##### 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 August 31, 2009
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



DEMANDTEC, INC.
FORM 10-Q
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of August 31, 2009 and February 28, 2009
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months Ended August 31, 2009 and 2008
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 31, 2009 and 2008
    
    5Notes to Condensed 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
    
    26PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    28Item 1A. Risk Factors
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    40Item 3. Defaults Upon Senior Securities
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    40Item 5. Other Information
    
    41Item 6. Exhibits
    
    42Signature
    
    43EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DemandTec, Inc.
 
 Condensed Consolidated Balance Sheets
 (In thousands, except per share data)
 As of
    
    
    As ofAugust 31,
    
    
    February 28,2009
    
    
    2009(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    33,669
    
    
    $
    33,572Marketable securities
    
    
    34,860
    
    
    
    46,426Accounts receivable, net of allowances of $125
and $120 as of August 31, 2009 and February 28,
2009, respectively
    
    
    4,553
    
    
    
    11,000Other current assets
    
    
    3,406
    
    
    
    4,230Total current assets
    
    
    76,488
    
    
    
    95,228Marketable securities, non-current
    
    
    7,842
    
    
    
    7,886Property, equipment and leasehold improvements, net
    
    
    4,238
    
    
    
    5,429Intangible assets, net
    
    
    6,252
    
    
    
    8,405Goodwill
    
    
    16,662
    
    
    
    16,492Other assets, net
    
    
    575
    
    
    
    715Total assets
    
    $
    112,057
    
    
    $
    134,155LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    12,164
    
    
    $
    12,962Deferred revenue
    
    
    39,824
    
    
    
    46,415Notes payable, current
    
    
    434
    
    
    
    1,720Merger consideration payable
    
    
    1,000
    
    
    
    12,343Total current liabilities
    
    
    53,422
    
    
    
    73,440Deferred revenue, non-current
    
    
    1,836
    
    
    
    2,400Other long-term liabilities
    
    
    656
    
    
    
    1,666Commitments and contingencies (see Note 5)Stockholders equity:Common stock, $0.001 par value  175,000 shares
authorized; 28,772 and 28,059 shares issued and
outstanding as of August 31, 2009 and February
28, 2009, respectively
    
    
    29
    
    
    
    28Additional paid-in capital
    
    
    139,975
    
    
    
    133,320Accumulated other comprehensive income
    
    
    387
    
    
    
    682Accumulated deficit
    
    
    (84,248
    )
    
    
    (77,381
    )Total stockholders equity
    
    
    56,143
    
    
    
    56,649Total liabilities and stockholders equity
    
    $
    112,057
    
    
    $
    134,155
  3




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##### Table of Contents



DemandTec, Inc.
 
 Condensed Consolidated Statements of Operations
 (In thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue
    
    $
    19,796
    
    
    $
    18,632
    
    
    $
    39,341
    
    
    $
    36,686Cost of revenue(1)(2)
    
    
    6,300
    
    
    
    5,846
    
    
    
    13,004
    
    
    
    11,501Gross profit
    
    
    13,496
    
    
    
    12,786
    
    
    
    26,337
    
    
    
    25,185Operating expenses:Research and development(2)
    
    
    7,997
    
    
    
    6,610
    
    
    
    16,153
    
    
    
    13,113Sales and marketing(2)
    
    
    5,414
    
    
    
    5,239
    
    
    
    10,845
    
    
    
    10,411General and administrative(2)
    
    
    2,786
    
    
    
    2,497
    
    
    
    5,160
    
    
    
    4,671Restructuring charges
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    Amortization of purchased intangible assets
    
    
    588
    
    
    
    331
    
    
    
    1,177
    
    
    
    420Total operating expenses
    
    
    16,785
    
    
    
    14,677
    
    
    
    33,613
    
    
    
    28,615Loss from operations
    
    
    (3,289
    )
    
    
    (1,891
    )
    
    
    (7,276
    )
    
    
    (3,430
    )Interest income
    
    
    162
    
    
    
    472
    
    
    
    391
    
    
    
    1,006Interest expense
    
    
    (31
    )
    
    
    (20
    )
    
    
    (62
    )
    
    
    (23
    )Other income (expense), net
    
    
    21
    
    
    
    (117
    )
    
    
    107
    
    
    
    (63
    )Loss before provision for income taxes
    
    
    (3,137
    )
    
    
    (1,556
    )
    
    
    (6,840
    )
    
    
    (2,510
    )Provision for income taxes
    
    
    8
    
    
    
    12
    
    
    
    27
    
    
    
    92Net loss
    
    $
    (3,145
    )
    
    $
    (1,568
    )
    
    $
    (6,867
    )
    
    $
    (2,602
    )Net loss per common share, basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.06
    )
    
    $
    (0.24
    )
    
    $
    (0.10
    )Shares used in computing net loss per common share, basic and diluted
    
    
    28,535
    
    
    
    27,204
    
    
    
    28,346
    
    
    
    26,951(1) Includes amortization of purchased intangible assets
    
    $
    465
    
    
    $
    153
    
    
    $
    931
    
    
    $
    305(2) Includes stock-based compensation expense as follows:Cost of revenue
    
    $
    523
    
    
    $
    465
    
    
    $
    941
    
    
    $
    854Research and development
    
    
    948
    
    
    
    580
    
    
    
    1,804
    
    
    
    1,172Sales and marketing
    
    
    652
    
    
    
    771
    
    
    
    1,271
    
    
    
    1,211General and administrative
    
    
    719
    
    
    
    430
    
    
    
    1,244
    
    
    
    798Total stock-based compensation expense
    
    $
    2,842
    
    
    $
    2,246
    
    
    $
    5,260
    
    
    $
    4,035
  4




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DemandTec, Inc
 
 Condensed Consolidated Statements of Cash Flows
 (In thousands)
 (Unaudited)
 Six Months EndedAugust 31,2009
    
    
    2008Operating activities:Net loss
    
    $
    (6,867
    )
    
    $
    (2,602
    )Adjustment to reconcile net loss to net cash provided by operating activities:Depreciation
    
    
    1,551
    
    
    
    1,408Stock-based compensation expense
    
    
    5,260
    
    
    
    4,035Amortization of purchased intangible assets
    
    
    2,108
    
    
    
    725Other
    
    
    14
    
    
    
    131Changes in operating assets and liabilities:Accounts receivable
    
    
    6,395
    
    
    
    6,121Other current assets
    
    
    660
    
    
    
    (291
    )Other assets
    
    
    (5
    )
    
    
    (881
    )Accounts payable and accrued expenses
    
    
    486
    
    
    
    3,213Accrued compensation
    
    
    (1,072
    )
    
    
    1,064Deferred revenue
    
    
    (7,155
    )
    
    
    (5,265
    )Net cash provided by operating activities
    
    
    1,375
    
    
    
    7,658Investing activities:Purchases of property, equipment and leasehold improvements
    
    
    (481
    )
    
    
    (1,484
    )Purchases of marketable securities
    
    
    (28,390
    )
    
    
    (36,054
    )Maturities of marketable securities
    
    
    40,000
    
    
    
    30,720Acquisition of Connect3
    
    
    (12,544
    )
    
    
    Purchase of intangible assets
    
    
    
    
    
    
    (200
    )Change in restricted cash
    
    
    
    
    
    
    200Net cash used in investing activities
    
    
    (1,415
    )
    
    
    (6,818
    )Financing activities:Proceeds from issuance of common stock, net of repurchases
    
    
    1,387
    
    
    
    1,596Payments on notes payable
    
    
    (1,286
    )
    
    
    (8
    )Net cash provided by financing activities
    
    
    101
    
    
    
    1,588Effect of exchange rate changes on cash and cash equivalents
    
    
    36
    
    
    
    (189
    )Net increase in cash and cash equivalents
    
    
    97
    
    
    
    2,239Cash and cash equivalents at beginning of period
    
    
    33,572
    
    
    
    43,257Cash and cash equivalents at end of period
    
    $
    33,669
    
    
    $
    45,496
  5




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##### Table of Contents



DemandTec, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 1. Business Summary and Significant Accounting Policies
 Description of Business
  Basis of Presentation
   Reclassifications
  Use of Estimates
  6




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Revenue Recognition
  Revenue Recognition Revenue Arrangements with Multiple Deliverables
 
    
    there is persuasive evidence of an arrangement;
 
    
    access to the software service has been provided to the customer;
 
    
    the collection of the fees is probable; and
 
    
    the amount of fees to be paid by the customer is fixed or determinable.
  Deferred Revenue
  Concentrations of Credit Risk, Significant Customers and Suppliers and Geographic Information
    Three Months Ended August 31,
    
    
    Six Months Ended August 31,2009
    
    
    2008
    
    
    2009
    
    
    2008United States
    
    $
    17,153
    
    
    $
    16,070
    
    
    $
    34,002
    
    
    $
    31,499International
    
    
    2,643
    
    
    
    2,562
    
    
    
    5,339
    
    
    
    5,187Total revenue
    
    $
    19,796
    
    
    $
    18,632
    
    
    $
    39,341
    
    
    $
    36,686
  7




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Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
 Stock-Based Compensation
 Share-Based Payment
 Net Loss per Common Share
 Earnings per Share
  Three Months Ended August 31,
    
    
    Six Months Ended August 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (3,145
    )
    
    $
    (1,568
    )
    
    $
    (6,867
    )
    
    $
    (2,602
    )Weighted average number of common shares outstanding
    
    
    28,536
    
    
    
    27,223
    
    
    
    28,348
    
    
    
    26,973Weighted average number of common shares subject to repurchase
    
    
    (1
    )
    
    
    (19
    )
    
    
    (2
    )
    
    
    (22
    )Shares used in computing net loss per common share, basic and
diluted
    
    
    28,535
    
    
    
    27,204
    
    
    
    28,346
    
    
    
    26,951Net loss per common share, basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.06
    )
    
    $
    (0.24
    )
    
    $
    (0.10
    )
  8




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##### Table of Contents



Three Months Ended August 31,
    
    
    Six Months Ended August 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Shares subject to options to
purchase common stock, PSUs and
RSUs, and shares subject to
issuance under the ESPP
    
    
    4,084
    
    
    
    4,690
    
    
    
    4,002
    
    
    
    4,659Common stock subject to repurchase
    
    
    1
    
    
    
    19
    
    
    
    2
    
    
    
    22Total
    
    
    4,085
    
    
    
    4,709
    
    
    
    4,004
    
    
    
    4,681
 New Accounting Pronouncements
 The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles The
Hierarchy of Generally Accepted Accounting Principles
 Recently Adopted Accounting Pronouncements
 Subsequent Events
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly Recognition and Presentation of Other-Than-Temporary Impairments Interim Disclosures About Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments
 Accounting for Defensive Intangible Assets Fair Value Measurements
 Determination of the Useful Life of Intangible
Assets,
 9




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Goodwill and Other Intangible
Assets
 Business Combinations Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination that Arise From Contingencies Accounting for Contingencies Reasonable
Estimation of the Amount of a Loss  an interpretation of FASB Statement No. 5
 2. Acquisition
  Business Combinations
 3. Balance Sheet Components
 Marketable Securities
  As of August 31, 2009GrossAmortized
    
    
    Unrecognized
    
    
    AggregateCost Basis
    
    
    Holding Gains
    
    
    Fair ValueCommercial paper
    
    $
    1,499
    
    
    $
    
    
    
    $
    1,499Corporate bonds
    
    
    5,695
    
    
    
    33
    
    
    
    5,728Obligations of Government-Sponsored Enterprises (GSEs)
    
    
    35,508
    
    
    
    54
    
    
    
    35,562$
    42,702
    
    
    $
    87
    
    
    $
    42,789
 10




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##### Table of Contents



As of February 28, 2009Gross
    
    
    GrossAmortized
    
    
    Unrecognized
    
    
    Unrecognized
    
    
    AggregateCost Basis
    
    
    Holding Gains
    
    
    Holding Losses
    
    
    Fair ValueCommercial paper
    
    $
    6,291
    
    
    $
    2
    
    
    $
    
    
    
    $
    6,293Corporate bonds
    
    
    12,314
    
    
    
    41
    
    
    
    (10
    )
    
    
    12,345Obligations of GSEs
    
    
    23,724
    
    
    
    102
    
    
    
    (10
    )
    
    
    23,816Treasury bills
    
    
    11,983
    
    
    
    14
    
    
    
    
    
    
    
    11,997$
    54,312
    
    
    $
    159
    
    
    $
    (20
    )
    
    $
    54,451
  Accounts Payable and Accrued Expenses
  As of
    
    
    As ofAugust 31,
    
    
    February 28,2009
    
    
    2009Accounts payable
    
    $
    2,959
    
    
    $
    2,822Accrued professional services
    
    
    828
    
    
    
    640Income taxes payable
    
    
    39
    
    
    
    50Other accrued liabilities
    
    
    1,797
    
    
    
    1,837Accrued compensation
    
    
    6,541
    
    
    
    7,613Total accounts payable and accrued expenses
    
    $
    12,164
    
    
    $
    12,962
 4. Goodwill and Purchased Intangible Assets
 Goodwill
 Disclosures about Segments of an Enterprise and Related Information
 Purchased Intangible Assets
  11




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5. Commitments and Contingencies
 Commitments
  Legal Proceedings
  6. Debt
   7. Stock-Based Compensation
 Equity Incentive Plans
 1999 Equity Incentive Plan
  2007 Equity Incentive Plan
  12




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##### Table of Contents



Stock Options
  Performance Stock Units (PSUs)
     Restricted Stock Units (RSUs)
   Shares
    
    Shares Subject
    
    Weighted AverageAvailable
    
    to Options
    
    Option Exercisefor Grant
    
    Outstanding
    
    Price per Share(Shares in thousands)Balance at February 28, 2009
    
    
    604
    
    
    
    7,732
    
    
    $
    5.20Additional shares authorized
    
    
    1,403
    
    
    
    
    
    
    
    Options granted
    
    
    (383
    )
    
    
    383
    
    
    
    8.06Performance stock units granted
    
    
    (926
    )
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    (404
    )
    
    
    2.101999 Plan options cancelled/forfeited (1)
    
    
    
    
    
    
    (61
    )
    
    
    6.832007 Plan options cancelled/forfeited
    
    
    122
    
    
    
    (122
    )
    
    
    9.61Performance and restricted stock units cancelled/forfeited
    
    
    248
    
    
    
    
    
    
    
    Balance at August 31, 2009
    
    
    1,068
    
    
    
    7,528
    
    
    
    5.43
 
 (1)
    
    Under the terms of the 1999 Plan, shares underlying cancelled or forfeited options are no
longer available for awards. 13




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##### Table of Contents



Employee Stock Purchase Plan (ESPP)
  Stock-Based Compensation Expense Associated with Awards to Employees
    Weighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted Average perAverage
    
    Expected
    
    
    
    
    
    
    
    
    
    Share Fair Value ofExpected
    
    Stock
    
    Risk-free
    
    Expected
    
    Options/FMV ofTerm
    
    Price
    
    Interest
    
    Dividend
    
    Awards Granted(in years)
    
    Volatility
    
    Rate
    
    Yield
    
    During the PeriodThree months ended August 31, 2009(1)Stock options
    
    
    4.3
    
    
    
    66
    %
    
    
    2.1
    %
    
    
    0
    %
    
    $
    4.60PSUs
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    9.55Three months ended August 31, 2008(1)(2)Stock options
    
    
    4.2
    
    
    
    53
    %
    
    
    2.8
    %
    
    
    0
    %
    
    $
    4.03Six months ended August 31, 2009(2)Stock options
    
    
    4.3
    
    
    
    65
    %
    
    
    1.9
    %
    
    
    0
    %
    
    $
    4.10PSUs
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    7.64ESPP
    
    
    0.5
    
    
    
    95
    %
    
    
    0.3
    %
    
    
    0
    %
    
    $
    3.08Six months ended August 31, 2008Stock options
    
    
    4.2
    
    
    
    46
    %
    
    
    3.0
    %
    
    
    0
    %
    
    $
    3.73PSUs
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    10.37RSUs
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    $
    10.40ESPP
    
    
    0.5
    
    
    
    43
    %
    
    
    2.0
    %
    
    
    0
    %
    
    $
    1.94
 14




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##### Table of Contents



(1)
    
    No ESPP shares were issued in the three months ended August 31, 2009 and 2008.(2)
    
    No RSUs were granted in the six months ended August 31, 2009, and no RSUs and PSUs were granted
in the three months ended August 31, 2008.  Unrecognized
    
    
    RemainingStock-Based
    
    
    Weighted AverageCompensation
    
    
    Recognition Period(in millions)
    
    
    (in years)Stock options granted after March 1, 2006
    
    $
    10.0
    
    
    
    2.4PSUs
    
    
    3.6
    
    
    
    1.1RSUs
    
    
    1.7
    
    
    
    0.6$
    15.3
    
    
    
    1.9
  8. Income Taxes
  Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 9. Derivative Financial Instruments
 Accounting for
Derivative Instruments and Hedging Activities
 
 15




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GainReclassified from
    
    
    AccumulatedNet Unrealized
    
    
    Cumulative
    
    
    Accumulated Other
    
    
    OtherGain on
    
    
    Implied Interest on
    
    
    Comprehensive
    
    
    ComprehensiveForward Contracts
    
    
    Forward Contracts
    
    
    Income Into Revenue
    
    
    IncomeBalance at February 28, 2009
    
    $
    642
    
    
    $
    40
    
    
    $
    
    
    
    $
    682Gain reclassified from
accumulated comprehensive
income into revenue
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    (34
    )Change in net unrealized gain
and cumulative implied
interest on forward contracts
    
    
    (284
    )
    
    
    23
    
    
    
    
    
    
    
    (261
    )Balance at August 31, 2009
    
    $
    358
    
    
    $
    63
    
    
    $
    (34
    )
    
    $
    387
   10. Fair Value Measurements
 Fair Value Measurements
 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.
    Significant OtherObservable InputsDescription
    
    Total
    
    (Level 2)Assets:Foreign currency forward contracts(1)
    
    $
    118
    
    
    $
    118
 
 (1)
    
    Included in other current assets, net on our condensed consolidated balance sheet. 16




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##### Table of Contents



11. Comprehensive Loss
  Three Months Ended August 31,
    
    
    Six Months Ended August 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (3,145
    )
    
    $
    (1,568
    )
    
    $
    (6,867
    )
    
    $
    (2,602
    )Gain reclassified from
accumulated
comprehensive income
into revenue
    
    
    (34
    )
    
    
    
    
    
    
    (34
    )
    
    
    Change in net
unrealized gain and
cumulative implied
interest on forward
contracts
    
    
    (17
    )
    
    
    249
    
    
    
    (261
    )
    
    
    249Total comprehensive loss
    
    $
    (3,196
    )
    
    $
    (1,319
    )
    
    $
    (7,162
    )
    
    $
    (2,353
    )
 12. Restructuring Charges
  13. Subsequent Events
    
 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 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 managements 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.
 17




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Overview
    .
    18




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Critical Accounting Policies and Estimates
  
    
    Revenue Recognition
    
    Stock-Based Compensation
    
    Goodwill and Intangible Assets
    
    Impairment of Long-Lived Assets
   Results of Operations
 Revenue
  Three Months Ended August 31,
    
    Six Months Ended August 31,2009
    
    2008
    
    2009
    
    2008(in thousands)Revenue
    
    $
    19,796
    
    
    $
    18,632
    
    
    $
    39,341
    
    
    $
    36,686
 19




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##### Table of Contents



Three and Six Months Ended August 31, 2009 Compared to the Three and Six Months Ended August
31, 2008
    Cost of Revenue
  Three Months Ended August 31,
    
    Six Months Ended August 31,2009
    
    2008
    
    2009
    
    2008(dollars in thousands)Revenue
    
    $
    19,796
    
    
    $
    18,632
    
    
    $
    39,341
    
    
    $
    36,686Cost of revenue
    
    
    6,300
    
    
    
    5,846
    
    
    
    13,004
    
    
    
    11,501Gross profit
    
    
    13,496
    
    
    
    12,786
    
    
    
    26,337
    
    
    
    25,185Gross margin
    
    
    68.2
    %
    
    
    68.6
    %
    
    
    66.9
    %
    
    
    68.7
    %
 Three and Six Months Ended August 31, 2009 Compared to the Three and Six Months Ended August
31, 2008.
  20




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##### Table of Contents



Research and Development Expenses
  Three Months Ended August 31,
    
    Six Months Ended August 31,2009
    
    2008
    
    2009
    
    2008(dollars in thousands)Research and development
    
    $
    7,997
    
    
    $
    6,610
    
    
    $
    16,153
    
    
    $
    13,113Percent of revenue
    
    
    40.4
    %
    
    
    35.5
    %
    
    
    41.1
    %
    
    
    35.7
    %
 Three and Six Months Ended August 31, 2009 Compared to the Three and Six Months Ended August
31, 2008.
   Sales and Marketing Expenses
  Three Months Ended August 31,
    
    Six Months Ended August 31,2009
    
    2008
    
    2009
    
    2008(dollars in thousands)Sales and marketing
    
    $
    5,414
    
    
    $
    5,239
    
    
    $
    10,845
    
    
    $
    10,411Percent of revenue
    
    
    27.3
    %
    
    
    28.1
    %
    
    
    27.6
    %
    
    
    28.4
    %
 21




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##### Table of Contents



Three and Six Months Ended August 31, 2009 Compared to the Three and Six Months Ended August
31, 2008.
   General and Administrative Expenses
  Three Months Ended August 31,
    
    Six Months Ended August 31,2009
    
    2008
    
    2009
    
    2008(dollars in thousands)General and administrative
    
    $
    2,786
    
    
    $
    2,497
    
    
    $
    5,160
    
    
    $
    4,671Percent of revenue
    
    
    14.1
    %
    
    
    13.4
    %
    
    
    13.1
    %
    
    
    12.7
    %
 Three and Six Months Ended August 31, 2009 Compared to the Three and Six Months Ended August
31, 2008.
   Amortization of Purchased Intangible Assets
 Three Months Ended August 31,
    
    Six Months Ended August 31,2009
    
    2008
    
    2009
    
    2008(dollars in thousands)Amortization of purchased intangible assets
    
    $
    588
    
    
    $
    331
    
    
    $
    1,177
    
    
    $
    420Percent of revenue
    
    
    3.0
    %
    
    
    1.8
    %
    
    
    3.0
    %
    
    
    1.1
    %
 22




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##### Table of Contents



Three and Six Months Ended August 31, 2009 Compared to the Three and Six Months Ended August
31, 2008.
 Other Income, Net
 Three Months Ended August 31,
    
    
    Six Months Ended August 31,2009
    
    
    2008
    
    
    2009
    
    
    2008(in thousands)Interest income
    
    $
    162
    
    
    $
    472
    
    
    $
    391
    
    
    $
    1,006Interest expense
    
    
    (31
    )
    
    
    (20
    )
    
    
    (62
    )
    
    
    (23
    )Other income (expense)
    
    
    21
    
    
    
    (117
    )
    
    
    107
    
    
    
    (63
    )Other income, net
    
    $
    152
    
    
    $
    335
    
    
    $
    436
    
    
    $
    920
 Three and Six Months Ended August 31, 2009 Compared to the Three and Six Months Ended August
31, 2008.
 Provision for Income Taxes
 Three Months Ended August 31,
    
    Six Months Ended August 31,2009
    
    2008
    
    2009
    
    2008(in thousands)Provision for income taxes
    
    $
    8
    
    
    $
    12
    
    
    $
    27
    
    
    $
    92
 Three and Six Months Ended August 31, 2009 Compared to the Three and Six and Months Ended
August 31, 2008.
  Stock-Based Compensation Expense
  23




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Liquidity and Capital Resources
   Six Months Ended August 31,2009
    
    2008(in thousands)Net cash provided by operating activities
    
    $
    1,375
    
    
    $
    7,658Net cash used in investing activities
    
    
    (1,415
    )
    
    
    (6,818
    )Net cash provided by financing activities
    
    
    101
    
    
    
    1,588
 Operating Activities
    Investing Activities
  24




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##### Table of Contents



Financing Activities
    Contractual Obligations
   Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(In thousands)Operating leases (1)
    
    $
    12,265
    
    
    $
    2,063
    
    
    $
    4,546
    
    
    $
    5,061
    
    
    $
    595Merger consideration payable to former Connect3 shareholders
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    Notes payable to former TradePoint shareholders
    
    
    434
    
    
    
    434
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    13,699
    
    
    $
    3,497
    
    
    $
    4,546
    
    
    $
    5,061
    
    
    $
    595
 
 (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 13 of Notes to Condensed Consolidated
Financial Statements. Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  25




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Risk
  
 Foreign Currency Translation
 Interest Rate Sensitivity
   
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  26




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Changes in Internal Control over Financial Reporting
  27




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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 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 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 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;
    
    outages and capacity constraints with our hosting partners;
    
    fluctuations in demand for our software;
    
    volatility in the sales of our solutions on a quarterly basis;
    
    reductions in customers budgets for information technology purchases and delays in their
purchasing cycles, particularly in light of recent deteriorating 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;
 28




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##### Table of Contents




    
    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,
including a delay in signing or a failure to sign significant customer agreements.
    The effects of the ongoing global economic crisis may adversely impact our business, operating
results or financial condition.
  We have a history of losses and we may not achieve or sustain profitability in the future.
  29




---



##### Table of Contents



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.
  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
statement of operations in any significant manner but will negatively affect revenue in future
quarters.
  We may expand through acquisitions of other companies, which may divert our managements attention
and result in unexpected operating and technology integration difficulties, increased costs and
dilution to our stockholders.
  30




---



##### Table of Contents



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 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.
 31




---



##### 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 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.
   32




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##### 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 software 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.
  33




---



##### 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 will be increasingly 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;
    
    difficulties in managing and staffing international operations;
 34




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##### Table of Contents




    
    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.
   35




---



##### Table of Contents



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.
   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 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.
  36




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##### Table of Contents



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.
  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.
  
    
    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;
 37




---



##### Table of Contents




    
    the financial projections we may provide to the public, any changes in these projections
or our failure to meet these projections;
 
    
    changes in the estimates of our operating results or changes in recommendations by any
securities analysts that elect to follow our common stock;
 
    
    market conditions in our industry, the retail industry and the economy as a whole;
 
    
    price and volume fluctuations in the overall stock market;
 
    
    lawsuits threatened or filed against us;
 
    
    adoption or modification of regulations, policies, procedures or programs applicable to
our business; and
 
    
    the volume of trading in our common stock, including sales upon exercise of outstanding
options.
  Future sales of shares by existing stockholders, or the perception that such sales may occur,
could cause our stock price to decline.
  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.
  38




---



##### Table of Contents




    
    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.
 39




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##### Table of Contents



Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
   (b) Use Proceeds from Public Offering of Common Stock
      (c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
   Votes For
    
    WithheldVictor L. Lund
    
    
    24,456,965
    
    
    
    1,969,554Joshua W.R. Pickus
    
    
    26,358,633
    
    
    
    67,886
  40




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##### Table of Contents



Votes for
    
    
    26,376,335Votes against
    
    
    21,415Abstain
    
    
    28,769Broker Non-Vote
    
    
    0
 
 Item 5.
    
    Other Information
  41




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##### Table of Contents



Item 6.
    
    Exhibits
 ExhibitNo.
    
    Description10.1
    
    Lease dated as of September 21, 2009 between DemandTec, Inc. and Franklin Templeton Companies,
LLC (incorporated herein by reference to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 25, 2009)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    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
 
 *
    
    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




---



##### Table of Contents



SIGNATURES
   DemandTec, Inc.By:
    /s/ Mark A. CulhaneMark A. CulhaneExecutive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 43




---



##### Table of Contents



ExhibitNo.
    
    Description10.1
    
    Lease dated as of September 21, 2009 between DemandTec, Inc. and Franklin Templeton Companies,
LLC (incorporated herein by reference to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 25, 2009)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    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
 
 *
    
    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