##### 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, 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 
Incorporation or Organization)
    
    (I.R.S. Employer
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)
 o þ
  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 August 31, 2007 and February 28, 2007
    
    
    3Consolidated Statements of Operations for the three and six months ended August 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the six months ended August 31, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



Item 1. Consolidated Financial Statements
 DemandTec, Inc.
 
 Consolidated Balance Sheets
(in thousands, except per share data)
 August 31,
    
    
    February 28,2007
    
    
    2007(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,677
    
    
    $
    21,036Marketable securities
    
    
    54,535
    
    
    
    4,442Accounts
receivable, net of allowances of $65 and $62 as of August 31 and February 28, 2007, respectively
    
    
    13,264
    
    
    
    14,338Deferred commissions, current
    
    
    2,190
    
    
    
    2,167Prepaid expenses and other current assets
    
    
    1,610
    
    
    
    1,035Total current assets
    
    
    92,276
    
    
    
    43,018Property, equipment and leasehold improvements, net
    
    
    4,383
    
    
    
    2,941Restricted cash
    
    
    200
    
    
    
    200Deferred commissions, non-current
    
    
    512
    
    
    
    122Goodwill
    
    
    5,290
    
    
    
    5,290Acquired intangible assets
    
    
    4,244
    
    
    
    4,729Other assets
    
    
    1
    
    
    
    495Total assets
    
    $
    106,906
    
    
    $
    56,795LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable and accrued expenses
    
    $
    5,037
    
    
    $
    4,538Accrued compensation
    
    
    4,144
    
    
    
    3,258Deferred revenue, current
    
    
    33,436
    
    
    
    31,143Note payable, current
    
    
    
    
    
    
    1,585Note payable to former TradePoint shareholders
    
    
    1,800
    
    
    
    1,800Liability for early exercise of stock options, current
    
    
    123
    
    
    
    168Redeemable convertible preferred stock warrant liability
    
    
    
    
    
    
    592Total current liabilities
    
    
    44,540
    
    
    
    43,084Liability for early exercise of stock options, non-current
    
    
    71
    
    
    
    130Deferred revenue, non-current
    
    
    14,127
    
    
    
    11,029Note payable, non-current
    
    
    
    
    
    
    8,678Line of credit
    
    
    
    
    
    
    3,000Other long-term liabilities
    
    
    435
    
    
    
    461Redeemable 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 August 31, 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 August 31, 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
August 31, 2007
    
    
    
    
    
    
    2,071Preferred stock, $0.001 par value  10,000,000 shares authorized as of August 31, 2007,
 no shares issued or
outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value  175,000 and 100,000 shares authorized as of August 31
and February 28, 2007, respectively; 26,250 and 6,455 shares issued and outstanding, excluding 123
and 200 shares subject to repurchase, as of August 31 and February 28,
2007, respectively
    
    
    26
    
    
    
    6Additional paid-in capital
    
    
    118,001
    
    
    
    7,204Accumulated deficit
    
    
    (70,294
    )
    
    
    (67,941
    )Total stockholders equity (deficit)
    
    
    47,733
    
    
    
    (58,660
    )Total liabilities, redeemable convertible preferred stock and stockholders equity (deficit)
    
    $
    106,906
    
    
    $
    56,795
  3




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##### Table of Contents



DemandTec, Inc.
 
 Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    14,673
    
    
    $
    10,447
    
    
    $
    27,921
    
    
    $
    20,513Cost of revenue(1)(2)
    
    
    5,015
    
    
    
    3,102
    
    
    
    9,338
    
    
    
    6,422Gross profit
    
    
    9,658
    
    
    
    7,345
    
    
    
    18,583
    
    
    
    14,091Operating expenses:Research and development(2)
    
    
    5,066
    
    
    
    3,582
    
    
    
    10,138
    
    
    
    6,811Sales and marketing(2)
    
    
    3,876
    
    
    
    2,898
    
    
    
    7,619
    
    
    
    5,739General and administrative(2)
    
    
    1,269
    
    
    
    672
    
    
    
    2,398
    
    
    
    1,205Amortization of acquired intangible assets
    
    
    91
    
    
    
    
    
    
    
    182
    
    
    
    Total operating expenses
    
    
    10,302
    
    
    
    7,152
    
    
    
    20,337
    
    
    
    13,755Income (loss) from operations
    
    
    (644
    )
    
    
    193
    
    
    
    (1,754
    )
    
    
    336Interest income
    
    
    430
    
    
    
    140
    
    
    
    780
    
    
    
    250Interest expense
    
    
    (823
    )
    
    
    (205
    )
    
    
    (1,216
    )
    
    
    (262
    )Other income (expense), net
    
    
    59
    
    
    
    (14
    )
    
    
    (12
    )
    
    
    55Income (loss) before provision (benefit) for income taxes
    
    
    (978
    )
    
    
    114
    
    
    
    (2,202
    )
    
    
    379Provision (benefit) for income taxes
    
    
    127
    
    
    
    (4
    )
    
    
    138
    
    
    
    (14
    )Net income (loss)
    
    
    (1,105
    )
    
    
    118
    
    
    
    (2,340
    )
    
    
    393Accretion to redemption value of preferred stock
    
    
    5
    
    
    
    8
    
    
    
    13
    
    
    
    16Net income (loss) attributable to common stockholders
    
    $
    (1,110
    )
    
    $
    110
    
    
    $
    (2,353
    )
    
    $
    377Net income (loss) per common share, basic
    
    $
    (0.10
    )
    
    $
    0.02
    
    
    $
    (0.26
    )
    
    $
    0.07Net income (loss) per common share, diluted
    
    $
    (0.10
    )
    
    $
    0.01
    
    
    $
    (0.26
    )
    
    $
    0.02Shares used in computing basic net income (loss) per common share
    
    
    11,443
    
    
    
    5,117
    
    
    
    8,974
    
    
    
    5,057Shares used in computing diluted net income (loss) per common share
    
    
    11,443
    
    
    
    21,466
    
    
    
    8,974
    
    
    
    21,443
 
 (1) Includes amortization of acquired intangible assets
    
    $
    152
    
    
    $
    
    
    
    $
    304
    
    
    $
    (2) Includes stock-based compensation expense as follows:Cost of revenue
    
    $
    201
    
    
    $
    5
    
    
    $
    300
    
    
    $
    8Research and development
    
    
    176
    
    
    
    7
    
    
    
    247
    
    
    
    11Sales and marketing
    
    
    136
    
    
    
    14
    
    
    
    225
    
    
    
    18General and administrative
    
    
    92
    
    
    
    8
    
    
    
    229
    
    
    
    10
  4




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##### Table of Contents



DemandTec, Inc.
 
 Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 Six Months EndedAugust 31,2007
    
    
    2006Operating activities:Net income (loss)
    
    $
    (2,340
    )
    
    $
    393Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation
    
    
    855
    
    
    
    452Stock-based compensation expense
    
    
    1,001
    
    
    
    47Amortization of warrants issued in conjunction with debt
    
    
    64
    
    
    
    22Revaluation of warrants to fair value
    
    
    119
    
    
    
    11Amortization of acquired intangible assets
    
    
    486
    
    
    
    Amortization of financing costs
    
    
    96
    
    
    
    25Charge on early extinguishment of debt
    
    
    504
    
    
    
    Provision for accounts receivable
    
    
    3
    
    
    
    (29
    )Other
    
    
    93
    
    
    
    (53
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,027
    
    
    
    (2,938
    )Prepaid expenses and other current assets
    
    
    (575
    )
    
    
    (523
    )Deferred commissions
    
    
    (413
    )
    
    
    561Other assets
    
    
    (30
    )
    
    
    (118
    )Accounts payable and accrued expenses
    
    
    (1,495
    )
    
    
    (392
    )Accrued compensation
    
    
    888
    
    
    
    335Deferred revenue
    
    
    5,391
    
    
    
    (1,573
    )Net cash provided by (used in) operating activities
    
    
    5,674
    
    
    
    (3,780
    )Investing activities:Purchases of property, equipment and leasehold improvements
    
    
    (2,297
    )
    
    
    (1,096
    )Purchases of marketable securities
    
    
    (54,193
    )
    
    
    (1,950
    )Maturities of marketable securities
    
    
    4,100
    
    
    
    1,692Net cash used in investing activities
    
    
    (52,390
    )
    
    
    (1,354
    )Financing activities:Proceeds from issuance of common stock, net of repurchases
    
    
    142
    
    
    
    488Proceeds from issuance of convertible preferred stock
    
    
    
    
    
    
    65Net cash proceeds from initial public offering
    
    
    57,702
    
    
    
    Increase in liability associated with offering costs
    
    
    1,957
    
    
    
    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
    
    
    46,401
    
    
    
    11,335Effect of exchange rate changes on cash and cash equivalents
    
    
    (44
    )
    
    
    68Net (decrease) increase in cash and cash equivalents
    
    
    (359
    )
    
    
    6,269Cash and cash equivalents at beginning of period
    
    
    21,036
    
    
    
    12,288Cash and cash equivalents at end of period
    
    $
    20,677
    
    
    
    18,557Supplemental information:Cash paid for interest
    
    $
    956
    
    
    $
    216Cash paid for income taxes
    
    $
    125
    
    
    $
    6Reclassification 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
    
    
    
    
    
    $
    400Conversion of preferred stock to common stock and additional paid-in capital
    
    $
    51,144
    
    
    $
    
  5




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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
  6




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##### Table of Contents



Revenue Recognition Revenue Arrangements with Multiple Deliverables
 
    
    there is persuasive evidence of an arrangement;
 
    
    the service has been provided to the customer;
 
    
    the collection of the fees is probable; and
 
    
    the amount of fees to be paid by the customer is fixed or determinable.
  Deferred Revenue
  Foreign Currency Translation
  Concentrations of Credit Risk, Significant Customers and Suppliers and Geographic
Information
   Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006Customer A
    
    
    14.5
    %
    
    
    3.6
    %
    
    
    10.3
    %
    
    
    1.8
    %Customer B
    
    
    3.0
    %
    
    
    12.1
    %
    
    
    3.3
    %
    
    
    12.3
    %Customer C
    
    
    3.2
    %
    
    
    7.8
    %
    
    
    3.3
    %
    
    
    12.2
    %Customer D
    
    
    2.8
    %
    
    
    12.5
    %
    
    
    2.9
    %
    
    
    12.8
    %
 7




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006United States
    
    $
    12,994
    
    
    $
    9,612
    
    
    $
    24,571
    
    
    $
    19,114International
    
    
    1,679
    
    
    
    835
    
    
    
    3,350
    
    
    
    1,399Total revenue
    
    $
    14,673
    
    
    $
    10,447
    
    
    $
    27,921
    
    
    $
    20,513
   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
 8




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##### Table of Contents



Goodwill and Intangible Assets
 Goodwill and Other Intangible Assets
 Impairment of Long-Lived Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets
 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
 9




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss) attributable to common stockholders
    
    $
    (1,110
    )
    
    $
    110
    
    
    $
    (2,353
    )
    
    $
    377Weighted average number of common shares outstanding
    
    
    11,582
    
    
    
    5,400
    
    
    
    9,129
    
    
    
    5,364Less: Weighted average number of common shares
subject to repurchase
    
    
    (139
    )
    
    
    (283
    )
    
    
    (155
    )
    
    
    (307
    )Weighted average number of common shares outstanding
used in computing basic net income (loss) per common
share
    
    
    11,443
    
    
    
    5,117
    
    
    
    8,974
    
    
    
    5,057Net income (loss) per common share, basic
    
    $
    (0.10
    )
    
    $
    0.02
    
    
    $
    (0.26
    )
    
    $
    0.07Effect of dilutive securities:Weighted average convertible preferred shares
    
    
    
    
    
    
    13,503
    
    
    
    
    
    
    
    13,501Weighted average stock options and warrants and
unvested common shares subject to repurchase
    
    
    
    
    
    
    2,846
    
    
    
    
    
    
    
    2,885Weighted average number of common shares outstanding
used in computing diluted net income (loss) per
common share
    
    
    11,443
    
    
    
    21,466
    
    
    
    8,974
    
    
    
    21,443Net income (loss) per common share, diluted
    
    $
    (0.10
    )
    
    $
    0.01
    
    
    $
    (0.26
    )
    
    $
    0.02
  Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Shares subject to options to purchase common
stock and PSUs
    
    
    5,023
    
    
    
    
    
    
    
    4,748
    
    
    
    Shares subject to warrants to purchase common stock
    
    
    98
    
    
    
    
    
    
    
    144
    
    
    
    Common stock subject to repurchase
    
    
    139
    
    
    
    
    
    
    
    155Convertible preferred stock (as-converted basis until IPO)
    
    
    10,133
    
    
    
    
    
    
    
    11,822
    
    
    
    Total
    
    
    15,393
    
    
    
    
    
    
    
    16,869
    
    
    
    
 10




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development Activities
 2. Goodwill and Purchased Intangibles
   WeightedAverageGross
    
    
    Accumulated
    
    Net
    
    
    AmortizationValue
    
    
    Amortization
    
    Value
    
    
    Period(dollars in thousands)
    
    
    (in years)Developed technology
    
    $
    3,050
    
    
    
    $ (508
    )
    
    $
    2,542
    
    
    
    5Customer relationships
    
    
    940
    
    
    
    (112
    )
    
    
    828
    
    
    
    7Non-compete covenants
    
    
    500
    
    
    
    (139
    )
    
    
    361
    
    
    
    3Trade name
    
    
    560
    
    
    
    (47
    )
    
    
    513
    
    
    
    10Total
    
    $
    5,050
    
    
    
    $ (806
    )
    
    $
    4,244
   As ofAugust 31,Fiscal Year
    
    20072008 (as of August 31, 2007, for the remaining six months)
    
    $
    4822009
    
    
    9672010
    
    
    9132011
    
    
    8002012
    
    
    597Thereafter
    
    
    485Total
    
    $
    4,244
 11




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##### Table of Contents



3. Marketable Securities
  As of
    
    
    As ofAugust 31,
    
    
    February 28,2007
    
    2007Certificates of deposit
    
    $
    200
    
    
    $
    550Commercial paper
    
    
    10,239
    
    
    
    350Corporate bonds
    
    
    3,215
    
    
    
    2,698U.S. agency bonds
    
    
    40,087
    
    
    
    250Asset backed securities
    
    
    794
    
    
    
    594Total marketable securities
    
    $
    54,535
    
    
    $
    4,442
   4. Commitments
   As ofAugust 31,Fiscal Year
    
    20072008 (for the remaining six months)
    
    $
    4642009
    
    
    1,0352010
    
    
    1,0652011
    
    
    133Total
    
    $
    2,697
  5. Debt and Warrants
  12




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##### Table of Contents



6. Stockholders Equity
  13




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##### Table of Contents



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
    
    
    6,739Total
    
    
    26,250
  Equity Incentive Plans and Employee Stock Purchase Plan
 1999 Equity Incentive Plan
  2007 Equity Incentive Plan
  Stock Options
 Performance Stock Units.
   14




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##### Table of Contents



2007 Employee Stock Purchase Plan
   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
    
    
    (1,163
    )
    
    
    1,163
    
    
    
    9.11Performance
stock units granted
    
    
    (1,000
    )Options exercised
    
    
    
    
    
    
    (68
    )
    
    
    2.11Options canceled/forfeited
    
    
    192
    
    
    
    (192
    )
    
    
    4.63Options repurchased
    
    
    10
    
    
    
    
    
    
    
    1.76Options expired
    
    
    (32
    )Balance at August 31, 2007
    
    
    2,000
    
    
    
    7,079
    
    
    $
    3.07
 15




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##### Table of Contents



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
    
    
    
    5.27
    
    
    $
    0.86
    
    
    
    2,105
    
    
    $
    0.851.30  1.70
    
    
    1,531
    
    
    
    7.36
    
    
    
    1.36
    
    
    
    960
    
    
    
    1.351.90  2.70
    
    
    907
    
    
    
    8.40
    
    
    
    2.56
    
    
    
    333
    
    
    
    2.543.20  3.80
    
    
    1,104
    
    
    
    8.59
    
    
    
    3.72
    
    
    
    226
    
    
    
    3.755.40  6.70
    
    
    634
    
    
    
    9.52
    
    
    
    6.20
    
    
    
    33
    
    
    
    5.448.60  11.00
    
    
    693
    
    
    
    9.70
    
    
    
    10.69
    
    
    
    1
    
    
    
    11.007,079
    
    
    
    7.46
    
    
    $
    3.07
    
    
    
    3,658
    
    
    $
    1.20
   As ofAugust 31,2007Number of vested and expected-to-vest options outstanding
    
    
    6,777Weighted average exercise price per share
    
    $
    3.00Aggregate intrinsic value
    
    $
    45,448Weighted average remaining contractual term (in years)
    
    
    7.40
 Stock-Based Compensation for Non-Employees
   Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006Weighted average expected term (in years)
    
    
    10.0
    
    
    
    9.9
    
    
    
    9.8
    
    
    
    9.9Expected stock price volatility
    
    
    61
    %
    
    
    62
    %
    
    
    60
    %
    
    
    62
    %Risk-free interest rate
    
    
    4.6
    %
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    4.7
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  16




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##### Table of Contents



Stock-Based Compensation Associated with Awards to Employees
  Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006Stock options:Weighted average expected term (in years)
    
    
    3.9
    
    
    
    3.0
    
    
    
    3.9
    
    
    
    3.0Expected stock price volatility
    
    
    39
    %
    
    
    42
    %
    
    
    38
    %
    
    
    42
    %Risk-free interest rate
    
    
    4.3
    %
    
    
    4.9
    %
    
    
    4.5
    %
    
    
    4.9
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Weighted average per share fair value of
stock options granted during the period
    
    $
    4.00
    
    
    $
    0.92
    
    
    $
    3.24
    
    
    $
    0.91Performance stock units:Weighted average per share fair value of
performance stock units granted during
the period
    
    $
    9.97
    
    
    
    n/a
    
    
    $
    9.97
    
    
    
    n/aEmployee Stock Purchase Plan:Weighted average expected term (in months)
    
    
    8
    
    
    
    n/a
    
    
    
    8
    
    
    
    n/aExpected stock price volatility
    
    
    32
    %
    
    
    n/a
    
    
    
    32
    %
    
    
    n/aRisk-free interest rate
    
    
    4.2
    %
    
    
    n/a
    
    
    
    4.2
    %
    
    
    n/aExpected dividend yield
    
    
    0
    %
    
    
    n/a
    
    
    
    0
    %
    
    
    n/a
 Weighted Average Expected Term.
 Volatility.
 Risk-Free Interest Rate.
 Dividend Yield.
 Forfeitures.
   17




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##### Table of Contents



7.
    
    Income Taxes
 Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
  18




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##### Table of Contents



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
      Critical Accounting Policies and Estimates
  
    
    Revenue Recognition
    
    Deferred Commissions
    
    Stock-Based Compensation
    
    Goodwill and Intangible Assets
    
    Impairment of Long-Lived Assets
 19




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Results of Operations
 Revenue
   Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Revenue
    
    $
    14,673
    
    
    $
    10,447
    
    
    $
    27,921
    
    
    $
    20,513
 Three and Six Months Ended August 31, 2007 Compared to the Three and Six Months
Ended August 31, 2006
  20




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##### Table of Contents



Cost of Revenue
  Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Revenue
    
    $
    14,673
    
    
    $
    10,447
    
    
    $
    27,921
    
    
    $
    20,513Cost of revenue
    
    
    5,015
    
    
    
    3,102
    
    
    
    9,338
    
    
    
    6,422Gross profit
    
    
    9,658
    
    
    
    7,345
    
    
    
    18,583
    
    
    
    14,091Gross margin
    
    
    65.8
    %
    
    
    70.3
    %
    
    
    66.6
    %
    
    
    68.7
    %
 Three and Months Ended August 31, 2007 Compared to the Three and Six Months Ended
August 31, 2006.
     21




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##### Table of Contents



Research and Development Expenses
  Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Research and development
    
    $
    5,066
    
    
    $
    3,582
    
    
    $
    10,138
    
    
    $
    6,811Percent of revenue
    
    
    34.5
    %
    
    
    34.3
    %
    
    
    36.3
    %
    
    
    33.2
    %
 Three and Six Months Ended August 31, 2007 Compared to the Three and Six Months
Ended August 31, 2006.
   22




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##### Table of Contents



Sales and Marketing Expenses
  Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Sales and marketing
    
    $
    3,876
    
    
    $
    2,898
    
    
    $
    7,619
    
    
    $
    5,739Percent of revenue
    
    
    26.4
    %
    
    
    27.7
    %
    
    
    27.3
    %
    
    
    28.0
    %
 Three and Six Months Ended August 31, 2007 Compared to the Three and Six Months
Ended August 31, 2006.
   General and Administrative Expenses
  Three Months
    
    Six MonthsEnded
    
    EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)General and administrative
    
    $
    1,269
    
    
    $
    672
    
    
    $
    2,398
    
    
    $
    1,205Percent of revenue
    
    
    8.6
    %
    
    
    6.4
    %
    
    
    8.6
    %
    
    
    5.9
    %
 Three and Six Months Ended August 31, 2007 Compared to the Three and Six Months
Ended August 31, 2006.
 23




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24




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##### Table of Contents



Amortization of Acquired Intangible Assets
 Three Months Ended
    
    Six Months EndedAugust 31,
    
    August 31,2007
    
    2006
    
    2007
    
    2006(dollars in thousands)Amortization of acquired intangible assets
    
    $
    91
    
    
    $
    
    
    
    $
    182
    
    
    $
    Percent of revenue
    
    
    0.6
    %
    
    
    
    
    
    
    0.7
    %
 Three and Six Months Ended August 31, 2007 Compared to the Three and Six Months
Ended August 31, 2006.
  O ther Income (Expense), Net
 Three Months Ended
    
    
    Six Months EndedAugust 31,
    
    
    August 31,2007
    
    
    2006
    
    
    2007
    
    
    2006(dollars in thousands)Interest income
    
    $
    430
    
    
    $
    140
    
    
    $
    780
    
    
    $
    250Interest expense
    
    
    (823
    )
    
    
    (205
    )
    
    
    (1,216
    )
    
    
    (262
    )Other income (expense)
    
    
    59
    
    
    
    (14
    )
    
    
    (12
    )
    
    
    55Other income (expense), net
    
    $
    (334
    )
    
    $
    (79
    )
    
    $
    (448
    )
    
    $
    43
 Three and Six Months Ended August 31, 2007 Compared to the Three and Six Months
Ended August 31, 2006.
    25




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##### Table of Contents



Provision (Benefit) for Income Taxes
  Accounting for Income Taxes
  Liquidity and Capital Resources
    Six Months EndedAugust 31,2007
    
    2006(dollars in thousands)Net cash provided by (used in) operating
activities
    
    $
    5,674
    
    
    $
    (3,780
    )Net cash used in investing activities
    
    
    (52,390
    )
    
    
    (1,354
    )Net cash provided by financing activities
    
    
    46,401
    
    
    
    11,335
 26




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Operating Activities
   Investing Activities
   Financing Activities
    27




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##### Table of Contents



Contractual Obligations
  Less
    
    
    
    
    
    
    
    
    
    
    MoreThan
    
    
    
    
    
    
    
    
    
    
    ThanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating leases
    
    $
    2,697
    
    
    $
    980
    
    
    $
    1,717
    
    
    $
    
    
    
    $
    Notes
payable to former TradePoint shareholders(1)
    
    
    1,800
    
    
    
    1,800
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    4,497
    
    
    $
    2,780
    
    
    $
    1,717
    
    
    $
    
    
    
    $
    
 
 (1)
    
    This note is subject to reduction based on indemnification claims we may make. 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
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Risk
   Foreign Currency Translation
 28




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Interest Rate Sensitivity
  Effects of Inflation
  
 Item 4T. Controls and Procedures
    29




---



##### 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 . 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 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;
    
    any significant changes in the competitive dynamics of our market, including new entrants or substantial
discounting of products;
 30




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##### Table of Contents




    
    our ability to control costs, including our operating expenses;
    
    the timing of hiring personnel and of large expenses such as those for trade shows and third-party
professional services; and
    
    general economic conditions in the retail and CP markets.
  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.
  31




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##### 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. 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.
  32




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##### 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.
  33




---



##### 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.
  34




---



##### Table of Contents



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.
    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.
  35




---



##### Table of Contents




    
    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;
    
    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.
  36




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##### 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.
  37




---



##### Table of Contents



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 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.
  38




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##### Table of Contents



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 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.
  39




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##### Table of Contents



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.
  
    
    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;
 40




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##### Table of Contents




    
    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 Securities
  (b)
    
    Use of Proceeds from Public Offering of Common Stock
   (c)
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  41




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Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  Voting actions take in connection with our IPO
 
 Item 5. Other Information.
  
 Item 6. INDEX TO 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.
  42




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##### 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.
    
    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.


44