e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33634
DemandTec, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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94-3344761
(I.R.S. Employer
Identification Number) |
One Franklin Parkway, Building 910
San Mateo, California 94403
(Address of Principal Executive Offices including Zip Code)
(650) 645-7100
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes 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 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
The number of shares of the registrants common stock, par value $0.001, outstanding as of December
31, 2009 was: 29,135,137.
DEMANDTEC, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements |
DemandTec, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
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November 30, |
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February 28, |
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2009 |
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2009 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
14,412 |
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$ |
33,572 |
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Marketable securities |
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32,592 |
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46,426 |
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Accounts receivable, net of allowances of $145
and $120 at November 30, 2009 and February 28,
2009, respectively |
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14,173 |
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11,000 |
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Other current assets |
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3,649 |
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4,230 |
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Total current assets |
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64,826 |
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95,228 |
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Marketable securities, non-current |
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19,096 |
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7,886 |
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Property, equipment and leasehold improvements, net |
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4,248 |
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5,429 |
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Intangible assets, net |
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5,228 |
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8,405 |
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Goodwill |
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16,662 |
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16,492 |
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Other assets, net |
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652 |
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715 |
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Total assets |
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$ |
110,712 |
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$ |
134,155 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
12,868 |
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$ |
12,962 |
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Deferred revenue |
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37,427 |
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46,415 |
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Notes payable, current |
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434 |
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1,720 |
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Merger consideration payable |
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1,000 |
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12,343 |
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Total current liabilities |
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51,729 |
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73,440 |
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Deferred revenue, non-current |
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1,162 |
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2,400 |
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Other long-term liabilities |
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953 |
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1,666 |
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Commitments and contingencies (see Note 5) |
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Stockholders equity: |
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Common stock, $0.001 par value 175,000 shares
authorized; 29,090 and 28,059 shares issued and
outstanding at November 30, 2009 and February
28, 2009, respectively |
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29 |
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28 |
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Additional paid-in capital |
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143,199 |
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133,320 |
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Accumulated other comprehensive income |
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285 |
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682 |
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Accumulated deficit |
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(86,645 |
) |
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(77,381 |
) |
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Total stockholders equity |
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56,868 |
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56,649 |
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Total liabilities and stockholders equity |
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$ |
110,712 |
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$ |
134,155 |
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See Notes to Condensed Consolidated Financial Statements.
3
DemandTec, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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November 30, |
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November 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenue |
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$ |
20,088 |
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$ |
18,989 |
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$ |
59,429 |
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$ |
55,675 |
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Cost of revenue(1)(2) |
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6,361 |
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5,834 |
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19,365 |
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17,335 |
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Gross profit |
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13,727 |
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13,155 |
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40,064 |
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38,340 |
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Operating expenses: |
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Research and development(2) |
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8,037 |
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6,659 |
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24,190 |
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19,772 |
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Sales and marketing(2) |
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5,067 |
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4,839 |
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15,912 |
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15,250 |
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General and administrative(2) |
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2,227 |
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2,662 |
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7,387 |
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7,333 |
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Restructuring charges |
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497 |
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775 |
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Amortization of purchased intangible assets |
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575 |
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331 |
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1,752 |
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751 |
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Total operating expenses |
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16,403 |
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14,491 |
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50,016 |
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43,106 |
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Loss from operations |
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(2,676 |
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(1,336 |
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(9,952 |
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(4,766 |
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Interest income |
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103 |
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431 |
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494 |
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1,436 |
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Interest expense |
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(12 |
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(31 |
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(74 |
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(54 |
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Other income (expense), net |
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21 |
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37 |
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128 |
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(25 |
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Loss before
provision (benefit) for income taxes |
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(2,564 |
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(899 |
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(9,404 |
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(3,409 |
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Provision (benefit) for income taxes |
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(167 |
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(91 |
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(140 |
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1 |
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Net loss |
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$ |
(2,397 |
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$ |
(808 |
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$ |
(9,264 |
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$ |
(3,410 |
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Net loss per common share, basic and diluted |
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$ |
(0.08 |
) |
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$ |
(0.03 |
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$ |
(0.32 |
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$ |
(0.13 |
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Shares used in computing net loss per common share, basic and diluted |
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28,914 |
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27,681 |
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28,534 |
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27,192 |
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(1) Includes amortization of purchased intangible assets |
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$ |
466 |
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$ |
152 |
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$ |
1,397 |
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$ |
457 |
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(2) Includes stock-based compensation expense as follows: |
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Cost of revenue |
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$ |
377 |
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$ |
389 |
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$ |
1,318 |
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$ |
1,243 |
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Research and development |
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784 |
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509 |
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2,588 |
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1,681 |
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Sales and marketing |
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597 |
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488 |
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1,868 |
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1,699 |
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General and administrative |
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473 |
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424 |
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1,717 |
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1,222 |
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Total stock-based compensation expense |
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$ |
2,231 |
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$ |
1,810 |
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$ |
7,491 |
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$ |
5,845 |
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See Notes to Condensed Consolidated Financial Statements.
4
DemandTec, Inc
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine Months Ended |
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November 30, |
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2009 |
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2008 |
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Operating activities: |
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Net loss |
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$ |
(9,264 |
) |
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$ |
(3,410 |
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Adjustment to reconcile net loss to net cash provided by operating activities: |
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Depreciation |
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2,285 |
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2,149 |
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Stock-based compensation expense |
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7,491 |
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5,845 |
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Amortization of purchased intangible assets |
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3,149 |
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1,208 |
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Other |
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(44 |
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179 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(3,263 |
) |
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5,955 |
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Other current assets |
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379 |
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142 |
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Other assets |
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(81 |
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221 |
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Accounts payable and accrued liabilities |
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2,108 |
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3,372 |
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Accrued compensation |
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(1,683 |
) |
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403 |
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Deferred revenue |
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(10,226 |
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(5,274 |
) |
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Net cash provided by (used in) operating activities |
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(9,149 |
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10,790 |
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Investing activities: |
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Purchases of property, equipment and leasehold improvements |
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(1,233 |
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(2,294 |
) |
Purchases of marketable securities |
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(52,996 |
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(69,805 |
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Maturities of marketable securities |
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55,620 |
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45,220 |
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Acquisition of Connect3 |
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(12,544 |
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Purchase of intangible assets |
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(1,000 |
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Change in restricted cash |
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200 |
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Net cash used in investing activities |
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(11,153 |
) |
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(27,679 |
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Financing activities: |
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Proceeds from issuance of common stock |
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2,381 |
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2,319 |
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Payments on notes payable |
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(1,286 |
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(8 |
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Net cash provided by financing activities |
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1,095 |
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2,311 |
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Effect of exchange rate changes on cash and cash equivalents |
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47 |
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(196 |
) |
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Net decrease in cash and cash equivalents |
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(19,160 |
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(14,774 |
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Cash and cash equivalents at beginning of period |
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33,572 |
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43,257 |
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Cash and cash equivalents at end of period |
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$ |
14,412 |
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$ |
28,483 |
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See Notes to Condensed Consolidated Financial Statements.
5
DemandTec,
Inc.
Notes to Condensed Consolidated Financial Statements
1. Business Summary and Significant Accounting Policies
Description of Business
DemandTec, Inc. (the Company or We) was incorporated in Delaware on November 1, 1999. We
are a leading provider of on-demand optimization solutions to retailers and consumer products, or
CP, companies. Our software services enable retailers and CP companies to define category, brand,
and customer strategies based on a scientific understanding of consumer behavior and make
actionable pricing, promotion, assortment, space, and other merchandising and marketing
recommendations to achieve their revenue, profitability, 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, sales, and marketing needs. We are
headquartered in San Mateo, California, with additional sales presence in North America, Europe,
and South America.
Basis of Presentation
Our condensed consolidated financial statements include our accounts and those of our
wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. Our fiscal year ends on the last day in February. References to fiscal
2010, for example, refer to our fiscal year ending February 28, 2010. The accompanying condensed
consolidated balance sheet at November 30, 2009, the condensed consolidated statements of
operations for the three and nine months ended November 30, 2009 and 2008, and the condensed
consolidated statements of cash flows for the nine months ended November 30, 2009 and 2008 are
unaudited. The condensed consolidated balance sheet data at February 28, 2009 was derived from the
audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal
year ended February 28, 2009 (the Form 10-K) filed with the Securities and Exchange Commission,
or SEC, on April 23, 2009. The accompanying statements should be read in conjunction with the
audited consolidated financial statements and related notes contained in the Form 10-K, as well as
subsequent filings with the SEC.
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States, or GAAP, for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to
such rules and regulations. The unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and, in the opinion of
our management, include all adjustments necessary, all of which are of a normal recurring nature,
for the fair presentation of our statement of financial position and our results of operations for
the periods included in this quarterly report. The results for the three and nine months ended
November 30, 2009 are not necessarily indicative of the results to be expected for any subsequent
quarter or for the fiscal year ending February 28, 2010.
Reclassifications
Certain amounts previously reported in the consolidated balance sheet at February 28, 2009 and
the consolidated statement of cash flows for the nine months ended November 30, 2008 have been
reclassified to conform to the current period classification. No changes to cash flows from
operating, investing, or financing activities occurred as a result of
such reclassifications.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of
the condensed consolidated financial statements, as well as the reported amounts of revenue and
expenses during the periods presented. Significant estimates and assumptions made by management
include the determination of the fair value of share-based payments, the fair value of purchased
intangible assets, the recoverability of long-lived assets and the provision for income taxes. We
believe that the estimates and judgments upon which we rely are reasonable, based upon information
available to us at the time that these estimates and judgments are made. To the extent there are
material differences between these estimates and actual results, our consolidated financial
statements will be affected.
6
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.
We provide our software as a service and recognize revenue when all of the following
conditions are met:
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there is persuasive evidence of an arrangement; |
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access to the software service has been provided to the customer; |
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the collection of the fees is probable; and |
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the amount of fees to be paid by the customer is fixed or determinable. |
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 generally 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 amounts billed or payments received in advance of revenue
recognition. Contracts under which we advance bill customers are generally non-cancellable. For
agreements with terms over one year, we generally invoice our customers in annual installments.
Accordingly, the deferred revenue balance associated with such multi-year, non-cancellable
agreements does not represent the total contract value. Deferred revenue to be recognized in the
succeeding twelve month period is included in current deferred revenue on our consolidated balance
sheets, with the remaining amounts included in non-current deferred revenue.
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.
At November 30, 2009 and February 28, 2009, long-lived assets located outside the United
States were not significant. At November 30, 2009, two customers accounted for 30% and 20%,
respectively, of our accounts receivable balance. At February 28, 2009, one customer accounted for
15% of our accounts receivable balance.
In the three months ended November 30, 2009, two customers accounted for 13% and 10%,
respectively, of total revenue, and in the nine months ended November 30, 2009, one customer
accounted for 14% of total revenue. In the three and nine months ended November 30, 2008, one
customer accounted for 17% and 14%, respectively, of total revenue. Revenue by geographic region,
based on the billing address of the customer, was as follows (in thousands):
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Three Months Ended November 30, |
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Nine Months Ended November 30, |
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2009 |
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2008 |
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2009 |
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|
2008 |
|
United States |
|
$ |
17,396 |
|
|
$ |
16,528 |
|
|
$ |
51,399 |
|
|
$ |
48,028 |
|
International |
|
|
2,692 |
|
|
|
2,461 |
|
|
|
8,030 |
|
|
|
7,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
20,088 |
|
|
$ |
18,989 |
|
|
$ |
59,429 |
|
|
$ |
55,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The equipment hosting our software is in three third-party data center facilities located in
California and Arizona. We do not control the operation of these facilities, and our operations are
vulnerable to damage or interruption in the event either of these third-party data center
facilities fails.
7
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 the accounting standards of the Financial Accounting
Standards Board (the FASB). 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 November 30, 2009.
Stock-Based Compensation
We account for and recognize all share-based payments as an expense in our statement of
operations based on their fair values over the vesting period. Grants of stock options to employees
and to new members of our board of directors generally vest over four years and annual stock option
grants to existing members of our board of directors vest over one year. Performance-based stock
units, or PSUs, vest pursuant to certain performance and time-based vesting criteria set by our
Compensation Committee. We evaluate the probability of meeting the performance criteria at the end
of each reporting period to determine how much compensation expense to record. Because the actual
number of shares to be issued is not known until the end of the performance period, the actual
compensation expense related to these awards could differ from our estimates. Restricted stock
units, or RSUs, vest solely pursuant to time-based vesting criteria set by our Compensation
Committee. We measure PSUs and RSUs at fair value on the measurement date, based on the number of
units granted and the closing price of our common stock on that date.
Net Loss per Common Share
Basic net loss per share is computed using the weighted average number of common shares
outstanding during the period, excluding any unvested common shares subject to repurchase.
Potential common shares consist of the incremental common shares issuable upon the exercise of
stock options or upon the settlement of PSUs and RSUs, shares subject to issuance under our 2007
Employee Stock Purchase Program, or ESPP, and unvested common shares subject to repurchase or
cancellation. The dilutive effect of such potential common shares is reflected in diluted loss per
share by application of the treasury stock method and on an if-converted basis from the date of
issuance. Because the Company has been in a loss position in all periods shown, shares used in
computing basic and diluted net loss per common share were the same for the three and nine months
ended November 30, 2009 and 2008, as the impact of all potentially dilutive securities outstanding
was anti-dilutive.
The following table presents the calculation of historical basic and diluted net loss per
common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(2,397 |
) |
|
$ |
(808 |
) |
|
$ |
(9,264 |
) |
|
$ |
(3,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
28,914 |
|
|
|
27,694 |
|
|
|
28,536 |
|
|
|
27,211 |
|
Weighted average number of common shares subject to
repurchase |
|
|
|
|
|
|
(13 |
) |
|
|
(2 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per common share,
basic and diluted |
|
|
28,914 |
|
|
|
27,681 |
|
|
|
28,534 |
|
|
|
27,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted |
|
$ |
(0.08 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8
The following weighted average outstanding shares subject to options to purchase common stock,
PSUs and RSUs, shares subject to issuance under the ESPP, and common stock subject to repurchase
were excluded from the computation of diluted net earnings per common share for the periods
presented because including them would have had an anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Shares subject to options to
purchase common stock, PSUs and
RSUs, and shares subject to
issuance under the ESPP |
|
|
3,779 |
|
|
|
4,073 |
|
|
|
3,930 |
|
|
|
4,467 |
|
Common stock subject to repurchase |
|
|
|
|
|
|
13 |
|
|
|
2 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,779 |
|
|
|
4,086 |
|
|
|
3,932 |
|
|
|
4,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Accounting Pronouncements
In October 2009, the FASB issued a new accounting standard for revenue recognition with
multiple deliverables. The new standard impacts the determination of when the individual
deliverables included in a multiple-element arrangement may be treated as separate units of
accounting. Additionally, the new standard modifies the manner in which the transaction
consideration is allocated across the separately identified deliverables by no longer permitting
the residual method of allocating arrangement consideration. The new standard is effective for
fiscal years beginning on or after June 15, 2010; however, early adoption of
this standard is permitted. We are assessing the potential impact, if any, that the adoption will
have on our consolidated results of operations and financial condition going forward.
In October 2009, the FASB issued a new accounting standard for the accounting for certain
revenue arrangements that include software elements. The new standard amends the scope of
pre-existing software revenue guidance by removing from the guidance non-software components of
tangible products and certain software components of tangible products. The new standard is
effective for fiscal years beginning on or after June 15, 2010; however, early
adoption of this standard is permitted. We are assessing the potential impact, if any, that the
adoption will have on our consolidated results of operations and financial condition going forward.
Recently Adopted Accounting Pronouncements
In June 2009, the FASB launched the FASB Accounting Standards Codification, or the
Codification, as the single source of authoritative U.S. GAAP recognized by the FASB. The
Codification reorganizes various U.S. GAAP pronouncements into accounting topics and displays them
using a consistent structure. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Codification
is effective for interim and annual periods ending after September 15, 2009. We adopted the
Codification in the quarter ended November 30, 2009 and there was no impact on our condensed
consolidated financial statements.
In May 2009, the FASB issued a new accounting standard for subsequent events which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or available to be issued. The new standard
requires an entity to recognize in the financial statements the effects of all subsequent events
that provide additional evidence about conditions that existed at the date of the balance sheet.
For unrecognized subsequent events that must be disclosed to keep the financial statements from
being misleading, an entity will be required to disclose the nature of the event as well as an
estimate of its financial effect, or a statement that such an estimate cannot be made. In addition,
the new standard requires an entity to disclose the date through which subsequent events have been
evaluated. The new standard is effective for the interim or annual financial periods ending after
June 15, 2009, and is required to be applied prospectively. We adopted the provisions of the new
standard in the quarter ended August 31, 2009 and there was no impact on our condensed consolidated
financial statements.
In April 2009, the FASB issued three new accounting standards that are intended to provide
additional application guidance and enhance disclosures about fair value measurements and
impairments of securities. The first standard clarifies the objective and method of fair value
measurement even when there has been a significant decrease in market activity for the asset being
measured. The second standard establishes a new model for measuring other-than-temporary
impairments for debt securities, including criteria for when to recognize a write-down through
earnings versus other comprehensive income. The third standard expands the fair value disclosures
requirements to interim periods. All of these new accounting standards are effective for interim
and annual periods ending after June 15, 2009. We adopted these standards in the quarter ended
August 31, 2009 and there was no impact on our condensed consolidated financial statements.
In November 2008, the FASB issued a new accounting standard which applies to purchased
intangible defensive assets that the acquirer does not intend to actively use, but intends to hold
to prevent its competitors from obtaining access to the asset. The new
9
standard clarifies that defensive intangible assets are separately identifiable and should be
accounted for as a separate unit of accounting. The new standard is effective for intangible assets
purchased in fiscal years beginning on or after December 15, 2008. We adopted the new standard in
March 2009 and there was no impact on our current condensed consolidated financial statements,
although it will affect our accounting for any intangible assets
acquired in a business combination or an asset acquisition in the
future.
In April 2008, the FASB issued a new accounting standard which amends the factors an entity
should consider in developing renewal or extension assumptions used in determining the useful life
of recognized intangible assets. This new guidance applies prospectively to intangible assets that
are acquired individually or with a group of other assets in business combinations and asset
acquisitions. The new standard is effective for fiscal years and interim periods beginning after
December 15, 2008. We adopted the new standard in March 2009 and there was no impact on our
condensed consolidated financial statements.
In December 2007, the FASB revised its accounting standards for business combinations. The
revised standards establish principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree in a business combination. The revised standards also
establish principles around how goodwill acquired in a business combination or a gain from a
bargain purchase should be recognized and measured, as well as provide guidelines on the disclosure
requirements on the nature and financial impact of the business combination. In April 2009, the
FASB further modified the revised standards by establishing a model to account for certain
pre-acquisition contingencies, which requires an acquirer to recognize an asset acquired or a
liability assumed based on the estimated fair value, if it is probable that an asset or liability
exists at the acquisition date and the amount can be reasonably estimated. The revised standards
are effective for fiscal years beginning after December 15, 2008. We adopted the new standards in
March 2009. Because we did not complete any business combination activities in the nine months
ended November 30, 2009, the adoption did not impact our current condensed consolidated financial
statements, but will affect our accounting for any future business combinations.
2. Acquisition
In February 2009, we acquired all of the issued and outstanding capital stock of
privately-held Connect3 Systems, Inc., or Connect3, a provider of advertising planning and
execution software, for a purchase price of approximately $13.5 million, which consisted of $13.3
million cash consideration and $201,000 of acquisition costs. We paid approximately $11.3 million
of the cash consideration in March 2009, and paid an additional $1.0 million in August 2009 that
had been withheld to secure certain indemnification obligations. The remaining $1.0 million, less
any amounts used to satisfy any claims for indemnification that we may make for certain breaches of
representations, warranties and covenants, will be distributed to the former Connect3 shareholders
in June 2010.
We recorded the assets acquired and liabilities assumed at fair market value upon closing. In
allocating the purchase price based on estimated fair values, we preliminarily recorded
approximately $11.4 million of goodwill, $4.7 million of identifiable intangible assets, $2.7
million of net liabilities, and $150,000 of in-process research and development. 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. In the nine months ended November 30, 2009, we increased goodwill by
$170,000 as a result of an increase in the estimated effort required to complete obligations under
purchased in-progress customer contracts. The results of operations related to this acquisition are
included in our consolidated financial statements from the date of acquisition. Pro forma results
of the acquired business have not been presented as they were not material to our consolidated
financial statements for all periods presented.
3. Balance Sheet Components
Marketable Securities
Marketable securities consisted of the following at the dates indicated (in thousands):
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2009 |
|
|
February 28, 2009 |
|
|
|
|
|
|
|
Unrecognized |
|
|
|
|
|
|
|
|
|
|
Unrecognized |
|
|
|
|
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
Commercial paper |
|
$ |
3,496 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
3,497 |
|
|
$ |
6,291 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
6,293 |
|
Certificate of deposit |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
13,750 |
|
|
|
137 |
|
|
|
(1 |
) |
|
|
13,886 |
|
|
|
12,314 |
|
|
|
41 |
|
|
|
(10 |
) |
|
|
12,345 |
|
Obligations of
government-sponsored
enterprises |
|
|
33,442 |
|
|
|
114 |
|
|
|
(4 |
) |
|
|
33,552 |
|
|
|
23,724 |
|
|
|
102 |
|
|
|
(10 |
) |
|
|
23,816 |
|
Treasury bills |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,983 |
|
|
|
14 |
|
|
|
|
|
|
|
11,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,688 |
|
|
$ |
252 |
|
|
$ |
(5 |
) |
|
$ |
51,935 |
|
|
$ |
54,312 |
|
|
$ |
159 |
|
|
$ |
(20 |
) |
|
$ |
54,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At November 30, 2009, the amortized cost and fair value of marketable securities with contractual
maturities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
Fair Value |
|
Due in less than one year |
|
$ |
40,762 |
|
|
$ |
40,903 |
|
Due in more than one year |
|
|
10,926 |
|
|
|
11,032 |
|
|
|
|
|
|
|
|
|
|
$ |
51,688 |
|
|
$ |
51,935 |
|
|
|
|
|
|
|
|
Historically, all investments have been held to maturity, and thus, there were no gains or
losses recognized during the periods presented. We have the ability and intent to hold our
marketable securities to maturity and do not believe any of the marketable securities are impaired
based on our evaluation of available evidence at November 30, 2009 and through the time of filing
of this Quarterly Report on Form 10-Q. We expect to receive all principal and interest on all of
our investment securities.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at the date indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
November 30, |
|
|
February 28, |
|
|
|
2009 |
|
|
2009 |
|
Accounts payable |
|
$ |
4,008 |
|
|
$ |
2,822 |
|
Accrued professional services |
|
|
826 |
|
|
|
640 |
|
Income taxes payable |
|
|
23 |
|
|
|
50 |
|
Other accrued liabilities |
|
|
2,081 |
|
|
|
1,837 |
|
Accrued compensation |
|
|
5,930 |
|
|
|
7,613 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued expenses |
|
$ |
12,868 |
|
|
$ |
12,962 |
|
|
|
|
|
|
|
|
4. Goodwill and Purchased Intangible Assets
Goodwill
We record goodwill as the excess of the acquisition purchase price over the fair value of the
tangible and identifiable intangible assets acquired. At November 30, 2009 and February 28, 2009,
we had $16.7 million and $16.5 million, respectively, of goodwill from our acquisitions of Connect3
in February 2009 and TradePoint Solutions, Inc., or TradePoint, in November 2006. We do not
amortize goodwill, but perform an annual impairment review during our third fiscal quarter, or more
frequently if indicators of potential impairment arise. We have a single operating segment and
consequently evaluate goodwill for impairment based on an evaluation of the fair value of our
company as a whole. We evaluated our goodwill in November 2009 and recognized no impairment charges
as a result of the review.
Purchased Intangible Assets
We record purchased intangible assets at their respective estimated fair values at the date of
acquisition. Intangible assets are being amortized on a straight-line basis over a remaining
weighted average period of 2.2 years. Amortization expense related to purchased intangible assets
was approximately $1.0 million and $3.1 million in the three and nine months ended November 30,
2009, respectively, and approximately $483,000 and $1.2 million in the three and nine months ended
November 30, 2008, respectively. We
11
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 November 30, 2009.
5. Commitments and Contingencies
Commitments
In September 2009, we entered into a lease agreement for office space in San Mateo,
California, under which the initial non-cancellable lease term is five years commencing December 1,
2009. We use the office space as our new corporate headquarters. The aggregate minimum lease
commitment is approximately $10.1 million. We have provided the lessor a $223,000 cash security
deposit and a $917,000 letter of credit to secure our obligations under the lease. In addition, in
September 2009, we entered into equipment and facility operating leases associated with our new
data center in Mesa, Arizona. The aggregate future minimum lease payments are approximately $1.5
million.
At November 30, 2009, we had a $200,000 irrevocable letter of credit outstanding in connection
with the non-cancellable operating lease commitment to the landlord of our former office building
in San Carlos, California, which will expire in February 2010. We secured both letters of credit
using our existing revolving line of credit, as described in Note 6.
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.
6. Debt
In connection with our acquisition of TradePoint in November 2006, we issued a $1.8 million
promissory note to former TradePoint shareholders. At November 30, 2009, $434,000 remained
outstanding and payable thereunder, awaiting instructions by the former TradePoint shareholders as
to how to allocate and distribute the proceeds.
In May 2009, we amended our revolving line of credit that we had entered in April 2008 with a
financial institution to, among other things, extend the maturity date of the loan agreement and to
increase the revolving line of credit from $15.0 million to $20.0 million. The amended revolving
line of credit can be used to (a) borrow revolving loans, (b) issue letters of credit, and (c)
enter into foreign exchange contracts. Revolving loans may be borrowed, repaid, and reborrowed
until May 2012. Amounts borrowed will bear interest, at our option at the time of borrowing, at
either (1) a floating per annum rate equal to the financial institutions prime rate, or (2) the
greater of (A) the LIBOR rate plus 250 basis points or (B) a per annum rate equal to 4.0%. A
default interest rate shall apply during an event of default at a rate per annum equal to 500 basis
points above the otherwise applicable interest rate. The line of credit is collateralized by
substantially all of our assets and requires us to comply with working capital, net worth, and
other non-financial covenants, including limitations on indebtedness and restrictions on dividend
distributions, among others. The available balance was approximately $18.9 million at November 30,
2009, having been reduced by $200,000 in May 2009 to secure a non-cancellable operating lease
commitment, and further reduced by approximately $917,000 in September 2009 to secure a new
operating lease commitment. Throughout the period ended November 30, 2009, we were in compliance
with all loan covenants and we had no outstanding borrowings under the line of credit.
7. Stock-Based Compensation
Equity Incentive Plans
1999 Equity Incentive Plan
In December 1999, our Board of Directors adopted the 1999 Equity Incentive Plan (the 1999
Plan). We ceased issuing awards under the 1999 Plan upon the completion of our Initial Public
Offering, or IPO, in August 2007. The 1999 Plan provided for incentive or nonstatutory stock
options, stock bonuses, and rights to acquire restricted stock to be granted to employees, outside
directors, and consultants. At November 30, 2009, options to purchase 4,734,597 shares were
outstanding under the 1999 Plan. Such options are exercisable as specified in each option
agreement, generally vest over four years, and expire no more than ten years from the date of
grant. If options awarded under the 1999 Plan are forfeited or repurchased, then shares underlying
those options will no longer be available for awards.
12
2007 Equity Incentive Plan
In May 2007, our Board of Directors adopted, and in July 2007 our stockholders approved, the
2007 Equity Incentive Plan (the 2007 Plan). The 2007 Plan became effective upon our IPO. The 2007
Plan, which is administered by the Compensation Committee of our Board of Directors, provides for
stock options, stock units, restricted shares, and stock appreciation rights to be granted to
employees, non-employee directors and consultants. We initially reserved 3.0 million shares of our
common stock for issuance under the 2007 Plan. In addition, on the first day of each fiscal year
commencing with fiscal year 2009, the aggregate number of shares reserved for issuance under the
2007 Plan automatically increases by a number equal to the lowest of a) 5% of the total number of
shares of common stock then outstanding, b) 3,750,000 shares, or c) a number determined by our
Board of Directors.
Stock Options
Options granted under the 2007 Plan may be either incentive stock options or nonstatutory
stock options and are exercisable as determined by the Compensation Committee and as specified in
each option agreement. Options vest over a period of time as determined by the Compensation
Committee, generally four years, and generally expire seven years (but in any event no more than
ten years) from the date of grant. The exercise price of any stock option granted under the 2007
Plan may not be less than the fair market value of our common stock on the date of grant. The term
of the 2007 Plan is ten years. At November 30, 2009, options to purchase 2,741,157 shares were
outstanding under the 2007 Plan.
Performance Stock Units (PSUs)
PSUs are awards under the 2007 Plan that entitle the recipient to receive shares of our common
stock upon vesting and settlement of the awards pursuant to certain performance and time-based
vesting criteria set by our Compensation Committee.
In August 2007, our Compensation Committee granted 1,000,000 PSUs to certain of 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 generally vest over a period of up to 29 months ending on January 15, 2010. At November
30, 2009, there were 162,104 shares subject to outstanding PSUs from the August 2007 grant.
In March 2008, our Compensation Committee granted 160,000 PSUs to our chief executive officer.
This PSU grant consisted of a single tranche and related to fiscal 2009 company performance metrics
and subsequent individual service requirements. At November 30, 2009, there were 52,000 shares
subject to outstanding PSUs from the March 2008 grant.
In May and June 2009, our Compensation Committee granted 901,000 and 25,000 PSUs,
respectively, to certain of our executive officers and other employees. These PSU grants consisted
of a single tranche and related to fiscal 2010 company performance objectives and subsequent
individual service requirements over a period of up to 23 months, subject to each grantees
continued service. At November 30, 2009, there were 917,500 shares subject to outstanding PSUs from
the May and June 2009 grants.
Restricted Stock Units (RSUs)
RSUs are awards under the 2007 Plan that entitle the recipient to receive shares of our common
stock upon vesting and settlement of the awards pursuant to time-based vesting criteria set by our
Compensation Committee. In the fiscal quarter ended May 31, 2008, our Compensation Committee
granted 545,900 RSUs to our executive officers and certain other employees. All of these RSUs will
vest on April 15, 2010, subject to each grantees continued service. At November 30, 2009, there
were 467,050 shares subject to outstanding RSUs.
13
A summary of the activity for the nine months ended November 30, 2009 under our 1999 Plan and
2007 Plan follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
Shares Subject |
|
Weighted Average |
|
|
Available |
|
to Options |
|
Option Exercise |
|
|
for Grant |
|
Outstanding |
|
Price per Share |
|
|
(Shares in thousands) |
Balance at February 28, 2009 |
|
|
604 |
|
|
|
7,732 |
|
|
$ |
5.20 |
|
Additional shares authorized |
|
|
1,403 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
(607 |
) |
|
|
607 |
|
|
$ |
8.26 |
|
Performance stock units granted |
|
|
(926 |
) |
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
(627 |
) |
|
$ |
1.97 |
|
1999 Plan options cancelled/forfeited (1) |
|
|
|
|
|
|
(80 |
) |
|
$ |
7.02 |
|
2007 Plan options cancelled/forfeited |
|
|
156 |
|
|
|
(156 |
) |
|
$ |
9.68 |
|
Performance and restricted stock units cancelled/forfeited |
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2009 |
|
|
916 |
|
|
|
7,476 |
|
|
$ |
5.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under the terms of the 1999 Plan, shares underlying cancelled or forfeited options are no
longer available for awards. |
Employee Stock Purchase Plan (ESPP)
In May 2007 our Board of Directors adopted, and in July 2007 our stockholders approved, the
2007 Employee Stock Purchase Plan. Under the ESPP, eligible employees may purchase shares of common
stock at a price per share equal to 85% of the lesser of the fair market values of our common stock
at the beginning or end of the applicable offering period. The initial offering period commenced on
August 8, 2007 and ended on April 15, 2008. Each subsequent offering period lasts for six months.
We initially reserved 500,000 shares of our common stock for issuance under the ESPP. In addition,
on the first day of each fiscal year commencing with fiscal year 2009, the aggregate number of
shares reserved for issuance under the ESPP shall automatically increase by a number equal to the
lowest of a) 1% of the total number of shares of common stock then outstanding, b) 375,000 shares,
or c) a number determined by our Board of Directors. At November 30, 2009, a total of 712,330
shares were available for issuance under the ESPP.
Stock-Based Compensation Expense Associated with Awards to Employees
We have issued employee stock-based awards in the form of stock options, PSUs, RSUs, and
shares subject to the ESPP. We measure the value of stock options and shares subject to the ESPP
based on the grant date fair value using the Black-Scholes pricing model. Stock-based compensation
cost for PSUs and RSUs is based on the closing price of the Companys common stock on the grant
date. The fair value of the PSUs granted in August 2007, March 2008, May 2009, and June 2009 was
approximately $10.0 million, $1.7 million, $6.8 million, and $239,000, respectively, and the total
fair value of the RSUs granted in the three months ended May 31, 2008 was approximately $5.7
million.
We amortize the fair value, net of estimated forfeitures, as stock-based compensation expense
on a straight-line basis over the vesting period. In the three months ended November 30, 2009 and
2008, we recognized total stock-based compensation expenses of approximately $2.2 million and $1.8
million, respectively. In the nine months ended November 30, 2009 and 2008, we recognized total
stock-based compensation expenses of approximately $7.5 million and $5.8 million, respectively. We
estimate forfeitures for our stock options, PSUs, and RSUs at the time of grant. At the end of each
reporting period, we evaluate the probability of the service condition being met and revise those
estimates based on actual results, taking into account cancellations related to terminations, as
applicable to each award. In addition, for PSUs granted, 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 stock-based
compensation expense to
be recognized or merely affects the period over which such expense will be recognized. In each of the three months ended May 31, 2008 and August 31, 2008, we recorded
cumulative effect adjustments that resulted in a decrease to stock-based compensation expense of
approximately $940,000 and $253,000, respectively. In the three and nine months ended November 30,
2009, we recorded cumulative effect adjustments which resulted in a decrease to stock-based
compensation expense of approximately $384,000 and $464,000, respectively.
The determination of the fair value of stock-based awards on the date of grant is affected by
our stock price as well as by assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the term of the options and
awards, actual and projected employee stock option exercise behaviors, risk-free interest rates,
and expected dividends. The grant date fair values of our stock-based awards, as well as the
assumptions used to calculate them, are set forth in the table below:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Expected |
|
|
|
|
|
|
|
|
|
Weighted Average per |
|
|
Expected |
|
Stock |
|
Risk-free |
|
Expected |
|
Share Fair Value of |
|
|
Term |
|
Price |
|
Interest |
|
Dividend |
|
Awards Granted |
|
|
(in years) |
|
Volatility |
|
Rate |
|
Yield |
|
During the Period |
Three months ended November 30, 2009 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
4.4 |
|
|
|
63 |
% |
|
|
2.3 |
% |
|
|
0 |
% |
|
$ |
4.46 |
|
ESPP |
|
|
0.5 |
|
|
|
45 |
% |
|
|
0.2 |
% |
|
|
0 |
% |
|
$ |
2.30 |
|
Three months ended November 30, 2008 (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
4.1 |
|
|
|
57 |
% |
|
|
2.3 |
% |
|
|
0 |
% |
|
$ |
4.10 |
|
ESPP |
|
|
0.5 |
|
|
|
72 |
% |
|
|
0.9 |
% |
|
|
0 |
% |
|
$ |
2.64 |
|
Nine months ended November 30, 2009 (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
4.3 |
|
|
|
64 |
% |
|
|
2.0 |
% |
|
|
0 |
% |
|
$ |
4.23 |
|
PSUs |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
$ |
7.64 |
|
ESPP |
|
|
0.5 |
|
|
|
71 |
% |
|
|
0.2 |
% |
|
|
0 |
% |
|
$ |
2.70 |
|
Nine months ended November 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
4.2 |
|
|
|
51 |
% |
|
|
2.7 |
% |
|
|
0 |
% |
|
$ |
3.88 |
|
PSUs |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
$ |
10.37 |
|
RSUs |
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
|
$ |
10.40 |
|
ESPP |
|
|
0.5 |
|
|
|
57 |
% |
|
|
1.5 |
% |
|
|
0 |
% |
|
$ |
2.27 |
|
|
|
|
(1) |
|
No RSUs and PSUs were granted in the three months ended November 30, 2009 and 2008. |
|
(2) |
|
No RSUs were granted in the nine months ended November 30, 2009. |
The following table summarizes gross unrecognized stock-based compensation expenses at
November 30, 2009, excluding estimated forfeitures:
|
|
|
|
|
|
|
|
|
|
|
Unrecognized |
|
|
Remaining |
|
|
Stock-Based |
|
|
Weighted Average |
|
|
Compensation |
|
|
Recognition Period |
|
|
(in millions) |
|
|
(in years) |
Stock options granted after March 1, 2006 |
|
$ |
9.4 |
|
|
|
2.3 |
|
PSUs |
|
|
2.0 |
|
|
|
0.8 |
|
RSUs |
|
|
1.0 |
|
|
|
0.4 |
|
ESPP |
|
|
0.2 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
$ |
12.6 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
8. Income Taxes
In the three and nine months ended November 30, 2009, we recorded an income tax expense
(benefit) of approximately ($167,000) and ($140,000), respectively, compared to ($91,000) and
$1,000 in the corresponding periods of the prior year. The effective tax rate for the three and
nine months ended November 30, 2009 was less than 1% based on our estimated taxable income for the
year, excluding certain discrete tax adjustments. In the three months ended November 30, 2009, we
recorded a discrete tax benefit of approximately $130,000 for the expected recovery of federal
alternative minimum taxes paid in prior years, as a result of the enactment of the Worker,
Homeownership, and Business Assistance Act of 2009 in November 2009, which increases the carryback
period for net operating losses (NOLs) incurred in fiscal 2009 and 2010 from two to five years and
suspends the alternative minimum tax NOL deduction limitation for the carryback period.
Accordingly, we expect to recover federal alternative minimum taxes paid in fiscal 2006, 2007, and
2008 and recorded a tax benefit in the three months ended November 30, 2009.
In the three months ended November 30, 2009, we also recorded a discrete tax benefit due to
changes in our prior year estimated tax liability based on the actual tax payments made and
increased refundable research and development (R&D) tax credits as a result of the extension of
the Housing Assistance Act of 2008 and the American Recovery and Reinvestment Act of 2009.
Excluding the impact of the discrete adjustments, we would have recorded tax expense primarily for
state income taxes in states where we do not have NOL carryforwards and
foreign taxes. The income tax expense (benefit) in the corresponding periods of the prior year was
for federal alternative minimum income taxes, state income taxes in states where we have no NOL
carryforwards, and foreign taxes, offset by a discrete benefit of $83,000 recorded in the three
months ended November 30, 2008 for estimated refundable R&D tax credits generated as a result of
the enactment of the Housing and Economic Recovery Act of 2008.
15
We record liabilities related to uncertain tax positions in accordance with the relevant
accounting standards. In the three and nine months ended November 30, 2009, there were no material
changes to our unrecognized tax benefits and we do not expect to have any significant changes to
unrecognized tax benefits over the next twelve months. Because of our history of operating losses,
all years remain open to audit.
9. Derivative Financial Instruments
We maintain a foreign currency risk management strategy that includes the use of derivative
financial instruments designed to protect our economic value from the possible adverse effects of
currency fluctuations. We do not enter into derivative financial instruments for speculative or
trading purposes. Our hedging relationships are formally documented at the inception of the hedge,
and hedges must be highly effective in offsetting changes to future cash flows on hedged
transactions both at the inception of a hedge and on an ongoing basis. We record the ineffective
portion of hedging instruments, if any, to other income (expense), net in the condensed
consolidated statements of operations.
In July 2008, we entered into two foreign currency forward contracts (forward contracts) to
reduce our exposure in Euro denominated accounts receivable. We designated these forward contracts
as cash flow hedges of foreign currency denominated firm commitments. Our objective in purchasing
these forward contracts was to negate the impact of currency exchange rate movements on our
operating results. We record effective spot-to-spot changes in these cash flow hedges in
accumulated other comprehensive income until the hedged transaction takes place. One of our forward
contracts matured and was settled in May 2009 (the May 2009 Forward Contract); the other matures
in May 2010 (the May 2010 Forward Contract). The May 2010 Forward Contract has a notional
principal of 1.2 million (or approximately $1.8 million). At November 30, 2009, the fair value of
the May 2010 Forward Contract was approximately $42,000 and was included in other current assets,
net on our condensed consolidated balance sheet. At February 28, 2009, the fair value of our
forward contracts was approximately $642,000, of which $335,000 and $307,000 was included in other
current assets and other assets, net on our consolidated balance sheet, respectively.
The following table sets forth the change in accumulated other comprehensive income
associated with our forward contracts for the nine months ended November 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified from |
|
|
Accumulated |
|
|
|
Net Unrealized |
|
|
Cumulative |
|
|
Accumulated Other |
|
|
Other |
|
|
|
Gain on |
|
|
Implied Interest on |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
Forward Contracts |
|
|
Forward Contracts |
|
|
Income Into Revenue |
|
|
Income |
|
Balance at February 28, 2009 |
|
$ |
642 |
|
|
$ |
40 |
|
|
$ |
|
|
|
$ |
682 |
|
Gain reclassified from
accumulated other
comprehensive income into
revenue |
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
|
(68 |
) |
Change in net unrealized gain
and cumulative implied
interest on forward contracts |
|
|
(360 |
) |
|
|
31 |
|
|
|
|
|
|
|
(329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2009 |
|
$ |
282 |
|
|
$ |
71 |
|
|
$ |
(68 |
) |
|
$ |
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the nine months ended November 30, 2009, we reclassified $68,000 of the cumulative net
unrealized gain associated with the May 2009 Forward Contract from accumulated other comprehensive
income into revenue. We expect to reclassify approximately $203,000 remaining net unrealized gains
associated with the May 2009 Forward Contract from accumulated other comprehensive income ratably
into revenue over the next 18 months.
Combined implied interest of approximately $85,000 on both forward contracts was excluded from
effectiveness testing and is being recorded using the straight-line method over the terms of the
forward contracts to interest expense and accumulated other comprehensive income. We did not incur
any hedge ineffectiveness on our forward contracts in the three and nine months ended November 30,
2009.
10. Fair Value Measurements
Effective March 1, 2008, we adopted new accounting standards for fair value measurements,
which clarify that fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be determined based on
assumptions that market
16
participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, the new accounting standards establish a three-tier value hierarchy,
which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 Include other inputs that are directly or indirectly observable in the
marketplace.
Level 3 Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
In accordance with the new accounting standards, we measure our foreign currency forward
contracts at fair value using Level 2 inputs, as the valuation inputs are based on quoted prices of
similar instruments in active markets and do not involve management judgment.
The following table summarizes the amounts measured at fair value at November 30, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other |
|
|
|
|
|
|
Observable Inputs |
Description |
|
Total |
|
(Level 2) |
Assets: |
|
|
|
|
|
|
|
|
Foreign currency forward contracts(1) |
|
$ |
42 |
|
|
$ |
42 |
|
|
|
|
(1) |
|
Included in other current assets, net on our condensed consolidated balance sheet. |
11. Comprehensive Loss
The following table summarizes the calculation and components of comprehensive loss, net of
taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(2,397 |
) |
|
$ |
(808 |
) |
|
$ |
(9,264 |
) |
|
$ |
(3,410 |
) |
Gain reclassified from
accumulated other
comprehensive income
into revenue |
|
|
(34 |
) |
|
|
|
|
|
|
(68 |
) |
|
|
|
|
Change in net
unrealized gain and
cumulative implied
interest on forward
contracts |
|
|
(68 |
) |
|
|
411 |
|
|
|
(329 |
) |
|
|
660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(2,499 |
) |
|
$ |
(397 |
) |
|
$ |
(9,661 |
) |
|
$ |
(2,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Restructuring Charges
In the three and nine months ended November 30, 2009, we recorded approximately $497,000 and
$775,000 of expenses associated with the reduction of our workforce as a result of synergies gained
through the acquisition of Connect3, and the consolidation and
relocation of our corporate headquarters. Expenses
associated with these actions were primarily for severance payments,
outplacement services, moving costs, and approximately $402,000 of
remaining operating lease obligations. All severance payments were made prior to November 30, 2009.
13. Subsequent Events
We
have evaluated subsequent events through January 8, 2010, the time of filing this Quarterly
Report on Form 10-Q. We are not aware of any significant events that occurred subsequent to the
balance sheet date but prior to the filing of this report that would have a material impact on our
condensed consolidated financial statements, or that required recognition or disclosure in our
condensed consolidated financial statements.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q 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
17
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 2, 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 in the section titled Risk Factors included elsewhere in this Form 10-Q and in
our other Securities and Exchange Commission filings, including our Annual Report on Form 10-K for
the fiscal year ended February 28, 2009. 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 Form 10-Q and with the consolidated financial statements and notes
thereto and managements discussion and analysis of financial condition and results of operations
appearing in our Annual Report on Form 10-K for the fiscal year ended February 28, 2009.
Overview
We are a leading provider of on-demand optimization solutions to retailers and consumer
products, or CP, companies. Our software services enable retailers and CP companies to define
category, brand, and customer strategies based on a scientific understanding of consumer behavior
and make actionable pricing, promotion, assortment, space and other merchandising and marketing
recommendations to achieve their revenue, profitability 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, sales, and marketing needs.
Our solutions consist of software services and complementary analytical services, and
analytical insights derived from the same platform that supports our software services. We offer
our solutions individually or as a suite of integrated software services. Our solutions for the
retail and CP industries include DemandTec Lifecycle Price Optimization(TM), DemandTec End-to-End
Promotion Management(TM), DemandTec Assortment & Space(TM), DemandTec Targeted Marketing(TM) and
DemandTec Trade Effectiveness(TM). The DemandTec TradePoint Network(TM) 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, and was $59.4 million for the nine months ended November 30, 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 $86.6 million at November 30, 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 generally 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 agreements with our existing customers at comparable prices, 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 often large contracts. The
annual contract value for each retail and CP company customer agreement is largely related to the
size of the customer, and therefore, the average contract value can fluctuate from period to
period. These retail and CP customer agreements can create significant variability in the aggregate
annual contract value of customer agreements signed in any given fiscal quarter. Our Advanced Deal
Management agreements with CP companies that leverage the DemandTec TradePoint Network are
principally one year in length and much smaller in annual and aggregate contract value than our
other CP company customer software services contracts and our retail contracts. In many of our
prior fiscal years, the agreements we have signed in the first fiscal quarter of such fiscal year
have had an aggregate annual contract value less than that of the agreements signed in the
preceding fiscal fourth quarter. In addition, the aggregate contract value of agreements signed can
fluctuate significantly on a quarterly basis within any given fiscal year. A significant percentage
of our new customer agreements are entered into during the last month, weeks, or even days of each
quarter-end.
We are headquartered in San Mateo, California, and have sales and marketing offices in North
America and Europe. We sell our software through our direct sales force and receive a number of
customer prospect introductions through third-parties, such as systems
18
integrators and a data
syndication company. In the nine months ended November 30, 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.
During fiscal 2009 and the nine months ended November 30, 2009, the global economic
environment has deteriorated compared to prior periods and has resulted in delays in the execution
of new and some renewal customer contracts, with some customers or potential customers electing not
to enter into new or renewal contracts, and some other customers renewing at lower prices.
Accordingly, our revenue growth has slowed and deferred revenue balances have decreased. In the
near term, our revenue growth may continue to slow, or revenue itself may decline from prior
quarters. In addition, the impact of the economic environment on our business contributed to the
use of approximately $10.5 million and $9.1 million, respectively, of net cash in operations in the
three and nine months ended November 30, 2009. Our cash flow generation will continue to remain
challenging and unpredictable and, consequently, we may continue to use cash in operations in
future periods. We have not seen any noticeable improvement in sales cycles and we currently have
little evidence to suggest that the impact of the global economic environment will improve in the
near term.
In February 2009, we acquired Connect3 Systems, Inc., a provider of advertising planning and
execution software. The Connect3 product suite, which Connect3 offered on an installed,
behind-the-firewall basis, is being replatformed into the DemandTec End-to-End Promotion
Management(TM) solution, which supports retailers end-to-end promotion planning process. The
aggregate purchase price was approximately $13.5 million, of which $12.5 million was paid during
the nine months ended November 30, 2009, including approximately $201,000 of acquisition costs. In
addition, we paid off approximately $1.3 million of notes payable held by a former Connect3
officer. 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 $2.3 million, $1.8 million, and $626,000 in fiscal 2010,
2011, and 2012, respectively.
In September 2009, we entered into a lease agreement for office space in San Mateo, California
that we use as our new corporate headquarters, replacing our then-existing corporate headquarters
in San Carlos, California. The lease has an initial non-cancellable lease term of five years
commencing December 1, 2009. The aggregate minimum lease commitment is approximately $10.1 million.
Upon commencement of this lease, our monthly rent payments increased significantly both immediately
and in the long term over our monthly rent payments for our prior space, and quarterly real
estate-related operating expenses that we incur increased by approximately $207,000. If our revenue
does not increase or our operating expenses do not decrease to offset this increase in real
estate-related operating expenses, or if we are unable to find suitable tenants to sublease a
significant portion of this space in the event we are unable to sufficiently grow our business in
the future, then our results of operations and financial position will be materially adversely
impacted.
In the nine months ended November 30, 2009, we introduced our nextGEN strategy, which
combines category, brand and shopper insights to provide our customers a unified understanding of
shopper behavior and the ability to leverage those insights to make better business decisions on
pricing, promotion, assortment and collaboration with their vendors.
In the nine months ended November 30, 2009, we recorded approximately $775,000 of expense
associated with the reduction of our workforce as a result of synergies gained through the
acquisition of Connect3 and with the consolidation and relocation of
our corporate headquarters.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with accounting principles
generally accepted in the United States. These accounting principles require us to make certain
estimates and judgments that can affect the reported amounts of assets and liabilities at the date
of our consolidated financial statements, as well as the reported amounts of revenue and expenses
during the periods presented. 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. To the extent that there are material
differences between these estimates and actual results, our consolidated financial statements could
be adversely affected. The accounting policies that we believe reflect our more significant
estimates, judgments and assumptions and which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following:
|
|
Stock-Based Compensation |
19
|
|
Goodwill and Intangible Assets |
|
|
Impairment of Long-Lived Assets |
In many cases, the accounting treatment of a particular transaction is specifically dictated
by GAAP and does not require managements judgment in its application. There are also areas in
which managements judgment in selecting among available accounting policy alternatives would not
produce a materially different result.
During the three and nine months ended November 30, 2009, there were no significant changes in
our critical accounting policies. During each of the three month periods ended May 31, 2008, August
31, 2008, August 31, 2009 and November 30, 2009, we changed our estimate of the number of shares
expected to vest in calculating stock-based compensation expense. Please refer to Note 7 of Notes
to Consolidated Financial Statements included herein for a more complete discussion of the changes
in estimates. Also, please refer to Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2009 and Note 1 of Notes to Consolidated Financial Statements included herein for a
more complete discussion of our critical accounting policies and estimates.
Results of Operations
Revenue
We derive all of our revenue from customer agreements that cover the use of our software and
various services associated with our customers use of our software. We generally recognize all
revenue ratably over the term of the agreement. Our agreements are generally non-cancellable, but
customers typically have the right to terminate their agreement for cause if we materially breach
our obligations under the agreement and, in certain situations, may have the ability to extend the
duration of their agreement on pre-negotiated terms. We invoice our customers in accordance with
contractual terms, which generally provide that our customers are invoiced in advance for annual
use of our software. We generally provide certain implementation services on a fixed fee basis and
invoice our customers in advance. In addition, we also provide implementation and training services
on a time and materials basis and invoice our customers monthly in arrears. Our payment terms
typically require our customers to pay us within 30 days of the invoice date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(in thousands) |
Revenue |
|
$ |
20,088 |
|
|
$ |
18,989 |
|
|
$ |
59,429 |
|
|
$ |
55,675 |
|
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine Months Ended
November 30, 2008. Revenue for the three and nine months ended November 30, 2009 increased
approximately $1.1 million and $3.8 million, or 5.8% and 6.7%, respectively, over the corresponding
periods of the prior year.
Revenue from new customers was approximately $1.0 million and $2.7 million in the three and
nine months ended November 30, 2009, respectively, and revenue from existing customers increased
approximately $92,000 and $1.0 million in the three and nine months ended November 30, 2009 over
the corresponding periods of the prior year. New customers are those that did not contribute any
revenue in the three and nine months ended November 30, 2008. Existing customers are those that
contributed revenue in each of the periods presented. Our revenue growth depends on our ability to
attract new customers and to maintain or increase revenues from our current customers over time.
During fiscal 2009 and the nine months ended November 30, 2009, the global economic environment has
deteriorated compared to prior periods and the retail and CP industries continue to be affected.
This has resulted in delays in the execution of new and some renewal customer contracts, with some
customers or potential customers electing not to enter into new or renewal contracts, and some
other customers renewing at lower prices. Accordingly, our revenue growth has slowed. In the near
term, we do not expect any significant improvements in the impact of the global economic
environment on our business. Consequently, our revenue growth may continue to slow, or revenue
itself may decline from prior quarters.
In the three and nine months ended November 30, 2009, revenue from customers located outside
the United States represented 13% and 14%, respectively, of revenue. In the three and nine months
ended November 30, 2008, revenue from customers located outside the United States represented 13%
and 14%, respectively, of revenue. Over the long term, we expect that revenue from customers
outside the United States will increase as a percentage of total revenue on an annual basis.
20
In both of the three and nine months periods ended November 30, 2009, revenue from retail
customers represented 82% of revenue and revenue from CP companies represented 18% of revenue. In
both of the three and nine month periods ended November 30, 2008, revenue from retail customers
represented 86% of revenue and revenue from CP companies represented 14% of revenue. Over the long
term, we expect that revenue from CP companies will increase as a percentage of total revenue on an
annual basis.
Cost of Revenue
Cost of revenue includes expenses related to data centers, depreciation expenses associated
with computer equipment and software, compensation and related expenses of operations, technical
customer support, production operations and professional services personnel, amortization of
purchased intangible assets, and allocated overhead expenses. We are in the process of
consolidating our data centers. Currently, we have contracts with three third parties for the use
of their data center facilities, and our data center costs principally consist of the amounts we
pay to these third parties for rack space, power and similar items. Amortization of purchased
intangible assets principally relates to developed technology acquired in the Connect3 and
TradePoint acquisitions. We allocate overhead costs, such as rent and occupancy costs, employee
benefits, information management costs, and legal and other costs, to all departments predominantly
based on headcount. As a result, we include allocated overhead expenses in cost of revenue and each
operating expense category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
Revenue |
|
$ |
20,088 |
|
|
$ |
18,989 |
|
|
$ |
59,429 |
|
|
$ |
55,675 |
|
Cost of revenue |
|
|
6,361 |
|
|
|
5,834 |
|
|
|
19,365 |
|
|
|
17,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,727 |
|
|
|
13,155 |
|
|
|
40,064 |
|
|
|
38,340 |
|
Gross margin |
|
|
68.3 |
% |
|
|
69.3 |
% |
|
|
67.4 |
% |
|
|
68.9 |
% |
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine Months Ended
November 30, 2008. Cost of revenue in the three and nine months ended November 30, 2009 increased
approximately $527,000 and $2.0 million, or 9.0% and 11.7%, respectively, over the corresponding
periods of the prior year. The increase was primarily due to increased personnel costs, outside
services and amortization of purchased intangible assets, partially offset by lower travel-related
costs.
Personnel costs include all compensation, employee benefits, and stock-based compensation
expenses. Personnel costs increased approximately $166,000 and $1.1 million in the three and nine
months ended November 30, 2009 over the corresponding periods of the prior year, mainly due to an
increase in headcount during the 12 months ended November 30, 2009. Headcount in consulting,
support services and production operations increased from 94 at November 30, 2008 to 100 at
February 28, 2009, primarily due to the acquisition of Connect3, and then declined to 96 at
November 30, 2009 as a result of our restructuring activities. Outside service costs increased
approximately $124,000 and $168,000 in the three and nine months ended November 30, 2009,
respectively, over the corresponding periods of the prior year, primarily due to the setup of our
new data center in Arizona in the three months ended November 30, 2009. In addition, expense
associated with the amortization of purchased intangible assets increased $314,000 and $940,000 in
the three and nine months ended November 30, 2009, respectively, over the corresponding periods of
the prior year primarily attributable to the acquisition of Connect3 in February 2009. The
increase in personnel costs, outside service costs, and amortization of intangible assets was
partially offset by a decrease of $123,000 and $339,000 in travel-related costs in the three and
nine months ended November 30, 2009, respectively, primarily due to efforts to control travel costs
such as reducing or eliminating conferences, offsite events, and non-billable travel.
Our gross margin decreased to 68.3% and 67.4% in the three and nine months ended November 30,
2009 compared to the corresponding periods of the prior year, as our personnel costs and the
amortization of purchased intangible assets, primarily associated with our acquisition of Connect3,
increased at a faster rate than our revenue.
Research and Development Expenses
Research and development expenses include personnel costs for our research, product management
and software development personnel, and allocated overhead expenses. We devote substantial
resources to extending our existing software applications as well as to developing new software.
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Research and development |
|
$ |
8,037 |
|
|
$ |
6,659 |
|
|
$ |
24,190 |
|
|
$ |
19,772 |
|
Percent of revenue |
|
|
40.0 |
% |
|
|
35.1 |
% |
|
|
40.7 |
% |
|
|
35.5 |
% |
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine Months Ended
November 30, 2008. Research and development expenses in the three and nine months ended November
30, 2009 increased approximately $1.4 million and $4.4 million, or 20.7% and 22.3%, respectively,
over the corresponding periods of the prior year, primarily due to increased personnel costs and
allocated overhead costs partially offset by a reduction in third party consulting services.
Personnel costs increased approximately $1.2 million and $3.7 million, respectively, in the
three and nine months ended November 30, 2009 over the corresponding periods of the prior year,
mainly due to an increase in headcount to 132 at November 30, 2009 from 101 at November 30, 2008,
primarily as a result of the acquisition of Connect3 in February 2009. Research and development
related stock-based compensation expense, which is a component of personnel costs, was $784,000 and
$2.6 million, respectively, in the three and nine months ended November 30, 2009 compared to
$509,000 and $1.7 million, respectively, in the three and nine months ended November 30, 2008. The
increase in stock-based compensation expense was primarily associated with equity awards granted
since November 2008. Allocated overhead expenses increased $246,000 and $766,000, respectively, in
the three and nine months ended November 30, 2009 over the corresponding periods of the prior year,
primarily due to larger allocations resulting from the headcount increase. The increase in
personnel costs and allocated overhead costs was partially offset by a decrease in third-party
contractor and consulting expenses of approximately $81,000 and $185,000, respectively, in the
three and nine months ended November 30, 2008 as a result of negotiating lower contract rates on
recurring services.
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 over the long term depending on the timing and magnitude of equity incentive grants during
each quarter and revisions to our estimates of the number of shares expected to vest. In the short
term, we expect that research and development expenses will increase in absolute dollars and as a
percentage of revenue. Over the long term, we expect that research and development expenses will
increase in absolute dollars, but decrease as a percentage of revenue.
Sales and Marketing Expenses
Sales and marketing expenses include personnel costs for our sales and marketing personnel,
including commissions and incentives, travel and entertainment expenses, marketing programs such as
product marketing, events, corporate communications and other brand building expenses, and
allocated overhead expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
Sales and marketing |
|
$ |
5,067 |
|
|
$ |
4,839 |
|
|
$ |
15,912 |
|
|
$ |
15,250 |
|
Percent of revenue |
|
|
25.2 |
% |
|
|
25.5 |
% |
|
|
26.8 |
% |
|
|
27.4 |
% |
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine Months Ended
November 30, 2008. Sales and marketing expenses in the three and nine months ended November 30,
2009 increased approximately $228,000 and $662,000, or 4.7% and 4.3%, respectively, over the
corresponding periods of the prior year mainly due to increased consulting and marketing program
costs.
Consulting and marketing program costs increased approximately $178,000 and $678,000 in the
three and nine months ended November 30, 2009 over the corresponding periods of the prior year,
primarily due to new service introductions, increased online marketing activities, and branding
initiatives.
Over the long term, we expect that 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 over the long term
depending on the timing and magnitude of equity incentive grants during each quarter and revisions
to our estimates of the number of shares expected to vest.
22
General and Administrative Expenses
General and administrative expenses include personnel costs for our executive, finance and
accounting, human resources, legal and information management personnel, third-party professional
services, travel and entertainment expenses, other corporate expenses and overhead not allocated to
cost of revenue, research and development expenses, or sales and marketing expenses. Third-party
professional services primarily include outside legal, audit and tax related consulting costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
General and administrative |
|
$ |
2,227 |
|
|
$ |
2,662 |
|
|
$ |
7,387 |
|
|
$ |
7,333 |
|
Percent of revenue |
|
|
11.1 |
% |
|
|
14.0 |
% |
|
|
12.4 |
% |
|
|
13.2 |
% |
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine Months Ended
November 30, 2008. General and administrative expenses decreased approximately $435,000 in the
three months ended November 30, 2009 from the corresponding period of the prior year and increased
approximately $54,000 in the nine months ended November 30, 2009 over the corresponding period of
the prior year. The changes were primarily related to decreased third party professional services,
partially offset by increased personnel costs.
Third party professional services expense decreased approximately $468,000 and $1.1 million in
the three and nine months ended November 30, 2009, respectively, over the corresponding periods of
the prior year, primarily due to lower Sarbanes-Oxley and audit related costs as well as a
reduction in various third-party professional services as part of our efforts to control costs. The
decrease in third party professional services costs was partially offset by increased personnel
costs of approximately $129,000 and $913,000 in the three and nine months ended November 30, 2009
over the corresponding periods of the prior year, primarily due to an increase in headcount and
stock-based compensation expense. General and administrative related stock-based compensation
expense, which is a component of personnel costs, was $473,000 and $1.7 million, respectively, in
the three and nine months ended November 30, 2009 compared to $424,000 and $1.2 million,
respectively, in the three and nine months ended November 30, 2008. The increase in stock-based
compensation expense was primarily associated with equity awards granted since November 2008.
Over the long term, we expect that general and administrative expenses will increase in
absolute dollars as we continue to grow, but decrease slightly as a percentage of revenue. In
addition, we expect that stock-based compensation charges included in general and administrative
expenses will vary over the long term depending on the timing and magnitude of equity incentive
grants during each quarter and revisions to our estimates of the number of shares expected to vest.
Amortization of Purchased Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
(dollars in thousands) |
Amortization of purchased intangible assets |
|
$ |
575 |
|
|
$ |
331 |
|
|
$ |
1,752 |
|
|
$ |
751 |
|
Percent of revenue |
|
|
2.9 |
% |
|
|
1.7 |
% |
|
|
2.9 |
% |
|
|
1.3 |
% |
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine Months Ended
November 30, 2008. Amortization of purchased intangible assets increased approximately $244,000 and
$1.0 million, respectively, in the three and nine months ended November 30, 2009 over the
corresponding periods of the prior year. The increase was primarily due to our acquisition of
Connect3 in February 2009 and our purchase of rights to develop assortment optimization technology
in May 2008. Intangible assets associated with the Connect3 acquisition are being amortized over
one to two and a half years starting from March 2009. The estimated average quarterly amortization
expense for fiscal 2010, absent any impairment, is approximately $1.0 million, of which
approximately $466,000 is attributed to cost of revenue. The quarterly amortization expense of all
existing purchased intangible assets will decline significantly in fiscal 2011 and thereafter as
some intangible assets become fully amortized.
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
|
Nine Months Ended November 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Interest income |
|
$ |
103 |
|
|
$ |
431 |
|
|
$ |
494 |
|
|
$ |
1,436 |
|
Interest expense |
|
|
(12 |
) |
|
|
(31 |
) |
|
|
(74 |
) |
|
|
(54 |
) |
Other income (expense) |
|
|
21 |
|
|
|
37 |
|
|
|
128 |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
$ |
112 |
|
|
$ |
437 |
|
|
$ |
548 |
|
|
$ |
1,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine Months Ended
November 30, 2008. Other income, net decreased $325,000 and $809,000, respectively, in the three
and nine months ended November 30, 2009 from the corresponding periods of the prior year, primarily
due to decreased interest income as a result of lower interest rates on invested cash balances and
marketable securities. Offsetting the decline in interest income were exchange rate-related gains
on our foreign currency denominated accounts receivable primarily due to the strengthening of the
Euro against the U.S. dollar in the three and nine months ended November 30, 2009. Such
exchange-related gains are included in other income (expense).
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, |
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Provision (benefit) for income taxes |
|
$ |
(167 |
) |
|
$ |
(91 |
) |
|
$ |
(140 |
) |
|
$ |
1 |
|
Three and Nine Months Ended November 30, 2009 Compared to the Three and Nine and Months Ended
November 30, 2008. In the three and nine months ended November 30, 2009, we recorded an income tax
expense (benefit) of approximately ($167,000) and ($140,000), respectively, compared to ($91,000)
and $1,000 in the corresponding periods of the prior year. The effective tax rate for the three and
nine months ended November 30, 2009 was less than 1% based on our estimated taxable income for the
year, excluding certain discrete tax adjustments. In the three months ended November 30, 2009, we
recorded a discrete tax benefit of approximately $130,000 for the expected recovery of federal
alternative minimum taxes paid in prior years, as a result of the enactment of the 2009 Worker,
Homeownership, and Business Assistance Act of 2009 in November 2009, which increases the carryback
period for NOLs incurred in fiscal 2009 and 2010 from two to five years and suspends the
alternative minimum tax NOL deduction limitation for the carryback period. Accordingly, we expect
to recover federal alternative minimum taxes paid in fiscal 2006, 2007, and 2008 and recorded a tax
benefit in the three months ended November 30, 2009.
In the three months ended November 30, 2009, we also recorded a discrete tax benefit due to
changes in our prior year estimated tax liability based on actual tax payments made and increased
refundable R&D credits as a result of the extension of the Housing Assistance Act of 2008 and the
American Recovery and Reinvestment Act of 2009. Excluding the impact of the discrete adjustments,
we would have recorded tax expense primarily for state income taxes in states where we do not have
NOL carryforwards and foreign taxes. The income tax expense (benefit) in the corresponding periods
of the prior year was for federal alternative minimum income taxes, state income taxes in states
where we have no NOL carryforwards, and foreign taxes, offset by a discrete benefit of $83,000
recorded in the three months ended November 30, 2008 for estimated refundable R&D tax credits
generated prior to fiscal 2006 as a result of the enactment of the Housing and Economic Recovery
Act of 2008.
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
principally in states where we have no NOL carryforwards, and foreign taxes. At February 28, 2009,
we had federal and state net operating loss carryforwards of approximately $56.4 million and $34.9
million, respectively, to cover future taxable income.
Stock-Based Compensation Expense
Total stock-based compensation expense increased by approximately $421,000 and $1.6 million,
respectively, in the three and nine months ended November 30, 2009 over the corresponding periods
of the prior year, mainly due to options granted to new and existing employees subsequent to
November 30, 2008, PSUs granted in May and June 2009, and shares subject to our ESPP. The increase
in each of the three and nine months ended November 30, 2009 was partially offset by decreases in
stock-based compensation expense associated with the PSUs granted in August 2007 and March 2008,
as most of these PSU awards were vested in prior periods and we revised our estimate of the number
of awards expected to vest. See Note 7 of Notes to our Condensed 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 vary in the future depending upon the magnitude
and timing of equity incentive grants and revisions to our estimates of the number of shares
expected to vest.
Liquidity and Capital Resources
At November 30, 2009, our principal sources of liquidity consisted of cash, cash equivalents,
and marketable securities of $66.1 million, accounts receivable (net of allowances) of $14.2
million, and available borrowing capacity under our credit facility of $18.9
24
million. At November
30, 2009, our marketable securities consisted of commercial paper, certificates of deposit,
corporate bonds and obligations of government-sponsored enterprises.
In May 2009, we amended our revolving line of credit that we had entered in April 2008 to,
among other things, extend the maturity date of the loan agreement and to increase the revolving
line of credit from $15.0 million to $20.0 million. The amended revolving line of credit 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 Form
10-Q, we were in compliance with all loan covenants and had no outstanding debt under the line of
credit, and the available line of credit amount was approximately $18.9 million.
|
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|
|
|
|
|
|
|
|
|
Nine Months Ended November 30, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
Net cash provided by (used in) operating activities |
|
$ |
(9,149 |
) |
|
$ |
10,790 |
|
Net cash used in investing activities |
|
|
(11,153 |
) |
|
|
(27,679 |
) |
Net cash provided by financing activities |
|
|
1,095 |
|
|
|
2,311 |
|
Operating Activities
Our cash flows from operating activities in any period are significantly influenced by the
number of customers using our software, the number and size of new customer contracts, the timing
and size of renewals of existing customer contracts, and the timing of payments by these customers.
Our largest source of operating cash flows is cash collections from our customers, which results in
decreases to accounts receivable. Our primary uses of cash in operating activities are for
personnel-related expenditures and rent payments. Our cash flows from operating activities in any
period will continue to be significantly affected by the extent to which we add new customers,
renew existing customers, collect payments from our customers and increase personnel to grow our
business.
In the nine months ended November 30, 2009, we used approximately $9.1 million of net cash in
operating activities compared to $10.8 million cash generated from operating activities in the
corresponding period of the prior year. The net cash outflow in the nine months ended November 30,
2009 was primarily attributable to net cash used in operating activities in the three months ended
November 30, 2009 of approximately $10.5 million. The current global economic conditions have
resulted in delays in the collection of payments from our customers and delays in the execution of
new and some renewal customer contracts, with some customers electing not to enter into new or
renewal contracts, and some other customers renewing at lower prices. These factors have resulted
in lower deferred revenue and higher accounts receivable balances, and consequently decreased cash
from operations by approximately $14.2 million compared to the corresponding period of the prior
year. Further, our acquisition of Connect3 in February 2009 has increased headcount and related
expenses in the nine months ended November 30, 2009, resulting in approximately $2.5 million lower
net profit, after adjusting for non-cash related expenses, compared to the corresponding period of
the prior year. In addition, a reduction in accrued compensation resulted in a decrease of
approximately $2.1 million in cash from operations in the nine months ended November 30, 2009
compared to the corresponding period of the prior year, primarily associated with the timing of
bonus payments. Other working capital items decreased cash from operations in the nine months ended
November 30, 2009 by approximately $1.2 million compared to the corresponding period of the prior
year, primarily due to the timing of payments to vendors.
We have not seen any noticeable improvement in sales cycles and we anticipate that the global
economic environment will not improve in the near term. As a result,
we expect the execution of new and
some renewal customer contracts and the collection of cash will continue to remain challenging and
unpredictable, thereby impacting our cash flow generation on a quarterly basis. We may continue to
use net cash in operations in future periods.
Investing Activities
Our primary investing activities have been capital expenditures on equipment for our data
centers, net purchases of marketable securities, and payments for the acquisition of businesses.
25
In the nine months ended November 30, 2009, we used $11.2 million of net cash in investing
activities, primarily due to $12.5 million cash payments associated with the Connect3 acquisition
and $1.2 million in capital expenditures, offset by approximately $2.6 million of net cash inflow
from maturities of marketable securities.
Financing Activities
Our primary financing activities have been issuances of common stock related to our IPO, the
exercise of stock options, and the sale of shares pursuant to our
ESPP, as well as borrowings and
repayments of notes payable.
In the nine months ended November 30, 2009, we received approximately $1.1 million of net cash
from financing activities, as a result of $2.4 million of cash proceeds from the issuance of common
stock under our equity incentive plans, offset by the payment in full of approximately $1.3 million
of notes payable held by a former Connect3 officer and principal shareholder.
We believe that our cash, cash equivalents, and marketable securities balances at November 30,
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 additional indebtedness to continue to
fund our operations over the long term. Our future capital requirements will depend on many
factors, including our rate of revenue growth, the 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, Connect3 merger consideration payable, and notes payable to former TradePoint
shareholders.
At November 30, 2009, the future minimum payments under these commitments, as well as payments
due under our notes payable, were as follows:
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|
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|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
(In thousands) |
|
Operating leases (1) |
|
$ |
11,951 |
|
|
$ |
2,287 |
|
|
$ |
4,574 |
|
|
$ |
5,090 |
|
|
$ |
|
|
Merger consideration payable to former Connect3 shareholders |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to former TradePoint shareholders |
|
|
434 |
|
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
13,385 |
|
|
$ |
3,721 |
|
|
$ |
4,574 |
|
|
$ |
5,090 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(1) |
|
Includes approximately $10.1 million in future minimum lease payments associated with our
new headquarters facility in San Mateo, California, and approximately $1.5 million in future
minimum lease payments for equipment and facility operating leases associated with our new data
center in Mesa, Arizona, all entered into in September 2009. See Note 5 of Notes to Condensed
Consolidated Financial Statements. |
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 purposes of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes, nor do we have any undisclosed material transactions or
commitments involving related persons or entities.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these
pronouncements on our condensed consolidated financial statements, see Note 1 of Notes to Condensed
Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Risk
26
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 and receivables are 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. At
November 30, 2009, we had one outstanding forward foreign exchange contract to sell Euros for U.S.
dollars in May 2010, with a notional principal of 1.2 million (or approximately $1.8 million). We
do not enter into derivative financial instruments for speculative or trading purposes.
With respect to our international operations, which are primarily sales and marketing support
entities, we have remeasured our accounts denominated in non-U.S. currencies using the U.S. dollar
as the functional currency and recorded the resulting gains (losses) within other income (expense),
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. Our foreign currency
gain was approximately $135,000 and $77,000 in the nine months ended November 30, 2009 and 2008,
respectively.
Interest Rate Sensitivity
We had cash and cash equivalents totaling $14.4 million and marketable securities totaling
$51.7 million at November 30, 2009. These amounts were invested primarily in government securities
and corporate notes and bonds with credit ratings of at least A-1 or better, money market funds
registered with the SEC under rule 2a-7 of the Investment Company Act of 1940, and interest-bearing
demand deposit accounts. By policy, we limit the amount of credit exposure to any one issuer and we
do not enter into investments for trading or speculative purposes. Our cash and cash equivalents
and marketable securities are held and invested with capital preservation as the primary objective.
Our cash equivalents and marketable securities are subject to market risk due to changes in
interest rates. Fixed-rate interest securities may have their market value adversely impacted due
to a rise in interest rates, while floating rate securities may produce less income than expected
if interest rates fall. Due in part to these factors, our future investment income may fall short
of expectations due to changes in interest rates or we may suffer losses in principal if we are
forced to sell securities that decline in market value due to changes in interest rates. However,
because we classify our marketable securities as held-to-maturity, no gains or losses are
recognized due to changes in interest rates unless such securities are sold prior to maturity or
declines in fair value are determined to be other-than-temporary. We believe that we do not have
any material exposure to changes in the fair value of our investment portfolio as a result of
changes in interest rates. Declines in interest rates, however, will reduce future investment
income, if any. For instance, a fluctuation in interest rates of 1.0% at November 30, 2009 would
result in a change of approximately $600,000 in annual interest income.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of November 30, 2009, the end of the period covered by this Quarterly Report on Form
10-Q. This evaluation (the controls evaluation) was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO). Disclosure controls and procedures means controls and other procedures that are
designed to provide reasonable assurance that information required to be disclosed in the reports
that we file or submit under the Securities and Exchange Act of 1934, as amended (the Exchange
Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed such that information is accumulated
and communicated to our management, including the CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure. Based on the controls evaluation, our CEO and CFO have
concluded that as of November 30, 2009, our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods specified by the SEC and to
ensure that material information relating to the Company and our consolidated subsidiaries is made
known to management, including the CEO and CFO, particularly during the period when our periodic
reports are being prepared.
27
Our management, including our CEO and CFO, believe that our disclosure controls and procedures
are effective at the reasonable assurance level. However, our management, including the CEO and
CFO, does not expect that our disclosure controls and procedures will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the period covered by
this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Internal control over financial
reporting means 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.
28
PART II. OTHER INFORMATION
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|
|
Item 1. |
|
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.
Set forth below and elsewhere in this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q and in other written and oral
communications from time to time. Because of the following factors, as well as other variables
affecting our operating results, past financial performance should not be considered as a reliable
indicator of future performance and investors should not use historical trends to anticipate
results or trends in future periods.
Risks Related to Our Business and Industry
We may experience significant quarterly fluctuations in our operating results due to a number of
factors, which makes our future operating results difficult to predict and could cause our
operating results to fall below expectations.
Our quarterly operating results may fluctuate significantly due to a variety of factors, many
of which are outside of our control. As a result, comparing our operating results on a
period-to-period basis may not be meaningful. You should not rely on our past results as an
indication of our future performance. If our operating results fall below the expectations of
investors or securities analysts or below the guidance, if any, we provide to the market, the price
of our common stock could decline substantially.
Factors that may affect our operating results include:
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|
|
our ability to increase sales to existing customers and to renew agreements with our
existing customers at comparable prices, particularly larger retail customers; |
|
|
|
|
our ability to attract new customers, particularly larger retail customers and consumer
products customers; |
|
|
|
|
our ability to achieve success with our recently-announced nextGEN strategy; |
|
|
|
|
changes in our pricing policies or those of our competitors, or pricing pressure on our
software services; |
|
|
|
|
periodic fluctuations in demand for our software and services; |
|
|
|
|
volatility in the sales of our solutions on a quarterly basis and timing of the execution
of new and renewal agreements within such quarterly periods; |
|
|
|
|
reductions in customers budgets for information technology purchases and delays in their
purchasing cycles, particularly in light of recent deteriorating global economic conditions; |
|
|
|
|
our ability to develop and implement in a timely manner new software and enhancements
that meet customer requirements; |
|
|
|
|
our ability to hire, train and retain key personnel; |
|
|
|
|
any significant changes in the competitive dynamics of our market, including new entrants
or substantial discounting of products; |
|
|
|
|
our ability to control costs, including our operating expenses; |
|
|
|
|
any significant change in our facilities-related costs; |
29
|
|
|
the timing of hiring personnel and of large expenses such as those for trade shows and
third-party professional services; |
|
|
|
|
general economic conditions in the retail and CP markets; |
|
|
|
|
outages and capacity constraints with our hosting partners; and |
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|
|
|
the impact of a recession or any other adverse global economic conditions on our
business, including a delay in signing or a failure to sign significant customer agreements. |
We have in the past experienced, and we may continue to experience, significant variations in
our level of sales on a quarterly basis. In recent periods, several of our customers have delayed
or failed to renew their agreements with us upon expiration, or have renewed at lower prices. Such
variations in our sales, or delays in signing or a failure to sign or renew significant customer
agreements, have led to significant fluctuations in our cash flows and deferred revenue on a
quarterly basis. For example, we used approximately $10.5 million of net cash in operations in the
three months ended November 30, 2009 while we generated approximately $2.0 million of net cash from
operations in the three months ended August 31, 2009. Our operating results have been impacted, and will
likely continue to be impacted in the near term, by any delays in signing or failures to sign
significant customer agreements. If the global economic environment does not improve in the short
term and delays in signing customer agreements continue in any future fiscal quarters, our future
operating results for any such quarter and for subsequent quarters may be below the expectations of
securities analysts or investors, which may result in a decline in our stock price.
In September 2009, we entered into a lease agreement for office space in San Mateo, California
that we use as our new corporate headquarters, replacing our then-existing corporate headquarters
in San Carlos, California. The lease has an initial non-cancellable lease term of five years
commencing December 1, 2009. The aggregate minimum lease commitment is approximately $10.1 million.
Upon commencement of this lease, our monthly rent payments increased significantly both immediately
and in the long term over our monthly rent payments for our prior space, and quarterly real
estate-related operating expenses that we incur increased by approximately $207,000. If our revenue
does not increase or our operating expenses do not decrease to offset this increase in real
estate-related operating expenses, or if we are unable to find suitable tenants to sublease a
significant portion of this space in the event we are unable to sufficiently grow our business in
the future, then our results of operations and financial position will be materially adversely
impacted.
In addition, in the past, certain of our customers have filed for bankruptcy protection. For
example, during fiscal 2010, two of our customers, Bi-Lo LLC and The Penn Traffic Company, filed
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. Our
aggregate revenue from Bi-Lo and Penn Traffic in the nine months ended November 30, 2009 was
approximately $2.2 million. It is possible that any customers or potential customers seeking
bankruptcy protection could seek to cancel their agreements with us, or could elect not to purchase
new or additional services or renew such services with us, or could fail to pay us according to our
contractual terms, any of which would negatively impact our results of operations or financial
position in the future.
The effects of the ongoing global economic conditionss may adversely impact our business,
operating results or financial condition.
The ongoing global economic conditions have caused a general tightening in the credit markets,
lower levels of liquidity, increases in the rates of default and bankruptcy, extreme volatility in
credit, equity and fixed income markets, and economic contraction. The retail and consumer products
industries have been and may continue to be especially hard hit by these economic developments,
which in recent periods has resulted in some customers delaying or not entering into new agreements
or renewing their existing agreements with us. In addition, current or potential customers may not
have funds to enter into or renew their agreements for our software and services, which could cause
them to delay, decrease or cancel purchases of our software and services, to renew at lower prices,
or to not pay us or to delay paying us for previously purchased software and services. Financial
institution failures may cause us to incur increased expenses or make it more difficult either to
utilize our existing debt capacity or otherwise obtain financing for our operations, investing
activities (including the financing of any future acquisitions), or financing activities. Finally,
our investment portfolio, which includes short-term debt securities, is subject to general credit,
liquidity, counterparty, market and interest rate risks that may be exacerbated by the ongoing
global financial conditions. If the banking system or the fixed income, credit or equity markets
deteriorate or remain volatile, our investment portfolio may be impacted and the values and
liquidity of our investments could be adversely affected.
30
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, and a net loss of $9.3 million in the nine months ended November 30,
2009. At November 30, 2009, we had an accumulated deficit of $86.6 million. We may continue to
incur net losses in the future. In addition, our cost of revenue and operating expenses may
increase in future periods as we implement initiatives to continue to grow our business. If the
global economic environment continues to negatively impact our business and our revenue does not
increase to offset these expected increases in cost of revenue and operating expenses, we will not
be profitable. In fact, in future periods our revenue could decline. For example, our costs have
grown faster than our revenue such that our net loss has increased to $9.3 million in the nine
months ended November 30, 2009 compared to $3.4 million in the nine months ended November 30, 2008.
Accordingly, we cannot assure you that we will be able to achieve or maintain profitability 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 82% of our revenue in the nine
months ended November 30, 2009, and 86% of our revenue in fiscal 2009. In the nine months ended
November 30, 2009, our largest customer accounted for approximately 14% of our revenue, and in
fiscal 2009 our three largest customers accounted for approximately 33% of our revenue. Although
our largest customers may vary from period to period, we anticipate that we will continue to depend
on revenue from a relatively small number of our 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,
which would adversely affect our revenue and results of operations.
Our business depends substantially on customers renewing their agreements for our software. Any
decline in our customer renewals would harm our operating results.
To maintain and grow our revenue, we must achieve and maintain high levels of customer
renewals. We sell our software pursuant to agreements with initial terms that are generally from
one to three years in length. Our customers have no obligation to renew their agreements after the
expiration of their term, and we cannot assure you that these agreements will be renewed on
favorable terms, renewed timely, or at all. The fees we charge for our solutions vary based on a
number of factors, including the software, service and hosting components provided, the size of the
customer, and the duration of the agreement term. Our initial agreements with customers may include
fees for software, services or hosting components that may not be needed upon renewal. As a
consequence, if we renew these agreements, we may receive lower total fees. In addition, if an
agreement is renewed for a term longer than the preceding term, we may receive total fees in excess
of total fees received in the initial agreement but a smaller average annual fee because we
generally charge lower annual fees in connection with agreements with longer terms. In any of these
situations, we would need to sell additional software, services or hosting in order to maintain the
same level of annual fees from that customer. There can be no assurance that we will be able to
renew these agreements, sell additional software or services or sell to new customers. In recent
periods certain of our customers have elected not to renew their agreements with us or have renewed
on less favorable terms. We have limited historical data with respect to customer renewals, so we
may not be able to predict future customer renewal rates and amounts accurately. Our customers
renewal rates may decline or fluctuate as a result of a number of factors, including their
satisfaction or dissatisfaction with our software, the price of our software, the prices of
competing products and services, consolidation within our customer base or reductions in our
customers information technology spending levels. If our customers do not renew their agreements
for our software for any reason, or if they renew on less favorable terms, our revenue will decline
and our cash flow will be negatively impacted.
Because we generally recognize revenue ratably over the terms of our customer agreements, the lack
of renewals or the failure to enter into new agreements will not immediately be reflected in our
statement of operations in any significant manner but will negatively affect revenue in future
quarters.
We generally 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. For example, in fiscal
31
2009 and fiscal 2010 the global economic environment has deteriorated compared to prior
periods. This has resulted in delays in the execution of new and some renewal customer contracts,
with some customers or potential customers electing not to enter into new or renewal contracts, and
some other customers renewing at lower prices. Accordingly, our revenue growth has slowed, and our
deferred revenue balance at November 30, 2009 was lower compared to prior periods, which may
adversely impact our revenue in the future.
We may expand through acquisitions of other companies, which may divert our managements attention
and result in unexpected operating and technology integration difficulties, increased costs and
dilution to our stockholders.
Our business strategy may include acquiring complementary software, technologies, or
businesses. For instance, in February 2009, we acquired Connect3, a provider of advertising
planning and execution software. Acquisitions may result in unforeseen operating difficulties and
expenditures. In particular, we may encounter difficulties in assimilating or integrating the
businesses, technologies, services, products, personnel or operations of the acquired companies
(including those of Connect3), especially if the key personnel of the acquired company choose not
to work for us, and we may have difficulty retaining the existing customers or signing new
customers of any acquired business or migrating them to a software-as-a-service model. For
instance, we are currently integrating Connect3s technology, which was offered solely on an
installed, behind-the-firewall basis, into our DemandTec End-to-End Promotion Management solution,
and we may not be successful in completing this integration on a timely basis or at all.
Acquisitions may also disrupt our ongoing business, divert our resources and require significant
management attention that would otherwise be available for ongoing development of our current
business. We also may be required to use a substantial amount of our cash or issue equity
securities to complete an acquisition, which could deplete our cash reserves and dilute our
existing stockholders and could adversely affect the market price of our common stock. Moreover, we
cannot assure you that the anticipated benefits of any acquisition, including our revenue or return
on investment assumptions, would be realized or that we would not be exposed to unknown
liabilities.
In addition, an acquisition may negatively impact our results of operations because we may
incur additional expenses relating to one-time charges, write-downs, amortization of intangible
assets, or tax-related expenses. For example, our acquisition of TradePoint in November 2006
resulted in approximately $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
$911,000 in fiscal 2010 with declining amounts for more than six years thereafter. Our acquisition of
Connect3 resulted in the write-off of $150,000 of in-process research and development costs in
fiscal 2009, and will result in amortization of purchased intangible assets of approximately $2.3
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
global macroeconomic factors, budget constraints, multiple approvals, and unplanned administrative,
processing and other delays. If sales expected from a specific customer are not realized, our
revenue and, thus, our future operating results could be adversely impacted.
Our business will be adversely affected if the retail and CP industries do not widely adopt
technology solutions incorporating scientific techniques to understand and predict consumer demand
to make pricing and other merchandising decisions.
Our software addresses the new and emerging market of applying econometric modeling and
optimization techniques through software to enable retailers and CP companies to understand and
predict consumer demand in order to improve their pricing, promotion, and other merchandising and
marketing decisions. These decisions are fundamental to retailers and CP companies; accordingly,
our target customers may be hesitant to accept the risk inherent in applying and relying on new
technologies or methodologies to supplant traditional methods. Our business will not be successful
if retailers and CP companies do not accept the use of software to enable more strategic pricing
and other merchandising decisions.
If we are unable to continue to enhance our current software or to develop or acquire new
software to address changing business requirements, we may not be able to attract or retain
customers.
Our ability to attract new customers, renew agreements with existing customers and maintain or
increase revenue from existing customers will depend in large part on our ability to anticipate the
changing needs of the retail and CP industries, to enhance 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
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development or acquisition of such software. For example, we have not yet completed
development or achieved market acceptance of certain components of our solutions underlying our
recently announced nextGEN strategy. 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 POS, transaction
log or loyalty program data or we are unable to obtain such data from them or from third-party data
aggregators, or if we fail to enhance our core science and modeling methodologies to adjust for
changes in consumer behavior, customers may delay or decide against purchases or renewals of our
software.
We rely on our management team and will need additional personnel to grow our business, and the
loss of one or more key employees or our inability to attract and retain qualified personnel could
harm our business.
Our success depends to a significant degree on our ability to attract, retain and motivate our
management team and our other key personnel. Our professional services organization and other
customer-facing groups, in particular, play an instrumental role in ensuring our customers
satisfaction. In addition, our science, engineering and modeling team requires experts in
econometrics and advanced mathematics, and there are a limited number of individuals with the
education and training necessary to fill these roles should we experience employee departures. All
of our employees work for us on an at-will basis, and there is no assurance that any employee will
remain with us. Our competitors may be successful in recruiting and hiring members of our executive
management team or other key employees, and it may be difficult for us to find suitable
replacements on a timely basis. Many of the members of our management team and key employees are
substantially vested in their shares of our common stock or options to purchase shares of our
common stock, and therefore retention of these employees may be difficult in the highly competitive
market and geography in which we operate our business.
We have derived most of our revenue from sales to our retail customers. If our software is not
widely accepted by CP companies, our ability to grow our revenue and achieve our strategic
objectives will be harmed.
To date, we have derived most of our revenue from retail customers. In the nine months ended
November 30, 2009, we generated approximately 82% of our revenue from sales to retail customers,
while we generated approximately 18% of our revenue from sales to CP companies. 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 92% of our
revenue from sales to retail customers while we generated 8% of our revenue from sales to CP
companies. In order to grow our revenue and to achieve our long-term strategic objectives, it is
important for us to expand our sales to derive a more significant portion of our revenue from new
and existing CP customers. If CP companies do not widely accept our software, our revenue growth
and business will be harmed.
We face intense competition that could prevent us from increasing our revenue and prevent us from
becoming profitable.
The market for our software is highly competitive and we expect competition to intensify in
the future. Competitors vary in size and in the scope and breadth of the products and services they
offer. Currently, we face competition from traditional enterprise software application vendors such
as Oracle Corporation and SAP AG, niche retail software vendors targeting smaller retailers such as
KSS Group, and statistical tool vendors such as SAS, Inc. To a lesser extent, we also compete or
potentially compete with marketing information providers for the CP industry such as The Nielsen
Company and Information Resources, Inc., as well as business consulting firms such as McKinsey &
Company, Inc., Deloitte & Touche LLP and Accenture LLP, which offer merchandising consulting
services and analyses. Because the market for our solutions is relatively new, we expect to face
additional competition from
33
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 might require additional capital to support our business growth, and this capital might
not be available on acceptable terms, or at all.
We intend to continue to make investments to support our business growth and may require
additional funds to respond to business challenges, including continued economic concerns as well
as the need to develop new software or enhance our existing software, enhance our operating
infrastructure and acquire complementary businesses and technologies. In May 2009, we amended our
loan agreement that we had entered in April 2008 with a financial institution to, among other
things, extend the maturity date to May 7, 2012 and increase our revolving line of credit from
$15.0 million to $20.0 million. However, we may need to engage in equity or debt financings or
enter into additional credit agreements to secure additional funds. If we raise additional funds
through further issuances of equity or convertible debt securities, our existing stockholders could
suffer significant dilution, and any new equity 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.
We rely on three third-party service providers to host our software, and any interruptions or
delays in services from these third parties could impair the delivery of our software as a
service.
We deliver our software to customers over the Internet. The software is hosted in three
third-party data centers located in California and Arizona. We do not control the operation of any
of these facilities, and we rely on these service providers to provide all power, connectivity and
physical security. These facilities could be vulnerable to damage or interruption from earthquakes,
floods, fires, power loss, telecommunications failures and similar events. They are also subject to
break-ins, computer viruses, sabotage, intentional acts of vandalism and other misconduct. The
occurrence of a natural disaster or intentional misconduct, a decision to close these facilities
without adequate notice or other unanticipated problems could result in lengthy interruptions in
our services. Additionally, because we currently rely upon disk and tape bond back-up procedures,
but do not operate or maintain a fully-redundant back-up site, there is an increased risk of
service interruption.
If our security measures are breached and unauthorized access is obtained to our customers data,
our operations may be perceived as not being secure, customers may curtail or stop using our
software and we may incur significant liabilities.
Our operations involve the storage and transmission of our customers confidential
information, and security breaches could expose us to a risk of loss of this information,
litigation and possible liability. If our security measures are breached as a result of third-party
action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized
access to our customers data, our reputation will be damaged, our business may suffer and we could
incur significant liability. Because techniques used to obtain unauthorized access or to sabotage
systems change frequently and generally are not recognized until launched against a target, we may
be unable to anticipate these techniques or to implement adequate preventative measures. If an
actual or perceived breach of our security occurs, the market perception of the effectiveness of
our security measures could be harmed and we could lose potential sales and existing customers.
If we fail to respond to rapidly changing technological developments or evolving industry
standards, our software may become less competitive or obsolete.
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Because our software is designed to operate on a variety of network, hardware and software
platforms using standard Internet tools and protocols, we will need to modify and enhance our
software continuously to keep pace with changes in Internet-related hardware, software,
communication, browser and database technologies. Furthermore, uncertainties about the timing and
nature of new network platforms or technologies, or modifications to existing platforms or
technologies, could increase our research and development expenses. If we are unable to respond in
a timely manner to these rapid technological developments, our software may become less marketable
and less competitive or obsolete.
Our use of open source software and third-party technology could impose limitations on our ability
to commercialize our software.
We incorporate open source software into our software. Although we monitor our use of open
source software closely, the terms of many open source licenses have not been interpreted by United
States courts, and there is a risk that these licenses could be construed in a manner that imposes
unanticipated conditions or restrictions on our 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 provide sales credits or issue refunds to our customers, cause existing
customers not to
35
renew their agreements and prospective customers not to purchase our software, divert
development resources, hurt our reputation and expose us to claims for liability. After the release
of our software, defects or errors may also be identified from time to time by our internal team
and by our customers. The costs incurred in correcting any material defects or errors in our
software may be substantial.
Because our long-term success depends, in part, on our ability to expand sales of our software
to customers located outside of the United States, our business will be increasingly susceptible to
risks associated with international operations.
We have limited experience operating in international jurisdictions. In the nine months ended
November 30, 2009, in fiscal 2009 and in fiscal 2008, 14%, 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. |
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 November 30, 2009, in addition to our 161 employees in our
operations, customer support, science, product management and engineering groups located in the
United States, an additional 65 Sonata personnel were dedicated to our projects. Remotely
coordinating a third party in China requires significant management attention and substantial
resources, and there can be no assurance that we will be successful in coordinating these
activities. Furthermore, if there is a disruption to these operations in China, it will require
that substantial management attention and time be devoted to achieving resolution. If Sonata were
to stop providing these services or if there was widespread departure of trained Sonata personnel,
this could cause a disruption in our product development process, quality assurance and product
release cycles and customer support organizations and require us to incur additional costs to
replace and train new personnel.
Enforcement of intellectual property rights and contractual rights may be more difficult in
China. China has not developed a fully integrated legal system, and the array of new laws and
regulations may not be sufficient to cover all aspects of economic activities in China. In
particular, because these laws and regulations are relatively new, and because of the limited
volume of published decisions
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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, we are required to perform annual system and process evaluation and
testing of our internal control over financial reporting to allow management and our independent
registered public accounting firm to report on the effectiveness of our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In the future, our
testing, or the subsequent testing by our independent registered public accounting firm, may reveal
deficiencies in our internal control over financial reporting that are deemed to be material
weaknesses. Our compliance with Section 404 requires that we incur substantial accounting expense
and expend significant management time on compliance-related issues. Moreover, if we are not able
to comply with the requirements of Section 404 in the future, or if we or our independent
registered public accounting firm identifies deficiencies in our internal control over financial
reporting that are deemed to be material weaknesses, the market price of our common stock could
decline and we could be subject to sanctions or investigations by the NASDAQ Stock Market, the
Securities and Exchange Commission, or SEC, or other regulatory authorities, which would require
additional financial and management resources.
Furthermore, implementing any appropriate future changes to our internal control over
financial reporting may entail substantial costs in order to modify our existing accounting
systems, may take a significant period of time to complete and may distract our officers, directors
and employees from the operation of our business. These changes, however, may not be effective in
maintaining the adequacy of our internal control over financial reporting, and any failure to
maintain that adequacy, or consequent inability to produce accurate financial statements on a
timely basis, could increase our operating costs and could materially impair our ability to operate
our business. In addition, investors perceptions that our internal control over financial
reporting is inadequate or that we are unable to produce accurate financial statements may
adversely affect our stock price. While neither we nor our independent registered public accounting
firm has identified deficiencies in our internal control over financial reporting that are deemed
to be material weaknesses, there can be no assurance that material weaknesses will not be
subsequently identified.
If one or more of our key strategic relationships were to become impaired or if these third
parties were to align with our competitors, our business could be harmed.
We have relationships with a number of third parties whose products, technologies and services
complement our software. Many of these third parties also compete with us or work with our
competitors. If we are unable to maintain our relationships with the key third parties that
currently recommend our software or that provide consulting services on our software
implementations or if these third parties were to begin to recommend our competitors products and
services, our business could be harmed.
Claims by others that we infringe their proprietary technology could harm our business.
Third parties could claim that our software infringes their proprietary rights. In recent
years, there has been significant litigation involving patents and other intellectual property
rights, and we expect that infringement claims may increase as the number of products and
competitors in our market increases and overlaps occur. In addition, to the extent that we gain
greater visibility and market exposure as a public company, we will face a higher risk of being the
subject of intellectual property infringement claims. Any claims of infringement by a third party,
even those without merit, could cause us to incur substantial defense costs and could distract our
management from our business. Furthermore, a party making such a claim, if successful, could secure
a judgment that requires us to pay substantial damages. A judgment could also include an injunction
or other court order that could prevent us from offering our software. In addition, we might be
required to seek a license for the use of the infringed intellectual 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
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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 the FASB accounting standards that require
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, and for the nine months
ended November 30, 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, 2008, 2009, and for the nine months ended November 30, 2009 relative to prior periods.
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 311 employees
at November 30, 2009. Headcount in research and development increased from 99 employees at February
28, 2007 to 132 employees at November 30, 2009. In addition, our revenue grew from $43.5 million in
fiscal 2007 to $75.0 million in fiscal 2009. In the nine months ended November 30, 2009, our
revenue was $59.4 million. We may need to continue to expand our operations in order to increase
our customer base and to develop additional software. Increases in our customer base could create
challenges in our ability to implement our software and support our customers. In addition, we will
be required to continue to improve our operational, financial and management controls and our
reporting procedures. As a result, we may be unable to manage our business effectively in the
future, which may negatively impact our operating results.
Evolving regulation of the Internet may affect us adversely.
As Internet commerce continues to evolve, increasing regulation by federal, state or foreign
agencies becomes more likely. For example, we believe increased regulation is likely in the area of
data privacy, and laws and regulations applying to the solicitation, collection, processing or use
of personal or consumer information could affect our customers ability to use and share data,
potentially reducing demand for our software and restricting our ability to store and process data
for our customers. In addition, taxation of software provided over the Internet or other charges
imposed by government agencies or by private organizations for accessing the Internet may also be
imposed. Any regulation imposing greater fees for Internet use or restricting information exchange
over the Internet could result in a decline in the use of the Internet and the viability of
Internet-based software, which could harm our business, financial condition and operating results.
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.
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Risks Related to Ownership of Our Common Stock
The trading price of our common stock has been volatile in the past, may continue to be volatile,
and may decline.
The trading price of our common stock has fluctuated widely in the past and may do so in the
future. Further, our common stock has limited trading history. Factors affecting the trading price
of our common stock, many of which are beyond our control, could include:
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variations in our operating results, including any decline in our revenues; |
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announcements of technological innovations, new products and services, acquisitions,
strategic alliances or significant agreements by us or by our competitors; |
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recruitment or departure of key personnel; |
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the financial projections we may provide to the public, any changes in these projections
or our failure to meet these projections; |
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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. |
In addition, if the market for technology stocks or the stock market in general experiences
loss of investor confidence as has happened in recent periods, the trading price of our common
stock could decline for reasons unrelated to our business, operating results, or financial
condition. The trading price of our common stock might also decline in reaction to events that
affect other companies in our industry even if these events do not directly affect us. Some
companies that have had volatile market prices for their securities have had securities class
actions filed against them. A suit filed against us, regardless of its merits or outcome, could
cause us to incur substantial costs and could divert managements attention.
Future sales of shares by existing stockholders, or the perception that such sales may occur,
could cause our stock price to decline.
If our existing stockholders, particularly our directors and executive officers and 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. In November 2009, Crosspoint Venture Partners, our largest
stockholder, distributed approximately 1.0 million shares of our common stock to their limited
partners. They may continue to distribute some or all of their remaining shares of our common stock
in the near term, which may impact our stock price adversely.
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.
39
At November 30, 2009, our directors, executive officers and other affiliates beneficially
owned, in the aggregate, approximately 42.1% 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. |
40
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
(a) Sales of Unregistered Securities
None.
(b) Use of Proceeds from Public Offering of Common Stock
In August 2007, we completed our initial public offering, or IPO, pursuant to a registration
statement on Form S-1 (Registration No. 333-143248) which the U.S. Securities and Exchange
Commission declared effective on August 8, 2007. Under the registration statement, we registered
the offering and sale of an aggregate of up to 6,900,000 shares of our common stock. Of the
registered shares, 6,000,000 of the shares of common stock issued pursuant to the registration
statement were sold at a price to the public of $11.00 per share. As a result of the IPO, we
raised a total of $57.6 million in net proceeds after deducting underwriting discounts and
commissions and expenses.
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 the nine months ended November 30, 2009, we used $12.3 million of our proceeds to pay
Connect3s former shareholders in connection with our February 2009 acquisition of Connect3, and
$1.3 million cash to pay off short-term notes payable held by a former Connect3 officer and
principal shareholder.
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 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).
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
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Item 3. |
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Defaults Upon Senior Securities |
None.
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
None.
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Item 5. |
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Other Information |
None.
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Exhibit |
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No. |
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Description |
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1*
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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* |
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This certification is not deemed filed with the Securities and Exchange Commission and is not
to be incorporated by reference into any filing of DemandTec, Inc. under the Securities Act of
1933 or the Securities Exchange Act of 1934, whether made before or after the date of this
Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in
such filing. |
42
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: January 8, 2010
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DemandTec, Inc.
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By: |
/s/ Mark A. Culhane
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Mark A. Culhane |
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Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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43
Exhibit Index
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Exhibit |
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No. |
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Description |
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1*
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
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* |
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This certification is not deemed filed with the Securities and Exchange Commission and is not
to be incorporated by reference into any filing of DemandTec, Inc. under the Securities Act of
1933 or the Securities Exchange Act of 1934, whether made before or after the date of this
Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in
such filing. |
44