates both
everyday price assumptions and promotion tactics, which results
in a more complete planning picture and ensures tighter forecast
accuracy. Leveraging the science of consumer demand to pinpoint
optimal pricing and promotion strategies, Trade
Planning & Optimization provides powerful predictive
planning capability to CP customer account teams and
headquarters users to deliver highly effective forecasts that
yield documented business results.
Advanced
Deal Management
Advanced Deal Management provides capabilities that are tailored
for CP companies and CP brokers to capture greater value from
the online trade promotion offer management experience. As a
paid upgrade to the basic Deal Management service (which is
offered at no charge), Advanced Deal Management provides a CP
company-centric set of reports and workflow privileges that help
further reduce costs, increase user effectiveness and enhance
data visibility. Advanced Deal Management subscribers also have
access to add-on services that are unavailable to basic Deal
Management subscribers. Key features of Deal Management for CP
companies and CP brokers include:
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Role-based access access to multiple users by
product line enables rapid and more effective user adoption;
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Customized item catalog CP-centric item
catalog customized by promoted group supports a more logical way
of building and entering promotions;
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Long-term deal archive full seven-year
history of all promotion offer data, including full
documentation of promotion offer versions and written
negotiations between retail trading partners supports, among
other benefits, compliance with regulatory requirements;
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Advanced data reporting detailed reporting
and data export features support better business
decisions; and
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Funds tracking accurate visibility into
available trade spending balances and the ability to reconcile
planned trade promotion activity against actual in-store
execution.
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CP companies upgrade to Advanced Deal Management in order to
derive more value from the online deal management initiative.
For a relatively small investment, our CP company customers are
provided with access to features that help to further reduce
costs, increase user effectiveness and enhance data visibility.
Professional
Services
Our professional services organization works closely with our
customers to implement our software so that our customers can
rapidly begin to achieve their merchandising and marketing
objectives. The organization consists of field consultants and
project managers, technology integration specialists, modeling
experts, and training specialists with experience in
implementing software in various retail and CP segments.
Depending on a specific customers requirements, we also
may engage third parties to assist with implementations. We
generally make our software available to a customer within two
weeks of signing its agreement, with several product categories
being fully operational within a matter of months.
The Analytical Insights & Solutions group within our
professional services organization works with prospects and
customers to identify actionable insights in order to improve
our customers returns on investment from using our
software. Leveraging our software platform, retailer
transaction-log/loyalty data, and additional third-party data
sources, we offer a number of strategic analytical insights both
as part of our software and as customer-specific
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services. For example, we offer an affinity analysis, which
summarizes millions of transaction-level records to identify
sets of products frequently purchased together, and recommend
subsequent strategies for maximizing consumer purchases.
The education group within our professional services
organization provides education and training services to our
customers and partners. The education group works closely with
each customer or partner to design and deliver a training
curriculum to match its needs. We deliver courses through
lectures, written materials and
e-learning
modules. We also offer a
train-the-trainer
program for customers with extensive or ongoing training
requirements.
Science
and Technology
Science
Our software not only incorporates the typical workflow and
business process management capabilities offered by many
enterprise software companies, but also is science-based and
applies advanced statistical analytics in the following areas:
Demand Modeling. Our software uses complex
econometric models designed to predict accurately the sales
volume of products under varying merchandising conditions and at
various prices, which enables customers to determine the factors
that influence consumer demand for a given product and location,
and to what extent. Our proprietary demand models quantify
consumer response to different merchandising and marketing
activities, environmental factors and elements of consumer
behavior across various consumer segments. Since our models are
non-linear, they are able to capture the complex underlying
relationships between consumer demand and the factors that
influence that demand.
Shopper-Centric Merchandising and
Marketing. Individual shoppers and particular
shopper segments respond differently to price changes for
different items. By applying various data mining and statistical
techniques to analyze sales data and combining the results with
additional data such as demographics, buying histories and item
affinities, our software enables our customers to understand
consumer and product segmentation more fully, to determine more
effective product assortments, and to design more individualized
promotion offers. Continuing to expand these techniques as a
major component of our nextGEN strategy will enable our
customers to make more granular, and therefore more effective,
merchandising and marketing decisions.
Forecasting and Simulation. Our forecasting
software enables our customers to determine the likely revenue,
profit and sales volumes for specific product categories, brands
or promoted groups at the store/item level for a given set of
prices and merchandising conditions. Our software does this by
incorporating and analyzing factors such as product
distribution, assortment and complementarity, cannibalization,
incrementality, transferable demand, stockpiling by consumers,
equivalent volumes and discrete events such as holidays and
localized merchandising categories. Our software also quantifies
and forecasts the store/item level margin impact caused by
varying supply chain costs.
Optimization and Rules Enforcement. While
demand modeling is a powerful tool that can provide quantifiable
benefits, achieving those benefits would be difficult if our
software relied solely upon modeling, because of the large
number of possibilities that our models generate. Our
optimization science uses a combination of complex algorithms to
help customers determine prices, promotions and markdowns that
best accomplish their objectives, while complying with their
business rules. These algorithms are designed to ensure accurate
results and incorporate rule relaxation that automatically
resolves conflicts in business rules according to the
customers preferences.
Technology
Data Processing. We receive and process
terabytes of customer data, including transaction-log/loyalty
data. This information is provided by retailers, CP companies
and syndicated data providers on a daily or weekly basis. We
process data through our proprietary software platform, which
integrates, validates and cleanses multiple data types and
enhances data quality by identifying and correcting common data
problems.
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Grid Computing. The implementation of our
advanced mathematical software requires substantial computing
resources. To address this challenge, we distribute our software
across a scalable grid of servers. This approach allows us to
automatically partition large computational problems into
smaller computations and to execute those computations in
parallel across the grid. We design our grid architecture to
ensure that optimizations are completed reliably and that
computing resources are allocated dynamically to our various
customers.
Enterprise Application Technology. With the
exception of customers who licensed Connect3 software prior to
its acquisition by DemandTec, our customers access our software
through a web browser and no software is installed on our
customers premises. Our portal technology allows us to
incorporate content from other sources and allows our content to
be shown in other applications and portals. Customers can
configure the user interface, customer-specific fields,
customer-specific workflow behavior and portal layout and
content. Our scalable architecture allows us to add new
customers without requiring us to make substantial incremental
investments in IT infrastructure.
Enterprise Integration. We provide multiple
integration points with our customers IT systems. Large
incoming and outgoing data feeds use data-level integration to
transfer bulk files on an automated basis. We use
industry-standard web services protocols to communicate with
customer systems and to process customer system requests. Our
DemandTec trade portal technology enables user interface-layer
integration between our system and our customers systems,
allowing us to display content served by customer systems and to
serve content to customer systems using industry-standard
protocols.
SaaS
Operations
Our operations organization is responsible for delivering our
software-as-a-service to our customers, which includes quality
assurance, release deployment, database management and
application tuning, systems monitoring and proactive problem
detection and prevention, application availability and customer
support.
Under our SaaS model, we currently release a new software
version approximately every quarter, each one containing
significant new functionality. Releases are deployed
simultaneously to our customers. Prior to deployment, each
release undergoes multi-stage testing and substantial quality
assurance, including build acceptance tests, regression test
cases, customer integration tests and final system verification
tests.
Our software is hosted in three data centers located in
San Jose, California, Sacramento, California, and Mesa,
Arizona. Each of these facilities includes advanced security,
power redundancy, and disaster mediation safeguards and
procedures such as biometric access control, onsite power
generation and earthquake hardening.
We have implemented a comprehensive information security
management program. As part of this program, our processes and
procedures include: logical access controls such as certificate
authentication, role-based authorization and detailed system
logging; vulnerability management assessment and remediation;
network security measures including encryption, firewalls and
monitoring; strict data and software
back-up
procedures with regular rotations to a secure, offsite storage
location; and network and system redundancy to provide
application resiliency.
In February 2010, an independent accounting and auditing firm
completed an audit of our controls over information technology
and processes in accordance with Statement on Auditing Standards
No. 70, or SAS 70. This firm issued a SAS 70 Type II
report confirming that suitably-designed controls were in place
and operating effectively.
Superior customer support is critical to customer satisfaction
and to retaining and expanding our customer base. By leveraging
our relationship with Sonata Services Limited in Shanghai,
China, discussed below in Research and
Development, we are able to provide customer support
24 hours a day, seven days a week through our support web
portal and by telephone. Since we manage our software for our
customers, we often are able to detect and resolve delivery
problems or processing capacity needs well in advance of when a
customer might actually notice the problem.
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Our
Customers
Today, our software-as-a-service is used by approximately 230
customers worldwide in the retail and CP industries. Retailers
together accounted for approximately 82% of our revenue in
fiscal 2010 and CP companies accounted for approximately 18% of
our revenue in fiscal 2010. Wal-Mart Stores, Inc., our largest
customer in fiscal 2010, accounted for approximately 14% of our
revenue in fiscal 2010.
Sales and
Marketing
We sell our solutions through our direct sales organization,
often in cooperation with entities such as systems integration
firms, strategy consultants and syndicated data providers. Our
sales organization is comprised of two distinct teams, one for
retailers and one for the CP industry. We assign our sales
directors to specific named target accounts. Solution
consultants assist our sales directors in providing detailed
technical and business expertise. After the first year of a
customers agreement term, we assign a strategic account
executive who is responsible for managing the customers
satisfaction, agreement renewals and sales of additional
software and services. Outside the United States, we have a
sales presence in the United Kingdom and France.
Our marketing group assists our direct sales, partner and
professional services organizations by providing sales tools,
programs and training. Our outbound marketing programs are
designed to develop awareness of DemandTec and to build our
brand through participation in a variety of industry events,
public relations, web-based seminar campaigns, and other
activities targeted at key executives, decision-makers, and
influencers in the industries we serve.
Our industry marketing and product management teams also engage
in inbound marketing efforts by collaborating on market research
to analyze new market and product opportunities, assess and
predict industry trends, and work directly with our customers to
identify, prioritize, and plan new solutions and new product
enhancements. In addition, every year we host DemandBetter, a
two-day
conference for our customers that brings together executives
from retailers and CP companies to share strategies and best
practices. The conference features in-depth product, science,
and customer case study sessions.
Strategic
Relationships
We continually seek to develop and foster alliances with third
parties whose products, technologies and services complement our
offerings. We work with industry leaders that assist in joint
sales activities and software implementation. These
relationships vary in complexity and scope and range from formal
global alliances to informal regional relationships. Three firms
with which we collaborate globally are The Nielsen Company,
International Business Machines Corporation, or IBM, and
Accenture LLP. We have had success working with these companies,
and we believe that we can continue to work together to provide
complementary solutions.
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Nielsen is a leading marketing information provider. In 2009, we
extended our exclusive 2005 agreement with Nielsen to continue
to deliver consumer-centric merchandising solutions to fast
moving consumer goods (FMCG) retailers around the globe.
Retailers utilizing both our and Nielsens offerings can
access a combination of consumer and market information,
demand-modeling science and optimization software to generate
merchandising plans.
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The Global Business Services division of IBM provides business
process outsourcing, systems integration and general consulting
services. IBM has pre-existing relationships with many of our
retail customers and prospects. We have worked with IBM to
jointly sell and implement our solutions in multiple geographies.
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Accenture has a strong retail industry practice that includes
expertise and solutions focused on precision pricing. We have
successfully collaborated with Accenture on joint sales and
implementation efforts for a number of retail customers around
the globe.
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Research
and Development
Under our SaaS model, we maintain and support only one version
of our software. This enables us to focus our research and
development expenditures on researching new methodologies for
understanding and predicting
19
consumer demand and developing new features and functionality.
We concentrate our research and development efforts on:
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improving our statistical modeling capabilities and advanced
optimization techniques to enhance our understanding of consumer
demand and customer segmentation;
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enhancing existing applications and developing new applications
that leverage our software platform to address a broader set of
business requirements; and
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enhancing our existing analytical services and developing new
analytics and tools.
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We have assembled an experienced science and modeling
organization comprised of experts in econometrics and advanced
mathematics, as well as a core group of engineers with
experience working with massive amounts of data and backgrounds
in scientific engineering. Our engineering design team is
predominantly located in San Mateo, California, but we also
utilize a group of software engineers employed by Sonata in
Shanghai, China. Under our agreement, Sonata provides dedicated
engineers for software development, sustaining engineering,
quality assurance and testing, operations, and customer support.
We pay a negotiated, fixed monthly fee for each dedicated
individual. Fees are paid monthly in arrears in
U.S. dollars. The term of the agreement runs through the
end of April 2012. We may terminate this agreement at any time
upon written notice, subject to certain scale-down restrictions.
We have an option to acquire the operations of Sonata that
relate to our business at any time at a pre-negotiated formula.
As of February 28, 2010, we had 132 employees in our
research and development located in the U.S., and an additional
65 Sonata engineers in China dedicated to our projects. Our
research and development expenses were approximately
$32.3 million, $26.8 million, and $22.4 million
in fiscal 2010, 2009, and 2008, respectively.
Competition
The market for consumer demand software varies greatly by
industry and business application, is rapidly evolving and
fragmented, and is subject to shifting customer needs and
changing technology. We compete primarily with vendors of
packaged software, whose software is installed by customers on
their own premises. We also compete with internally-developed
solutions. Our current principal competitors include:
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enterprise software application vendors such as SAP AG and
Oracle Corporation;
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niche retail software vendors, such as KSS Group (recently
acquired by dunnhumby USA) ;
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statistical tool vendors such as SAS, Inc.;
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marketing information providers for the CP industry such as
Nielsen and Information Resources, Inc.; and
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business consulting firms such as McKinsey & Company,
Inc., Deloitte & Touche LLP and Accenture.
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Many of our current and potential competitors have a larger
installed base of users, longer operating histories, greater
brand recognition and substantially greater financial,
technical, marketing, service and other resources. Competitors
with greater financial resources may be able to offer lower
prices, additional products or services, or other incentives
that we cannot match or offer. In addition, niche retail
software vendors may compete with us on price to attract smaller
retailers. Further, larger retailers and CP companies
historically have tended to invest in in-house applications and
advanced analytics provided by business consulting firms,
marketing information providers and statistical tools vendors.
We believe the principal competitive factors in our markets
include the following:
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demonstrated customer successes and the attendant retail and CP
domain expertise in both domestic and foreign markets;
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the quality and comprehensiveness of science and technology to
manage large data sets, model consumer demand accurately, and
optimize pricing and other merchandising and marketing decisions;
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the ability to drive predictable revenue, profitability, sales
volume and customer loyalty improvements;
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the ease and speed of software implementation and use;
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the ability to enhance science and technology rapidly to meet a
broader set of consumer behavior dynamics;
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the performance, scalability and flexibility of the software;
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the interoperability of the software with the customers
legacy systems;
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the cost of the software and the related implementation
process; and
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the vendors reputation.
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We believe that we compete favorably with our competitors on the
basis of these factors, when evaluated in totality. Enterprise
software application vendors offer applications that require
implementation of highly-customized, static software code at
each customers site. These providers market multiple
applications to the same customer, advertising a more uniform
and interoperable IT environment. Our software is provided
through a SaaS delivery model that is designed to allow quick
access to more dynamic software with significantly less costly
and time-consuming
on-site
implementation. Our SaaS model also reduces dependence upon a
customers internal IT resources and therefore decreases
the costs associated with interoperability with legacy systems.
We believe that we may not compete as favorably for retail
customers with annual sales below $500 million, which may
not consider their potential return from incremental changes in
revenue or profitability sufficiently compelling to purchase a
higher cost, higher value solution. These retailers may instead
choose less expensive, less feature rich solutions offered by
niche retail software vendors, statistical tools companies or
business consulting firms.
If we are not able to compete successfully against our current
or future competitors, it will be difficult to acquire and
retain customers, and our business, financial condition and
operating results will be harmed.
Intellectual
Property
We believe that our proprietary mathematical algorithms,
statistical models and techniques and unique software
architecture differentiate us from other consumer demand
companies, as they enable us to understand and forecast consumer
behavior more completely. Our success depends on our ability to
continue to innovate in science and engineering and to protect
our core intellectual property. Our intellectual property
strategy relies on a combination of trade secrets, patents,
copyrights, trademarks and contractual confidentiality
agreements.
We currently have 18 issued patents and 17 patent applications
in the United States, and 5 issued patents and 6 patent
applications internationally. The expiration dates of our issued
patents range from 2020 to 2023. We focus our patent efforts in
the United States, but from time to time we will file
corresponding foreign patent applications in strategic areas
such as Europe and Asia. Our patent strategy balances strategic
importance, competitive assessment and the need to maintain
costs at a reasonable level, and we do not depend on any
specific patent or set of patents to conduct our business
operations. We may not receive competitive advantages from any
rights granted under our existing patents. We do not know
whether any of our patent applications will result in the
issuance of any further patents or whether the examination
process will require us to narrow the scope of our claims. To
the extent any of our applications proceeds to issuance as a
patent, the future patent may be opposed, contested,
circumvented, designed around by a third party, or found to be
unenforceable or invalidated. In addition, our future patent
applications may not be issued with the scope of the claims
sought by us, if at all, or the scope of claims we are seeking
may not be sufficiently broad to protect our proprietary
technologies. Others may develop technologies that are similar
or superior to our proprietary technologies, duplicate our
proprietary technologies or design around patents owned or
licensed by us. If our products, patents or patent applications
are found to conflict with any patent held by third parties, we
could be prevented from selling our products, our patents could
be declared invalid or our patent applications might not result
in issued patents.
We have registered the trademark DemandTec in the United States,
China, Japan, the European Union, Colombia and certain other
countries. We have also registered the DemandTec logo in the
United States and the European Union. We have filed other
trademark applications in the United States and certain other
countries.
In addition to filing patent applications and registering
trademarks, we also rely in part on United States and
international copyright laws to protect our software.
Furthermore, we control access to and use of our proprietary
21
software and other confidential information through the use of
internal and external controls, including signing non-disclosure
agreements with contractors, customers and partners. In
addition, all of our employees and consultants are required to
execute proprietary information and invention assignment
agreements in connection with their employment and consulting
relationships with us, pursuant to which they agree to maintain
the confidentiality of our proprietary information and they
grant us ownership rights in all inventions they reduce to
practice in the scope of performing their employment or
consulting services. However, we cannot provide any assurance
that employees and consultants will abide by these agreements.
Despite our efforts to protect our trade secrets and proprietary
rights through patents, licenses and confidentiality agreements,
unauthorized parties may still copy or otherwise obtain and use
our software and technology. In addition, we intend to expand
our international operations, and effective patent, copyright,
trademark and trade secret protection may not be available or
may be limited in foreign countries. If we fail to protect our
intellectual property and other proprietary rights, our business
could be harmed.
Employees
As of February 28, 2010, we employed 313 full-time
employees, including 132 in research and development, 68 in
professional services, 37 in sales and marketing, 45 in general
and administrative, and 31 in operations and support. We have
never had a work stoppage, and none of our employees is
represented by a labor organization or under any
collective-bargaining arrangements. We consider our employee
relations to be good.
Available
Information
Our Internet website address is www.demandtec.com. We
provide free access to various reports that we file with or
furnish to the Securities and Exchange Commission, or SEC,
through our website, as soon as reasonably practicable after
they have been filed or furnished. These reports include, but
are not limited to, our Annual Reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports. Our SEC reports can be
accessed through the investor relations section of our website,
or through www.sec.gov. Information on our website does
not constitute part of this Annual Report on
Form 10-K
or any other report we file or furnish with the SEC.
Stockholders may request copies of these documents from:
DemandTec, Inc.
One Franklin Parkway, Building 910
San Mateo, California 94403
Attention: Investor Relations
22
Set forth below and elsewhere in this Annual Report on
Form 10-K,
and in other documents we file with the Securities and Exchange
Commission, or SEC, are risks and uncertainties that could cause
actual results to differ materially from the results
contemplated by the forward-looking statements contained in this
Annual Report on
Form 10-K
and in other written and oral communications from time to time.
Because of the following factors, as well as other variables
affecting our operating results, past financial performance
should not be considered as a reliable indicator of future
performance and investors should not use historical trends to
anticipate results or trends in future periods.
Risks
Related to Our Business and Industry
We may
experience significant quarterly fluctuations in our operating
results due to a number of factors, which makes our future
operating results difficult to predict and could cause our
operating results to fall below expectations.
Our quarterly operating results may fluctuate significantly due
to a variety of factors, many of which are outside of our
control. As a result, comparing our operating results on a
period-to-period
basis may not be meaningful. You should not rely on our past
results as an indication of our future performance. If our
operating results fall below the expectations of investors or
securities analysts or below the guidance, if any, we provide to
the market, the price of our common stock could decline
substantially.
Factors that may affect our operating results include:
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our ability to increase sales to existing customers and to renew
agreements with our existing customers at comparable prices,
particularly larger retail customers;
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our ability to attract new customers, particularly larger retail
and consumer products customers in both domestic and foreign
markets;
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our ability to achieve success with our nextGEN
strategy;
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changes in our pricing policies or those of our competitors, or
pricing pressure on our software services;
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periodic fluctuations in demand for our software and services;
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volatility in the sales of our solutions on a quarterly basis
and timing of the execution of new and renewal agreements within
such quarterly periods;
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reductions in customers budgets for information technology
purchases and delays in their purchasing cycles, particularly in
light of recent adverse global economic conditions;
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our ability to develop and implement in a timely manner new
software and enhancements that meet customer requirements;
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our ability to hire, train and retain key personnel;
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any significant changes in the competitive dynamics of our
market, including new entrants or substantial discounting of
products;
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our ability to control costs, including our operating expenses;
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any significant change in our facilities-related costs;
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the timing of hiring personnel and of large expenses such as
those for trade shows and third-party professional services;
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general economic conditions in the retail and CP markets;
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our ability to appropriately resolve any disputes with customers;
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outages and capacity constraints with our hosting
partners; and
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the impact of a recession or any other adverse global economic
conditions on our business, including a delay in signing or a
failure to sign significant customer agreements.
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We have in the past experienced, and we may continue to
experience, significant variations in our level of sales on a
quarterly basis. In recent periods, several of our customers
have delayed or failed to renew their agreements with us upon
expiration, or have renewed at lower prices. Such variations in
our sales, or delays in signing or a failure to sign or renew
significant customer agreements, have led to significant
fluctuations in our cash flows and deferred revenue on a
quarterly and annual basis. For example, we used approximately
$6.8 million of net cash in operations in fiscal 2010,
primarily due to the use of $10.5 million of net cash in
operations in the third quarter, while we generated
approximately $13.8 million of net cash from operations in
fiscal 2009. Our operating results have been impacted, and will
likely continue to be impacted in the near term, by any delays
in signing or failures to sign significant customer agreements.
If the global economic environment does not improve in the short
term and delays in signing customer agreements continue in any
future fiscal quarters, our future operating results for any
such quarter and for subsequent quarters may be below the
expectations of securities analysts or investors, which may
result in a decline in our stock price.
In September 2009, we entered into a lease agreement for office
space in San Mateo, California that we use as our new
corporate headquarters, replacing our then-existing corporate
headquarters in San Carlos, California. The lease has a
total lease term of eight years with an initial non-cancellable
lease term of five years commencing December 1, 2009. The
aggregate minimum lease commitment is approximately
$10.1 million. Upon commencement of this lease, our monthly
rent payments increased significantly both immediately and in
the long term over our monthly rent payments for our prior
space, and quarterly real estate-related operating expenses that
we incur increased by approximately $207,000. If our revenue
does not increase or our operating expenses do not decrease to
offset this increase in real estate-related operating expenses,
or if we are unable to find suitable tenants to sublease a
significant portion of this space in the event we are unable to
sufficiently grow our business in the future, then our results
of operations and financial position will be materially
adversely impacted.
In addition, in the past, certain of our customers have filed
for bankruptcy protection. For example, during fiscal 2010, two
of our customers, Bi-Lo LLC and The Penn Traffic Company, filed
voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code. Our agreements with these
customers have subsequently been terminated. Our aggregate
revenue from Bi-Lo and Penn Traffic in fiscal 2010 was
approximately $3.4 million. It is possible that any
customers or potential customers seeking bankruptcy protection
could seek to cancel their agreements with us, or could elect
not to purchase new or additional services or renew such
services with us, or could fail to pay us according to our
contractual terms, any of which would negatively impact our
results of operations or financial position in the future.
We
have a history of losses and we may not achieve or sustain
profitability in the future.
We have a history of losses and have not achieved profitability
in any fiscal year. We experienced net losses of
$11.8 million, $5.0 million and $4.5 million in
fiscal 2010, fiscal 2009 and fiscal 2008, respectively. At
February 28, 2010, we had an accumulated deficit of
$89.2 million. We expect to continue to incur net losses in
fiscal 2011 and perhaps beyond. In addition, our cost of revenue
and operating expenses may increase in future periods as we
implement initiatives to continue to grow our business. If the
recent adverse global economic environment continues to
negatively impact our business and our revenue does not increase
to offset these expected increases in cost of revenue and
operating expenses, we will not be profitable. For example, in
fiscal 2010 our costs grew faster than our revenue such that our
net loss increased to $11.8 million in fiscal 2010 compared
to $5.0 million in fiscal 2009. In the near term, our
revenue growth may continue to slow, or revenue itself may
decline from prior periods. Accordingly, we cannot assure you
that we will be able to achieve or maintain profitability in the
future.
The
effects of recent adverse global economic conditions may
adversely impact our business, operating results or financial
condition.
Recent adverse global economic conditions have caused a general
tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, extreme
volatility in credit, equity and fixed income markets, and
economic contraction. The retail and consumer products
industries have been and may continue to be especially hard hit
by these economic developments, which in recent periods has
resulted in some customers
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delaying or not entering into new agreements or renewing their
existing agreements with us. In addition, current or potential
customers may not have funds to enter into or renew their
agreements for our software and services, which could cause them
to delay, decrease or cancel purchases of our software and
services, to renew at lower prices, or to not pay us or to delay
paying us for previously purchased software and services.
Financial institution failures may cause us to incur increased
expenses or make it more difficult either to utilize our
existing debt capacity or otherwise obtain financing for our
operations, investing activities (including the financing of any
future acquisitions), or financing activities. Finally, our
investment portfolio, which includes short-term debt securities,
is subject to general credit, liquidity, counterparty, market
and interest rate risks that may be exacerbated by the ongoing
global financial conditions. If the banking system or the fixed
income, credit or equity markets deteriorate or remain volatile,
our investment portfolio may be impacted and the values and
liquidity of our investments could be adversely affected.
We
depend on a small number of customers, which are primarily large
retailers, and our growth, if any, depends upon our ability to
add new and retain existing large customers.
We derive a significant percentage of our revenue from a
relatively small number of customers, and the loss of any one or
more of those customers could decrease our revenue and harm our
current and future operating results. Our retail customers
accounted for 82% of our revenue in fiscal 2010. Our three
largest customers accounted for approximately 29% and 30% of our
revenue in fiscal 2010 and 2009, respectively. Although our
largest customers may vary from period to period, we anticipate
that we will continue to depend on revenue from a relatively
small number of our large retail customers. We have recently
become involved in a dispute with a large customer relating to a
development project with that customer. See Risk
Factors Third-party claims and litigation could
seriously harm our business. Further, our ability to grow
revenue depends on our ability to increase sales to existing
customers, to renew agreements with our existing customers and
to attract new customers. In fiscal 2010 we did not add any
significant large new retail customers. If economic factors,
including the recent adverse global economic conditions, were to
have a continued or increasingly negative impact on the retail
market segment, it could reduce the amount that these customers
spend on information technology, which would adversely affect
our revenue and results of operations.
Our
business depends substantially on customers renewing their
agreements for our software. Any decline in our customer
renewals would harm our operating results.
To maintain and grow our revenue, we must achieve and maintain
high levels of customer renewals. We sell our software pursuant
to agreements with initial terms that are generally from one to
three years in length. Our customers have no obligation to renew
their agreements after the expiration of their term, and we
cannot assure you that these agreements will be renewed on
favorable terms, renewed timely, or at all. The fees we charge
for our solutions vary based on a number of factors, including
the software, service and hosting components provided, the size
of the customer, and the duration of the agreement term. Our
initial agreements with customers may include fees for software,
services or hosting components that may not be needed upon
renewal. As a consequence, if we renew these agreements, we may
receive lower total fees. In addition, if an agreement is
renewed for a term longer than the preceding term, we may
receive total fees in excess of total fees received in the
initial agreement but a smaller average annual fee because we
generally charge lower annual fees in connection with agreements
with longer terms. In any of these situations, we would need to
sell additional software, services or hosting in order to
maintain the same level of annual fees from that customer. There
can be no assurance that we will be able to renew these
agreements, sell additional software or services or sell to new
customers. In recent periods certain of our customers have
elected not to renew their agreements with us or have renewed on
less favorable terms. We have limited historical data with
respect to customer renewals, so we may not be able to predict
future customer renewal rates and amounts accurately. Our
customers renewal rates may decline or fluctuate as a
result of a number of factors, including their satisfaction or
dissatisfaction with our software, the price of our software,
the prices of competing products and services, consolidation
within our customer base or reductions in our customers
information technology spending levels. If our customers do not
renew their agreements for our software for any reason, or if
they renew on less favorable terms, our revenue will decline and
our cash flow will be negatively impacted.
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Because
we generally recognize revenue ratably over the terms of our
customer agreements, the lack of renewals or the failure to
enter into new agreements may not immediately be reflected in
our statement of operations in any significant manner but may
negatively affect revenue in future quarters.
We generally recognize revenue ratably over the terms of our
customer agreements and invoice our customers in advance for
annual use of our software and certain implementation services
on a fixed fee basis. As a result, most of our quarterly revenue
results from agreements entered into during previous quarters.
Consequently, a decline in new or renewed agreements in a
particular quarter, as well as any renewals at reduced annual
dollar amounts, will not be reflected in any significant manner
in our revenue for that quarter, but it will negatively affect
revenue in future quarters. For example, in fiscal 2009 and
fiscal 2010 the global economic environment deteriorated
compared to prior periods. This has resulted in delays in the
execution of new and some renewal customer contracts, with some
customers or potential customers electing not to enter into new
or renewal contracts, and some other customers renewing at lower
prices. Accordingly, our revenue growth has slowed, and our
deferred revenue balance at February 28, 2010 was lower
compared to prior periods, which may adversely impact our
revenue in the future.
We may
expand through acquisitions of and/or partnership with other
companies, which may divert our managements attention and
result in unexpected operating and technology integration
difficulties, increased costs and dilution to our
stockholders.
Our business strategy may include acquiring complementary
software, technologies, or businesses. For instance, in February
2009, we acquired Connect3, a provider of advertising planning
and execution software. Acquisitions may result in unforeseen
operating difficulties and expenditures. In particular, we may
encounter difficulties in assimilating or integrating the
businesses, technologies, services, products, personnel, or
operations of the acquired companies (including those of
Connect3), especially if the key personnel of the acquired
company choose not to work for us, and we may have difficulty
retaining the existing customers or signing new customers of any
acquired business or migrating them to a software-as-a-service
model. For instance, we are currently integrating
Connect3s technology, which was offered solely on an
installed,
behind-the-firewall
basis, into our DemandTec
End-to-End
Promotion Management solution, and we may not be successful in
completing this integration on a timely basis or at all.
Acquisitions may also disrupt our ongoing business, divert our
resources and require significant management attention that
would otherwise be available for ongoing development of our
current business. We also may be required to use a substantial
amount of our cash or issue equity securities to complete an
acquisition, which could deplete our cash reserves and dilute
our existing stockholders and could adversely affect the market
price of our common stock. Moreover, we cannot assure you that
the anticipated benefits of any acquisition, including our
revenue or return on investment assumptions, would be realized
or that we would not be exposed to unknown liabilities.
In addition, an acquisition may negatively impact our results of
operations because we may incur additional expenses relating to
one-time charges, write-downs, amortization of intangible
assets, or tax-related expenses. For example, our acquisition of
TradePoint in November 2006 resulted in approximately $911,000
of amortization of purchased intangible assets in fiscal 2010,
and $967,000 in each of fiscal 2009 and 2008, and will result in
amortization of approximately $800,000 in fiscal 2011 with
declining amounts for more than six years thereafter. Our
acquisition of Connect3 resulted in the write-off of $150,000 of
in-process research and development costs in fiscal 2009 and
amortization of purchased intangible assets of approximately
$2.2 million in fiscal 2010, and will result in
approximately $1.8 million and $626,000 of amortization
expense in fiscal 2011 and 2012, respectively.
We
might require additional capital to support our business growth,
and this capital might not be available on acceptable terms, or
at all.
We intend to continue to make investments to support our
business growth and may require additional funds to respond to
business challenges, including continued economic concerns as
well as the need to develop new software or enhance our existing
software, enhance our operating infrastructure and acquire
complementary businesses and technologies. In May 2009, we
amended our loan agreement that we had entered in April 2008
with a financial institution to, among other things, extend the
maturity date to May 7, 2012 and increase our revolving
line of credit from $15.0 million to $20.0 million.
However, we may need to engage in equity or debt financings or
enter into additional credit agreements to secure additional
funds. If we raise additional funds through further issuances of
equity or convertible debt securities, our existing stockholders
could suffer significant dilution, and any new equity
26
securities we issue could have rights, preferences and
privileges superior to those of holders of our common stock. Any
debt financing secured by us in the future could involve
restrictive covenants relating to our capital-raising activities
and other financial and operational matters that make it more
difficult for us to obtain additional capital and to pursue
business opportunities, including potential acquisitions. In
addition, we may not be able to obtain additional financing on
terms favorable to us, if at all. If we are unable to obtain
adequate financing or financing on terms satisfactory to us,
when we require it, our ability to continue to support our
business growth and to respond to business challenges could be
significantly limited.
Our
sales cycles are long and unpredictable, and our sales efforts
require considerable time and expense.
We market our software to large retailers and CP companies, and
sales to these customers are complex efforts that involve
educating our customers about the use and benefits of our
software, including its technical capabilities. Customers
typically undertake a significant evaluation process that can
result in a lengthy sales cycle, in some cases over
12 months. We spend substantial time, effort, and money in
our sales efforts without any assurance that our efforts will
generate long-term agreements. In addition, customer sales
decisions are frequently influenced by global macroeconomic
factors, budget constraints, multiple approvals, and unplanned
administrative, processing and other delays. If sales expected
from a specific customer are not realized, our revenue and,
thus, our future operating results could be adversely impacted.
Our
business will be adversely affected if the retail and CP
industries do not widely adopt technology solutions
incorporating scientific techniques to understand and predict
consumer demand to make pricing and other merchandising
decisions.
Our software addresses the new and emerging market of applying
econometric modeling and optimization techniques through
software to enable retailers and CP companies to understand and
predict consumer demand in order to improve their pricing,
promotion, and other merchandising and marketing decisions.
These decisions are fundamental to retailers and CP companies;
accordingly, our target customers may be hesitant to accept the
risk inherent in applying and relying on new technologies or
methodologies to supplant traditional methods. Our business will
not be successful if retailers and CP companies do not accept
the use of software to enable more strategic pricing and other
merchandising decisions.
If we
are unable to continue to enhance our current software, which is
becoming increasingly complex, or to develop or acquire new
software to address changing business requirements, we may not
be able to attract or retain customers.
Our ability to attract new customers, renew agreements with
existing customers and maintain or increase revenue from
existing customers will depend in large part on our ability to
anticipate the changing needs of the retail and CP industries,
to enhance our increasingly complex existing software and to
introduce new software that meet those needs. Certain of our
implementation and integration engagements, particularly with
respect to initial deployment with larger customers, have become
increasingly complex. Further, certain of our engagements
require, and other future engagements may require, us to develop
certain customer-specific functionality. Such engagements can be
significantly more time-consuming and complicated than our other
customer engagements. Any new software may not be introduced in
a timely or cost-effective manner and may not achieve market
acceptance, meet customer expectations or contractual
commitments, or generate revenue sufficient to recoup the cost
of development or acquisition of such software. For example, we
have not yet completed development or achieved market acceptance
of certain components of our solutions underlying our
nextGEN strategy. Further, we have recently become
involved in a dispute with a large customer relating to a
development project with that customer. If we are unable to
successfully develop or acquire new software and enhance our
existing applications to meet customer requirements, we may not
be able to attract or retain customers.
27
Understanding
and predicting consumer behavior is dependent upon the continued
availability of accurate and relevant data from retailers and
third-party data aggregators. If we are unable to obtain access
to relevant data, or if we do not enhance our core science and
econometric modeling methodologies to adjust for changing
consumer behavior, our software may become less competitive or
obsolete.
The ability of our econometric models to forecast consumer
demand depends upon the assumptions we make in designing the
models and in the quality of the data we use to build them. Our
models rely on point of sale (POS), transaction log or loyalty
program data provided to us directly by our retail customers and
by third-party data aggregators. Consumer behavior is affected
by many factors, including evolving consumer needs and
preferences, new competitive product offerings, more targeted
merchandising and marketing, emerging industry standards, and
changing technology. Data adequately representing all of these
factors may not be readily available in certain geographies or
in certain markets. In addition, the relative importance of the
variables that influence demand will change over time,
particularly with the continued growth of the Internet as a
viable retail alternative and the emergence of non-traditional
marketing channels. If our retail customers are unable to
collect POS, transaction log or loyalty program data or we are
unable to obtain such data from them or from third-party data
aggregators, or if we fail to enhance our core science and
modeling methodologies to adjust for changes in consumer
behavior, customers may delay or decide against purchases or
renewals of our software.
We
rely on our management team and will need additional personnel
to grow our business, and the loss of one or more key employees
or our inability to attract and retain qualified personnel could
harm our business.
Our success depends to a significant degree on our ability to
attract, retain and motivate our management team and our other
key personnel. Our professional services organization and other
customer-facing groups, in particular, play an instrumental role
in ensuring our customers satisfaction. In addition, our
science, engineering, and modeling team requires experts in
econometrics and advanced mathematics, and there are a limited
number of individuals with the education and training necessary
to fill these roles should we experience employee departures.
All of our employees work for us on an at-will basis, and there
is no assurance that any employee will remain with us. Our
competitors may be successful in recruiting and hiring members
of our executive management team or other key employees, and it
may be difficult for us to find suitable replacements on a
timely basis. Many of the members of our management team and key
employees are substantially vested in their shares of our common
stock or options to purchase shares of our common stock, and
therefore retention of these employees may be difficult in the
highly competitive market and geography in which we operate our
business.
We
have derived most of our revenue from sales to our retail
customers. If our software is not widely accepted by CP
companies, our ability to grow our revenue and achieve our
strategic objectives will be harmed.
To date, we have derived most of our revenue from retail
customers. During fiscal 2010, we generated approximately 82% of
our revenue from sales to retail customers, while we generated
approximately 18% of our revenue from sales to CP companies. In
fiscal 2009, we generated approximately 86% of our revenue from
sales to retail customers while we generated approximately 14%
of our revenue from sales to CP companies. In order to grow our
revenue and to achieve our long-term strategic objectives, it is
important for us to expand our sales to derive a more
significant portion of our revenue from new and existing CP
customers. If CP companies do not widely accept our software,
our revenue growth and business will be harmed.
We
face intense competition that could prevent us from increasing
our revenue and prevent us from becoming
profitable.
The market for our software is highly competitive and we expect
competition to intensify in the future. Competitors vary in size
and in the scope and breadth of the products and services they
offer. Currently, we face competition from traditional
enterprise software application vendors such as Oracle
Corporation and SAP AG, niche retail software vendors such as
KSS Group (recently acquired by dunnhumby USA), and statistical
tool vendors such as SAS, Inc. To a lesser extent, we also
compete or potentially compete with marketing information
providers for the CP industry such as The Nielsen Company and
Information Resources, Inc., as well as business consulting
firms such as McKinsey & Company, Inc.,
Deloitte & Touche LLP and Accenture LLP, which offer
28
merchandising consulting services and analyses. Because the
market for our solutions is relatively new, we expect to face
additional competition from other established and emerging
companies and, potentially, from internally-developed
applications. This competition could result in increased pricing
pressure, reduced profit margins, increased sales and marketing
expenses and a failure to increase, or the loss of, market share.
Competitive offerings may have better performance, lower prices
and broader acceptance than our software. Many of our current or
potential competitors have longer operating histories, greater
name recognition, larger customer bases and significantly
greater financial, technical, sales, research and development,
marketing and other resources than we have. As a result, our
competition may be able to offer more effective software or may
opt to include software competitive to our software as part of
broader, enterprise software solutions at little or no charge.
We may not be able to maintain or improve our competitive
position against our current or future competitors, and our
failure to do so could seriously harm our business.
We
rely on three third-party service providers to host our
software, and any interruptions or delays in services from these
third parties could impair the delivery of our software as a
service.
We deliver our software to customers over the Internet. The
software is hosted in three third-party data centers located in
San Jose, California, Sacramento, California, and Mesa,
Arizona. We do not control the operation of any of these
facilities, and we rely on these service providers to provide
all power, connectivity and physical security. These facilities
could be vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunications failures and
similar events. They are also subject to break-ins, computer
viruses, sabotage, intentional acts of vandalism and other
misconduct. The occurrence of a natural disaster or intentional
misconduct, a decision to close these facilities without
adequate notice or other unanticipated problems could result in
lengthy interruptions in our services. Additionally, because we
currently rely upon disk and tape bond
back-up
procedures, but do not operate or maintain a fully-redundant
back-up
site, there is an increased risk of service interruption.
If our
security measures are breached and unauthorized access is
obtained to our customers data, our operations may be
perceived as not being secure, customers may curtail or stop
using our software and we may incur significant
liabilities.
Our operations involve the storage and transmission of our
customers confidential information, and security breaches
could expose us to a risk of loss of this information,
litigation and possible liability. If our security measures are
breached as a result of third-party action, employee error,
malfeasance or otherwise, and, as a result, someone obtains
unauthorized access to our customers data, our reputation
will be damaged, our business may suffer and we could incur
significant liability. Because 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. If an actual or perceived breach
of our security occurs, the market perception of the
effectiveness of our security measures could be harmed and we
could lose potential sales and existing customers.
If we
fail to respond to rapidly changing technological developments
or evolving industry standards, our software may become less
competitive or obsolete.
Because our software is designed to operate on a variety of
network, hardware and software platforms using standard Internet
tools and protocols, we will need to modify and enhance our
software continuously to keep pace with changes in
Internet-related hardware, software, communication, browser and
database technologies. Furthermore, uncertainties about the
timing and nature of new network platforms or technologies, or
modifications to existing platforms or technologies, could
increase our research and development expenses. If we are unable
to respond in a timely manner to these rapid technological
developments, our software may become less marketable and less
competitive or obsolete.
Our
use of open source software and third-party technology could
impose limitations on our ability to commercialize our
software.
We incorporate open source software into our software. Although
we monitor our use of open source software closely, the terms of
many open source licenses have not been interpreted by United
States courts, and there is a risk that these licenses could be
construed in a manner that imposes unanticipated conditions or
restrictions on our
29
ability to commercialize our software. In that event, we could
be required to seek licenses from third parties in order to
continue offering our software, to re-engineer our technology or
to discontinue offering our software in the event re-engineering
cannot be accomplished on a timely basis, any of which could
adversely affect our business, operating results and financial
condition. We also incorporate certain third-party technologies,
including software programs and algorithms, into our software
and may desire to incorporate additional third-party
technologies in the future. Licenses to new third-party
technologies may not be available to us on commercially
reasonable terms, or at all.
If we
are unable to protect our intellectual property rights, our
competitive position could be harmed and we could be required to
incur significant expenses in order to enforce our
rights.
To protect our proprietary technology, including our core
statistical and mathematic models and our software, we rely on
trade secret, patent, copyright, service mark, trademark and
other proprietary rights laws and confidentiality agreements
with employees and third parties, all of which offer only
limited protection. Despite our efforts, the steps we have taken
to protect our proprietary rights may not be adequate to
preclude misappropriation of our proprietary information or
infringement of our intellectual property rights, and our
ability to police that misappropriation or infringement is
uncertain, particularly in countries outside of the United
States, including China where a third party conducts a portion
of our development activity for us. Further, we do not know
whether any of our pending patent applications will result in
the issuance of patents or whether the examination process will
require us to narrow our claims. Our current patents and any
future patents that may be issued may be contested, circumvented
or invalidated. Moreover, the rights granted under any issued
patents may not provide us with proprietary protection or
competitive advantages, and, as with any technology, competitors
may be able to develop technologies similar or superior to our
own now or in the future.
Protecting against the unauthorized use of our trade secrets,
patents, copyrights, service marks, trademarks and other
proprietary rights is expensive, difficult and not always
possible. Litigation may be necessary in the future to enforce
or defend our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could be costly
and divert management resources, either of which could harm our
business, operating results and financial condition.
Furthermore, many of our current and potential competitors have
the ability to dedicate substantially greater resources to
enforcing their intellectual property rights than we do.
Accordingly, despite our efforts, we may not be able to prevent
third parties from infringing upon or misappropriating our
intellectual property.
We cannot be certain that the steps we have taken will prevent
the unauthorized use or the reverse engineering of our
technology. Moreover, others may independently develop
technologies that are competitive to ours or infringe our
intellectual property. The enforcement of our intellectual
property rights also depends on our legal actions against these
infringers being successful, but we cannot be sure these actions
will be successful, even when our rights have been infringed.
Furthermore, effective patent, trademark, service mark,
copyright and trade secret protection may not be available in
every country in which our services are available or where we
have development work performed. In addition, the legal
standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related
industries are uncertain and still evolving.
Material
defects or errors in our software or any failure to meet service
level agreements with our customers could harm our reputation,
result in significant expense to us and impair our ability to
sell our software.
Our software is inherently complex and may contain material
defects or errors that may cause it to fail to perform in
accordance with customer expectations. Any defects that cause
interruptions to the availability of our software could result
in lost or delayed market acceptance and sales, require us to
provide sales credits or issue refunds to our customers, cause
existing customers not to renew their agreements and prospective
customers not to purchase our software, divert development
resources, hurt our reputation and expose us to claims for
liability. After the release of our software, defects or errors
may also be identified from time to time by our internal team
and by our customers. In addition, we have occasionally entered
into service level agreements with our customers warranting
defined levels of uptime reliability and performance and
permitting those customers to receive service credits or
discounted future services, or to terminate their agreements in
the event that we fail to meet those levels. The costs
30
incurred in correcting any material defects or errors in our
software or in failing to meet any such service levels may be
substantial.
Because
our long-term success depends, in part, on our ability to expand
sales of our software to customers located outside of the United
States, our business may be increasingly susceptible to risks
associated with international operations.
We have limited experience operating in international
jurisdictions. In each of fiscal 2010 and 2009, 14% of our
revenue was attributable to sales to companies located outside
the United States. Our inexperience in operating our business
outside of the United States increases the risk that any
international expansion efforts that we may undertake will not
be successful. In addition, conducting international operations
subjects us to new risks that we have not generally faced in the
United States. These include:
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fluctuations in currency exchange rates;
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unexpected changes in foreign regulatory requirements;
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localization of our software, including translation of the
interface of our software into foreign languages and creation of
localized agreements;
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longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
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tariffs and trade barriers and other regulatory or contractual
limitations on our ability to sell or develop our software in
certain international markets;
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difficulties in managing and staffing international operations;
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potentially adverse tax consequences, including the complexities
of international value added tax systems and restrictions on the
repatriation of earnings;
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the burdens of complying with a wide variety of international
laws and different legal standards, including local data privacy
laws and local consumer protection laws that could regulate
retailers permitted pricing and promotion practices;
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political, social and economic instability abroad, terrorist
attacks and security concerns in general; and
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reduced or varied protection of intellectual property rights in
some countries.
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The occurrence of any of these risks could negatively affect our
international business and, consequently, our results of
operations.
Because
portions of our software development, sustaining engineering,
quality assurance and testing, operations and customer support
are provided by a third party in China, our business is
susceptible to risks associated with having substantial
operations overseas.
Portions of our software development, sustaining engineering,
quality assurance and testing, operations and customer support
are provided by Sonata Services Limited, or Sonata, a third
party located in Shanghai, China. As of February 28, 2010,
in addition to our 163 employees in our operations,
customer support, science, product management and engineering
groups located in the United States, an additional 65 Sonata
personnel were dedicated to our projects. Remotely coordinating
a third party in China requires significant management attention
and substantial resources, and there can be no assurance that we
will be successful in coordinating these activities.
Furthermore, if there is a disruption to these operations in
China, it will require that substantial management attention and
time be devoted to achieving resolution. If Sonata were to stop
providing these services or if there was widespread departure of
trained Sonata personnel, this could cause a disruption in our
product development process, quality assurance and product
release cycles and customer support organizations and require us
to incur additional costs to replace and train new personnel.
Enforcement of intellectual property rights and contractual
rights may be more difficult in China. China has not developed a
fully integrated legal system, and the array of new laws and
regulations may not be sufficient to cover all aspects of
economic activities in China. In particular, because these laws
and regulations are relatively new, and because of the limited
volume of published decisions and their non-binding nature, the
interpretation and
31
enforcement of these laws and regulations involve uncertainties.
Accordingly, the enforcement of our contractual arrangements
with Sonata, our confidentiality agreements with each Sonata
employee dedicated to our work, and the interpretation of the
laws governing this relationship are subject to uncertainty.
If we
fail to maintain proper and effective internal controls, our
ability to produce accurate financial statements could be
impaired, which could adversely affect our operating results,
our ability to operate our business and investors views of
us.
Ensuring that we have internal financial and accounting controls
and procedures adequate to produce accurate financial statements
on a timely basis is a costly and time-consuming effort that
needs to be re-evaluated frequently. The Sarbanes-Oxley Act
requires, among other things, that we maintain effective
internal control over financial reporting and disclosure
controls and procedures. In particular, we are required to
perform annual system and process evaluation and testing of our
internal control over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act. In the future, our testing, or the subsequent testing by
our independent registered public accounting firm, may reveal
deficiencies in our internal control over financial reporting
that are deemed to be material weaknesses. Our compliance with
Section 404 requires that we incur substantial accounting
expense and expend significant management time on
compliance-related issues. Moreover, if we are not able to
comply with the requirements of Section 404 in the future,
or if we or our independent registered public accounting firm
identifies deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, the market
price of our common stock could decline and we could be subject
to sanctions or investigations by the NASDAQ Stock Market, the
Securities and Exchange Commission, or SEC, or other regulatory
authorities, which would require additional financial and
management resources.
Furthermore, implementing any appropriate future changes to our
internal control over financial reporting may entail substantial
costs in order to modify our existing accounting systems, may
take a significant period of time to complete and may distract
our officers, directors and employees from the operation of our
business. These changes, however, may not be effective in
maintaining the adequacy of our internal control over financial
reporting, and any failure to maintain that adequacy, or
consequent inability to produce accurate financial statements on
a timely basis, could increase our operating costs and could
materially impair our ability to operate our business. In
addition, investors perceptions that our internal control
over financial reporting is inadequate or that we are unable to
produce accurate financial statements may adversely affect our
stock price. While neither we nor our independent registered
public accounting firm has identified deficiencies in our
internal control over financial reporting that are deemed to be
material weaknesses, there can be no assurance that material
weaknesses will not be subsequently identified.
If one
or more of our key strategic relationships were to become
impaired or if these third parties were to align with our
competitors, our business could be harmed.
We have relationships with a number of third parties whose
products, technologies and services complement our software.
Many of these third parties also compete with us or work with
our competitors. If we are unable to maintain our relationships
with the key third parties that currently recommend our software
or that provide consulting services on our software
implementations or if these third parties were to begin to
recommend our competitors products and services, our
business could be harmed.
Claims
by others that we infringe their proprietary technology could
harm our business.
Third parties could claim that our software infringes their
proprietary rights. In recent years, there has been significant
litigation involving patents and other intellectual property
rights, and we expect that infringement claims may increase as
the number of products and competitors in our market increases
and overlaps occur. In addition, to the extent that we gain
greater visibility and market exposure as a public company, we
will face a higher risk of being the subject of intellectual
property infringement claims. Any claims of infringement by a
third party, even those without merit, could cause us to incur
substantial defense costs and could distract our management from
our business. Furthermore, a party making such a claim, if
successful, could secure a judgment that requires us to pay
substantial damages. A judgment could also include an injunction
or other court order that could prevent us from offering our
software. In addition, we might be required to seek a license
for the use of the infringed intellectual
32
property, which may not be available on commercially reasonable
terms or at all. Alternatively, we might be required to develop
non-infringing technology, which could require significant
effort and expense and might ultimately not be successful.
Third parties may also assert infringement claims relating to
our software against our customers. Any of these claims might
require us to initiate or defend potentially protracted and
costly litigation on their behalf, regardless of the merits of
these claims, because in certain situations we agree to
indemnify our customers from claims of infringement of
proprietary rights of third parties. If any of these claims
succeeds, we might be forced to pay damages on behalf of our
customers, which could materially adversely affect our business.
Changes
in financial accounting standards or practices may cause
adverse, unexpected financial reporting fluctuations and affect
our reported results of operations.
A change in accounting standards or practices could have a
significant effect on our reported results and might affect our
reporting of transactions completed before the change is
effective. New accounting pronouncements and varying
interpretations of accounting pronouncements have occurred in
the past and may occur in the future. Changes to existing rules
or the questioning of current practices may adversely affect our
reported financial results or the way we conduct our business.
We
have expanded our operations in recent periods. If we fail to
manage this expansion effectively, we may be unable to execute
our business plan, maintain high levels of customer service or
address competitive challenges adequately.
We have expanded our overall business, headcount and operations
in recent periods. For instance, our headcount grew from
198 employees at February 28, 2007 to
313 employees at February 28, 2010. Headcount in
research and development increased from 99 employees at
February 28, 2007 to 132 employees at
February 28, 2010. We may need to continue to expand our
operations in order to increase our customer base and to develop
additional software. Increases in our customer base could create
challenges in our ability to implement our software and support
our customers. In addition, we will be required to continue to
improve our operational, financial and management controls and
our reporting procedures. As a result, we may be unable to
manage our business effectively in the future, which may
negatively impact our operating results.
Evolving
regulation of the Internet may affect us
adversely.
As Internet commerce continues to evolve, increasing regulation
by federal, state or foreign agencies becomes more likely. For
example, we believe increased regulation is likely in the area
of data privacy, and laws and regulations applying to the
solicitation, collection, processing, or use of personal or
consumer information could affect our customers ability to
use and share data, potentially reducing demand for our software
and restricting our ability to store and process data for our
customers. In addition, taxation of software provided over the
Internet or other charges imposed by government agencies or by
private organizations for accessing the Internet may also be
imposed. Any regulation imposing greater fees for Internet use
or restricting information exchange over the Internet could
result in a decline in the use of the Internet and the viability
of Internet-based software, which could harm our business,
financial condition and operating results.
Third-party
claims and litigation could seriously harm our
business.
We have from time to time become involved in legal matters that
arise in the normal course of business and otherwise. For
example, we have recently become involved in a dispute with a
large customer relating to a development project with that
customer. We are currently assessing the potential impact of the
dispute, which is at an early stage. There can be no assurance
that the dispute or other third party claims and litigation that
may arise in the future will not have a material adverse effect
on our business, financial position, results of operations, or
cash flows, including a loss of customers, or subject us to
significant financial or other remedies.
We
incur significant costs as a result of operating as a public
company, and our management is required to devote substantial
time to compliance efforts.
As a public company, we incur significant legal, accounting and
other expenses. The Sarbanes-Oxley Act and rules subsequently
implemented by the SEC and the NASDAQ Global Market impose
additional requirements on
33
public companies, including enhanced corporate governance
practices. For example, the listing requirements for the NASDAQ
Global Market provide that listed companies satisfy certain
corporate governance requirements relating to independent
directors, audit committees, distribution of annual and interim
reports, stockholder meetings, stockholder approvals,
solicitation of proxies, conflicts of interest, stockholder
voting rights and codes of business conduct. Our management and
other personnel need to devote a substantial amount of time to
complying with these requirements. Moreover, these rules and
regulations have increased our legal and financial compliance
costs and make some activities more time-consuming and costly.
These rules and regulations could also make it more difficult
for us to attract and retain qualified persons to serve on our
board of directors and board committees or as executive officers
and more expensive for us to obtain or maintain director and
officer liability insurance.
Risks
Related to Ownership of Our Common Stock
The
trading price of our common stock has been volatile in the past,
may continue to be volatile, and may decline.
The trading price of our common stock has fluctuated widely in
the past and may do so in the future. Further, our common stock
has limited trading history. Factors affecting the trading price
of our common stock, many of which are beyond our control, could
include:
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variations in our operating results, including any decline in
our revenues;
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announcements of technological innovations, new products and
services, acquisitions, strategic alliances or significant
agreements by us or by our competitors;
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recruitment or departure of key personnel;
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the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
|
|
|
|
changes in the estimates of our operating results or changes in
recommendations by any securities analysts that elect to follow
our common stock;
|
|
|
|
market conditions in our industry, the retail industry and the
economy as a whole;
|
|
|
|
price and volume fluctuations in the overall stock market;
|
|
|
|
lawsuits threatened or filed against us or other disputes;
|
|
|
|
adoption or modification of regulations, policies, procedures or
programs applicable to our business; and
|
|
|
|
the volume of trading in our common stock, including sales upon
exercise of outstanding options.
|
In addition, if the market for technology stocks or the stock
market in general experiences loss of investor confidence as has
happened in recent periods, the trading price of our common
stock could decline for reasons unrelated to our business,
operating results, or financial condition. The trading price of
our common stock might also decline in reaction to events that
affect other companies in our industry even if these events do
not directly affect us. Some companies that have had volatile
market prices for their securities have had securities class
actions filed against them. A suit filed against us, regardless
of its merits or outcome, could cause us to incur substantial
costs and could divert managements attention.
Future
sales of shares by existing stockholders, or the perception that
such sales may occur, could cause our stock price to
decline.
If our existing stockholders, particularly our directors and
executive officers and other significant stockholders, sell
substantial amounts of our common stock in the public market, or
are perceived by the public market as intending to sell, the
trading price of our common stock could decline. During fiscal
2010 Crosspoint Venture Partners, previously our largest
stockholder, distributed all of the shares of our common stock
held by them to their limited partners, which may impact, or may
have impacted, our stock price adversely.
34
If
securities analysts do not publish research or publish
unfavorable research about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends in part on the
research and reports that securities analysts publish about us
or our business. We have limited research coverage by securities
analysts. If we do not obtain further securities analyst
coverage, or if one or more of the analysts who cover us
downgrade our stock or publish unfavorable research about our
business, our stock price would likely decline. If one or more
of these analysts cease coverage of our company or fail to
publish reports on us regularly, demand for our stock could
decrease, which could cause our stock price and trading volume
to decline.
Insiders
and other significant stockholders have substantial control over
us and will be able to influence corporate
matters.
At February 28, 2010, our directors, executive officers and
holders of ten percent or more of our common stock beneficially
owned, in the aggregate, approximately 34.3% of our outstanding
common stock. As a result, these stockholders will be able to
exercise significant influence over all matters requiring
stockholder approval, including the election of directors and
approval of significant corporate transactions, such as a merger
or other sale of our company or its assets. This concentration
of ownership could limit your ability to influence corporate
matters and may have the effect of delaying or preventing a
third party from acquiring control over us.
Anti-takeover
provisions in our charter documents and Delaware law could
discourage, delay or prevent a change in control of our company
and may affect the trading price of our common
stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change in control would be beneficial to
our existing stockholders. In addition, our restated certificate
of incorporation and amended and restated bylaws may discourage,
delay or prevent a change in our management or control over us
that stockholders may consider favorable. Our restated
certificate of incorporation and amended and restated bylaws:
|
|
|
|
|
authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt;
|
|
|
|
establish a classified board of directors, as a result of which
the successors to the directors whose terms have expired will be
elected to serve from the time of election and qualification
until the third annual meeting following their election;
|
|
|
|
require that directors only be removed from office for cause and
only upon a majority stockholder vote;
|
|
|
|
provide that vacancies on our board of directors, including
newly created directorships, may be filled only by a majority
vote of directors then in office;
|
|
|
|
limit who may call special meetings of stockholders;
|
|
|
|
prohibit stockholder action by written consent, thus requiring
all actions to be taken at a meeting of the stockholders;
|
|
|
|
require supermajority stockholder voting to effect certain
amendments to our restated certificate of incorporation and
amended and restated bylaws; and
|
|
|
|
require advance notification of stockholder nominations and
proposals.
|
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
35
Our corporate headquarters and our primary facilities occupy
approximately 82,000 square feet in San Mateo,
California under a lease that has a total lease term of eight
years with an initial non-cancellable lease term of five years
commencing December 1, 2009. In addition, we lease
approximately 9,200 square feet in Pleasanton, California
that expires in October 2010 and approximately 7,200 square
feet in Cerritos, California that expires in December 2010. We
also lease small sales and marketing offices in the United
States and Europe. The size and location of these properties
change from time to time on the basis of business requirements.
We do not own any real property. We believe our facilities are
adequate for our current needs and that suitable additional or
substitute space will be available to accommodate any
foreseeable expansion of our operations.
|
|
Item 3.
|
Legal
Proceedings
|
We have from time to time become involved in legal matters that
arise in the normal course of business and otherwise. For
example, we have recently become involved in a dispute with a
large customer relating to a development project with that
customer. We are currently assessing the potential impact of the
dispute, which is at an early stage. There can be no assurance
that the dispute or other third party claims and litigation that
may arise in the future will not have a material adverse effect
on our business, financial position, results of operations, or
cash flows, including a loss of customers, or subject us to
significant financial or other remedies.
|
|
Item 4.
|
(Removed
and Reserved)
|
Not applicable.
36
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market Information. Our common stock has been
listed on the NASDAQ Global Market under the symbol
DMAN since August 9, 2007. Prior to that time,
there was no public market for our common stock. The following
table sets forth for the indicated periods the high and low
sales prices by quarter for our common stock as reported by the
NASDAQ Global Market.
|
|
|
|
|
|
|
|
|
Fiscal Year 2010 Quarters Ended:
|
|
High
|
|
Low
|
|
February 28, 2010
|
|
$
|
9.50
|
|
|
$
|
5.25
|
|
November 30, 2009
|
|
$
|
9.57
|
|
|
$
|
7.83
|
|
August 31, 2009
|
|
$
|
10.00
|
|
|
$
|
7.47
|
|
May 31, 2009
|
|
$
|
9.28
|
|
|
$
|
6.65
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2009 Quarters Ended:
|
|
High
|
|
Low
|
|
February 28, 2009
|
|
$
|
9.25
|
|
|
$
|
5.86
|
|
November 30, 2008
|
|
$
|
11.00
|
|
|
$
|
5.77
|
|
August 31, 2008
|
|
$
|
11.05
|
|
|
$
|
7.02
|
|
May 31, 2008
|
|
$
|
11.00
|
|
|
$
|
6.65
|
|
Stockholders of Record. As of
February 28, 2010, we had approximately 107 stockholders of
record of our common stock.
Dividends. We have never declared or paid any
cash dividends on our common stock. We currently intend to
retain earnings, if any, to finance future growth, and therefore
do not expect to pay cash dividends on our common stock in the
foreseeable future. Any future determination to declare cash
dividends will be made at the discretion of our board of
directors and will be subject to compliance with certain
covenants in our loan and security agreement with Silicon Valley
Bank, which may restrict or limit our ability to pay dividends.
Securities Authorized for Issuance Under Equity Compensation
Plans. For equity plan compensation information,
please refer to Item 12 in Part III of this Annual
Report on
Form 10-K.
37
Stock
Performance Graph and Cumulative Total Return
Notwithstanding any statement to the contrary in any of our
previous or future filings with the Securities and Exchange
Commission, or SEC, the following information relating to the
price performance of our common stock shall not be deemed to be
filed with the SEC or to be soliciting
material under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and it shall not be deemed to be
incorporated by reference into any of our filings under the
Securities Act or the Exchange Act, except to the extent we
specifically incorporate it by reference into such filing.
The graph below compares the cumulative total stockholder return
of our common stock with that of the Nasdaq Composite Index and
the Nasdaq Computer Index from August 9, 2007 (the date on
which our common stock commenced trading on the NASDAQ Global
Market) through February 28, 2010. The graph assumes that
$100 was invested in shares of our common stock, the Nasdaq
Composite Index and the Nasdaq Computer & Data
Processing Index at the close of market on August 9, 2007,
and that dividends, if any, were reinvested. The comparisons in
this graph are based on historical data and are not intended to
forecast or be indicative of future performance of our common
stock.
Comparison
of Cumulative Total Returns of DemandTec, Inc., Nasdaq
Composite
Index and Nasdaq Computer & Data Processing
Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/9/07
|
|
|
8/31/07
|
|
|
2/29/08
|
|
|
8/31/08
|
|
|
2/28/09
|
|
|
8/31/09
|
|
|
2/28/10
|
DemandTec, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
95.90
|
|
|
|
$
|
101.50
|
|
|
|
$
|
103.70
|
|
|
|
$
|
73.60
|
|
|
|
$
|
84.70
|
|
|
|
$
|
58.70
|
|
Nasdaq Composite Index
|
|
|
|
100.00
|
|
|
|
|
102.02
|
|
|
|
|
89.26
|
|
|
|
|
93.03
|
|
|
|
|
54.14
|
|
|
|
|
78.94
|
|
|
|
|
87.95
|
|
Nasdaq Computer & Data Processing Index
|
|
|
|
100.00
|
|
|
|
|
102.64
|
|
|
|
|
88.45
|
|
|
|
|
94.56
|
|
|
|
|
55.86
|
|
|
|
|
87.30
|
|
|
|
|
98.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Unregistered
Sales of Equity Securities
(1) On December 19, 2007, we issued 80,884 shares
upon the net exercise of a warrant to purchase
113,759 shares of our common stock held by a financial
institution.
(2) On January 29, 2008, we issued 22,455 shares
upon the net exercise of a warrant to purchase
30,488 shares of our common stock held by a financial
institution.
(3) During our fiscal quarter ended February 29, 2008,
we issued 5,000 shares of our common stock to Silicon
Valley Community Foundation, for the benefit of the DemandTec
Foundation, at an aggregate issue price of $5.00.
The sales of securities described in Items (1), (2) and
(3) above were deemed to be exempt from registration under
the Securities Act in reliance upon Section 4(2) of the
Securities Act. The recipients of securities in each transaction
represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution, and appropriate legends were affixed to
the share certificates issued in these transactions. All
recipients had adequate access, through their relationships with
us, to information about us. All shares issued pursuant to an
exemption under Section 4(2) of the Securities Act were
issued to purchasers who were accredited investors or
sophisticated with access to information regarding us.
Use of
Proceeds from Sales of Registered Securities
In August 2007, we completed our initial public offering, or
IPO, pursuant to a registration statement on
Form S-1
(Registration
No. 333-143248)
which the U.S. Securities and Exchange Commission declared
effective on August 8, 2007. Under the registration
statement, we registered the offering and sale of an aggregate
of up to 6,900,000 shares of our common stock. Of the
registered shares, 6,000,000 of the shares of common stock
issued pursuant to the registration statement were sold at a
price to the public of $11.00 per share. As a result of the IPO,
we raised a total of $57.6 million in net proceeds after
deducting underwriting discounts and commissions and expenses.
In August 2007, we used $3.0 million of our proceeds to
settle our credit facility and used $10.2 million of our
proceeds to settle our term loan with Silicon Valley Bank and
Gold Hill Venture Lending 03, LP. In fiscal 2010, we used
$12.3 million of our proceeds to pay Connect3s former
shareholders in connection with our February 2009 acquisition of
Connect3 and $1.3 million cash to pay off short-term notes
payable held by a former Connect3 officer and principal
shareholder. As of February 28, 2010, approximately
$30.8 million of aggregate net proceeds remained invested
in short-term interest-bearing obligations, investment-grade
instruments, certificates of deposit or direct or guaranteed
obligations of the United States government or in operating cash
accounts.
We have used and intend to continue to use the remaining net
proceeds from the offering for working capital and other general
corporate purposes, including to finance our growth, develop new
software and fund capital expenditures. Additionally, we may
choose to expand our current business through acquisitions of
other complementary businesses, products, services, or
technologies. Pending such uses, we plan to invest the net
proceeds in short-term, interest-bearing, investment grade
securities.
There were no material differences in the actual use of proceeds
from our IPO as compared to the planned use of proceeds as
described in the final prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b).
39
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our audited consolidated financial
statements and related notes thereto and with Managements
Discussion and Analysis of Financial Condition and Results of
Operation, which are included elsewhere in this Annual Report on
Form 10-K.
The consolidated statements of operations data for fiscal 2010,
2009 and 2008, and the selected consolidated balance sheet data
as of February 28, 2010 and 2009, are derived from, and are
qualified by reference to, the audited consolidated financial
statements that are included in this Annual Report on
Form 10-K.
The consolidated statements of operations data for fiscal 2007
and 2006 and the consolidated balance sheet data as of
February 29, 2008, February 28, 2007 and 2006 are
derived from audited consolidated financial statements which are
not included in this Annual Report on
Form 10-K.
Our historical results are not necessarily indicative of results
to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
Year Ended February 28,
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
79,052
|
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
$
|
32,539
|
|
Cost of revenue(2)(3)
|
|
|
25,760
|
|
|
|
23,331
|
|
|
|
20,444
|
|
|
|
14,230
|
|
|
|
12,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
53,292
|
|
|
|
51,674
|
|
|
|
40,826
|
|
|
|
29,255
|
|
|
|
19,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(3)
|
|
|
32,279
|
|
|
|
26,787
|
|
|
|
22,445
|
|
|
|
15,340
|
|
|
|
11,021
|
|
Sales and marketing(3)
|
|
|
20,828
|
|
|
|
20,343
|
|
|
|
17,290
|
|
|
|
12,108
|
|
|
|
10,170
|
|
General and administrative(3)
|
|
|
9,657
|
|
|
|
9,888
|
|
|
|
6,292
|
|
|
|
2,673
|
|
|
|
2,388
|
|
Restructuring charges
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of purchased intangible assets
|
|
|
2,044
|
|
|
|
1,241
|
|
|
|
360
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,583
|
|
|
|
58,259
|
|
|
|
46,387
|
|
|
|
30,239
|
|
|
|
23,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,291
|
)
|
|
|
(6,585
|
)
|
|
|
(5,561
|
)
|
|
|
(984
|
)
|
|
|
(3,624
|
)
|
Other income (expense), net
|
|
|
306
|
|
|
|
1,585
|
|
|
|
1,542
|
|
|
|
(480
|
)
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes and cumulative
effect of change in accounting principle
|
|
|
(11,985
|
)
|
|
|
(5,000
|
)
|
|
|
(4,019
|
)
|
|
|
(1,464
|
)
|
|
|
(2,774
|
)
|
Provision (benefit) for income taxes
|
|
|
(148
|
)
|
|
|
(47
|
)
|
|
|
455
|
|
|
|
52
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(11,837
|
)
|
|
|
(4,953
|
)
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,788
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(11,837
|
)
|
|
|
(4,953
|
)
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,734
|
)
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(11,837
|
)
|
|
$
|
(4,953
|
)
|
|
$
|
(4,487
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per common share, basic and
diluted
|
|
|
28,720
|
|
|
|
27,372
|
|
|
|
17,612
|
|
|
|
5,531
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2010
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities(4)
|
|
$
|
67,284
|
|
|
$
|
87,884
|
|
|
$
|
75,889
|
|
|
$
|
25,478
|
|
|
$
|
14,771
|
|
Working capital (deficit)
|
|
|
22,177
|
|
|
|
21,788
|
|
|
|
44,739
|
|
|
|
(66
|
)
|
|
|
(10,731
|
)
|
Total assets
|
|
|
110,662
|
|
|
|
134,155
|
|
|
|
113,796
|
|
|
|
56,795
|
|
|
|
21,016
|
|
Deferred revenue
|
|
|
38,921
|
|
|
|
48,815
|
|
|
|
55,375
|
|
|
|
42,172
|
|
|
|
25,124
|
|
Debt
|
|
|
434
|
|
|
|
1,720
|
|
|
|
442
|
|
|
|
15,063
|
|
|
|
2,219
|
|
Merger consideration payable
|
|
|
1,000
|
|
|
|
13,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,073
|
|
|
|
48,976
|
|
Stockholders equity (deficit)
|
|
|
56,938
|
|
|
|
56,649
|
|
|
|
50,297
|
|
|
|
(58,660
|
)
|
|
|
(62,529
|
)
|
|
|
|
(1) |
|
We acquired TradePoint in November 2006 and Connect3 in February
2009. See Overview of Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Note 2 of Notes to Consolidated
Financial Statements. |
|
(2) |
|
Includes amortization of purchased intangible assets of $1,862,
$610, $608, and $203 in fiscal 2010, 2009, 2008, and 2007,
respectively. |
|
(3) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
1,732
|
|
|
$
|
1,712
|
|
|
$
|
1,261
|
|
|
$
|
41
|
|
|
$
|
|
|
Research and development
|
|
|
3,309
|
|
|
|
2,261
|
|
|
|
1,824
|
|
|
|
62
|
|
|
|
6
|
|
Sales and marketing
|
|
|
2,411
|
|
|
|
2,263
|
|
|
|
1,367
|
|
|
|
74
|
|
|
|
1
|
|
General and administrative
|
|
|
2,267
|
|
|
|
1,743
|
|
|
|
883
|
|
|
|
156
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
9,719
|
|
|
$
|
7,979
|
|
|
$
|
5,335
|
|
|
$
|
333
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
At February 28, 2010 and 2009, and February 29, 2008,
cash, cash equivalents and marketable securities include net
proceeds of $57.6 million from our sale of 6.0 million
shares of common stock in August 2007 in our initial public
offering. |
41
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, as amended. In addition, we may make other written and
oral communications from time to time that contain such
statements. Forward-looking statements include statements as to
industry trends and future expectations of ours and other
matters that do not relate strictly to historical facts. These
statements are often identified by the use of words such as
may, will, expect,
believe, anticipate, intend,
could, estimate, or
continue, and similar expressions or variations.
These statements are based on the beliefs and assumptions of our
management based on information currently available to
management. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual
results and the timing of certain events to differ materially
from future results expressed or implied by such forward-looking
statements. These forward-looking statements include statements
in this Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Factors that could cause or contribute to such differences
include, but are not limited to, those identified below, and
those discussed under the heading Risk Factors in
Item 1A of this Annual Report on
Form 10-K
and in our other Securities and Exchange Commission filings.
Furthermore, such forward-looking statements speak only as of
the date of this report. We undertake no obligation to update
any forward-looking statements to reflect events or
circumstances after the date of such statements.
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the consolidated financial statements and
related notes thereto appearing elsewhere in this Annual Report
on
Form 10-K.
Our fiscal year ends on the last day of February; fiscal 2010,
for example, refers to our fiscal year ended February 28,
2010.
Overview
We are a leading provider of on-demand optimization solutions to
retailers and consumer products, or CP, companies. Our software
services enable retailers and CP companies to separately or
collaboratively define category, brand, and customer strategies
based on a scientific understanding of consumer behavior and
make actionable pricing, promotion, assortment, space and other
merchandising and marketing recommendations to achieve their
revenue, profitability, sales volume, and customer loyalty
objectives. We deliver our applications by means of a
software-as-a-service, or SaaS, model, which allows us to
capture and analyze the most recent retailer and market-level
data and enhance our software services rapidly to address our
customers ever-changing merchandising and marketing needs,
and connect retailers and CP companies via collaborative,
Internet-based applications. During fiscal 2010, we introduced
our nextGEN strategy, which combines category, brand
and shopper-insights to provide our retail customers a unified
understanding of shopper behavior and the ability to leverage
those insights to make better business decisions on pricing,
promotion, assortment and collaboration with their CP trading
partners.
Our solutions consist of software services and complementary
analytical services and analytical insights derived from the
same platform that supports our software services. We offer our
solutions individually or as a suite of integrated software
services. Our solutions for the retail and CP industries include
DemandTec Lifecycle Price
Optimizationtm,
DemandTec
End-to-End
Promotion
Managementtm,
DemandTec Assortment &
Spacetm,
DemandTec Targeted
Marketingtm,
and DemandTec Trade
Effectivenesstm.
The DemandTec TradePoint
Networktm
connects our solutions for the retail and CP industries. We sell
our solutions through our direct sales force and receive a
number of customer prospect introductions through third-parties,
such as systems integrators and a data syndication company. We
were incorporated in November 1999 and began selling our
software in fiscal 2001. Our revenue has grown from
$9.5 million in fiscal 2004 to $79.1 million in fiscal
2010. Our operating expenses have also increased significantly
during these same periods. We have incurred losses to date and
had an accumulated deficit of approximately $89.2 million
at February 28, 2010.
We sell our software to retailers and CP companies under
agreements with initial terms that generally are one to three
years in length and provide a variety of services associated
with our customers use of our software. Our software
service agreements with retailers and CP companies are often
large contracts. The annual contract value
42
for each retail and CP company customer agreement is largely
related to the size of the customer. These retail and CP
customer agreements can create significant variability in the
aggregate annual contract value of customer agreements signed in
any given fiscal quarter. Our Advanced Deal Management
agreements with CP companies that leverage the DemandTec
TradePoint Network are principally one year in length and much
smaller in annual and aggregate contract value than our other CP
company customer software services contracts and our retail
contracts. Generally, the agreements we have signed in the first
fiscal quarter of a fiscal year have had an aggregate annual
contract value less than that of the agreements signed in the
preceding fiscal fourth quarter. In addition, the aggregate
contract value of agreements signed can fluctuate significantly
on a quarterly basis within any given fiscal year. A significant
percentage of our new and existing customer add-on agreements
are entered into during the last month, weeks, or even days of
each quarter-end. We generally recognize the revenue we generate
from each agreement ratably over the term of the agreement. Our
ability to maintain or increase revenues depends on our
attracting new customers, renewing agreements with our existing
customers at comparable prices, and selling add-on software
services to existing customers, as well as the success of our
nextGEN strategy. Further, our revenue will be directly affected
by the continued acceptance of our software in the marketplace,
as well as the timing, size and term length of our customer
agreements. If we are unable to successfully develop or acquire
new software and enhance our existing applications, including
solutions underlying our nextGEN strategy, we may not be able to
attract and retain customers or increase or maintain our revenue.
During fiscal 2009 and 2010, the global economic environment
deteriorated and resulted in delays in the execution of new and
some renewal customer contracts, with some customers or
potential customers electing not to enter into new or renewal
contracts, and some other customers renewing at lower prices or
for shorter contract periods. Accordingly, our revenue growth
has slowed and deferred revenue balances have decreased. In the
fiscal quarter ended February 28, 2010, our revenue
declined from the preceding quarter and we expect our revenue to
further decline in our first quarter of fiscal 2011 ending
May 31, 2010 compared to the quarter ended
February 28, 2010. In the near term, we expect that our
revenue growth may continue to slow, or revenue itself may
decline from prior periods. In addition, the impact of the
adverse economic environment on our business contributed to the
use of approximately $6.8 million of cash in operations in
fiscal 2010. Our cash flow generation will continue to remain
challenging and unpredictable and, consequently, we may continue
to use cash in operations in future periods. We have not seen
any noticeable improvement in sales cycles and we currently have
little evidence to suggest that the impact of the global
economic environment will improve in the near term. Furthermore,
our ability to achieve profitability will be affected by our
revenue as well as our other operating expenses associated with
growing our business. Our largest category of operating expenses
is research and development expenses, and the largest component
of our operating expenses is personnel costs.
We are headquartered in San Mateo, California, and have
sales and marketing offices in North America and Europe. We sell
our software through our direct sales force and receive a number
of customer prospect introductions through third-parties, such
as systems integrators and a data syndication company. In fiscal
2010, approximately 86% of our revenue was attributable to sales
of our software to companies located in the United States.
In September 2009, we entered into a lease agreement for office
space in San Mateo, California that we use as our new
corporate headquarters, replacing our then-existing corporate
headquarters in San Carlos, California. The lease has a
total lease term of eight years with an initial non-cancellable
lease term of five years commencing December 1, 2009. The
aggregate minimum lease commitment is approximately
$10.1 million. Upon commencement of this lease, our monthly
rent payments increased significantly both immediately and in
the long term over our monthly rent payments for our prior
space, and quarterly real estate-related operating expenses that
we incur increased by approximately $207,000. If our revenue
does not increase or our other operating expenses do not
decrease to offset this increase in real estate-related
operating expenses, or if we are unable to find suitable tenants
to sublease a significant portion of this space in the event we
are unable to sufficiently grow our business in the future, then
our results of operations and financial position will be
materially adversely impacted.
In February 2009, we acquired Connect3 Systems, Inc., a provider
of advertising planning and execution software for
$13.5 million. The Connect3 product suite, which Connect3
offered on an installed,
behind-the-firewall
basis, is being replatformed into the DemandTec
End-to-End
Promotion
Managementtm
solution, which supports retailers
end-to-end
promotion planning process. In fiscal 2010, we paid
$12.5 million of the acquisition
43
consideration as well as $1.3 million of assumed notes
payable held by a former Connect3 officer, and we recorded
approximately $2.2 million of amortization expense
associated with Connect3s purchased intangible assets.
During fiscal 2010, we recorded approximately $775,000 of
expense associated with the reduction of our workforce as a
result of synergies gained through the acquisition of Connect3
and with the consolidation and relocation of our corporate
headquarters.
As of April 15, 2010, we had approximately
30.0 million shares of common stock outstanding, excluding
approximately 9.4 million shares subject to outstanding
options, performance stock units and restricted stock units. The
issuance of shares upon the exercise of these options and
settlement of these units, as well as the grant of additional
options and units pursuant to our equity compensation plans,
would result in additional dilution and may adversely impact our
earnings per share. See Note 7 of Notes to Consolidated
Financial Statements.
Sources
of Revenue
We derive all of our revenue from customer agreements that cover
the use of our software and various services associated with our
customers use of our software. We generally recognize all
revenue ratably over the term of the agreement. Our agreements
are generally non-cancellable, but customers typically have the
right to terminate their agreement for cause if we materially
breach our obligations under the agreement and, in certain
situations, may have the ability to extend the duration of their
agreement on pre-negotiated terms. We invoice our customers in
accordance with contractual terms, which generally provide that
our customers are invoiced in advance for annual use of our
software. We generally provide certain implementation services
on a fixed fee basis and invoice our customers in advance. In
addition, we also provide implementation and training services
on a time and materials basis and invoice our customers monthly
in arrears. Our payment terms typically require our customers to
pay us within 30 days of the invoice date.
Cost of
Revenue and Operating Expenses
Cost
of Revenue
Cost of revenue includes expenses related to data centers,
depreciation expenses associated with computer equipment and
software, compensation and related expenses of operations,
technical customer support, production operations and
professional services personnel, amortization of purchased
intangible assets, and allocated overhead expenses. We have
contracts with three third parties for the use of their data
center facilities, and our data center costs principally consist
of the amounts we pay to these third parties for rack space,
power and similar items. We amortize purchased intangible
assets, principally for developed technology acquired in prior
acquisitions. We allocate overhead costs, such as rent and
occupancy costs, employee benefits, information management
costs, and legal and other costs, to all departments
predominantly based on headcount. As a result, we include
allocated overhead expenses in cost of revenue and each
operating expense category.
Research
and Development
Research and development expenses include personnel costs for
our research, product management and software development
personnel, and allocated overhead expenses. We devote
substantial resources to extending our existing software
applications as well as to developing new software.
Sales
and Marketing
Sales and marketing expenses include personnel costs for our
sales and marketing personnel, including commissions and
incentives, travel and entertainment expenses, marketing
programs such as product marketing, events, corporate
communications and other brand building expenses, and allocated
overhead expenses.
General
and Administrative
General and administrative expenses include personnel costs for
our executive, finance and accounting, human resources, legal
and information management personnel, third-party professional
services, travel and entertainment expenses, other corporate
expenses and overhead not allocated to cost of revenue, research
and development
44
expenses, or sales and marketing expenses. Third-party
professional services primarily include outside legal, audit and
tax-related consulting costs.
Amortization
of Purchased Intangible Assets
In February 2009, we acquired Connect3. The aggregate purchase
price was approximately $13.5 million, which consisted of
approximately $13.3 million in cash and $201,000 of
acquisition costs. We are amortizing purchased intangible assets
related to developed technology, customer relationships,
non-compete covenants and backlog over one to two and a half
years on a straight-line basis, which resulted in approximately
$2.2 million of amortization expense in fiscal 2010. Annual
amortization expenses related to this acquisition, absent any
impairment, will be approximately $1.8 million and $626,000
in fiscal 2011 and 2012, respectively.
In May 2008, we purchased rights to develop assortment
optimization technology for $1.5 million, which was
amortized over 18 months on a straight-line basis and was
fully amortized at February 28, 2010. This resulted in
approximately $766,000 of amortization expense in fiscal 2010,
which was included in our operating expenses.
In November 2006, we acquired TradePoint. The aggregate purchase
price was approximately $9.8 million, which consisted of
approximately $3.7 million in cash, approximately
$4.1 million in our common stock, a $1.8 million
promissory note and $219,000 of acquisition costs. In this
acquisition, we purchased intangible assets related to developed
technology, customer relationships, a trade name, and
non-compete covenants. We have been amortizing purchased
intangible assets over three to ten years on a straight-line
basis. This resulted in approximately $911,000 of amortization
expense in fiscal 2010. Annual amortization expenses related to
this acquisition, absent any impairment, will be approximately
$800,000 and $597,000 in fiscal 2011 and 2012, respectively, and
will decline significantly thereafter.
Other
Income (Expense), Net
Other income (expense), net includes interest income on our cash
and marketable securities balances, interest expense related to
debt, and losses or gains on conversions of
non-U.S. dollar
transactions into U.S. dollars. In the past three fiscal
years, we have invested a majority of our cash in money market
funds, treasury bills, corporate bonds, obligations of
government-sponsored enterprises, and commercial paper. In the
first half of fiscal 2008 (the period preceding our IPO before
our convertible preferred stock was automatically converted to
common stock), other income (expense), net included the impact
of recording our outstanding redeemable convertible preferred
stock warrants at fair value. In fiscal 2011 and thereafter,
other income (expense), net will depend on a number of factors,
including our ability to generate cash from operations, interest
rates and the rates of return on our investments, foreign
exchange rates, and whether or not we incur debt.
Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States, or GAAP. These accounting principles often require us to
make certain estimates and judgments that can affect the
reported amounts of assets and liabilities as of the date of our
consolidated financial statements, as well as the reported
amounts of revenue and expenses during the periods presented. In
some cases, the accounting treatment of a particular transaction
is specifically dictated by GAAP and does not require
managements judgment in its application or our judgments
in selecting among available accounting policy alternatives, as
they would not produce a materially different result. In other
cases, our judgments among available alternatives can have a
material impact on our accounting results. We believe that our
estimates and judgments were reasonable based upon information
available to us at the time that these estimates and judgments
were made. On an ongoing basis, we evaluate our estimates and
judgments. Our actual results may differ from these estimates
under different assumptions or conditions.
We believe that of our significant accounting policies, which
are described in Note 1 to our Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data of this Annual Report on
Form 10-K,
the following accounting polices involve the greatest degree of
judgment and complexity and have the potential for the greatest
impact on our consolidated financial statements. Accordingly, we
believe these policies are the most critical in fully
understanding and evaluating our reported financial results.
45
Revenue
Recognition
We generate revenue from fees under agreements with initial
terms that generally are one to three years in length. Our
agreements contain multiple elements, which include the use of
our software, SaaS delivery services, professional services,
maintenance, and customer support. Professional services consist
of implementation, training, data modeling, and analytical
services related to our customers use of our software. We
have determined that the elements within our agreements do not
qualify for treatment as separate units of accounting.
Therefore, we account for all fees received under our agreements
as a single unit of accounting and recognize them ratably over
the term of the related agreement, commencing upon the later of
the agreement start date or the date access to the application
is provided to the customers, and when all of the following
conditions are also met:
|
|
|
|
|
there is persuasive evidence of an arrangement;
|
|
|
|
the service has been provided to the customer;
|
|
|
|
the collection of the fees is probable; and
|
|
|
|
the amount of fees to be paid by the customer is fixed or
determinable.
|
Deferred
Commissions
We capitalize certain commission costs directly related to the
acquisition of a customer agreement in accordance with
applicable accounting standards. Commissions are paid shortly
after our receipt of the related customer payment. Commissions
are deferred and amortized to sales and marketing expense over
the revenue recognition term of the related non-cancelable
customer agreement. The deferred commission amounts are
recoverable through their accompanying future revenue streams
under non-cancellable customer agreements. We believe this is
the appropriate method of accounting as the commission charges
are so closely related to the revenue from the customer
contracts that they should be recorded as an asset and charged
to expense over the same period that the related revenue is
recognized. Commission expense was approximately
$2.3 million, $3.4 million, and $2.8 million in
fiscal 2010, 2009, and 2008, respectively. Deferred commissions
on our consolidated balance sheets totaled approximately
$843,000 and $1.3 million at February 28, 2010 and
2009, respectively.
Stock-Based
Compensation
We account for and recognize all share-based payments as an
expense in our statements of operations. Grants of stock options
to employees and to new members of our board of directors
generally vest over four years and annual stock option grants to
existing members of our board of directors vest over one year.
We measure the value of stock options based on the grant date
fair value using the Black-Scholes pricing model.
Performance-based stock units, or PSUs, vest pursuant to certain
performance and time-based vesting criteria set by our
Compensation Committee. We evaluate the probability of meeting
the performance criteria at the end of each reporting period to
determine how much compensation expense to record. Because the
actual number of shares to be issued is not known until the end
of the performance period, the actual compensation expense
related to these awards could differ from our current
expectations. Beginning in fiscal 2009, we also have time-based
restricted stock units, or RSUs, outstanding that entitle the
recipient to receive shares of our common stock upon vesting and
settlement of the awards pursuant to time-based vesting criteria
set by our Compensation Committee. Stock-based compensation
expense for PSUs and RSUs is based on the closing price of our
common stock on the grant date. We amortize the fair value of
those awards, net of estimated forfeitures, as stock-based
compensation expense over the vesting period of the awards.
Fair
Value of Financial Instruments
The carrying amounts of our financial instruments, which include
cash and cash equivalents, marketable securities, accounts
receivable, accounts payable, notes payable, and other accrued
expenses, approximate their fair values. Our financial assets
and liabilities are remeasured and reported at fair value at
each reporting period. We measure our foreign currency forward
contracts at fair value. Our foreign currency forward contracts
are classified within Level 2 as the valuation inputs are
based on quoted prices of similar instruments in active markets
and do not involve management judgment.
46
Income
Taxes
Deferred tax assets and liabilities are determined based on the
temporary differences between their financial reporting and tax
bases and are measured using the enacted tax rates that are
anticipated to be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts more likely than not
expected to be realized. We have established a valuation
allowance against substantially all of our deferred tax assets
as we believe it is more likely than not that the deferred tax
assets will not be realized.
We will continue to evaluate the ongoing need for and amount of
the valuation allowance. We may determine that some, or all, of
our deferred tax assets will be realized, in which case we will
reduce our valuation allowance in the quarter in which such
determination is made. If the valuation allowance is reduced, we
may recognize a benefit from income taxes on our income
statement in that period. In subsequent periods, we may have
higher income tax expenses.
Goodwill
and Intangible Assets
We record as goodwill the excess of the acquisition purchase
price over the fair value of the tangible and identifiable
intangible assets acquired. We do not amortize goodwill, but
perform an annual impairment review of our goodwill during our
third quarter, or more frequently if indicators of potential
impairment arise. We have a single operating segment and
consequently evaluate goodwill for impairment based on an
evaluation of the fair value of our company as a whole. We
record purchased intangible assets at their respective estimated
fair values at the date of acquisition. Purchased intangible
assets are being amortized using the straight-line method over
their remaining estimated useful lives, which range from
approximately one to seven years. We evaluate the remaining
useful lives of intangible assets on a periodic basis to
determine whether events or circumstances warrant a revision to
the remaining estimated amortization period. We evaluated our
goodwill in November 2009 and recognized no impairment charges
as a result of the review. Additionally, we observed no
impairment indicators for both goodwill and intangible assets
through February 28, 2010.
Impairment
of Long-Lived Assets
Long-lived assets are reviewed for possible impairment whenever
events or circumstances indicate that the carrying amount of
these assets may not be recoverable. We evaluate the
recoverability of each of our long-lived assets, including
purchased intangible assets and property, equipment, and
leasehold improvements, by comparison of its respective carrying
amount to the future undiscounted cash flows we expect the asset
to generate. If we consider the asset to be impaired, we measure
the amount of any impairment as the difference between the
carrying amount and the fair value of the impaired asset. We
observed no impairment indicators through February 28, 2010.
47
Results
of Operations
The following table sets forth selected consolidated statements
of operations data as a percentage of revenue for each of the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
33
|
|
|
|
31
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
67
|
|
|
|
69
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
41
|
|
|
|
36
|
|
|
|
37
|
|
Sales and marketing
|
|
|
26
|
|
|
|
27
|
|
|
|
28
|
|
General and administrative
|
|
|
12
|
|
|
|
13
|
|
|
|
10
|
|
Restructuring charges
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Amortization of purchased intangible assets
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
83
|
|
|
|
78
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16
|
)
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Other income (expense), net
|
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes
|
|
|
(15
|
)
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Provision (benefit) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(15
|
)%
|
|
|
(7
|
)%
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Revenue
|
|
$
|
79,052
|
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
Fiscal 2010 Compared to Fiscal 2009. Fiscal
2010 revenue increased approximately $4.0 million, or 5%,
from fiscal 2009 revenue, due to an increase in revenue of
approximately $2.2 million from new customers and
approximately $1.8 million from existing customers. New
customers are those that did not contribute any revenue in
fiscal 2009. Existing customers are those that contributed
revenue in both current and prior fiscal years. Revenue from
existing customers was approximately 97% of our total revenue in
each of fiscal 2010 and 2009. Fiscal 2010 revenue included
approximately $1.2 million of revenue recognized in the
fiscal quarter ended February 28, 2010 related to
terminated agreements associated with customer bankruptcies. Had
these customer agreements not terminated, approximately $690,000
of revenue under these agreements would have been recognized
throughout fiscal 2011 over their remaining terms rather than
being recognized in our fourth quarter of fiscal 2010. Revenue
from new customers in any given period can fluctuate depending
upon the period in which the contract is signed, the number of
new customer contracts and the size of the new retailer or CP
customer. In fiscal 2010, the adverse global economic conditions
continued to result in delays in the execution of new and some
renewal customer contracts, with some customers or potential
customers electing not to enter into new or renewal contracts,
and some other customers renewing at lower prices. Accordingly,
our revenue growth has slowed. In the near term, we do not
expect any significant improvements in our business due to the
impact of the global economic environment. Consequently, our
revenue growth may continue to slow, or revenue itself may
decline from prior periods.
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 revenue increased approximately $13.7 million, or 22%,
from fiscal 2008 revenue, primarily due to an increase in
revenue of approximately $11.8 million from existing
customers and approximately $1.9 million from new customers.
48
For fiscal 2010, 2009 and 2008, percentage of total revenue by
customer type and geographic region was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
By customer type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
82
|
%
|
|
|
86
|
%
|
|
|
90
|
%
|
CP
|
|
|
18
|
%
|
|
|
14
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By location:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
86
|
%
|
|
|
86
|
%
|
|
|
88
|
%
|
International
|
|
|
14
|
%
|
|
|
14
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from CP companies has generally increased as a
percentage of total revenue
year-over-year.
Revenue from customers located outside the United States as a
percentage of revenue remained flat in fiscal 2010 compared to
fiscal 2009, but increased two percentage points in fiscal 2009
from fiscal 2008. Over the long term, we expect that revenue
from CP companies and revenue from international customers will
increase as a percentage of total revenue on an annual basis.
We had one customer that accounted for 13.6%, 14.4% and 11.7% of
our total revenue in fiscal 2010, 2009 and 2008, respectively.
No other customer accounted for more than 10% of our revenue in
fiscal 2010, 2009 or fiscal 2008.
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Revenue
|
|
$
|
79,052
|
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
Cost of revenue
|
|
|
25,760
|
|
|
|
23,331
|
|
|
|
20,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
53,292
|
|
|
$
|
51,674
|
|
|
$
|
40,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
67
|
%
|
|
|
69
|
%
|
|
|
67
|
%
|
Fiscal 2010 Compared to Fiscal 2009. Fiscal
2010 cost of revenue increased approximately $2.4 million,
or 10%, from fiscal 2009, primarily due to increased
amortization of purchased intangible assets and personnel costs.
Amortization of purchased intangible assets increased
approximately $1.3 million in fiscal 2010 compared to
fiscal 2009, primarily as a result of our acquisition of
Connect3 in February 2009. Personnel costs, which include all
compensation, employee benefits, and stock-based compensation
expenses, increased approximately $968,000 in fiscal 2010
compared to fiscal 2009, mainly due to an increase in headcount
during fiscal 2010. Average headcount during fiscal 2010
increased by 10 compared to average headcount during fiscal
2009, primarily as a result of the acquisition of Connect3.
Our gross margin decreased to 67% in fiscal 2010 compared to 69%
in fiscal 2009, primarily associated with our acquisition of
Connect3, as our personnel costs and the amortization of
purchased intangible assets increased at a faster rate than our
revenue. In the near term, we expect that our gross margin will
decrease, primarily as a result of increased infrastructure
costs associated with our new data center located in Mesa,
Arizona.
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 cost of revenue increased approximately $2.9 million,
or 14%, from fiscal 2008 cost of revenue. This increase was due
primarily to increased personnel costs, equipment maintenance
and depreciation expense offset by a decrease in third-party
consulting costs.
49
Personnel costs increased approximately $1.6 million in
fiscal 2009 compared to fiscal 2008, primarily as a result of
increased compensation and employee benefit costs, stock-based
compensation expense and headcount in fiscal 2009. Consulting
services, support services, and production operations headcount
increased to 87 (excluding Connect3s former employees) at
February 28, 2009 from 82 at February 29, 2008. Salary
and employee benefit costs increased approximately
$1.1 million in fiscal 2009 as a result of increased
employee benefit costs and merit and promotion salary
adjustments. Stock-based compensation expense increased to
$1.7 million in fiscal 2009 compared to $1.3 million
in fiscal 2008. The increase in stock-based compensation expense
was primarily due to new stock options and time-based RSUs
granted in fiscal 2009. There were no time-based RSUs granted in
fiscal 2008. In addition, in fiscal 2009, equipment and
maintenance contract expenses increased approximately $549,000,
data center facility rental costs increased approximately
$499,000, and depreciation expense increased approximately
$606,000 as a result of $2.8 million of capital
expenditures, predominantly related to the expansion of data
infrastructure facilities to support customer growth.
Third-party contractor and consulting expense decreased
approximately $664,000 in fiscal 2009 compared to fiscal 2008,
primarily due to increased use of DemandTec personnel to provide
integration services as opposed to third-party consulting firms.
Our gross margin increased to 69% in fiscal 2009 as compared to
67% in fiscal 2008 due to economies of scale gained from
spreading our data center infrastructure and personnel costs
over a larger customer base, partially offset by higher
stock-based compensation and intangible amortization expenses in
fiscal 2009.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Research and development
|
|
$
|
32,279
|
|
|
$
|
26,787
|
|
|
$
|
22,445
|
|
Percent of revenue
|
|
|
41
|
%
|
|
|
36
|
%
|
|
|
37
|
%
|
Fiscal 2010 Compared to Fiscal 2009. Fiscal
2010 research and development expenses increased approximately
$5.5 million, or 21%, from fiscal 2009, primarily due to
increased personnel costs and allocated overhead costs
associated with increased headcount.
Personnel costs increased approximately $4.5 million in
fiscal 2010 compared to fiscal 2009, mainly due to an increase
in headcount as a result of the acquisition of Connect3, and
increased stock-based compensation. The average research and
development headcount increased by 27 in fiscal 2010 from fiscal
2009. Research and development related stock-based compensation
expense, which is a component of personnel costs, was
approximately $3.3 million and $2.3 million in fiscal
2010 and 2009, respectively. The increase in stock-based
compensation was primarily associated with stock options and
PSUs granted to new and existing employees subsequent to
February 28, 2009, partially offset by lower expenses
associated with fully vested PSUs that were granted in fiscal
2008. Allocated overhead costs increased approximately $932,000
in fiscal 2010 from fiscal 2009, primarily due to increased
allocated facility and information technology expenses as a
result of our new corporate headquarters.
We intend to continue to invest significantly in our research
and development efforts because we believe these efforts are
essential to maintaining our competitive position. In the near
term, we expect that research and development expenses will
remain relatively flat in absolute dollars.
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 research and development expenses increased approximately
$4.3 million, or 19%, from fiscal 2008, primarily due to
increased personnel costs and allocated overhead costs
associated with increased headcount, increased third-party
contractor and consulting costs, and increased equipment
maintenance and depreciation expense. Personnel costs increased
$3.2 million in fiscal 2009 compared to fiscal 2008 as
headcount increased to 119 at February 28, 2009 from 99 at
February 29, 2008. Stock-based compensation expense
increased approximately $437,000 from fiscal 2008. Allocated
overhead expenses increased approximately $331,000, primarily
due to increased headcount and increased infrastructure support
expenses associated with growth. Third-party consulting expense
increased approximately $418,000 compared to fiscal
50
2008, primarily as a result of a new development process
methodology initiated with an outside consultation firm in May
2008. Equipment maintenance and depreciation expense increased
approximately $282,000 as compared to fiscal 2008 and was
primarily due to increased capital expenditures to support our
research and development labs, infrastructure, and increased
headcount.
Sales
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Sales and marketing
|
|
$
|
20,828
|
|
|
$
|
20,343
|
|
|
$
|
17,290
|
|
Percent of revenue
|
|
|
26
|
%
|
|
|
27
|
%
|
|
|
28
|
%
|
Fiscal 2010 Compared to Fiscal 2009. Fiscal
2010 sales and marketing expenses increased by approximately
$485,000, or 2%, from fiscal 2009, primarily as a result of
increased consulting and marketing program costs, partially
offset by a decrease in commission expenses.
Consulting and marketing program costs increased approximately
$1.0 million in fiscal 2010 from fiscal 2009, primarily due
to new service introductions, increased online marketing
activities, branding, and our nextGen strategy initiatives. The
increase in consulting and marketing program costs was partially
offset by a decrease of $442,000 in personnel costs in fiscal
2010 compared to fiscal 2009, mainly due to decreased commission
expenses.
In the near term, we expect that sales and marketing expenses
will remain relatively flat in absolute dollars.
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 sales and marketing expenses increased by approximately
$3.1 million, or 18%, from fiscal 2008, primarily as a
result of increased personnel costs of approximately
$2.5 million. Sales and marketing headcount increased to 39
at February 28, 2009 from 35 at February 29, 2008.
Compensation and employee benefit costs, including commissions,
increased approximately $1.6 million in fiscal 2009 as a
result of increased headcount, employee benefit costs, and merit
and promotion salary adjustments. Stock-based compensation,
which is a component of personnel costs, increased by
approximately $896,000, primarily due to stock awards granted
since February 2008. Marketing-related costs increased $112,000
in fiscal 2009, primarily for tradeshows, events and advertising.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
General and administrative
|
|
$
|
9,657
|
|
|
$
|
9,888
|
|
|
$
|
6,292
|
|
Percent of revenue
|
|
|
12
|
%
|
|
|
13
|
%
|
|
|
10
|
%
|
Fiscal 2010 Compared to Fiscal 2009. Fiscal
2010 general and administrative expenses decreased approximately
$231,000, or 2%, from fiscal 2009, partially offset by increased
personnel costs.
Third party professional services expenses decreased
approximately $1.3 million in fiscal 2010 from fiscal 2009,
primarily due to lower Sarbanes-Oxley compliance and audit
related costs. The decrease in third party professional services
expense was partially offset by increased personnel costs of
approximately $911,000 in fiscal 2010 from fiscal 2009,
primarily due to an increase in stock-based compensation
expense. General and administrative related stock-based
compensation expense, which is a component of personnel costs,
was $2.3 million and $1.7 million in fiscal 2010 and
2009, respectively. The increase in stock-based compensation
expense was primarily associated with stock options and PSUs
granted to new and existing employees subsequent to
February 28, 2009, partially offset by lower expenses
associated with fully vested PSUs that were granted in fiscal
2008.
In the near term, we expect that general and administrative
expenses will remain relatively flat in absolute dollars.
51
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 general and administrative expenses increased approximately
$3.6 million, or 57%, from fiscal 2008 general and
administrative expenses, primarily due to increased personnel
costs associated with headcount increases and increased
third-party professional services, principally for legal,
accounting and auditing expenses associated with being a public
company. Personnel costs increased approximately
$1.7 million in fiscal 2009 compared to the prior year,
primarily as a result of headcount increases and stock-based
compensation expense. Headcount increased to 44 at
February 28, 2009 from 35 at February 29, 2008.
Stock-based compensation, which is a component of personnel
costs, increased approximately $860,000 to $1.7 million in
fiscal 2009 from $883,000 in fiscal 2008. Third-party
professional services costs increased approximately
$1.3 million, primarily due to costs associated with being
a public company related to Sarbanes-Oxley compliance and audit
expenses.
Amortization
of Purchased Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in thousands)
|
|
Amortization of purchased intangible assets
|
|
$
|
2,044
|
|
|
$
|
1,241
|
|
|
$
|
360
|
|
Percent of revenue
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
Fiscal 2010 Compared to Fiscal 2009. Fiscal
2010 amortization of purchased intangible assets increased
approximately $803,000 from fiscal 2009. The increase was
primarily due to our acquisition of Connect3 in February 2009.
Intangible assets associated with the Connect3 acquisition are
being amortized over one to two and a half years starting from
March 2009, and resulted in amortization expense of
approximately $977,000 in operating expenses in fiscal 2010. The
annual amortization expense of all existing purchased intangible
assets will decline significantly in fiscal 2011 and thereafter
as some intangible assets become fully amortized.
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 amortization of purchased intangible assets increased
approximately $881,000 from fiscal 2008, primarily due to our
May 2008 acquisition of rights to develop assortment
optimization technology for $1.5 million. In June 2008 we
began amortizing intangible assets associated with those rights
over a period of eighteen months, resulting in approximately
$734,000 amortization expense in fiscal 2009. In addition,
$150,000 of in-process research and development associated with
our Connect3 acquisition was expensed in February 2009 upon
consummation of the acquisition.
Other
Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
577
|
|
|
$
|
1,772
|
|
|
$
|
2,467
|
|
Interest expense
|
|
|
(87
|
)
|
|
|
(84
|
)
|
|
|
(1,216
|
)
|
Other income (expense)
|
|
|
(184
|
)
|
|
|
(103
|
)
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
306
|
|
|
$
|
1,585
|
|
|
$
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010 Compared to Fiscal 2009. Fiscal
2010 other income (expense), net decreased approximately
$1.3 million compared to fiscal 2009, primarily due to
decreased interest income as a result of lower interest rates on
invested cash balances and marketable securities.
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 other income (expense), net remained relatively constant as
compared to fiscal 2008. Interest income decreased approximately
$695,000 in fiscal 2009 as a result of lower interest rates on
invested cash balances and marketable securities. Interest
expense decreased $1.1 million as we paid off approximately
$13.0 million in interest-bearing debt with proceeds from
our IPO. Other expense increased by $394,000 in fiscal 2009 from
fiscal 2008 primarily due to foreign exchange losses recognized
in fiscal 2009 on our cash and accounts receivable balances,
whereas we recognized a net gain in fiscal 2008. The majority of
our foreign exchange gains and losses were the result of
fluctuations in the
Euro-to-U.S. dollar
exchange rates.
52
Provision
(Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Provision (benefit) for income taxes
|
|
$
|
(148
|
)
|
|
$
|
(47
|
)
|
|
$
|
455
|
|
Since inception, we have incurred annual operating losses and,
accordingly, have recorded a provision for income taxes
primarily for federal minimum income taxes, state income taxes,
and foreign taxes associated with our foreign customers and
operations. At February 28, 2010, we had federal and state
net operating loss carryforwards to offset future taxable income
of approximately $70.6 million and $43.4 million,
respectively, to offset future taxable income, subject to
limitations provided by the Internal Revenue Code and similar
state provisions.
In fiscal 2010, we recorded a net income tax benefit of $148,000
compared to $47,000 in fiscal 2009. The effective tax rate for
fiscal 2010 was approximately 1.2% based on our estimated
taxable income for the year, excluding certain discrete tax
adjustments and benefits associated with federal legislation
passed in fiscal 2010. In fiscal 2010, we recorded a discrete
tax benefit of approximately $135,000 for the expected recovery
of federal alternative minimum taxes paid in prior years, as a
result of the enactment of the Worker, Homeownership, and
Business Assistance Act in November 2009, which increases the
carryback period for NOLs incurred in fiscal 2009 and 2010 from
two to five years and suspends the alternative minimum tax NOL
deduction limitation for the carryback period. Accordingly, we
expect to recover federal alternative minimum taxes paid in
fiscal 2008, 2007, and 2006 and recorded a tax benefit in fiscal
2010. Additionally, as in fiscal 2009, we recorded a federal
income tax benefit of $83,000 in fiscal 2010, which was related
to the provisions of the Housing Assistance Act of 2008 and the
American Recovery and Reinvestment Act of 2009 whereby
corporations otherwise eligible for first-year bonus
depreciation may instead elect to claim a refund for research
and development tax credits generated prior to 2006. Excluding
the tax impact of these acts, we would have recorded income tax
expense primarily for state minimum taxes and for our foreign
operations.
In fiscal 2009, we recorded a net income tax benefit of $47,000,
primarily due to an $83,000 federal income tax benefit from a
tax refund received in fiscal 2009 associated with research and
development tax credits generated prior to fiscal 2006. The
effective tax rate for fiscal 2009 was approximately 1% based on
our taxable income for the year. Excluding the tax benefit
associated with the refund of the research and development tax
credits, we would have recorded income tax expense primarily for
state minimum taxes and for our foreign jurisdictions.
In fiscal 2008, we recorded net income tax expense of $455,000
for federal minimum taxes, state taxes, and foreign taxes
associated with our foreign customers and foreign operations.
The federal minimum taxes and state taxes were primarily due to
currently non-deductible stock-based compensation expenses and
revenue that must be recognized for income tax purposes before
it is recognized in the financial statements.
Stock-Based
Compensation Expense
Total stock-based compensation expense increased approximately
$1.7 million in fiscal 2010 compared to fiscal 2009. The
increase was due primarily to stock options and PSUs granted to
new and existing employees subsequent to February 28, 2009,
partially offset by lower expenses associated with fully vested
PSUs that were granted in fiscal 2008. See Note 7 of Notes
to Consolidated Financial Statements for the amount of gross
unrecognized stock-based compensation expense at
February 28, 2010, and further explanation of how we derive
and account for these estimates. We expect that stock-based
compensation expense will vary over the long term depending on
the timing and magnitude of equity incentive grants and
revisions to our estimates of the number of shares expected to
vest.
Liquidity
and Capital Resources
At February 28, 2010, our principal sources of liquidity
consisted of cash, cash equivalents, and marketable securities
of $67.3 million, accounts receivable (net of allowance) of
$14.0 million, and available borrowing capacity under our
credit facility of $18.9 million, after reduction of
$200,000 to secure a non-cancellable operating lease commitment
and approximately $917,000 to secure a new operating lease
commitment. In August 2007, we
53
completed our IPO, in which we raised approximately
$57.6 million in net proceeds after deducting underwriting
discounts and commissions of $4.6 million, and other
offering costs of $3.8 million.
Our $20.0 million revolving may be borrowed, repaid, and
reborrowed until May 7, 2012 and includes a number of
covenants and restrictions with which we must comply. For
example, our ability to incur debt, grant liens, make
investments, enter into mergers and acquisitions, pay dividends,
repurchase our outstanding common stock, change our business,
enter into transactions with affiliates, and dispose of assets
is limited. To secure the line of credit, we have granted our
lenders a first priority security interest in substantially all
of our assets. Through the filing of this Annual Report on
Form 10-K,
we were in compliance with all loan covenants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
February 28,
|
|
February 28,
|
|
February 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(6,779
|
)
|
|
$
|
13,813
|
|
|
$
|
11,255
|
|
Net cash used in investing activities
|
|
|
(6,694
|
)
|
|
|
(25,840
|
)
|
|
|
(33,675
|
)
|
Net cash provided by financing activities
|
|
|
1,267
|
|
|
|
2,595
|
|
|
|
44,605
|
|
Operating
Activities
Our cash flows from operating activities in any period have been
significantly influenced by the number of customers using our
software, the number and size of new customer contracts, the
timing and size of renewals of existing customer contracts, and
the timing of payments by these customers. Our largest source of
operating cash flows is cash collections from our customers,
which results in decreases to accounts receivable. Our primary
uses of cash in operating activities are for personnel-related
expenditures. Our cash flows from operating activities in any
period will continue to be significantly affected by the extent
to which we add new customers, renew or sell add-on
functionality to existing customers, collect payments from our
customers and increase personnel to grow our business.
Fiscal 2010 Compared to Fiscal 2009. In fiscal
2010, we used approximately $6.8 million of net cash in
operating activities compared to $13.8 million cash
generated from operating activities in fiscal 2009. The increase
in net cash outflow in fiscal 2010 was primarily attributable to
lower deferred revenue balances as a result of delays in the
execution of new, add-on and some renewal customer contracts,
with some customers electing not to renew contracts, and some
other customers renewing at lower rates. We believe the adverse
global economic conditions contributed to these delays. These
factors also resulted in higher accounts receivable balances as
average days sales outstanding increased. Consequently cash from
operations decreased by approximately $13.5 million
compared to fiscal 2009. Further, our acquisition of Connect3 in
February 2009 increased headcount and related expenses in fiscal
2010, resulting in approximately $3.3 million lower net
profit, after adjusting for non-cash related expenses, compared
to fiscal 2009. In addition, other working capital items
decreased cash from operations in fiscal 2010 by approximately
$3.8 million compared to fiscal 2009, primarily due to
reduced accrued compensation that resulted in a decrease of
approximately $3.0 million in cash from operations related
to the amount and timing of bonus payments.
Fiscal 2009 Compared to Fiscal 2008. Net cash
provided by operating activities increased to $13.8 million
in fiscal 2009 from $11.3 million in fiscal 2008. Improved
expense management and growth in our business resulted in
approximately $8.1 million of cash inflow from operating
activities after taking into consideration non-cash expenses
primarily associated with stock-based compensation, depreciation
and amortization of intangible assets included in our net loss.
Growth in our customer base and improved collection efforts
resulted in a $7.7 million decrease in accounts receivable
as well as an improvement in days sales outstanding. Our days
sales outstanding was 55 days at February 28, 2009
compared to 82 days at February 29, 2008. The accounts
receivable decrease was largely offset by a $7.1 million
decrease in deferred revenue, in large part because we
increasingly bill customers on an annual basis rather than
billing multiple years in advance, as reflected in our lower
long-term deferred revenue balance. In addition, we had cash
inflow from other working capital items in fiscal 2009 compared
to a cash outflow from these same working capital items in
fiscal 2008. Increased accounts payable, accrued compensation
and accrued commissions, primarily due to the timing of payments
to certain vendors and employees, accounted for the improved
cash flow from other working capital.
54
Investing
Activities
Our primary investing activities have been capital expenditures
on equipment for our data center, net purchases of marketable
securities and payments for an acquisition.
Fiscal 2010 Compared to Fiscal 2009. Net cash
used in investing activities was $6.7 million in fiscal
2010 compared to $2.6 million in fiscal 2009, primarily due
to $12.5 million cash payments associated with the Connect3
acquisition and $2.5 million in capital expenditures,
offset by approximately $8.4 million of net cash inflows
from maturities of marketable securities. The $2.5 million
in capital expenditures was largely related to the expansion of
our data centers, including the setup of our new data center in
Mesa, Arizona, and the leasehold improvements on our new
corporate headquarters located in San Mateo, California.
Fiscal 2009 Compared to Fiscal 2008. Net cash
used in investing activities was $25.8 million in fiscal
2009, primarily due to approximately $21.7 million of net
cash outflows from the purchase of marketable securities as we
invested more in cash and cash equivalents in fiscal 2009 due to
uncertainty and volatility in interest rates. In addition, we
used approximately $3.1 million in capital expenditures and
acquired assortment optimization technology for
$1.5 million in fiscal 2009.
Financing
Activities
Our primary financing activities have been issuances of common
stock related to our IPO in August 2007, the exercise of stock
options, and the sale of shares pursuant to our ESPP, as well as
borrowings and repayments of notes payable and advances taken
and repayments made under our lines of credit.
Fiscal 2010 Compared to Fiscal 2009. Net cash
provided by financing activities was approximately
$1.3 million in fiscal 2010. In fiscal 2010, we had
$2.6 million of net proceeds from the issuance of common
stock related to exercises of stock options and the sale of
shares pursuant to our ESPP, partially offset by the payoff of
$1.3 million of the assumed short-term notes payable held
by a former Connect3 officer and principal shareholder.
Fiscal 2009 Compared to Fiscal 2008. Net cash
provided by financing activities was $2.6 million in fiscal
2009, primarily attributable to net proceeds from the issuance
of our common stock. In fiscal 2008, net cash provided by
financing activities was $44.6 million, as a result of
approximately $57.6 million of net proceeds from our
initial public offering in fiscal 2008, partially offset by
$13.4 million in payments of notes payable in fiscal 2008
and the repayment of advances under our line of credit in fiscal
2008.
We believe that our cash, cash equivalents, and marketable
securities balances at February 28, 2010, along with cash
provided by operating activities, if any, will be sufficient to
fund our projected operating requirements for at least the next
twelve months. We may need to raise additional capital or incur
debt to continue to fund our operations over the long term. Our
future capital requirements will depend on many factors,
including revenues, any expansion of our workforce, the timing
and extent of any expansion into new markets, the timing of
introductions of any new functionality and enhancements to our
software, the timing and size of any acquisitions of other
companies or assets and the continuing market acceptance of our
software. We may enter into arrangements for potential
acquisitions of complementary businesses, services or
technologies, which also could require us to seek additional
equity or debt financing. Additional funds may not be available
on terms favorable to us or at all. In April 2010, in connection
with the vesting and settlement of certain outstanding RSUs, we
withheld 148,303 shares of common stock in settlement of
employee income and payroll tax withholding obligations and paid
the corresponding amounts in cash, approximately
$1.1 million, to the appropriate federal and state taxing
authorities. Additionally, in June 2010, we expect to distribute
the remaining $1.0 million of cash consideration, less any
amounts used to satisfy any claims for indemnification that we
may make for certain breaches of representations, warranties and
covenants, due to the former Connect3 shareholders.
Contractual
Obligations
Our principal commitments consist of obligations under operating
leases for office space in the United States, data center
facilities and equipment, merger consideration payable and notes
payable. Our future operating lease
55
obligations will change if we enter into new lease agreements
upon the expiration of our existing lease agreements or if we
enter into new lease agreements to expand our operations.
At February 28, 2010, the future minimum payments under our
lease commitments, contractual commitments, and amounts due for
merger consideration and notes payable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating leases(1)
|
|
$
|
11,574
|
|
|
$
|
2,480
|
|
|
$
|
4,576
|
|
|
$
|
4,518
|
|
|
$
|
|
|
Contractual commitments(2)
|
|
|
918
|
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger consideration payable to former Connect3 shareholders
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to former TradePoint shareholders
|
|
|
434
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
13,926
|
|
|
$
|
4,832
|
|
|
$
|
4,576
|
|
|
$
|
4,518
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $9.8 million in future minimum lease
payments associated with our new headquarters facility in
San Mateo, California, and approximately $1.3 million
in future minimum lease payments for equipment and facility
operating leases associated with our new data center in Mesa,
Arizona, all entered into in September 2009. See Note 5 of
Notes to Consolidated Financial Statements. |
|
(2) |
|
Amounts are associated with agreements that are enforceable and
legally binding and that specify all significant terms,
including fixed or minimum services to be used, fixed, minimum
or variable price provisions, and the approximate timing of the
transaction. Obligations under contracts that we can cancel
without a significant penalty are not included. |
Off-Balance
Sheet Arrangements
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes, nor do we have any undisclosed material transactions
or commitments involving related persons or entities.
Recent
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.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Foreign
Currency Risk
As we operate internationally and fund our international
operations, our cash and cash equivalents could be affected by
fluctuations in foreign exchange rates. For example, we recorded
approximately $176,000 and $97,000 of foreign currency losses in
fiscal 2010 and 2009, respectively, and $397,000 of foreign
currency gains in fiscal 2008.
Certain of our international sales agreements are denominated in
the country of origin currency, and therefore our revenue and
receivables are subject to foreign currency risk. Also, some of
our operating expenses and cash flows are denominated in foreign
currencies and, thus, are subject to fluctuations due to changes
in foreign currency exchange rates, particularly changes in the
exchange rates for the British Pound and the Euro. We
periodically enter into foreign exchange forward contracts to
reduce exposure in
non-U.S. dollar
denominated receivables. We formally assess, both at a
hedges inception and on an ongoing basis, whether the
derivatives used in hedging transactions are highly effective in
negating currency risk. At February 28, 2010, we had two
outstanding forward foreign exchange contracts to sell Euros for
U.S. dollars in May 2010 and February 2011, with notional
principal of
56
1.2 million (or approximately $1.8 million) and
1.6 million (or approximately $2.2 million),
respectively. We do not enter into derivative financial
instruments for speculative or trading purposes.
With respect to our international operations, which are
primarily sales and marketing support entities, we have
remeasured our accounts denominated in
non-U.S. currencies
using the U.S. dollar as the functional currency and
recorded the resulting gains (losses) within other income
(expense) for the period. We remeasure all monetary assets and
liabilities at the current exchange rate at the end of the
period, non-monetary assets and liabilities at historical
exchange rates, and revenue and expenses at average exchange
rates in effect during the period.
Interest
Rate Sensitivity
We had cash and cash equivalents totaling $21.3 million and
marketable securities totaling $45.9 million at
February 28, 2010. These amounts were invested primarily in
government securities and corporate notes and bonds with credit
ratings of at least
A-1 or
better, money market funds registered with the SEC under
rule 2a-7
of the Investment Company Act of 1940, and interest-bearing
demand deposit accounts. By policy, we limit the amount of
credit exposure to any one issuer and we do not enter into
investments for trading or speculative purposes. Our cash and
cash equivalents and marketable securities are held and invested
with capital preservation as the primary objective.
Our cash equivalents and marketable securities are subject to
market risk due to changes in interest rates. Fixed-rate
interest securities may have their market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to
sell securities that decline in market value due to changes in
interest rates. However, because we classify our marketable
securities as
held-to-maturity,
no gains or losses are recognized due to changes in interest
rates unless such securities are sold prior to maturity or
declines in fair value are determined to be
other-than-temporary.
We believe that we do not have any material exposure to changes
in the fair value of our investment portfolio as a result of
changes in interest rates. Declines in interest rates, however,
will reduce future investment income, if any. For instance, a
fluctuation in interest rates of 100 basis points at
February 28, 2010 would result in a change of approximately
$670,000 in annual interest income.
Effects
of Inflation
We do not believe that inflation has had a material effect on
our business, financial condition or results of operations. If
our costs were to become subject to significant inflationary
pressures, we might not be able to offset these higher costs
fully through price increases. Our inability or failure to do so
could harm our business, operating results and financial
condition.
57
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
DemandTec, Inc. Consolidated Financial Statements
|
|
|
|
|
|
|
|
59
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
65
|
|
58
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
DemandTec, Inc.
We have audited the accompanying consolidated balance sheets of
DemandTec, Inc. as of February 28, 2010 and 2009, and the
related consolidated statements of operations, redeemable
convertible preferred stock and stockholders equity
(deficit), and cash flows for each of the three years in the
period ended February 28, 2010. Our audits also included
the financial statement schedule listed in the Index at
Item 15(b). These financial statements and schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and 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 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of DemandTec, Inc. at February 28, 2010
and 2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
February 28, 2010, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
present 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),
DemandTec, Inc.s internal control over financial reporting
as of February 28, 2010, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated April 23, 2010 expressed an
unqualified opinion thereon.
San Jose, California
April 23, 2010
59
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
DemandTec, Inc.
We have audited DemandTec, Inc.s internal control over
financial reporting as of February 28, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). DemandTec,
Inc.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
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the companys 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 companys 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 companys
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
companys 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, DemandTec, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of February 28, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of DemandTec, Inc. as of
February 28, 2010 and 2009, and the related consolidated
statements of operations, redeemable convertible preferred stock
and stockholders equity (deficit), and cash flows for each
of the three years in the period ended February 28, 2010 of
DemandTec, Inc. and our report dated April 23, 2010
expressed an unqualified opinion thereon.
San Jose, California
April 23, 2010
60
DemandTec,
Inc.
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,335
|
|
|
$
|
33,572
|
|
Marketable securities, current
|
|
|
36,068
|
|
|
|
46,426
|
|
Accounts receivable, net of allowances of $145 and $120 at
February 28, 2010 and 2009, respectively
|
|
|
13,984
|
|
|
|
11,000
|
|
Prepaid expenses and other current assets
|
|
|
3,127
|
|
|
|
4,230
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
74,514
|
|
|
|
95,228
|
|
Marketable securities, non-current
|
|
|
9,881
|
|
|
|
7,886
|
|
Property, equipment and leasehold improvements, net
|
|
|
4,777
|
|
|
|
5,429
|
|
Intangible assets
|
|
|
4,328
|
|
|
|
8,405
|
|
Goodwill
|
|
|
16,599
|
|
|
|
16,492
|
|
Other assets, net
|
|
|
563
|
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
110,662
|
|
|
$
|
134,155
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
12,441
|
|
|
$
|
12,962
|
|
Deferred revenue, current
|
|
|
38,462
|
|
|
|
46,415
|
|
Notes payable, current
|
|
|
434
|
|
|
|
1,720
|
|
Merger consideration payable
|
|
|
1,000
|
|
|
|
12,343
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
52,337
|
|
|
|
73,440
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
|
459
|
|
|
|
2,400
|
|
Other long-term liabilities
|
|
|
928
|
|
|
|
1,666
|
|
Commitments and contingencies (see Note 5)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
175,000 shares authorized, and 29,501 and
28,059 shares issued and outstanding at February 28,
2010 and 2009, respectively
|
|
|
29
|
|
|
|
28
|
|
Additional paid-in capital
|
|
|
145,600
|
|
|
|
133,320
|
|
Accumulated other comprehensive income
|
|
|
527
|
|
|
|
682
|
|
Accumulated deficit
|
|
|
(89,218
|
)
|
|
|
(77,381
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
56,938
|
|
|
|
56,649
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
110,662
|
|
|
$
|
134,155
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
61
DemandTec,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
79,052
|
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
Cost of revenue(1)(2)
|
|
|
25,760
|
|
|
|
23,331
|
|
|
|
20,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
53,292
|
|
|
|
51,674
|
|
|
|
40,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(2)
|
|
|
32,279
|
|
|
|
26,787
|
|
|
|
22,445
|
|
Sales and marketing(2)
|
|
|
20,828
|
|
|
|
20,343
|
|
|
|
17,290
|
|
General and administrative(2)
|
|
|
9,657
|
|
|
|
9,888
|
|
|
|
6,292
|
|
Restructuring charges
|
|
|
775
|
|
|
|
|
|
|
|
|
|
Amortization of purchased intangible assets
|
|
|
2,044
|
|
|
|
1,241
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,583
|
|
|
|
58,259
|
|
|
|
46,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,291
|
)
|
|
|
(6,585
|
)
|
|
|
(5,561
|
)
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
577
|
|
|
|
1,772
|
|
|
|
2,467
|
|
Interest expense
|
|
|
(87
|
)
|
|
|
(84
|
)
|
|
|
(1,216
|
)
|
Other income (expense)
|
|
|
(184
|
)
|
|
|
(103
|
)
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
306
|
|
|
|
1,585
|
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes
|
|
|
(11,985
|
)
|
|
|
(5,000
|
)
|
|
|
(4,019
|
)
|
Provision (benefit) for income taxes
|
|
|
(148
|
)
|
|
|
(47
|
)
|
|
|
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(11,837
|
)
|
|
|
(4,953
|
)
|
|
|
(4,474
|
)
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(11,837
|
)
|
|
$
|
(4,953
|
)
|
|
$
|
(4,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per common share, basic and
diluted
|
|
|
28,720
|
|
|
|
27,372
|
|
|
|
17,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes amortization of purchased intangible assets
|
|
$
|
1,862
|
|
|
$
|
610
|
|
|
$
|
608
|
|
(2) Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,732
|
|
|
$
|
1,712
|
|
|
$
|
1,261
|
|
Research and development
|
|
|
3,309
|
|
|
|
2,261
|
|
|
|
1,824
|
|
Sales and marketing
|
|
|
2,411
|
|
|
|
2,263
|
|
|
|
1,367
|
|
General and administrative
|
|
|
2,267
|
|
|
|
1,743
|
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
9,719
|
|
|
$
|
7,979
|
|
|
$
|
5,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
62
DemandTec,
Inc.
Stockholders
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands)
|
|
|
Balance at February 28, 2007
|
|
|
11,411
|
|
|
$
|
49,073
|
|
|
|
2,100
|
|
|
$
|
2,071
|
|
|
|
6,455
|
|
|
$
|
6
|
|
|
$
|
7,204
|
|
|
$
|
|
|
|
$
|
(67,941
|
)
|
|
$
|
(58,660
|
)
|
Issuance of common stock upon initial public offering, net of
$8,370 of offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
6
|
|
|
|
57,623
|
|
|
|
|
|
|
|
|
|
|
|
57,629
|
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Conversion of preferred stock to common stock at initial public
offering
|
|
|
(11,411
|
)
|
|
|
(49,086
|
)
|
|
|
(2,100
|
)
|
|
|
(2,071
|
)
|
|
|
13,511
|
|
|
|
14
|
|
|
|
51,143
|
|
|
|
|
|
|
|
|
|
|
|
49,086
|
|
Reclassification of warrant liability at initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
Issuance of common stock upon net exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
397
|
|
Charitable contribution of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
Vesting of common stock related to early exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,926
|
|
|
|
|
|
|
|
|
|
|
|
4,926
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
409
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,474
|
)
|
|
|
(4,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,452
|
|
|
|
26
|
|
|
|
122,699
|
|
|
|
|
|
|
|
(72,428
|
)
|
|
|
50,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan and
upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,341
|
|
|
|
2
|
|
|
|
2,608
|
|
|
|
|
|
|
|
|
|
|
|
2,610
|
|
Conversion of vested restricted stock units to shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of common stock related to early exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,979
|
|
|
|
|
|
|
|
|
|
|
|
7,979
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,953
|
)
|
|
|
(4,953
|
)
|
Change in fair value of cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
682
|
|
|
|
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,059
|
|
|
|
28
|
|
|
|
133,320
|
|
|
|
682
|
|
|
|
(77,381
|
)
|
|
|
56,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan and
upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,004
|
|
|
|
1
|
|
|
|
2,552
|
|
|
|
|
|
|
|
|
|
|
|
2,553
|
|
Conversion of vested restricted stock units to shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of common stock related to early exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,719
|
|
|
|
|
|
|
|
|
|
|
|
9,719
|
|
Components of comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,837
|
)
|
|
|
(11,837
|
)
|
Gain reclassified from accumulated other comprehensive income
into revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
(101
|
)
|
Change in fair value of cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
29,501
|
|
|
$
|
29
|
|
|
$
|
145,600
|
|
|
$
|
527
|
|
|
$
|
(89,218
|
)
|
|
$
|
56,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
63
DemandTec,
Inc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,837
|
)
|
|
$
|
(4,953
|
)
|
|
$
|
(4,474
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,009
|
|
|
|
2,930
|
|
|
|
1,929
|
|
Stock-based compensation expense
|
|
|
9,719
|
|
|
|
7,979
|
|
|
|
5,335
|
|
Revaluation of warrants to fair value
|
|
|
|
|
|
|
|
|
|
|
119
|
|
Charge on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
504
|
|
Amortization of purchased intangible assets
|
|
|
3,906
|
|
|
|
1,851
|
|
|
|
968
|
|
Other
|
|
|
(20
|
)
|
|
|
266
|
|
|
|
174
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,027
|
)
|
|
|
7,706
|
|
|
|
(3,927
|
)
|
Prepaid expenses and other current assets
|
|
|
716
|
|
|
|
402
|
|
|
|
(777
|
)
|
Other assets
|
|
|
8
|
|
|
|
761
|
|
|
|
(1,030
|
)
|
Accounts payable and accrued liabilities
|
|
|
1,209
|
|
|
|
1,586
|
|
|
|
(2,161
|
)
|
Accrued compensation
|
|
|
(596
|
)
|
|
|
2,363
|
|
|
|
1,392
|
|
Deferred revenue
|
|
|
(9,866
|
)
|
|
|
(7,078
|
)
|
|
|
13,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(6,779
|
)
|
|
|
13,813
|
|
|
|
11,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of TradePoint, net of cash received
|
|
|
|
|
|
|
|
|
|
|
(1,358
|
)
|
Acquisition of Connect3, net of cash received
|
|
|
(12,544
|
)
|
|
|
257
|
|
|
|
|
|
Purchases of property, equipment and leasehold improvements
|
|
|
(2,513
|
)
|
|
|
(3,117
|
)
|
|
|
(4,127
|
)
|
Purchases of marketable securities
|
|
|
(61,107
|
)
|
|
|
(82,500
|
)
|
|
|
(86,583
|
)
|
Maturities of marketable securities
|
|
|
69,470
|
|
|
|
60,820
|
|
|
|
58,393
|
|
Purchase of intangible assets
|
|
|
|
|
|
|
(1,500
|
)
|
|
|
|
|
Removal of restricted cash
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,694
|
)
|
|
|
(25,840
|
)
|
|
|
(33,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of repurchases
|
|
|
2,553
|
|
|
|
2,603
|
|
|
|
374
|
|
Net cash proceeds from initial public offering
|
|
|
|
|
|
|
|
|
|
|
57,631
|
|
Payments on lines of credit
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
Payments on notes payable
|
|
|
(1,286
|
)
|
|
|
(8
|
)
|
|
|
(10,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
1,267
|
|
|
|
2,595
|
|
|
|
44,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(31
|
)
|
|
|
(253
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(12,237
|
)
|
|
|
(9,685
|
)
|
|
|
22,221
|
|
Cash and cash equivalents at beginning of year
|
|
|
33,572
|
|
|
|
43,257
|
|
|
|
21,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
21,335
|
|
|
$
|
33,572
|
|
|
$
|
43,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
60
|
|
|
$
|
65
|
|
|
$
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for (refund of) income taxes
|
|
$
|
(107
|
)
|
|
$
|
157
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of preferred stock warrant liability to
additional paid-in capital
|
|
$
|
|
|
|
$
|
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger consideration payable to Connect3 shareholders
|
|
$
|
|
|
|
$
|
13,343
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed notes payable to a former Connect3 officer and principal
shareholder
|
|
$
|
|
|
|
$
|
1,286
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
64
DemandTec,
Inc.
|
|
1.
|
Business
Summary and Significant Accounting Policies
|
Description
of Business
DemandTec, Inc. (the Company or We) was
incorporated in Delaware on November 1, 1999. We are a
leading provider of on-demand optimization solutions to
retailers and consumer products, or CP, companies. Our software
services enable retailers and CP companies to separately or
collaboratively define category, brand, and customer strategies
based on a scientific understanding of consumer behavior and
make actionable pricing, promotion, assortment, space, and other
merchandising and marketing decisions to achieve their revenue,
profitability, sales volume, and customer loyalty objectives. We
deliver our applications by means of a software-as-a-service, or
SaaS, model, which allows us to capture and analyze the most
recent retailer and market-level data, enhance our software
services rapidly to address our customers ever-changing
merchandising, and marketing needs, and connect retailers and CP
companies via collaborative, Internet-based applications. We are
headquartered in San Mateo, California, with additional
sales presence in North America, Europe, and South America.
Reclassifications
Certain amounts previously reported in our consolidated balance
sheet at February 28, 2009 and our consolidated statements
of cash flows for fiscal 2009 and 2008 have been reclassified to
conform to the current period classification. No changes to cash
flows from operating, investing, or financing activities
occurred as a result of such reclassifications.
Initial
Public Offering
In August 2007, we completed our initial public offering, or
IPO, in which we sold and issued 6,000,000 shares of our
common stock at an issue price of $11.00 per share. We raised a
total of $66.0 million in gross proceeds from the IPO, or
approximately $57.6 million in net proceeds after deducting
underwriting discounts and commissions of $4.6 million and
other offering costs of $3.8 million. Upon the closing of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into 13,511,107 shares of common
stock, and all outstanding warrants to purchase shares of
convertible preferred stock automatically converted to warrants
to purchase 181,747 shares of common stock.
Principles
of Consolidation
Our consolidated financial statements include our accounts and
those of our wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Fiscal
Year
Our fiscal year ends on the last day in February. References to
fiscal 2010, for example, refer to our fiscal year ended
February 28, 2010.
Segments
We operate in a single segment and we report financial
information on a consolidated basis.
Subsequent
Events
We have evaluated subsequent events through the time of filing
this Annual Report on
Form 10-K.
We are not aware of any significant events that occurred
subsequent to the balance sheet date but prior to the filing of
this report that would have a material impact on our
consolidated financial statements.
65
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Use of
Estimates
We prepare our consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States, or GAAP. These accounting principles require us
to make certain estimates and judgments that can affect the
reported amounts of assets and liabilities as of the date of our
consolidated financial statements, as well as the reported
amounts of revenue and expenses during the periods presented.
Significant estimates and assumptions made by management include
the determination of the fair value of share-based payments, the
fair value of purchased intangible assets, the recoverability of
long-lived assets, and the provision for income taxes. We
believe that the estimates and judgments upon which we rely are
reasonable based upon information available to us at the time
that these estimates and judgments are made. To the extent there
are material differences between these estimates and actual
results, our consolidated financial statements will be affected.
Revenue
Recognition
We generate revenue from fees under agreements with initial
terms that generally are one to three years in length. Our
agreements contain multiple elements, which include the use of
our software, SaaS delivery services, professional services,
maintenance, and customer support. Professional services consist
of implementation, training, data modeling, and analytical
services related to our customers use of our software. We
have determined that the elements within our agreements do not
qualify for treatment as separate units of accounting.
Therefore, we account for all fees received under our agreements
as a single unit of accounting and recognize them ratably over
the term of the related agreement, commencing upon the later of
the agreement start date or the date access to the application
is provided to the customers, and when all of the following
conditions are also met:
|
|
|
|
|
there is persuasive evidence of an arrangement;
|
|
|
|
the service has been provided to the customer;
|
|
|
|
the collection of the fees is probable; and
|
|
|
|
the amount of fees to be paid by the customer is fixed or
determinable.
|
Deferred
Revenue
Deferred revenue consists of amounts billed or payments received
in advance of revenue recognition. Contracts under which we
advance bill customers are generally non-cancellable. For
agreements with terms over one year, we generally invoice our
customers in annual installments. Accordingly, the deferred
revenue balance associated with such multi-year, non-cancellable
agreements does not represent the total contract value. Deferred
revenue to be recognized in the succeeding twelve month period
is included in current deferred revenue on our consolidated
balance sheets, with the remaining amounts included in
non-current deferred revenue.
Foreign
Currency Translation
The denomination of the majority of our sales arrangements and
the functional currency of our international operations is the
United States dollar. Our international operations
financial statements are remeasured into United States dollars,
with adjustments recorded as foreign currency gains (losses) in
the consolidated statements of operations. All monetary assets
and liabilities are remeasured at the current exchange rate at
the end of the period, non-monetary assets and liabilities are
remeasured at historical exchange rates, and revenue and
expenses are remeasured at average exchange rates in effect
during the period. We recognized a foreign currency gain (loss)
of approximately $(176,000), $(97,000), and $397,000 in fiscal
2010, 2009, and 2008, respectively, in other income (expense),
net.
66
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Concentrations
of Credit Risk, Significant Customers and Suppliers and
Geographic Information
Our financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents,
marketable securities, accounts receivable, and a line of
credit. Although we deposit our cash with multiple financial
institutions, our deposits, at times, may exceed federally
insured limits. Collateral is not required for accounts
receivable.
We had one customer that accounted for 13.6%, 14.4%, and 11.7%
of total revenue in fiscal 2010, 2009, and 2008, respectively.
At February 28, 2010 and 2009, long-lived assets located
outside the United States were not significant. Revenue by
geographic region, based on the billing address of the customer,
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
68,174
|
|
|
$
|
64,664
|
|
|
$
|
53,641
|
|
International
|
|
|
10,878
|
|
|
|
10,341
|
|
|
|
7,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
79,052
|
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 28, 2010 and 2009, three customers accounted
for 48% and 35% of our outstanding accounts receivable balance,
respectively.
The equipment hosting our software is located in three
third-party data center facilities located in San Jose,
California, Sacramento, California, and Mesa, Arizona. We do not
control the operation of these facilities, and our operations
are vulnerable to damage or interruption in the event either of
these third-party data center facilities fail.
Fair
Value of Financial Instruments
The carrying amounts of our financial instruments, which include
cash and cash equivalents, marketable securities, accounts
receivable, accounts payable, notes payable, and other accrued
expenses, approximate their fair values. Our financial assets
and liabilities are remeasured and reported at fair value at
each reporting period. We measure our foreign currency forward
contracts at fair value. Our foreign currency forward contracts
are classified within Level 2 as the valuation inputs are
based on quoted prices of similar instruments in active markets
and do not involve management judgment.
Cash
and Cash Equivalents
We consider all highly liquid investments purchased with
original maturities of three months or less to be cash
equivalents. Cash and cash equivalents, which primarily consist
of cash on deposit with banks and money market funds, are
recorded at cost, which approximates fair value.
Marketable
Securities
We classify our investments as
held-to-maturity
at the time of purchase and reevaluate the classification at
each balance sheet date. All of our investments were classified
as
held-to-maturity
at February 28, 2010 and 2009. Our
held-to-maturity
investments are classified as current or non-current based on
the maturity dates of the individual debt securities.
We monitor our investments in marketable securities for
impairment on a periodic basis. In the event that the carrying
value of an investment exceeds its fair value and the decline in
value is determined to be
other-than-temporary,
we record an impairment charge and establish a new cost basis
for the investment. We did not record any impairment adjustments
in fiscal 2010, 2009, or 2008.
67
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In order to determine whether or not a decline in value is
other-than-temporary,
we evaluate, among other things, the duration and extent to
which the fair value has been less than the carrying value, our
financial condition and business outlook, including key
operational and cash flow metrics, current market conditions,
and our intent and ability to retain the investment for a period
of time sufficient to allow for any anticipated recovery in fair
market value.
Deferred
Commissions
We capitalize certain commission costs directly related to the
acquisition of a customer agreement. Our commission payments are
paid shortly after our receipt of the related customer payment.
Commissions are deferred and amortized to sales and marketing
expense over the revenue recognition term of the related
non-cancelable customer agreement. We believe this is the
appropriate method of accounting as the commission charges are
so closely related to the revenue from the customer contracts
that they should be recorded as an asset and charged to expense
over the same period that the related revenue is recognized.
Commission costs amortized to sales and marketing expense were
approximately $2.3 million, $3.4 million, and
$2.8 million in fiscal 2010, 2009, and 2008, respectively.
At February 28, 2010 and 2009, deferred commission costs
totaled approximately $843,000 and $1.3 million,
respectively.
Property,
Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at
historical cost, net of accumulated depreciation. Depreciation
is calculated using the straight-line method over estimated
useful lives of three to five years. Leasehold improvements are
amortized over the shorter of the lease term or the estimated
useful lives of the improvements. Repair and maintenance costs
are expensed as incurred.
Goodwill
and Intangible Assets
We record as goodwill the excess of the acquisition purchase
price over the fair value of the tangible and identifiable
intangible assets acquired. We do not amortize goodwill, but
perform an annual impairment review of our goodwill during our
third quarter, or more frequently if indicators of potential
impairment arise. We have a single operating segment and
consequently evaluate goodwill for impairment based on an
evaluation of the fair value of our company as a whole. We
record purchased intangible assets at their respective estimated
fair values at the date of acquisition. Purchased intangible
assets are being amortized using the straight-line method over
their remaining estimated useful lives, which currently range
from approximately one to seven years. We evaluate the remaining
useful lives of intangible assets on a periodic basis to
determine whether events or circumstances warrant a revision to
the remaining estimated amortization period. We evaluated our
goodwill in November 2009 and recognized no impairment charges
as a result of the review. Additionally, we observed no
impairment indicators for both goodwill and intangible assets
through February 28, 2010.
Impairment
of Long-Lived Assets
Long-lived assets are reviewed for possible impairment whenever
events or circumstances indicate that the carrying amount of
these assets may not be recoverable. We evaluate the
recoverability of each of our long-lvied assets, including
purchased intangible assets and property, equipment, and
leasehold improvements, by comparison of its carrying amount to
the future undiscounted cash flows we expect the asset to
generate. If we consider the asset to be impaired, we measure
the amount of any impairment as the difference between the
carrying amount and the fair value of the impaired asset. We
observed no impairment indicators through February 28, 2010.
68
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Advertising
Expenses
Advertising costs are expensed when incurred and are included in
sales and marketing expenses in the accompanying consolidated
statements of operations. We incurred advertising expenses of
approximately $532,000, $124,000, and $59,000 for fiscal 2010,
2009, and 2008, respectively.
Research
and Development and Software Development Costs
We capitalize the costs to develop software for our website and
other internal uses, as well as the cost of upgrades and
enhancements to that software, when preliminary development
efforts are successfully completed, management has authorized
and committed project funding, and it is probable that the
project will be completed and the software will be used as
intended. Any capitalized costs are amortized to expense on a
straight-line basis over their expected lives. To date, internal
software development costs eligible for capitalization have been
insignificant, and accordingly we have charged all software
development costs to research and development expense as
incurred.
Warranties
and Indemnification
Our software services are generally warranted to perform in a
manner consistent with industry standards and materially in
accordance with our documentation under normal use and
circumstances. Additionally, our arrangements generally include
provisions for indemnifying customers against liabilities if our
services infringe a third partys intellectual property
rights or if a breach of confidentiality obligations harms a
third party. Further, we have entered into indemnification
agreements with our officers, directors, and certain key
employees, and our bylaws contain similar indemnification
obligations. To date, we have not incurred any material costs as
a result of those indemnification provisions and have not
accrued any liabilities related to these obligations in the
accompanying consolidated financial statements.
We have occasionally entered into service level agreements with
our customers warranting defined levels of uptime reliability
and performance and permitting those customers to receive
service credits or discounted future services, or to terminate
their agreements in the event that we fail to meet those levels.
To date, we have not experienced any significant failures to
meet defined levels of reliability and performance as a result
of those agreements and, accordingly, we have not accrued any
liabilities related to these agreements in the accompanying
consolidated financial statements
Income
Taxes
Deferred tax assets and liabilities are determined based on the
temporary differences between their financial reporting and tax
bases and are measured using the enacted tax rates that are
anticipated to be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts more likely than not
expected to be realized. We have established a valuation
allowance against substantially all of our deferred tax assets
as we believe it is more likely than not that the deferred tax
assets will not be realized.
We will continue to evaluate the need for a valuation allowance.
We may determine that some, or all, of our deferred tax assets
will be realized, in which case we will reduce our valuation
allowance in the quarter in which such determination is made. If
the valuation allowance is reduced, we may recognize a benefit
from income taxes on our statement of operations in that period.
In subsequent periods, we may have higher income tax expenses.
Derivative
Instruments and Hedging Activities
We operate internationally and entered into foreign exchange
forward contracts during fiscal 2010 and 2009 to reduce our
exposure in
non-U.S. dollar
denominated accounts receivable. We designated these forward
contracts as cash flow hedges of foreign currency denominated
firm commitments; their objective was to negate the impact of
currency exchange rate movements on our operating results. We
excluded the implicit interest in the forward
69
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
contracts when assessing hedge effectiveness. In each of fiscal
2010 and 2009, implicit interest costs totaled approximately
$40,000 and were included within interest expense. We formally
assess, both at a hedges inception and on an ongoing
basis, whether the derivatives used in hedging transactions are
highly effective in negating currency risk. All forward
contracts entered during fiscal 2010 and 2009 were deemed highly
effective. We did not engage in hedging activities during fiscal
2008. We do not enter into derivative financial instruments for
speculative or trading purposes.
Comprehensive
Loss
Comprehensive loss consists of net loss and other comprehensive
income (loss), which includes certain changes in equity that is
excluded from net loss. In fiscal 2010 and 2009, an unrealized
gain (loss) on cash flow hedges and implicit interest of
approximately $(54,000) and $682,000, respectively, was included
in accumulated other comprehensive income, which has been
reflected in stockholders equity. In addition, in fiscal
2010, we recognized into revenue approximately $101,000 of gain
from accumulated other comprehensive income, which was
associated with a forward contract that matured in May 2009.
There was no other comprehensive income or loss in fiscal 2008.
Stock-Based
Compensation
We account for and recognize all share-based payments as an
expense in our statements of operations. Grants of stock options
to employees and to new members of our board of directors
generally vest over four years and annual stock option grants to
existing members of our board of directors vest over one year.
We measure the value of stock options based on the grant date
fair value using the Black-Scholes pricing model.
Performance-based stock units, or PSUs, vest pursuant to certain
performance and time-based vesting criteria set by our
Compensation Committee. We evaluate the probability of meeting
the performance criteria at the end of each reporting period to
determine how much compensation expense to record. Because the
actual number of shares to be issued is not known until the end
of the performance period, the actual compensation expense
related to these awards could differ from our current
expectations. Beginning in fiscal 2009, we also have time-based
restricted stock units, or RSUs, outstanding that entitle the
recipient to receive shares of our common stock upon vesting and
settlement of the awards pursuant to time-based vesting criteria
set by our Compensation Committee. Stock-based compensation
expense for PSUs and RSUs is based on the closing price of our
common stock on the grant date. We amortize the fair value of
those awards, net of estimated forfeitures, as stock-based
compensation expense over the vesting period of the awards.
Options granted to consultants and other non-employees are
valued using the Black-Scholes method. These options are subject
to periodic revaluation over their vesting terms, and are
charged to expense over the vesting term using the graded method.
Net
Loss per Common Share
All issued and outstanding common stock and per share amounts
contained in the consolidated financial statements and notes
have been retroactively adjusted to reflect the
1-for-2
reverse stock split effected on August 2, 2007.
Basic net loss per share is computed using the weighted average
number of common shares outstanding during the period, excluding
any unvested common shares subject to repurchase. Potential
common shares consist of the incremental common shares issuable
upon the exercise of stock options or warrants or upon the
settlement of PSUs and RSUs, shares subject to issuance under
our 2007 Employee Stock Purchase Program, or ESPP, unvested
common shares subject to repurchase or cancellation, and
convertible preferred stock. The dilutive effect of such
potential common shares is reflected in diluted loss per share
by application of the treasury stock method and on an
if-converted basis from the date of issuance. Because the
Company has been in a loss position in all periods shown,
70
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
shares used in computing basic and diluted net loss per common
share were the same for all periods presented, as the impact of
all potentially dilutive securities outstanding was
anti-dilutive.
The following table presents the calculation of historical basic
and diluted net loss per common share (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(11,837
|
)
|
|
$
|
(4,953
|
)
|
|
$
|
(4,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
28,721
|
|
|
|
27,388
|
|
|
|
17,731
|
|
Less: Weighted average number of common shares subject to
repurchase
|
|
|
(1
|
)
|
|
|
(16
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in
computing basic and diluted net loss per common share
|
|
|
28,720
|
|
|
|
27,372
|
|
|
|
17,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.41
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following weighted average outstanding shares subject to
options to purchase common stock, PSUs and RSUs, shares subject
to warrants to purchase common stock, common stock subject to
repurchase, shares subject to issuance under the ESPP, and
convertible preferred stock were excluded from the computation
of diluted net loss per common share for the periods presented
because including them would have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Shares subject to options to purchase common stock, PSUs, and
RSUs
|
|
|
3,813
|
|
|
|
4,342
|
|
|
|
5,285
|
|
Shares subject to warrants to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
98
|
|
Common stock subject to repurchase
|
|
|
1
|
|
|
|
16
|
|
|
|
119
|
|
Shares subject to issuance under the ESPP
|
|
|
10
|
|
|
|
13
|
|
|
|
|
|
Convertible preferred stock (if-converted basis until IPO)
|
|
|
|
|
|
|
|
|
|
|
5,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,824
|
|
|
|
4,371
|
|
|
|
11,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (the
FASB) issued a new accounting standard for revenue
recognition for arrangements with multiple deliverables. The new
standard impacts the determination of when the individual
deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, the new
standard modifies the manner in which the transaction
consideration is allocated across the separately identified
deliverables by no longer permitting the residual method of
allocating arrangement consideration. The new standard is
effective for fiscal years beginning on or after June 15,
2010; however, early adoption of this standard is permitted. We
have determined that there will be no impact on our consolidated
financial statements for existing customer arrangements upon
adoption of the new accounting standard.
In October 2009, the FASB issued a new accounting standard for
the accounting for certain revenue arrangements that include
software elements. The new standard amends the scope of
pre-existing software revenue
71
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
guidance by removing from the guidance non-software components
of tangible products and certain software components of tangible
products. The new standard is effective for fiscal years
beginning on or after June 15, 2010; however, early
adoption of this standard is permitted. We have determined that
there will be no impact on our consolidated financial statements
for existing customer arrangements upon adoption of the new
accounting standard.
Recently
Adopted Accounting Pronouncements
In June 2009, the FASB launched the FASB Accounting Standards
Codification, or the Codification, as the single source of
authoritative U.S. GAAP recognized by the FASB. The
Codification reorganizes various U.S. GAAP pronouncements
into accounting topics and displays them using a consistent
structure. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. The
Codification is effective for interim and annual periods ending
after September 15, 2009. We adopted the Codification in
the quarter ended November 30, 2009 and there was no impact
on our consolidated financial statements.
In May 2009, the FASB issued a new accounting standard for
subsequent events which establishes general standards of
accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
available to be issued. The standard was amended in February
2010 for certain recognition and disclosure requirements. The
new standard requires an entity to recognize in the financial
statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the date of
the balance sheet. For unrecognized subsequent events that must
be disclosed to keep the financial statements from being
misleading, an entity will be required to disclose the nature of
the event as well as an estimate of its financial effect, or a
statement that such an estimate cannot be made. The new standard
is effective for the interim or annual financial periods ending
after June 15, 2009, and is required to be applied
prospectively. We adopted the provisions of the new standard in
the quarter ended August 31, 2009 and there was no impact
on our consolidated financial statements.
In April 2009, the FASB issued three new accounting standards
that are intended to provide additional application guidance and
enhance disclosures about fair value measurements and
impairments of securities. The first standard clarifies the
objective and method of fair value measurement even when there
has been a significant decrease in market activity for the asset
being measured. The second standard establishes a new model for
measuring
other-than-temporary
impairments for debt securities, including criteria for when to
recognize a write-down through earnings versus other
comprehensive income. The third standard expands the fair value
disclosures requirements to interim periods. All of these new
accounting standards are effective for interim and annual
periods ending after June 15, 2009. We adopted these
standards in the quarter ended August 31, 2009 and there
was no impact on our consolidated financial statements.
In November 2008, the FASB issued a new accounting standard
which applies to purchased intangible defensive assets that the
acquirer does not intend to actively use, but intends to hold to
prevent its competitors from obtaining access to the asset. The
new standard clarifies that defensive intangible assets are
separately identifiable and should be accounted for as a
separate unit of accounting. The new standard is effective for
intangible assets purchased in fiscal years beginning on or
after December 15, 2008. We adopted the new standard in
March 2009 and there was no impact on our consolidated financial
statements, although it will affect our accounting for any
intangible assets acquired in a business combination or an asset
acquisition in the future.
In April 2008, the FASB issued a new accounting standard which
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets. This new guidance applies
prospectively to intangible assets that are acquired
individually or with a group of other assets in business
combinations and asset acquisitions. The new standard is
effective for fiscal years and interim periods beginning after
December 15, 2008. We adopted the new standard in March
2009 and there was no impact on our consolidated financial
statements.
72
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In December 2007, the FASB revised its accounting standards for
business combinations. The revised standards establish
principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree in a business combination. The revised
standards also establish principles around how goodwill acquired
in a business combination or a gain from a bargain purchase
should be recognized and measured, as well as provide guidelines
on the disclosure requirements on the nature and financial
impact of the business combination. In April 2009, the FASB
further modified the revised standards by establishing a model
to account for certain pre-acquisition contingencies, which
requires an acquirer to recognize an asset acquired or a
liability assumed based on the estimated fair value, if it is
probable that an asset or liability exists at the acquisition
date and the amount can be reasonably estimated. The revised
standards are effective for fiscal years beginning after
December 15, 2008. We adopted the new standards in March
2009. Because we did not complete any business combination
activities in fiscal 2010, the adoption did not impact our
current consolidated financial statements, but will affect our
accounting for any future business combinations.
In February 2009, we acquired all of the issued and outstanding
capital stock of privately-held Connect3 Systems, Inc., or
Connect3, a provider of advertising, planning, and execution
software. The aggregate purchase price of Connect3 was
approximately $13.5 million, which consisted of
$13.3 million cash consideration and $201,000 of
acquisition costs. We paid approximately $12.3 million of
the consideration in fiscal 2010. The remaining
$1.0 million, less any amounts used to satisfy any claims
for indemnification that we may make for certain breaches of
representations, warranties and covenants, will be distributed
to the former Connect3 shareholders in June 2010.
We accounted for the Connect3 acquisition under the purchase
method of accounting. The assets acquired and liabilities
assumed were recorded at fair market value, based on the
valuation performed by an independent third-party valuation
firm. We recorded approximately $11.3 million of goodwill,
$4.5 million of identifiable intangible assets, and
$2.3 million of net liabilities assumed. Intangible assets
are being amortized on a straight-line basis over a period of
one to two and a half years, with a remaining weighted average
useful life of 1.3 years at February 28, 2010. The
goodwill balance is not deductible for tax purposes. The results
of the Connect3s operations are included in our
consolidated financial statements from the date of acquisition.
Pro forma results of the acquired business have not been
presented as it was not material to our consolidated financial
statements for all periods presented.
|
|
3.
|
Goodwill
and Purchased Intangibles
|
Goodwill
The changes in the carrying amount of goodwill for the fiscal
year ended February 28, 2010 and 2009 are as follows (in
thousands):
|
|
|
|
|
Balance at February 29, 2008
|
|
$
|
5,290
|
|
Goodwill recorded for Connect3 acquisition
|
|
|
11,202
|
|
|
|
|
|
|
Balance at February 28, 2009
|
|
|
16,492
|
|
Connect3 subsequent goodwill adjustment, net of tax
|
|
|
107
|
|
|
|
|
|
|
Balance at February 28, 2010
|
|
$
|
16,599
|
|
|
|
|
|
|
73
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Purchased
Intangible Assets
Our purchased intangible assets are subject to amortization on a
straight-line basis over their estimated useful lives as follows:
|
|
|
|
|
|
|
Estimated
|
|
Weighted Average
|
|
|
Life
|
|
Remaining Life
|
|
|
(In years)
|
|
Developed technology
|
|
2.5 to 5
|
|
1.6
|
Customer relationships
|
|
1.5 to 7
|
|
2.2
|
Non-compete covenants
|
|
2 to 3
|
|
1.0
|
Backlog
|
|
1.5
|
|
0.5
|
Trade name
|
|
10
|
|
6.7
|
The carrying values of amortizing intangible assets are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010
|
|
|
February 28, 2009
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology
|
|
$
|
7,680
|
|
|
$
|
(4,785
|
)
|
|
$
|
2,895
|
|
|
$
|
7,680
|
|
|
$
|
(2,157
|
)
|
|
$
|
5,523
|
|
Customer relationships
|
|
|
2,150
|
|
|
|
(1,254
|
)
|
|
|
896
|
|
|
|
2,150
|
|
|
|
(313
|
)
|
|
|
1,837
|
|
Non-compete covenants
|
|
|
840
|
|
|
|
(670
|
)
|
|
|
170
|
|
|
|
840
|
|
|
|
(389
|
)
|
|
|
451
|
|
Backlog(1)
|
|
|
(158
|
)
|
|
|
152
|
|
|
|
(6
|
)
|
|
|
167
|
|
|
|
(2
|
)
|
|
|
165
|
|
Trade name
|
|
|
560
|
|
|
|
(187
|
)
|
|
|
373
|
|
|
|
560
|
|
|
|
(131
|
)
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,072
|
|
|
$
|
(6,744
|
)
|
|
$
|
4,328
|
|
|
$
|
11,397
|
|
|
$
|
(2,992
|
)
|
|
$
|
8,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The gross value of the backlog at February 28, 2010
includes a $325 purchase accounting adjustment in fiscal 2010.
The amortization of backlog has been recorded as revenue since
February 2009. |
Amortization expense related to the purchased intangible assets
was approximately $3.9 million, $1.9 million, and
$1.0 million in fiscal 2010, 2009 and 2008, respectively.
In addition, $150,000 of in-process technology purchased from
Connect3 was expensed immediately upon acquisition in February
2009.
At February 28, 2010, the estimated amortization expense
related to the purchased intangible assets for each of the next
five fiscal years and thereafter is as follows (in thousands):
|
|
|
|
|
|
|
February 28,
|
|
Fiscal Year
|
|
2010
|
|
|
2011
|
|
$
|
2,620
|
|
2012
|
|
|
1,223
|
|
2013
|
|
|
190
|
|
2014
|
|
|
146
|
|
2015
|
|
|
56
|
|
Thereafter
|
|
|
93
|
|
|
|
|
|
|
Total
|
|
$
|
4,328
|
|
|
|
|
|
|
74
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
4.
|
Balance
Sheet Components
|
Marketable
Securities consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2010
|
|
|
February 28, 2009
|
|
|
|
|
|
|
Unrecognized
|
|
|
Fair
|
|
|
|
|
|
Unrecognized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Commercial paper
|
|
$
|
3,999
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
4,002
|
|
|
$
|
6,291
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
6,293
|
|
Certificate of deposit
|
|
|
1,000
|
|
|
|
3
|
|
|
|
|
|
|
|
1,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
15,563
|
|
|
|
14
|
|
|
|
(10
|
)
|
|
|
15,567
|
|
|
|
12,314
|
|
|
|
41
|
|
|
|
(10
|
)
|
|
|
12,345
|
|
Obligations of government-sponsored enterprises
|
|
|
25,387
|
|
|
|
19
|
|
|
|
|
|
|
|
25,406
|
|
|
|
23,724
|
|
|
|
102
|
|
|
|
(10
|
)
|
|
|
23,816
|
|
Treasury bills
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,983
|
|
|
|
14
|
|
|
|
|
|
|
|
11,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,949
|
|
|
$
|
39
|
|
|
$
|
(10
|
)
|
|
$
|
45,978
|
|
|
$
|
54,312
|
|
|
$
|
159
|
|
|
$
|
(20
|
)
|
|
$
|
54,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the book value of our investments
in marketable debt securities classified by the contractual
maturity date of the security:
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Due within one year
|
|
$
|
36,068
|
|
|
$
|
46,426
|
|
Due within one to two years
|
|
|
9,881
|
|
|
|
7,886
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,949
|
|
|
$
|
54,312
|
|
|
|
|
|
|
|
|
|
|
Historically, all investments have been held to maturity, and
thus, there were no gains or losses recognized during the
periods presented. We have the ability and intent to hold our
marketable securities to maturity and do not believe any of the
marketable securities are impaired based on our evaluation of
available evidence at February 28, 2010 and through the
time of filing of this Annual Report on
Form 10-K.
We expect to receive all principal and interest on all of our
investment securities.
Property,
equipment and leasehold improvements consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Computers, software and equipment
|
|
$
|
12,791
|
|
|
$
|
11,180
|
|
Furniture and fixtures
|
|
|
172
|
|
|
|
238
|
|
Leasehold improvements
|
|
|
753
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,716
|
|
|
|
11,669
|
|
Less: accumulated depreciation
|
|
|
(8,939
|
)
|
|
|
(6,240
|
)
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
$
|
4,777
|
|
|
$
|
5,429
|
|
|
|
|
|
|
|
|
|
|
75
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Accounts
payable and accrued expenses consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Accounts payable
|
|
$
|
2,751
|
|
|
$
|
2,822
|
|
Accrued professional services
|
|
|
807
|
|
|
|
640
|
|
Income taxes payable
|
|
|
32
|
|
|
|
50
|
|
Other accrued liabilities
|
|
|
1,934
|
|
|
|
1,837
|
|
Accrued bonuses
|
|
|
3,820
|
|
|
|
3,670
|
|
Other accrued compensation
|
|
|
3,097
|
|
|
|
3,943
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
12,441
|
|
|
$
|
12,962
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Commitments
and Contingencies
|
We lease office space in various locations throughout the United
States and Europe. In September 2009, we entered into a lease
agreement for office space in San Mateo, California, under
which the total lease term is eight years with the initial
non-cancellable lease term of five years commencing
December 1, 2009. We use the office space as our new
corporate headquarters. The aggregate minimum lease commitment
is approximately $10.1 million. To secure our obligations
under the lease, we have provided the lessor a $223,000 cash
security deposit and a $917,000 letter of credit, secured by
using our existing revolving line of credit as described in
Note 6. Additionally, the lessor provided us with a tenant
improvement allowance of $265,000 and assumed our payment
obligations (equal to approximately $200,000) under the previous
sublease for our then-existing corporate headquarters in
San Carlos, California for the period from December 1,
2009 through February 28, 2010, the expiration date of such
sublease. The tenant improvement allowance and the $200,000 of
assumed sublease obligations have been deferred and are being
recognized on a straight-line basis over the lease term as
reductions of rent expenses. The leasehold improvements are
being amortized on a straight-line basis over the lesser of the
lease term or the estimated useful lives of the assets.
In September 2009, we entered into equipment and facility
operating leases associated with our new data center in Mesa,
Arizona. The aggregate minimum lease payments are approximately
$1.5 million.
Future minimum lease commitments due under non-cancelable
operating leases with an initial term greater than one year were
as follows (in thousands):
|
|
|
|
|
|
|
February 28,
|
|
Fiscal Year
|
|
2010
|
|
|
2011
|
|
$
|
2,276
|
|
2012
|
|
|
2,265
|
|
2013
|
|
|
2,311
|
|
2014
|
|
|
2,312
|
|
2015
|
|
|
2,206
|
|
|
|
|
|
|
Total
|
|
$
|
11,370
|
|
|
|
|
|
|
Total rent expense was $2.2 million, $1.9 million and
$1.3 million in fiscal 2010, 2009, and 2008, respectively.
Legal
Proceedings
We have from time to time become involved in legal matters that
arise in the normal course of business and otherwise. For
example, we have recently become involved in a dispute with a
large customer relating to a development project with that
customer. We are currently assessing the potential impact of the
dispute, which is at
76
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
an early stage. There can be no assurance that the dispute or
other third party claims and litigation that may arise in the
future will not have a material adverse effect on our business,
financial position, results of operations, or cash flows,
including a loss of customers, or subject us to significant
financial or other remedies.
The table below sets forth a summary of previously outstanding
warrants held by financial institutions that were exercised in
fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
Shares of
|
|
Shares of
|
|
|
|
|
Common Stock
|
|
|
|
Common Stock
|
|
Common Stock
|
|
|
|
|
Issuable Upon
|
|
|
|
Withheld to
|
|
Issued Upon
|
Warrant
|
|
Warrant
|
|
Exercise of
|
|
Exercise Price
|
|
Settle Exercise
|
|
Exercise of
|
Issuance Date
|
|
Exercise Date
|
|
Warrant
|
|
Per Share
|
|
Price
|
|
Warrant
|
|
May 2006
|
|
December 2007
|
|
|
37,500
|
(a)
|
|
$
|
5.16
|
|
|
|
12,858
|
|
|
|
24,642
|
|
July 2006
|
|
August 2007
|
|
|
37,500
|
(b)
|
|
$
|
2.70
|
|
|
|
10,703
|
|
|
|
26,797
|
|
July 2006
|
|
December 2007
|
|
|
37,500
|
(b)
|
|
$
|
2.70
|
|
|
|
6,728
|
|
|
|
30,772
|
|
Various
|
|
December 2007
|
|
|
38,759
|
(a)
|
|
$
|
5.16
|
|
|
|
13,289
|
|
|
|
25,470
|
|
Various
|
|
January 2008
|
|
|
30,488
|
(a)
|
|
$
|
3.28
|
|
|
|
8,033
|
|
|
|
22,455
|
|
|
|
|
(a) |
|
Warrants were originally issued as warrants to purchase our
Series B convertible preferred stock or our Series C
convertible preferred stock. In conjunction with our IPO, these
warrants automatically converted into warrants to purchase an
equal number of shares of our common stock. |
|
(b) |
|
Warrants were originally issued to one of the financial
institutions in connection with a term loan entered in July 2006. |
Prior to the closing date of our IPO in August 2007, the
preferred stock warrants were classified in liabilities and were
revalued each reporting period with the changes in fair value
recorded within other income (expense) in the accompanying
consolidated statements of operations. Because of the automatic
conversion of the preferred stock warrants to common stock
warrants upon the closing of our IPO, we ceased to revalue the
warrants and reclassified the $714,000 remaining liability
balance to additional paid-in capital in August 2007.
Expense associated with the amortization of the fair value of
warrants and loan financing costs was $157,000 in fiscal 2008.
We accelerated the expense recognition of the remaining
unamortized fair values of the warrants, loan financing cost,
debt discount costs and balloon interest balance upon paying off
the $3.0 million revolving line of credit balance and the
$10.0 million term loan in August 2007, resulting in an
additional $504,000 charge to interest expense in fiscal 2008.
There was no charge to interest expense in fiscal 2010 and 2009.
In connection with our acquisition of TradePoint in November
2006, we issued a $1.8 million promissory note to former
TradePoint shareholders. At February 28, 2010, $434,000
remained outstanding and payable thereunder, awaiting
instructions by the former TradePoint shareholders as to how to
allocate and distribute the proceeds.
In May 2009, we amended our revolving line of credit that we had
entered in April 2008 with a financial institution to, among
other things, extend the maturity date of the loan agreement and
to increase the revolving line of credit from $15.0 million
to $20.0 million. The amended revolving line of credit can
be used to (a) borrow, (b) issue letters of credit,
and (c) enter into foreign exchange contracts. Revolving
loans may be borrowed, repaid, and reborrowed until May 2012.
Amounts borrowed will bear interest, at our option at the time
of borrowing, at either (1) a floating per annum rate equal
to the financial institutions prime rate, or (2) the
greater of (A) the LIBOR rate plus 250 basis points or
(B) a per annum rate equal to 4.0%. A default interest rate
shall apply during an event of default at a rate per annum equal
to 500 basis points above the otherwise applicable interest
rate. The line of credit is collateralized by substantially all
of our assets and requires us to comply with working capital,
net worth, and other non-financial covenants, including
limitations on indebtedness and restrictions on dividend
distributions, among others. The available balance was
approximately $18.9 million as of February 28, 2010,
having been reduced by
77
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
$200,000 in May 2009 to secure a non-cancellable operating lease
commitment and by approximately $917,000 in September 2009 to
secure a new operating lease commitment. Through the filing of
this Annual Report on
Form 10-K,
we were in compliance with all loan covenants.
|
|
7.
|
Share-Based
Compensation
|
Equity
Incentive Plans
1999
Equity Incentive Plan
In December 1999, our Board of Directors adopted the 1999 Equity
Incentive Plan (the 1999 Plan). We ceased issuing
awards under the 1999 Plan upon the completion of our Initial
Public Offering, or IPO, in August 2007. The 1999 Plan provided
for incentive or nonstatutory stock options, stock bonuses, and
rights to acquire restricted stock to be granted to employees,
outside directors, and consultants. At February 28, 2010,
options to purchase 4,514,697 shares were outstanding under
the 1999 Plan. Such options are exercisable as specified in each
option agreement, generally vest over four years, and expire no
more than ten years from the date of grant. If options awarded
under the 1999 Plan are forfeited or repurchased, then shares
underlying those options will no longer be available for awards.
2007
Equity Incentive Plan
In May 2007, our Board of Directors adopted, and in July 2007
our stockholders approved, the 2007 Equity Incentive Plan (the
2007 Plan). The 2007 Plan became effective upon our
IPO. The 2007 Plan, which is administered by the Compensation
Committee of our Board of Directors, provides for stock options,
stock units, restricted shares, and stock appreciation rights to
be granted to employees, non-employee directors, and
consultants. We initially reserved 3.0 million shares of
our common stock for issuance under the 2007 Plan. In addition,
on the first day of each fiscal year commencing with fiscal year
2009, the aggregate number of shares reserved for issuance under
the 2007 Plan automatically increases by a number equal to the
lowest of a) 5% of the total number of shares of common
stock then outstanding, b) 3,750,000 shares, or
c) a number determined by our Board of Directors. An
additional 1,475,065 shares and 1,403,189 shares were
reserved for issuance under the 2007 Plan on March 1, 2010
and 2009, respectively.
Stock
Options
Options granted under the 2007 Plan may be either incentive
stock options or nonstatutory stock options and are exercisable
as determined by the Compensation Committee and as specified in
each option agreement. Options vest over a period of time as
determined by the Compensation Committee, generally four years,
and generally expire seven years (but in any event no more than
ten years) from the date of grant. The exercise price of any
stock option granted under the 2007 Plan may not be less than
the fair market value of our common stock on the date of grant.
The term of the 2007 Plan is ten years. At February 28,
2010, options to purchase 2,733,220 shares were outstanding
under the 2007 Plan.
Performance
Stock Units (PSUs)
PSUs are awards under our 2007 Plan that entitle the recipient
to receive shares of our common stock upon vesting and
settlement of the awards pursuant to certain performance and
time-based vesting criteria set by our Compensation Committee.
Such issuance is referred to as the settlement of the awards.
In August 2007, our Compensation Committee granted 1,000,000
PSUs to our executive officers and other key employees. These
PSU grants were divided into two tranches. The first tranche
consisted of 30% of each grant, and related to fiscal
2008 company performance and subsequent individual service
requirements. The second tranche consisted of the remaining 70%
of each grant, and related to fiscal 2009 company
performance and subsequent
78
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
individual service requirements. These PSUs vested over a period
of 29 months ended January 15, 2010, at which point
573,627 PSUs were fully vested and settled.
In March 2008, our Compensation Committee granted 160,000 PSUs
to our chief executive officer. This PSU grant consisted of a
single tranche and related to fiscal 2009 company
performance metrics and subsequent individual service
requirements. On January 15, 2010, 104,000 of these PSUs
were fully vested and settled .
In May and June 2009, our Compensation Committee granted 901,000
and 25,000 PSUs, respectively, to certain of our executive
officers and other employees. These PSU grants consist of a
single tranche and relate to fiscal 2010 company
performance objectives and subsequent individual service
requirements over a period of 23 months, subject to each
grantees continued service. At February 28, 2010,
there were 387,151 shares subject to outstanding PSUs from
the May and June 2009 grants.
Restricted
Stock Units (RSUs)
RSUs are awards under the 2007 Plan that entitle the recipient
to receive shares of our common stock upon vesting and
settlement of the awards pursuant to time-based vesting criteria
set by our Compensation Committee. In the fiscal quarter ended
May 31, 2008, our Compensation Committee granted 545,900
RSUs to our executive officers and certain other employees. At
February 28, 2010, there were 460,350 shares subject
to outstanding RSUs. 455,150 of these RSUs became fully vested
in April 2010. In connection with the vesting and settlement of
these outstanding RSUs, we withheld 148,303 shares of
common stock in settlement of employee income and payroll tax
withholding obligations and paid the corresponding amounts in
cash to the appropriate federal and state taxing authorities
In January 2010, our Compensation Committee granted 100,000
RSUs, all of which were outstanding at February 28, 2010
and will vest over a period of approximately four years. In
April 2010, our Compensation Committee granted 1,130,000 RSUs to
certain of our executive officers and other employees. Such RSUs
will vest over a period of approximately 27 months, subject
to each grantees continued service.
79
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
A summary of activity under the 1999 Plan and the 2007 Plan
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
Shares
|
|
|
Shares Subject
|
|
|
Exercise
|
|
|
|
Available
|
|
|
to Options
|
|
|
Price
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
per Share
|
|
|
|
(Shares in thousands)
|
|
|
Balance at February 28, 2007
|
|
|
317
|
|
|
|
6,176
|
|
|
$
|
1.98
|
|
Additional shares authorized
|
|
|
3,675
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,788
|
)
|
|
|
1,788
|
|
|
|
10.48
|
|
Performance stock units granted
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(194
|
)
|
|
|
2.04
|
|
1999 Plan options cancelled/forfeited(1)
|
|
|
181
|
|
|
|
(343
|
)
|
|
|
6.35
|
|
2007 Plan options cancelled/forfeited
|
|
|
18
|
|
|
|
(18
|
)
|
|
|
13.14
|
|
Performance and restricted stock units cancelled/forfeited
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Shares repurchased(1)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Options expired(1)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|