##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended November 30, 2007
 OR
 o
    
    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)
 Delaware
    
    94-3344761(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)
 One Circle Star Way, Suite 200
San Carlos, California 94070
(Address of Principal Executive Offices including Zip Code)
 (650) 226-4600
(Registrants Telephone Number, Including Area Code)
 þ o
  o o þ
 o þ




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##### 



DemandTec, Inc.
 INDEX
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Consolidated Balance Sheets as of November 30, 2007 and February 28, 2007
    
    
    3Consolidated Statements of Operations for the three and nine months ended November 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the nine months ended November 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    40EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DemandTec, Inc.
 
 Consolidated Balance Sheets
 (in thousands, except per share data)
 November 30,
    
    
    February 28,2007
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,762
    
    
    $
    21,036Marketable securities
    
    
    45,344
    
    
    
    4,442Accounts receivable, net of allowances of $188 and $62 as of November 30 and February
28, 2007, respectively
    
    
    17,547
    
    
    
    14,338Deferred commissions, current
    
    
    1,627
    
    
    
    2,167Prepaid expenses and other current assets
    
    
    1,696
    
    
    
    1,035Total current assets
    
    
    94,976
    
    
    
    43,018Property, equipment and leasehold improvements, net
    
    
    4,527
    
    
    
    2,941Restricted cash
    
    
    200
    
    
    
    200Deferred commissions, non-current
    
    
    776
    
    
    
    122Goodwill
    
    
    5,290
    
    
    
    5,290Acquired intangible assets
    
    
    4,002
    
    
    
    4,729Other assets
    
    
    3
    
    
    
    495Total assets
    
    $
    109,774
    
    
    $
    56,795LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable and accrued expenses
    
    $
    2,819
    
    
    $
    4,538Accrued compensation
    
    
    4,315
    
    
    
    3,258Deferred revenue, current
    
    
    39,759
    
    
    
    31,143Note payable, current
    
    
    
    
    
    
    1,585Note payable to former TradePoint shareholders
    
    
    475
    
    
    
    1,800Liability for early exercise of stock options, current
    
    
    99
    
    
    
    168Redeemable convertible preferred stock warrant liability
    
    
    
    
    
    
    592Total current liabilities
    
    
    47,467
    
    
    
    43,084Liability for early exercise of stock options, non-current
    
    
    54
    
    
    
    130Deferred revenue, non-current
    
    
    12,839
    
    
    
    11,029Note payable, non-current
    
    
    
    
    
    
    8,678Line of credit
    
    
    
    
    
    
    3,000Other long-term liabilities
    
    
    491
    
    
    
    461Commitments and contingent liabilitiesRedeemable convertible preferred stock:Series B, $0.001 par value  5,219 shares authorized, 5,188 shares issued and
outstanding as of February 28, 2007; no shares authorized as of November 30, 2007
    
    
    
    
    
    
    17,005Series C, $0.001 par value  6,299 shares authorized, 6,223 shares issued and
outstanding as of February 28, 2007; no shares authorized as of November 30, 2007
    
    
    
    
    
    
    32,068Total redeemable convertible preferred stock
    
    
    
    
    
    
    49,073Stockholders equity (deficit):Convertible preferred stock, Series A, $0.001 par value  2,100 shares authorized, 2,100
shares issued and outstanding as of February 28, 2007; no shares authorized as of
November 30, 2007
    
    
    
    
    
    
    2,071Common stock, $0.001 par value  175,000 and 100,000 shares authorized as of November 30
and February 28, 2007, respectively; 26,292 and 6,455 shares issued and outstanding,
excluding 91 and 200 shares subject to repurchase, as of November 30 and February 28,
2007, respectively
    
    
    26
    
    
    
    6Additional paid-in capital
    
    
    120,158
    
    
    
    7,204Accumulated deficit
    
    
    (71,261
    )
    
    
    (67,941
    )Total stockholders equity (deficit)
    
    
    48,923
    
    
    
    (58,660
    )Total liabilities, redeemable convertible preferred stock and stockholders equity (deficit)
    
    $
    109,774
    
    
    $
    56,795
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##### Table of Contents



DemandTec, Inc.
 
 Consolidated Statements of Operations
 (in thousands, except per share data)
(unaudited)
 Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    15,945
    
    
    $
    10,673
    
    
    $
    43,866
    
    
    $
    31,186Cost of revenue(1)(2)
    
    
    5,560
    
    
    
    3,274
    
    
    
    14,898
    
    
    
    9,696Gross profit
    
    
    10,385
    
    
    
    7,399
    
    
    
    28,968
    
    
    
    21,490Operating expenses:Research and development(2)
    
    
    5,598
    
    
    
    3,786
    
    
    
    15,736
    
    
    
    10,597Sales and marketing(2)
    
    
    4,697
    
    
    
    2,929
    
    
    
    12,316
    
    
    
    8,668General and administrative(2)
    
    
    1,956
    
    
    
    719
    
    
    
    4,354
    
    
    
    1,924Amortization of acquired intangible assets
    
    
    89
    
    
    
    30
    
    
    
    271
    
    
    
    30Total operating expenses
    
    
    12,340
    
    
    
    7,464
    
    
    
    32,677
    
    
    
    21,219Income (loss) from operations
    
    
    (1,955
    )
    
    
    (65
    )
    
    
    (3,709
    )
    
    
    271Interest income
    
    
    878
    
    
    
    250
    
    
    
    1,658
    
    
    
    500Interest expense
    
    
    
    
    
    
    (430
    )
    
    
    (1,216
    )
    
    
    (693
    )Other income (expense), net
    
    
    291
    
    
    
    (51
    )
    
    
    279
    
    
    
    5Income (loss) before provision for income taxes
    
    
    (786
    )
    
    
    (296
    )
    
    
    (2,988
    )
    
    
    83Provision for income taxes
    
    
    181
    
    
    
    18
    
    
    
    319
    
    
    
    4Net income (loss)
    
    
    (967
    )
    
    
    (314
    )
    
    
    (3,307
    )
    
    
    79Accretion to redemption value of preferred stock
    
    
    
    
    
    
    8
    
    
    
    13
    
    
    
    24Net income (loss) attributable to common stockholders
    
    $
    (967
    )
    
    $
    (322
    )
    
    $
    (3,320
    )
    
    $
    55Net income (loss) per common share, basic
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )
    
    $
    0.01Net income (loss) per common share, diluted
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )
    
    $
    0.00Shares used in computing basic net income (loss) per common share
    
    
    26,167
    
    
    
    5,597
    
    
    
    14,705
    
    
    
    5,237Shares used in computing diluted net income (loss) per common share
    
    
    26,167
    
    
    
    5,597
    
    
    
    14,705
    
    
    
    21,823
 
 (1) Includes amortization of acquired intangible assets
    
    $
    154
    
    
    $
    51
    
    
    $
    456
    
    
    $
    51(2) Includes stock-based compensation expense as follows:Cost of revenue
    
    $
    539
    
    
    $
    13
    
    
    $
    839
    
    
    $
    21Research and development
    
    
    580
    
    
    
    13
    
    
    
    827
    
    
    
    24Sales and marketing
    
    
    605
    
    
    
    18
    
    
    
    830
    
    
    
    37General and administrative
    
    
    340
    
    
    
    18
    
    
    
    569
    
    
    
    28
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DemandTec, Inc.
 
 Consolidated Statements of Cash Flows
 (in thousands)
(unaudited)
 Nine Months EndedNovember 30,2007
    
    
    2006Operating activities:Net income (loss)
    
    $
    (3,307
    )
    
    $
    79Adjustment to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    1,390
    
    
    
    732Stock-based compensation expense
    
    
    3,065
    
    
    
    110Amortization of warrants issued in conjunction with debt
    
    
    64
    
    
    
    61Revaluation of warrants to fair value
    
    
    119
    
    
    
    57Amortization of acquired intangible assets
    
    
    727
    
    
    
    81Amortization of financing costs
    
    
    93
    
    
    
    77Acceleration of interest amortization upon early extinguishment of debt
    
    
    504
    
    
    
    Provision for accounts receivable
    
    
    126
    
    
    
    16Other
    
    
    (120
    )
    
    
    (58
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,269
    )
    
    
    (4,983
    )Prepaid expenses and other current assets
    
    
    (661
    )
    
    
    (115
    )Deferred commissions
    
    
    (114
    )
    
    
    441Other assets
    
    
    (30
    )
    
    
    (251
    )Accounts payable and accrued expenses
    
    
    (1,841
    )
    
    
    (618
    )Accrued compensation
    
    
    1,056
    
    
    
    157Deferred revenue
    
    
    10,426
    
    
    
    4,319Net cash provided by operating activities
    
    
    8,228
    
    
    
    105Investing activities:Purchases of property, equipment and leasehold improvements
    
    
    (2,976
    )
    
    
    (1,442
    )Purchases of marketable securities
    
    
    (56,652
    )
    
    
    (5,100
    )Maturities of marketable securities
    
    
    15,750
    
    
    
    3,442Acquisition of TradePoint, net of cash received
    
    
    (1,325
    )
    
    
    (3,704
    )Net cash used in investing activities
    
    
    (45,203
    )
    
    
    (6,804
    )Financing activities:Proceeds from issuance of common stock, net of repurchases, excluding initial public offering
    
    
    284
    
    
    
    521Proceeds from issuance of convertible preferred stock
    
    
    
    
    
    
    65Net cash proceeds from initial public offering
    
    
    57,611
    
    
    
    Increase in liability associated with offering costs
    
    
    166
    
    
    
    Proceeds from advances on line of credit
    
    
    
    
    
    
    3,000Payments on line of credit
    
    
    (3,000
    )
    
    
    (2,218
    )Proceeds from issuance of notes payable
    
    
    
    
    
    
    10,000Payment of term loan balloon interest
    
    
    (400
    )
    
    
    Payments of notes payable
    
    
    (10,000
    )
    
    
    Net cash provided by financing activities
    
    
    44,661
    
    
    
    11,368Effect of exchange rate changes on cash and cash equivalents
    
    
    40
    
    
    
    72Net increase in cash and cash equivalents
    
    
    7,726
    
    
    
    4,741Cash and cash equivalents at beginning of period
    
    
    21,036
    
    
    
    12,288Cash and cash equivalents at end of period
    
    $
    28,762
    
    
    $
    17,029Supplemental information:Cash paid for interest
    
    $
    956
    
    
    $
    523Cash paid for income taxes
    
    $
    200
    
    
    $
    15Common stock issued in connection with acquisition of TradePoint
    
    $
    
    
    
    $
    4,085Reclassification of preferred stock warrant from liability to additional paid-in capital
    
    $
    712
    
    
    $
    Issuance of warrants for common stock
    
    $
    
    
    
    $
    171Issuance of warrants for preferred stock
    
    $
    
    
    
    $
    172Deferred financing costs on note payable
    
    $
    
    
    
    $
    400Note payable to former TradePoint stockholders
    
    $
    
    
    
    $
    1,800Accretion to redemption value of preferred stock
    
    $
    13
    
    
    $
    24Conversion of preferred stock to common stock and additional paid-in capital
    
    $
    51,144
    
    
    $
    
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##### Table of Contents



DemandTec, Inc.
 
 Notes to Consolidated Financial Statements
 1. Business Summary and Significant Accounting Policies
 Business Summary
  Initial Public Offering
  Significant Accounting Policies
 Basis of Presentation
   Revenue Recognition
  Revenue Recognition Revenue Arrangements with Multiple Deliverables
 
    
    there is persuasive evidence of an arrangement;
    
    the service has been provided to the customer;
 6




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
    
    the collection of the fees is probable; and
    
    the amount of fees to be paid by the customer is fixed or determinable.
  Deferred Revenue
  Foreign Currency Translation
  Concentrations of Credit Risk, Significant Customers and Suppliers and Geographic Information
   Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006Customer A
    
    
    13.5
    %
    
    
    0.4
    %
    
    
    11.5
    %
    
    
    1.3
    %Customer B
    
    
    10.4
    %
    
    
    3.6
    %
    
    
    8.6
    %
    
    
    1.2
    %Customer C
    
    
    7.2
    %
    
    
    10.5
    %
    
    
    7.8
    %
    
    
    10.1
    %
   Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,2007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    $
    14,011
    
    
    $
    9,856
    
    
    $
    38,595
    
    
    $
    28,970International
    
    
    1,934
    
    
    
    817
    
    
    
    5,271
    
    
    
    2,216Total revenue
    
    $
    15,945
    
    
    $
    10,673
    
    
    $
    43,866
    
    
    $
    31,186
  7




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##### Table of Contents



Redeemable Convertible Preferred Stock Warrants
 Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity
 Deferred Commissions
 Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts
 Goodwill and Intangible Assets
 Goodwill and
Other Intangible Assets Disclosures about Segments of
an Enterprise and Related Information
 Impairment of Long-Lived Assets
 Accounting for the Impairment or
Disposal of Long-Lived Assets
 8




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Stock-Based Compensation
 Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure.
 Share-Based Payment
 Accounting for Equity Investments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
 Net Income (Loss) per Common Share
 Earnings per Share
  Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss) attributable to common stockholders
    
    $
    (967
    )
    
    $
    (322
    )
    
    $
    (3,320
    )
    
    $
    55Weighted average number of common shares outstanding
    
    
    26,274
    
    
    
    5,841
    
    
    
    14,844
    
    
    
    5,523Less: Weighted average number of common shares subject to repurchase
    
    
    (107
    )
    
    
    (244
    )
    
    
    (139
    )
    
    
    (286
    )Weighted average number of common shares outstanding used in
computing basic net income (loss) per common share
    
    
    26,167
    
    
    
    5,597
    
    
    
    14,705
    
    
    
    5,237Net income (loss) per common share, basic
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )
    
    $
    0.01Effect of dilutive securities:Weighted average convertible preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,504Weighted average stock options and warrants and unvested common
shares subject to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,082Weighted average number of common shares outstanding used in
computing diluted net income (loss) per common share
    
    
    26,167
    
    
    
    5,597
    
    
    
    14,705
    
    
    
    21,823Net income (loss) per common share, diluted
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (0.23
    )
    
    $
    0.00
  9




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006Shares subject to options to purchase common stock and PSUs
    
    
    6,027
    
    
    
    2,935
    
    
    
    5,101Shares subject to warrants to purchase common stock
    
    
    105
    
    
    
    182
    
    
    
    172
    
    
    
    Common stock subject to repurchase
    
    
    107
    
    
    
    244
    
    
    
    139
    
    
    
    Convertible preferred stock (as-converted basis until IPO)
    
    
    
    
    
    
    13,511
    
    
    
    7,881
    
    
    
    Total
    
    
    6,239
    
    
    
    16,872
    
    
    
    13,293
    
    
    
    
 Recent Accounting Pronouncements
 Accounting for Nonrefundable Advance Payments for
Goods or Services to Be Used in Future Research and Development
Activities
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FAS No. 115
 Fair Value Measurements
 2. Goodwill and Purchased Intangibles
   WeightedAverageGross
    
    
    Accumulated
    
    
    Net
    
    
    AmortizationValue
    
    
    Amortization
    
    
    Value
    
    
    Period(dollars in thousands)
    
    
    
    
    
    
    (in years)Developed technology
    
    $
    3,050
    
    
    $
    (661
    )
    
    $
    2,389
    
    
    
    5Customer relationships
    
    
    940
    
    
    
    (145
    )
    
    
    795
    
    
    
    7Non-compete covenants
    
    
    500
    
    
    
    (181
    )
    
    
    319
    
    
    
    3Trade name
    
    
    560
    
    
    
    (61
    )
    
    
    499
    
    
    
    10Total
    
    $
    5,050
    
    
    $
    (1,048
    )
    
    $
    4,002
  10




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##### Table of Contents



As ofNovember 30,Fiscal Year
    
    20072008 (for the remaining three months)
    
    $
    2402009
    
    
    9672010
    
    
    9132011
    
    
    8002012
    
    
    597Thereafter
    
    
    485Total
    
    $
    4,002
 3. Marketable Securities
  As of
    
    
    As ofNovember 30,
    
    
    February 28,2007
    
    
    2007Certificates of deposit
    
    $
    
    
    
    $
    550Commercial paper
    
    
    8,063
    
    
    
    350Corporate bonds
    
    
    2,825
    
    
    
    2,698U.S. agency bonds
    
    
    34,059
    
    
    
    250Asset backed securities
    
    
    397
    
    
    
    594Total marketable securities
    
    $
    45,344
    
    
    $
    4,442
  4. Commitments
   As ofNovember 30,Fiscal Year
    
    20072008
    
    $
    2422009
    
    
    1,0322010
    
    
    1,0652011
    
    
    153Total
    
    $
    2,492
  11




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##### Table of Contents



5. Debt and Warrants
      Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable
 12




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##### Table of Contents



6. Stockholders Equity
  Common stock issued in IPO
    
    
    6,000Common stock issued upon conversion of preferred stock
    
    
    13,511Common stock issued to pre-IPO investors or upon exercise of options or warrants
    
    
    6,781Total
    
    
    26,292
  Equity Incentive Plans and Employee Stock Purchase Plan
 1999 Equity Incentive Plan
  2007 Equity Incentive Plan
  Stock Options
 Performance Stock Units.
 13




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##### Table of Contents



AverageOptionShares
    
    Shares Subject
    
    ExerciseAvailable
    
    to Options
    
    Pricefor Grant
    
    Outstanding
    
    per Share(shares in thousands)Balance at February 28, 2007
    
    
    318
    
    
    
    6,176
    
    
    $
    1.98Additional shares authorized
    
    
    3,675
    
    
    
    
    
    
    
    Options granted
    
    
    (1,362
    )
    
    
    1,362
    
    
    
    9.73Performance stock units granted
    
    
    (1,000
    )
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    (112
    )
    
    
    2.54Options canceled/forfeited
    
    
    239
    
    
    
    (239
    )
    
    
    5.04Shares repurchased
    
    
    12
    
    
    
    
    
    
    
    Options expired
    
    
    (73
    )
    
    
    
    
    
    
    Balance at November 30, 2007
    
    
    1,809
    
    
    
    7,187
    
    
    $
    3.33
  Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedNumber of
    
    Average
    
    Average
    
    Number of
    
    AverageShares
    
    Remaining
    
    Exercise
    
    Shares
    
    ExerciseSubject to
    
    Contractual
    
    Price per
    
    Subject to
    
    Price perOptions
    
    Term
    
    Share
    
    Options
    
    ShareRange of Exercise Prices

    
    (in thousands)
    
    (in years)
    
    
    
    
    
    (in thousands)$0.10  $1.00
    
    
    
    2,210
    
    
    
    4.98
    
    
    $
    0.86
    
    
    
    2,162
    
    
    $
    0.861.30   1.90
    
    
    
    1,559
    
    
    
    7.13
    
    
    
    1.37
    
    
    
    1,071
    
    
    
    1.362.50   5.40
    
    
    
    2,165
    
    
    
    8.49
    
    
    
    3.46
    
    
    
    700
    
    
    
    3.246.70  11.00
    
    
    
    1,148
    
    
    
    9.38
    
    
    
    9.30
    
    
    
    50
    
    
    
    7.2713.60  19.67
    
    
    
    105
    
    
    
    9.89
    
    
    
    16.79
    
    
    
    0
    
    
    
    7,187
    
    
    
    7.28
    
    
    $
    3.33
    
    
    
    3,983
    
    
    $
    1.49
  14




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##### Table of Contents



As ofNovember 30,2007Number of vested and expected-to-vest options outstanding
    
    
    6,784Weighted average exercise price per share
    
    $
    3.22Aggregate intrinsic value
    
    $
    89,657Weighted average remaining contractual term (in years)
    
    
    7.2
 2007 Employee Stock Purchase Plan
  Stock-Based Compensation for Non-Employees
   Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007 (1)
    
    2006
    
    2007
    
    2006Weighted average expected term (in years)
    
    
    
    
    
    
    9.9
    
    
    
    9.6
    
    
    
    9.7Expected stock price volatility
    
    
    
    
    
    
    61
    %
    
    
    60
    %
    
    
    62
    %Risk-free interest rate
    
    
    
    
    
    
    4.5
    %
    
    
    4.9
    %
    
    
    4.6
    %Expected dividend yield
    
    
    
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 
 (1)
    
    No options were granted to non-employees in the three months ended November 30, 2007.  15




---



##### Table of Contents



Stock-Based Compensation Associated with Awards to Employees
  Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006Stock options:Weighted average expected term (in years)
    
    
    4.0
    
    
    
    3.4
    
    
    
    3.7
    
    
    
    3.1Expected stock price volatility
    
    
    38
    %
    
    
    47
    %
    
    
    36
    %
    
    
    43
    %Risk-free interest rate
    
    
    3.1
    %
    
    
    4.7
    %
    
    
    4.1
    %
    
    
    4.8
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average per share fair value of
stock options granted during the period
    
    $
    4.53
    
    
    $
    1.27
    
    
    $
    3.34
    
    
    $
    1.01Performance stock units:(1)Weighted average per share fair value of
performance stock units granted during
the period
    
    
    
    
    
    
    
    
    
    $
    9.97Employee Stock Purchase Plan:(1)Weighted average expected term (in months)
    
    
    
    
    
    
    
    
    
    
    8Expected stock price volatility
    
    
    
    
    
    
    
    
    
    
    32
    %Risk-free interest rate
    
    
    
    
    
    
    
    
    
    
    4.2
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    0
    %
 
 (1)
    
    No shares were issued in the periods presented other than the nine months ended November 30,
2007. Weighted Average Expected Term.
 Volatility.
 Risk-Free Interest Rate.
 Dividend Yield.
 Forfeitures.
   16




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##### Table of Contents



7. Income Taxes
  Accounting for Uncertainty in Income Taxes 
an interpretation of FASB Statement No. 109
  
 Item 2. Managements 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 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, Managements 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 final prospectus dated August 8, 2007, which we filed in connection with our IPO.
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 managements discussion and analysis of financial condition and results of operation
appearing in our final prospectus dated August 8, 2007 filed in connection with our IPO.
 Overview
  17




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##### Table of Contents



Critical Accounting Policies and Estimates
  
    
    Revenue Recognition
    
    Deferred Commissions
    
    Stock-Based Compensation
    
    Goodwill and Intangible Assets
    
    Impairment of Long-Lived Assets
 
 18




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##### Table of Contents



Results of Operations
 Revenue
   Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Revenue
    
    $
    15,945
    
    
    $
    10,673
    
    
    $
    43,866
    
    
    $
    31,186
 Three and Nine Months Ended November 30, 2007 Compared to the Three and Nine Months Ended
November 30, 2006
   Cost of Revenue
  19




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Revenue
    
    $
    15,945
    
    
    $
    10,673
    
    
    $
    43,866
    
    
    $
    31,186Cost of revenue
    
    
    5,560
    
    
    
    3,274
    
    
    
    14,898
    
    
    
    9,696Gross profit
    
    
    10,385
    
    
    
    7,399
    
    
    
    28,968
    
    
    
    21,490Gross margin
    
    
    65.1
    %
    
    
    69.3
    %
    
    
    66.0
    %
    
    
    68.9
    %
 Three and Nine Months Ended November 30, 2007 Compared to the Three and Nine Months Ended
November 30, 2006.
      20




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##### Table of Contents



Research and Development Expenses
  Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Research and development
    
    $
    5,598
    
    
    $
    3,786
    
    
    $
    15,736
    
    
    $
    10,597Percent of revenue
    
    
    35.1
    %
    
    
    35.5
    %
    
    
    35.9
    %
    
    
    34.0
    %
 Three and Nine Months Ended November 30, 2007 Compared to the Three and Nine Months Ended
November 30, 2006.
     Sales and Marketing Expenses
  Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Sales and marketing
    
    $
    4,697
    
    
    $
    2,929
    
    
    $
    12,316
    
    
    $
    8,668Percent of revenue
    
    
    29.4
    %
    
    
    27.4
    %
    
    
    28.1
    %
    
    
    27.8
    %
 Three and Nine Months Ended November 30, 2007 Compared to the Three and Nine Months Ended
November 30, 2006.
 21




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##### Table of Contents



General and Administrative Expenses
  Three Months
    
    Nine MonthsEnded
    
    EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)General and administrative
    
    $
    1,956
    
    
    $
    719
    
    
    $
    4,354
    
    
    $
    1,924Percent of revenue
    
    
    12.3
    %
    
    
    6.7
    %
    
    
    9.9
    %
    
    
    6.2
    %
 Three and Nine Months Ended November 30, 2007 Compared to the Three and Nine Months Ended
November 30, 2006.
  22




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##### Table of Contents



Amortization of Acquired Intangible Assets
 Three Months Ended
    
    Nine Months EndedNovember 30,
    
    November 30,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Amortization of acquired intangible assets
    
    $
    89
    
    
    $
    30
    
    
    $
    271
    
    
    $
    30Percent of revenue
    
    
    0.6
    %
    
    
    0.3
    %
    
    
    0.6
    %
    
    
    0.1
    %
 Three and Nine Months Ended November 30, 2007 Compared to the Three and Nine Months Ended
November 30, 2006.
  Other Income (Expense), Net
 Three Months Ended
    
    
    Nine Months EndedNovember 30,
    
    
    November 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(dollars in thousands)Interest income
    
    $
    878
    
    
    $
    250
    
    
    $
    1,658
    
    
    $
    500Interest expense
    
    
    
    
    
    
    (430
    )
    
    
    (1,216
    )
    
    
    (693
    )Other income (expense)
    
    
    291
    
    
    
    (51
    )
    
    
    279
    
    
    
    5Other income (expense), net
    
    $
    1,169
    
    
    $
    (231
    )
    
    $
    721
    
    
    $
    (188
    )
 Three and Nine Months Ended November 30, 2007 Compared to the Three and Nine Months Ended
November 30, 2006.
    23




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##### Table of Contents



Provision for Income Taxes
  Accounting for Income Taxes
  Liquidity and Capital Resources
    Nine Months EndedNovember 30,2007
    
    2006(dollars in thousands)Net cash provided by operating activities
    
    $
    8,228
    
    
    $
    105Net cash used in investing activities
    
    
    (43,203
    )
    
    
    (6,804
    )Net cash provided by financing activities
    
    
    44,661
    
    
    
    11,368
 Operating Activities
  24




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##### Table of Contents



Investing Activities
   Financing Activities
    Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    MoreThan
    
    
    
    
    
    
    
    
    
    
    ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating leases
    
    $
    2,492
    
    
    $
    1,012
    
    
    $
    1,480
    
    
    $
    
    
    
    $
    Notes payable to former TradePoint shareholders
    
    
    475
    
    
    
    475
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    2,967
    
    
    $
    1,487
    
    
    $
    1,480
    
    
    $
    
    
    
    $
    
 25




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 Accounting for Nonrefundable Advance Payments for
Goods or Services to Be Used in Future Research and Development Activities
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an amendment of FAS No. 115
 Fair Value Measurements
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Risk
   Foreign Currency Translation
 26




---



##### Table of Contents



Interest Rate Sensitivity
  Effects of Inflation
  
 Item 4. Controls and Procedures
    27




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Set forth below and elsewhere in this quarterly report on Form 10-Q, and in other documents we
file with the 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 have a history of losses and we may not achieve or sustain profitability in the future.
  We may experience significant quarterly fluctuations in our operating results due to a number
of factors, which makes our future operating results difficult to predict and could cause our
operating results to fall below expectations.
   
    
    our ability to increase sales to existing customers and to renew agreements with our
existing customers, particularly larger retail customers;
    
    our ability to attract new customers, particularly larger retail and consumer products
customers;
    
    changes in our pricing policies or those of our competitors;
    
    outages and capacity constraints with our hosting partners;
    
    fluctuations in demand for our software;
    
    reductions in customers budgets for information technology purchases and delays in their
purchasing cycles;
    
    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;
 28




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##### Table of Contents




    
    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;
    
    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; and
    
    the impact of a recession or any other adverse economic conditions on our business.
   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.
  Our business depends substantially on customers renewing their agreements for our software.
Any decline in our customer renewals would harm our operating results.
  29




---



##### Table of Contents



Because we recognize revenue ratably over the terms of our customer agreements, the lack of
renewals or the failure to enter into new agreements will not immediately be reflected in our
operating results but will negatively affect revenue in future quarters.
  Our sales cycles are long and unpredictable, and our sales efforts require considerable time
and expense.
  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.
  If we are unable to continue to enhance our current software or to develop or acquire new
software to address changing consumer demand management business requirements, we may not be able
to attract or retain customers.
  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.
  30




---



##### Table of Contents



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.
  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 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.
  We face intense competition that could prevent us from increasing our revenue and prevent us
from becoming profitable.
   31




---



##### Table of Contents



We rely on two third-party service providers to host our software, and any interruptions or
delays in services from these third parties could impair the delivery of our software as a service.
  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.
  If we fail to respond to rapidly changing technological developments or evolving industry
standards, our software may become less competitive or obsolete.
  Our use of open source and third-party technology could impose limitations on our ability to
commercialize our software.
  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.
 32




---



##### Table of Contents



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.
  Because our long-term success depends, in part, on our ability to expand sales of our software
to customers located outside of the United States, our business increasingly will be susceptible to
risks associated with international operations.
  
    
    fluctuations in currency exchange rates;
    
    unexpected changes in foreign regulatory requirements;
    
    localization of our software, including translation of the interface of our software into
foreign languages and creation of localized agreements;
    
    longer accounts receivable payment cycles and difficulties in collecting accounts
receivable;
    
    tariffs and trade barriers and other regulatory or contractual limitations on our ability
to sell or develop our software in certain international markets;
 33




---



##### Table of Contents




    
    difficulties in managing and staffing international operations;
    
    potentially adverse tax consequences, including the complexities of international value
added tax systems and restrictions on the repatriation of earnings;
    
    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;
    
    political, social and economic instability abroad, terrorist attacks and security
concerns in general; and
    
    reduced or varied protection of intellectual property rights in some countries.
  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.
   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.
   34




---



##### Table of Contents



We may expand through acquisitions of other companies, which may divert our managements
attention and result in unexpected operating difficulties, increased costs and dilution to our
stockholders.
   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.
  Claims by others that we infringe their proprietary technology could harm our business.
   35




---



##### Table of Contents



Changes in financial accounting standards or practices may cause adverse, unexpected financial
reporting fluctuations and affect our reported results of operations.
 Share-Based Payment.
 We might require additional capital to support our business growth, and this capital might not
be available on acceptable terms, or at all.
  Evolving regulation of the Internet may affect us adversely.
  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.
  36




---



##### Table of Contents



Risks Related to Ownership of Our Common Stock
 The trading price of our common stock is likely to be volatile.
  
    
    variations in our operating results;
    
    announcements of technological innovations, new products and services, acquisitions,
strategic alliances or significant agreements by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    the financial projections we may provide to the public, any changes in these projections
or our failure to meet these projections;
    
    changes in the estimates of our operating results or changes in recommendations by any
securities analysts that elect to follow our common stock;
    
    market conditions in our industry, the retail industry and the economy as a whole;
    
    price and volume fluctuations in the overall stock market;
    
    lawsuits threatened or filed against us;
    
    adoption or modification of regulations, policies, procedures or programs applicable to
our business; and
    
    the expiration of market standoff or contractual lock-up agreements.
  Future sales of shares by existing stockholders, or the perception that such sales may occur,
could cause our stock price to decline.
   37




---



##### Table of Contents



If securities analysts do not publish research or publish unfavorable research about our
business, our stock price and trading volume could decline.
  Insiders and other affiliates have substantial control over us and will be able to influence
corporate matters.
  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.
  
    
    authorize the issuance of blank check preferred stock that could be issued by our board
of directors to thwart a takeover attempt;
    
    establish a classified board of directors, as a result of which the successors to the
directors whose terms have expired will be elected to serve from the time of election and
qualification until the third annual meeting following their election;
    
    require that directors only be removed from office for cause and only upon a majority
stockholder vote;
    
    provide that vacancies on our board of directors, including newly created directorships,
may be filled only by a majority vote of directors then in office;
    
    limit who may call special meetings of stockholders;
    
    prohibit stockholder action by written consent, thus requiring all actions to be taken at
a meeting of the stockholders;
    
    require supermajority stockholder voting to effect certain amendments to our restated
certificate of incorporation and amended and restated bylaws; and
    
    require advance notification of stockholder nominations and proposals.
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Sales of Unregistered SecuritiesNone.
 38




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##### Table of Contents



(b)
    
    Use of Proceeds from Public Offering of Common StockIn August 2007, we completed our IPO pursuant to a registration statement on Form
S-1 (Registration No. 333-143248) which the U.S. Securities and Exchange Commission
declared effective on August 7, 2007. Under the registration statement, we registered
the offering and sale of an aggregate of up to 6,900,000 shares of our common stock. Of
the registered shares, 6,000,000 of the shares of common stock issued pursuant to the
registration statement were sold at a price to the public of $11.00 per share. As a
result of the IPO, we raised a total of $57.6 million in net proceeds after deducting
underwriting discounts and commissions and expenses.We intend to use the net proceeds from the offering for working capital and other general
corporate purposes, including to finance our growth, develop new software and fund capital
expenditures. Additionally, we may choose to expand our current business through acquisitions
of other complementary businesses, products, services or technologies. Pending such uses, we
plan to invest the net proceeds in short-term, interest-bearing, investment grade securities.As of November 30, 2007, approximately $43.2 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.Use of proceeds to date are as follows:
 
    
    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.
 There were no material differences in the actual use of proceeds from our IPO as compared to
the planned use of proceeds as described in the final prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424(b).(c)
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 Issuer Purchases of Equity SecuritiesTotal Number of Shares
    
    Maximum Number ofTotal Number
    
    
    
    
    
    Purchased as Part of
    
    Shares that May Yet Beof Shares
    
    Average Price
    
    Publicly Announced
    
    Purchased Under thePeriod
    
    Purchased (1)
    
    Paid per Share
    
    Plans or Programs
    
    Plans or Programs9/1/07  9/30/07
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    10/1/07  10/31/07
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    11/1/07  11/30/07
    
    
    2,407
    
    
    $
    1.30
    
    
    
    
    
    
    
    Total
    
    
    2,407
    
    
    
    
    
    
    
    
 
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  39




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##### Table of Contents



Item 6. Exhibits
 ExhibitNo.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    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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##### Table of Contents



SIGNATURES
   DemandTec, Inc.By:
    
    /s/ Mark A. Culhane

Mark A. CulhaneExecutive Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
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##### Table of Contents



ExhibitNo.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    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.