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DEMANDTEC, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2011. 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. 19 -------------------------------------------------------------------------------- Table of Contents The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed 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 Annual Report on Form 10-K for the fiscal year ended February 28, 2011. Overview We provide a collaborative optimization network of software services connecting retail and CP companies, enabling them to define category, brand, and shopper marketing strategies based on a scientific understanding of consumer behavior and make actionable pricing, promotion, assortment, space and other merchandising and marketing recommendations to achieve their revenue, profitability, sales volume, and customer loyalty objectives. We provide our applications by means of a software-as-a-service, or SaaS, model, which allows us to capture and analyze the most recent retailer and market-level data and enhance our software services rapidly to address our customers' ever-changing merchandising and marketing needs, and connect retailers and CP companies online to enable improved, more collaborative business processes between trading partners. Our solutions consist of software services and complementary analytical services and analytical insights derived from the same platform that supports our software services. We offer our solutions individually or as a suite of integrated software services. Our solutions for the retail and CP industries include DemandTec Lifecycle Price Optimization™, DemandTec End-to-End Promotion Management™, DemandTec Assortment & Space™, DemandTec Shopper Insights™, DemandTec Targeted Marketing™, DemandTec Marketing Plan Optimization™, DemandTec Total Trade Optimization™, DemandTec Shopper Marketing Optimization™, and DemandTec Connect™. The DemandTec network connects our solutions for the retail and CP industries. We sell our solutions through our direct sales force and receive a number of customer prospect introductions through third parties, such as systems integrators, strategic consulting firms, and a data syndication company. We were incorporated in November 1999 and began selling our software in fiscal 2001. Our revenue has grown from $43.5 million in fiscal 2007 to $82.4 million in fiscal 2011, and was $22.5 million in the three months ended May 31, 2011. Our operating expenses have also increased significantly during these same periods. We have incurred losses to date and had an accumulated deficit of approximately $109.9 million as of May 31, 2011. We sell our software to retailers and CP companies under agreements with initial terms that generally are one to three years in length and provide a variety of services associated with our customers' use of our software. Our software service agreements with retailers and CP companies are often large contracts. The annual contract value for each retail and CP company customer agreement is largely related to the size of the customer. Our Advanced Deal Management agreements with CP companies that leverage the DemandTec network are principally one year in length and much smaller in annual and aggregate contract value than our other CP company customer software services contracts and our retail customer contracts. Generally, the agreements we have signed in the first fiscal quarter of a fiscal year have had an aggregate annual contract value less than that of the agreements signed in the preceding fiscal fourth quarter. In addition, the aggregate contract value of agreements signed can fluctuate significantly on a quarterly basis within any given fiscal year. A significant percentage of our new and existing customer add-on agreements are entered into during the last month, weeks, or even days of each quarter. We generally recognize the revenue from each agreement ratably over the term of the agreement. Our ability to maintain or increase revenues depends on our attracting new customers, renewing agreements with our existing customers at comparable prices, and selling add-on software services to existing customers as well as successfully incorporating shopper segmentation and analytics into our offerings. Historically, some customers or potential customers have elected not to enter into new or renewal contracts and some other customers have renewed at lower prices or for shorter terms. Further, our revenue will be directly affected by the continued acceptance of our software solutions in the marketplace, as well as the timing, size and term length of our customer agreements. If we are unable to successfully develop or acquire new software and enhance our existing applications, we may not be able to attract and retain customers or increase or maintain our revenue. We are headquartered in San Mateo, California. We have sales and marketing offices in North America and Europe, and conduct research and development operations in India, Russia, and China. In each of the quarters ended May 31, 2011 and 2010, approximately 86% of our revenue was attributable to sales of our software to companies located in the United States. Our ability to achieve profitability will be affected by our revenue as well as by the level of our operating expenses associated with growing our business. Our largest category of operating expenses is research and development expenses, and the largest component of our operating expenses is personnel costs. In March 2011, we acquired M-Factor, Inc. ("M-Factor"), a provider of predictive analytics software for CP companies that optimizes marketing mix and trade investment spending. M-Factor is a software-as-a-service company that enables consumer products companies to continuously analyze, forecast, and optimize marketing investments and trade spend. The services deliver 20 -------------------------------------------------------------------------------- Table of Contents optimized action plans, reliable forecasts for plans and "what-if" scenarios, and reports that decompose the drivers of sales volume to explain why results came out as they did. The aggregate purchase price was $9.5 million in cash, of which $9.0 million was paid to M-Factor investors upon closing. The remaining $500,000 will be held by the Company to secure potential indemnification obligations of M-Factor investors and will be released approximately sixteen months after the closing, to the extent not used to satisfy the indemnity obligations. We accounted for the M-Factor acquisition as a business combination. See Note 2 of the Notes to Condensed Consolidated Financial Statements. After the M-Factor acquisition we reduced our workforce and consolidated facilities to achieve cost savings and operating efficiencies, and consequently recorded approximately $451,000 of restructuring charges in the three months ended May 31, 2011. In addition, we incurred approximately $1.0 million of personnel-related costs for transitional employees, redundant facility costs, and integration related professional services fees in the three months ended May 31, 2011. Those non-recurring costs would not have otherwise been incurred in the period presented as a part of our continuing operations and will not be incurred in future periods. As of June 23, 2011, we had approximately 32.5 million shares of common stock outstanding, excluding approximately 9.1 million shares subject to outstanding options, performance stock units, restricted stock units, and rights under our employee stock purchase program. The issuance of shares upon the exercise of these options and settlement of these units, as well as the grant of additional options and units pursuant to our equity compensation plans, would result in additional dilution and may adversely impact our earnings per share. See Note 7 of Notes to Condensed Consolidated Financial Statements. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. We believe that our estimates and judgments were reasonable based upon information available to us at the time that these estimates and judgments were made. We evaluate our estimates and judgments on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our consolidated financial statements could be adversely affected. The accounting policies that we believe reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: † Revenue Recognition † Stock-Based Compensation † Goodwill and Intangible Assets † Impairment of Long-Lived Assets In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available accounting policy alternatives would not produce a materially different result. During the three months ended May 31, 2011, there were no significant changes in our critical accounting policies. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2011 and Note 1 of Notes to Condensed Consolidated Financial Statements included herein for a more complete discussion of our critical accounting policies and estimates. Results of Operations Revenue We derive all of our revenue from customer agreements that cover the use of our software and various services associated with our customers' use of our software. We generally recognize all revenue ratably over the term of the agreement. Our agreements have generally been non-cancellable, but customers typically have the right to terminate their agreement for cause if we materially breach our obligations under the agreement and, in certain situations, may have the ability to extend the duration of their agreement on pre-negotiated terms. We invoice our customers in accordance with contractual terms, which generally have provided that our customers 21 -------------------------------------------------------------------------------- Table of Contents are invoiced in advance for annual use of our software services. We have provided certain implementation services on a fixed fee basis and have generally invoiced our customers in advance. In addition, we also have provided implementation and training services on a time and materials basis and have invoiced our customers monthly in arrears. Our payment terms typically require our customers to pay us within 30 days of the invoice date. Three Months Ended May 31, 2011 2010 (in thousands) Revenue $ 22,461 $ 18,045 Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. Revenue for the three months ended May 31, 2011 increased approximately $4.4 million, or 24%, compared to the corresponding period of the prior year, primarily due to a $2.5 million increase in revenue from existing customers and $1.9 million of revenue from new customers, of which approximately $930,000 was derived from former M-Factor solutions, in the three months ended May 31, 2011. New customers are those that did not contribute any revenue in the three months ended May 31, 2010. Existing customers are those that contributed revenue in each of the periods presented. Our revenue growth depends on our ability to attract new customers and to retain the existing revenues from our current customers over time. In addition, revenue from new customers in any given period can fluctuate depending upon the period in which the contract is signed, the number of new customer contracts, and the size of the new retailer or CP customer. In the short term we expect that our revenue may remain flat or decrease slightly. With the existing uncertainties in the global economic environment, we believe long-term revenue growth is more difficult to predict. Percentages of total revenue by customer type and geographic region for the periods presented were as follows: Three Months Ended May 31, 2011 2010 By customer type: Retail 77 % 79 % CP 23 % 21 % Total revenue 100 % 100 % By location: United States 86 % 86 % International 14 % 14 % Total revenue 100 % 100 % Revenue from CP companies continued to increase as a percentage of total revenue in the three months ended May 31, 2011 compared to the corresponding period of the prior year, largely as a result of incremental revenue from former M-Factor customers, all of which are CP companies. Revenue from customers located outside the United States remained flat as a percentage of total revenue in the three months ended May 31, 2011 compared to the corresponding period of the prior year. Over the long term, we expect that revenue from CP companies and international customers will increase as a percentage of total revenue on an annual basis. Cost of Revenue Cost of revenue includes expenses related to data centers, depreciation expenses associated with computer equipment and software, compensation and related expenses of operations, technical customer support, production operations and professional services personnel, amortization of purchased intangible assets, and allocated overhead expenses. We have contracts with three third parties for the use of their data center facilities, and our data center costs principally consist of the amounts we pay to these third parties for rack space, power and similar items. We amortize purchased intangible assets, principally for developed technology. We allocate overhead costs, such as rent and occupancy costs, employee benefits, information management costs, and legal and other costs, to all departments predominantly based on headcount. As a result, we include allocated overhead expenses in cost of revenue and each operating expense category. Three Months Ended May 31, 2011 2010 (dollars in thousands) Revenue $ 22,461 $ 18,045 Cost of revenue 8,912 7,114 Gross profit 13,549 10,931 Gross margin 60 % 61 % 22 -------------------------------------------------------------------------------- Table of Contents Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. Cost of revenue in the three months ended May 31, 2011 increased approximately $1.8 million, or 25%, over the corresponding period of the prior year, primarily due to increased personnel costs, data center costs, and amortization of purchased intangible assets associated with the AIS and M-Factor acquisitions. Personnel costs increased $843,000 compared to the corresponding period of the prior year, as average headcount increased by about 29, primarily due to the M-Factor acquisition. In addition, stock-based compensation expense, which is a component of personnel costs, increased $302,000 compared to the corresponding period of the prior year as we granted additional PSUs and RSUs during the three months ended May 31, 2011. Expenses associated with our data center in Mesa, Arizona increased $366,000, as we expanded our infrastructure to handle the increased level of customer data processed and analyzed to embed shopper segments and insights in our service offerings. Amortization of purchased intangible assets increased $257,000 from the corresponding period of the prior year due to the purchased developed technologies associated with the AIS and M-Factor acquisitions. Additionally, allocated overhead costs increased $165,000 over the corresponding period of the prior year, primarily due to increased facility-related and IT costs. Travel expense increased $159,000 over the corresponding period of the prior year as a result of increased headcount and international travel. Our gross margin decreased to 60% in the three months ended May 31, 2011 compared to 61% in the corresponding period of the prior year, primarily due to increased amortization of intangible assets associated with the AIS and M-Factor acquisitions. We anticipate that, in the short term, our gross margin will increase slightly as a result of post-acquisition synergies achieved through restructuring actions and facilities consolidation. Research and Development Expenses Research and development expenses include personnel costs for our research, product management and software development personnel, and allocated overhead expenses. We devote substantial resources to extending our existing software applications as well as to developing new software. Three Months Ended May 31, 2011 2010 (dollars in thousands) Research and development $ 9,619 $ 7,772 Percent of revenue 43 % 43 % Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. Research and development expenses in the three months ended May 31, 2011 increased approximately $1.8 million, or 24%, from the corresponding period of the prior year, primarily due to increased personnel costs and consulting expenses. Personnel costs increased $1.1 million in the three months ended May 31, 2011 from the corresponding period of the prior year as average headcount increased by 26, primarily due to the M-Factor acquisition and our recently established development presence in India. Stock-based compensation expense, which is a component of personnel costs, increased approximately $477,000 in the three months ended May 31, 2011 compared to the corresponding period of the prior year, primarily due to additional PSUs and RSUs granted during the three months ended May 31, 2011. In addition, consulting expenses increased $584,000 in the three months ended May 31, 2011 from the corresponding period of the prior year, as we expanded our outsourced research services in China, brought on third-party consulting services in Russia as part of the AIS acquisition, and supplemented our development efforts related to apparel retailing by using outside consultants. We intend to continue to invest significantly in our research and development efforts because we believe these efforts are essential to maintaining our competitive position over the long-term. In the short term, however, we expect that our research and development costs will decrease slightly in absolute dollars, as a result of post-acquisition synergies achieved through restructuring actions and facilities consolidation. 23 -------------------------------------------------------------------------------- Table of Contents Sales and Marketing Expenses Sales and marketing expenses include personnel costs for our sales and marketing personnel, including commissions and incentives, travel and entertainment expenses, marketing programs such as product marketing, events, corporate communications and other brand building expenses, and allocated overhead expenses. Three Months Ended May 31, 2011 2010 (dollars in thousands) Sales and marketing $ 7,483 $ 6,325 Percent of revenue 33 % 35 % Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. Sales and marketing expenses in the three months ended May 31, 2011 increased approximately $1.2 million, or 18%, over the corresponding period of the prior year, primarily due to increased personnel costs, marketing-related program expenses, and outside consulting costs, partially offset by decreased bad debt expense. Personnel costs increased $1.1 million in the three months ended May 31, 2011 from the corresponding period of the prior year, as a result of increased headcount, bonus expense, and commission expense. Average sales and marketing headcount increased by about nine in the three months ended May 31, 2011 compared to the corresponding period of the prior year. Bonus and commission expenses increased as a result of increased headcount and revenue since May 31, 2010. Consulting and marketing-related program expenses increased $397,000, primarily attributable to the consulting services associated with developing our collaborative optimization network, as well as increased spending on our annual DemandBetter user conference and other marketing initiatives. Additionally, travel expense increased $145,000 over the corresponding period of the prior year, as a result of increased headcount and international travel. Partially offsetting the increases in sales and marketing expense was a $460,000 decrease in bad debt expense, as we fully reserved for a customer invoice that was in dispute in the three months ended May 31, 2010 and had no similar charges in the three months ended May 31, 2011. We expect that, in the short term, sales and marketing expenses will decrease in absolute dollars and as a percentage of revenue as a result of post-acquisition synergies achieved through restructuring actions and facilities consolidation. General and Administrative Expenses General and administrative expenses include personnel costs for our executive, finance and accounting, human resources, legal and information management personnel, third-party professional services, travel and entertainment expenses, other corporate expenses and overhead not allocated to cost of revenue, research and development expenses, or sales and marketing expenses. Third-party professional services primarily include outside legal, audit and tax-related consulting costs. Three Months Ended May 31, 2011 2010 (dollars in thousands) General and administrative $ 2,804 $ 2,412 Percent of revenue 12 % 13 % Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. General and administrative expenses in the three months ended May 31, 2011 increased $392,000, or 16%, from the corresponding period of the prior year, primarily due to an increase in personnel costs and accounting fees. Personnel costs increased $116,000 in the three months ended May 31, 2011 from the corresponding period of the prior year, as average headcount increased by about four. Accounting and other outside services expenses increased $130,000 compared to the corresponding period of the prior year, primarily attributable to professional services related to the AIS and M-Factor acquisitions. We expect that, in the short term, general and administrative expenses may increase slightly or remain flat, in absolute dollars, and may decrease slightly as a percentage of revenue. 24 -------------------------------------------------------------------------------- Table of Contents Amortization of Purchased Intangible Assets Three Months Ended May 31, 2011 2010 (dollars in thousands)Amortization of purchased intangible assets $ 211 $ 292 Percent of revenue 1 % 2 % Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. Expenses associated with amortization of purchased intangible assets (recognized as a component of operating expenses) decreased approximately $81,000 in the three months ended May 31, 2011 from the corresponding period of the prior year. The decrease was primarily due to the scheduled full amortization of intangible assets associated with certain intangible assets from the prior TradePoint and Connect3 acquisitions, partially offset by increased amortization expense related to the intangible assets associated with our recent AIS and M-Factor acquisitions. Intangible assets are being amortized using the straight-line method over their estimated useful lives, with an estimated remaining weighted average period of 3.0 years at May 31, 2011. We expect that, in the short term, amortization expense relating to the existing purchased intangible assets (recognized as a component of operating expenses), absent of any impairment loss, will remain flat. Other Income (Expense), Net Three Months Ended May 31, 2011 2010 (in thousands) Interest income $ 40 $ 61 Interest expense (9 ) (31 ) Other income (expense) 29 (4 ) Other income (expense), net $ 60 $ 26 Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. Other income (expense), net increased approximately $34,000 in the three months ended May 31, 2011 from the corresponding period of the prior year, primarily due to foreign currency exchange gains associated with certain customer contracts denominated in Euros as a result of the strengthening of the Euro against the U.S. dollar. Provision for Income Taxes Three Months Ended May 31, 2011 2010 (in thousands) Provision for income taxes $ 95 $ 23 Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010. In the three months ended May 31, 2011, we recorded income tax expense of approximately $95,000 compared to $23,000 in the corresponding period of the prior year. The effective tax rate for the three months ended May 31, 2011 was less than 2% based on our estimated taxable income for the year. We recorded tax expenses primarily for state minimum taxes and foreign taxes in each of the three months ended May 31, 2011 and 2010. Since inception, we have incurred annual operating losses and, accordingly, have recorded a provision for income taxes primarily for federal minimum income taxes, state income taxes principally in states where we have no net operating loss carryforwards, and foreign taxes. At February 28, 2011, we had federal and state net operating loss carryforwards of approximately $87.8 million and $63.6 million, respectively, that may be available to offset future taxable income. Stock-Based Compensation Expense Year Ended May 31, 2011 2010 (In thousands)Stock-based compensation expense $ 3,271 $ 2,449 25 -------------------------------------------------------------------------------- Table of Contents Total stock-based compensation expense increased approximately $822,000 in the three months ended May 31, 2011 compared to the corresponding period of the prior year. The increase was primarily due to PSUs and RSUs granted in April 2011 to new and existing employees. The increase was partially offset by lower expenses associated with PSUs and RSUs that were granted in fiscal 2009 and 2010 becoming vested in fiscal 2011 or in the three months ended May 31, 2011. See Note 7 of Notes to Condensed Consolidated Financial Statements for the amount of gross unrecognized stock-based compensation expense at May 31, 2011, and further explanation of how we derive and account for these estimates. We expect that stock-based compensation expense will vary over the long term depending on the timing and magnitude of equity incentive grants and revisions to our estimates of the number of shares expected to vest. Liquidity and Capital Resources At May 31, 2011, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $68.6 million, accounts receivable (net of allowance) of $16.3 million, and available borrowing capacity under our credit facility of $19.1 million, after a reduction of approximately $917,000 to secure the operating lease commitment associated with our San Mateo headquarters facility. Our $20.0 million revolving line of credit may be borrowed, repaid, and reborrowed until May 7, 2012 and includes a number of covenants and restrictions with which we must comply. For example, our ability to incur debt, grant liens, make investments, enter into mergers and acquisitions, pay dividends, repurchase our outstanding common stock, change our business, enter into transactions with affiliates, and dispose of assets is limited. To secure the line of credit, we have granted our lenders a first priority security interest in substantially all of our assets. Through the filing of this Quarterly Report on Form 10-Q, we were in compliance with all loan covenants. Three Months Ended May 31, 2011 2010 (in thousands) Net cash provided by (used in) operating activities $ 3,150 $ (4,358 ) Net cash provided by (used in) investing activities 3,297 (2,999 ) Net cash provided by (used in) financing activities 2,336 (251 ) Operating Activities Our cash flows from operating activities in any period are significantly influenced by the number of customers using our software, the number and size of new customer contracts, the timing of renewals of existing customer contracts, and the timing of payments by these customers. Our largest source of operating cash flows is cash collections from our customers, which results in decreases to accounts receivable. Our primary uses of cash in operating activities are for personnel-related expenditures and rent payments. Our cash flows from operating activities in any period will continue to be significantly affected by the extent to which we add new customers, renew existing customers, collect payments from our customers and increase personnel to grow our business. Additionally, certain executives received all or a portion of their fiscal 2011 annual variable compensation in the form of PSUs rather than cash, which had a beneficial impact on cash flows from operating activities in the three months ended May 31, 2011. Net cash provided by operating activities in the three months ended May 31, 2011 was $3.2 million compared to $4.4 million of net cash used in operating activities in the corresponding period of the prior year. The $7.6 million net change in cash flow was primarily attributable to the timing of cash collection during the three months ended May 31, 2011. Cash collections increased $15.1 million in the three months ended May 31, 2011 compared to the corresponding period of the prior year. The increase in cash collections was partially offset by increased cash payments, as cost of revenue and operating expenses increased approximately $5.6 million in the three months ended May 31, 2011 compared to the corresponding period of the prior year, primarily as a result of increased headcount (partially due to the M-Factor acquisition) and outside services. In addition, the timing of employee bonus and vendor payments further increased cash outflow by $2.2 million in the three months ended May 31, 2011 compared to the corresponding period of the prior year. We anticipate that the economic environment may not improve in the near term and, as a result, the signing of customer contracts and the collection of cash will continue to remain challenging and unpredictable, thereby impacting our cash generation. 26 -------------------------------------------------------------------------------- Table of Contents Investing Activities Our primary investing activities have been capital expenditures on equipment for our data center, investment in marketable securities, and payments for the acquisition of businesses. In the three months ended May 31, 2011, net cash provided by investing activities was $3.3 million compared to $3.0 million of net cash used in investing activities in the corresponding period of the prior year. In the three months ended May 31, 2011, we had $13.1 million of net cash inflow from purchases and maturities of marketable securities, partially offset by approximately $8.7 million of cash payments associated with the M-Factor acquisition, net of cash received, and $1.1 million in capital expenditures. In the three months ended May 31, 2010, we incurred $1.6 million of net cash outflow from purchases and maturities of marketable securities, $1.0 million of capital expenditures, and a $426,000 payment of notes payables to former TradePoint shareholders. Financing Activities Our primary financing activities have been the exercise of stock options, the sale of shares pursuant to our ESPP, and borrowings and repayments under our credit facilities. In the three months ended May 31, 2011, net cash provided by financing activities was approximately $2.3 million, all from issuance of common stock under our equity incentive plans. In the three months ended May 31, 2010, we used approximately $251,000 of net cash in financing activities. We paid approximately $937,000 cash to fulfill employee federal and state withholding tax obligations in connection with the vesting and settlement of certain outstanding RSUs, partially offset by $686,000 of cash proceeds from the issuance of common stock. We believe that our cash, cash equivalents, and marketable securities balances at May 31, 2011, along with cash provided by operating activities, if any, will be sufficient to fund our projected operating requirements for at least the next twelve months. We may need to raise additional capital or incur debt to continue to fund our operations over the long term. Our future capital requirements will depend on many factors, including revenues, profits or losses incurred there from, any expansion of our workforce, the timing and extent of any expansion into new markets, the timing of introductions of any new functionality and enhancements to our software, the timing and size of any acquisitions of other companies or assets and the continuing market acceptance of our software. We may enter into arrangements for potential acquisitions of complementary businesses, services or technologies, which also could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. Contractual Obligations Our principal commitments consist of obligations under operating leases for office space in the United States, data center facilities and equipment, and merger consideration payable. Our future operating lease obligations will change if we enter into new lease agreements upon the expiration of our existing lease agreements or if we enter into new lease agreements to expand our operations. At February 28, 2011, the future minimum payments under our lease commitments, contractual commitments, and amounts due for merger consideration were as follows: Payments Due by Period Less than More than Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years (In thousands) Operating leases (1) $ 10,653 $ 3,043 $ 5,232 $ 2,366 $ 12 Contractual commitments (2) 2,187 2,187 - - - Merger consideration payable 475 - 475 - - Total contractual obligations $ 13,315 $ 5,230 $ 5,707 $ 2,366 $ 12 -------------------------------------------------------------------------------- (1) Includes approximately $9.1 million in future minimum lease payments, $8.5 million of which was associated with our 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 data center in Mesa, Arizona, entered into in fiscal 2010 and 2011. See Note 5 of Notes to Condensed Consolidated Financial Statements. (2) Amounts are associated with agreements for contract engineering services and other purchase commitments that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used; fixed, minimum, or variable price provisions; and the approximate timing of the transactions. Obligations under contracts that we can cancel without a significant penalty are not included. 27 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purposes of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, nor do we have any undisclosed material transactions or commitments involving related persons or entities. Recent Accounting Pronouncements For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, see Note 1 of Notes to Condensed Consolidated Financial Statements. |