e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 28, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number
001-33634
DemandTec, Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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94-3344761
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification Number)
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One
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 whether the registrant has submitted
electronically and posted on its corporate website, if any,
every interactive data file required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting
company)
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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, 2008, 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 $10.37 per share on the NASDAQ
Global Market on such date) was approximately
$172.5 million.
As of March 31, 2009, there were 28,075,232 shares of
the registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for
its fiscal 2009 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
business decisions. Specifically, 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, assortment, space 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 were incorporated in
November 1999.
Our CDM solutions consist of software services and complementary
analytical services, and analytical insights, derived from the
same platform that supports our software services. We offer our
solutions individually or as a suite of integrated software
services.
Our solutions for the retail and CP industries include:
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DemandTec Lifecycle Price
Optimizationtm,
which enables retailers to strategically manage pricing for
items throughout their stores, including regular items, promoted
items, and markdown items.
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DemandTec End-to-End Promotion
Managementtm,
which supports retailers end-to-end promotion planning
processes, including suppliers, internal workflow, and
downstream execution.
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DemandTec Assortment &
Spacetm,
which enables retailers to create localized assortments by
store, cluster, or section, based on shopper demographics, the
competitive environment, and a science-based, quantitative
understanding of each items ability to add variety and
grow incremental sales in the category.
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DemandTec Targeted
Marketingtm,
a collection of services delivered by DemandTec and partners for
customer segmentation, store clustering, segment-targeted
merchandising, and one-to-one marketing.
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DemandTec Trade
Effectivenesstm,
a consumer-centric sales and marketing solution that improves
the way CP companies develop and sell-in promotion plans, price
recommendations, new item introductions, and cost changes with
their retail customers.
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Connecting our solutions for both the retail and the CP
industries is the DemandTec TradePoint
Networktm,
an Internet-based network 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, and more than
200 of those retailers have annual sales in excess of
$2 billion. Retailing is highly competitive and generally
characterized by low profit margins. Furthermore, there are more
than 1,300 CP companies worldwide that have annual revenues in
excess of $500 million that sell to retailers. The CP
industry is becoming increasingly competitive due to factors
such as retailer consolidation, more discerning and less loyal
consumers, and the growing impact of private label products. To
counter these trends, CP companies are making substantial
investments in product innovation, market research, branding,
and consumer and brand marketing.
3
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 offer consumers further alternatives when
purchasing goods. 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.
Consumer demand, though, is driven by more than just the
everyday price of an item. In addition, retailers may want to
consider whether promoting an item would result in increased
sales volume and, if so, whether that increase would represent
incremental revenue or merely cannibalize sales of other items.
Retailers must also determine which items should be stocked, by
store or store cluster. These pricing and marketing decisions
must also strike a balance between the retailers financial
goals and its desired price and brand image in order to enhance
consumer loyalty and maximize sustainable, lifetime value from
its 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. As raw ingredient costs escalate and competitive threats
intensify, predicting the relative impact promotion and everyday
price activities will have on volume and margin objectives is an
essential planning requirement. CP companies must understand how
consumers will respond to promotions, how price changes will
affect sales volumes, how often to promote their brands. CP
companies also must decide when and how to use trade funds in
the form of discounts, offsets or direct cash payments to
compensate retailers for offering temporary price reductions on
their products and how competitive trade plans will impact their
own promoted items, their total portfolio and even the
retailers entire category. According to Capgemini, most CP
companies trade promotion budgets represent 15% or more of
their net sales, which is second in magnitude only to their cost
of goods sold. In 2007, CP companies in North America alone
spent over $70 billion on trade promotions according to
Cannondale Associates, Inc. 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.
4
In order to attain higher revenue growth, improve profit margins
and increase market share, while maintaining proper price and
brand image, retailers and CP companies must better understand
and predict consumer behavior across geographic, demographic,
gender, age, income and other segments. However, achieving these
objectives through day-to-day pricing and other merchandising
and marketing decisions is extremely complex.
Existing
Approaches to Understanding Consumer Demand
Retailers and CP companies have made significant investments in
information technology, or IT. Most of these IT investments have
focused on achieving cost reductions through increased
operational efficiencies and transaction automation, including
supply chain management, point of sale, or POS, systems, and
marketing automation software.
As a result of these IT investments, retailers have accumulated
vast amounts of sales data. While a number of academic
techniques exist to analyze this data, incorporating advanced
statistical analytics into a commercially-useful solution that
yields meaningful and actionable insights for retailers and CP
companies presents significant scientific, engineering,
processing and cost challenges due to the vast amounts of data
and the complexities of mathematical computing. Consequently,
existing approaches that incorporate an understanding of
consumer demand into retail and CP pricing decisions generally
have been limited to modeling sample data sets to provide
limited insights. As a result, retailers and CP companies
historically have made merchandising decisions based on simpler
approaches such as:
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cost-plus or competitor-matching pricing;
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national pricing of items, regardless of local consumer demand
and competitive dynamics;
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one-size-fits-all assortments of goods, regardless
of the unique preferences of consumers who shopped in each
location;
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habitual promotions, advertisements, mailers and other marketing
programs; and
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engaging business consultants to provide isolated category-based
analyses.
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In 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, assortment, space 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, assortment, space and other
merchandising and marketing decisions based on consumer demand;
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balance financial goals with price and brand image in order to
maximize the lifetime value of their targeted consumer segments;
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enforce pricing rules consistently;
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forecast sales more accurately;
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devise more targeted promotions based on consumer segmentation
insights;
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create, version and publish targeted advertisements to be
distributed via multiple channels and media vehicles; and
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allocate trade funds more effectively and efficiently.
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Incorporate
scalable science into merchandising and marketing
decision-making processes
We incorporate advanced econometric modeling techniques and
optimization theory into scalable software services that our
customers use to make day-to-day merchandising and marketing
decisions. Our software automates the process of predicting
consumer response to various merchandising and marketing
activities, such as pricing, promotion, assortment, space,
loyalty programs and media. Our proprietary demand models
quantify consumer response at the individual store and item
levels based on a number of factors, including store location,
consumer demographics, advertising, in-store displays, the
availability of complementary and substitute products,
seasonality, competitive activity and loyalty and marketing
programs. Our software incorporates optimization science that
uses a combination of complex algorithms to help our customers
determine in real-time the prices, promotions and markdowns that
best accomplish their merchandising and marketing objectives,
while complying with their business rules.
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 transaction-log/loyalty
data from retailers, as well as up-to-date market-level data,
syndicated data and other third-party demographic content, in
order to better understand the dynamic nature of consumer
behavior;
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intimately understand how our customers use our software to make
their day-to-day merchandising and marketing decisions so we can
continuously enhance our offering to address our customers
business needs;
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improve user productivity with more frequent but smaller
incremental updates and training courses;
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deliver technical enhancements to our software on a frequent and
predictable schedule with little or no disruption to our
customers operations;
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utilize grid computing and service-oriented-architecture, or
SOA, techniques to maximize scalability and processing
capacity; and
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enable interoperability across our customers diverse
legacy systems.
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By delivering our software as a service, we 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.
6
Strategy
Our objective is to extend our position as a leading provider of
CDM solutions. The three 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 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 and CP industries 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 End-to-End Promotion
Managementtm,
which supports retailers end-to-end promotion planning
processes, including internal and external collaboration,
promotion calendar optimization, and multi-channel, cross-media
execution;
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DemandTec Assortment &
Spacetm,
which enables retailers to create localized assortments by
store, cluster, or section, based on shopper demographics, the
competitive environment, and a science-based, quantitative
understanding of each items ability to add variety and
grow incremental sales in the category;
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DemandTec Targeted
Marketingtm,
a collection of services delivered by DemandTec and partners for
customer segmentation, store clustering, segment-targeted
merchandising, and one-to-one marketing; and
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DemandTec Trade
Effectivenesstm,
a consumer-centric sales and marketing solution that improves
the way CP companies develop and sell-in promotion plans, price
recommendations, new item introductions, and cost changes with
their retail customers.
|
Connecting our solutions for both the retail and the CP
industries is the DemandTec TradePoint
Networktm,
an Internet-based network 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.
7
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, assortment, space 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.
In February 2009, we completed our acquisition of privately-held
Connect3 Systems, Inc. (Connect3), a provider of advertising
planning and execution software. Connect3 helped retailers from
all industry segments improve the efficiency and effectiveness
of their cross-channel and cross-media promotions. The Connect3
solutions support the workflow of customers merchandising
and advertising departments and include key capabilities such as
cross-media budgeting, workflow management, versioning, and
other advertising execution functionality. The former Connect3
product suite is being incorporated into the DemandTec
End-to-End Promotion
Managementtm
solution.
DemandTec
Lifecycle Price
Optimizationtm
for Retail
Our Lifecycle Price
Optimizationtm
solution for the retail industry consists of one or more of the
following software services, along with complementary software,
analytical services, and analytical insights:
Everyday
Price Optimization and Everyday Price Management
Everyday Price Optimization and Everyday Price Management enable
retailers 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: Everyday Price
Optimization enables retailers to determine optimized prices to
achieve their sales, volume, profit, and price image objectives
for regular, everyday items. Using Everyday Price Optimization,
customers create scenarios in which they define strategic
objectives such as increased revenues, profitability
and/or sales
volume and optimize prices to best achieve these objectives. A
typical strategic objective might be to maximize net margins,
while not sacrificing more than a certain defined percentage of
sales volume.
Retailers use Everyday Price Optimization to optimize and set
retail prices in their stores based on their unique cost
structure and strategic goals. Everyday Price Optimization would
likely generate different optimized prices for the same item
carried by competing retailers in stores located in the same
geographic location, since consumer behavior varies between
competitors and each retailer has its own vendor costs and
strategic pricing objectives.
Key features of Everyday Price Optimization include:
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Store/SKU-level modeling econometric modeling
that captures the elasticity of each item, in addition to
cannibalization between items, halo effects, cross-category
pull-through effects, trends, seasonality, and a variety of
other causals to deliver accuracy;
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Optimization and forecasting full category
price optimization, with store/item level forecasting, enables
retailers to develop pricing that conforms to their pricing
rules while maximizing their primary and secondary goals, such
as driving higher sales, increasing volume, and improving
profitability;
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Image item analysis determination of
effective price image items for key consumer segments;
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Natural language pricing rules and rules management
non-technical end-users can define and enforce
pricing policies by creating pricing scenarios with pricing
rules selected from a comprehensive library of retail pricing
rules, customized with a rules editor and prioritized with rules
relaxation capabilities to handle conflicts;
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Scenario management the ability to create and
evaluate multiple pricing scenarios to fine-tune pricing
strategy before prices hit shelves in order to change goals
(maximize profit, sales, or unit volume) or add, remove, modify,
or reprioritize pricing rules; and
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Benefits reporting the ability to validate
the effects of price optimization on actual sales of a
particular category and to understand the degree to which
factors such as promotions, seasonality and macroeconomic shifts
contributed to sales.
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Everyday Price Management: Everyday Price
Management enables retailers to improve execution and compliance
with their pricing strategy, and dramatically boost efficiency
by automating their most cumbersome, time-consuming pricing
tasks. Using Everyday Price Management, customers define pricing
rules and apply those rules-based prices to merchandise
categories that are not modeled and optimized using Everyday
Price Optimization. In addition, customers maintain both
optimized and rules-based prices using Everyday Price Management
as vendor costs and competitor prices change.
Key features of Everyday Price Management include:
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Rules-based pricing define and enforce
pricing policies by creating pricing scenarios with rules
selected from a comprehensive library of pricing rules such as
last digit rules, competitive price index rules, and cross-zone
rules, all of which are configured using easy-to-understand
natural language;
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Rules management rules editor and rules
relaxation capabilities to handle conflicts;
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Advanced price maintenance operational price
management capabilities to handle frequent vendor cost changes,
competitive price changes, and new item introductions; and
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Advanced pricing delivery quickly review and
approve incoming data and automatically schedule when updated
pricing will be delivered to downstream systems.
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Both Everyday Price Optimization and Everyday Price Management
utilize a library of configurable business rules that act as
constraints on the optimization by limiting the set of possible
outcomes. For example, a customer can ensure that larger size
items always cost more than smaller size items but are a better
value, or that an optimized price is within a given percentage
of a competitors price.
Promotion
Planning & Optimization
Promotion Planning & Optimization enables retailers to
plan, optimize, and execute more effective and more profitable
promotion plans. Promotion Planning & Optimization
customers 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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Store/SKU-level modeling the ability to plan
promotions that maximize total store impact on all categories by
taking into account promotional response by item by store,
cannibalization, halo effects, and cross-elasticity effects of
everyday prices in place;
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Category plan management the ability to build
complete promotions by defining deal terms, discounts, time
periods, and promotion types, and associating these promotions
with individual ads, displays, radio spots, and other media,
taking into account factors such as pull-through effects,
cannibalization between promoted items and regularly priced
items, cannibalization between stacked promotions, and the
pantry-loading effect of successive promotions;
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Master calendar aggregate category plans into
a master calendar that provides a single, unified view of all
planned events across categories;
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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 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 (including our Advertising & Marketing
Execution service, as well as other offerings from third
parties), 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.
Retailers can use Promotion Planning & Optimization in
conjunction with DemandTecs Deal Management software
service to streamline the deal presentation, negotiation, and
reconciliation process, and automatically pull deal information
into Promotion Optimization for evaluation.
Markdown
Optimization
Markdown Optimization incorporates the science of Consumer
Demand Management to enable retailers to design optimal plans
that set markdown timing and depth to maximize profitability or
meet inventory objectives for every clearance item in every
store. Markdown Optimization supports a wide range of markdown
types, including seasonal, short product lifecycle, event and
holiday, category reset, cycle refresh, and standard discount
markdowns. Key features of Markdown Optimization include:
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Scenario management the ability to create and
forecast multiple scenarios in order to evaluate tradeoffs
between timing and depth of markdown prices, as well as other
factors such as the number of markdowns taken within a time
period;
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Science-based the ability to design markdown
plans based on the unique price elasticity and inventory
position at each store;
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Rules management the ability to configure
markdown-specific rules;
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Re-optimization the ability to re-optimize
plans and prices on a weekly basis to adjust for changes in
demand and inventory position; and
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Automated workflow process the ability to
create and initiate new markdown plans and scenarios
automatically based on category-specific rules defined by the
retailer so that merchants can simply log into the system to
review the results of planned optimizations.
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Retailers use Markdown Optimization to eliminate excess
inventory by a specified date after which an item will no longer
be sold and to maximize profitability of items sold before that
date. Retailers have the flexibility either to allow all stores
or zones to share the same schedule or to have each store
execute its own unique schedule to maximize overall plan
performance. Retailers can also create, forecast, compare, and
evaluate multiple markdown pricing scenarios to fine tune their
markdown strategy before finalizing in-store prices.
DemandTec
End-to-End Promotion
Managementtm
for Retail
Our End-to-End Promotion
Managementtm
solution for the retail industry consists of the Promotion
Planning & Optimization software service discussed
above as part of the DemandTec Lifecycle Price
Optimizationtm
solution, as well as one or more of the following software
services, along with complementary software, analytical services
and insights:
Deal
Management
Deal Management enables retailers to automate and streamline the
presentation, negotiation and reconciliation of trade promotion
offers they receive from their CP trading partners in a secure,
Web-based environment. 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
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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 collaboration provides a common
platform for retailers and their trading partners to present and
negotiate the terms of trade promotion offers, eliminating the
large number of emails, faxes, and spreadsheets that typically
go back and forth between parties, thereby reducing errors;
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Web portal boosts the retailers
productivity by pushing data entry work to the suppliers and
allowing the suppliers to enter deal information;
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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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Electronic document and 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 to eliminate the need for
costly post-deal audits; and
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Accounting and reconciliation provides for
reconciliation of invoicing and deduction notices with CP
trading partners.
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When a retailer implements Deal Management, that retailer
requires that all of its CP trading partners submit and
negotiate their future trade promotion offers electronically
through the Deal Management software service. We offer two
editions of this service for CP companies: Deal
Management, which is offered at no charge and allows
vendors to submit promotion offers by selecting valid items from
the retailers item catalog, and Advanced Deal
Management, which is a paid upgrade that includes
additional features specific to a CP company, such as accounting
and reconciliation, transaction and workflow reporting, catalog
management, vendor item catalog synchronization and deal history
archiving.
Advertising &
Marketing Execution
Previously referred to as Promotion Manager when marketed and
sold by Connect3, Advertising & Marketing Execution
and its related ad execution software services Signage, Proofing
and iFlyer work
hand-in-hand
with Promotion Planning & Optimization to manage
versioned offers and promotional pricing while addressing the
detailed requirements of delivering targeted promotional
messages across multiple touch points. Key features of
Advertising & Marketing Execution include:
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Out-of-the-box enterprise advertising
solution provides detailed planning and
execution functionality;
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Centralized marketing calendar and integrated workflow
system enables collaboration between analysts,
marketing, buyers/merchants, advertising and other partners;
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Dynamic layout and versionsioning
capabilities view and select items, build and
manage sophisticated promotional offers and create multiple
versions customized for different regions, clusters of stores,
customer segments, or advertising zones;
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Multi-channel/cross-media publishing create
content for planned promotional events once and then manage and
publish the content and digital assets across print, email,
website, mobile device, and other multi-channel/media publishing;
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Highly-configurable enterprise architecture
supports complex requirements to integrate with key retail
production systems; and
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Integration with DemandTec Promotion Planning &
Optimization the ability to import planned and
optimized promotional details directly into the dynamic layout
and publishing, enabling a more scientific approach to selecting
items and building promotions.
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Retailers use Advertising & Marketing Execution to
drive the production process and execute more targeted
promotions across multiple channels and media vehicles while
also dynamically creating the highly-granular promotion history
required to drive effective promotion analytics and close the
loop in the promotion cycle with post event measurement and
improved modeling for future periods.
DemandTec
Assortment &
Spacetm
for Retail
Our Assortment &
Spacetm
solution for the retail industry consists of one or more of the
following software services, along with complementary software,
analytical services, and analytical insights:
Assortment
Optimization
Assortment Optimization enables retailers to determine which
items should be stocked, by store or store cluster, based on the
customers that shop at each store, the competitive environment,
and a quantified understanding of whether each item in a
category is merely duplicative or truly provides variety and
adds incremental sales to the category. Key features of
Assortment Optimization include:
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Advanced modeling and optimization science
enables the creation of efficient, customer-centric assortments
based on a quantitative understanding of incrementality (an
items ability to increase overall category sales) and
transferable demand (the degree to which sales volume shifts to
similar items or leaves the store when one item is delisted);
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Multiple data inputs incorporates market,
loyalty card, planogram, and cost data into the optimization
process;
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Automated processes includes automated
processes and wizards to address the assortment challenges
merchants face every day, such as performing straight
optimizations, increasing or decreasing SKU count and space, and
making
one-in-one-out
changes to assortments; and
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What if analyses enables
retailers to run multiple scenarios and compare results to
identify the best strategy to meet company objectives such as
protecting private label items and image items.
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Retailers use Assortment Optimization to optimize assortments
based on sales, profit, space productivity, and gross margin
return on inventory investment (GMROII) goals. Retailers can
choose to generate these assortments by store, store cluster, or
section, and view recommended facings. With Assortment
Optimization, merchants can receive a set of specific
recommendations for assortment changes, and a highly accurate
forecast of how the addition or removal of each item will impact
category sales.
Assortment Optimization is augmented by a number of DemandTec
analytical services and analytical insights, including Image
Item Analysis (where we analyze item and basket-level data
to determine key items by chain, store, or customer segment in
order to enhance price image), Market Basket Profile Analysis
(which helps our customers to understand which consumer
purchasing behaviors drive larger, more profitable market
baskets), and Zone Analysis (where we analyze store-level demand
and geo-demographic factors to create or reconfigure ad zones
that improve volume and profit potential).
DemandTec
Targeted
Marketingtm
for Retail
Our Targeted
Marketingtm
solution for the retail industry is a collection of services
delivered by DemandTec and its partners that enable retailers to
better understand key customer segments, align segmentation and
targeted merchandising and marketing initiatives, and create
targeted marketing programs that leverage customer insights to
build loyalty, increase sales, and improve profitability.
Analytical services that comprise this solution include Market
Basket Profile Analysis (helps retailers understand which
consumer purchasing behaviour drives larger, more profitable
market baskets), Customer Segmentation Analysis (enables
retailers to create a new segmentation scheme or refine an
existing one to better target their customers), Affinity
Analysis (helps retailers determine the probability of a
follow-on purchase to improve their merchandising and secondary
placements), Image Item Analysis (allows retailers to
enhance their price image by analyzing item and basket-level
data to determine key items by chain, store, or customer
segment),
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and Zone Analysis / Store Clustering (helps retailers
analyze customer segments, store-level demand and
geo-demographic factors to create or reconfigure ad zones that
improve volume and profit potential).
DemandTec
Trade
Effectivenesstm
for CP
Our Trade
Effectivenesstm
solution for the CP industry consists of one or more of the
following software services, along with complementary software,
analytical services, and analytical insights:
Trade
Planning & Optimization
Trade Planning & Optimization empowers CP company
managers to forecast promotion and pricing activity in a unified
planning environment. With this capability, manufacturers can
develop and predict trade volume and profitability metrics that
will help transform the trade planning function and provide a
sustainable competitive advantage. Key features of Trade
Planning & Optimization for CP companies include:
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Optimization and forecasting accurately
predict key volume and financial metrics for brands and overall
retail category;
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Common analytical platform optimize trade
planning with unified pricing and promotion planning based on
the same underlying consumption data;
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Comprehensive trade planning use cases
create, forecast and build plans that include periodic trade
promotions (i.e., temporary discounts with or without ad or
display support) as well as price advances or buy-downs of the
retail price using trade funds; and
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Demand elasticity curves for every item in the
category quantify the financial impact of
competitive trade activity against promoted items, total
portfolio and even a retailers entire category.
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CP companies use Trade Planning & Optimization to
build a total trade marketing plan that incorporates both
everyday price assumptions and promotion tactics, which results
in a more complete planning picture and ensures tighter forecast
accuracy. Leveraging the science of consumer demand management
to pinpoint optimal pricing and promotion strategies, Trade
Planning & Optimization provides powerful predictive
planning capability to customer account teams and headquarters
users to deliver highly effective forecasts that yield
documented business results.
Advanced
Deal Management
Advanced Deal Management provides capabilities that are tailored
for CP companies and brokers to capture greater value from the
online deal management experience. As a paid upgrade to the
basic Deal Management service (which is offered at no charge),
Advanced Deal Management provides a manufacturer-centric set of
reports and workflow privileges that help further reduce costs,
increase user effectiveness and enhance data visibility.
Advanced Deal Management subscribers also have access to add-on
services that are unavailable to basic Deal Management
subscribers. Key features of Deal Management for CP companies
and brokers include:
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Role-based access access to multiple users by
product line enables rapid and more effective user adoption;
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Customized item catalog manufacturer-centric
item catalog customized by promoted group supports a more
logical way of building and entering promotions;
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Long-term deal archive full seven-year
history of all deal data, including full documentation of offer
versions and written negotiations between trading partners
supports, among other benefits, compliance with regulatory
requirements;
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Advanced data reporting detailed reporting
and data export features support better business
decisions; and
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Funds tracking accurate visibility into
available trade spending balances and the ability to reconcile
planned trade promotion activity against actual in-store
execution.
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CP companies upgrade to Advanced Deal Management in order to
derive more value from the online deal management initiative.
For a relatively small investment, our CP company customers are
provided with access to features that help to further reduce
costs, increase user effectiveness and enhance data visibility.
Professional
Services
Our professional services organization works closely with our
customers to implement our software so that our customers can
rapidly begin to achieve their merchandising and marketing
objectives. The organization consists of field consultants and
project managers, technology integration specialists, modeling
experts, and training specialists with experience in
implementing software in various retail and CP segments.
Depending on a specific customers requirements, we also
may engage third parties to assist with implementations. We
generally make our software available to a customer within two
weeks of signing its agreement, with several product categories
being fully operational within a matter of months.
The analytical 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 transaction-log/loyalty data, and
additional third-party data sources, we offer a number of
strategic analytical insights both as part of our software and
as customer-specific 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
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,
incrementality, transferable demand, stockpiling by consumers,
equivalent volumes and discrete events such as holidays and
localized merchandising categories. Our software also quantifies
and forecasts the store/item level margin impact caused by
varying supply chain costs.
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Optimization and Rules Enforcement. While
demand modeling is a powerful tool that can provide quantifiable
benefits, achieving those benefits would be difficult if our
software relied solely upon modeling, because of the large
number of possibilities that our models generate. Our
optimization science uses a combination of complex algorithms to
help customers determine prices, promotions and markdowns that
best accomplish their objectives, while complying with their
business rules. These algorithms are designed to ensure accurate
results and incorporate rule relaxation that automatically
resolves conflicts in business rules according to the
customers preferences.
Technology
Data Processing. We receive and process
terabytes of customer data, including transaction-log/loyalty
data. This information is provided by retailers, CP companies
and syndicated data providers on a daily or weekly basis. We
process data through our proprietary software platform, which
integrates, validates and cleanses multiple data types and
enhances data quality by identifying and correcting common data
problems.
Grid Computing. The implementation of our
advanced mathematical software requires substantial computing
resources. To address this challenge, we distribute our software
across a scalable grid of servers. This approach allows us to
automatically partition large computational problems into
smaller computations and to execute those computations in
parallel across the grid. We design our grid architecture to
ensure that optimizations are completed reliably and that
computing resources are allocated dynamically to our various
customers.
Enterprise Application Technology. With the
exception of customers who licensed Connect3 software prior to
its acquisition by DemandTec, our customers access our software
through a web browser and no software is installed on our
customers premises. Our portal technology allows us to
incorporate content from other sources and allows our content to
be shown in other applications and portals. Customers can
configure the user interface, customer-specific fields,
customer-specific workflow behavior and portal layout and
content. Our scalable architecture allows us to add new
customers without requiring us to make substantial incremental
investments in IT infrastructure.
Enterprise Integration. We provide multiple
integration points with our customers IT systems. Large
incoming and outgoing data feeds use data-level integration to
transfer bulk files on an automated basis. We use
industry-standard web services protocols to communicate with
customer systems and to process customer system requests. Our
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 currently release a new software
version approximately every quarter. Since June 1, 2004, we
have released 36 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 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
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with regular rotations to a secure, offsite storage location;
and network and system redundancy to provide application
resiliency.
In January 2009, 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 195 customers
worldwide in the retail and CP industries. Retailers together
accounted for approximately 86% of our revenue in fiscal 2009
and CP companies accounted for approximately 14% of our revenue
in fiscal 2009. Wal-Mart Stores, Inc., our largest customer in
fiscal 2009, accounted for approximately 14% of our revenue in
fiscal 2009.
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 a
sales presence 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 2012. We may
terminate this agreement at any time upon written notice,
subject to certain scale-down restrictions. We have an option to
acquire the operations of Sonata that relate to our business at
any time at a pre-negotiated price.
As of February 28, 2009, we had 141 employees in our
science, product management and engineering groups located in
California, and an additional 64 Sonata engineers in China
dedicated to our projects. Our research and development expenses
were approximately $26.8 million in fiscal 2009,
$22.4 million in fiscal 2008, and $15.3 million in
fiscal 2007.
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
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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 14 issued patents and 16 patent applications
in the United States, and five issued patents and five patent
applications internationally. The expiration dates of our issued
patents range from 2020 to 2023. We focus our patent efforts in
the United States, but from time to time we will file
corresponding foreign patent applications in strategic areas
such as Europe and Asia. Our patent strategy balances strategic
importance, competitive assessment and the need to maintain
costs at a reasonable level, and we do not depend on any
specific patent or set of patents to conduct our business
operations. We may not receive competitive advantages from any
rights granted under our existing patents. We do not know
whether any of our patent applications will result in the
issuance of any further patents or whether the examination
process will require us to narrow the scope of our claims. To
the extent any of our applications proceeds to issuance as a
patent, the future patent may be opposed, contested,
circumvented, designed around by a third party, or found to be
unenforceable or invalidated. In addition, our future patent
applications may not be issued with the scope of the claims
sought by us, if at all, or the scope of claims we are seeking
may not be sufficiently broad to protect our proprietary
technologies. Others may develop
18
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.
Despite our efforts to protect our trade secrets and proprietary
rights through patents, licenses and confidentiality agreements,
unauthorized parties may still copy or otherwise obtain and use
our software and technology. In addition, we intend to expand
our international operations, and effective patent, copyright,
trademark and trade secret protection may not be available or
may be limited in foreign countries. If we fail to protect our
intellectual property and other proprietary rights, our business
could be harmed.
Employees
As of February 28, 2009, we employed 329 full-time
employees, including 141 in research and development, 65 in
professional services, 42 in sales and marketing, 46 in general
and administrative, and 35 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
19
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
$5.0 million, $4.5 million and $1.5 million in
fiscal 2009, fiscal 2008 and fiscal 2007, respectively. At
February 28, 2009, we had an accumulated deficit of
$77.4 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. 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.
The
effects of the recent global economic crisis may adversely
impact our business, operating results or financial
condition.
The recent global economic crisis has caused a general
tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, extreme
volatility in credit, equity and fixed income markets, and a
growing economic contraction. The retail and consumer products
industries have been and may continue to be especially hard hit
by these economic developments. For example, current or
potential customers may not have funds to enter into or renew
their agreements for our software and services, which could
cause them to delay, decrease or cancel purchases of our
software and services or to not pay us or to delay paying us for
previously purchased software and services. Financial
institution failures may cause us to incur increased expenses or
make it more difficult either to utilize our existing debt
capacity or otherwise obtain financing for our operations,
investing activities (including the financing of any future
acquisitions), or financing activities. Finally, our investment
portfolio, which includes short-term debt securities, is subject
to general credit, liquidity, counterparty, market and interest
rate risks that may be exacerbated by the recent global
financial crisis. If the banking system or the fixed income,
credit or equity markets continue to deteriorate or remain
volatile, our investment portfolio may be impacted and the
values and liquidity of our investments could be adversely
affected.
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.
In addition, in the past, certain of our customers have filed
for bankruptcy protection. For example, in March 2009, one of
our customers, Bi-Lo LLC, filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code.
While we do not believe that any such bankruptcy filing to date
has had a material impact on our results of operations in fiscal
2009, it is possible that in the future any customers or
potential customers seeking bankruptcy protection could seek to
cancel their agreements with us, or could elect not to purchase
new or additional services or renew such services with us, or
could fail to pay us according to our contractual terms, any of
which would negatively impact our results of operations or
financial position in the future.
We
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 86% of our revenue in fiscal 2009. Our three
largest customers accounted for approximately 33% and 29% of our
revenue in fiscal 2009 and 2008, respectively. Although our
largest customers may vary from period to period, we anticipate
that we will continue to depend on revenue from a relatively
small number of 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, including the
recent global economic crisis, were to have a continued or
increasingly negative impact on the retail market segment, it
could reduce the amount that these customers spend on
information technology, and in particular CDM software, which
would adversely affect our revenue and results of operations.
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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. Some of our 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 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.
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. For instance, in February
2009, we acquired Connect3 Systems, Inc., a provider of
advertising planning and execution software. Acquisitions may
result in unforeseen operating difficulties and expenditures. In
particular, we may encounter difficulties in assimilating or
integrating the businesses, technologies, services, products,
personnel or operations of the acquired companies (including
those of Connect3), especially if the key personnel of the
acquired company choose not to work for us, and we may have
difficulty retaining the 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 approximately $970,000 of amortization of purchased
intangible assets in each of fiscal 2009 and 2008, and $321,000
in fiscal 2007, and will result in amortization of approximately
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$911,000 in fiscal 2010 with declining amounts for seven years
thereafter. Our acquisition of Connect3 resulted in the
write-off of $150,000 of in-process research and development
cost in fiscal 2009, and will result in amortization of
purchased intangibles of approximately $2.4 million,
$1.8 million and $626,000 in fiscal 2010, 2011, and 2012,
respectively.
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.
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, and in some cases
transaction log or loyalty program data provided to us directly
by our retail customers and by third-party data aggregators.
Consumer behavior is affected by many factors, including
evolving consumer needs and preferences, new competitive product
offerings, more targeted merchandising and marketing, emerging
industry standards, and changing technology. Data adequately
representing all of these factors may not be readily available
in certain geographies or in certain markets. In addition, the
relative importance of the variables that influence demand will
change over time, particularly with the continued growth of the
Internet as a viable retail alternative and the emergence of
non-traditional marketing channels. If our retail customers are
unable to collect
23
POS, transaction log or loyalty program data or we are unable to
obtain such data from them or from third-party data aggregators,
or if we fail to enhance our core science and modeling
methodologies to adjust for changes in consumer behavior,
customers may delay or decide against purchases or renewals of
our software.
We
rely on our management team and will need additional personnel
to grow our business, and the loss of one or more key employees
or our inability to attract and retain qualified personnel could
harm our business.
Our success depends to a significant degree on our ability to
attract, retain and motivate our management team and our other
key personnel. Our professional services organization and other
customer-facing groups, in particular, play an instrumental role
in ensuring our customers satisfaction. In addition, our
science, engineering and modeling team requires experts in
econometrics and advanced mathematics, and there are a limited
number of individuals with the education and training necessary
to fill these roles should we experience employee departures.
All of our employees work for us on an at-will basis, and there
is no assurance that any employee will remain with us. Our
competitors may be successful in recruiting and hiring members
of our executive management team or other key employees, and it
may be difficult for us to find suitable replacements on a
timely basis. Many of the members of our management team and key
employees are substantially vested in their shares of our common
stock or options to purchase shares of our common stock, and
therefore retention of these employees may be difficult in the
highly competitive market and geography in which we operate our
business.
We
have 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 198 employees at February 28, 2007 to
251 employees at February 29, 2008, and to
329 employees at February 28, 2009. Headcount in
research and development increased from 99 at February 28,
2007 to 141 at February 28, 2009. In addition, our revenue
grew from $43.5 million in fiscal 2007 to
$61.3 million in fiscal 2008, and to $75.0 million in
fiscal 2009. 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 2009, we generated approximately 86% of
our revenue from sales to retail customers while we generated
approximately 14% of our revenue from sales to CP companies. In
fiscal 2008 we generated 90% of our revenue from sales to retail
customers while we generated 10% 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
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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.
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.
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Our
use of open source software and third-party technology could
impose limitations on our ability to commercialize our
software.
We incorporate open source software into our software. Although
we monitor our use of open source software closely, the terms of
many open source licenses have not been interpreted by United
States courts, and there is a risk that these licenses could be
construed in a manner that imposes unanticipated conditions or
restrictions on our ability to commercialize our software. In
that event, we could be required to seek licenses from third
parties in order to continue offering our software, to
re-engineer our technology or to discontinue offering our
software in the event re-engineering cannot be accomplished on a
timely basis, any of which could adversely affect our business,
operating results and financial condition. We also incorporate
certain third-party technologies, including software programs
and algorithms, into our software and may desire to incorporate
additional third-party technologies in the future. Licenses to
new third-party technologies may not be available to us on
commercially reasonable terms, or at all.
If we
are unable to protect our intellectual property rights, our
competitive position could be harmed and we could be required to
incur significant expenses in order to enforce our
rights.
To protect our proprietary technology, including our core
statistical and mathematic models and our software, we rely on
trade secret, patent, copyright, service mark, trademark and
other proprietary rights laws and confidentiality agreements
with employees and third parties, all of which offer only
limited protection. Despite our efforts, the steps we have taken
to protect our proprietary rights may not be adequate to
preclude misappropriation of our proprietary information or
infringement of our intellectual property rights, and our
ability to police that misappropriation or infringement is
uncertain, particularly in countries outside of the United
States, including China where a third party conducts a portion
of our development activity for us. Further, we do not know
whether any of our pending patent applications will result in
the issuance of patents or whether the examination process will
require us to narrow our claims. Our current patents and any
future patents that may be issued may be contested, circumvented
or invalidated. Moreover, the rights granted under any issued
patents may not provide us with proprietary protection or
competitive advantages, and, as with any technology, competitors
may be able to develop technologies similar or superior to our
own now or in the future.
Protecting against the unauthorized use of our trade secrets,
patents, copyrights, service marks, trademarks and other
proprietary rights is expensive, difficult and not always
possible. Litigation may be necessary in the future to enforce
or defend our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could be costly
and divert management resources, either of which could harm our
business, operating results and financial condition.
Furthermore, many of our current and potential competitors have
the ability to dedicate substantially greater resources to
enforcing their intellectual property rights than we do.
Accordingly, despite our efforts, we may not be able to prevent
third parties from infringing upon or misappropriating our
intellectual property.
We cannot be certain that the steps we have taken will prevent
the unauthorized use or the reverse engineering of our
technology. Moreover, others may independently develop
technologies that are competitive to ours or infringe our
intellectual property. The enforcement of our intellectual
property rights also depends on our legal actions against these
infringers being successful, but we cannot be sure these actions
will be successful, even when our rights have been infringed.
Furthermore, effective patent, trademark, service mark,
copyright and trade secret protection may not be available in
every country in which our services are available or where we
have development work performed. In addition, the legal
standards relating to the validity, enforceability and scope of
protection of intellectual property rights in Internet-related
industries are uncertain and still evolving.
Material
defects or errors in our software 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
26
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 will be increasingly susceptible to risks
associated with international operations.
We have limited experience operating in international
jurisdictions. In fiscal 2009 and fiscal 2008, 14% and 12%,
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 of February 28, 2009,
in addition to our 176 employees in our operations,
customer support, science, product management and engineering
groups located in the United States, an additional 64 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
27
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, commencing in fiscal
2009, we are required to perform annual system and process
evaluation and testing of our internal control over financial
reporting to allow management and our independent registered
public accounting firm to report on the effectiveness of our
internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act. In the future, our
testing, or the subsequent testing by our independent registered
public accounting firm, may reveal deficiencies in our internal
control over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 requires that
we incur substantial accounting expense and expend significant
management time on compliance-related issues. Moreover, if we
are not able to comply with the requirements of Section 404
in the future, or if we or our independent registered public
accounting firm identifies deficiencies in our internal control
over financial reporting that are deemed to be material
weaknesses, the market price of our common stock could decline
and we could be subject to sanctions or investigations by the
NASDAQ Stock Market, the Securities and Exchange Commission, or
SEC, or other regulatory authorities, which would require
additional financial and management resources.
Furthermore, implementing any appropriate future changes to our
internal control over financial reporting may entail substantial
costs in order to modify our existing accounting systems, may
take a significant period of time to complete and may distract
our officers, directors and employees from the operation of our
business. These changes, however, may not be effective in
maintaining the adequacy of our internal control over financial
reporting, and any failure to maintain that adequacy, or
consequent inability to produce accurate financial statements on
a timely basis, could increase our operating costs and could
materially impair our ability to operate our business. In
addition, investors perceptions that our internal control
over financial reporting is inadequate or that we are unable to
produce accurate financial statements may adversely affect our
stock price. While neither we nor our independent registered
public accounting firm has identified deficiencies in our
internal control over financial reporting that are deemed to be
material weaknesses, there can be no assurance that material
weaknesses will not be subsequently identified.
If one
or more of our key strategic relationships were to become
impaired or if these third parties were to align with our
competitors, our business could be harmed.
We have relationships with a number of third parties whose
products, technologies and services complement our software.
Many of these third parties also compete with us or work with
our competitors. If we are unable to maintain our relationships
with the key third parties that currently recommend our software
or that provide consulting services on our software
implementations or if these third parties were to begin to
recommend our competitors products and services, our
business could be harmed.
Claims
by others that we infringe their proprietary technology could
harm our business.
Third parties could claim that our software infringes their
proprietary rights. In recent years, there has been significant
litigation involving patents and other intellectual property
rights, and we expect that infringement claims may increase as
the number of products and competitors in our market increases
and overlaps occur. In addition, to the extent that we gain
greater visibility and market exposure as a public company, we
will face a higher risk of being the subject of intellectual
property infringement claims. Any claims of infringement by a
third party, even those without merit, could
28
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 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 March 1, 2006 we adopted Statement of
Financial Accounting Standards, or SFAS, No. 123(R),
Share-Based Payment, which 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, fiscal 2008 and
fiscal 2009 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, fiscal 2008 and fiscal 2009 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 $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.
29
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.
Risks
Related to Ownership of Our Common Stock
The
trading price of our common stock has been volatile in the past,
may continue to be volatile, and may decline.
The trading price of our common stock has fluctuated widely in
the past and may do so in the future. Further, our common stock
has limited trading history. Factors affecting the trading price
of our common stock, many of which are beyond our control, could
include:
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variations in our operating results;
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announcements of technological innovations, new products and
services, acquisitions, strategic alliances or significant
agreements by us or by our competitors;
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recruitment or departure of key personnel;
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the financial projections we may provide to the public, any
changes in these projections or our failure to meet these
projections;
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changes in the estimates of our operating results or changes in
recommendations by any securities analysts that elect to follow
our common stock;
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market conditions in our industry, the retail industry and the
economy as a whole;
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price and volume fluctuations in the overall stock market;
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lawsuits threatened or filed against us;
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adoption or modification of regulations, policies, procedures or
programs applicable to our business; and
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the volume of trading in our common stock, including sales upon
exercise of outstanding options.
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In addition, if the market for technology stocks or the stock
market in general continues to experience loss of investor
confidence as has happened in recent periods, the trading price
of our common stock could decline for reasons unrelated to our
business, operating results, or financial condition. The trading
price of our common stock might also decline in reaction to
events that affect other companies in our industry even if these
events do not directly affect us. Some companies that have had
volatile market prices for their securities have had securities
class actions filed against them. A suit filed against us,
regardless of its merits or outcome, could cause us to incur
substantial costs and could divert managements attention.
30
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 28, 2009, our directors, executive officers and
other affiliates beneficially owned, in the aggregate,
approximately 57.9% of our outstanding common stock. As a
result, these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval,
including the election of directors and approval of significant
corporate transactions, such as a merger or other sale of our
company or its assets. This concentration of ownership could
limit your ability to influence corporate matters and may have
the effect of delaying or preventing a third party from
acquiring control over us.
Anti-takeover
provisions in our charter documents and Delaware law could
discourage, delay or prevent a change in control of our company
and may affect the trading price of our common
stock.
We are a Delaware corporation and the anti-takeover provisions
of the Delaware General Corporation Law may discourage, delay or
prevent a change in control by prohibiting us from engaging in a
business combination with an interested stockholder for a period
of three years after the person becomes an interested
stockholder, even if a change in control would be beneficial to
our existing stockholders. In addition, our restated certificate
of incorporation and amended and restated bylaws may discourage,
delay or prevent a change in our management or control over us
that stockholders may consider favorable. Our restated
certificate of incorporation and amended and restated bylaws:
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authorize the issuance of blank check preferred
stock that could be issued by our board of directors to thwart a
takeover attempt;
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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;
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require that directors only be removed from office for cause and
only upon a majority stockholder vote;
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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;
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limit who may call special meetings of stockholders;
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prohibit stockholder action by written consent, thus requiring
all actions to be taken at a meeting of the stockholders;
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require supermajority stockholder voting to effect certain
amendments to our restated certificate of incorporation and
amended and restated bylaws; and
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require advance notification of stockholder nominations and
proposals.
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31
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Item 1B.
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Unresolved
Staff Comments
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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 October 2010 and
approximately 7,200 square feet in Cerritos, California
that expires in December 2010. We also lease small sales and
marketing offices in the United States and Europe. The size and
location of these properties change from time to time on the
basis of business requirements. We do not own any real property.
We believe our facilities are adequate for our current needs and
that suitable additional or substitute space will be available
to accommodate foreseeable expansion of our operations.
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Item 3.
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Legal
Proceedings
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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.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
32
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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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.
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Fiscal Year 2009 Quarters Ended:
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High
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Low
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February 28, 2009
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$
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9.25
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$
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5.86
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November 30, 2008
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$
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11.00
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$
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5.77
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August 31, 2008
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$
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11.05
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$
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7.02
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May 31, 2008
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$
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11.00
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$
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6.65
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Fiscal Year 2008 Quarters Ended:
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High
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Low
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February 29, 2008
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$
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20.55
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$
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8.75
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November 30, 2007
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$
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20.50
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$
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9.45
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August 31, 2007 (from August 9, 2007)
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$
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10.75
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$
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8.95
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Stockholders of Record. As of
February 28, 2009, we had approximately 140 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.
33
Stock
Performance Graph and Cumulative Total Return
Notwithstanding any statement to the contrary in any of our
previous or future filings with the Securities and Exchange
Commission, or SEC, the following information relating to the
price performance of our common stock shall not be deemed to be
filed with the SEC or to be soliciting
material under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, and it shall not be deemed to be
incorporated by reference into any of our filings under the
Securities Act or the Exchange Act, except to the extent we
specifically incorporate it by reference into such filing.
The graph below compares the cumulative total stockholder return
of our common stock with that of the Nasdaq Composite Index and
the Nasdaq Computer Index from August 9, 2007 (the date on
which our common stock commenced trading on the NASDAQ Global
Market) through February 28, 2009. The graph assumes that
$100 was invested in shares of our common stock, the Nasdaq
Composite Index and the Nasdaq Computer Index at the close of
market on August 9, 2007, and that dividends, if any, were
reinvested. The comparisons in this graph are based on
historical data and are not intended to forecast or be
indicative of future performance of our common stock.
Comparison
of Cumulative Total Returns of DemandTec, Inc., Nasdaq
Composite
Index and Nasdaq Computer Index
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8/9/07
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8/31/07
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11/30/07
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2/29/08
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5/31/08
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8/31/08
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11/31/08
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2/28/09
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DemandTec, Inc.
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$
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100.00
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$
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95.90
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$
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164.10
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$
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101.50
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$
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87.80
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$
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103.70
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$
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72.60
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$
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73.60
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Nasdaq Composite Index
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100.00
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102.02
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104.56
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89.26
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99.13
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93.03
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|
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60.34
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54.14
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Nasdaq Computer Index
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100.00
|
|
|
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102.64
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110.49
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88.45
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|
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103.90
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|
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94.56
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59.36
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55.86
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34
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. As of February 28, 2009, 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.
In March 2009, subsequent to our fiscal year end, we used
$11.3 million of our proceeds to pay Connect3s former
shareholders in connection with our February 2009 acquisition of
Connect3, and $1.3 million cash to pay off short-term notes
payable held by a former Connect3 officer and principal
shareholder.
We have used and intend to continue to use the remaining net
proceeds from the offering for working capital and other general
corporate purposes, including to finance our growth, develop new
software and fund capital expenditures. Additionally, we may
choose to expand our current business through acquisitions of
other complementary businesses, products, services or
technologies. Pending such uses, we plan to invest the net
proceeds in short-term, interest-bearing, investment grade
securities.
There were no material differences in the actual use of proceeds
from our IPO as compared to the planned use of proceeds as
described in the final prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b).
35
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Publicly
|
|
|
that May Yet be
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced
|
|
|
Purchased Under
|
|
Period
|
|
Purchased(1)
|
|
|
per Share
|
|
|
Program
|
|
|
the Program
|
|
|
December 1, 2008 December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
January 1, 2009 January 31, 2009
|
|
|
2,865
|
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
February 1, 2009 February 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,865
|
|
|
$
|
1.90
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under our 1999 Equity Incentive Plan we granted options to
purchase common stock that permit the optionee to exercise the
option before vesting, with us retaining a right to repurchase
any unvested shares at the optionees original cost in the
event of the optionees cessation of service. We ceased to
grant further options with this repurchase feature after
December 2, 2005. This table shows the shares acquired by
us upon our repurchase of unvested shares upon an
employees termination during the quarter ended
February 28, 2009. |
36
|
|
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 2009,
2008 and 2007, and the selected consolidated balance sheet data
as of February 28, 2009 and February 29, 2008, 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 2006
and 2005 and the consolidated balance sheet data as of
February 28, 2007, 2006 and 2005 are derived from audited
consolidated financial statements which are not included in this
Annual Report on
Form 10-K.
Our historical results are not necessarily indicative of results
to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
$
|
32,539
|
|
|
$
|
19,537
|
|
Cost of revenue(2)(3)
|
|
|
23,331
|
|
|
|
20,444
|
|
|
|
14,230
|
|
|
|
12,584
|
|
|
|
8,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
51,674
|
|
|
|
40,826
|
|
|
|
29,255
|
|
|
|
19,955
|
|
|
|
10,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(3)
|
|
|
26,787
|
|
|
|
22,445
|
|
|
|
15,340
|
|
|
|
11,021
|
|
|
|
9,737
|
|
Sales and marketing(3)
|
|
|
20,343
|
|
|
|
17,290
|
|
|
|
12,108
|
|
|
|
10,170
|
|
|
|
8,105
|
|
General and administrative(3)
|
|
|
9,888
|
|
|
|
6,292
|
|
|
|
2,673
|
|
|
|
2,388
|
|
|
|
1,798
|
|
Amortization of purchased intangible assets
|
|
|
1,241
|
|
|
|
360
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
58,259
|
|
|
|
46,387
|
|
|
|
30,239
|
|
|
|
23,579
|
|
|
|
19,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,585
|
)
|
|
|
(5,561
|
)
|
|
|
(984
|
)
|
|
|
(3,624
|
)
|
|
|
(8,984
|
)
|
Other income (expense), net
|
|
|
1,585
|
|
|
|
1,542
|
|
|
|
(480
|
)
|
|
|
850
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes and cumulative effect of
change in accounting principle
|
|
|
(5,000
|
)
|
|
|
(4,019
|
)
|
|
|
(1,464
|
)
|
|
|
(2,774
|
)
|
|
|
(9,268
|
)
|
Provision (benefit) for income taxes
|
|
|
(47
|
)
|
|
|
455
|
|
|
|
52
|
|
|
|
14
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(4,953
|
)
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,788
|
)
|
|
|
(9,276
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,953
|
)
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
|
|
(2,734
|
)
|
|
|
(9,276
|
)
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
13
|
|
|
|
32
|
|
|
|
32
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,953
|
)
|
|
$
|
(4,487
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
(2,766
|
)
|
|
$
|
(9,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(2.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
27,372
|
|
|
|
17,612
|
|
|
|
5,531
|
|
|
|
4,449
|
|
|
|
4,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
As of
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009(1)
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities(4)
|
|
$
|
87,884
|
|
|
$
|
75,889
|
|
|
$
|
25,478
|
|
|
$
|
14,771
|
|
|
$
|
11,594
|
|
Working capital (deficit)
|
|
|
21,788
|
|
|
|
44,739
|
|
|
|
(66
|
)
|
|
|
(10,731
|
)
|
|
|
(8,593
|
)
|
Total assets
|
|
|
134,155
|
|
|
|
113,796
|
|
|
|
56,795
|
|
|
|
21,016
|
|
|
|
19,299
|
|
Deferred revenue
|
|
|
48,815
|
|
|
|
55,375
|
|
|
|
42,172
|
|
|
|
25,124
|
|
|
|
24,536
|
|
Debt
|
|
|
1,720
|
|
|
|
442
|
|
|
|
15,063
|
|
|
|
2,219
|
|
|
|
1,646
|
|
Merger consideration payable
|
|
|
13,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
49,073
|
|
|
|
48,976
|
|
|
|
49,211
|
|
Stockholders equity (deficit)
|
|
|
56,649
|
|
|
|
50,297
|
|
|
|
(58,660
|
)
|
|
|
(62,529
|
)
|
|
|
(60,595
|
)
|
|
|
|
(1) |
|
We acquired TradePoint in November 2006 and Connect3 in February
2009. See Note 2 to the consolidated financial statements. |
|
(2) |
|
Includes amortization of purchased intangible assets of $610 in
fiscal 2009, $608 in fiscal 2008, and $203 in fiscal 2007. |
|
(3) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
Year Ended February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of revenue
|
|
$
|
1,712
|
|
|
$
|
1,261
|
|
|
$
|
41
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
2,261
|
|
|
|
1,824
|
|
|
|
62
|
|
|
|
6
|
|
|
|
14
|
|
Sales and marketing
|
|
|
2,263
|
|
|
|
1,367
|
|
|
|
74
|
|
|
|
1
|
|
|
|
11
|
|
General and administrative
|
|
|
1,743
|
|
|
|
883
|
|
|
|
156
|
|
|
|
64
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
7,979
|
|
|
$
|
5,335
|
|
|
$
|
333
|
|
|
$
|
71
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, but does not reflect the reduction of
$11.3 million in merger consideration to Connect3s
former shareholders and $1.3 million of short-term notes
payable to a former Connect3 officer and principal shareholder,
as those payments were made in March 2009, subsequent to our
fiscal year end. |
38
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Forward-Looking
Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of
1934, as amended. In addition, we may make other written and
oral communications from time to time that contain such
statements. Forward-looking statements include statements as to
industry trends and future expectations of ours and other
matters that do not relate strictly to historical facts. These
statements are often identified by the use of words such as
may, will, expect,
believe, anticipate, intend,
could, estimate, or
continue, and similar expressions or variations.
These statements are based on the beliefs and assumptions of our
management based on information currently available to
management. Such forward-looking statements are subject to
risks, uncertainties and other factors that could cause actual
results and the timing of certain events to differ materially
from future results expressed or implied by such forward-looking
statements. These forward-looking statements include statements
in this Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Factors that could cause or contribute to such differences
include, but are not limited to, those identified below, and
those discussed under the heading Risk Factors in
Item 1A of this Annual Report on
Form 10-K
and in our other Securities and Exchange Commission filings.
Furthermore, such forward-looking statements speak only as of
the date of this report. We undertake no obligation to update
any forward-looking statements to reflect events or
circumstances after the date of such statements.
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the consolidated financial statements and
related notes thereto appearing elsewhere in this Annual Report
on
Form 10-K.
Our fiscal year ends on the last day of February; fiscal 2009,
for example, refers to our fiscal year ended February 28,
2009.
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, assortment,
space 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 and CP industries
include DemandTec Lifecycle Price
Optimizationtm,
DemandTec End-to-End Promotion
Managementtm,
DemandTec Assortment &
Spacetm,
DemandTec Targeted
Marketingtm
and DemandTec Trade
Effectivenesstm.
The DemandTec TradePoint
Networktm
connects our solutions for the retail and CP industries. We 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 $75.0 million in fiscal 2009. Our operating
expenses have also increased significantly during these same
periods. We have incurred losses to date and had an accumulated
deficit of approximately $77.4 million at February 28,
2009.
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, renewing existing agreements, and selling add-on
software services to 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 software service agreements with retailers and CP companies
are large contracts that generally are two to three years in
length. The annual contract value for each retail and CP company
customer agreement is largely
39
related to their size, and therefore can fluctuate from period
to period. Our Advance Deal Management agreements with CP
companies that leverage the DemandTec TradePoint Network are
principally one year in length and much smaller in annual and
aggregate contract value than our retail and CP Companies
customer software services 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 and Europe. We sell
our software through our direct sales force and receive a number
of customer prospect introductions through third-parties such as
systems integrators and a data syndication company. In fiscal
2009, approximately 86% of our revenue was attributable to sales
of our software to companies located in the United States. Our
ability to achieve profitability will be affected by our revenue
as well as our other operating expenses associated with growing
our business. Our largest category of operating expenses is
research and development expenses, and the largest component of
our operating expenses is personnel costs.
In February 2009, we acquired Connect3 Systems, Inc., a provider
of advertising planning and execution software. The Connect3
product suite is being incorporated into the DemandTec
End-to-End Promotion ManagementTM solution, which supports
retailers end-to-end promotion planning process. The
aggregate purchase price was approximately $13.5 million.
We will amortize intangible assets associated with the Connect3
acquisition over one to two and a half years on a straight-line
basis, which, absent any impairment, will result in amortization
expense of approximately $2.4 million, $1.8 million,
and $626,000 in fiscal 2010, 2011, and 2012, respectively.
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.
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 purchased 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
November 2009 and declining amounts thereafter.
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 generally 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.
40
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 purchased 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. Amortization of
purchased intangible assets in fiscal 2009 relates to developed
technology associated with the TradePoint acquisition. We are
amortizing the purchased developed technology associated with
the TradePoint acquisition over five years on a straight-line
basis. We will amortize the purchased developed technology
associated with the Connect3 acquisition over two and a half
years on a straight line basis beginning in our fiscal year
2010. 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 vary 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 vary 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 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, 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 vary
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.
We expect that, in the future, general and administrative
expenses will 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 depending on the timing and magnitude of equity incentive
grants.
41
Amortization
of Purchased Intangible Assets
In February 2009, we acquired Connect3. The aggregate purchase
price was approximately $13.5 million, which consisted of
approximately $13.3 million in cash and $201,000 of
acquisition costs. We are amortizing purchased intangible assets
related to developed technology, customer relationships,
non-compete covenants and backlog over one to two and a half
years on a straight-line basis. Accordingly, annual amortization
expenses, absent any impairment, will be approximately
$2.4 million, $1.8 million, and $626,000 in fiscal
2010, 2011 and 2012, respectively.
In May 2008, we purchased rights to develop assortment
optimization technology for $1.5 million. We are amortizing
this intangible asset over 18 months on a straight-line
basis. This resulted in $734,000 of amortization expense in
fiscal 2009.
In November 2006, we acquired TradePoint. The aggregate purchase
price was approximately $9.8 million, which consisted of
approximately $3.7 million in cash, approximately
$4.1 million in our common stock, a $1.8 million
promissory note and $219,000 of acquisition costs. In this
acquisition, we purchased intangible assets related to developed
technology, customer relationships, a trade name, and
non-compete covenants. We are amortizing purchased intangible
assets over three to ten years on a straight-line basis.
Intangible asset amortization expense was approximately $360,000
in operating expenses and $610,000 in cost of revenue in each of
fiscal 2009 and 2008. In fiscal 2007, amortization expense was
approximately $118,000 in operating expenses and $203,000 in
cost of revenue. The amortization expense associated with
TradePoint purchased intangible assets will decline beginning in
December 2009.
Other
Income (Expense), Net
Other income (expense), net includes interest income on our cash
and marketable securities balances, interest expense related to
debt, and losses or gains on conversions of
non-U.S. dollar
transactions into U.S. dollars. In the past two fiscal
years, we have invested a majority of our cash in money market
funds, treasury bills, corporate bonds, U.S. agencies, and
commercial paper. In the first half of fiscal 2008 and fiscal
2007 (the periods preceding our IPO before convertible preferred
stock was automatically converted to common stock), other income
(expense), net included the impact of recording our outstanding
redeemable convertible preferred stock warrants at fair value
under Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, or
SFAS No. 150. In fiscal 2010 and thereafter, other
income (expense), net will depend on a number of factors,
including our ability to generate cash from operations, interest
rates and the rates of return on our investments and whether or
not we incur debt.
Critical
Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States, or GAAP. These accounting principles often require us to
make certain estimates and judgments that can affect the
reported amounts of assets and liabilities as of the date of our
consolidated financial statements, as well as the reported
amounts of revenue and expenses during the periods presented. In
some cases, the accounting treatment of a particular transaction
is specifically dictated by GAAP and does not require
managements judgment in its application or our judgments
in selecting among available accounting policy alternatives, as
they would not produce a materially different result. In other
cases, our judgments among available alternatives can have a
material impact on our accounting results. We believe that our
estimates and judgments were reasonable based upon information
available to us at the time that these estimates and judgments
were made. On an ongoing basis, we evaluate our estimates and
judgments. Our actual results may differ from these estimates
under different assumptions or conditions.
We believe that of our significant accounting policies, which
are described in Note 1 to our Consolidated Financial
Statements included in Item 8, Financial Statements and
Supplementary Data of this Annual Report on
Form 10-K,
the following accounting polices involve the greatest degree of
judgment and complexity and have the potential for the greatest
impact on our consolidated financial statements. Accordingly, we
believe these policies are the most critical in fully
understanding and evaluating our reported financial results.
42
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:
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|
|
|
|
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.
|
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 $3.4 million, $2.8 million, and
$1.5 million in fiscal 2009, 2008, and 2007, respectively.
Deferred commissions on our consolidated balance sheet totaled
$1.3 million at February 28, 2009 and
$2.6 million at February 29, 2008.
Stock-Based
Compensation
Effective March 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (Revised 2004),
Share-Based Payment, or SFAS No. 123(R), using
the prospective transition method, which required us to apply
the provisions of SFAS No. 123(R) only to new awards
granted, and to awards modified, repurchased or cancelled after
the adoption date. Under this transition method, we began
amortizing the grant-date fair value of outstanding stock
options granted or modified on or after March 1, 2006 to
stock-based compensation expense on a straight-line basis over
the requisite service period of the award. Prior to our IPO in
August 2007, our board of directors used the services of an
unrelated third-party valuation firm to perform contemporaneous
valuations at various points in time to determine the fair value
of our common stock and to establish the exercise prices of
stock options granted. During this time, 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. These estimates were consistent
with 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
43
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.
Income
Taxes
We account for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income
Taxes. 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 continued need for and amount
of the valuation allowance. We may determine that some, or all,
of our deferred tax assets will be realized, in which case we
will reduce our valuation allowance in the quarter in which such
determination is made. If the valuation allowance is reduced, we
may recognize a benefit from income taxes on our income
statement in that period. In subsequent periods, we may have
higher income tax expenses.
Goodwill
and Intangible Assets
We record as goodwill the excess of the acquisition purchase
price over the fair value of the tangible and identifiable
intangible assets acquired. 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 purchased intangible assets at their respective estimated
fair values at the date of acquisition. Purchased intangible
assets are being amortized using the straight-line method over
their estimated useful lives, which range from approximately one
to ten 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 purchased 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 28, 2009.
44
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
31
|
|
|
|
33
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
69
|
|
|
|
67
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
36
|
|
|
|
37
|
|
|
|
35
|
|
Sales and marketing
|
|
|
27
|
|
|
|
28
|
|
|
|
28
|
|
General and administrative
|
|
|
13
|
|
|
|
10
|
|
|
|
6
|
|
Amortization of purchased intangible assets
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
78
|
|
|
|
76
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
(2
|
)
|
Other income (expense), net
|
|
|
2
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
(3
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
|
(7
|
)%
|
|
|
(7
|
)%
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 revenue increased approximately $13.7 million, or
22.4%, from fiscal 2008 revenue. The revenue increase was
primarily due to a $11.8 million increase in revenue from
customers that had contributed revenue in prior years, which we
refer to as existing customers. Revenue from existing customers
was approximately 97% and 89% of our total revenue in fiscal
2009 and 2008, respectively. Revenue from customers that did not
contribute any revenue in prior years, which we refer to as new
customers, was approximately $1.9 million in fiscal 2009.
In fiscal 2009, the economic environment deteriorated as
compared to fiscal 2008 and has resulted in the signing of
customer contracts taking longer, particularly new customer
contracts. New customer revenue in any given period can
fluctuate depending upon the period in which the contract signs,
the number of new customer contracts in any given period and the
size of the new customer retailer or CP customer. The impact of
the deteriorating economic environment on our future revenue
growth rates, or upon the contribution between existing and new
customers is currently unknown. We generated 86% of our revenue
from retail companies in fiscal 2009 and the remaining 14% from
consumer products companies. In fiscal 2008 we generated 90% of
our revenue from retail companies and the remaining 10% from
consumer products companies. We expect that, in the future,
revenue from CP companies will continue to increase as a
percentage of total revenue on an annual basis.
In fiscal 2009, revenue from customers located outside the
United States increased to 14% from 12% in fiscal 2008 .The
increase resulted from increased revenue in existing
international locations as well as revenue generated in new
locations. Revenue from Wal-Mart Stores, Inc. accounted for
14.4% and 11.7% of our total revenue in fiscal 2009 and 2008,
respectively. No other customer accounted for more than 10% of
our revenue in fiscal 2009 or fiscal 2008.
45
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 existing
customers. In addition, revenue from new customers, was
$6.9 million in fiscal 2008. 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 companies. In fiscal 2007 we
generated 94% of our revenue from retail companies and the
remaining 6% from consumer products companies.
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 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.
Cost
of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
Cost of revenue
|
|
|
23,331
|
|
|
|
20,444
|
|
|
|
14,230
|
|
Gross profit
|
|
|
51,674
|
|
|
|
40,826
|
|
|
|
29,255
|
|
Gross margin
|
|
|
69
|
%
|
|
|
67
|
%
|
|
|
67
|
%
|
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 cost of revenue increased approximately $2.9 million,
or 14.1%, from fiscal 2008 cost of revenue. This increase was
due primarily to increased personnel costs, equipment
maintenance and depreciation expense offset by a decrease in
third-party contractor and consulting costs.
Personnel costs increased approximately $1.6 million in
fiscal 2009 compared to fiscal 2008, primarily as a result of
increased compensation and employee benefit costs, stock-based
compensation expense and headcount in fiscal 2009. Personnel
costs include all compensation, benefits and hiring costs.
Consulting services, support services, and production operations
headcount increased to 87 (excluding Connect3s former
employees) at February 28, 2009 from 82 at
February 29, 2008. Salary and employee benefit costs
increased approximately $1.1 million in fiscal 2009 as a
result of increased employee benefit costs and merit and
promotion salary adjustments. Stock-based compensation expense
increased approximately $451,000 to $1.7 million in fiscal
2009 compared to $1.2 million in fiscal 2008. The increase
in stock-based compensation expense was primarily due to new
stock options and time-based RSUs granted under the 2007 Equity
Incentive Plan in fiscal 2009. There were no time-based RSUs
granted in fiscal 2008. In addition, in fiscal 2009, equipment
and maintenance contract expenses increased approximately
$549,000, data center facility rental costs increased
approximately $499,000, and depreciation expense increased
approximately $606,000 as a result of $2.8 million of
capital expenditures, predominantly related to the expansion of
data infrastructure facilities to support customer growth.
Third-party contractor and consulting expense decreased
approximately $664,000 in fiscal 2009 compared to fiscal 2008,
primarily due to increased use of DemandTec personnel to provide
integration services as opposed to third-party consulting firms.
Our gross margin increased to 69% in fiscal 2009 as compared to
67% in fiscal 2008 due to economies of scale gained from
spreading our data center infrastructure and personnel costs
over a larger customer base, partially offset by higher
stock-based compensation and intangible amortization expenses in
fiscal 2009. We anticipate that our gross margin will decrease
in the short term as a result of the impact of the Connect3
acquisition, but that in the future, our gross margin will
increase as we continue to grow our customer base and gain
economies of scale.
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
46
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-based 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.
Research
and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development
|
|
$
|
26,787
|
|
|
$
|
22,445
|
|
|
$
|
15,340
|
|
Percent of revenue
|
|
|
36
|
%
|
|
|
37
|
%
|
|
|
35
|
%
|
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 research and development expenses increased approximately
$4.3 million, or 19%, from fiscal 2008, primarily due to
increased personnel costs and allocated overhead costs
associated with increased headcount, increased third-party
contractor and consulting costs, and increased equipment
maintenance and depreciation expense. Research and development
headcount increased to 119 at February 28, 2009 from 99 at
February 29, 2008. Personnel costs, including all
compensation, benefits and hiring costs, increased by
$3.2 million in fiscal 2009 as compared to fiscal 2008.
Stock-based compensation expense, which is a component of
personnel costs, increased approximately $437,000 from fiscal
2008. Allocated overhead expenses increased approximately
$331,000, primarily due to increased headcount and increased
infrastructure support expenses associated with growth.
Third-party contractor and consulting expense increased
approximately $418,000 compared to fiscal 2008, primarily as a
result of a new development process methodology initiated with
an outside consultation firm in May 2008. Equipment maintenance
and depreciation expense increased approximately $282,000 as
compared to fiscal 2008 and was primarily due to increased
capital expenditures to support our research and development
labs, infrastructure and increased headcount.
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.
47
Sales
and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Sales and marketing
|
|
$
|
20,343
|
|
|
$
|
17,290
|
|
|
$
|
12,108
|
|
Percent of revenue
|
|
|
27
|
%
|
|
|
28
|
%
|
|
|
28
|
%
|
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 sales and marketing expenses increased by approximately
$3.1 million, or 18%, from fiscal 2008, primarily as a
result of increased personnel costs of approximately
$2.5 million. Sales and marketing personnel costs include
all compensation, benefits and hiring costs. Sales and marketing
headcount increased to 39 at February 28, 2009 from 35 at
February 29, 2008. Compensation and employee benefit costs,
including commissions, increased approximately $1.6 million
in fiscal 2009 as a result of increased headcount, employee
benefit costs, and merit and promotion salary adjustments.
Stock-based compensation, which is a component of personnel
costs and is included in sales and marketing expenses, increased
by approximately $896,000, primarily due to stock awards granted
under the 2007 Equity Incentive Plan. Marketing-related costs
increased $112,000 in fiscal 2009, primarily for tradeshows,
events and advertising.
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 sales and marketing expenses increased by approximately
$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.
General
and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
General and administrative
|
|
$
|
9,888
|
|
|
$
|
6,292
|
|
|
$
|
2,673
|
|
Percent of revenue
|
|
|
13
|
%
|
|
|
10
|
%
|
|
|
6
|
%
|
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 general and administrative expenses increased approximately
$3.6 million, or 57%, over fiscal 2008 general and
administrative expenses, primarily due to increased personnel
costs associated with headcount increases and increased
third-party professional services, principally for legal,
accounting and auditing expenses associated with being a public
company. General and administrative headcount increased to 44 at
February 28, 2009 from 35 at February 29, 2008.
Personnel costs increased approximately $1.7 million in
fiscal 2009 compared to the prior year, primarily as a result of
headcount increases and stock-based compensation expense.
Stock-based compensation, which is a component of personnel
costs, increased approximately $860,000 to $1.7 million in
fiscal 2009 from $824,000 in fiscal 2008. Third-party
professional services costs increased approximately
$1.3 million, primarily due to costs associated with being
a public company related to Sarbanes-Oxley compliance and audit
expenses.
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
48
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.
Amortization
of Purchased Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Amortization of purchased intangible assets
|
|
$
|
1,241
|
|
|
$
|
360
|
|
|
$
|
118
|
|
Percent of revenue
|
|
|
1.7
|
%
|
|
|
0.6
|
%
|
|
|
0.3
|
%
|
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 amortization of purchased intangible assets increased
approximately $881,000 from fiscal 2008, primarily due to our
May 2008 acquisition of rights to develop assortment
optimization technology for $1.5 million. In June 2008 we
began amortizing intangible assets associated with those rights
over a period of eighteen months. In addition, $150,000 of
in-process research and development associated with our Connect3
acquisition was expensed in February 2009 upon consummation of
the acquisition. Intangible assets associated with the Connect3
acquisition will be amortized over one to two and a half years
starting in fiscal 2010.
Fiscal 2008 Compared to Fiscal 2007. Fiscal
2008 amortization of purchased 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 purchased intangible assets was included in
fiscal 2008 cost of revenue compared to $203,000 in fiscal 2007.
Other
Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Interest income
|
|
$
|
1,772
|
|
|
$
|
2,467
|
|
|
$
|
735
|
|
Interest expense
|
|
|
(84
|
)
|
|
|
(1,216
|
)
|
|
|
(1,091
|
)
|
Other income (expense)
|
|
|
(103
|
)
|
|
|
291
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
1,585
|
|
|
$
|
1,542
|
|
|
$
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 Compared to Fiscal 2008. Fiscal
2009 other income (expense), net remained relatively constant as
compared to fiscal 2008. Interest income decreased approximately
$695,000 in fiscal 2009 as a result of lower interest rates on
invested cash balances and marketable securities. Interest
expense decreased $1.1 million as we paid off approximately
$13.0 million in interest-bearing debt with proceeds from
our IPO. Other expense increased by $394,000 in fiscal 2009 over
fiscal 2008 primarily due to foreign exchange losses recognized
in fiscal 2009 on our cash and accounts receivable balances,
whereas we recognized a net gain in fiscal 2008. The majority of
our foreign exchange gains and losses are the result of
fluctuations in the Euro-to-U.S. dollar exchange rates.
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.
49
Provision
(Benefit) for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 29,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Provision (benefit) for income taxes
|
|
$
|
(47
|
)
|
|
$
|
455
|
|
|
$
|
52
|
|
Since inception, we have incurred annual operating losses and,
accordingly, have recorded a provision for income taxes
primarily for federal minimum income taxes, state income taxes
and foreign taxes associated with our foreign customers and
operations. At February 28, 2009, we had federal and state
net operating loss carryforwards of approximately
$56.4 million and $34.9 million, respectively, to
offset future taxable income, subject to limitations provided by
the Internal Revenue Code and similar state provisions.
We adopted Financial Accounting Standards Board 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 2009, we recorded an income tax benefit of $47,000 as
compared to income tax expense of $455,000 in fiscal 2008. The
effective tax rate for fiscal 2009 was 1.0% based on our taxable
income for the year, and includes a federal income tax benefit
of $83,000 related to the provisions of the Housing Assistance
Act of 2008 and American Recovery and Reinvestment Act of 2009
whereby corporations otherwise eligible for bonus first-year
depreciation may instead elect to claim a refund for research
and development tax credits generated prior to 2006. Excluding
the tax impact of these acts, we would have recorded income tax
expense primarily for state minimum taxes and for our foreign
jurisdictions.
In fiscal 2008, we incurred income tax expense of $455,000
compared to $52,000 in fiscal 2007. 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.
Stock-Based
Compensation Expense
Total stock-based compensation expense increased approximately
$2.6 million in fiscal 2009 as compared to fiscal 2008. The
increase was primarily due to options granted to new and
existing employees subsequent to February 29, 2008 and the
award of RSUs, partially offset by decreases of stock-based
compensation expense resulting from our revising of our estimate
of the number of awards (primarily performance stock units, or
PSUs) expected to vest and lower PSU expense as some shares
vested in July 2008. See Note 7 of Notes to our
Consolidated Financial Statements contained herein for further
explanation of how we derive and account for these estimates. We
expect that stock-based compensation expense will increase in
the short term but will vary in the long term depending upon the
timing and magnitude of equity incentive grants and revisions of
our estimate of the number of shares expected to vest.
Liquidity
and Capital Resources
At February 28, 2009, our principal sources of liquidity
consisted of cash, cash equivalents, and marketable securities
of $87.9 million, accounts receivable (net of allowance) of
$11.0 million, and available borrowing capacity under our
credit facility of $15.0 million. At February 28, 2009
we had no auction rate securities and no investments in
asset-backed securities. In August 2007, we completed our IPO,
in which we raised approximately
50
$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 $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 and had no
outstanding debt under the line of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
13,813
|
|
|
$
|
11,255
|
|
|
$
|
5,230
|
|
Net cash used in investing activities
|
|
|
(25,840
|
)
|
|
|
(33,675
|
)
|
|
|
(7,944
|
)
|
Net cash provided by financing activities
|
|
|
2,595
|
|
|
|
44,605
|
|
|
|
11,395
|
|
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. 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 2009 Compared to Fiscal 2008. Net cash
provided by operating activities increased to $13.8 million
in fiscal 2009 from $11.3 million in fiscal 2008. Improved
expense management and growth in our business resulted in
approximately $8.1 million of cash inflow from operating
activities after taking into consideration non-cash expenses
primarily associated with stock-based compensation, depreciation
and amortization of intangible assets included in our net loss.
Growth in our customer base and improved collection efforts
resulted in a $7.7 million decrease in accounts receivable
as well as an improvement in days sales outstanding. Our days
sales outstanding was 55 days at February 28, 2009
compared to 82 days at February 29, 2008. The accounts
receivable decrease was largely offset by a $7.1 million
decrease in deferred revenue associated with the fact that
long-term deferred revenue decreased because we increasingly
bill customers on an annual basis rather than billing multiple
years in advance. In addition, we had cash inflow from other
working capital items in fiscal 2009 compared to a cash outflow
from these same working capital items in fiscal 2008. Increased
accounts payable, accrued compensation and accrued commissions,
primarily due to the timing of payments to certain vendors and
employees, accounted for the improved cash flow from other
working capital.
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 in cash provided by operating activities was primarily
due to the collections of increased amounts billed to customers
in advance of revenue recognition. Growth in our business as
well as the fact that we billed some customers for multiple
years in advance largely accounted for the $3.9 million
increase in accounts receivable and $13.2 million increase
in deferred revenue in fiscal 2008. This compares to accounts
receivable and deferred revenue growth of $11.1 million and
$16.0 million, respectively, in fiscal 2007, where we were
also experiencing rapid growth and billed customers multiple
years in advance. Our days sales outstanding was 82 days at
February 29, 2008 compared to 54 days at
February 28, 2007. The increase in our days sales
outstanding was the result of delayed collections of a few of
our customers accounts receivable balances. In addition,
our net loss increased by $3.0 million in fiscal 2008, 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 trade disbursements.
51
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 2009 Compared to Fiscal 2008. Net cash
used in investing activities was $25.8 million in fiscal
2009 as compared to $33.7 million in fiscal 2008, primarily
due to purchases and maturities of marketable securities, which
was $6.5 million lower in fiscal 2009 as compared to fiscal
2008, as we invested more in cash and cash equivalents in fiscal
2009 due to uncertainty and volatility in interest rates. In
addition, capital expenditures decreased approximately
$1.0 million in fiscal 2009 compared to fiscal 2008 and we
acquired assortment optimization technology for
$1.5 million in fiscal 2009.
In March 2009, we paid $11.3 million of the approximately
$13.3 million cash purchase consideration in connection
with our February 2009 acquisition of Connect3. The remaining
$2.0 million, less any amounts used to satisfy any claims
for indemnification that we may make for certain breaches of
representations, warranties and covenants, will be distributed
within sixteen months of the consummation of the acquisition.
Fiscal 2008 Compared to Fiscal 2007. Net cash
used in investing activities was $33.7 million in fiscal
2008 as compared to $7.9 million in fiscal 2007, primarily
due to purchases of marketable securities, which was
$26.2 million higher in fiscal 2008 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.
Financing
Activities
Our primary financing activities have been issuances of common
stock related to our IPO, our issuance and repayments of notes
payable, and advances taken and repayments made under our lines
of credit.
Fiscal 2009 Compared to Fiscal 2008. Net cash
provided by financing activities was $2.6 million in fiscal
2009 as compared to $44.6 million in fiscal 2008. The
decrease was primarily due to net proceeds from our initial
public offering in fiscal 2008 of $57.6 million offset by
$13.4 million in payments of notes payable in fiscal 2008
and the repayment of advances under our line of credit in fiscal
2008.
In March 2009, we paid off $1.3 million in short-term notes
payable held by a former Connect3 officer and principal
shareholder.
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.
We believe that cash provided by operating activities, together
with our cash, cash equivalents, and marketable securities
balances at February 28, 2009, will be sufficient to fund
our projected operating requirements for at least the next
twelve months. We may need to raise additional capital or incur
debt to continue to fund our operations over the long term. Our
future capital requirements will depend on many factors,
including 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, merger
consideration payable and notes payable to former TradePoint and
Connect3 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
or if we enter into new lease agreements to expand our
operations.
52
At February 28, 2009, the future minimum payments under our
lease commitments, and amounts due for merger consideration and
notes payable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating leases
|
|
$
|
1,482
|
|
|
$
|
1,220
|
|
|
$
|
262
|
|
|
$
|
|
|
|
$
|
|
|
Merger consideration payable to former Connect3 shareholders
|
|
|
13,343
|
|
|
|
12,343
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Notes payable to a former Connect3 officer and principal
shareholder
|
|
|
1,286
|
|
|
|
1,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to former TradePoint shareholders
|
|
|
434
|
|
|
|
434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
16,545
|
|
|
$
|
15,283
|
|
|
$
|
1,262
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 November 2008, the FASB ratified
EITF 08-7,
Accounting for Defensive Intangible Assets, or
EITF 08-7.
EITF 08-7
applies to purchased intangible defensive assets that the
acquirer does not intend to actively use, but intends to hold to
prevent its competitors from obtaining access to the asset.
EITF 08-7
clarifies that defensive intangible assets are separately
identifiable and should be accounted for as a separate unit of
accounting in accordance with SFAS No. 141(R) and
SFAS No. 157, Fair Value Measurements.
EITF 08-7
is effective for intangible assets purchased in fiscal years
beginning on or after December 15, 2008 and will be adopted
by us in the first quarter of fiscal year 2010. This guidance
does not impact our current consolidated financial statements
since it will be applied prospectively on adoption. We are
assessing the potential impact, if any, that its adoption will
have on our consolidated results of operations and financial
condition going forward.
In April 2008, the FASB issued FSP
No. 142-3,
Determination of the Useful Life of Intangible Assets, or
FSP 142-3.
FSP 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other Intangible Assets. This
new guidance applies prospectively to intangible assets that are
acquired individually or with a group of other assets in
business combinations and asset acquisitions.
FSP 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. This
guidance does not impact our current consolidated financial
statements since it will be applied prospectively on adoption.
We are assessing the potential impact, if any, that its adoption
will have on our consolidated results of operations and
financial condition going forward.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, or SFAS No. 161.
SFAS No. 161 requires companies with derivative
instruments to disclose information that should enable financial
statement users to understand how and why a company uses
derivative instruments and how derivative instruments and
related hedged items affect a companys financial position,
financial performance and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Early
application is encouraged and, accordingly, we early adopted
SFAS No. 161 in our quarter ended August 31, 2008
and included the additional disclosures in Note 9 to our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141(R), 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
53
the acquiree in a business combination.
SFAS No. 141(R) 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. 141(R) is effective for fiscal years
beginning after December 15, 2008, and we will adopt it
beginning in the first quarter of fiscal 2010. This guidance
does not impact our current consolidated financial statements
since it will be applied prospectively on adoption. We are
assessing the potential impact, if any, that its adoption will
have on our consolidated results of operations and financial
condition going forward.
|
|
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.
We operate internationally and generally our international sales
agreements are denominated in the country of origin currency,
and therefore our revenue is subject to foreign currency risk.
Also, some of our operating expenses and cash flows are
denominated in foreign currency and, thus, are subject to
fluctuations due to changes in foreign currency exchange rates,
particularly changes in the exchange rates for the British Pound
and the Euro. We periodically enter into foreign exchange
forward contracts to reduce exposure in
non-U.S. dollar
denominated receivables. We formally assess, both at a
hedges inception and on an ongoing basis, whether the
derivatives used in hedging transactions are highly effective in
negating currency risk. As of February 28, 2009, we had two
outstanding forward foreign exchange contracts to sell Euros for
U.S. dollars in 3 months and 15 months,
respectively, with a notional principal of
1.2 million (or approximately $1.5 million)
each. 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 $(97,000), $397,000 and $70,000 for
fiscal 2009, 2008 and 2007, respectively.
Interest
Rate Sensitivity
We had cash and cash equivalents totaling $33.6 million and
marketable securities totaling $54.3 million at
February 28, 2009. These amounts were invested primarily in
government securities and corporate notes and bonds with credit
ratings of at least A1 or better, money market funds, and
interest-bearing demand deposit accounts. By policy, we limit
the amount of credit exposure to any one issuer and we do not
enter into investments for trading or speculative purposes. Our
cash and cash equivalents and marketable securities are held and
invested with capital preservation as the primary objective.
Our cash equivalents and marketable securities are subject to
market risk due to changes in interest rates. Fixed rate
interest securities may have their market value adversely
impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment
income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if we are forced to
sell securities that decline in market value due to changes in
interest rates. However, because we classify our marketable
securities as held-to-maturity, no gains or losses
are recognized due to changes in interest rates unless such
securities are sold prior to maturity or declines in fair value
are determined to be other-than-temporary. An immediate increase
or decrease in interest rates of 100 basis points at
February 28, 2009 would result in an approximately $543,000
market value reduction or increase.
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.
54
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
DemandTec, Inc. Consolidated Financial Statements
|
|
|
|
|
|
|
|
56
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
62
|
|
55
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
DemandTec, Inc.
We have audited the accompanying consolidated balance sheets of
DemandTec, Inc. as of February 28, 2009 and
February 29, 2008, and the related consolidated statements
of operations, redeemable convertible preferred stock and
stockholders equity (deficit), and cash flows for each of
the three years in the period ended February 28, 2009. Our
audits also included the financial statement schedule listed in
the Index at Item 15(b). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of DemandTec, Inc. at February 28, 2009
and February 29, 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the
period ended February 28, 2009, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
DemandTec, Inc.s internal control over financial reporting
as of February 28, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated April 21, 2009 expressed an unqualified
opinion thereon.
As discussed in Note 1 to the consolidated financial
statements under the heading Fair Value of Financial
Instruments, on March 1, 2008, the Company adopted
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements. Also, as discussed in
Note 1 to the consolidated financial statements under the
heading Income Taxes, on March 1, 2007,
the Company adopted Statement of Financial Accounting Standards
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an Interpretation of FASB Statement
No. 109.
San Jose, California
April 21, 2009
56
Report of
Independent Registered Public Accounting Firm
Board of Directors and Stockholders
DemandTec, Inc.
We have audited DemandTec, Inc.s internal control over
financial reporting as of February 28, 2009, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). DemandTec,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, DemandTec, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of February 28, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of DemandTec, Inc. as of
February 28, 2009 and February 29, 2008, and the
related consolidated statements of operations, redeemable
convertible preferred stock and stockholders equity
(deficit), and cash flows for each of the three years in the
period ended February 28, 2009 of DemandTec, Inc. and our
report dated April 21, 2009 expressed an unqualified
opinion thereon.
San Jose, California
April 21, 2009
57
DemandTec,
Inc.
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,572
|
|
|
$
|
43,257
|
|
Short-term marketable securities
|
|
|
46,426
|
|
|
|
30,547
|
|
Accounts receivable, net of allowances of $120 and $160 as of
February 28, 2009 and February 29, 2008, respectively
|
|
|
11,000
|
|
|
|
18,227
|
|
Other current assets
|
|
|
4,230
|
|
|
|
4,161
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
95,228
|
|
|
|
96,192
|
|
Marketable securities, non-current
|
|
|
7,886
|
|
|
|
2,085
|
|
Property, equipment and leasehold improvements, net
|
|
|
5,429
|
|
|
|
5,139
|
|
Intangible assets
|
|
|
8,405
|
|
|
|
3,761
|
|
Goodwill
|
|
|
16,492
|
|
|
|
5,290
|
|
Other assets, net
|
|
|
715
|
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
134,155
|
|
|
$
|
113,796
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
12,955
|
|
|
$
|
6,969
|
|
Deferred revenue, current
|
|
|
46,415
|
|
|
|
44,006
|
|
Notes payable, current
|
|
|
1,720
|
|
|
|
442
|
|
Merger consideration payable
|
|
|
12,343
|
|
|
|
|
|
Other current liabilities
|
|
|
7
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
73,440
|
|
|
|
51,453
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
|
2,400
|
|
|
|
11,369
|
|
Other long-term liabilities
|
|
|
1,666
|
|
|
|
677
|
|
Commitments and contingencies (see Note 5)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
175,000 shares authorized, and 28,059 and
26,452 shares issued and outstanding, respectively,
excluding 4 and 31 shares subject to repurchase,
respectively, as of February 28, 2009 and February 29,
2008
|
|
|
28
|
|
|
|
26
|
|
Additional paid-in capital
|
|
|
133,320
|
|
|
|
122,699
|
|
Accumulated other comprehensive income
|
|
|
682
|
|
|
|
|
|
Accumulated deficit
|
|
|
(77,381
|
)
|
|
|
(72,428
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
56,649
|
|
|
|
50,297
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
134,155
|
|
|
$
|
113,796
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
58
DemandTec,
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
Cost of revenue(1)(2)
|
|
|
23,331
|
|
|
|
20,444
|
|
|
|
14,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
51,674
|
|
|
|
40,826
|
|
|
|
29,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(2)
|
|
|
26,787
|
|
|
|
22,445
|
|
|
|
15,340
|
|
Sales and marketing(2)
|
|
|
20,343
|
|
|
|
17,290
|
|
|
|
12,108
|
|
General and administrative(2)
|
|
|
9,888
|
|
|
|
6,292
|
|
|
|
2,673
|
|
Amortization of purchased intangible assets
|
|
|
1,241
|
|
|
|
360
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
58,259
|
|
|
|
46,387
|
|
|
|
30,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,585
|
)
|
|
|
(5,561
|
)
|
|
|
(984
|
)
|
Interest income
|
|
|
1,772
|
|
|
|
2,467
|
|
|
|
735
|
|
Interest expense
|
|
|
(84
|
)
|
|
|
(1,216
|
)
|
|
|
(1,091
|
)
|
Other income (expense), net
|
|
|
(103
|
)
|
|
|
291
|
|
|
|
(124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(5,000
|
)
|
|
|
(4,019
|
)
|
|
|
(1,464
|
)
|
Provision (benefit) for income taxes
|
|
|
(47
|
)
|
|
|
455
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,953
|
)
|
|
|
(4,474
|
)
|
|
|
(1,516
|
)
|
Accretion to redemption value of preferred stock
|
|
|
|
|
|
|
13
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,953
|
)
|
|
$
|
(4,487
|
)
|
|
$
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per common
share
|
|
|
27,372
|
|
|
|
17,612
|
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes amortization of purchased intangible assets
|
|
$
|
610
|
|
|
$
|
608
|
|
|
$
|
203
|
|
(2) Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,712
|
|
|
$
|
1,261
|
|
|
$
|
41
|
|
Research and development
|
|
|
2,261
|
|
|
|
1,824
|
|
|
|
62
|
|
Sales and marketing
|
|
|
2,263
|
|
|
|
1,367
|
|
|
|
74
|
|
General and administrative
|
|
|
1,743
|
|
|
|
883
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
7,979
|
|
|
$
|
5,335
|
|
|
$
|
333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
59
DemandTec,
Inc.
Stockholders
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
Convertible Preferred
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
|
(In thousands)
|
|
|
Balance at February 28, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan and
upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,341
|
|
|
|
2
|
|
|
|
2,608
|
|
|
|
|
|
|
|
|
|
|
|
2,610
|
|
Conversion of vested restricted stock units to shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of common stock related to early exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,979
|
|
|
|
|
|
|
|
|
|
|
|
7,979
|
|
Change in fair value of cash flow hedge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
682
|
|
|
|
|
|
|
|
682
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,953
|
)
|
|
|
(4,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
28,059
|
|
|
$
|
28
|
|
|
$
|
133,320
|
|
|
$
|
682
|
|
|
$
|
(77,381
|
)
|
|
$
|
56,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
60
DemandTec,
Inc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,953
|
)
|
|
$
|
(4,474
|
)
|
|
$
|
(1,516
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,930
|
|
|
|
1,929
|
|
|
|
1,060
|
|
Stock-based compensation expense
|
|
|
7,979
|
|
|
|
5,335
|
|
|
|
333
|
|
Amortization of warrants issued in conjunction with debt
|
|
|
|
|
|
|
64
|
|
|
|
99
|
|
Revaluation of warrants to fair value
|
|
|
|
|
|
|
119
|
|
|
|
206
|
|
Amortization of purchased intangible assets
|
|
|
1,851
|
|
|
|
968
|
|
|
|
321
|
|
Amortization of financing costs
|
|
|
20
|
|
|
|
93
|
|
|
|
125
|
|
Charge on early extinguishment of debt
|
|
|
|
|
|
|
504
|
|
|
|
|
|
Provision for accounts receivable
|
|
|
(40
|
)
|
|
|
98
|
|
|
|
31
|
|
Other
|
|
|
286
|
|
|
|
(81
|
)
|
|
|
(64
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
7,706
|
|
|
|
(3,927
|
)
|
|
|
(11,099
|
)
|
Prepaid expenses and other current assets
|
|
|
(233
|
)
|
|
|
(1,149
|
)
|
|
|
(187
|
)
|
Deferred commissions
|
|
|
1,261
|
|
|
|
(317
|
)
|
|
|
(1,135
|
)
|
Other assets
|
|
|
135
|
|
|
|
(341
|
)
|
|
|
(113
|
)
|
Accounts payable and accrued expenses
|
|
|
1,586
|
|
|
|
(2,161
|
)
|
|
|
515
|
|
Accrued compensation
|
|
|
2,363
|
|
|
|
1,392
|
|
|
|
700
|
|
Deferred revenue
|
|
|
(7,078
|
)
|
|
|
13,203
|
|
|
|
15,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,813
|
|
|
|
11,255
|
|
|
|
5,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of TradePoint, net of cash received
|
|
|
|
|
|
|
(1,358
|
)
|
|
|
(3,649
|
)
|
Cash received from Connect3 acquisition, net of cash payments
|
|
|
257
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and leasehold improvements
|
|
|
(3,117
|
)
|
|
|
(4,127
|
)
|
|
|
(2,336
|
)
|
Purchases of marketable securities
|
|
|
(82,500
|
)
|
|
|
(86,583
|
)
|
|
|
(6,200
|
)
|
Maturities of marketable securities
|
|
|
60,820
|
|
|
|
58,393
|
|
|
|
4,241
|
|
Purchase of intangible assets
|
|
|
(1,500
|
)
|
|
|
|
|
|
|
|
|
Removal of restricted cash
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(25,840
|
)
|
|
|
(33,675
|
)
|
|
|
(7,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of repurchases
|
|
|
2,603
|
|
|
|
374
|
|
|
|
633
|
|
Proceeds from issuance of convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
65
|
|
Net cash proceeds from initial public offering
|
|
|
|
|
|
|
57,631
|
|
|
|
|
|
Proceeds from advances on line of credit
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Payments on lines of credit
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
(84
|
)
|
Proceeds from issuance of notes payable
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Payments on notes payable
|
|
|
(8
|
)
|
|
|
(10,400
|
)
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,595
|
|
|
|
44,605
|
|
|
|
11,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(253
|
)
|
|
|
36
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(9,685
|
)
|
|
|
22,221
|
|
|
|
8,748
|
|
Cash and cash equivalents at beginning of year
|
|
|
43,257
|
|
|
|
21,036
|
|
|
|
12,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
33,572
|
|
|
$
|
43,257
|
|
|
$
|
21,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
65
|
|
|
$
|
956
|
|
|
$
|
780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
157
|
|
|
$
|
320
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with acquisition of TradePoint
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of preferred stock warrant liability to
additional paid-in capital
|
|
$
|
|
|
|
$
|
714
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants for common and preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred financing costs on note payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger consideration payable to Connect3 shareholders
|
|
$
|
13,343
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed notes payable to a former Connect3 officer and principal
shareholder
|
|
$
|
1,286
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable in connection with acquisition of TradePoint
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
61
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, assortment, space 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 sales presence in North
America, Europe and Japan.
Reclassifications
Certain amounts previously reported in the consolidated balance
sheet as of February 29, 2008, have been reclassified to
conform to the current year classification. Specifically,
intangible assets and goodwill of $3.8 million and
$5.3 million, respectively, have been reclassified from
other assets, net and restricted cash of $200,000 has been
reclassified to other assets, net.
Initial
Public Offering
In August 2007, we completed our initial public offering, or
IPO, in which we sold and issued 6,000,000 shares of our
common stock at an issue price of $11.00 per share. We raised a
total of $66.0 million in gross proceeds from the IPO, or
approximately $57.6 million in net proceeds after deducting
underwriting discounts and commissions of $4.6 million and
other offering costs of $3.8 million. Upon the closing of
the IPO, all shares of convertible preferred stock outstanding
automatically converted into 13,511,107 shares of common
stock, and all outstanding warrants to purchase shares of
convertible preferred stock automatically converted to warrants
to purchase 181,747 shares of common stock.
Principles
of Consolidation
Our consolidated financial statements include our accounts and
those of our wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Fiscal
Year
Our fiscal year ends on the last day in February. References to
fiscal 2009, for example, refer to our fiscal year ended
February 28, 2009.
Business
Combinations
We account for our business acquisitions in accordance with the
provisions of Statement of Financial Accounting Standards, or
SFAS, No. 141, Business Combination, or
SFAS 141, using the purchase method of accounting. We
allocate the total cost of an acquisition to the underlying net
assets based on their respective estimated fair values. As part
of this allocation process, we identify and attribute values and
estimated useful lives to the intangible assets acquired. These
determinations involve significant estimates and assumptions
regarding multiple, highly subjective variables, including those
with respect to future cash flows, discount rates, asset lives,
and the use of different valuation models and therefore require
considerable judgment. Our estimates and assumptions may be
based, in part, on the availability of listed market prices or
other transparent market data. These determinations will affect
the amount of amortization expense recognized in future periods.
We base our fair
62
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
value estimates on assumptions we believe to be reasonable but
are inherently uncertain. Depending on the size of the purchase
price of a particular acquisition as well as the mix of
intangible assets acquired, our financials results could be
materially impacted by the application of a different set of
assumptions and estimates.
Segments
We operate in a single segment and we report financial
information on a consolidated basis.
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 purchased 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 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. We generally invoice our
customers in annual installments although certain multi-year
agreements have had certain fees for all years invoiced and paid
upfront. Contracts under which we advance bill customers are
non-cancellable. 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.
63
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 $(97,000), $397,000 and $70,000 in
fiscal 2009, fiscal 2008 and fiscal 2007, 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 2009 at 14.4%; one customer in fiscal 2008 at 11.7%; and
one customer in fiscal 2007 at 11.8%.
As of February 28, 2009 and February 29, 2008,
long-lived assets located outside the United States were not
significant. Revenue by geographic region, based on the billing
address of the customer, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
64,664
|
|
|
$
|
53,641
|
|
|
$
|
40,656
|
|
International
|
|
|
10,341
|
|
|
|
7,629
|
|
|
|
2,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
75,005
|
|
|
$
|
61,270
|
|
|
$
|
43,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2009 and February 29, 2008, three
customers accounted for 35% and 51% of our outstanding accounts
receivable balance, respectively.
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, notes payable, and other accrued
expenses, approximate their fair values. Effective March 1,
2008, we adopted SFAS No. 157, Fair Value
Measurements, or SFAS No. 157, for our financial
assets and liabilities that are remeasured and reported at fair
value at each reporting period, and non-financial assets and
liabilities that are remeasured and reported at fair value at
least annually. In accordance with SFAS No. 157, we
measure our foreign currency forward contracts at fair value.
Our foreign currency forward contracts are classified within
Level 2 as the valuation inputs are based on quoted prices
of similar instruments in active markets and do not involve
management judgment.
64
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 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 was removed at
that time.
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 28, 2009 and
February 29, 2008. At February 28, 2009 we had no
auction rate securities and no investments in 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 2009, 2008 or 2007.
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 sales and marketing expense were approximately
$3.4 million, $2.8 million, and $1.5 million in
fiscal 2009, 2008, and 2007, respectively. At February 28,
2009 and February 29, 2008, deferred commission costs
totaled $1.3 million and $2.6 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.
65
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful lives of the improvements.
Repair and maintenance costs are expensed as incurred.
Goodwill
and Intangible Assets
We record as goodwill the excess of the acquisition purchase
price over the fair value of the tangible and identifiable
intangible assets acquired. 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 purchased intangible assets at
their respective estimated fair values at the date of
acquisition. Purchased intangible assets are being amortized
using the straight-line method over their remaining estimated
useful lives, which currently range from approximately one to
eight 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 28, 2009.
Impairment
of Long-Lived Assets
We evaluate the recoverability of our long-lived assets,
including purchased 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 28, 2009.
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 $124,000, $59,000 and $68,000 for fiscal 2009,
2008 and 2007, 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, as well as the cost of upgrades and
enhancements to that software, when preliminary development
efforts are successfully completed, management has authorized
and committed project funding, and it is probable that the
project will be completed and the software will be used as
intended. Any capitalized costs are amortized to expense on a
straight-line method over their expected lives. To date,
internal software development costs eligible for capitalization
have been insignificant, and accordingly we have charged all
software development costs to research and development expense
as incurred.
Warranties
and Indemnification
Our software services are generally warranted to perform in a
manner consistent with industry standards and materially in
accordance with our documentation under normal use and
circumstances. Additionally, our arrangements generally include
provisions for indemnifying customers against liabilities if our
services infringe a third partys intellectual property
rights or if a breach of the confidentiality obligations harms a
third party. Further, we have entered into indemnification
agreements with our officers, directors and certain key
employees, and our
66
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 SFAS 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 Financial Accounting Standards
Board 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 accrued as a result of the adoption of
FIN 48 on March 1, 2007 have not been material. We
have elected to record interest and penalties recognized in
accordance with FIN 48 in the consolidated financial
statements as income tax expenses.
Derivative
Instruments and Hedging Activities
We operate internationally and entered into foreign exchange
forward contracts during fiscal 2009 to reduce our exposure in
non-U.S. dollar
denominated accounts receivable. We designated these forward
contracts as cash flow hedges of foreign currency denominated
firm commitments; their objective was to negate the impact of
currency exchange rate movements on our operating results. In
accordance with SFAS No. 133, Accounting for
67
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Derivative Instruments and Hedging Activities, as
amended, or SFAS No. 133, we excluded the implicit
interest in the forward contracts when assessing hedge
effectiveness. For fiscal 2009, implicit interest costs totaled
approximately $40,000 and were included within interest expense.
We formally assess, both at a hedges inception and on an
ongoing basis, whether the derivatives used in hedging
transactions are highly effective in negating currency risk. All
forward contracts entered during fiscal 2009 were deemed highly
effective. We did not engage in hedging activities during fiscal
2008 and 2007. We do not enter into derivative financial
instruments for speculative or trading purposes.
Comprehensive
Loss
Comprehensive loss consists of net loss and accumulated other
comprehensive income, which includes certain changes in equity
that is excluded from net loss. In fiscal 2009, an unrealized
gain on cash flow hedges and implicit interest of approximately
$682,000 was included in accumulated other comprehensive income,
which has been reflected in stockholders equity. There was
no accumulative other comprehensive income or loss in fiscal
2008.
Stock-Based
Compensation
Effective March 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (Revised 2004),
Share-Based Payment, or SFAS No. 123(R), using
the prospective transition method, which required us to apply
the provisions of SFAS No. 123(R) only to new awards
granted, and to awards modified, repurchased or cancelled, after
the adoption date. Under this transition method, we began
amortizing the grant-date fair value of stock options granted or
modified on or after March 1, 2006 to stock-based
compensation expense on a straight-line basis over the requisite
service period of the award.
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. 123(R). 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) and restricted stock units (RSUs), unvested common shares
subject to repurchase or cancellation and convertible preferred
stock. The dilutive effect of outstanding stock options, PSUs,
RSUs, 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 2009, 2008, and 2007, as the impact of all
potentially dilutive securities outstanding was anti-dilutive.
68
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table presents the calculation of historical basic
and diluted net loss per common share (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,953
|
)
|
|
$
|
(4,487
|
)
|
|
$
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
27,388
|
|
|
|
17,731
|
|
|
|
5,798
|
|
Less: Weighted average number of common shares subject to
repurchase
|
|
|
(16
|
)
|
|
|
(119
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding used in
computing basic and diluted net loss per common share
|
|
|
27,372
|
|
|
|
17,612
|
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.18
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following weighted average outstanding shares subject to
options to purchase common stock, PSUs and RSUs, 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
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Shares subject to options to purchase common stock, PSUs, and
RSUs
|
|
|
4,342
|
|
|
|
5,285
|
|
|
|
4,891
|
|
Shares subject to warrants to purchase common stock
|
|
|
|
|
|
|
98
|
|
|
|
45
|
|
Common stock subject to repurchase
|
|
|
16
|
|
|
|
119
|
|
|
|
267
|
|
Warrants (as converted basis)
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Employee stock purchase plan
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock (if-converted basis until IPO)
|
|
|
|
|
|
|
5,911
|
|
|
|
13,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,371
|
|
|
|
11,413
|
|
|
|
18,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In November 2008, the FASB ratified
EITF 08-7,
Accounting for Defensive Intangible Assets, or
EITF 08-7.
EITF 08-7
applies to purchased intangible defensive assets that the
acquirer does not intend to actively use, but intends to hold to
prevent its competitors from obtaining access to the asset.
EITF 08-7
clarifies that defensive intangible assets are separately
identifiable and should be accounted for as a separate unit of
accounting in accordance with SFAS No. 141(R) and
SFAS No. 157, Fair Value Measurements.
EITF 08-7
is effective for intangible assets acquired in fiscal years
beginning on or after December 15, 2008 and will be adopted
by us in the first quarter of fiscal year 2010. This guidance
does not impact our current consolidated financial statements
since it will be applied prospectively on adoption. We are
assessing the potential impact, if any, that its adoption will
have on our consolidated results of operations and financial
condition going forward.
In April 2008, the FASB issued FSP
No. 142-3,
Determination of the Useful Life of Intangible Assets, or
FSP 142-3.
FSP 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions
69
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
used in determining the useful life of recognized intangible
assets under FASB Statement No. 142, Goodwill and Other
Intangible Assets. This new guidance applies prospectively
to intangible assets that are acquired individually or with a
group of other assets in business combinations and asset
acquisitions.
FSP 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008.
Early adoption is prohibited. This guidance does not impact our
current consolidated financial statements since it will be
applied prospectively on adoption. We are assessing the
potential impact, if any, that its adoption will have on our
consolidated results of operations and financial condition going
forward.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, or SFAS No. 161.
SFAS No. 161 requires companies with derivative
instruments to disclose information that should enable financial
statement users to understand how and why a company uses
derivative instruments and how derivative instruments and
related hedged items affect a companys financial position,
financial performance and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Early
application is encouraged and, accordingly, we early adopted
SFAS No. 161 in our quarter ended August 31, 2008
and included the additional disclosures in Note 9 to our
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141(R), 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. 141(R)
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. 141(R) is effective
for fiscal years beginning after December 15, 2008, and we
will adopt it beginning in the first quarter of fiscal 2010.
This guidance does not impact our current consolidated financial
statements since it will be applied prospectively on adoption.
We are assessing the potential impact, if any, that its adoption
will have on our consolidated results of operations and
financial condition going forward.
Connect3
Systems, Inc.
On February 24, 2009, we acquired all of the issued and
outstanding capital stock of privately-held Connect3 Systems,
Inc., or Connect3, a provider of advertising planning and
execution software, for a purchase price of approximately
$13.5 million, which consisted of $13.3 million cash
and $201,000 of acquisition costs. We paid approximately
$11.3 million of the consideration in March 2009. The
remaining $2.0 million, less any amounts used to satisfy
any claims for indemnification that we may make for certain
breaches of representations, warranties and covenants, will be
distributed to the former Connect3 shareholders within
sixteen months of the consummation of the acquisition.
We recorded the assets acquired and liabilities assumed at fair
market value in accordance with SFAS 141. The results of
operations related to this acquisition are included in our
consolidated financial statements from the date of
70
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
acquisition. The following table summarizes the preliminary
allocation of fair value of the assets acquired and liabilities
assumed in the transaction (in thousands).
|
|
|
|
|
Current assets
|
|
$
|
626
|
|
Deferred tax asset
|
|
|
1,865
|
|
Property and equipment
|
|
|
177
|
|
Intangible assets:
|
|
|
|
|
Developed technology
|
|
|
3,130
|
|
Customer relationships
|
|
|
1,210
|
|
Non-compete covenants
|
|
|
340
|
|
Backlog
|
|
|
167
|
|
Goodwill
|
|
|
11,202
|
|
Current liabilities assumed
|
|
|
(2,141
|
)
|
Noncurrent liabilities assumed
|
|
|
(31
|
)
|
Notes payable to a former Connect3 officer and principal
shareholder
|
|
|
(1,286
|
)
|
Deferred tax liability
|
|
|
(1,865
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
13,394
|
|
Purchased in-process research and development
|
|
|
150
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
13,544
|
|
|
|
|
|
|
The allocation of the purchase price to the tangible and
intangible assets acquired and liabilities assumed was based on
the estimated fair value as of the acquisition date. We engaged
an independent third-party valuation firm to perform a valuation
of the purchased intangible assets. Although we believe the
purchase price allocation is substantially complete, the
finalization of certain reorganization costs, or the settlement
of tax-related issues, for example, could result in an
adjustment to the allocation.
The $11.2 million excess of the purchase price over the
estimated fair value of the net tangible and identifiable assets
acquired was recorded as goodwill, which will not be amortized.
We do not anticipate that any of the goodwill recorded in
connection with the Connect3 acquisition will be deductible for
income tax purposes. As part of the acquisition accounting, we
established deferred income tax liabilities to reflect the tax
effect of the temporary difference between the $4.8 million
fair value assigned to intangible assets acquired and their tax
bases. In addition, we recognized a deferred tax asset of
$1.9 million by reducing $1.9 million of our valuation
allowance as part of our acquisition accounting. Purchased
intangible assets are being amortized on a straight-line basis
over one to two and a half years, with a weighted average period
of 2.2 years. Pro forma results of the acquired business have
not been presented as it was not material to our consolidated
financial statements for all periods presented.
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
71
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 an independent third-party
valuation firm to perform a valuation of these purchased
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 unaudited pro forma financial information presents
the combined results of operations of DemandTec as if the
acquisition had occurred as of March 1, 2006 and represents
the combined results of DemandTecs fiscal year ended
February 28, 2007 and TradePoints interim nine months
ended September 30, 2006. This unaudited pro forma
financial information is based upon available information and
certain assumptions that management believes to be reasonable,
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:
|
|
|
|
|
|
|
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
|
)
|
72
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
3.
|
Goodwill
and Purchased Intangibles
|
The carrying values as of February 28, 2009 of amortizing
intangible assets associated with TradePoint, Connect3 and
assortment optimization technology are summarized in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Amortization
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Period (In years)
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Developed technology
|
|
$
|
7,680
|
|
|
$
|
(2,157
|
)
|
|
$
|
5,523
|
|
|
|
3
|
|
Customer relationships
|
|
|
2,150
|
|
|
|
(313
|
)
|
|
|
1,837
|
|
|
|
3
|
|
Non-compete covenants
|
|
|
840
|
|
|
|
(389
|
)
|
|
|
451
|
|
|
|
3
|
|
Backlog
|
|
|
167
|
|
|
|
(2
|
)
|
|
|
165
|
|
|
|
1
|
|
Trade name
|
|
|
560
|
|
|
|
(131
|
)
|
|
|
429
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,397
|
|
|
$
|
(2,992
|
)
|
|
$
|
8,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying values as of February 29, 2008 of amortizing
intangible assets acquired in the TradePoint acquisition are
summarized in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 3.5 years. Amortization
expense related to the purchased intangible assets was
approximately $1.7 million during fiscal 2009, of which
approximately $1.1 million was included as a separate
component of operating expenses and $610,000 was included in
cost of revenue in the accompanying consolidated statements of
operations. In addition, $150,000 of in-process technology
purchased from Connect3 was expensed immediately upon
acquisition.
Amortization expense related to the purchased 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.
73
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
As of February 28, 2009, the estimated amortization expense
related to the purchased intangible assets for each of the next
five fiscal years and thereafter is summarized in the following
table (in thousands):
|
|
|
|
|
|
|
As of
|
|
|
|
February 28,
|
|
Fiscal Year
|
|
2009
|
|
|
2010
|
|
$
|
4,071
|
|
2011
|
|
|
2,626
|
|
2012
|
|
|
1,223
|
|
2013
|
|
|
190
|
|
2014
|
|
|
146
|
|
Thereafter
|
|
|
149
|
|
|
|
|
|
|
Total
|
|
$
|
8,405
|
|
|
|
|
|
|
We performed an annual impairment review of our goodwill during
the third quarter of fiscal 2009 with no impairment charges
recognized as a result of our review. We observed no impairment
indicators through the fourth quarter of fiscal 2009. At
February 28, 2009 and February 29, 2008, we had
$16.5 million and $5.3 million of goodwill,
respectively, from our acquisitions of Connect3 and TradePoint.
|
|
4.
|
Balance
Sheet Components
|
Marketable securities, at amortized cost, consisted of the
following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Commercial paper
|
|
$
|
6,291
|
|
|
$
|
6,946
|
|
Corporate bonds
|
|
|
12,314
|
|
|
|
4,721
|
|
U.S. agency bonds
|
|
|
23,724
|
|
|
|
20,766
|
|
Treasury bills
|
|
|
11,983
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,312
|
|
|
$
|
32,632
|
|
|
|
|
|
|
|
|
|
|
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 28, 2009. 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:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Due within one year
|
|
$
|
46,426
|
|
|
$
|
30,547
|
|
Due within one to two years
|
|
|
7,886
|
|
|
|
2,085
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,312
|
|
|
$
|
32,632
|
|
|
|
|
|
|
|
|
|
|
74
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
Property, equipment and leasehold improvements consisted of the
following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Computers, software and equipment
|
|
$
|
11,180
|
|
|
$
|
8,965
|
|
Furniture and fixtures
|
|
|
238
|
|
|
|
184
|
|
Leasehold improvements
|
|
|
251
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,669
|
|
|
|
9,393
|
|
Less: accumulated depreciation
|
|
|
(6,240
|
)
|
|
|
(4,254
|
)
|
|
|
|
|
|
|
|
|
|
Property, equipment and leasehold improvements, net
|
|
$
|
5,429
|
|
|
$
|
5,139
|
|
|
|
|
|
|
|
|
|
|
Gain or losses from the sale of computers, software and
equipment were insignificant in fiscal 2009, 2008, and 2007.
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accounts payable
|
|
$
|
2,822
|
|
|
$
|
1,304
|
|
Accrued professional services
|
|
|
640
|
|
|
|
569
|
|
Income taxes payable
|
|
|
50
|
|
|
|
158
|
|
Other accrued liabilities
|
|
|
1,830
|
|
|
|
290
|
|
Accrued compensation
|
|
|
7,613
|
|
|
|
4,648
|
|
|
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
12,955
|
|
|
$
|
6,969
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Commitments
and Contingencies
|
We lease office space in various locations throughout the United
States and Europe. Total rent expense was $1.1 million,
$935,000 and $783,000 in fiscal 2009, 2008, and 2007,
respectively.
Future minimum lease commitments due under non-cancelable
operating leases with an initial term greater than one year were
as follows (in thousands):
|
|
|
|
|
|
|
As of
|
|
|
|
February 28,
|
|
Fiscal Year
|
|
2009
|
|
|
2010
|
|
$
|
1,190
|
|
2011
|
|
|
262
|
|
|
|
|
|
|
Total
|
|
$
|
1,452
|
|
|
|
|
|
|
At February 28, 2009 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 in other assets, net
on the accompanying balance sheet at February 29, 2008. In
April 2008, the certificate of deposit expired and we secured
the letter of credit under the new line of credit we established
with a financial institution in April 2008, as described in
Note 6. As such, the restriction on cash was removed at
that time.
75
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 2006, we entered into a revolving line of credit with a
financial institution from which we borrowed $3.0 million.
In August 2007, we paid off the entire $3.0 million
outstanding balance. There was no prepayment penalty and no
minimum interest due when the line of credit was closed in April
2008.
Upon the completion of our IPO, a warrant to purchase up to
37,500 shares of our Series C convertible preferred
stock that we had issued to the financial institution in
connection with the May 2006 credit line 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 with two financial institutions. In
August 2007, we paid off the $10.0 million remaining term
loan balance, without penalty, as well as a $400,000 balloon
interest payment. The term loan facility is no longer available.
In August 2007, a warrant to purchase up to 37,500 shares
of our common stock that we had issued to one of the financial
institutions in connection with the July 2006 term loan was
exercised, 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, a
warrant to purchase up to 37,500 shares of our common stock
that we had issued to the other financial institution in
connection with the July 2006 term loan was exercised, 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.
Upon the completion of our IPO, warrants to purchase up to
30,488 shares of our Series B redeemable convertible
preferred stock and up to 38,759 shares of our
Series C redeemable convertible preferred stock that we had
granted to a financial institution in connection with equipment
financing loans 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 FASB Staff Position
No. 150-5,
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, prior to the closing date of our
IPO in August 2007, the preferred stock warrants were classified
in liabilities and were revalued each reporting period with the
changes in fair value recorded within other income (expense),
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 ceased to revalue the warrants and reclassified the $714,000
remaining liability balance to additional paid-in capital in
August 2007.
Expense associated with the amortization of the fair value of
warrants and loan financing costs was $157,000 in fiscal 2008
and $224,000 in fiscal 2007. We accelerated the expense
recognition of the remaining unamortized fair values of the
warrants, loan financing cost, debt discount costs and balloon
interest balance upon paying off the $3.0 million revolving
line of credit balance and the $10.0 million term loan in
August 2007, resulting in an additional $504,000 charge to
interest expense in fiscal 2008. There was no charge to interest
expense in fiscal 2009.
In connection with our TradePoint acquisition, a
$1.8 million promissory note was issued to former
TradePoint shareholders. At February 28, 2009 and
February 29, 2008, $434,000 and $442,000, respectively,
remained outstanding and payable thereunder.
76
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
In April 2008, we entered into a new revolving line of credit
with a total borrowing capacity of $15.0 million and
terminated our existing $5.0 million credit facility.
Amounts borrowed bear interest, at our election, at a rate equal
to either (i) the financial institutions prime rate
at the time of the borrowing or (ii) the LIBOR rate plus
2.0%. The line of credit is collateralized by substantially all
of our assets and requires us to comply with working capital,
net worth, and other non-financial covenants, including
limitations on indebtedness and restrictions on dividend
distributions, among others. In April 2008, the available
balance was reduced by $200,000 to $14.8 million to secure
a non-cancelable operating lease commitment. Throughout fiscal
year 2009, we were in compliance with all loan covenants and as
of February 28, 2009 we had no outstanding debt under the
line of credit.
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 February 28, 2009, options to
purchase 5,433,006 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. We ceased issuing awards under the 1999 Plan upon
the completion of our IPO in August 2007.
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. An
additional 1,403,189 shares and 1,324,136 shares were
reserved for issuance under the 2007 Plan on March 1, 2009
and 2008, respectively.
Stock Options. Options granted under the 2007
Plan may be either incentive stock options or nonstatutory stock
options and are exercisable as determined by the Compensation
Committee and as specified in each option agreement. Options
vest over a period of time as determined by the Compensation
Committee, generally four years, and generally expire seven
years (but in any event no more than ten years) from the date of
grant. The exercise price of any stock option granted under the
2007 Plan may not be less than the fair market value of our
common stock on the date of grant. The term of the 2007 Plan is
ten years.
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. 123(R) requires compensation expense to be
77
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
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 how much compensation expense
to record. 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.
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 consisted of 30% of each grant, and related to
fiscal 2008 company performance and subsequent individual
service requirements. The second tranche consisted of the
remaining 70% of each grant, and related to fiscal
2009 company performance and subsequent individual service
requirements. These PSUs may vest over a period of up to
29 months ending on January 15, 2010. On March 4,
2008, our Compensation Committee granted 160,000 PSUs to our
chief executive officer. This PSU grant consists of a single
tranche and relates to fiscal 2009 company performance
metrics and subsequent individual service requirements. The PSUs
may vest over a period of up to 22 months ending on
January 15, 2010.
At the measurement dates, the fair value of the PSUs granted on
March 4, 2008 and August 17, 2007 were approximately
$1.7 million and $10 million, respectively, and are
being recognized over the vesting lives of the awards. We record
compensation expense over the anticipated vesting periods of the
awards, net of an assumed forfeiture rate. In fiscal 2009 and
2008, we recognized stock-based compensation expense associated
with the PSUs of approximately $2.4 million and
$3.0 million, respectively. As of February 28, 2009,
there were a total of 439,563 shares subject to outstanding
PSUs.
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. 123(R) 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. We
granted 545,900 RSUs in fiscal 2009 and no RSUs in fiscal 2008.
As of February 28, 2009, there were 501,950 shares
subject to outstanding RSUs.
78
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, 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 cancelled/forfeited
|
|
|
361
|
|
|
|
(361
|
)
|
|
|
6.68
|
|
Performance and restricted stock units cancelled/forfeited
|
|
|
88
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
12
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2008
|
|
|
1,480
|
|
|
|
7,409
|
|
|
$
|
3.80
|
|
Additional shares authorized
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(1,819
|
)
|
|
|
1,819
|
|
|
|
8.94
|
|
Performance stock units granted
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
(546
|
)
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(1,188
|
)
|
|
|
1.42
|
|
Options cancelled/forfeited
|
|
|
308
|
|
|
|
(308
|
)
|
|
|
8.14
|
|
Performance and restricted stock units cancelled/forfeited
|
|
|
197
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Options expired
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2009
|
|
|
604
|
|
|
|
7,732
|
|
|
$
|
5.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
DemandTec,
Inc.
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes information concerning options
outstanding at February 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|