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 29, 2008
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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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7372
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94-3344761
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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One
Circle Star Way, Suite 200
San Carlos, California 94070
(Address
of Principal Executive Offices)
(650) 226-4600
(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 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.
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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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, 2007, 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 $9.59 per share on the NASDAQ
Global Market on such date) was approximately
$118.6 million.
As of March 31, 2008, there were 26,488,941 shares of
the registrants common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
its fiscal 2008 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 Consumer Demand Management, or CDM,
solutions. CDM is a software category based on quantifying
consumer demand and using that understanding to make better
merchandising and marketing decisions. Our software services
enable retailers and consumer products, or CP, companies to
define merchandising and marketing strategies based on a
scientific understanding of consumer behavior and make
actionable pricing, promotion and other merchandising and
marketing recommendations to achieve their revenue,
profitability and sales volume 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.
Our CDM solutions consist of software services and complementary
analytical services. We offer our solutions individually or as a
suite of integrated software services.
Our solutions for the retail industry include:
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DemandTec Lifecycle Price
Optimizationtm,
which enables retailers to strategically manage pricing for
items throughout their stores, including regular items, promoted
items, and markdown items.
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DemandTec Collaborative Promotion
Managementtm
for Retailers, which supports retailers end-to-end
promotion planning processes, including suppliers, internal
workflow, and downstream execution.
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Our solutions for the CP industry include:
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DemandTec Trade Planning &
Optimizationtm,
which enables CP companies to improve their return on investment
on spending for both trade promotions and everyday price
reductions.
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DemandTec Collaborative Promotion
Managementtm
for CP Companies, which includes services connecting CP
companies with their customers (the retailers) in an end-to-end
promotion management process.
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Underlying our solutions for both the retail and the CP
industries is the DemandTec TradePoint
Networktm,
an Internet-based platform of software services used by
retailers and their suppliers to transact, interact, and
collaborate. Using our solutions via the DemandTec TradePoint
Networktm,
retailers and CP companies can streamline business processes,
access advanced analytics, and enhance collaboration based on
retailer-driven rules of engagement.
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. Retailing is
highly competitive and generally characterized by low profit
margins. Furthermore, there are thousands of CP companies 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 and
dollar stores and the emergence of the Internet as a viable
retail destination
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offer consumers further alternatives when purchasing goods.
Recent increases in the costs of fuel and other commodities 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. 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. 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
targeted consumer segments.
CP companies make similar, complex decisions when pricing and
promoting their products. Like retailers, CP companies are faced
with rising costs, intense competition, less loyal consumers and
an operating environment in which it is difficult to raise
prices. 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. According
to Capgemini, most CP companies trade promotion budgets
represent 15% or more of their net sales, which percentage is
second only to their cost of goods sold. In 2003, CP companies
in the grocery channel alone spent over $25 billion on
trade promotions according to Accenture, and we believe trade
promotion budgets continue to rise across the CP industry.
Despite the pervasive use of trade funds, studies suggest that
over 90% of trade promotions have negative returns on investment
after taking into consideration execution costs and unintended
cannibalization.
The trade promotion process is 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.
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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 todays environment, retailers and CP companies need
scalable enterprise software that is capable of modeling the
numerous variables that affect consumer demand and processing
massive data sets in a cost-effective manner and that delivers
actionable merchandising and marketing recommendations to
achieve their revenue, profitability and sales volume objectives.
DemandTec
Solution
We are a leading provider of CDM solutions. Our software
services enable retailers and CP companies to define
merchandising and marketing strategies based on a scientific
understanding of consumer behavior and make actionable pricing,
promotion and other merchandising and marketing recommendations
to achieve their revenue, profitability and sales volume
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
and sales volume 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 and sales volume 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 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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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; 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, 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.
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 CDM 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 POS data, transaction log
data and loyalty program 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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deliver technical enhancements to our software on a frequent and
predictable schedule and 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 quickly 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 begin
to achieve measurable financial results within a matter of
months.
Strategy
Our objective is to extend our position as a leading provider of
CDM solutions. Key elements of our strategy to achieve this
objective include:
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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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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 solutions as
well as their adoption of incremental solutions. A key element
of our strategy is to leverage our
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domain expertise, proprietary software platform and advanced
analytical capabilities to expand our CDM solutions.
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Using our presence with retailers to create and expand our
relationships with their 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. Our
retail customers are able to mandate that their CP trading
partners submit and negotiate their future trade promotion
offers electronically through the DemandTec TradePoint Network.
We believe there is a significant opportunity to expand our
market presence by way of a network effect driven by cost
efficiencies and a common business language.
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Products
Overview
Our CDM 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 industry include:
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DemandTec Lifecycle Price
Optimizationtm,
which enables retailers to strategically manage pricing for
items throughout their stores, including regular items, promoted
items, and markdown items.
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|
DemandTec Collaborative Promotion
Managementtm
for Retailers, which supports retailers end-to-end
promotion planning processes including suppliers, internal
workflow, and downstream execution.
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Our solutions for the CP industry include:
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DemandTec Trade Planning &
Optimizationtm,
which enables CP companies to improve their return on investment
on spending for both trade promotions and everyday price
reductions.
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|
DemandTec Collaborative Promotion
Managementtm
for CP Companies, which includes services connecting CP
companies with their customers (the retailers) in an end-to-end
promotion management process.
|
Underlying our solutions for both the retail and the CP
industries is the DemandTec TradePoint
Networktm,
an Internet-based platform of software services used by
retailers and their suppliers to transact, interact, and
collaborate. Using our solutions via the DemandTec TradePoint
Networktm,
retailers and CP companies can streamline business processes,
access advanced analytics, and enhance collaboration based on
retailer-driven rules of engagement.
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.
MyDemandTec is the common, configurable dashboard for all of our
applications. Based on industry-standard portal technology,
MyDemandTec consolidates web-based content and information
through a common portal, providing users with context to make
pricing, promotion and other merchandising and marketing
decisions and to organize tasks. MyDemandTec can incorporate
third-party content within its windows or can exist within a
customers broader corporate intranet or other portal
system.
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Each of our solutions for the retail industry and the CP
industry consists of one or more of the following software
services, along with complementary analytical services:
Everyday
Price Optimization and Everyday Price Management (together
previously referred to as DemandTec Price)
Everyday Price Optimization and Everyday Price Management enable
retailers and CP companies 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: 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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Optimization and forecasting full category
price optimization, with store/item level forecasting of
revenue, profitability and sales volume at various price points;
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Image item analysis determines effective
price image items for key consumer segments;
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Rules management and rules-based pricing a
set of retail pricing rules with a rules editor and rules
relaxation capabilities to handle conflicts; 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: Using Everyday
Price Management, customers define pricing rules and apply those
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 management and rules-based pricing a
set of retail pricing rules with a rules editor and rules
relaxation capabilities to handle conflicts;
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Advanced price maintenance operational price
management features to handle frequent vendor cost changes and
competitive price changes; and
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Price delivery regularly scheduled delivery
of recommended base prices to customers.
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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.
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Promotion
Planning & Optimization (previously referred to as
DemandTec Promotion)
Promotion Planning & Optimization enables retailers
and CP companies to create and simulate multiple scenarios based
on mathematical forecasts of results in order to evaluate
tradeoffs among various promotions such as discounts,
advertisements and displays. Key features of Promotion
Planning & Optimization include:
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Category plan and master calendar management
the ability to generate, view and forecast
promotion calendars, 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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Promotion offer support the ability to enter
key promotion performance details that drive promotion response,
as well as CP company allowances that drive financial
performance for individualized promotions;
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Event and tactic management the ability to
plan and manage different promotional events and capture
individual performance details such as holidays, features and
in-store displays;
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Deal Management integration the ability for
all vendor offers entered into DemandTecs Deal Management
software service (previously referred to as DemandTec
TradePoint) to flow directly into Promotion Planning &
Optimization for analysis, optimization and forecasting; and
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Pre-configured outbound interfaces the
ability to export promotional forecast information to supply
chain systems, promotional details to advertisement execution
systems, and other details to other customer systems.
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Retailers use Promotion Planning & Optimization to
evaluate and forecast the likely results from incoming vendor
offers, as well as to plan private label and other promotions.
CP companies use Promotion Planning & Optimization to
maximize the effectiveness and efficiency of the trade funds
investments they make with retailers by developing plans that
are effective for both their brands and the retailers
product categories.
Markdown
Optimization (previously referred to as DemandTec
Markdown)
Markdown Optimization enables retailers to optimize plans and
prices for items they intend to remove from their assortments,
such as end-of-season items, discontinued product lines or
overstocked merchandise. 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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Rules management the ability to configure
markdown-specific rules; and
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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.
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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.
Deal
Management (previously referred to as DemandTec
TradePoint)
Deal Management enables retailers and CP companies to automate
and streamline the presentation, negotiation and reconciliation
of trade promotion offers. The Deal Management and Promotion
Planning & Optimization services are integrated such
that offers entered by CP companies are available for analysis,
optimization and forecasting by retailers, and both parties can
manage the status of those trade promotions in an interactive,
collaborative 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 deal center for both parties provides
a common platform for retailers and their trading partners to
present and negotiate the terms of trade promotion offers;
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Retailer item catalog-based entry provides
vendors use of retailer-specific item catalogs in order to
eliminate data-entry errors;
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Deal history archive provides version control
of offers, final contract terms, user activity and
communications in order to facilitate regulatory compliance and
dispute resolution; 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
vendors to submit promotion offers by selecting valid items from
the retailers item catalog, and Advanced Deal
Management (previously referred to as VendorPlus), 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 deal history archiving.
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 of its product
categories being fully operational within a matter of months.
The analytical services 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 POS and 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 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 science-based CDM software applies advanced statistical
analytics in the following areas:
Demand Modeling. Our CDM 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.
Consumer-Centric Merchandising and
Marketing. Individual consumers and particular
consumer 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
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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. These techniques 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,
stockpiling by consumers, equivalent volumes and discrete events
such as holidays and localized merchandising categories. Our
software also includes an activity-based costing model to
quantify and forecast 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. This information is provided by
retailers, CP companies and syndicated data providers on a daily
or weekly basis and usually includes all of a retailers
POS transactions. 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.
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
automatically to 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. Since our
customers access our software through a web browser, 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
MyDemandTec 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 release a new software version
approximately every six weeks. Since June 1, 2004, we have
released 31 new versions of our software, each one containing
significant new functionality. Releases are deployed
simultaneously to all of our customers. Prior to deployment,
each release undergoes multi-stage testing
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and substantial quality assurance, including build acceptance
tests, regression test cases, customer integration tests and
final system verification tests.
Our software is hosted in two data centers, one in
San Jose, California and one in Sacramento, California.
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 March 2008, 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.
Our
Customers
Today, our software as a service is used by over 165 customers
worldwide. The following table sets forth our twenty largest
retail customers based on annual contract value. Retailers
together accounted for approximately 90% of our revenue in
fiscal 2008, and Wal-Mart Stores, Inc., our largest customer in
fiscal 2008, accounted for approximately 12% of our revenue in
fiscal 2008.
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Advance Auto Parts
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Hannaford Bros. Co.
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Best Buy Stores, L.P.
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HEB Grocery Company, LP
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Big C Supercenter Public Company Limited
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Monoprix S.A.
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Big Y Foods, Inc.
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Office Depot, Inc.
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BI-LO LLC
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The Penn Traffic Company
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Casino Supermarkets/Hypermarkets
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RadioShack Corporation
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Companhia Brasileira de Distribuição
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Safeway Inc.
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Food Lion, LLC
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Target Corporation
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Giant Food Stores, LLC
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Toys R Us
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Giant Eagle, Inc.
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Wal-Mart Stores, Inc.
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The following table sets forth our ten largest CP customers
based on annual contract value:
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Acosta Sales and Marketing*
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General Mills Sales, Inc.
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Advantage Sales & Marketing LLC*
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Kraft Foods Global, Inc.
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Cadbury Schweppes
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Nestlé USA, Inc.
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ConAgra Foods, Inc.
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The Procter & Gamble Company
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Crossmark, Inc.*
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Tyson Foods, Inc.
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Sales agency that brokers items on behalf of CP companies. |
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Sales and
Marketing
We sell our CDM 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
employee sales directors located in the United Kingdom, France
and Japan.
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 and decision-makers in the
industries we serve.
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 ACNielsen, Inc.,
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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ACNielsen is a leading marketing information provider. In 2005,
we entered into an exclusive agreement with ACNielsen to deliver
consumer-centric merchandising solutions to fast moving consumer
goods (FMCG) retailers around the globe. Retailers utilizing
both our and ACNielsens 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 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 consumer segmentation;
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enhancing existing applications and developing new applications
that leverage our software platform to address a broader set of
CDM 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
located in San Carlos, 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 2009, but we may
terminate it 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 price.
As of February 29, 2008, we had 99 employees in our
science, product management and engineering groups located in
California, and an additional 56 Sonata engineers in China
dedicated to our projects. Our research and development expenses
were approximately $11.0 million in fiscal 2006,
$15.3 million in fiscal 2007 and $22.4 million in
fiscal 2008.
Competition
The market for CDM 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 targeting smaller retailers such
as KSS Group;
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statistical tool vendors such as SAS, Inc.;
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marketing information providers for the CP industry such as
ACNielsen 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;
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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 and
sales volume 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 CDM 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 CDM 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 CDM 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 12 issued patents and 15 patent applications
in the United States, and four issued patents and six patent
applications internationally. Of the 15 United States patent
applications, one has been allowed for issuance. 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
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.
15
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 29, 2008, we employed 251 full-time
employees, including 99 in research and development, 56 in
professional services, 35 in sales and marketing, 35 in general
and administrative, and 26 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 Circle Star Way, Suite 200
San Carlos, CA 94070
Attention: Investor Relations
16
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
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
$4.5 million, $1.5 million and $2.7 million in
fiscal 2008, fiscal 2007 and fiscal 2006, respectively. At
February 29, 2008, we had an accumulated deficit of
$72.4 million. We may continue to incur net losses in the
future. In addition, we expect our cost of revenue and operating
expenses to continue to increase as we implement initiatives to
continue to grow our business. We also expect to incur
additional general and administrative expenses associated with
being a public company. If our revenue does not increase to
offset these expected increases in cost of revenue and operating
expenses, we will not be profitable. You should not consider our
revenue growth in recent periods as indicative of our future
performance. In fact, in future periods our revenue could
decline. Accordingly, we cannot assure you that we will be able
to achieve or maintain profitability in the future.
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, particularly larger
retail customers;
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our ability to attract new customers, particularly larger retail
customers and consumer products customers;
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changes in our pricing policies or those of our competitors;
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outages and capacity constraints with our hosting partners;
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fluctuations in demand for our software;
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volatility in the sales of our solutions on a quarterly basis;
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reductions in customers budgets for information technology
purchases and delays in their purchasing cycles, particularly in
light of recent deteriorating 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; and
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the impact of a recession or any other adverse 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. Such variations in our sales, or delays in
signing or a failure to sign significant customer agreements,
may lead to significant fluctuations in our cash flows and
deferred revenue on a quarterly basis. If we experience a delay
in signing or a failure to sign a significant customer agreement
in any particular quarter, then our operating results for 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.
Many economists are now predicting that the United States
economy, and possibly the global economy, may enter into a
recession as a result of the credit crisis and a variety of
other factors. A downturn in the United States or global economy
could hurt our business in a number of ways, including longer
sales and renewal cycles, delays in signing or failing to sign
customer agreements or signing customer agreements at reduced
purchase levels. Any of these effects could have a material
adverse effect on our revenues and results of operations.
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 90% of our revenue in fiscal 2008. In each of
fiscal 2008 and 2007, our three largest customers accounted for
approximately 29% of our revenue. 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
retail customers. 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. If economic factors were to negatively impact the
retail market segment, it could reduce the amount that these
customers spend on information technology, and in particular CDM
software, 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 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 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, upon renewal
of these agreements, if any, 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 the past, some customers
have elected not to renew their agreements with us or have
renewed on less favorable terms. For instance, Sainsbury plc,
which accounted for 21.2% of our fiscal 2006 revenue, did not
renew its agreement when its term expired in the fourth quarter
of fiscal 2006. 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
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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.
Because
we recognize revenue ratably over the terms of our customer
agreements, the lack of renewals or the failure to enter into
new agreements will not immediately be reflected in our
operating results but will negatively affect revenue in future
quarters.
We recognize revenue ratably over the terms of our customer
agreements, which typically range from one to three years. 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.
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 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 in 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 or to
develop or acquire new software to address changing consumer
demand management 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 existing software and to introduce new software that
meet those needs. Any new software may not be introduced in a
timely or cost-effective manner and may not achieve market
acceptance, meet customer expectations, or generate revenue
sufficient to recoup the cost of development or acquisition of
such software. 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.
19
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, or POS, 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 data or we are unable
to obtain POS 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 experienced growth in recent periods. If we fail to manage
our growth effectively, we may be unable to execute our business
plan, maintain high levels of customer service or address
competitive challenges adequately.
We have substantially expanded our overall business, headcount
and operations in recent periods. For instance, our headcount
grew from 154 employees at February 28, 2006 to
198 employees at February 28, 2007, and to
251 employees at February 29, 2008, including an
increase in research and development headcount from 58 at
February 28, 2006 to 99 at February 29, 2008. In
addition, our revenue grew from $32.5 million in fiscal
2006 to $43.5 million in fiscal 2007, and to
$61.3 million in fiscal 2008. We will 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.
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 2008, we generated approximately 90% of
our revenue from sales to retail customers while we generated
approximately 10% of our revenue from sales to CP companies. In
fiscal 2007 we generated 94% of our revenue from sales to retail
customers
20
while we generated 6% 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 targeting
smaller retailers such as KSS Group, 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 ACNielsen, Inc. and Information Resources,
Inc., as well as business consulting firms such as
McKinsey & Company, Inc., Deloitte & Touche
LLP and Accenture LLP, which offer merchandising consulting
services and analyses. Because the market for CDM 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 two 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 two third-party data centers located in
California. We do not control the operation of either 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.
21
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 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 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
22
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 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
pay 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. The costs incurred in correcting any
material defects or errors in our software 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 increasingly will be susceptible to risks
associated with international operations.
As part of our strategy, we intend to expand our international
operations. We have limited experience operating in
international jurisdictions. In fiscal 2008 and fiscal 2007, 12%
and 6%, respectively, 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 will be
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
23
of February 29, 2008, in addition to our 125 employees
in our operations, customer support, science, product management
and engineering groups located in the United States, an
additional 56 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 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, in fiscal 2009, we must
perform 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. 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
will require 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 a timely manner, 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 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. Our independent registered public accounting firm
identified two material weaknesses in internal controls with
respect to the historical financial statements of TradePoint
Solutions, Inc. (TradePoint) relating to revenue
recognition and the availability of supporting documentation for
its financial statements. After we acquired TradePoint, we
integrated the accounting processes associated with TradePoint
into our financial and accounting systems. 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.
24
We may
expand through acquisitions of other companies, which may divert
our managements attention and result in unexpected
operating difficulties, increased costs and dilution to our
stockholders.
Our business strategy may include acquiring complementary
software, technologies or businesses. An acquisition 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, especially if
the key personnel of the acquired company choose not to work for
us, and we may have difficulty retaining the customers of any
acquired business due to changes in management and ownership.
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 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 or tax-related expenses. For
example, our acquisition of TradePoint in November 2006 resulted
in $321,000 and $968,000 of amortization of acquired intangible
assets in fiscal 2007 and fiscal 2008, respectively, and will
result in amortization of approximately $970,000 in fiscal 2009
and declining amounts for eight years thereafter.
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 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
25
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. For example, on December 16, 2004,
the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS,
No. 123R, Share-Based Payment.
SFAS No. 123R, which we adopted on March 1,
2006, requires that employee stock-based compensation be
measured based on its fair value on the grant date and treated
as an expense that is reflected in the financial statements over
the related service period. As a result, our operating results
for fiscal 2007 and fiscal 2008 include expenses that are not
reflected in prior periods, increasing our net loss and making
it more difficult for investors to evaluate our results of
operations for fiscal 2007 and fiscal 2008 relative to prior
periods.
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 the need to develop new software
or enhance our existing software, enhance our operating
infrastructure and acquire complementary businesses and
technologies. In April 2008, we secured a $15.0 million
revolving credit line with a financial institution that replaced
our existing $5.0 million credit line in order to increase
our access to available capital. 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 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.
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.
We
incur significantly increased 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 that we did not incur as a private company. The
Sarbanes-Oxley Act and rules subsequently implemented by the SEC
and the NASDAQ Global Market impose additional requirements on
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.
26
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:
|
|
|
|
|
variations in our operating results;
|
|
|
|
announcements of technological innovations, new products and
services, acquisitions, strategic alliances or significant
agreements by us or by our competitors;
|
|
|
|
recruitment or departure of key personnel;
|
|
|
|
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;
|
|
|
|
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, 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 the venture capital funds affiliated with
our former directors, 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.
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 affiliates have substantial control over us and will
be able to influence corporate matters.
At February 29, 2008, our directors, executive officers and
other affiliates beneficially owned, in the aggregate,
approximately 51.6% 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
27
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.
Our corporate headquarters and our primary facilities occupy
approximately 40,000 square feet in San Carlos,
California under a lease that expires in February 2010. In
addition, we lease approximately 9,200 square feet in
Pleasanton, California that expires in September 2010. We also
lease small sales and marketing offices in the United States,
Japan 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 foreseeable
expansion of our operations.
|
|
Item 3.
|
Legal
Proceedings
|
We are from time to time involved in legal matters that arise in
the normal course of business. Based on information currently
available, we do not believe that the ultimate resolution of any
current matters, individually or in the aggregate, will have a
material adverse effect on our business, financial condition or
results of operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
28
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 2008 Quarters Ended:
|
|
High
|
|
|
Low
|
|
|
August 31, 2007 (from August 9, 2007)
|
|
$
|
10.75
|
|
|
$
|
8.95
|
|
November 30, 2007
|
|
$
|
20.50
|
|
|
$
|
9.45
|
|
February 29, 2008
|
|
$
|
20.55
|
|
|
$
|
8.75
|
|
Stockholders of Record. As of
February 29, 2008, we had approximately 252 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 to finance future growth, and therefore do not
expect to pay cash dividends on our common stock in the
foreseeable future.
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.
29
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 29, 2008. The graph assumes that
$100 was invested in shares of our common stock, the Nasdaq
Composite Index and the Nasdaq Computer 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 Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/9/07
|
|
|
8/31/07
|
|
|
9/30/07
|
|
|
10/31/07
|
|
|
11/30/07
|
|
|
12/31/07
|
|
|
1/31/08
|
|
|
2/29/08
|
DemandTec, Inc.
|
|
|
$
|
100.00
|
|
|
|
$
|
95.90
|
|
|
|
$
|
136.50
|
|
|
|
$
|
180.60
|
|
|
|
$
|
164.10
|
|
|
|
$
|
192.90
|
|
|
|
$
|
128.30
|
|
|
|
$
|
101.50
|
|
Nasdaq Composite Index
|
|
|
|
100.00
|
|
|
|
|
102.02
|
|
|
|
|
106.15
|
|
|
|
|
112.35
|
|
|
|
|
104.56
|
|
|
|
|
104.22
|
|
|
|
|
93.91
|
|
|
|
|
89.26
|
|
Nasdaq Computer Index
|
|
|
|
100.00
|
|
|
|
|
102.64
|
|
|
|
|
107.26
|
|
|
|
|
119.53
|
|
|
|
|
110.49
|
|
|
|
|
113.35
|
|
|
|
|
95.91
|
|
|
|
|
88.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
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 fourth 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 7, 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.
On August 14, 2007 we used $3.0 million of our
proceeds to settle our credit facility. On August 16, 2007,
we used $10.2 million of our proceeds to settle our term
loan with Silicon Valley Bank and Gold Hill Venture Lending 03,
LP. 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.
As of February 29, 2008, approximately $44.4 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.
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).
31
|
|
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 statement of operations data for fiscal 2008,
2007 and 2006, and the selected consolidated balance sheet data
as of February 29, 2008 and February 28, 2007, 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 statement of operations data for fiscal 2005
and 2004 and the consolidated balance sheet data as of
February 28, 2006, February 28, 2005 and
February 29, 2004 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 29,
|
|
|
Year Ended February 28,
|
|
|
February 29,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
$
|
32,539
|
|
|
$
|
19,537
|
|
|
$
|
9,470
|
|
Cost of revenue(2)(3)
|
|
|
20,444
|
|
|
|
14,230
|
|
|
|
12,584
|
|
|
|
8,881
|
|
|
|
8,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,826
|
|
|
|
29,255
|
|
|
|
19,955
|
|
|
|
10,656
|
|
|
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(3)
|
|
|
22,445
|
|
|
|
15,340
|
|
|
|
11,021
|
|
|
|
9,737
|
|
|
|
8,667
|
|
Sales and marketing(3)
|
|
|
17,290
|
|
|
|
12,108
|
|
|
|
10,170
|
|
|
|
8,105
|
|
|
|
5,334
|
|
General and administrative(3)
|
|
|
6,292
|
|
|
|
2,673
|
|
|
|
2,388
|
|
|
|
1,798
|
|
|
|
1,358
|
|
Amortization of acquired intangible assets
|
|
|
360
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
46,387
|
|
|
|
30,239
|
|
|
|
23,579
|
|
|
|
19,640
|
|
|
|
15,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,561
|
)
|
|
|
(984
|
)
|
|
|
(3,624
|
)
|
|
|
(8,984
|
)
|
|
|
(14,394
|
)
|
Other income (expense), net
|
|
|
1,542
|
|
|
|
(480
|
)
|
|
|
850
|
|
|
|
(284
|
)
|
|
|
(481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes and cumulative effect of
change in accounting principle
|
|
|
(4,019
|
)
|
|
|
(1,464
|
)
|
|
|
(2,774
|
)
|
|
|
(9,268
|
)
|
|
|
(14,875
|
)
|
Provision for income taxes
|
|
|
455
|
|
|
|
52
|
|
|
|
14
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,788
|
)
|
|
|
(9,276
|
)
|
|
|
(14,875
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,734
|
)
|
|
|
(9,276
|
)
|
|
|
(14,875
|
)
|
Accretion to redemption value of preferred stock
|
|
|
13
|
|
|
|
32
|
|
|
|
32
|
|
|
|
32
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,487
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
(2,766
|
)
|
|
$
|
(9,308
|
)
|
|
$
|
(14,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.25
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(3.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
17,612
|
|
|
|
5,531
|
|
|
|
4,449
|
|
|
|
4,039
|
|
|
|
4,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
February 29,
|
|
|
As of February 28,
|
|
|
February 29,
|
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities(4)
|
|
$
|
75,889
|
|
|
$
|
25,478
|
|
|
$
|
14,771
|
|
|
$
|
11,594
|
|
|
$
|
6,762
|
|
Working capital (deficit)
|
|
|
44,739
|
|
|
|
(66
|
)
|
|
|
(10,731
|
)
|
|
|
(8,593
|
)
|
|
|
(2,227
|
)
|
Total assets
|
|
|
113,796
|
|
|
|
56,795
|
|
|
|
21,016
|
|
|
|
19,299
|
|
|
|
14,857
|
|
Deferred revenue
|
|
|
55,375
|
|
|
|
42,172
|
|
|
|
25,124
|
|
|
|
24,536
|
|
|
|
10,664
|
|
Debt
|
|
|
442
|
|
|
|
15,063
|
|
|
|
2,219
|
|
|
|
1,646
|
|
|
|
3,269
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
49,073
|
|
|
|
48,976
|
|
|
|
49,211
|
|
|
|
49,179
|
|
Stockholders equity (deficit)
|
|
|
50,297
|
|
|
|
(58,660
|
)
|
|
|
(62,529
|
)
|
|
|
(60,595
|
)
|
|
|
(51,379
|
)
|
|
|
|
(1) |
|
We acquired TradePoint in November 2006. See Note 3 to the
consolidated financial statements. |
|
(2) |
|
Includes amortization of acquired intangible assets of $608 in
fiscal 2008 and $203 in fiscal 2007. |
|
(3) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
February 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
1,261
|
|
|
$
|
41
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
1,824
|
|
|
|
62
|
|
|
|
6
|
|
|
|
14
|
|
|
|
21
|
|
Sales and marketing
|
|
|
1,367
|
|
|
|
74
|
|
|
|
1
|
|
|
|
11
|
|
|
|
18
|
|
General and administrative
|
|
|
883
|
|
|
|
156
|
|
|
|
64
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,335
|
|
|
$
|
333
|
|
|
$
|
71
|
|
|
$
|
31
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
Cash, cash equivalents, and marketable securities includes 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. |
33
|
|
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 1 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 2008,
for example, refers to our fiscal year ended February 29,
2008.
Overview
We are a leading provider of Consumer Demand Management, or CDM,
solutions. Our software services enable retailers and consumer
products, or CP, companies to define merchandising and marketing
strategies based on a scientific understanding of consumer
behavior and make actionable pricing, promotion and other
merchandising and marketing recommendations to achieve their
revenue, profitability and sales volume 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.
Our CDM solutions consist of one or more software services and
complementary analytical services. We offer our solutions
individually or as a suite of integrated applications. Our
software services are configurable to accommodate individual
customer needs. Our solutions for the retail industry include
DemandTec Lifecycle Price
Optimizationtm
and DemandTec Collaborative Promotion
Managementtm
for Retailers. Our solutions for the CP industry include
DemandTec Trade Planning &
Optimizationtm
and DemandTec Collaborative Promotion
Managementtm
for CP Companies. The DemandTec TradePoint
Networktm
underlies our solutions for the retail and CP industries. 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 $61.3 million in fiscal
2008. Our operating expenses have also increased significantly
during these same periods. We have incurred losses to date and
had an accumulated deficit of approximately $72.4 million
at February 29, 2008.
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. We recognize the
revenue we generate from each agreement ratably over the term of
the agreement. Our revenue growth depends on our attracting new
customers and renewing agreements with existing customers. Our
ability to maintain or increase our rate of growth 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.
Our agreements with retailers are large contracts that generally
are two to three years in length. The annual contract value for
each retail customer agreement is largely related to the size of
the retailer, and therefore can
34
fluctuate from period to period. Our agreements with CP
companies are principally one year in length and much smaller in
annual and aggregate contract value than our retail customer
contracts. A significant percentage of our new customer
agreements are entered into during the last month, weeks or even
days of each quarter-end.
We are headquartered in San Carlos, California, and have
sales and marketing offices in North America, Europe and Japan.
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 2008, approximately 88% of our revenue was
attributable to sales of our software to companies located in
the United States. In the future, we expect to derive a greater
percentage of total revenue from international customers by
expanding our operations, professional services and direct sales
force abroad, thereby incurring additional operating expenses
and capital expenditures. Our ability to achieve profitability
will also 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.
In November 2006, we acquired TradePoint Solutions, Inc., a
provider of on-demand promotion offer management software
linking manufacturers, sales agencies and retailers on one
platform. The aggregate purchase price was approximately
$9.8 million. In this acquisition, we purchased intangible
assets. We are amortizing these acquired intangible assets over
three to ten years on a straight-line basis, which, absent any
impairment, will result in annual amortization expense of
approximately $970,000 from the date of acquisition through
August 31, 2009 and declining amounts thereafter.
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.
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 recognize all revenue
ratably over the term of the agreement.
Our agreements are non-cancelable, 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 and for services other than implementation
and training services. We provide implementation services on a
time and materials basis and invoice our customers monthly in
arrears. To a lesser extent, we also provide implementation
services on a fixed fee basis and invoice our customers in
advance. We invoice in arrears for our training classes on
implementing and using our software on a per person, per class
basis. Our payment terms typically require our customers to pay
us within 30 days of the invoice date. For those billings
for which the service period has begun and is non-cancellable,
we include amounts invoiced in accounts receivable until
collected and in deferred revenue until recognized as revenue.
Cost of
Revenue and Operating Expenses
Cost
of Revenue
Cost of revenue includes expenses related to data center costs,
depreciation expenses associated with computer equipment and
software, compensation and related expenses of operations,
technical customer support and professional services personnel,
amortization of acquired intangible assets, and allocated
overhead expenses. We have contracts with two 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.
35
Amortization of acquired intangible assets relates to developed
technology acquired in the TradePoint acquisition. We are
amortizing the acquired developed technology over five years on
a straight-line basis. We allocate overhead costs, such as rent
and occupancy costs, employee benefits, information management
costs, and legal and other costs, to all departments based on
headcount. As a result, we include allocated overhead expenses
in cost of revenue and each operating expense category. We
expect that, in the future, cost of revenue will increase in
absolute dollars but decrease as a percentage of revenue as we
spread our data center infrastructure and personnel costs over a
larger customer base. In addition, we expect that stock-based
compensation charges included in cost of revenue will increase
in the near term but will vary over the long term depending on
the timing and magnitude of equity incentive grants.
Research
and Development
Research and development expenses include compensation and
related expenses 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. 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 addition,
we expect that stock-based compensation charges included in
research and development expenses will increase in the near term
but will vary over the long term depending on the timing and
magnitude of equity incentive grants. In the near term, we
expect that research and development expenses will increase in
absolute dollars and will remain relatively constant as a
percentage of revenue, and in the long term, we expect these
expenses to increase in absolute dollars and decrease as a
percentage of revenue.
Sales
and Marketing
Sales and marketing expenses include compensation and related
expenses 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. We expect that, in the future, sales and
marketing expenses will increase in absolute dollars as we hire
additional personnel, including additional direct sales
personnel internationally, and spend more on marketing programs,
but remain relatively constant or decrease slightly as a
percentage of revenue. In addition, we expect that stock-based
compensation charges included in sales and marketing expenses
will increase in the near term but will vary over the long term
depending on the timing and magnitude of equity incentive grants.
General
and Administrative
General and administrative expenses include compensation and
related expenses for our executive, finance and accounting,
human resources, legal and information management personnel,
third-party professional services fees, travel and entertainment
expenses, other corporate expenses and overhead not allocated to
cost of revenue, research and development expenses, or sales and
marketing expenses. Third-party professional services primarily
include outside legal, audit and tax-related consulting costs.
In the near term, we expect that general and administrative
expenses will increase in absolute dollars and as a percentage
of revenue primarily as a result of expenses associated with
being a public company. We expect that, in the future, general
and administrative expenses will increase in absolute dollars
but remain relatively constant or decrease slightly as a
percentage of revenue. We expect that stock-based compensation
charges included in general and administrative expenses will
vary over the long term depending on the timing and magnitude of
equity incentive grants.
Amortization
of Acquired Intangible Assets
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 customer
relationships, a trade name, and non-compete covenants. We are
amortizing acquired intangible assets over three to ten years on
a straight-line basis, which, absent any impairment, will result
in annual
36
amortization expense of approximately $360,000 in operating
expenses and $610,000 in cost of revenue through August 31,
2009 and declining amounts thereafter.
Other
Income (Expense), Net
Other income (expense), net includes interest income on our cash
balances, interest expense related to debt, and losses or gains
on conversions of
non-U.S. dollar
transactions into U.S. dollars. We have historically
invested a majority of our cash in money market funds. In fiscal
2006, fiscal 2007 and the first half of fiscal 2008, other
income (expense), net included the impact of recording our
outstanding redeemable convertible preferred stock warrants at
fair value under Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity, or
SFAS No. 150, as described below. In fiscal 2009, we
expect interest expense to decrease as a result of the
prepayment of outstanding debt in August 2007 and interest
income to increase as a result of having a full year of interest
income on our substantially higher cash and marketable
securities balances, largely generated by proceeds from our
initial public offering in August 2007. In fiscal 2009, however,
we expect rates of return on investments to decline given
economic changes in capital markets compared to fiscal 2008.
Thereafter, other income (expense), net will depend on a number
of factors, including our ability to generate cash from
operations, rates of return on our investments 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. There are also
areas in which managements judgment in selecting among
available accounting policy alternatives would not produce a
materially different result. 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.
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.
Because we provide our applications as a service, we follow the
provisions of the Securities and Exchange Commission, or SEC,
Staff Accounting Bulletin No. 104, Revenue
Recognition, and Emerging Issues Task Force, or EITF, Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21.
We recognize revenue when all of the following conditions are
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.
|
37
In applying the provisions of
EITF 00-21,
we have determined that we do not have objective and reliable
evidence of fair value for each element of our offering. As a
result, 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 customer.
Deferred
Commissions
We capitalize certain commission costs directly related to the
acquisition of a customer agreement in accordance with Financial
Accounting Standards Board, or FASB, Technical
Bulletin 90-1,
Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts. Our commission payments are
paid shortly after our receipt of the related customer payment.
The 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 $2.8 million, $1.5 million, and
$1.2 million in fiscal 2008, 2007, and 2006, respectively.
Stock-Based
Compensation
Accounting Treatment for Options prior to March 1,
2006. Prior to March 1, 2006, we accounted
for stock-based employee and director compensation arrangements
using the intrinsic-value method in accordance with the
provisions and related interpretations of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees, or APB No. 25, and elected to follow the
disclosure-only alternative prescribed by
SFAS No. 123, Accounting for Stock-Based
Compensation, or SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure.
APB No. 25 required companies granting options to record
deferred stock-based compensation equal to the difference, if
any, on the date of grant between the aggregate fair value of
the common stock underlying each option and the aggregate
exercise price of that option and to amortize that difference
over the vesting period of the option. In connection with the
preparation of our financial statements, we reviewed the
estimated fair value of our common stock during fiscal 2005 and
2006 in light of the expected completion of our initial public
offering and determined that all stock options had exercise
prices equal to the fair market value of our common stock on the
date of grant. As a result, in accordance with APB No. 25,
we did not record any stock-based compensation expense during
those periods.
Accounting Treatment for Options Beginning March 1,
2006. Effective March 1, 2006, we adopted
the fair value recognition provisions of SFAS No. 123
(Revised 2004), Share-Based Payment, or
SFAS No. 123R, using the prospective transition
method, which required us to apply the provisions of
SFAS No. 123R only to new awards granted, and to
awards modified, repurchased or cancelled, after the adoption
date. Under this transition method, we began recognizing
stock-based compensation expense under SFAS No. 123R
on March 1, 2006 based on the grant-date fair value of
stock options granted or modified on or after March 1,
2006. We use the Black-Scholes option pricing model to determine
the fair value of our stock option grants. This model requires
judgment in determining factors such as the fair value of our
common stock on the date of grant, the expected volatility of
the price of our common stock and the expected term of the
options. During fiscal 2007 and the three months ended
May 31, 2007, we obtained contemporaneous valuations at
various points in time from an unrelated third-party valuation
firm, or Valuation Firm, to assist us in the determination of
the fair value of our common stock. Our board of directors used
these contemporaneous valuations to establish the exercise
prices of stock options granted during these periods.
As a result of adopting SFAS No. 123R on March 1,
2006, our net loss for fiscal 2007 was $202,000 higher than if
we had continued to account for stock-based compensation under
APB No. 25. Basic and diluted net loss per common share for
fiscal 2007 were each $0.04 higher than if we had continued to
account for stock-based compensation under APB No. 25.
38
Determinations of Common Stock Fair Value Before November
2005. Prior to November 2005, we relied on our
board of directors to determine the fair value of our common
stock on the date of each grant. Given the absence of an active
market for our common stock, our board of directors determined
the estimated fair value of our common stock on the date of
grant based on a number of factors, including:
|
|
|
|
|
the price at which Series C convertible preferred stock was
sold by us to outside investors in arms-length transactions in
fiscal 2004 and the rights, preferences and privileges of our
convertible preferred stock relative to those of our common
stock;
|
|
|
|
important developments relating to our software;
|
|
|
|
our stage of development and business strategy;
|
|
|
|
the status of our efforts to build our management team;
|
|
|
|
the achievement of our financial plans;
|
|
|
|
the likelihood of achieving a liquidity event for our common
stock, such as an initial public offering or sale of our
company, given prevailing market conditions;
|
|
|
|
the state of the new issue market for similarly situated
technology companies;
|
|
|
|
the market prices of various publicly held technology
companies; and
|
|
|
|
the illiquidity of the private company securities granted.
|
Determinations of Common Stock Fair Value by Contemporaneous
Valuations Beginning in November 2005. In
November 2005, we first engaged the Valuation Firm to perform a
contemporaneous valuation of our common stock and utilized the
value that it determined in its report for options granted in
the remainder of fiscal 2006. The Valuation Firm has
subsequently performed, on a grant date by grant date basis, a
number of contemporaneous valuations of our common stock. In
each valuation, the Valuation Firm used a combination of two
different approaches to value our company the income
approach and the market multiple approach.
Under the income (or discounted cash flow) approach, estimated
debt-free annual cash flows based on our financial forecasts,
plus an estimated terminal company value, were discounted to
their present values to estimate the present value of the
company. The discount rate used was the expected rate of return
that would provide potential investors a sufficient rate of
return on their investment, and was calculated by estimating our
weighted average cost of capital. Our weighted average cost of
capital was computed by selecting market rates at the valuation
dates for debt and equity that were reflective of the risks
associated with an investment in our industry as estimated by
using comparable publicly traded companies.
Under the market multiple approach, we were compared to various
publicly traded companies in similar lines of business. The
market multiples of those comparable publicly traded companies
were calculated as of the applicable valuation date and were
then applied to our historical and forecasted financial results
at the applicable valuation date to estimate the value of the
company.
The initial valuation results, obtained under both the income
approach and the market multiple approach, were then
individually adjusted by applying a private company discount
rate to reflect the fact that our shares were not traded in an
efficient, liquid market (i.e., a lack-of-liquidity discount).
The average of the values derived under the income approach and
the market multiple approach, in each case, after application of
the private company discount, resulted in an initial estimated
value of our company. Our initial estimated value was then
subjected to a probability weighted expected return analysis to
determine the ultimate value of our common stock. The
probability weighted expected return method estimated our
ultimate value based upon our potential values, assuming four
possible outcomes (an initial public offering by the company, a
sale of the company, the companys remaining private, and a
liquidation of the company). The estimated value under each
outcome was then probability weighted, and the resulting
estimated weighted values per common share were summed to
determine the estimated final value per share of our common
stock.
Determining the fair value of our common stock requires complex
and subjective judgments. Our approach to valuation was based,
in part, on a discounted future cash flow approach that used our
estimates of revenue and costs, driven by assumed market growth
rates, as well as appropriate discount rates. These estimates
were consistent with
39
the plans and estimates that we used to manage the business.
There is inherent uncertainty in making these estimates.
In addition, we have performance-based awards outstanding that
vest only pursuant to certain performance and time-based vesting
criteria set by our Compensation Committee. We amortize the fair
value of those awards, net of estimated forfeitures, as
stock-based compensation expense over the vesting period of the
awards. 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 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. We measure the value of the RSUs at fair
value on the measurement date, based on the number of units
granted and the market value of our common stock on that 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.
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. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets, or SFAS No. 142, 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. Following the criteria
of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, and
SFAS No. 142, 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 acquired intangible assets at their respective estimated
fair values at the date of acquisition. Acquired intangible
assets are being amortized using the straight-line method over
their remaining estimated useful lives, which range from
approximately two to nine 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.
Impairment
of Long-Lived Assets
We evaluate the recoverability of our long-lived assets,
including acquired intangible assets and property and equipment,
in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal 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 measure recoverability of each asset
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 29, 2008.
40
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 29,
|
|
|
Year Ended February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
33
|
|
|
|
33
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
67
|
|
|
|
67
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
37
|
|
|
|
35
|
|
|
|
34
|
|
Sales and marketing
|
|
|
28
|
|
|
|
28
|
|
|
|
31
|
|
General and administrative
|
|
|
10
|
|
|
|
6
|
|
|
|
7
|
|
Amortization of acquired intangible assets
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
76
|
|
|
|
69
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9
|
)
|
|
|
(2
|
)
|
|
|
(11
|
)
|
Other income (expense), net
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes and cumulative effect of
change in accounting principle
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
(9
|
)
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(7
|
)%
|
|
|
(3
|
)%
|
|
|
(9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
$
|
32,539
|
|
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 revenue increased approximately $17.8 million, or 41%,
from fiscal 2007 revenue. The revenue increase was primarily due
to a $10.9 million increase in revenue from customers that
had contributed revenue in prior years, which we refer to as
existing customers. In addition, revenue from customers that did
not contribute any revenue in prior years, which we refer to as
new customers, increased $6.9 million from fiscal 2007. The
TradePoint acquisition in November 2006 had a full year impact
on revenue in fiscal 2008 compared to four months in fiscal
2007. We generated 90% of our revenue from retail companies in
fiscal 2008 and the remaining 10% from consumer products
manufacturers. In fiscal 2007 we generated 94% of our revenue
from retail companies and the remaining 6% from consumer
products manufacturers.
In fiscal 2008, revenue from customers located outside the
United States increased to 12% from 6% in fiscal 2007. The
increase resulted from increased revenue in existing
international locations as well as revenue generated in new
locations. In fiscal 2008, revenue from Wal-Mart Stores, Inc.
accounted for 11.7% of our total revenue. In
41
fiscal 2007, revenue from Safeway Inc. accounted for 11.8% of
our revenue. No other customer accounted for more than 10% of
our revenue in fiscal 2008 or fiscal 2007.
Fiscal 2007 Compared to Fiscal 2006. Fiscal
2007 revenue increased approximately $10.9 million, or 34%,
from fiscal 2006 revenue. The revenue increase was primarily due
to an $11.1 million increase in revenue from new customers.
This increase was offset by a $200,000 decline in revenue from
existing customers. Fiscal 2007 new customer revenue included
approximately $1.3 million related to our TradePoint
acquisition, and the balance resulted from new retail customers
purchasing our software. The fiscal 2007 decline in existing
customer revenue resulted from a decrease of approximately
$8.2 million in revenue related to two customers that did
not renew their agreements in the fourth quarter of fiscal 2006
offset by an increase in existing customer revenue of
approximately $8.0 million primarily associated with
customers that contributed to revenue throughout fiscal 2007 but
only for a portion of fiscal 2006. In fiscal 2007, we generated
94% of our revenue from retail companies and 6% from consumer
products manufacturers. In fiscal 2006, we generated 95% of our
revenue from retail companies and 3% from consumer products
manufacturers.
In fiscal 2007, revenue from customers located outside the
United States represented 6% of revenue as compared to 34% in
fiscal 2006. This fiscal 2007 decrease primarily related to the
two customers described above that did not renew their
agreements, each of which was located outside of the United
States. In fiscal 2007, revenue from Safeway Inc. accounted for
11.8% of our revenue. In fiscal 2006, revenue from Sainsbury
plc, Best Buy Stores, L.P., Safeway Inc. and RadioShack
Corporation accounted for 21.2%, 12.4%, 11.3% and 10.6% of our
revenue, respectively. No other customer accounted for more than
10% of our revenue in either of these periods. Sainsbury plc was
one of the two customers that did not renew their agreements in
the fourth quarter of fiscal 2006.
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
$
|
32,539
|
|
Cost of revenue
|
|
|
20,444
|
|
|
|
14,230
|
|
|
|
12,584
|
|
Gross profit
|
|
|
40,826
|
|
|
|
29,255
|
|
|
|
19,955
|
|
Gross margin
|
|
|
67
|
%
|
|
|
67
|
%
|
|
|
61
|
%
|
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 cost of revenue increased approximately $6.2 million,
or 44%, from fiscal 2007 cost of revenue. This increase was due
primarily to personnel expenses which increased approximately
$4.2 million, depreciation and amortization expense which
increased approximately $820,000, and allocated overhead
expenses which increased approximately $480,000. Personnel costs
increased in fiscal 2008 primarily as a result of increased
headcount and stock-based compensation expense. Professional
services, technical support and data center operations headcount
increased to 82 at February 29, 2008 from 57 at
February 28, 2007, and stock-based compensation increased
$1.2 million from fiscal 2007 as a result of new stock
option and performance stock unit, or PSU, grants.
Depreciation and amortization expense increased in fiscal 2008
largely due to an additional $405,000 of intangibles
amortization related to the TradePoint acquisition compared to
fiscal 2007 as we had twelve months of amortization in
fiscal 2008 compared to four months in fiscal 2007. The
remaining increase in depreciation and amortization expense was
due to purchases of computers, software and equipment. In fiscal
2008, capital expenditures associated with the expansion of data
infrastructure facilities were approximately $1.7 million.
Allocated overhead expenses increased as a result of increased
professional services headcount and an increase in total
allocated overhead costs.
Our gross margin remained unchanged at 67% in fiscal 2008 and
2007 as cost benefits from spreading our data center
infrastructure and personnel costs over a larger customer base
were partially offset by substantially higher stock-based
compensation and intangibles amortization expense.
42
Fiscal 2007 Compared to Fiscal 2006. Fiscal
2007 cost of revenue increased $1.6 million, or 13%, from
fiscal 2006 cost of revenue. This increase was due primarily to
personnel costs, which increased approximately
$2.4 million, and depreciation expense, which increased
approximately $450,000, offset by third-party data center costs,
which decreased approximately $1.7 million. In addition,
amortization of intangible assets acquired in the acquisition of
TradePoint Solution, Inc. increased cost of revenue by $203,000
in fiscal 2007.
Personnel costs increased in fiscal 2007 primarily as a result
of increased headcount and our use of third-party contractors in
our professional services organization. Professional services
headcount increased to 44 at February 28, 2007 from 37 at
February 28, 2006, and salary and bonus levels also
increased, causing most of the overall increase in payroll
expenses of approximately $1.7 million. During fiscal 2007,
we increased the use of third-party contractors in our customer
implementations, which resulted in third-party contractor
expense increasing approximately $600,000.
Depreciation expense increased and data center costs decreased
in fiscal 2007 due to completing our transition to a new
third-party data center provider in June 2006 where we became
responsible for the hardware and software platform used to
deliver our software to our customers. As a result, our
third-party data center costs decreased significantly while
depreciation expense increased because of the increase in
capital expenditures associated with the procurement of hardware
and software for the new third-party data center. In fiscal
2007, our capital expenditures were approximately
$2.3 million and were largely associated with our move to
the third-party data center.
Stock-based compensation expense included in cost of revenue was
approximately $41,000 in fiscal 2007. There was no stock-based
compensation included in cost of revenue in fiscal 2006.
Our gross margin increased to 67% in fiscal 2007 from 61% in
fiscal 2006, predominantly due to our ability to control our new
third-party data center costs and spread them across a larger
base of customers.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development
|
|
$
|
22,445
|
|
|
$
|
15,340
|
|
|
$
|
11,021
|
|
Percent of revenue
|
|
|
37
|
%
|
|
|
35
|
%
|
|
|
34
|
%
|
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 research and development expenses increased
$7.1 million, or 46%, from fiscal 2007 research and
development expenses, primarily due to increased personnel
costs, allocated overhead costs, and depreciation and
amortization expense. Personnel costs increased
$6.4 million as a result of increased headcount, increased
third-party development expenses, and stock-based compensation
expense. Research and development headcount increased to 99 at
February 29, 2008 from 89 at February 28, 2007. Of the
89 research and development personnel at February 28, 2007,
approximately 19 were added as a result of the TradePoint
acquisition in November 2006. Third-party development costs
increased approximately $475,000, primarily due to increased
off-shore development activities related to sustaining
engineering and quality assurance, which we have outsourced to
the off-shore engineering firm Sonata. Stock-based compensation
expense increased approximately $1.8 million from fiscal
2007 and allocated overhead expenses increased approximately
$640,000 as a result of increased research and development
headcount and an increase in total allocated overhead costs.
Fiscal 2007 Compared to Fiscal 2006. Fiscal
2007 research and development expenses increased
$4.3 million, or 39%, from fiscal 2006 research and
development expenses primarily due to increased personnel costs
and allocated overhead expenses. Personnel costs increased as a
result of increased headcount and third-party contract
development expenses. Research and development headcount
increased to 89 at February 28, 2007 from 58 at
February 28, 2006, which resulted in increased payroll
expenses of approximately $2.9 million. The headcount
increase in fiscal 2007 principally resulted from the TradePoint
acquisition. Third-party development expenses increased
approximately $1.0 million, primarily due to increased
off-shore development activities related to sustaining
engineering and quality assurance, which we have outsourced to
Sonata. Allocated overhead expenses increased approximately
$345,000 as a result of increased research and development
headcount. Stock-based
43
compensation expense included in research and development
expenses was approximately $62,000 in fiscal 2007 and $6,000 in
fiscal 2006.
Sales
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Sales and marketing
|
|
$
|
17,290
|
|
|
$
|
12,108
|
|
|
$
|
10,170
|
|
Percent of revenue
|
|
|
28
|
%
|
|
|
28
|
%
|
|
|
31
|
%
|
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 sales and marketing expenses increased $5.2 million,
or 43%, from fiscal 2007 sales and marketing expenses, primarily
as a result of increased personnel costs of approximately
$3.7 million, increased selling and marketing expenses of
approximately $615,000, and increased allocated overhead
expenses of approximately $630,000. Personnel costs increased
primarily due to an increase in headcount to 35 at
February 29, 2008 from 31 at February 28, 2007,
increased stock-based compensation expense of approximately
$1.3 million, increased commission expense of approximately
$1.4 million, and increased contract labor of approximately
$430,000 compared to fiscal 2007. Sales and marketing expenses
increased as a result of increased travel costs associated with
our expanding customer base, increased business development
expenses and marketing expenses associated with trade shows,
events and other promotional activities. Allocated overhead
expenses increased as a result of increased sales and marketing
headcount and an increase in total allocated overhead costs.
Fiscal 2007 Compared to Fiscal 2006. Fiscal
2007 sales and marketing expenses increased $1.9 million,
or 19%, from fiscal 2006 sales and marketing expenses, primarily
as a result of personnel costs, travel and entertainment
expenses, and marketing program expenses. Personnel costs
increased approximately $1.1 million due to higher
salaries, amortization of commission expenses, and benefit
expenses associated with our sales organization. Travel and
entertainment expenses increased approximately $330,000
associated with our expanding customer base. Marketing program
expenses increased approximately $280,000 due to increased
expenses associated with trade shows and events. Stock-based
compensation expense included in sales and marketing expenses
was $74,000 in fiscal 2007 and $1,000 in fiscal 2006.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative
|
|
$
|
6,292
|
|
|
$
|
2,673
|
|
|
$
|
2,388
|
|
Percent of revenue
|
|
|
10
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 general and administrative expenses increased approximately
$3.6 million, or 135%, over fiscal 2007 general and
administrative expenses, primarily due to increased personnel
costs associated with headcount and contract labor expenses.
General and administrative headcount increased to 35 at
February 29, 2008 from 21 at February 28, 2007
resulting in higher salary and benefit costs and higher
stock-based compensation expense, which increased approximately
$730,000 in fiscal 2008. Contract labor costs increased
approximately $890,000 in fiscal 2008 as a result of the
increased use of contract staff to assist with our IPO, systems
implementation, and Sarbanes-Oxley related control compliance.
Fiscal 2007 Compared to Fiscal 2006. Fiscal
2007 general and administrative expenses increased approximately
$285,000, or 12%, over fiscal 2006 general and administrative
expenses, primarily due to increased personnel costs associated
with headcount increases. Headcount increased to 21 at
February 28, 2007 from 17 at February 28, 2006
resulting in higher salary and benefit costs. Stock-based
compensation expense included in general and administrative
expenses was $156,000 and $64,000 in fiscal 2007 and fiscal
2006, respectively.
44
Amortization
of Acquired Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Amortization of acquired intangible assets
|
|
$
|
360
|
|
|
$
|
118
|
|
|
$
|
|
|
Percent of revenue
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
|
|
|
|
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 amortization of acquired intangible assets increased
$242,000 from fiscal 2007 due to the timing of the TradePoint
acquisition in November 2006. As a result, twelve months of
amortization expense are included in fiscal 2008 results
compared to four months in fiscal 2007. An additional $608,000
of amortization of acquired intangible assets was included in
fiscal 2008 cost of revenue compared to $203,000 in fiscal 2007.
Fiscal 2007 Compared to Fiscal 2006. Fiscal
2007 amortization of acquired intangible assets resulted from
our acquisition of TradePoint in November 2006. An additional
$203,000 of amortization of acquired intangible assets was
included in fiscal 2007 cost of revenue.
Other
Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
2,467
|
|
|
$
|
735
|
|
|
$
|
385
|
|
Interest expense
|
|
|
(1,216
|
)
|
|
|
(1,091
|
)
|
|
|
(194
|
)
|
Other income (expense)
|
|
|
291
|
|
|
|
(124
|
)
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
1,542
|
|
|
$
|
(480
|
)
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 other income (expense), net increased approximately
$2.0 million from fiscal 2007 other income (expense), net.
The increase was primarily due to interest income earned on
higher invested cash balances as a result of investing proceeds
from our initial public offering. Partially offsetting the
increased interest income, interest expense increased primarily
due to charges of $504,000 arising from the prepayment of debt
in the second quarter of fiscal 2008 partially offset by lower
interest expense as debt was outstanding for a shorter period of
time compared to fiscal 2007. In May 2006, we borrowed
$3.0 million under a new line of credit and in July 2006 we
entered into a new term loan for $10.0 million principally
to support our acquisition of TradePoint. We repaid the full
$13.0 million of debt in August 2007. As part of our
prepayment of the $13.0 million of debt, we incurred
charges of $504,000 for the accelerated recognition of expense
associated with the unamortized fair value of warrants, term
loan balloon interest and loan financing costs. Other income
(expense) increased $415,000 over fiscal 2007 primarily due to
foreign currency gains recognized in fiscal 2008.
Fiscal 2007 Compared to Fiscal 2006. Fiscal
2007 other income (expense), net decreased $1.3 million
from fiscal 2006 other income (expense), net. This decrease was
due to higher interest expense and other expense, offset by an
increase in interest income. Interest expense increased $897,000
because of an increased level of debt outstanding during 2007.
We increased our line of credit and bank loans to a total of
$13.0 million as of February 28, 2007 from
$2.2 million as of February 28, 2006, principally to
support our acquisition of TradePoint. Other income (expense)
decreased $783,000 in fiscal 2007 from fiscal 2006 because
fiscal 2006 included a one-time gain of $750,000 on the sale of
computers, software and equipment. In addition, our adoption of
FASB Staff Position
150-5
required us to classify our redeemable convertible preferred
stock warrants as liabilities and record the difference in fair
value each period as an expense to other income (expense).
Interest income increased $350,000 largely because of higher
invested cash balances resulting from cash generated from
operations as well as cash from our increased bank loans and
line of credit.
45
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Provision for income taxes
|
|
$
|
455
|
|
|
$
|
52
|
|
|
$
|
14
|
|
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 29, 2008, we had federal and state
net operating loss carryforwards of approximately
$54.1 million and $35.3 million, respectively, to
cover future taxable income.
We adopted Statement of Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, or FIN 48, on March 1, 2007, the
first day of fiscal 2008. FIN 48 is an interpretation of
FASB Statement 109, Accounting for Income Taxes, and it
seeks to reduce the diversity in practice associated with
certain aspects of measurement and recognition in accounting for
income taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position that an entity takes or
expects to take in a tax return. Additionally, FIN 48
provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods, disclosures, and
transition. Under FIN 48, an entity may only recognize or
continue to recognize tax positions that meet a more
likely than not threshold. In accordance with our
accounting policy, we recognize accrued interest and penalties
related to unrecognized tax benefits as a component of tax
expense. This policy did not change as a result of our adoption
of FIN 48 and there was no financial impact to our
consolidated statement of operations.
In fiscal 2008 we incurred income tax expense of $455,000
compared to $52,000 in fiscal 2007 and $14,000 in fiscal 2006.
The increase in income tax expense in fiscal 2008 was the result
of higher federal minimum taxes and state taxes, principally 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, as well as
increased foreign taxes associated with our foreign customers
and expanded foreign operations.
Liquidity
and Capital Resources
At February 29, 2008, our principal sources of liquidity
consisted of cash, cash equivalents, and marketable securities
of $75.9 million, accounts receivable, net of allowances of
$18.2 million, and available borrowing capacity under our
credit facility of $5.0 million. In April 2008 we entered
into a new revolving line of credit with a total borrowing
capacity of $15.0 million, reduced by an outstanding letter
of credit in the amount of $200,000 associated with the new
credit line, and terminated our existing $5.0 million
credit facility. At February 29, 2008 we had no auction
rate securities and no significant investments in asset-backed
securities. We have historically funded our operations primarily
through private sales of our convertible preferred stock,
customer payments for our software services and proceeds from
our bank loans and lines of credit. In August 2007, we 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 new $15.0 million revolving line of credit 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. At the filing date of this Annual Report on
Form 10-K,
we were in compliance with all loan covenants, had a $200,000
letter of credit outstanding and had no outstanding debt under
the line of credit.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
11,255
|
|
|
$
|
5,230
|
|
|
$
|
3,445
|
|
Net cash used in investing activities
|
|
|
(33,675
|
)
|
|
|
(7,944
|
)
|
|
|
(4,000
|
)
|
Net cash provided by financing activities
|
|
|
44,605
|
|
|
|
11,395
|
|
|
|
1,331
|
|
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 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 and rent payments. 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
existing customers, collect payments from our customers and
increase personnel to grow our business.
Fiscal 2008 Compared to Fiscal 2007. Net cash
provided by operating activities increased to $11.3 million
in fiscal 2008 from $5.2 million in fiscal 2007. The
increase was primarily due to the collections of increased
amounts billed to customers in advance of revenue recognition.
Accounts receivable increased $3.9 million compared to
$11.1 million in fiscal 2007, but was partially offset by
an increase in deferred revenue of $13.2 million compared
to $16.0 million in fiscal 2007. Our adjusted days sales
outstanding was 82 days at February 29, 2008 compared
to 54 days at February 28, 2007. In addition, our net
loss increased by $3.0 million but the higher net loss was
largely driven by non-cash charges such as stock-based
compensation, intangible amortization and depreciation that
together were $6.3 million higher in fiscal 2008 than in
fiscal 2007. Finally, those increases were partially offset by a
$2.3 million increase in amounts associated with prepaid
expenses and the payment of liabilities related to normal
operations.
Fiscal 2007 Compared to Fiscal 2006. Net cash
provided by operating activities increased to $5.2 million
in fiscal 2007 from $3.4 million in fiscal 2006. The
increase was primarily due to an increase in amounts received
from customers for services and a smaller net loss, partially
offset by a smaller increase in amounts owed to vendors and
employees.
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 2008 Compared to Fiscal 2007. Net cash
used in investing activities increased to $33.7 million in
fiscal 2008 from $7.9 million in fiscal 2007, primarily due
to an increase in net purchases of marketable securities of
$26.2 million as compared to fiscal 2007 as we invested the
proceeds from our IPO in August 2007. In addition, in fiscal
2008, we purchased $1.8 million more in property and
equipment than in fiscal 2007 as we continued to expand our data
centers to support a larger customer base and provided more
infrastructure to support company growth, including an
enterprise resource planning system. Offsetting this increase,
cash used in the acquisition of TradePoint decreased
$2.3 million compared to fiscal 2007.
Fiscal 2007 Compared to Fiscal 2006. Net cash
used in investing activities increased to $7.9 million in
fiscal 2007 from $4.0 million in fiscal 2006. The increase
was primarily due to the acquisition of TradePoint and increased
capital expenditures.
Financing
Activities
Our primary financing activities have been issuances of common
stock related to our IPO and issuances of convertible preferred
stock to private investors, our issuance and repayments of notes
payable, and advances taken and repayments made under our lines
of credit.
47
Fiscal 2008 Compared to Fiscal 2007. Net cash
provided by financing activities increased to $44.6 million
in fiscal 2008 from $11.4 million in fiscal 2007. The
$33.2 million increase in fiscal 2008 was primarily due to
net proceeds from our initial public offering of
$57.6 million offset by $13.4 million in payments of
notes payable and the repayment of advances under our line of
credit.
Fiscal 2007 Compared to Fiscal 2006. Net cash
provided by financing activities increased to $11.4 million
in fiscal 2007 from $1.3 million in fiscal 2006. The
increase was primarily due to the increased proceeds from notes
payable and increased proceeds from our line of credit,
partially offset by increased payments on our notes payable.
We believe that cash provided by operating activities, together
with our cash, cash equivalents, and marketable securities
balances at February 29, 2008, 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
additional indebtedness to continue to fund our operations over
the long term. Our future capital requirements will depend on
many factors, including our rate of revenue growth, our rate of
expansion of our workforce, the timing and extent of our
expansion into new markets, the timing of introductions of 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.
Contractual
Obligations
Our principal commitments consist of obligations under operating
leases for office space in the United States and abroad and
notes payable to former TradePoint shareholders. Our lease
agreements generally do not provide us with the option to renew.
Our future operating lease obligations will change if we enter
into new lease agreements upon the expiration of our existing
lease agreements and if we enter into new lease agreements to
expand our operations.
At February 29, 2008, the future minimum payments under
these commitments as well as payments due under our 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
|
|
$
|
2,251
|
|
|
$
|
1,031
|
|
|
$
|
1,220
|
|
|
$
|
|
|
|
$
|
|
|
Notes payable to former TradePoint shareholders
|
|
|
442
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
2,693
|
|
|
$
|
1,473
|
|
|
$
|
1,220
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141R, which establishes 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. SFAS No. 141R also
establishes principles around how goodwill acquired in a
business combination or a gain from a bargain purchase should be
recognized and measured, as well as provides guidelines on the
disclosure requirements on the nature and financial impact of
the business combination. SFAS No. 141R is effective
for fiscal years beginning after December 15, 2008, and we
will adopt it beginning in the first quarter of
48
fiscal 2010. We are currently evaluating the potential impact,
if any, of the adoption of SFAS No. 141R on our
consolidated financial statements.
In June 2007, the FASB ratified
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities, or
EITF 07-3.
EITF 07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed.
EITF 07-3
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007. We adopted
EITF 07-3
in March 2008, and there was no material impact on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115, or SFAS No. 159.
SFAS No. 159 allows measurement at fair value of
eligible financial assets and liabilities that are not otherwise
measured at fair value. If the fair value option for an eligible
item is elected, unrealized gains and losses on that item shall
be reported in current earnings at each subsequent reporting
date. SFAS No. 159 also establishes presentation and
disclosure requirements designed to draw comparisons between the
different measurement attributes a company elects for similar
types of assets and liabilities. SFAS No. 159 is
effective for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 in March 2008, and there
was no material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157, which
defines fair value, establishes a framework for measuring fair
value and requires additional disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, with early
adoption permitted. In November 2007, the FASB agreed to defer
the effective date of SFAS No. 157 for one year for
all nonfinancial assets and nonfinancial liabilities, except for
those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. Generally, the
provisions of this statement should be applied prospectively as
of the beginning of the fiscal year in which this statement is
initially applied. We adopted SFAS No. 157 in March
2008, and there was no material impact on our consolidated
financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Foreign
Currency Risk
As we fund our international operations, our cash and cash
equivalents could be affected by changes in exchange rates. To
date, the foreign currency exchange rate effect on our cash and
cash equivalents has not been significant.
Generally, our international sales agreements are denominated in
the country of origin currency, and therefore our revenue is
subject to foreign currency risk. Our operating expenses and
cash flows 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 operate
internationally and periodically enter into foreign exchange
forward contracts to reduce exposure in
non-United
States 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. As of February 29, 2008, we had no
outstanding foreign exchange forward contracts but may enter
into such contracts in the future as circumstances warrant. We
do not enter into derivative financial instruments for
speculative or trading purposes.
We apply SFAS No. 52, Foreign Currency
Translation, 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), net 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. Foreign currency gains
(losses) were approximately $397,000, $70,000 and $(89,000) for
fiscal 2008, 2007 and 2006, respectively.
49
Interest
Rate Sensitivity
We had unrestricted cash and cash equivalents totaling
$43.3 million at February 29, 2008. The majority of
these amounts were invested in money market funds. These
unrestricted cash and cash equivalents were held for working
capital purposes. Additionally, we had marketable securities of
$32.6 million at February 29, 2008. We do not enter
into investments for trading or speculative purposes and we do
not believe that we have any material exposure to changes in
their fair value as a result of changes in interest rates. A
change in interest rates of 50 basis points would result in
a change in interest income of approximately $303,000.
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.
50
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
DemandTec, Inc. Consolidated Financial Statements
|
|
|
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
57
|
|
51
Report of
Ernst & Young LLP,
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
DemandTec, Inc.
We have audited the accompanying consolidated balance sheets of
DemandTec, Inc., or the Company, as of
February 29, 2008 and February 28, 2007, 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 29, 2008. 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. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and 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 29, 2008
and February 28, 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended February 29, 2008, 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, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial
statements under the heading Income Taxes, on
March 1, 2007, the Company adopted the provisions of
Statement of Financial Accounting Standards Interpretation
No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109, and changed
its method of accounting for uncertain tax positions. Also, as
discussed in Note 1 to the consolidated financial
statements, under the heading Stock-Based
Compensation, the Company adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment,
effective March 1, 2006 using the prospective
transition method. As discussed in Note 2 to the
consolidated financial statements, the Company adopted Financial
Accounting Standards Board, or FASB, Staff Position
150-5,
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, during the year ended
February 28, 2006.
San Francisco, California
April 23, 2008
52
DemandTec,
Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,257
|
|
|
$
|
21,036
|
|
Short-term marketable securities
|
|
|
30,547
|
|
|
|
4,442
|
|
Accounts receivable, net of allowances of $160 and $62 as of
February 29, 2008 and February 28, 2007, respectively
|
|
|
18,227
|
|
|
|
14,338
|
|
Deferred commissions, current
|
|
|
1,795
|
|
|
|
2,167
|
|
Other current assets
|
|
|
2,366
|
|
|
|
1,035
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
96,192
|
|
|
|
43,018
|
|
Marketable securities, non-current
|
|
|
2,085
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
|
5,139
|
|
|
|
2,941
|
|
Restricted cash
|
|
|
200
|
|
|
|
200
|
|
Other assets, net
|
|
|
10,180
|
|
|
|
10,636
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
113,796
|
|
|
$
|
56,795
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
6,969
|
|
|
$
|
7,796
|
|
Deferred revenue, current
|
|
|
44,006
|
|
|
|
31,143
|
|
Notes payable, current
|
|
|
442
|
|
|
|
3,385
|
|
Other current liabilities
|
|
|
36
|
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
51,453
|
|
|
|
43,084
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
|
11,369
|
|
|
|
11,029
|
|
Note payable, non-current
|
|
|
|
|
|
|
8,678
|
|
Line of credit
|
|
|
|
|
|
|
3,000
|
|
Other long-term liabilities
|
|
|
677
|
|
|
|
591
|
|
Commitments and contingencies (see Note 6)
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
Series B, $0.001 par value No shares
authorized or outstanding at February 29, 2008. At
February 28, 2007, 5,219 shares authorized,
5,188 shares issued and outstanding, and aggregate
liquidation preference of $17,018
|
|
|
|
|
|
|
17,005
|
|
Series C, $0.001 par value No shares
authorized or outstanding at February 29, 2008. At
February 28, 2007, 6,299 shares authorized,
6,223 shares issued and outstanding, and aggregate
liquidation preference of $32,109
|
|
|
|
|
|
|
32,068
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
|
|
|
|
49,073
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
Convertible preferred stock, Series A, $0.001 par
value No shares authorized or outstanding at
February 29, 2008. At February 28, 2007,
2,100 shares authorized, 2,100 shares issued and
outstanding, and aggregate liquidation preference of $2,100
|
|
|
|
|
|
|
2,071
|
|
Common stock, $0.001 par value 175,000 and
100,000 shares authorized, respectively, and 26,452 and
6,455 shares issued and outstanding, respectively,
excluding 31 and 200 shares subject to repurchase,
respectively, as of February 29, 2008 and February 28,
2007
|
|
|
26
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
122,699
|
|
|
|
7,204
|
|
Accumulated deficit
|
|
|
(72,428
|
)
|
|
|
(67,941
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
50,297
|
|
|
|
(58,660
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders equity (deficit)
|
|
$
|
113,796
|
|
|
$
|
56,795
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
53
DemandTec,
Inc.
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
$
|
32,539
|
|
Cost of revenue(1)(2)
|
|
|
20,444
|
|
|
|
14,230
|
|
|
|
12,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
40,826
|
|
|
|
29,255
|
|
|
|
19,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(2)
|
|
|
22,445
|
|
|
|
15,340
|
|
|
|
11,021
|
|
Sales and marketing(2)
|
|
|
17,290
|
|
|
|
12,108
|
|
|
|
10,170
|
|
General and administrative(2)
|
|
|
6,292
|
|
|
|
2,673
|
|
|
|
2,388
|
|
Amortization of acquired intangible assets
|
|
|
360
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
46,387
|
|
|
|
30,239
|
|
|
|
23,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,561
|
)
|
|
|
(984
|
)
|
|
|
(3,624
|
)
|
Interest income
|
|
|
2,467
|
|
|
|
735
|
|
|
|
385
|
|
Interest expense
|
|
|
(1,216
|
)
|
|
|
(1,091
|
)
|
|
|
(194
|
)
|
Other income (expense), net
|
|
|
291
|
|
|
|
(124
|
)
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes and cumulative effect of
change in accounting principle
|
|
|
(4,019
|
)
|
|
|
(1,464
|
)
|
|
|
(2,774
|
)
|
Provision for income taxes
|
|
|
455
|
|
|
|
52
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,788
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,734
|
)
|
Accretion to redemption value of preferred stock
|
|
|
13
|
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,487
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.25
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
17,612
|
|
|
|
5,531
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes amortization of acquired intangible assets
|
|
$
|
608
|
|
|
$
|
203
|
|
|
$
|
|
|
(2) Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,261
|
|
|
$
|
41
|
|
|
$
|
|
|
Research and development
|
|
|
1,824
|
|
|
|
62
|
|
|
|
6
|
|
Sales and marketing
|
|
|
1,367
|
|
|
|
74
|
|
|
|
1
|
|
General and administrative
|
|
|
883
|
|
|
|
156
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,335
|
|
|
$
|
333
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
54
DemandTec,
Inc.
Consolidated
Statements of Redeemable Convertible Preferred Stock and
Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
From
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands)
|
|
|
Balance at February 28, 2005
|
|
|
11,399
|
|
|
$
|
49,211
|
|
|
|
2,100
|
|
|
$
|
2,071
|
|
|
|
4,102
|
|
|
$
|
4
|
|
|
$
|
1,083
|
|
|
$
|
(126
|
)
|
|
$
|
(63,627
|
)
|
|
$
|
(60,595
|
)
|
Issuance of common stock for cash upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
611
|
|
|
|
1
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
Vesting of common stock related to early exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
(26
|
)
|
Accrued interest on note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
Payment of note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
128
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Reclassification of preferred stock warrants to liabilities
|
|
|
|
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(32
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,734
|
)
|
|
|
(2,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2006
|
|
|
11,399
|
|
|
$
|
48,976
|
|
|
|
2,100
|
|
|
$
|
2,071
|
|
|
|
4,772
|
|
|
$
|
5
|
|
|
$
|
1,788
|
|
|
$
|
|
|
|
$
|
(66,393
|
)
|
|
$
|
(62,529
|
)
|
Issuance of Series C redeemable preferred stock
|
|
|
12
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for TradePoint acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,075
|
|
|
|
1
|
|
|
|
4,084
|
|
|
|
|
|
|
|
|
|
|
|
4,085
|
|
Issuance of common stock upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
454
|
|
|
|
|
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
626
|
|
Vesting of common stock related to early exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
Issuance of common stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
Employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(32
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,516
|
)
|
|
|
(1,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
55
DemandTec,
Inc
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,474
|
)
|
|
$
|
(1,516
|
)
|
|
$
|
(2,734
|
)
|
Adjustment to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,929
|
|
|
|
1,060
|
|
|
|
441
|
|
Stock-based compensation expense
|
|
|
5,335
|
|
|
|
333
|
|
|
|
71
|
|
Amortization of warrants issued in conjunction with debt
|
|
|
64
|
|
|
|
99
|
|
|
|
|
|
Revaluation of warrants to fair value
|
|
|
119
|
|
|
|
206
|
|
|
|
(53
|
)
|
Amortization of acquired intangible assets
|
|
|
968
|
|
|
|
321
|
|
|
|
|
|
Amortization of financing costs
|
|
|
93
|
|
|
|
125
|
|
|
|
25
|
|
Charge on early extinguishment of debt
|
|
|
504
|
|
|
|
|
|
|
|
|
|
Provision for accounts receivable
|
|
|
98
|
|
|
|
31
|
|
|
|
31
|
|
Other
|
|
|
(81
|
)
|
|
|
(64
|
)
|
|
|
91
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,927
|
)
|
|
|
(11,099
|
)
|
|
|
2,240
|
|
Prepaid expenses and other current assets
|
|
|
(1,149
|
)
|
|
|
(187
|
)
|
|
|
26
|
|
Deferred commissions
|
|
|
(317
|
)
|
|
|
(1,135
|
)
|
|
|
211
|
|
Other assets
|
|
|
(341
|
)
|
|
|
(113
|
)
|
|
|
(10
|
)
|
Accounts payable and accrued expenses
|
|
|
(2,161
|
)
|
|
|
515
|
|
|
|
2,876
|
|
Accrued compensation
|
|
|
1,392
|
|
|
|
700
|
|
|
|
(358
|
)
|
Deferred revenue
|
|
|
13,203
|
|
|
|
15,954
|
|
|
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
11,255
|
|
|
|
5,230
|
|
|
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of TradePoint, net of cash received
|
|
|
(1,358
|
)
|
|
|
(3,649
|
)
|
|
|
|
|
Purchases of property, equipment and leasehold improvements
|
|
|
(4,127
|
)
|
|
|
(2,336
|
)
|
|
|
(1,517
|
)
|
Purchases of marketable securities
|
|
|
(86,583
|
)
|
|
|
(6,200
|
)
|
|
|
(2,483
|
)
|
Maturities of marketable securities
|
|
|
58,393
|
|
|
|
4,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(33,675
|
)
|
|
|
(7,944
|
)
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of repurchases
|
|
|
58,005
|
|
|
|
633
|
|
|
|
631
|
|
Proceeds from issuance of convertible preferred stock
|
|
|
|
|
|
|
65
|
|
|
|
|
|
Payment of note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
128
|
|
Proceeds from advances on line of credit
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
Payments on lines of credit
|
|
|
(3,000
|
)
|
|
|
(84
|
)
|
|
|
(800
|
)
|
Proceeds from issuance of notes payable
|
|
|
|
|
|
|
10,000
|
|
|
|
3,000
|
|
Payments on notes payable
|
|
|
(10,400
|
)
|
|
|
(2,219
|
)
|
|
|
(1,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
44,605
|
|
|
|
11,395
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
36
|
|
|
|
67
|
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
22,221
|
|
|
|
8,748
|
|
|
|
694
|
|
Cash and cash equivalents at beginning of year
|
|
|
21,036
|
|
|
|
12,288
|
|
|
|
11,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
43,257
|
|
|
$
|
21,036
|
|
|
$
|
12,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
956
|
|
|
$
|
780
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
320
|
|
|
$
|
21
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with acquisition of TradePoint
|
|
$
|
|
|
|
$
|
4,085
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of preferred stock warrant liability to
additional paid-in capital
|
|
$
|
714
|
|
|
$
|
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants for common and preferred stock
|
|
$
|
|
|
|
$
|
343
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs on note payable
|
|
$
|
|
|
|
$
|
400
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to former TradePoint stockholders
|
|
$
|
|
|
|
$
|
1,800
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion to redemption value of preferred stock
|
|
$
|
13
|
|
|
$
|
32
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock and additional
paid-in capital
|
|
$
|
51,144
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
56
DemandTec,
Inc.
Notes to
Consolidated Financial Statements
|
|
1.
|
Business
Summary and Significant Accounting Policies
|
Description
of Business
DemandTec, Inc. was incorporated in Delaware on November 1,
1999. We are a leading provider of Consumer Demand Management,
or CDM, solutions. CDM is a software category based on
quantifying consumer demand and using that understanding to make
better merchandising and marketing decisions. Our software
services enable retailers and consumer products, or CP,
companies to define merchandising and marketing strategies based
on a scientific understanding of consumer behavior and make
actionable pricing, promotion and other merchandising and
marketing recommendations to achieve their revenue,
profitability and sales volume 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. We are headquartered in
San Carlos, California, with additional offices in North
America, Europe and Japan.
Reclassifications
Certain amounts previously reported within current assets and
other assets, net in the consolidated balance sheet at
February 28, 2007, and within operating activities in the
consolidated statements of cash flows for the years ended
February 28, 2007 and 2006, have been reclassified to
conform to the current year classification. The fiscal 2008
consolidated financial statements have been condensed to improve
the presentation of our financial information.
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.
Acquisition
of Business
On November 9, 2006, we acquired all of the issued and
outstanding capital stock of TradePoint Solutions, Inc., or
TradePoint, a provider of on-demand promotion offer management
software linking manufacturers, sales agencies and retailers on
one platform. The operating results of TradePoint have been
included in the accompanying consolidated financial statements
from the date of the acquisition. We accounted for the
TradePoint acquisition under the purchase method of accounting
whereby the excess of the purchase price over the fair value of
net tangible and identifiable intangible assets acquired was
recorded as goodwill.
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 2008, for example, refer to our fiscal year ended
February 29, 2008.
57
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Segments
Our chief operating decision maker is our chief executive
officer, who reviews financial information presented on a
consolidated basis, accompanied by information about revenue by
geographic region. Accordingly, in accordance with Statement of
Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information, or
SFAS No. 131, we have determined that we have a single
reporting segment and operating unit structure.
Use of
Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America. 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 the
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 acquired intangible assets and the recoverability
of long-lived assets. 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, and professional services,
as well as maintenance and customer support. Professional
services consist of implementation, training, data and modeling,
and analytical services related to our customers use of
our software.
Because we provide our software as a service, we follow the
provisions of the Securities and Exchange Commission Staff
Accounting Bulletin No. 104, Revenue
Recognition, and Emerging Issues Task Force, or EITF, Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or
EITF 00-21.
We recognize revenue when all of the following conditions are
met:
|
|
|
|
|
there is persuasive evidence of an arrangement;
|
|
|
|
the software as a 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.
|
In applying the provisions of
EITF 00-21,
we have determined that we do not have objective and reliable
evidence of fair value for each element of our offering. As a
result, 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 software is provided to the
customer.
Deferred
Revenue
Deferred revenue consists of billings or payments received in
advance of revenue recognition. For arrangements with terms of
over one year, we generally invoice our customers in annual
installments although certain multi-year agreements have had
certain fees for all years invoiced and paid upfront. 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.
58
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 $397,000, $70,000 and $(89,000) in fiscal 2008,
fiscal 2007 and fiscal 2006, respectively, in other income
(expense), net.
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.
In each of the last three years we had customers that accounted
for more than 10% of total revenue as follows: one customer in
fiscal 2008 at 11.7%; one customer in fiscal 2007 at 11.8%; and
four customers in fiscal 2006 at 21.2%, 12.4%, 11.3% and 10.6%.
As of February 29, 2008 and February 28, 2007,
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
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
53,641
|
|
|
$
|
40,656
|
|
|
$
|
21,500
|
|
International
|
|
|
7,629
|
|
|
|
2,829
|
|
|
|
11,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
$
|
32,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2008, three customers accounted for 51%
of our outstanding accounts receivable balance. As of
February 28, 2007, one customer accounted for 70% of our
outstanding accounts receivable balance.
The equipment hosting our software is located in two third-party
data center facilities located in California. 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, note payable and other accrued
expenses, approximate their fair values.
Redeemable
Convertible Preferred Stock Warrants
Prior to our IPO, freestanding warrants related to shares that
were redeemable were accounted for in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity, or SFAS No. 150. Under
SFAS No. 150, the freestanding warrants associated
with our redeemable convertible preferred stock were classified
as liabilities on our consolidated balance sheets and were
subject to re-measurement at each balance sheet date and through
the closing of our IPO. Any change in fair value
59
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
was recognized as a component of other income (expense), net.
Subsequent to the closing of our IPO and the associated
conversion of our outstanding convertible preferred stock to
common stock, the warrants were reclassified from liabilities to
common stock and additional paid-in capital and are no longer
subject to re-measurement. A total of $714,000 was reclassified
in this manner in our second quarter of fiscal 2008 ended
August 31, 2007. At February 29, 2008, there were no
warrants to purchase shares of common stock outstanding.
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.
Restricted
Cash
Restricted cash at February 29, 2008 and February 28,
2007 was comprised of a certificate of deposit under an
irrevocable standby letter of credit that was required as
collateral under an operating lease agreement and was scheduled
to automatically renew until the lease expires in February 2010.
In April 2008, the certificate of deposit expired and we secured
the letter of credit under our new line of credit we established
in April 2008, as described in Note 12. As such, the
restriction on cash has been removed subsequent to year-end.
Marketable
Securities
Our short-term marketable securities have a remaining maturity
at the time of purchase of greater than three months and less
than twelve months. Our noncurrent marketable securities have a
remaining maturity at the time of purchase of twelve months or
greater. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
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 29, 2008 and
February 28, 2007. At February 29, 2008 we had no
auction rate securities and no significant amount of
asset-backed 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 2008, 2007 or 2006.
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 in accordance with Financial
Accounting Standards Board, or FASB, Technical
Bulletin 90-1,
Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts. Our commission payments are
paid shortly after our receipt of the related customer payment.
The 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 costs
amortized to
60
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
sales and marketing expense were approximately
$2.8 million, $1.5 million and $1.2 million in
fiscal 2008, 2007 and 2006, respectively. At February 29,
2008 and February 28, 2007, deferred commission costs
totaled $2.6 million and $2.3 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 the 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, which in each case is three
years. 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. In accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets, or SFAS No. 142, 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. Following the criteria
of SFAS No. 131 and SFAS No. 142, 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 acquired intangible assets at
their respective estimated fair values at the date of
acquisition. Acquired intangible assets are being amortized
using the straight-line method over their remaining estimated
useful lives, which currently range from approximately two to
nine 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 observed no impairment indicators
through February 29, 2008.
Impairment
of Long-Lived Assets
We evaluate the recoverability of our long-lived assets,
including acquired intangible assets and property and equipment,
in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. We review
long-lived assets for possible impairment whenever events or
circumstances indicate that the carrying amount of these assets
may not be recoverable. We measure recoverability of assets by
comparison of their carrying amount to the future undiscounted
cash flows we expect the assets to generate. If we consider
assets to be impaired, we measure the amount of any impairment
as the difference between the carrying amount and the fair value
of the impaired assets. We observed no impairment indicators
through February 29, 2008.
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 $59,000, $68,000 and $140,000 for fiscal 2008,
2007 and 2006, respectively.
Research
and Development and Software Development Costs
We account for internal use software costs, including website
development costs, in accordance with the American Institute of
Certified Public Accountants Statement of Position
No. 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, or
SOP No. 98-1.
In accordance with
SOP No. 98-1,
we capitalize the costs to develop software for our website and
other internal uses 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. Costs
incurred prior to meeting these criteria, together with costs
incurred for training and maintenance, are expensed. Costs
incurred for upgrades and enhancements that are considered to be
probable to result in additional functionality are capitalized.
Any capitalized costs are amortized to expense on a
straight-line method over their expected lives. To date,
internal software
61
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 the 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
We account for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes, or SFAS No. 109. Under this method,
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 income statement in that period. In
subsequent periods, we may have higher income tax expenses.
In June 2006, the FASB issued Statement of Financial Accounting
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement
No. 109, or FIN 48. This interpretation prescribes
a recognition threshold and measurement attribute for tax
positions taken or expected to be taken in a tax return. This
interpretation also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The evaluation of a tax
position in accordance with this interpretation is a two-step
process. In the first step, recognition, we determine whether it
is more likely than not that a tax position will be sustained
upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position. The second step addresses measurement of a tax
position that meets the more-likely-than-not criteria. The tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement. Differences between tax positions taken in
a tax return and amounts recognized in the financial statements
will generally result in an increase in a liability for income
taxes payable or a reduction of an income tax refund receivable,
or a reduction in a deferred tax asset or an increase in a
deferred tax liability or both. Tax positions that previously
failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting
period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not
recognition threshold should be de-recognized in the first
subsequent financial reporting period in which that threshold is
no longer met. Amounts
62
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
accrued as a result of the adoption of FIN 48 on
March 1, 2007 have not been material. We have also
recognized a decrease in our deferred tax asset of
$3.0 million as of February 29, 2008. We have elected
to record interest and penalties recognized in accordance with
FIN 48 in the consolidated financial statements as income
taxes.
Stock-Based
Compensation
Prior to March 1, 2006, we accounted for stock-based
employee and director compensation under the provisions of
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, or APB No. 25, and
elected to follow the disclosure-only alternative prescribed by
SFAS No. 123, Accounting for Stock-Based
Compensation, or SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. Under
APB No. 25, stock-based employee and director compensation
arrangements were accounted for using the intrinsic-value method
based on the difference, if any, between the estimated fair
value of our common stock and the exercise price on the date of
grant.
Effective March 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (Revised 2004),
Share-Based Payment, or SFAS No. 123R, using
the prospective transition method, which requires us to apply
the provisions of SFAS No. 123R only to new awards
granted, and to awards modified, repurchased or cancelled, after
the adoption date. Under this transition method, stock-based
compensation expense recognized beginning March 1, 2006 is
based on the grant-date fair value of stock option awards
granted or modified on or after March 1, 2006.
As a result of adopting SFAS No. 123R, our net loss
for fiscal 2007 was $202,000 higher than if we had continued to
account for stock-based compensation under APB No. 25.
Basic and diluted net loss per common share for fiscal 2007 were
each $0.04 higher than if we had continued to account for
stock-based compensation under APB No. 25.
Options and warrants granted to consultants and other
non-employees are accounted for in accordance with EITF Issue
No. 96-18,
Accounting for Equity Investments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, or EITF
No. 96-18,
and are valued using the Black-Scholes method prescribed by
SFAS No. 123R. 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.
We compute net loss per share in accordance with
SFAS No. 128, Earnings per Share, or
SFAS No. 128. Under the provisions of
SFAS No. 128, basic net loss per share is computed
using the weighted average number of common shares outstanding
during the period except that it does not include unvested
common shares subject to repurchase. Diluted net loss per share
is computed using the weighted average number of common shares
and, if dilutive, potential common shares outstanding during the
period. Potential common shares consist of the incremental
common shares issuable upon the exercise of stock options or
warrants or upon the settlement of performance stock units
(PSUs), unvested common shares subject to repurchase or
cancellation and convertible preferred stock. The dilutive
effect of outstanding stock options, PSUs, and warrants is
reflected in diluted loss per share by application of the
treasury stock method. When dilutive, convertible preferred
stock is reflected on an if-converted basis from the date of
issuance.
Basic and diluted net loss per common share were the same for
each of fiscal 2008, 2007 and 2006, as the impact of all
potentially dilutive securities outstanding was anti-dilutive.
63
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table presents the calculation of historical basic
and diluted net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,487
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
(2,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
17,731
|
|
|
|
5,798
|
|
|
|
4,589
|
|
Less: Weighted average number of common shares subject to
repurchase
|
|
|
(119
|
)
|
|
|
(267
|
)
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in
computing basic and diluted net loss per common share
|
|
|
17,612
|
|
|
|
5,531
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.25
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following weighted average outstanding shares subject to
options to purchase common stock and PSUs, warrants to purchase
common stock, common stock subject to repurchase, convertible
preferred stock and shares subject to warrants to purchase
redeemable 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
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Shares subject to options to purchase common stock and PSUs
|
|
|
5,285
|
|
|
|
4,891
|
|
|
|
2,740
|
|
Shares subject to warrants to purchase common stock
|
|
|
98
|
|
|
|
45
|
|
|
|
|
|
Common stock subject to repurchase
|
|
|
119
|
|
|
|
267
|
|
|
|
140
|
|
Warrants (as converted basis)
|
|
|
|
|
|
|
104
|
|
|
|
69
|
|
Convertible preferred stock (if-converted basis until IPO)
|
|
|
5,911
|
|
|
|
13,506
|
|
|
|
13,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,413
|
|
|
|
18,813
|
|
|
|
16,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141R, which establishes 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. SFAS No. 141R also
establishes principles around how goodwill acquired in a
business combination or a gain from a bargain purchase should be
recognized and measured, as well as provides guidelines on the
disclosure requirements on the nature and financial impact of
the business combination. SFAS No. 141R is effective
for fiscal years beginning after December 15, 2008, and we
will adopt it beginning in the first quarter of fiscal 2010. We
are currently evaluating the potential impact, if any, of the
adoption of SFAS No. 141R on our consolidated
financial statements.
In June 2007, the FASB ratified
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities, or
EITF 07-3.
EITF 07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and
recognized as an expense as the goods are delivered or the
related services are performed.
EITF 07-3
is effective, on a prospective basis, for fiscal years beginning
after December 15, 2007. We adopted
EITF 07-3
in March 2008, and there was no material impact on our
consolidated financial statements.
64
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115, or SFAS No. 159.
SFAS No. 159 allows measurement at fair value of
eligible financial assets and liabilities that are not otherwise
measured at fair value. If the fair value option for an eligible
item is elected, unrealized gains and losses on that item shall
be reported in current earnings at each subsequent reporting
date. SFAS No. 159 also establishes presentation and
disclosure requirements designed to draw comparisons between the
different measurement attributes a company elects for similar
types of assets and liabilities. SFAS No. 159 is
effective for fiscal years beginning after November 15,
2007. We adopted SFAS No. 159 in March 2008, and there
was no material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157, which
defines fair value, establishes a framework for measuring fair
value and requires additional disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, with early
adoption permitted. In November 2007, the FASB agreed to defer
the effective date of SFAS No. 157 for one year for
all nonfinancial assets and nonfinancial liabilities, except for
those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. Generally, the
provisions of this statement should be applied prospectively as
of the beginning of the fiscal year in which this statement is
initially applied. We adopted SFAS No. 157 in March
2008, and there was no material impact on our consolidated
financial statements.
|
|
2.
|
Cumulative
Effect of Change in Accounting Principle
|
On June 29, 2005, the FASB issued Staff Position
150-5,
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, or
FSP 150-5,
which affirms that warrants of this type are subject to the
requirements of
FSP 150-5,
regardless of the timing of the redemption feature or the
redemption price. Therefore, under
FSP 150-5,
the freestanding warrants to purchase our convertible preferred
stock are liabilities that must be recorded at fair value. We
previously accounted for freestanding warrants to purchase our
convertible preferred stock under EITF
No. 96-18.
We adopted
FSP 150-5
and accounted for the cumulative effect of the change in
accounting principle as of the beginning of the third quarter of
fiscal 2006. For fiscal 2006, the impact of the change in
accounting principle was to decrease our net loss by $53,000, or
$0.01 per common share. The impact consisted of a $54,000
cumulative credit for adoption as of September 1, 2005,
reflecting the difference between the fair value of the warrants
as of that date and as of the date of issuance, and $1,000 of
expense that was recorded in other income (expense), net to
reflect the increase in fair value of the warrants between
September 1, 2005 and February 28, 2006.
|
|
3.
|
Acquisition
of TradePoint Solutions, Inc.
|
On November 9, 2006, we acquired all of the issued and
outstanding capital stock of TradePoint Solutions, Inc., or
TradePoint, a provider of on-demand promotion offer management
software linking manufacturers, sales agencies and retailers on
one platform. We did not assume any TradePoint outstanding
options or warrants. The operating results of TradePoint have
been included in the accompanying consolidated financial
statements from the date of the acquisition. We accounted for
the TradePoint acquisition under the purchase method of
accounting whereby the excess of the purchase price over the
fair value of net tangible and identifiable assets acquired was
recorded as goodwill. Intangible assets are being amortized on a
straight-line basis over a period of three to ten years.
The aggregate purchase price of TradePoint was
$9.8 million, consisting of 1.1 million shares of our
common stock valued at approximately $4.1 million based on
a third-party valuation of our common stock using a weighted
average income and market comparable approach, approximately
$3.7 million in cash, a $1.8 million promissory note
issued to TradePoint shareholders and $219,000 of acquisition
costs.
We allocated the purchase price to the estimated fair value of
the tangible and identifiable intangible assets acquired and
liabilities assumed based on their estimated fair values as of
the date of acquisition. We engaged Financial Strategies
Consulting Group, or FSCG, an unrelated third-party valuation
firm, to perform a valuation of
65
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
these acquired intangible assets. Based on this third-party
valuation, the excess of the purchase price over the fair value
of net tangible and identifiable intangible assets acquired was
recorded as goodwill. The purchase price was allocated as
follows (in thousands):
|
|
|
|
|
Current assets
|
|
$
|
808
|
|
Deferred tax asset
|
|
|
1,741
|
|
Property and equipment
|
|
|
76
|
|
Intangible assets:
|
|
|
|
|
Developed technology
|
|
|
3,050
|
|
Customer relationships
|
|
|
940
|
|
Non-compete covenants
|
|
|
500
|
|
Trade name
|
|
|
560
|
|
Goodwill
|
|
|
5,290
|
|
Current liabilities assumed
|
|
|
(1,387
|
)
|
Deferred tax liability
|
|
|
(1,741
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,837
|
|
|
|
|
|
|
Developed technology consisted of products that had reached
technological feasibility as of the acquisition date. A discount
factor was applied to the projected cash flows from the
technology in order to determine its present value. Goodwill
will not be amortized and is not tax deductible. As part of the
acquisition accounting, we established deferred income tax
liabilities to reflect the tax effect of the temporary
difference between the $5.1 million in fair value assigned
to intangible assets acquired and their tax bases. In addition,
we recognized a deferred tax asset of $1.7 million by
reducing $1.7 million of our valuation allowance as part of
our acquisition accounting.
The following pro forma financial information presents the
combined results of operations of DemandTec and TradePoint as if
the acquisition had occurred as of March 1, 2005. The table
below represents the combined results of DemandTecs fiscal
year ended February 28, 2007 and TradePoints interim
nine months ended September 30, 2006.
The unaudited pro forma financial information is based upon
available information and certain assumptions that management
believes to be reasonable. The unaudited pro forma financial
information is not intended to represent or be indicative of the
consolidated results of operations or financial condition of the
combined company that would have been reported had the
acquisition been completed as of the date presented and should
not be taken as representative of our future consolidated
results of operations or financial condition.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
|
2007
|
|
|
|
(In thousands except
|
|
|
|
per share data)
|
|
|
Revenue
|
|
$
|
45,230
|
|
Net loss attributable to common stockholders
|
|
|
(2,382
|
)
|
Basic and diluted net loss per common share
|
|
$
|
(0.38
|
)
|
66
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
4.
|
Goodwill
and Purchased Intangibles
|
The carrying values as of February 29, 2008 of amortizing
intangible assets acquired in the TradePoint acquisition are
summarized in the following table. These assets were included in
other assets, net on our balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Amortization
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Period (in Years)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Developed technology
|
|
$
|
3,050
|
|
|
$
|
(813
|
)
|
|
$
|
2,237
|
|
|
|
5
|
|
Customer relationships
|
|
|
940
|
|
|
|
(179
|
)
|
|
|
761
|
|
|
|
7
|
|
Non-compete covenants
|
|
|
500
|
|
|
|
(222
|
)
|
|
|
278
|
|
|
|
3
|
|
Trade name
|
|
|
560
|
|
|
|
(75
|
)
|
|
|
485
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,050
|
|
|
$
|
(1,289
|
)
|
|
$
|
3,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are being amortized on a straight-line basis
over a weighted average period of 5.7 years. Amortization
expense related to the acquired intangible assets was $968,000
during fiscal 2008, of which $360,000 was included as a separate
component of operating expenses and $608,000 was included in
cost of revenue in the accompanying consolidated statements of
operations. At February 29, 2008, $3.8 million of net
intangible assets were included in other assets, net on our
consolidated balance sheet.
Amortization expense related to the acquired intangible assets
was $321,000 during fiscal 2007, of which $118,000 was included
as a separate component of operating expenses and $203,000 was
included in cost of revenue in the accompanying consolidated
statements of operations. At February 28, 2007,
$4.7 million of intangible assets were included in other
assets, net on our consolidated balance sheet.
As of February 29, 2008, the estimated amortization expense
related to the acquired intangible assets for each of the next
five fiscal years and thereafter is summarized in the following
table (in thousands):
|
|
|
|
|
|
|
As of
|
|
|
|
February 29,
|
|
Fiscal Year
|
|
2008
|
|
|
2009
|
|
$
|
967
|
|
2010
|
|
|
911
|
|
2011
|
|
|
800
|
|
2012
|
|
|
597
|
|
2013
|
|
|
190
|
|
Thereafter
|
|
|
296
|
|
|
|
|
|
|
Total
|
|
$
|
3,761
|
|
|
|
|
|
|
We performed an annual impairment review of our goodwill during
the third quarter of fiscal 2008 with no impairment charges
recognized as a result of our review. We observed no impairment
indicators through the fourth quarter of fiscal 2008. At
February 29, 2008 and February 28, 2007, $5.3 million
of goodwill from our acquisition of TradePoint was included in
other assets, net on our consolidated balance sheets.
67
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
5.
|
Balance
Sheet Components
|
Marketable securities, at amortized cost, consisted of the
following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Certificates of deposit
|
|
$
|
|
|
|
$
|
550
|
|
Commercial paper
|
|
|
6,946
|
|
|
|
350
|
|
Corporate bonds
|
|
|
4,721
|
|
|
|
2,698
|
|
U.S. agency bonds
|
|
|
20,766
|
|
|
|
250
|
|
Asset backed securities
|
|
|
199
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,632
|
|
|
$
|
4,442
|
|
|
|
|
|
|
|
|
|
|
All investments are held to maturity, and thus, there were no
recognized gains or losses during the fiscal years presented.
The carrying amount of our marketable securities approximates
fair value and unrecognized gains and losses were insignificant.
We have the ability and intent to hold these investments to
maturity and do not believe any of the marketable securities are
impaired based on our evaluation of available evidence as of
February 29, 2008. We expect to receive all principal and
interest on all of our investment securities.
The following table summarizes the book value of our investments
in marketable debt securities classified by the contractual
maturity date of the security (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Due within one year
|
|
$
|
30,547
|
|
|
$
|
4,442
|
|
Due within one through two years
|
|
|
2,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,632
|
|
|
$
|
4,442
|
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements consisted of the
following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Computers, software and equipment
|
|
$
|
8,965
|
|
|
$
|
5,052
|
|
Furniture and fixtures
|
|
|
184
|
|
|
|
115
|
|
Leasehold improvements
|
|
|
244
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,393
|
|
|
|
5,266
|
|
Less: accumulated depreciation
|
|
|
(4,254
|
)
|
|
|
(2,325
|
)
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
$
|
5,139
|
|
|
$
|
2,941
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2006, we recognized a gain of $750,000 related to the
sale of various computers, software and equipment, which is
included in other income (expense), net.
68
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accounts payable
|
|
$
|
1,304
|
|
|
$
|
2,652
|
|
Accrued professional services
|
|
|
569
|
|
|
|
1,159
|
|
Income taxes payable
|
|
|
158
|
|
|
|
40
|
|
Other accrued liabilities
|
|
|
290
|
|
|
|
687
|
|
Accrued compensation
|
|
|
4,648
|
|
|
|
3,258
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
6,969
|
|
|
$
|
7,796
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Commitments
and Contingencies
|
We lease office space in various locations throughout the United
States, Europe, and Japan. Total rent expense was $935,000,
$783,000 and $794,000 in fiscal 2008, 2007 and 2006,
respectively.
Future minimum lease commitments due under noncancelable
operating leases with an initial term greater than one year were
as follows (in thousands):
|
|
|
|
|
|
|
As of
|
|
|
|
February 29,
|
|
Fiscal Year
|
|
2008
|
|
|
2009
|
|
$
|
1,031
|
|
2010
|
|
|
1,064
|
|
2011
|
|
|
156
|
|
|
|
|
|
|
Total
|
|
$
|
2,251
|
|
|
|
|
|
|
At February 29, 2008 we had outstanding an irrevocable
letter of credit in connection with a noncancelable operating
lease commitment which we issued in favor of our landlord, for
an aggregate amount of $200,000 that would automatically renew
until the lease expires in February 2010. To secure the letter
of credit, we had a $200,000 certificate of deposit with a
financial institution, which was recorded as restricted cash on
the accompanying balance sheets. In April 2008, the certificate
of deposit expired and we secured the letter of credit under the
new line of credit we established in April 2008, as described in
Note 7. As such, the restriction on cash has been removed
subsequent to year-end.
Legal
Proceedings
We are from time to time involved in legal matters that arise in
the normal course of business. Based on information currently
available, we do not believe that the ultimate resolution of any
current matters, individually or in the aggregate, will have a
material adverse effect on our business, financial condition or
results of operations.
In May 2005, we entered into a $3.0 million term loan
facility, or the May 2005 Term Loan, that accrued interest at a
fixed rate of 7.20%. Principal and interest payments of
approximately $92,000 were due monthly over 36 months. The
$2.2 million outstanding balance of this term loan was
repaid when we entered into the May 2006 Credit Line as
described below.
In May 2006, we entered into a revolving line of credit, or May
2006 Credit Line, with a financial institution. Amounts
available for borrowing were limited to the lesser of
(i) $5.0 million or (ii) $3.0 million plus
80% of
69
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
eligible accounts receivable. Borrowings under this line of
credit accrued interest at the greater of (i) the prime
rate plus 0.5% or (ii) 8.0%. During the first year of this
line of credit, minimum monthly interest was charged based on
the higher of interest based on outstanding borrowings or the
interest applicable to borrowings of $2.0 million. The line
of credit was collateralized by all of our assets and required
us to comply with certain covenants, including limitations on
indebtedness and restrictions on dividend distributions. We also
guaranteed and pledged to the financial institution a security
interest in all of our intellectual property. As of
February 28, 2007, $3.0 million was outstanding under
this line of credit. In August 2007, we paid off the entire
outstanding balance of $3.0 million. There was no
prepayment penalty and no minimum interest due when the line of
credit was closed in April 2008.
In connection with entering into the May 2006 Credit Line, we
issued the financial institution a warrant to purchase up to
37,500 shares of our Series C convertible preferred
stock at an exercise price of $5.16 per share. The warrant was
nonforfeitable, fully vested and exercisable upon grant, and had
an expiration date in May 2016. The fair value of the warrant
was recorded as debt issuance costs and was being amortized to
interest expense using the effective interest method over the
loan term. Upon the completion of our IPO, the warrant converted
into a warrant to purchase common stock. In December 2007, the
financial institution exercised its warrant, resulting in our
issuance of 24,642 shares of common stock after netting
12,858 shares in settlement of the exercise price of $5.16
per share.
In July 2006, we entered into a
48-month
$10.0 million term loan, or the July 2006 Term Loan, with
two financial institutions at a fixed interest rate of 9.5%.
During the first twelve month interest-only period, interest was
payable monthly. Following the interest-only period, we were
obligated to pay principal and interest in equal monthly
installments over the remaining 36 months. The final
scheduled payment included a balloon interest payment of
$400,000. The balloon interest payment was accounted for as a
deferred charge in other assets and was being amortized to
interest expense over the term of the loan. In August 2007, we
paid off the remaining term loan balance, without penalty,
including the full $400,000 balloon interest payment. The term
loan facility is no longer available.
In connection with the July 2006 Term Loan, we issued to each of
the two financial institutions a warrant to purchase up to
37,500 shares of our common stock (for an aggregate of
75,000 shares) at an exercise price of $2.70 per share.
Each warrant was nonforfeitable, fully vested and exercisable
upon grant, and had an expiration date in July 2016. The fair
value of the warrants was recorded to debt discount costs and
was being amortized to interest expense using the effective
interest method over the loan term. In August 2007, one of the
financial institutions exercised its warrant, resulting in our
issuance of 26,797 shares of common stock after netting
10,703 shares in settlement of the exercise price of $2.70
per share. In December 2007, the other financial institution
exercised its warrant, resulting in our issuance of
30,772 shares of common stock after netting
6,728 shares in settlement of the exercise price of $2.70
per share.
In addition to the warrants issued in connection with debt in
fiscal 2007, in October 2001 we granted to a financial
institution a warrant to purchase up to 30,488 shares of
our Series B redeemable convertible preferred stock, at an
exercise price of $3.28 per share, in connection with a loan for
equipment financing. The warrant was nonforfeitable, fully
vested and exercisable upon grant, and had an expiration date in
October 2008. In March 2002, we granted to the same financial
institution an additional warrant to purchase up to
38,759 shares of our Series C redeemable convertible
preferred stock, at an exercise price of $5.16 per share, in
connection with a loan for equipment financing. The warrant was
nonforfeitable, fully vested and exercisable upon grant, and had
an expiration date in March 2012. Upon the completion of our
IPO, the warrants converted into warrants to purchase common
stock. In December 2007, the financial institution exercised one
of its warrants, resulting in our issuance of 25,470 shares
of common stock after netting 13,289 shares in settlement
of the exercise price of $5.16 per share. In January 2008, the
financial institution exercised the remaining warrant, resulting
in our issuance of 22,455 shares of common stock after
netting 8,033 shares in settlement of the exercise price of
$3.28 per share.
Under FSP
No. 150-5,
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
70
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
income (expense), net 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 no longer 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,
$224,000 in fiscal 2007 and $25,000 in fiscal 2006. 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.
In connection with our TradePoint acquisition, a
$1.8 million promissory note was issued to former
TradePoint shareholders. At February 29, 2008, $442,000
remained outstanding and payable thereunder.
|
|
8.
|
Stockholders
Equity (Deficit)
|
Early
Exercise of Employee Options
Shares purchased by employees pursuant to the early exercise of
stock options are not deemed to be outstanding for accounting
purposes until those shares vest. Therefore, cash received in
exchange for exercised and unvested shares related to stock
options granted is recorded as a liability for early exercise of
stock options on the accompanying consolidated balance sheets,
and will be transferred into common stock and additional paid-in
capital as the shares vest. As of February 29, 2008, there
were 31,116 shares outstanding that remained subject to
repurchase, classified as approximately $36,000 and $12,000 in
current and long-term liabilities, respectively. As of
February 28, 2007, there were 199,931 shares
outstanding that remained subject to repurchase, classified as
approximately $168,000 and $130,000 in current and long-term
liabilities, respectively.
Equity
Incentive Plans and Employee Stock Purchase Plan
1999
Equity Incentive Plan
In December 1999, our Board of Directors adopted the 1999 Equity
Incentive Plan (the 1999 Plan). The 1999 Plan, which
expired on August 8, 2007, provided for incentive or
nonstatutory stock options, stock bonuses and rights to acquire
restricted stock to be granted to employees, outside directors
and consultants. As of March 1, 2007, 317,655 shares
remained authorized for issuance under the 1999 Plan. In March
and May 2007, we reserved an additional 250,000 and
425,000 shares, respectively, for grant under the 1999
Plan. As of February 29, 2008, options to purchase
6,801,247 shares of common stock remained outstanding under
the 1999 Plan. Such options are exercisable as determined by our
Board of Directors and as specified in each option agreement.
Options granted under the 1999 Plan vest over a period of time
as determined by our Board of Directors, generally four years,
and expire no more than ten years from the date of grant.
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 shall automatically increase 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. On
March 1, 2008, an additional 1,324,136 shares were
reserved for issuance under the 2007 Plan.
71
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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.
Performance Stock Units. Performance stock
units (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.
We measure the value of the PSUs at fair value on the
measurement date, based on the number of units granted and the
market value of our common stock on that date. We amortize the
fair value, net of estimated forfeitures, as stock-based
compensation expense on a straight-line basis over the vesting
period of the award (or, if applicable, over the vesting period
of the tranche, viewing each tranche as a separate award).
SFAS No. 123R requires compensation expense to be
recognized on the PSUs if it is probable that the performance
and service conditions will be achieved. We evaluate the
probability of meeting the performance criteria at the end of
each reporting period to determine whether to record
compensation expense.
On August 17, 2007, our Compensation Committee granted
1,000,000 PSUs to our executive officers and other key
employees. These PSU grants are divided into two tranches. The
first tranche consists of 30% of each grant, and relates to
fiscal 2008 company performance and subsequent individual
service requirements. The second tranche consists of the
remaining 70% of each grant, and relates to fiscal
2009 company performance and subsequent individual service
requirements. These PSUs may vest over a period of up to
29 months. As of February 29, 2008, there were
913,000 shares subject to outstanding PSUs.
At the measurement date, the fair value of the PSUs granted on
August 17, 2007 was approximately $10.0 million, which
is to be recognized over the vesting lives of the awards. We
have assessed that it is probable that the company performance
targets will be achieved and are recording compensation expense
over the anticipated vesting periods of the awards, net of an
assumed forfeiture rate. At each reporting period, we reassess
the probability of achieving the performance targets and the
service periods required for vesting. The estimation of whether
the performance targets and service periods will be achieved
requires judgment. To the extent actual results or updated
estimates differ from our current estimates, either (a) the
cumulative effect on current and prior periods of those changes
will be recorded in the period those estimates are revised, or
(b) the change in estimate will be applied prospectively,
depending on whether the change affects the estimate of total
compensation cost to be recognized or merely affects the period
over which the compensation cost will be recognized. The
ultimate number of shares to be issued upon settlement of the
PSUs, and the related compensation expense to be recognized,
will be based on actual achievement of the performance targets
and service requirements. In fiscal 2008, we recognized
stock-based compensation expense associated with the PSUs of
approximately $3.0 million.
Restricted Stock Units. Restricted stock units
(RSUs) 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 time-based vesting criteria
set by our Compensation Committee. We measure the value of the
RSUs at fair value on the measurement date, based on the number
of units granted and the market value of our common stock on
that date. We amortize the fair value, net of estimated
forfeitures, as stock-based compensation expense on a
straight-line basis over the vesting period.
SFAS No. 123R requires compensation expense to be
recognized with respect to the RSUs if it is probable that the
service condition will be achieved. We evaluate the probability
of the service condition being met at the end of each reporting
period to determine whether to accrue compensation expense. No
RSUs were granted in fiscal 2008.
72
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
A summary of activity under our 1999 and 2007 Equity Incentive
Plans follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
Shares
|
|
|
Shares Subject
|
|
|
Exercise
|
|
|
|
Available
|
|
|
to Options
|
|
|
Price
|
|
|
|
for Grant
|
|
|
Outstanding
|
|
|
per Share
|
|
|
|
(Shares in thousands)
|
|
|
Balance at February 28, 2005
|
|
|
1,158
|
|
|
|
4,956
|
|
|
$
|
1.00
|
|
Additional shares authorized
|
|
|
250
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,170
|
)
|
|
|
1,170
|
|
|
|
1.98
|
|
Options exercised
|
|
|
|
|
|
|
(1,004
|
)
|
|
|
1.10
|
|
Options canceled/forfeited
|
|
|
231
|
|
|
|
(231
|
)
|
|
|
1.18
|
|
Shares repurchased
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2006
|
|
|
476
|
|
|
|
4,891
|
|
|
|
1.22
|
|
Additional shares authorized
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,926
|
)
|
|
|
1,926
|
|
|
|
3.68
|
|
Options exercised
|
|
|
|
|
|
|
(386
|
)
|
|
|
1.08
|
|
Options canceled/forfeited
|
|
|
255
|
|
|
|
(255
|
)
|
|
|
1.54
|
|
Shares repurchased
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Options/units cancelled/forfeited
|
|
|
448
|
|
|
|
(361
|
)
|
|
|
6.68
|
|
Shares repurchased
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2008
|
|
|
1,480
|
|
|
|
7,409
|
|
|
$
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning options
outstanding at February 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Shares
|
|
|
Exercise
|
|
|
|
Subject to
|
|
|
Contractual
|
|
|
Price per
|
|
|
Subject to
|
|
|
Price per
|
|
Range of Exercise Prices
|
|
Options
|
|
|
Term
|
|
|
Share
|
|
|
Options
|
|
|
Share
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
$ 0.10 - $1.00
|
|
|
2,157
|
|
|
|
4.67
|
|
|
$
|
0.86
|
|
|
|
2,143
|
|
|
$
|
0.86
|
|
1.30 - 1.90
|
|
|
1,530
|
|
|
|
6.82
|
|
|
|
1.38
|
|
|
|
1,152
|
|
|
|
1.36
|
|
2.50 - 5.40
|
|
|
2,146
|
|
|
|
8.25
|
|
|
|
3.45
|
|
|
|
835
|
|
|
|
3.27
|
|
6.70 - 11.00
|
|
|
1,347
|
|
|
|
8.44
|
|
|
|
9.55
|
|
|
|
165
|
|
|
|
9.44
|
|
13.60 - 19.67
|
|
|
229
|
|
|
|
6.72
|
|
|
|
16.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,409
|
|
|
|
6.90
|
|
|
$
|
3.80
|
|
|
|
4,295
|
|
|
$
|
1.79
|
|
At February 29, 2008, the aggregate intrinsic value of
currently exercisable options was approximately
$36.0 million and the weighted average remaining
contractual term of those options was approximately
6.0 years.
73
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The aggregate intrinsic value was calculated as the difference
between the exercise price of the underlying stock option awards
and the closing market value of our common stock on
February 29, 2008 of $10.15 per share.
The following table summarizes information concerning vested and
expected to vest options outstanding (dollars in thousands,
except per share amounts):
|
|
|
|
|
|
|
As of
|
|
|
|
February 29,
|
|
|
|
2008
|
|
|
Number of vested and
expected-to-vest
options outstanding
|
|
|
7,003
|
|
Weighted average exercise price per share
|
|
$
|
3.66
|
|
Aggregate intrinsic value
|
|
$
|
47,443
|
|
Weighted average remaining contractual term (in years)
|
|
|
6.8
|
|
The total fair value of options vested during fiscal 2008 and
fiscal 2007 was $1.5 million and $114,000, respectively.
The intrinsic value of options exercised during fiscal 2008,
2007 and 2006 was $1.9 million, $705,000 and $700,000,
respectively.
2007
Employee Stock Purchase Plan
In May 2007 our Board of Directors adopted, and in July 2007 our
stockholders approved, the 2007 Employee Stock Purchase Plan
(the ESPP). Under the ESPP, eligible employees may
purchase shares of common stock at a price per share equal to
85% of the lesser of the fair market values of our common stock
as of the beginning and the end of the applicable offering
period. The initial offering period commenced on August 8,
2007 and ended on April 15, 2008; each subsequent offering
period will last for six months. We initially reserved
500,000 shares of our common stock for issuance under the
ESPP. 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 ESPP shall automatically
increase by a number equal to the lowest of a) 1% of the
total number of shares of common stock then outstanding,
b) 375,000 shares, or c) a number determined by
our Board of Directors. On March 1, 2008, an additional
264,827 shares were reserved for issuance under the ESPP.
Stock-Based
Compensation for Non-Employees
Stock-based compensation expense related to stock options
granted to non-employees is recognized as the stock options
vest. We believe that the fair value of the stock options
granted is more reliably measurable than the fair value of the
services received. The fair value of the stock options granted
is calculated at each reporting date using the Black-Scholes
option pricing model as prescribed by SFAS No. 123R.
The fair values of options granted to non-employees were
calculated using the following assumptions for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average expected term (in years)
|
|
|
9.6
|
|
|
|
10.0
|
|
|
|
10.0
|
|
Expected stock price volatility
|
|
|
61
|
%
|
|
|
62
|
%
|
|
|
60
|
%
|
Risk-free interest rate
|
|
|
4.1
|
%
|
|
|
4.5-5.1
|
%
|
|
|
3.0
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Stock-based compensation expense related to options granted to
non-employees for fiscal 2008, 2007 and 2006 was approximately
$409,000, $131,000 and $71,000, respectively.
74
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Stock-Based
Compensation Associated with Awards to Employees
Employee
Stock-Based Awards Granted Prior to March 1, 2006
Compensation costs for employee stock options granted prior to
March 1, 2006, the date we adopted SFAS No. 123R,
were accounted for using the intrinsic-value method of
accounting as prescribed by APB No. 25, as permitted by
SFAS No. 123. Under APB No. 25, compensation
expense for employee stock options is based on the excess, if
any, of the fair value of our common stock over the option
exercise price on the measurement date, which is typically the
date of grant. All options granted were intended to be
exercisable at a price per share not less than fair market value
of the shares of our common stock underlying those options on
their respective dates of grant. Our Board of Directors
determined these fair market values in good faith based on the
best information available to them and our management at the
time of the grant. These fair value determinations included the
use of inputs from FSCG, a third-party valuation consultant. The
fair value of all shares underlying options granted through
February 28, 2006, for financial reporting purposes, was
equal to or less than their respective option exercise prices.
Employee
Stock-Based Awards Granted On or Subsequent to March 1,
2006
On March 1, 2006, we adopted the fair value recognition
provisions of SFAS No. 123R. We adopted
SFAS No. 123R using the prospective transition method.
Under this transition method, beginning March 1, 2006,
compensation expense recognized includes: (a) compensation
expense for all stock-based awards granted on or prior to, but
not yet vested as of, February 28, 2006, based on the
intrinsic-value method in accordance with the provisions of APB
No. 25, and (b) compensation expense for all
stock-based payments granted or modified subsequent to
February 28, 2006, based on the grant-date fair value
estimated in accordance with the provisions of
SFAS No. 123R, as determined using inputs from FSCG.
Compensation expense for employee stock-based awards granted on
or after March 1, 2006 is based on the grant-date fair
value estimated in accordance with the provisions of
SFAS No. 123R and is recognized over the respective
vesting periods of the applicable awards on a straight-line
basis. During fiscal 2008, we issued employee stock-based awards
in the form of stock options, PSUs and shares subject to the
ESPP. The weighted average estimated fair value of the employee
stock options and PSUs granted during fiscal year 2008 was $3.52
and $9.97 per share, respectively. During fiscal 2007, we issued
employee stock-based awards in the form of stock options. The
weighted average estimated fair value of the employee stock
options granted during fiscal year 2007 was $1.25 per share.
75
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
We use the Black-Scholes pricing model to determine the fair
value of stock options. The determination of the fair value of
stock-based awards on the date of grant using this pricing model
is affected by our stock price as well as by assumptions
regarding a number of complex and subjective variables. These
variables include our expected stock price volatility over the
term of the awards, actual and projected employee stock option
exercise behaviors, risk-free interest rates and expected
dividends. The estimated grant date fair values of the employee
and non-employee director stock options, PSUs and shares subject
to the ESPP were calculated using the Black-Scholes option
pricing model, based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
Stock options:
|
|
|
|
|
|
|
|
|
Weighted average expected term (in years)
|
|
|
3.7
|
|
|
|
3-4
|
|
Expected stock price volatility
|
|
|
38
|
%
|
|
|
35-42
|
%
|
Risk-free interest rate
|
|
|
3.8
|
%
|
|
|
4.7-5.0
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted average per share fair value of stock options granted
during the period
|
|
$
|
3.52
|
|
|
$
|
1.25
|
|
Performance stock units:(1)
|
|
|
|
|
|
|
|
|
Weighted average per share fair value of performance stock units
granted during the period
|
|
$
|
9.97
|
|
|
|
|
|
Employee Stock Purchase Plan:(1)
|
|
|
|
|
|
|
|
|
Weighted average expected term (in months)
|
|
|
8
|
|
|
|
|
|
Expected stock price volatility
|
|
|
32
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
4.2
|
%
|
|
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
|
|
|
|
|
(1) |
|
No awards were issued prior to fiscal 2008. |
Weighted Average Expected Term. Under the 1999
Plan, the 2007 Plan, and the ESPP, the expected term of awards
granted is based on the awards vesting terms, contractual
terms and historical exercise and vesting information, as well
as data from similar entities. In evaluating similarity, we
considered factors such as industry, stage of lifecycle, size,
employee demographics and the nature of stock option plans. We
believe that, with this information taken together, we have been
able to develop reasonable expectations about future exercise
patterns and post-vesting employment termination behavior.
Volatility. Since we were a private entity
until August 2007 and have insufficient historical data
regarding the volatility of our common stock price, the expected
volatility used beginning March 1, 2006 and in all periods
presented has been based on the volatility of stock prices for
similar entities.
Risk-Free Interest Rate. The risk-free
interest rate is based on U.S. Treasury zero-coupon issues
with remaining terms similar to the expected terms of the awards.
Dividend Yield. We have never declared or paid
any cash dividends and do not plan to pay cash dividends in the
foreseeable future, and therefore we used an expected dividend
yield of zero in the valuation model.
Forfeitures. SFAS No. 123R also
requires us to estimate forfeitures at the time of grant, and
revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We use historical data
to estimate pre-vesting forfeitures and record stock-based
compensation expense only for those awards that are expected to
vest. We believe that we have been able to develop reasonable
expectations about future forfeiture patterns. All stock-based
payment awards are amortized on a straight-line basis over the
requisite service periods of the awards,
76
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
which are generally the vesting periods. If our actual
forfeiture rate is materially different from our estimate, the
stock-based compensation expense could be significantly
different from what we have recorded in the current period.
As of February 29, 2008, we had $6.7 million of
unrecognized compensation expense, excluding estimated
forfeitures, related to unvested stock options granted after
March 1, 2006, which was expected to be recognized over a
weighted average period of approximately 2.7 years.
As of February 29, 2008, approximately $6.8 million of
gross unrecognized compensation expense, excluding estimated
forfeitures, related to PSUs was expected to be recognized over
a weighted average period of approximately 1.3 years.
The total compensation cost of approximately $174,000 related to
the initial purchase period under the ESPP has been recognized
on a straight-line basis through April 15, 2008, the end of
the first purchase period.
Shares
of Common Stock Reserved for Future Issuance
We are required to reserve and keep available out of our
authorized but unissued shares of common stock a number of
shares sufficient to permit the exercise of options and
settlement of restricted or performance stock units granted
under our 1999 Plan and our 2007 Plan, as well as shares
available for grant under our 2007 Plan and our ESPP. As of the
dates presented, common stock was reserved for issuance as
follows (in thousands):
|
|
|
|
|
|
|
As of
|
|
|
|
February 29,
|
|
|
|
2008
|
|
|
Equity plans:
|
|
|
|
|
Outstanding stock options and performance stock units
|
|
|
8,322
|
|
Reserved for future grants
|
|
|
1,980
|
|
|
|
|
|
|
Total
|
|
|
10,302
|
|
|
|
|
|
|
The provision for income taxes consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
176
|
|
|
$
|
22
|
|
|
$
|
|
|
State
|
|
|
118
|
|
|
|
13
|
|
|
|
|
|
Foreign
|
|
|
161
|
|
|
|
17
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
455
|
|
|
|
52
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
455
|
|
|
$
|
52
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes relates to federal minimum income
tax, state income tax and foreign income tax. Foreign income
before the provision for income taxes and cumulative effect of
change in accounting principle for fiscal 2008, 2007 and 2006
was $148,000, $44,000 and $88,000, respectively. Our effective
tax rate differs from
77
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
the amount computed by applying the statutory federal income tax
rate to net loss before income tax and cumulative effect of
change in accounting principle as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal income tax benefit at statutory rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
Net operating losses not used
|
|
|
17.9
|
|
|
|
16.5
|
|
|
|
33.6
|
|
Federal minimum tax
|
|
|
4.3
|
|
|
|
1.5
|
|
|
|
|
|
State tax
|
|
|
2.9
|
|
|
|