S-1 1 ds1.htm REGISTRATION STATEMENT ON FORM S-1 Registration Statement on Form S-1
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As filed with the Securities and Exchange Commission on December 19, 2007

Registration No. 333-            

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 


DANGER, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   7371   77-0529259

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

3101 Park Blvd.

Palo Alto, CA 94306

(650) 289-5000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


Henry R. Nothhaft

Chairman and Chief Executive Officer

Danger, Inc.

3101 Park Blvd.

Palo Alto, CA 94306

(650) 289-5000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 


Copies to:

 

Mark P. Tanoury, Esq.

John M. Geschke, Esq.

Cooley Godward Kronish LLP

Five Palo Alto Square

3000 El Camino Real

Palo Alto, CA 94306

Telephone: (650) 843-5000

 

Scott L. Darling, Esq.

Vice President

and General Counsel

Danger, Inc.

3101 Park Blvd.

Palo Alto, CA 94306

Telephone: (650) 289-5000

 

Robert G. Day, Esq.

Allison B. Spinner, Esq.

Wilson Sonsini Goodrich & Rosati,

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304-1050

Telephone: (650) 493-9300

 


Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed maximum
aggregate

offering price(1)(2)

 

Amount of

registration fee

Common Stock, $0.0001 par value per share

  $100,050,000   $3,072
 
 
(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes $13,050,000 of shares that the underwriters have the option to purchase to cover over-allotments, if any.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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Subject to Completion, dated                     , 2007

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

            Shares

LOGO

Danger, Inc.

Common Stock

 


This is our initial public offering of shares of our common stock. No public market currently exists for our common stock. The initial public offering price of our common stock is expected to be between $             and $             per share.

We have applied to list our common stock on the NASDAQ Global Market under the symbol “DNGR.”

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 10.

 

     Per Share    Total

Initial public offering price

   $               $           

Underwriting discounts and commissions

   $      $  

Proceeds to us (before expenses)

   $      $  

We have granted the underwriters a 30-day option to purchase up to an additional              shares from us on the same terms and conditions as set forth above if the underwriters sell more than              shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities regulator has approved or disapproved of these securities nor determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                      , 2008.

 


 

Deutsche Bank Securities    UBS Investment Bank
  Thomas Weisel Partners LLC  
Pacific Crest Securities       ThinkEquity Partners LLC

 


                    , 2008


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TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   10

Forward-Looking Statements

   38

Use of Proceeds

   39

Dividend Policy

   39

Capitalization

   40

Dilution

   42

Selected Consolidated Financial Data

   45

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   47

Business

   73

Management

   90

Executive and Director Compensation

   96

Certain Relationships and Related Party Transactions

   122

Principal Stockholders

   129

Description of Capital Stock

   133

Shares Eligible for Future Sale

   139

Material United States Federal Tax Considerations for Non-United States Holders of Common Stock

   142

Underwriting

   145

Legal Matters

   149

Experts

   149

Where You Can Find More Information

   149

Index to Consolidated Financial Statements

   F-1

 


You should rely only on the information contained in this prospectus or any related free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and are seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or any related free writing prospectus is accurate only as of its date, regardless of its time of delivery, or of any sale of the common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until and including                     , 2008 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside of the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. You should read the following summary together with the entire prospectus and our consolidated financial statements and the related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in the section entitled “Risk Factors.”

Our Company

Overview

We are a software-as-a-service company that provides mobile operators with an integrated end-to-end solution to deliver mobile data and Internet services to their subscribers. As advanced Internet and messaging services are increasingly becoming available on mobile devices, our solution enables operators to offer their subscribers a differentiated and compelling mobile data and Internet experience and consequently, helps our operator customers increase their average revenue per user. Our solution is deployed in the United States and certain international markets through the T-Mobile Sidekick family of mobile devices and in other international markets, including Australia and Europe, through mobile devices utilizing our “hiptop” brand.

The Danger solution integrates our hosted service delivery engine, or SDE, and our client software with Danger-enabled mobile devices manufactured by Sharp Corporation and Motorola, Inc., our original equipment manufacturer, or OEM, partners. Our technology platform enables fast subscriber access to data services, provides data compression and optimization, and provides users with the ability to run multiple applications simultaneously. Our solution offers real-time email, instant messaging and social networking services, and HTML web browsing, as well as premium applications, content and services developed internally and through our third-party developer program.

We leverage the expertise and scale of our mobile operator customers and our OEM partners to help manufacture, market and distribute Danger-enabled mobile devices to a broad consumer audience. By delivering the Danger solution as a service, we allow our mobile operator customers to leverage our infrastructure, third-party developer program and expertise in deploying an end-to-end mobile data service offering with minimal capital investment.

We receive recurring monthly service fees from our mobile operator customers for each subscriber that has access to our mobile data services, and we also generate revenues from the premium applications, content and services that we provide. From the introduction of our solution in October 2002 through September 30, 2007, the number of subscribers to our mobile data services has grown to approximately 923,000. Our total revenues have grown from $49.3 million in the year ended September 30, 2006 to $56.4 million in the year ended September 30, 2007, and our service revenues have grown from $38.9 million in the year ended September 30, 2006 to $50.6 million in the year ended September 30, 2007.

Industry Background

The mobile data services market is in a period of transition and growth fueled by consumer adoption, mobile operator competition, advances in mobile device technologies and the convergence of the traditional Internet and mobile communications industries. As a result of these trends, mobile devices are no longer predominantly used for a single function, such as voice, but are increasingly becoming an important platform for multiple forms of communication, access to information, consumption of media and content creation.

Our Solution

The Danger solution powers advanced data applications and services on Danger-enabled mobile devices, and features premium applications, content and services developed internally and through our third-party

 

 

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developer program. The Danger solution is designed to be easy for our mobile operator customers to deploy and manage, and to integrate seamlessly with their back-end systems. Key features of the Danger solution include the following:

Superior mobile data and Internet experience for consumers.    The Danger solution adds real-time email, popular instant messaging and social networking services, HTML web browsing, and easy access to premium applications, content and services to standard voice and personal information management features, and provides an intuitive user-interface to mimic a personal computer experience on a mobile device.

End-to-end integrated mobile data and Internet solution for mobile operators.    We offer mobile operators a single, tightly-integrated solution that enables them to capitalize on advances in mobile devices, network technologies and Internet services to offer consumers a more compelling mobile data and Internet experience.

Powerful technology platform enabling optimized delivery of enhanced mobile data services.    The Danger technology platform, which consists of our hosted SDE and client software for mobile devices, optimizes the delivery of enhanced mobile data services by compressing content, managing network and device communications, facilitating the real-time delivery of software upgrades and additional features, and synchronizing and storing data in a manner easily accessible by the consumer.

Close collaboration with mobile device manufacturers.    We collaborate closely with our OEM partners throughout the design and development process of Danger-enabled mobile devices, allowing us to better integrate our software into their devices and to optimize performance, minimize design flaws and accelerate device development.

Large and growing third-party developer program.    Our third-party developer program is designed to foster a steady and competitive pipeline of premium applications, content and services for distribution on our platform that we believe enhance the overall consumer experience.

Leveraged, software-as-a-service business model aligned with customer interests.    We deploy our solution through a software-as-a-service business model that enables us to leverage the reach and expertise of our mobile operator customers, OEM partners and third-party developers so we can scale rapidly while minimizing our investment.

Our Strategy

Our objective is to expand our position as a leading provider of mobile consumer data services and to increase the value of our solution for mobile operators worldwide. The principal elements of our strategy are to:

 

   

extend our leadership position by strengthening and broadening our solution;

 

   

pursue new mobile operator relationships and expand our distribution globally;

 

   

extend and deepen our OEM partnerships;

 

   

increase the number of subscribers using our mobile data services; and

 

   

expand the development of third-party applications, content and services for our platform.

Risks Related to Our Business

Our business and our ability to execute on our business strategy are subject to a number of risks that you should be aware of before making an investment decision. These risks are discussed more fully in the section entitled “Risk Factors” immediately following this prospectus summary. For example:

 

   

We have a history of net losses, may incur substantial net losses in the future and may not achieve profitability in the future. As of September 30, 2007, we had an accumulated deficit of $188.1 million.

 

 

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We are substantially dependent on T-Mobile USA, Inc., or T-Mobile USA, for our revenues and if we fail to maintain our relationship with T-Mobile USA or if T-Mobile USA reduces its expenditures for marketing our mobile data services, alters the data plan pricing under which it offers our mobile data services, or offers or promotes competing mobile data services in lieu of, or to a greater degree than, our mobile data services, our revenues would be materially and substantially reduced.

 

   

The mobile data services we provide run exclusively on Danger-enabled mobile devices that are manufactured and sold by our OEM partners. If our OEM partners delay the development of, elect not to develop or fail to ship mobile devices that run our mobile data services, our business, operating results and financial condition would be materially harmed.

 

   

We have a limited operating history in an emerging industry, which may make it difficult to evaluate our business. In particular, we have a limited history of generating revenues solely as a provider of mobile data services, and the future revenue potential of our business in the emerging mobile data services industry is still uncertain.

 

   

We operate in a highly competitive industry and we may not be able to compete effectively. In addition, recent developments in the mobile device and mobile services markets, such as the formation of the Google-led Open Handset Alliance, as well as the introduction of new wireless technologies and new entrants seeking to gain market share, could harm our competitive position.

 

   

Our success is strongly tied to the popularity of our mobile data services platform and Danger-enabled mobile devices with subscribers and is subject to risks associated with unpredictable and continuously changing customer tastes.

 

   

There is a limited number of mobile operator customers for our mobile data services solution, and we are substantially dependent on our mobile operator customers to market and distribute Danger-enabled mobile devices. If mobile operator customers do not introduce, market and promote Danger-enabled mobile devices, our mobile data services solution will not achieve widespread acceptance and we may not be able to grow as fast as anticipated, or at all.

 

   

We operate in an industry with extensive intellectual property litigation. Claims of infringement against us, our OEM partners or our mobile operator customers could cause our business, financial condition and results of operations to suffer.

Corporate Information

We were incorporated in December 1999, originally operated under the name “Danger Research,” and are headquartered in Palo Alto, California. Our principal executive offices are located at 3101 Park Blvd., Palo Alto, California 94306. Our telephone number is (650) 289-5000. Our website address is www.danger.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.

We own the trademarks “Danger®” and “hiptop®,” and our other trademarks or service marks appearing in this prospectus. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Market Data

This prospectus contains market data and industry forecasts that were obtained from industry publications. We have not independently verified any of this information.

 

 

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The Offering

 

Common stock offered by Danger

             shares

 

Common stock to be outstanding after this offering

             shares

 

Over-allotment option

             shares

 

Use of proceeds

We intend to use approximately $7.2 million of the net proceeds of this offering to repay in full the principal and accrued interest under, and other fees related to, certain of our outstanding credit facilities, based on amounts outstanding as of November 30, 2007. We expect to use the remaining net proceeds of this offering for working capital and other general corporate purposes, including to finance the expansion and operation of our data centers, to fund capital expenditures and to support our research and development and sales and marketing activities, or for acquisitions of or investments in companies, technologies, products or other assets. See “Use of Proceeds.”

 

Proposed NASDAQ Global Market symbol

DNGR

The number of shares of common stock outstanding immediately after this offering is based on              shares of common stock outstanding as of September 30, 2007. This number excludes, as of September 30, 2007:

 

   

42,861,396 shares of common stock issuable upon the exercise of options outstanding under our 2000 Stock Option/Stock Issuance Plan, or 2000 plan, having a weighted average exercise price of $0.35 per share;

 

   

6,525,841 shares of common stock issuable upon the exercise of outstanding warrants, having a weighted average exercise price of $0.83 per share, of which warrants to purchase 6,415,222 shares of common stock will terminate if not exercised prior to the closing of this offering;

 

   

2,056,194 shares of common stock reserved for future issuance under our 2000 plan; provided, however, that immediately upon the signing of the underwriting agreement for this offering, no further awards will be granted under our 2000 plan; and

 

   

an aggregate of up to              shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan and 2008 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under these benefit plans, both of which will become effective immediately upon the signing of the underwriting agreement for this offering.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

a  -for-  reverse stock split of our common stock and preferred stock to be effective prior to the closing of this offering;

 

   

the conversion of all of our outstanding shares of preferred stock into 168,133,864 shares of common stock upon the closing of this offering;

 

 

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the filing of our amended and restated certificate of incorporation upon the closing of this offering;

 

   

no exercise of the underwriters’ over-allotment option; and

 

   

the exercise of warrants that, by their terms, provide for automatic exercise on a cashless basis immediately prior to the closing of this offering, resulting in the net issuance of              shares of common stock, assuming a deemed market price equal to the assumed initial public offering price of $             per share, the mid-point of the price range reflected on the cover page of this prospectus. The actual number of shares of our common stock to be issued upon the automatic cashless exercise of these warrants depends on the deemed market price of our common stock immediately prior to the date of exercise. See “Capitalization” and “Description of Capital Stock—Warrants.”

 

 

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Summary Consolidated Financial Data

We present below our summary consolidated financial data. The summary of our consolidated statements of operations data for each of the years ended September 30, 2005, 2006 and 2007, and the summary of our consolidated balance sheet data as of September 30, 2007, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read this information together with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Selected Consolidated Financial Data.” Our historical results are not necessarily indicative of the results to be expected in any future period.

 

     Years Ended September 30,  
         2005             2006             2007      
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

      

Revenues:

      

Service

   $ 21,669     $ 38,895     $ 50,581  

Product

     15,121       10,416       5,832  
                        

Total revenues

     36,790       49,311       56,413  

Cost of revenues:

      

Cost of service revenues

     10,701       17,755       26,846  

Cost of product revenues

     16,220       9,130       5,276  
                        

Total cost of revenues

     26,921       26,885       32,122  
                        

Gross profit

     9,869       22,426       24,291  

Operating expenses:

      

Research and development

     11,317       17,746       22,497  

Sales and marketing

     5,211       5,723       7,020  

General and administrative

     3,610       6,999       6,541  
                        

Total operating expenses

     20,138       30,468       36,058  
                        

Loss from operations

     (10,269 )     (8,042 )     (11,767 )

Other income (expense), net

     359       107       (520 )
                        

Loss before provision for income taxes and cumulative effect of change in accounting principle

     (9,910 )     (7,935 )     (12,287 )

Provision for income taxes

           (54 )     (74 )
                        

Loss before cumulative effect of change in accounting principle

     (9,910 )     (7,989 )     (12,361 )

Cumulative effect of change in accounting principle

           1,421        
                        

Net loss

     (9,910 )     (6,568 )     (12,361 )

Accretion of redemption value on redeemable convertible preferred stock

     (12,309 )     (14,477 )     (15,710 )
                        

Net loss attributable to common stockholders

   $ (22,219 )   $ (21,045 )   $ (28,071 )
                        

Net loss per share attributable to common stockholders—basic and diluted:

      

Loss before cumulative effect of change in accounting principle

   $ (0.69 )   $ (0.53 )   $ (0.76 )

Cumulative effect of change in accounting principle

           0.09        

Accretion of redemption value on redeemable convertible preferred stock

     (0.85 )     (0.95 )     (0.96 )
                        

Net loss per share attributable to common stockholders—basic and diluted

   $ (1.54 )   $ (1.39 )   $ (1.72 )
                        

Weighted average common shares outstanding—basic and diluted

     14,396       15,142       16,353  
                        

Pro forma net loss per share—basic and diluted (unaudited)(1)

       $ (0.06 )
            

Pro forma weighted average common shares outstanding—basic and diluted (unaudited)(1)

         184,463  
            

(1) Please see Note 3 to our consolidated financial statements for an explanation of the method used to compute pro forma basic and diluted net loss per common share and the number of shares used in computing per share amounts.

 

 

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The following table presents our summary consolidated balance sheet data:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

   

the conversion of all of our outstanding shares of our preferred stock into 168,133,864 shares of common stock upon the closing of this offering;

 

   

the exercise of warrants that, by their terms, provide for automatic exercise on a cashless basis immediately prior to the closing of this offering, resulting in the net issuance of              shares of common stock, assuming a deemed market price equal to the assumed initial public offering price of $             per share, the mid-point of the price range reflected on the cover page of this prospectus; and

 

   

the reclassification of preferred stock warrant liability to common stock and additional paid-in capital upon the closing of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $             per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the repayment of amounts outstanding under an equipment lease line, which had an outstanding balance of approximately $3.8 million as of September 30, 2007.

 

     As of September 30, 2007
     Actual     Pro
Forma
   Pro Forma As
Adjusted(1)
     (In thousands)

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 12,979       

Working capital

     8,961       

Property and equipment, net

     17,358       

Total assets

     49,024       

Deferred revenues, including current portion

     10,630       

Installment payable, including current portion

     885       

Capital lease obligations, including current maturities

     4,501       

Preferred stock warrant liability

     12,180       

Redeemable convertible preferred stock

     197,623       

Common stock and additional paid-in capital

     1,689       

Total stockholders’ equity (deficit)

     (186,412 )     

 

(1) Each $             increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of shares in the number of              shares offered by us would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $             million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

 

 

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     Years Ended September 30,  
     2005     2006     2007  
     (In thousands)  

Other Financial and Operating Data (unaudited):

      

End of period subscribers(1)

     348       563       923  

Adjusted EBITDA(2)

   $ (6,961 )   $ (3,574 )   $ (5,700 )

 

(1) Represents the number of mobile operator customers’ subscribers using our mobile data services as of September 30, 2005, 2006 and 2007.
(2) We define adjusted EBITDA as net loss before the cumulative effect of change in accounting principle, the provision for income taxes, other income (expense), net, depreciation and amortization expense, and non-cash charges in relation to performance warrants and stock-based compensation expense. Adjusted EBITDA is not a measure of liquidity calculated in accordance with U.S. generally accepted accounting principles, or GAAP, and should be viewed as a supplement to—not a substitute for—our consolidated results of operations presented on the basis of GAAP. Adjusted EBITDA does not purport to represent cash flows provided by, or used in, operating activities as defined by GAAP. Our consolidated statements of cash flows present our cash flow activity in accordance with GAAP. Furthermore, adjusted EBITDA is not necessarily comparable to similarly-titled measures reported by other companies.

We believe that the presentation of adjusted EBITDA provides useful information to investors because it enhances their overall understanding of our operating performance by excluding potential differences caused by variations to our:

 

   

interest income and expense due to changes in our capital structure, including our credit facility drawdowns and historical sales of our redeemable convertible preferred stock;

 

   

tax positions, such as the impact of changes in effective tax rates and our ability to use net operating losses and their potential for expiration;

 

   

depreciation and amortization expense, including depreciation and amortization expense arising from variable and periodic capital investments to fund our operational infrastructure;

 

   

stock-based compensation expense, which is not necessarily comparable from year to year due to our adoption of SFAS No. 123(R), Share-Based Payment, or SFAS 123(R), effective October 1, 2006, and is a non-cash expense that is not a primary measure of our operations; and

 

   

unusual and/or non-recurring items, such as the cumulative effect of change in accounting principle and non-cash charges in relation to performance warrants.

We also believe that by reporting adjusted EBITDA, we provide insight and consistency in our financial reporting and present a basis for comparison of our business operations between current, past and future periods.

We understand that although adjusted EBITDA is frequently used by securities analysts, lenders and others in their evaluation of companies, adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of, our consolidated results of operations as reported under GAAP. Some of these limitations are:

 

   

adjusted EBITDA does not reflect our cash expenditures for, or future requirements for, capital expenditures or contractual commitments;

 

   

adjusted EBITDA does not reflect changes in our cash requirements;

 

   

adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments related to our credit facilities;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; and

 

 

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other companies in our industry may calculate adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

A reconciliation of adjusted EBITDA to net loss, the most directly comparable GAAP measure, for each of the years ended September 30, 2005, 2006 and 2007 is as follows (in thousands):

 

     Years Ended September 30,  
     2005     2006     2007  

Net loss

   $ (9,910 )   $ (6,568 )   $ (12,361 )

Cumulative effect of change in accounting principle

           (1,421 )      

Provision for income taxes

           54       74  

Other (income) expense, net

     (359 )     (107 )     520  

Depreciation and amortization expense

        2,546          3,604       5,713  

Non-cash charges in relation to performance warrants

     729       860        

Stock-based compensation expense

     33       4       354  
                        

Adjusted EBITDA

   $ (6,961 )   $ (3,574 )   $ (5,700 )
                        

 

 

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RISK FACTORS

You should carefully consider the risks described below, which we believe are the material risks of our business, our industry and this offering, before making an investment decision. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. In assessing these risks, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes.

Risks Related to Our Business

We have a history of net losses, may incur substantial net losses in the future and may not achieve profitability in the future.

We have incurred significant losses since inception, including net losses of $6.6 million and $12.4 million for the fiscal years ended September 30, 2006 and 2007, respectively. As of September 30, 2007, we had an accumulated deficit of $188.1 million. We expect to continue to increase our costs and expenses as we implement initiatives and take other actions designed to continue to grow our business, including, among other things:

 

   

further international expansion of our customer base and our operations;

 

   

development and marketing of our mobile data services;

 

   

expansion of our hosting capabilities and other service infrastructure;

 

   

increasing our internal resources to support our original equipment manufacturer, or OEM, partners’ development of new products; and

 

   

general and administrative expenses associated with the planned expansion and management of operations as a public company.

Additionally, we may encounter unforeseen difficulties, complications and other unknown factors that require additional expenditures. If our revenues do not increase to offset these expected increases in our costs and expenses, we will continue to incur significant losses and will not become profitable. Our revenue growth in recent periods should not be considered indicative of our future performance. In fact, in future periods, our revenues could decline and we may not be able to achieve profitability in the future.

We are substantially dependent on T-Mobile USA for our revenues.

Substantially all of our revenues to date have been derived from one customer, T-Mobile USA, Inc., or T-Mobile USA, and we expect to be dependent on T-Mobile USA for a substantial majority of our revenues for the foreseeable future. During the years ended September 30, 2005, 2006 and 2007, we derived approximately 92.1%, 88.5% and 92.0% of our revenues from T-Mobile USA, respectively. During the years ended September 30, 2006 and 2007, our mobile operator customers in the T-Mobile International group, which include T-Mobile USA, T-Mobile Deutschland GmbH, T-Mobile (UK) Limited and T-Mobile Austria GmbH, represented 90.9% and 94.5% of our revenues, respectively. Our current agreement with T-Mobile USA will expire on December 31, 2008. T-Mobile USA has the right, but not the obligation, to renew our current agreement for a single additional period of up to three years, unless we notify T-Mobile USA of our intent not to renew. In addition, T-Mobile USA has the right to terminate the agreement in the event of certain breaches by us, including the right to immediately terminate the agreement if we improperly disclose information about T-Mobile USA’s subscribers. Our failure to renew or renegotiate this agreement on favorable terms or at all, or to otherwise maintain our relationship with T-Mobile USA, would materially reduce our revenues and harm our business, operating results and financial condition. In addition, if T-Mobile USA reduces its expenditures for

 

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marketing our mobile data services, alters the data plan pricing under which it offers our mobile data services, or offers and promotes competing mobile data services, such as those as may be developed under the Open Handset Alliance discussed below, in lieu of, or to a greater degree than, our mobile data services, our revenues would be materially reduced and our business, operating results and financial condition would be materially and adversely affected.

We currently rely on two OEM partners to manufacture Danger-enabled mobile devices. If our OEM partners have difficulties manufacturing or shipping Danger-enabled mobile devices, our business will suffer.

The mobile data services we provide run exclusively on Danger-enabled mobile devices manufactured and sold by our OEM partners. If our OEM partners delay the development of, elect not to develop or fail to ship mobile devices that run our mobile data services, our business, operating results and financial condition would be materially harmed. Our OEM partners are not contractually obligated to ship Danger-enabled mobile devices that they develop.

In April 2004, we established our first OEM relationship with Sharp Corporation, or Sharp, under which Sharp manufactures and sells Danger-enabled mobile devices. From April 2004 until September 2006, Sharp was our only OEM partner. If Sharp delays or ceases manufacturing current Danger-enabled mobile devices and/or delays or discontinues its development of future Danger-enabled mobile devices, our business, operating results and financial condition would be materially harmed.

In September 2006, we established our second OEM relationship with Motorola, Inc., or Motorola. Motorola’s first Danger-enabled mobile device launched in November 2007 with T-Mobile USA. If this or any future Danger-enabled mobile devices manufactured by Motorola are not purchased in volume by mobile operators or are not adopted by consumers in the marketplace, our business, operating results and financial condition would be materially harmed.

We have a limited operating history in an emerging industry, which may make it difficult to evaluate our business.

We were incorporated in December 1999 and the first Danger-enabled mobile device was launched in October 2002. Under our initial mobile operator customer contracts, we were responsible for the manufacture, sale and after-market support of Danger-enabled mobile devices. In April 2004, we changed our business model by licensing the reference design for our Danger-enabled mobile device to Sharp and allowing Sharp to assume direct responsibility for the manufacture and sale of Danger-enabled mobile devices to our mobile operator customers. We expect our OEM partners to continue to be responsible for the future manufacture of Danger-enabled mobile devices that run our mobile data services. As a result, we have a limited history of generating revenues solely as a provider of a mobile data services solution, and the future revenue potential of our business in the emerging mobile data services industry is still uncertain. Any evaluation of our business and our prospects must be considered in light of our limited operating history and the risks and uncertainties encountered by companies in our stage of development. As a relatively early stage company in the emerging mobile data services industry, we face increased risks, uncertainties and difficulties related to:

 

   

retaining our current economic arrangements with mobile operator customers;

 

   

maintaining and expanding our current, and developing new, mobile operator relationships;

 

   

maintaining and expanding our current, and developing new, relationships with OEM partners;

 

   

developing new innovative and high-quality mobile data services that achieve significant market acceptance;

 

   

developing and upgrading our mobile data services platform to incorporate new technologies;

 

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maintaining a stable service infrastructure and reliable service delivery to our mobile operator customers;

 

   

expanding our service infrastructure to handle growth in subscribers and growth in application usage;

 

   

keeping subscriber turnover, or subscribers switching to other mobile data services, at acceptable levels;

 

   

executing our business and marketing strategies successfully;

 

   

responding to competitive developments; and

 

   

attracting, integrating and retaining qualified personnel.

Failure to achieve any of these objectives could harm our business. In addition, the costs to overcome these risks may be more expensive than planned, which could adversely impact our operating results and financial condition.

We operate in a highly competitive industry, and many of our competitors have significantly greater resources than we do.

The markets for development, distribution and sale of mobile devices and mobile data services are highly competitive. This competition could make it more difficult for us to sell our mobile data services solution, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share or expected market share, any of which would likely cause serious harm to our business, operating results and financial condition.

Many of our competitors have greater name recognition, larger customer bases and significantly greater financial, technical, marketing, public relations, sales, distribution and other resources than we do. Our primary competitors include integrated mobile data service providers such as Research in Motion Limited, which markets BlackBerry wireless devices, as well as smartphone software providers such as Microsoft Corporation and Symbian Software Limited. We also face competition from mobile device manufacturers and mobile virtual network operators, or MVNOs, that market devices and services that compete with Danger-enabled mobile devices and our mobile data services. These include OEMs such as Palm, Inc., Nokia Corporation, Samsung Electronics, Apple, Inc., Sony Ericsson Mobile Communications AB, LG Electronics and Kyocera Corporation, original design manufacturers such as HTC Corporation, Chi Mei Communication Systems, Inc. and Compal Electronics, Inc., and MVNOs such as Helio, Inc. In addition, consumers use or may use products and services from Internet companies, such as Google Inc., or Google, that may compete with Danger-enabled mobile devices and our mobile data services. We also compete broadly with a significant number of firms that market single elements of our solution, including mobile platform companies such as Motricity, Inc. and wireless messaging solutions companies such as Good Technology Inc. (owned by Motorola), Openwave Systems Inc., Seven Networks, Inc. and Visto Corporation.

Some of our competitors’ and our potential competitors’ advantages over us, either globally or in particular geographic markets, include the following:

 

   

significantly greater revenues and financial resources;

 

   

stronger brand and consumer recognition regionally or worldwide;

 

   

the capacity to leverage their marketing expenditures across a broader portfolio of mobile and non-mobile products;

 

   

access to core technology and intellectual property, including more extensive patent portfolios;

 

   

quicker pace of innovation;

 

   

stronger mobile operator relationships;

 

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greater resources to make acquisitions;

 

   

lower labor and development costs; and

 

   

broader global distribution and presence.

If we are unable to compete effectively or we are not as successful as our competitors in our target markets, our sales would decline, our margins would decline and we would lose market share, any of which would materially harm our business, operating results and financial condition.

New entrants and recent developments in the mobile device and mobile services markets may harm our competitive position.

The markets for development, distribution and sale of mobile devices and mobile data services are rapidly evolving. New entrants seeking to gain market share by introducing new technology and new products may make it more difficult for us to sell our mobile data services solution, and could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share or expected market share, any of which may significantly harm our business, operating results and financial condition.

For example, Google recently announced the formation of the Open Handset Alliance, a consortium of mobile operators, mobile handset manufacturers and software and mobile computing companies focused on developing an open source software platform for mobile devices. Google’s announcement indicated that more than thirty companies had joined the Open Handset Alliance and that mobile devices based on the open source software platform developed by the Open Handset Alliance would be available in the second half of 2008. T-Mobile USA, our largest customer, and Motorola, one of our two OEM partners, are both founding members of the Open Handset Alliance and have each publicly expressed an intention to leverage the software platform developed by the Open Handset Alliance. If the Open Handset Alliance’s software platform is widely adopted, we may not be able to attract new OEM partners to manufacture mobile devices based on our mobile data services platform, our existing OEM partners may cease developing mobile devices that operate our mobile data services platform, and mobile operator customers, including T-Mobile USA, may not purchase Danger-enabled mobile devices or our mobile data services solution. These developments would significantly harm our business, operating results and financial condition.

In addition, many mobile operators have also started to develop, internally or through managed third parties, their own mobile devices and mobile data services for distribution. Verizon Wireless also recently announced that it will open its network to wireless devices, software and applications that are not sold by Verizon Wireless in an effort to expand its customer base. As mobile operators invest in their own mobile devices and mobile data services and, like Verizon Wireless, choose to open their networks to a variety of devices, applications and services, they might refuse to distribute Danger-enabled mobile devices or some or all of our mobile data services. In addition, to the extent that we license our technology to enable additional device manufacturers to equip their mobile devices with our mobile data services platform, such action may impact demand for Danger-enabled mobile devices sold with our current OEM partners and mobile operator customers.

Our success is strongly tied to the popularity of our mobile data services platform and Danger-enabled mobile devices with subscribers and is subject to risks associated with unpredictable and continuously changing consumer tastes. If we fail to develop new mobile data services or our OEM partners fail to develop mobile devices that achieve market acceptance by consumers, sales of our mobile data services and our revenues would decline.

Our business depends on developing mobile data services and supporting the launch of Danger-enabled mobile devices manufactured by our OEM partners that mobile operators sell to subscribers. We must invest significant resources in research and development, engineering and software development to enhance our mobile data services platform and introduce new data services, and we must bring them to market in a timely manner.

 

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Even if our mobile data services and Danger-enabled mobile devices are successfully introduced and initially adopted, a subsequent shift in the requirements of our mobile operator customers, market dynamics or the preferences of consumers could cause a decline in the popularity of Danger-enabled mobile devices or our mobile data services. For example, to date, our mobile operator customers have marketed Danger-enabled mobile devices primarily to young adults, teenagers and socially-oriented consumers. We believe that the current popularity of social networking and instant messaging has contributed to sales of Danger-enabled mobile devices among this demographic. The tastes of these consumers are unpredictable and subject to rapid change, based in part on changing trends within the popular culture. In addition, these consumers are strongly influenced by the pricing structure and branding success of our mobile operator customers, over which we have no control. As the tastes and preferences of consumers change, we cannot assure you that our Danger-enabled mobile devices will continue to be popular with these consumers or whether our mobile operator customers will be able to structure product offerings that successfully market to them or other demographic groups. Competitors may also offer new mobile devices and services that have greater appeal to our core consumer demographic. If we and our mobile operator customers are not able to successfully market Danger-enabled mobile devices and our mobile data services to these and other consumers, our revenues would decline and our business, operating results and financial condition would be harmed.

Our success depends on significantly increasing the number of subscribers that use Danger-enabled mobile devices to access our mobile data services.

Our revenues are derived primarily from payments that we receive from our mobile operator customers for each subscriber that uses a Danger-enabled mobile device to access our mobile data services and, to a lesser extent, from revenue share arrangements associated with purchases of premium applications, content and services by subscribers. To date, only a relatively small number of consumers use Danger-enabled mobile devices compared to the total number of mobile device users. Our near-term operating and financial results depend heavily on achieving significant use by consumers of Danger-enabled mobile devices. Our operating and financial results also depend on achieving widespread deployment of our mobile data services by attracting and retaining additional mobile operator customers. The use of our mobile data services platform will depend on the quality of those services and subscriber expectations for those services, which may vary by market, as well as the level of subscriber turnover experienced by our mobile operator customers. If subscriber turnover increases more than we anticipate, our financial results could be adversely affected. For example, during the three month period ended September 30, 2007, subscriber turnover increased as compared to the prior three-month period, which we believe was due to the commercial introduction of Apple Inc.’s iPhone in June 2007.

If our current and future mobile operator customers are not able to successfully market Danger-enabled mobile devices and our mobile data services, if we are not successful in maintaining and expanding relationships with mobile operator customers, or if we are not able offer a compelling mobile data and Internet solution for consumers, we will not be able to increase the number of consumers that use our mobile data services, and our business prospects, operating results and financial condition will be materially adversely affected.

There is a limited number of mobile operator customers for our mobile data services solution.

Our success is highly dependent upon establishing and maintaining successful relationships with mobile operator customers. There is a limited number of mobile operator customers that may use our mobile data services solution on their networks due to a number of factors, including:

 

   

operator concentration within the wireless services industry;

 

   

incompatibility between our mobile data services platform and certain mobile operator networks;

 

   

contractual limitations in our agreements or the agreements of our OEM partners; and

 

   

unfavorable market conditions in certain geographies.

Many of our mobile operator customer agreements provide the mobile operator customer with rights of first refusal or exclusive rights to sell our mobile data services in a particular territory. For example, pursuant to our

 

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agreement with T-Mobile USA, T-Mobile USA has certain exclusivity rights and rights of first refusal for new mobile data services and mobile device designs owned or controlled by us. The exclusivity and first refusal rights in our agreements with our mobile operator customers may inhibit our ability to establish relationships with other mobile operator customers, and therefore may limit our growth in particular territories. In addition, our OEM partners’ agreements with our mobile operator customers may prevent our OEM partners from selling Danger-enabled mobile devices to other mobile operators, and, consequently, would limit us from establishing new relationships with mobile operator customers.

Our mobile data services platform is not currently compatible with the networks of certain mobile operators and may not support future network technologies implemented by mobile operators. For example, our technology does not currently support devices that are based on code division multiple access, or CDMA, technology which represents a significant portion of the total mobile device market in the United States and certain Asian countries, and we have no current plans to support such devices. Our inability to develop or deliver a mobile data services platform that supports the technologies of multiple mobile operators will limit the number of mobile operator customers that may employ our solution. In addition, we are limited as to which subscriber markets we can access through mobile operators as a result of inadequate infrastructure within certain territories, the existence of entrenched or localized mobile operators with which we have no relationship, and differences in consumer trends and public tastes in certain geographies. For example, in Europe, we believe that the popularity of text messaging among mobile device consumers has inhibited the adoption of other mobile data messaging services, such as instant messaging, which are widely used by subscribers of our mobile data services in the United States. If we are not able to establish or maintain relationships with mobile operators or obtain access to additional subscribers, our operating results and financial condition will be adversely impacted.

We are substantially dependent on our mobile operator customers to market and distribute Danger-enabled mobile devices and our mobile data services to subscribers and to generate our revenues.

We rely on our mobile operator customers for substantially all of the marketing of Danger-enabled mobile devices and our mobile data services to subscribers. None of our mobile operator customers are contractually obligated to introduce, market or promote mobile devices that run on our mobile data services platform. Moreover, our mobile operator customer agreements do not prevent our mobile operator customers from offering mobile data services supported by internally-developed technologies or technologies developed by one or more of our competitors. If mobile operator customers do not introduce, market and promote Danger-enabled mobile devices, our mobile data services solution will not achieve widespread acceptance and we may not be able to grow as fast as anticipated, or at all. In addition, our mobile operator customers are responsible for the structure and pricing of mobile data service plans that they offer, as well as marketing strategies and customer service programs. Any modifications to these pricing structures could affect the demand for Danger-enabled mobile devices by consumers.

Our success depends on a number of factors controlled by our mobile operator customers.

In addition to the marketing and promotion of our mobile data services by our mobile operator customers, our success depends on a number of factors that are largely controlled by our mobile operator customers, including:

 

   

the addition and retention by our mobile operator customers of subscribers to our mobile data services;

 

   

changes in the terms that our mobile operator customers may offer to subscribers for our mobile data services;

 

   

the achievement of branding success by our mobile operator customers and related consumer familiarity with Danger-enabled mobile devices;

 

   

the availability and quality of the wireless networks of our mobile operator customers, which we do not maintain;

 

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the extent and timeliness of testing of our mobile data services on the wireless networks of our mobile operator customers;

 

   

continued investments by our mobile operator customers in evolving network technologies, such as third-generation, or 3G, high bandwidth wireless network capability, and our ability to maintain compatibility with such evolving technology; and

 

   

consolidation involving our mobile operator customers.

Any or all of these factors could negatively impact our business, which could have a material adverse effect on our financial condition and results of operations.

If our mobile operator customers, particularly T-Mobile USA, change their branding strategies, our potential revenues could be limited and our business, operating results and financial condition could be harmed.

Danger-enabled mobile devices are most popularly recognized and sold in the United States and certain other geographies under the T-Mobile Sidekick brand. Deutsche Telekom, AG, the parent company of the group of T-Mobile mobile operators, owns the trademark “Sidekick” in the United States and in international territories, and T-Mobile mobile operators have spent a significant amount of money during the last several years promoting and marketing Danger-enabled mobile devices and our mobile data services under the Sidekick brand in the United States and internationally. As such, the marketplace and consumers popularly know Danger-enabled mobile devices and our mobile data services by the Sidekick trademark. Although the T-Mobile mobile operators have not marketed a competitor’s device or mobile data services under the Sidekick brand, we cannot guarantee how T-Mobile mobile operators will use the Sidekick trademark in the future. If T-Mobile mobile operators do not market future Danger-enabled mobile devices under the Sidekick brand or begin marketing competitors’ products under the Sidekick brand, our business, operating results and financial condition could be harmed.

We rely on network infrastructures provided by our mobile operator customers for the delivery of our mobile data services to consumers.

Our future success will depend on the availability and quality of our mobile operator customers’ wireless networks in the United States and internationally to run our mobile data services and to provide us access to their subscribers. This includes deployment and maintenance of reliable 3G networks with the speed, data capacity and security necessary to provide reliable wireless communications services. We do not establish or maintain these wireless networks and have no control over interruptions or failures in the deployment and maintenance by mobile operators of their wireless network infrastructure. In addition, these wireless network infrastructures may be unable to support the demands placed on them if the number of subscribers continues to increase, or if existing or future subscribers increase their bandwidth requirements. Market acceptance of our mobile data services platform will depend in part on the quality of these wireless networks and the ability of our mobile operator customers to effectively manage their subscribers’ expectations. Wireless communications have experienced a variety of outages and other delays as a result of infrastructure and equipment failures, and could face outages and delays in the future. These outages and delays could reduce the level of wireless communications usage as well as our ability to provide our mobile data services successfully. In addition, changes by a mobile operator to network infrastructure may interfere with the delivery of our mobile data services and may cause subscribers to lose functionality in Danger-enabled mobile devices that they have already purchased. Any of this could harm our business, operating results and financial condition.

The failure of our OEM partners to keep pace with technological and market developments in mobile device design may negatively affect the demand for Danger-enabled mobile devices and our mobile data services.

Our future success will depend on our OEM partners’ ability to manufacture Danger-enabled mobile devices that meet the technological and design demands of mobile operator customers and their subscribers. Our OEM

 

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partners will have to invest in developing mobile devices that are compatible with the advanced network technology, such as 3G technology, that mobile network operators are deploying to increase network capacity and speed for mobile data delivery. For example, we are currently planning to work with Sharp and Motorola to develop Danger-enabled mobile devices that are compatible with 3G technologies from Qualcomm Corporation. If our current or future OEM partners fail to adopt 3G technology or other advanced technologies, future sales of Danger-enabled mobile devices may suffer. In addition, if our OEM partners adopt 3G technology that is incompatible with our mobile data services platform development, there will be fewer Danger-enabled mobile devices available to consumers and sales of our mobile data services will suffer.

Successful sales of Danger-enabled mobile devices also depend on our OEM partners keeping pace with changing consumer preferences for mobile devices. If our OEM partners do not develop Danger-enabled mobile devices with the design attributes attractive to consumers, such as thin form factors, high-resolution screens and attractive plastics and colors, sales of Danger-enabled mobile devices may decline and, consequently, our business will be harmed.

We have experienced, and may in the future experience, delays or interruptions in the manufacturing and delivery of Danger-enabled mobile devices by our OEM partners, that may harm our business.

Our OEM partners’ ability to timely manufacture and ship Danger-enabled mobile devices in large quantities and at competitive prices depends on a variety of factors. Our OEM partners may experience design or development delays due to hardware or software defects, problems with their contract manufacturers, difficulties in obtaining required industry or regulatory certifications, or difficulties in passing mobile operator handset qualification tests. Any such delays would adversely impact the timing of Danger-enabled mobile device launches and would consequently negatively impact our future revenues. For example, in November 2007, following the initial launch of the Sidekick Slide, T-Mobile suspended sales and removed devices from retail store shelves due to reports that some devices were irregularly powering off. After diagnosing the problem, our OEM partner’s contract manufacturer implemented a fix at the factory and our OEM partner repaired the defective units that had already shipped. The defect resulted in approximately a three week delay in sales of Sidekick Slide devices. In addition, our OEM partners rely on a limited number of sources for the timely supply of functional components, such as displays, semiconductors, batteries, printed circuit boards, plastics, tooling equipment and flash memory. Functional component supply shortages or delays could prevent or delay the manufacture and shipment of Danger-enabled mobile devices by our OEM partners. For example, in 2005, a fire at a component supplier’s factory limited the supply of camera modules for Sharp’s Danger-enabled mobile devices, resulting in an inventory shortage and production and shipment delays until an alternative source was located. Cost increases in such components could also result in our OEM partners refusing to commercially offer or continue to support Danger-enabled mobile devices. In addition, contractual restrictions or claims for infringement of intellectual property rights may restrict our OEM partners’ use of certain components. These restrictions or claims may require our OEM partners to utilize alternative components or obtain additional licenses or technologies, and may impede our OEM partners’ ability to manufacture and deliver Danger-enabled mobile devices on a timely or cost-effective basis. Any of these occurrences could ultimately have a material adverse effect on our business, operating results and financial condition.

Changes to the economics of our relationships with our OEM partners could have a material adverse impact on our business, operating results and financial condition.

We license our client software to our OEM partners on a royalty-free basis. However, our client software includes certain technology or intellectual property that we license from third parties for which royalties are due on the sale of Danger-enabled mobile devices. Such third parties include, but are not limited to:

 

   

Sun Microsystems, Inc., for the use of its Java specifications;

 

   

owners of intellectual property related to the global system for mobile communication, or GSM standard, and other wireless standards, such as Nokia Corporation, Telefonaktiebolaget LM Ericsson and Interdigital, Inc.;

 

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owners of intellectual property relating to digital image compression and transmission, such as Eastman Kodak Company; and

 

   

owners of intellectual property relating to compression and transmission of digital music files, such as Thomson S.A.

We anticipate that the addition of new features and functionality to our mobile data services and Danger-enabled mobile devices will require us to obtain licenses that involve the payment of additional per unit royalties to third parties. Under our agreements with our OEM partners, our OEM partners agree to either reimburse us for any such per unit royalties that we may be required to pay, or agree to pay these royalties directly to the rights holders. If, in the future, our OEM partners do not agree to pay these third party royalties or do not agree to reimburse us for our royalty payments, we would incur increased expenses, which would have a material adverse impact on our business, operating results and financial condition. In addition to these technologies for which we obtain licenses, if third parties claim that we, our OEM partners or our mobile operator customers infringe upon their intellectual property rights, we may be required to make significant payments or obtain additional licenses, which may not be available on terms acceptable to us, or at all.

If our third-party developers cease development of new premium applications, content and services for us or the mix of premium applications, content and services that we offer to consumers changes, our business may be adversely impacted.

We rely on third-party developers to develop a majority of the games, ringtones and other premium applications, content and services that our mobile operator customers sell to subscribers that access our mobile data services. During the fiscal years ended September 30, 2006 and 2007, sales of premium applications, content and services represented 7.6% and 8.3% of our service revenues, respectively. Because we rely on third-party developers to develop the majority of the premium applications, content and services that we offer, we are subject to the following risks:

 

   

key developers that worked with us in the past may choose not to work with us in the future;

 

   

third-party developers currently under contract may try to renegotiate our agreements with them on terms less favorable to us;

 

   

larger third-party developers with popular offerings may not do business with us because the subscriber base at our existing mobile operator customers is small relative to other opportunities;

 

   

the content that is produced for us may not be popular with our customers; and

 

   

our third-party developers may be unable or unwilling to allocate sufficient resources to complete premium applications, content and services for our platform in a timely or satisfactory manner, if at all.

If our developers terminate their relationships with us or negotiate agreements with terms less favorable to us, we may have to reduce the number of premium applications, content and services that we intend to introduce, delay the introduction of some premium applications, content and services or increase our internal development staff, which would be a time-consuming and potentially costly process, and, as a result, our business, operating results and financial condition could be harmed.

Some of our mobile operator customers source their own premium applications, content and services and we have lower margins on sales of these mobile operator customers’ premium applications, content and services. Our agreements with certain mobile operator customers also allow the mobile operator customer to control the mix of premium applications, content and services that are offered to subscribers. If the mix of premium applications, content and services sold to subscribers changes and our margins are reduced, our business, operating results and financial condition could be harmed.

 

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We may not be able to enhance our mobile data services platform to keep pace with technological and market developments, or develop new mobile data services in a timely manner or at competitive prices.

The market for mobile data services is emerging and is characterized by rapid technological change, evolving industry standards, frequent new product introductions and short product life cycles. To keep pace with technological developments, satisfy increasing customer requirements and achieve product acceptance, our future success depends upon our ability to enhance our current mobile data services platform and to continue to develop and introduce new mobile data services offering compatibility, enhanced performance features and functionality on a timely basis at competitive prices. For example, our mobile data services platform does not currently support video services or Wi-Fi interoperability, and our failure to address these or other technological advances may limit our growth and harm our competitive position. In addition, our mobile data services platform is not compatible with the technologies of many mobile operators, such as CDMA networks that are operated by certain mobile operators, such as Sprint Nextel Corporation and Verizon Wireless in the United States, and may not support future technologies developed by mobile operators or OEMs. Our inability, for technological or other reasons, to enhance, develop, introduce or deliver compelling mobile data services in a timely manner, or at all, in response to changing market conditions, technologies or consumer expectations could have a material adverse effect on our operating results or could result in our mobile data services platform becoming obsolete. Our ability to compete successfully will depend in large measure on our ability to maintain a technically skilled development and engineering staff and to adapt to technological changes and advances in the industry, including providing for the continued compatibility of our mobile data services platform with evolving industry standards and protocols and competitive network operating environments.

Development and delivery schedules for mobile data services are difficult to predict. If new releases of our mobile data services are delayed, mobile operators may curtail their efforts to market and promote Danger-enabled mobile devices and subscribers may switch to competing products, any of which would result in a delay or loss of revenues and could seriously harm our business. In addition, there cannot be any assurance that the technologies and related mobile data services that we develop will be brought to market by mobile operators as quickly as anticipated or that they will achieve broad acceptance among mobile operator customers or consumers.

We anticipate that the addition of certain advanced features and functionality to our current mobile data services platform will require us to obtain licenses from third parties that may not be available on commercially favorable terms, or at all.

We may not be able to upgrade our mobile data services platform to support certain advanced features and functionality, such as mobile video services or Wi-Fi, without obtaining technology licenses from third parties. Obtaining these licenses may be costly and may delay the introduction of such features and functionality, and these licenses may not be available on commercially favorable terms, or at all. The inability to offer advanced features or functionality, or a delay in our ability to upgrade our mobile data services platform, may adversely affect consumer demand for our mobile data services and, consequently, harm our business.

Our lengthy sales cycle makes it difficult for us to predict when we will generate revenues from new mobile operator customers.

We have a lengthy and complex sales process. The integration and testing of our mobile data services platform with our prospective mobile operator customers requires a substantial amount of time before launching our mobile data services with that mobile operator customer. Our sales cycles are typically longer and more problematic in new markets. Even after an initial decision to launch our mobile data services is made, the integration of our mobile data services platform with a mobile operator customer’s network and billing systems requires several months before commercial deployment. Because of this lengthy cycle, we may experience delays from the time we begin the sales process and incur increased costs and expenses to obtain a new mobile operator customer and integrate our mobile data services platform until the time we generate revenues from such mobile operator customer. These delays may make it difficult to predict when we will generate revenues from new customers.

 

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We operate in an industry with extensive intellectual property litigation. Claims of infringement against us, our OEM partners or our mobile operator customers may cause our business, financial condition and operating results to suffer.

Our commercial success depends in part upon us, our OEM partners and our customers not infringing intellectual property rights owned by others and being able to resolve claims of intellectual property infringement without major financial expenditures. We operate in an industry with extensive intellectual property litigation. Many participants that own, or claim to own, intellectual property aggressively assert their rights, and our mobile operator customers and our OEM partners, whom we indemnify for intellectual property infringement claims related to our solution, are often targets of such assertions. We cannot determine with certainty whether any existing or future third-party intellectual property rights would require us to alter our technologies, obtain licenses or cease certain activities.

We have received, and may in the future continue to receive, claims from third parties asserting infringement and other related claims. For instance, in 2005, a patent holding company filed lawsuits alleging patent infringement and trade secret misappropriation against us, T-Mobile USA, Sharp and an affiliate of Sharp. We incurred expense of approximately $2.7 million in defending ourselves, T-Mobile and Sharp before settling the litigation in November 2006. Future litigation may be necessary to defend ourselves, our mobile operator customers and our OEM partners by determining the scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights. Some of our competitors may have substantially greater resources than we do and may be able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us, our mobile operator customers or our OEM partners. Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and could:

 

   

adversely affect our relationships with our current or future mobile operator customers, their subscribers or our OEM partners;

 

   

cause delays or stoppages in the shipment of Danger-enabled mobile devices, or cause us to modify or suspend the provision of our mobile data services;

 

   

divert management’s attention and resources;

 

   

subject us to significant liabilities;

 

   

require us to enter into royalty or licensing agreements on unfavorable terms; and

 

   

require us to cease certain activities.

In addition to liability for monetary damages against us or, in certain circumstances, our OEM partners and mobile operator customers, we may be prohibited from developing, commercializing or continuing to provide certain of our mobile data services unless we obtain licenses from the holders of the patents or other intellectual property rights. We cannot assure you that we will be able to obtain any such licenses on commercially favorable terms, or at all. If we do not obtain such licenses, our business, operating results and financial condition could be materially adversely affected and we could, for example, be required to cease offering or materially alter our mobile data services in some markets.

In addition, our OEM partners and mobile operator customers may be subject to claims from third parties asserting that they are infringing patents or other intellectual property rights of these third parties. These claims may require our OEM partners or mobile operator customers to utilize alternative components, obtain additional licenses or cease the use of certain technologies, which can be time-consuming and expensive. For example, the U.S. International Trade Commission recently ruled that Qualcomm infringed Broadcom Corporation’s patent rights and issued an import ban on certain mobile devices containing Qualcomm’s technology. Broadcom also initiated two suits against Qualcomm alleging, among other things, patent infringement and antitrust violations.

 

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We are planning to work with our OEM partners to develop future Danger-enabled mobile devices that utilize chipsets sold by Qualcomm. If the import ban is not stayed or lifted, if these suits are resolved unfavorably for Qualcomm or if our OEM partners are otherwise unable to utilize chips sold by Qualcomm, the manufacture and delivery of Danger-enabled mobile devices by our OEM partners may be delayed or discontinued, and our business may be harmed.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement, damages caused by defective software and other losses.

Our agreements with our mobile operator customers and OEM partners include indemnification provisions. In these provisions, we agree to indemnify them for losses suffered or incurred in connection with our client software and mobile data services, including as a result of intellectual property infringement, damages caused by defects and damages caused by viruses, worms and other malicious software. The term of these indemnity provisions is generally perpetual after execution of the corresponding agreement, and the maximum potential amount of future payments we could be required to make under these indemnification provisions is generally unlimited.

We have received, and expect to continue to receive, demands for indemnification under these agreements, which demands can be very expensive to settle or defend, and we have in the past contributed to settlement amounts and incurred substantial legal fees in connection with certain of these indemnity demands. A number of these indemnity demands, including demands from T-Mobile USA and Sharp, relate to pending litigation and remain outstanding and unresolved as of the date of this prospectus. For example, in October 2007, T-Mobile USA demanded that we indemnify and defend T-Mobile USA against a lawsuit brought by NTP, Inc., or NTP, alleging that T-Mobile USA is infringing certain patents held by NTP relating to the use of wireless communications in electronic mail systems and seeking unspecified damages. NTP is a patent holding company that sued Research in Motion Limited, which markets BlackBerry wireless devices, for patent infringement in 2001, and settled such litigation with Research in Motion Limited in 2006 for $612.5 million. Although NTP’s lawsuit against T-Mobile USA was recently stayed pending the U.S. Patent and Trademark Office’s ongoing review of NTP’s patents, the stay could be lifted at any time. As of the date of this prospectus, we have not accepted or rejected T-Mobile USA’s indemnity demand related to this litigation. Large future indemnity payments and associated legal fees and expenses, including potential indemnity payments and legal fees and expenses relating to T-Mobile USA’s indemnity demand with respect to the NTP lawsuit, could materially harm our business, operating results and financial condition.

Although we have not agreed to defend or indemnify our mobile operator customers or OEM partners for any outstanding and unresolved indemnity demands, we may in the future agree to defend and indemnify them in connection with these demands, irrespective of whether we believe that we have an obligation to indemnify them or whether we believe that our solution infringes the asserted intellectual property rights. Alternatively, we may reject certain of our mobile operator customers’ or OEM partners’ indemnity demands, including outstanding demands from T-Mobile USA or Sharp, which rejections may lead to disputes with our mobile operator customers or OEM partners and may negatively impact our relationships with them or result in litigation against us. Our mobile operator customers or OEM partners may also claim that any rejection of their indemnity demands constitutes a material breach of our agreements with them, allowing them to terminate such agreements. If, as a result of indemnity demands, we make substantial payments, our relationships with our mobile operator customers or OEM partners is negatively impacted, or if any of our mobile operator customer or OEM partner agreements is terminated, our business, financial condition and operational results could be materially adversely affected.

If we are unable to protect our intellectual property and proprietary rights, our competitive position and our business could be harmed.

We rely primarily on a combination of patent laws, trademark laws, copyright laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary technology. As of September 30,

 

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2007, we held 34 U.S. patents and eight foreign patents expiring between August 16, 2021 and April 20, 2024, and have 40 U.S. and 47 pending foreign patent applications. We also have filed corresponding foreign applications pursuant to the Patent Cooperation Treaty for many of our patents and patent applications. However, our issued patents and any future patents that may issue may not survive a legal challenge to their scope, validity or enforceability, or provide significant protection for us. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. In addition, patents may not issue from any of our current or any future applications.

Monitoring unauthorized use of our intellectual property is difficult and costly. The steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Any failure by us to meaningfully protect our intellectual property could result in competitors offering products that incorporate our most technologically advanced features, which could seriously reduce demand for Danger-enabled mobile devices and our mobile data services. In addition, we may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us.

Our financial results could vary significantly from quarter to quarter and are difficult to predict.

Our revenues and operating results could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition, we may not be able to predict our future revenues or results of operations. In the event that we enter into an agreement, or amend an existing agreement, with a particular mobile operator customer that requires us to provide specified deliverables, the generally accepted accounting principles governing our recognition of revenue and expenses may require us to defer all revenues and certain direct and incremental expenses related to that particular mobile operator customer until such specified deliverable is provided. This could result in a deferral of a substantial portion of our revenues in future periods as well as significant variations in our results from quarter to quarter, and therefore makes it very difficult for us to adequately forecast our revenues and expenses in future periods. In addition, revenues and expenses related to our premium applications, content and services and non-recurring engineering fees are required to be amortized over the longer of the applicable mobile operator contract or the expected period of performance under the applicable mobile operator contract. As a result, our amortization of these revenues, and, consequently, our margins, may change materially from quarter to quarter, particularly in connection with any extension to an applicable mobile operator customer contract. Any significant variations in our results of operations as a result of these accounting policies could adversely impact the price of our common stock.

We base our current and future expense levels on our internal operating plans and sales forecasts, and our operating costs are to a large extent fixed. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect our financial results for a particular quarter. Our relationship with T-Mobile USA represents a substantial majority of our revenues and will influence our net income or loss in any quarter, as will our relationships with other mobile operator customers. We may also incur significant or unanticipated expenses if we need to acquire licenses to third party technology and/or develop new mobile data services based on new and emerging technologies. For instance, we recently licensed technology from Qualcomm Corporation at a significant cost for the development of our mobile data services platform to support higher speed, 3G mobile devices. These engineering development efforts may take longer than anticipated, which could delay or prevent the commercial introduction of new or enhanced Danger-enabled mobile devices or mobile data services, which would have an adverse impact on our business and operating results.

 

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In addition to other risk factors discussed above, factors that may contribute to the limited visibility and variability of our quarterly results include:

 

   

the number of and timing of release of new Danger-enabled mobile devices developed by our OEM partners;

 

   

the number of and timing of release of new mobile devices developed by our competitors or competitors of our OEM partners;

 

   

uncertain and limited visibility into the volume of Danger-enabled mobile device orders by our mobile operator customers;

 

   

our lengthy and complex sales process;

 

   

the efforts of our mobile operator customers in marketing Danger-enabled mobile devices, including service plans and promotions, sales channels supported, sales compensation, device subsidies, device positioning and direct marketing programs;

 

   

the rate of subscriber turnover from Danger-enabled mobile devices to competitive products;

 

   

the renegotiation or expiration of existing mobile operator customer agreements;

 

   

the impact of outages of our mobile data services, or of our mobile operator customers’ network services;

 

   

changes in pricing policies by us, our competitors or our mobile operator customers;

 

   

changes in the mix of premium applications, content and services that we provide or our mobile operator customers provide, which have varying gross margins;

 

   

fluctuations in the size and rate of growth of overall consumer demand for mobile devices and related content;

 

   

our success in entering new geographic markets;

 

   

future changes in accounting rules governing recognition of revenue;

 

   

the seasonality of our industry; and

 

   

general economic and political conditions in the countries where we operate or Danger-enabled mobile devices are used.

As a result of these and other factors, our operating results may vary and not meet expectations. If we fail to meet market expectations, the trading price of our common stock would decrease.

We may be required to reduce our prices to compete successfully, or we may incur increased or unexpected costs, which could have a material adverse effect on our operating results and financial condition.

The intensely competitive market in which we conduct our business may require us to reduce our prices, which could negatively impact our operating results. For example, competition could result in price reductions due to competing solutions that are provided at little or no cost as part of a bundled offering or competitors offering deep discounts on mobile data services in an effort to recapture or gain market share or to sell other mobile data services. In addition, rates charged by our mobile operator customers for mobile data services could decline significantly, resulting in pricing pressures that negatively impact our operating results. Moreover, we may experience cost increases or unexpected costs which may also negatively impact our operating results, including increased or unexpected costs related to:

 

   

the implementation of new data centers and expansion of existing data centers, as well as increased data center rent, hosting and bandwidth costs;

 

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the replacement of aging equipment;

 

   

acquiring key technologies to support or expand our mobile data services solution;

 

   

changes in the mix of premium applications, content and services that we provide or our mobile operator customers provide, which have varying gross margins; and

 

   

increases in our software warranty costs and indemnification obligations associated with our mobile operator customer and OEM partner agreements.

Network failures, disruptions or capacity constraints in our third-party data center facilities or in our hosted service delivery engine, or SDE, could affect the performance of our mobile data services platform and harm our reputation and our revenues.

Our mobile data services are provided through a combination of our hosted SDE and the wireless networks of our mobile operator customers. Our operations rely to a significant degree on the efficient and uninterrupted operation of our hosted SDE. Our hosted SDE is currently located in third-party data center facilities located in San Jose, California and is now operated by Verizon Business Network Services, Inc., or Verizon, following its acquisition of MCI Communications Services. In October 2007, we entered into an agreement with Digital Realty Trust, or DRT, for additional hosted data center facilities located in Phoenix, Arizona to accommodate the anticipated growth of our mobile data services. Unlike our Verizon facilities, our hosting facilities with DRT are not full service hosting facilities. Therefore, we must separately contract for and manage the supply of internet connectivity, power, equipment installation and on site support for the DRT facilities and we have not previously been responsible for managing these services. We are planning to complete the set up of our DRT facilities to support their commercial operation of our SDE by June 1, 2008. Depending on the rate of growth of our mobile data services, if our DRT facilities are not timely completed and operational, we may experience SDE capacity issues, which could lead to network failures and disruptions.

Our hosted SDE and data center facilities are potentially vulnerable to damage or interruption from a variety of sources including by fire, flood, earthquake, power loss, telecommunications or computer systems failure, human error, terrorist acts or other events. In addition, under the terms of our service agreement with Verizon, Verizon may cease providing service to us if Verizon determines that its personnel or facilities are at risk of harm or damage. We have not yet completed a business continuity plan and there can be no assurance that the measures implemented by us to date, or measures implemented by us in the future, to manage risks related to network failures or disruptions in our SDE or data center facilities will be adequate, or that the redundancies built into our SDE will work as planned in the event of network failures or other disruptions. In particular, if we experience damage or interruptions to our data center facilities in San Jose, California, or were unable to build out and commence operations in our new data center facilities in Phoenix, Arizona, our ability to provide efficient and uninterrupted operation of our SDE would be significantly impaired.

We could also experience failures or interruptions of our SDE, or other problems in connection with our operations, as a result of:

 

   

damage to or failure of our computer software or hardware or our connections and outsourced service arrangements with third parties;

 

   

errors in the processing of data by our SDE;

 

   

computer viruses or software defects;

 

   

physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events; or

 

   

errors by our employees or third-party service providers.

Poor performance in or disruptions of our mobile data services platform could harm our reputation, delay market acceptance of our services and subject us to liabilities. We enter into service level agreements with our

 

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customers that specify the events constituting “down time” and the actions that we will take to rectify or respond to such down time, including in certain cases, the payment of financial penalties. For instance, in March 2005, we experienced a multiple day service outage for which we were required to provide significant financial credits to our mobile operator customers under the terms of our service level agreements. Failure to comply with service level agreements in the future may have a material adverse effect on our business, operating results and financial condition.

In addition, if our consumer base grows, additional strain will be placed on our technology systems and networks, which may increase the risk of a network disruption. Any outage in a network or system, or other unanticipated problem that leads to an interruption or disruption of our mobile data services could have a material adverse effect on our operations, sales and operating results.

If our mobile data services platform does not scale as anticipated, or we are unable to grow data center capacity as needed, our business will be harmed.

Despite frequent testing of the scalability of our mobile data services platform in a test environment, the ability of our mobile data services platform to scale to support a substantial increase in the number of users in an actual commercial environment is unproven. If our mobile data services platform does not efficiently and effectively scale to support and manage a substantial increase in the number of users while maintaining a high level of performance, our business will be seriously harmed. In addition if we are unable to secure data center space with appropriate power, cooling and bandwidth capacity, we may not be able to efficiently and effectively scale our business to manage the addition of new mobile operator customers, increases in subscriber growth or increases in data traffic.

If the use of our mobile data services solution results in more mobile data traffic than anticipated, our mobile operator customers may change the pricing and other terms by which they offer our mobile data services, which could result in increased subscriber turnover and damage to our business.

T-Mobile USA and other of our mobile operator customers sell Danger-enabled mobile devices with an unlimited data service plan. Offering unlimited data service plans is profitable for our mobile operator customers as long as average subscriber data usage remains below expected levels. If average subscriber usage of our mobile data services exceeds the levels anticipated by our mobile operator customers, or if we begin to offer new mobile data services, such as video streaming services, that cause average subscriber data usage to increase, our mobile operator customers may decide to raise prices, impose usage caps or discontinue unlimited data service plans. If imposed, these pricing changes or usage restrictions could make our mobile data services solution less attractive to consumers and could result in current subscribers abandoning our mobile data services for other products and services. If subscriber turnover increases, the number of consumers using Danger-enabled mobile devices and our revenues would decrease, and our business would be harmed.

Defects in our mobile data services can be difficult to detect. If defects occur, they could have a material adverse effect on our business.

Our mobile data services are highly complex and may contain design defects that are difficult to detect and correct. In the past, we have experienced delays in new releases of Danger-enabled mobile devices and of our mobile data services due to defects, and we may experience similar delays in the future. In addition, we license software and services from third parties that we incorporate into our mobile data services platform, and we cannot control the business and quality standards of these third parties. Despite testing by us, defects and errors may still be found in our current mobile data services platform or in new mobile data service releases, potentially resulting in delayed or lost revenues, loss of customers due to poor user experience, failure to achieve market acceptance, diversion of development resources and harm to our reputation or brand.

The support of our mobile data services entails the risk of product liability or warranty claims based on mobile device returns and repairs due to defects in our client software or mobile data services. In addition, the

 

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failure of our mobile data services to perform to customer expectations could give rise to service level agreement claims and credits towards fees owed to us. The consequences of such defects, failures and claims could have a material adverse effect on our business.

Products and services that incorporate our mobile data services platform may contain errors or defects, or may be of low quality and break, which could have an adverse effect on our business.

We cannot control the business and quality standards of our mobile operator customers, OEM partners and other technology partners, and we are unable to control the distribution of mobile devices that run our mobile data services. We cannot guarantee that the products and services provided by our OEM partners or mobile operator customers are free from errors or defects. If errors or defects occur in products and services that use our mobile data services platform, it could result in the rejection of these products and services by mobile operators or consumers, damage to our reputation, increased customer service and support costs, warranty claims, lost revenues and diverted development resources, any of which could adversely affect our business and results of operations. For example, in November 2007, T-Mobile USA suspended sales of the Sidekick Slide device and removed devices from retail store shelves due to reports that some Sidekick Slide devices were irregularly powering off. Following an approximately three week delay, the issues were remedied and sales of Sidekick Slide devices resumed. Also, in 2003, our contract manufacturer’s improper assembly process led to a high rate of device screen failures and nearly caused an interruption in the supply of Danger-enabled mobile devices. We were required to implement manufacturing process changes and repair returned devices to remedy the defect without a supply interruption. In addition, where consumers perceive that our mobile operator customers do not have adequate network coverage, sales of Danger-enabled mobile devices may decrease or consumers that purchase our mobile data services may attribute network coverage issues to our mobile data services.

Software and components that we incorporate into our mobile data services may contain errors or defects, which could have an adverse effect on our business.

We cannot control the quality standards of our suppliers of components that we incorporate into our mobile data services. Although we test certain software before incorporating it into our mobile data services, we cannot guarantee that all of the third-party technology that we incorporate will not contain errors, defects or bugs. If errors or defects occur in products and services that we utilize in our mobile data services platform, it could result in the rejection of these products and services by our OEM partners, our mobile operator customers or their subscribers, damage to our reputation, increased customer service and support costs, warranty claims, lost revenues and diverted development resources. For example, complicated wireless transmission radio software, or radio firmware, from third parties is included in Danger-enabled mobile devices. In the past, we have encountered radio firmware defects that have affected the user experience for our mobile data services. In one case, the radio firmware defect caused the software on Danger-enabled mobile devices to freeze and become unusable. To date, our radio firmware vendor has been able to fix these defects or we have been able to modify our client software to reduce the negative effect caused by these defects. However, we cannot guarantee that we will be successful in remedying any future radio firmware defects. In addition, if a component supplier fails to meet one of our product quality standards, the development of our mobile data services may be delayed. Any of these occurrences could adversely affect our business and results of operations.

The occurrence or perception of a security breach or an inappropriate disclosure of confidential information could seriously harm our business.

Our mobile data services include the transmission and storage of personal, private and confidential information. If there is a security breach or if there is an inappropriate disclosure of any of these types of information, we could be exposed to litigation and possible liability. Even if we were not held liable for such event, a security breach or inappropriate disclosure of personal, private or confidential information could harm our reputation and our relationships with current and potential customers. Even the perception of a security risk could inhibit market acceptance of Danger-enabled mobile devices and our mobile data services. For example, in

 

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February 2005, the personal information contained on Paris Hilton’s Sidekick device was disclosed on the Internet. Although investigations into the incident concluded that our mobile data services solution was not at fault, the incident may have raised concerns regarding the security of our mobile data services solution. In addition, we may be required to invest additional resources to protect against damages caused by any actual or perceived disruptions of our mobile data services solution or security breaches. Any of these developments could seriously harm our business.

We may need to raise additional capital to grow our business, and we may not be able to raise capital on terms acceptable to us or at all.

The operation of our business and our efforts to grow our business further will require significant cash outlays and commitments. We believe that our existing working capital and borrowings available under our loan agreement with Silicon Valley Bank will be sufficient to fund our working capital requirements, capital expenditures and operations for at least the next 12 months. We have based this estimate on assumptions that may prove to be wrong, and it is possible that we could utilize our available financial resources sooner than we currently expect. The timing and amount of our cash needs may vary significantly depending on numerous factors, including but not limited to:

 

   

market acceptance of our mobile data services;

 

   

the need to adapt to changing technologies and technical requirements; and

 

   

the existence of opportunities for expansion.

If our existing working capital, borrowings available under our loan agreement with Silicon Valley Bank and the net proceeds from this offering are not sufficient to meet our cash requirements, we will need to seek additional capital, potentially through debt or equity financings, to fund our growth. We may not be able to raise needed cash on terms acceptable to us or at all. Financings, if available, may be on terms that are dilutive or potentially dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than our current common stock price. The holders of new securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock. If new sources of financing are required but are insufficient or unavailable, we would be required to modify our growth and operating plans to the extent of available funding, which could harm our ability to grow our business.

Failure to adequately manage our growth may seriously harm our business.

We operate in an emerging market and have experienced, and may continue to experience, significant growth in our business. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require us to, among other things:

 

   

implement additional management information systems;

 

   

further develop our operating, administrative, financial and accounting systems and controls;

 

   

hire additional personnel;

 

   

develop additional levels of management within our company;

 

   

locate additional office space in the United States as well as internationally; and

 

   

maintain close coordination among our engineering, operations, legal, finance, sales and marketing and customer service and support organizations.

Moreover, as our sales increase, we may be required to concurrently deploy our services infrastructure at multiple locations or provide increased levels of customization. As a result, we may lack the resources to deploy our mobile data services on a timely and cost-effective basis. Failure to accomplish any of these requirements

 

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would seriously harm our ability to deliver our mobile data services platform in a timely fashion, fulfill existing customer commitments or attract and retain new customers.

We depend on the services of key personnel to implement our strategy. If we lose the services of our key personnel or are unable to attract and retain other qualified personnel, we may be unable to implement our strategy.

We believe that the future success of our business depends on the services of a number of key management and operating personnel, including Henry R. Nothhaft, our Chief Executive Officer and Chairman of the Board of Directors, Joe F. Britt, Jr., our founder and Chief Technology Officer, Matt Hershenson, our founder and Senior Vice President of Advanced Products, and other members of our senior management. We have at-will employment relationships with all of our management and other employees. Some of these key employees have strong relationships with our OEM partners or mobile operator customers and our business may be harmed if these employees leave us. The loss of members of our key management and certain other members of our operating personnel could materially and adversely affect our business.

In addition, our ability to manage our growth depends, in part, on our ability to identify, hire and retain additional qualified employees, including a technically skilled development and engineering staff. We face intense competition for qualified individuals from numerous technology, marketing and mobile software and service companies. In addition, competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located. Qualified individuals are in high demand, and we may incur significant costs to attract them. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing creative, operational and managerial requirements, or may be required to pay increased compensation in order to do so. If we are unsuccessful in attracting and retaining these key personnel, our ability to operate our business effectively would be negatively impacted and our business would be adversely affected.

Future acquisitions of businesses or technologies may dilute the ownership interests of our stockholders, cause us to incur debt or assume contingent liabilities and strain our business and resources.

In order to remain competitive, we may find it necessary to acquire complementary businesses, products or technologies in the future. In the event of any future acquisitions, we could:

 

   

issue equity securities that would dilute current stockholders’ percentage ownership;

 

   

incur substantial debt;

 

   

assume contingent liabilities; or

 

   

expend significant cash.

These actions could harm our business, operating results and financial condition, or the price of our common stock. Moreover, even if we do obtain benefits from acquisitions in the form of increased revenues, there may be a delay between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits. This is particularly relevant in cases where it is necessary to integrate new types of technology into our existing mobile data services platform and where new types of products may be targeted for potential operator customers with which we do not have pre-existing relationships. Acquisitions and investment activities also entail numerous risks, including:

 

   

difficulties in the assimilation of acquired operations and technologies;

 

   

unanticipated costs associated with the acquisition transaction;

 

   

the diversion of management’s attention from other business;

 

   

adverse effects on existing business relationships with our OEM partners and mobile operator customers;

 

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risks associated with entering geographic or consumer markets in which we have no or limited prior experience;

 

   

the potential loss of key employees of acquired businesses;

 

   

difficulties in the assimilation of different corporate cultures and practices; and

 

   

substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items.

We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future, and our failure to do so could have a material adverse effect on our business, operating results and financial condition.

Our expansion in international markets may be subject to added business, political, regulatory, operational, financial and economic risks that could increase our costs and hinder our growth.

Our growth strategy involves the expansion of our operations in foreign jurisdictions. International sales represented approximately 8.2% of our revenues in the year ended September 30, 2006 and 6.5% of our revenues in the year ended September 30, 2007. We currently have an office in the United Kingdom, and we contract with offshore engineering centers in India, Ukraine and Romania. We expect international sales to contribute to our future revenues. We have limited experience conducting business outside of the United States, and we may not be aware of all of the factors that may affect our business in foreign jurisdictions. International operations carry certain risks and associated costs, such as:

 

   

the complexities and expense of administering a business abroad;

 

   

complications in compliance with, and unexpected changes in, regulatory requirements;

 

   

foreign laws, including data privacy laws, as well as international import and export legislation;

 

   

trading and investment policies;

 

   

consumer protection laws that impose additional obligations on us or restrict our ability to provide limited warranty protection;

 

   

corruption, requests for improper payments or other actions that may violate U.S. foreign corrupt practices acts, uncertain legal enforcement and physical security;

 

   

foreign currency fluctuations;

 

   

exchange or pricing controls;

 

   

tariffs and other trade barriers;

 

   

difficulties in collecting accounts receivable;

 

   

potential adverse tax consequences;

 

   

uncertainties of laws and enforcement relating to the protection of intellectual property;

 

   

unauthorized copying of software;

 

   

political, economic and social instability;

 

   

difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs; and

 

   

other factors, depending upon the country involved.

In addition, developing mobile data services that are compatible with other languages or cultures can be expensive. As a result, our ongoing international expansion efforts may be more costly than we expect. Further, expansion into developing countries subjects us to the effects of regional instability, civil unrest and

 

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hostilities, and could adversely affect us by disrupting communications and making travel more difficult. As we continue to expand our business internationally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could adversely affect our international operations and, consequently, our operating results.

Changes to financial accounting standards and the interpretation of those standards could affect the way we recognize and report our financial results and could make it more expensive to issue stock options to employees, either of which would negatively impact our business.

We prepare our financial statements to conform with accounting principles generally accepted in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, or SEC, and various other regulatory bodies. A change in those principles could have a significant effect on our reported results and might affect our reporting of transactions completed before a change is announced. For example, we have used stock options as a fundamental component of our employee compensation packages. We believe that stock options directly motivate our employees to maximize long-term stockholder value and, through the use of vesting, encourage employees to remain in our employ. Several regulatory agencies and entities have made regulatory changes that could make it more difficult or expensive for us to grant stock options to employees. For example, the FASB released Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, that required us to record a charge to earnings for employee stock option grants beginning October 1, 2006. We have, as a result of these changes, incurred increased compensation costs, which may cause us to change our equity compensation strategy. Any such change may make it more difficult to attract, retain and motivate employees.

Our results may vary significantly from period to period due to the timing of the release of new Danger-enabled mobile device models or new premium applications, content and services, as well as the seasonality of the mobile device market.

We may experience spikes in new subscriber activations and premium applications, content and services revenues as a result of the release of new Danger-enabled mobile device models or new premium applications, content and services. In addition, during the holiday shopping season, mobile device sales typically increase, driving new subscriber activations and an increase in premium applications and content downloads. If we or our OEM partners fail to introduce new Danger-enabled mobile devices and new mobile data services, for any reason, and particularly during key selling periods, our sales will suffer disproportionately. Likewise, if a key event to which our premium applications, content and services release schedule is tied were to be delayed or cancelled, our sales would also suffer disproportionately. Our ability to meet development schedules is affected by a number of factors, including the creative processes involved and the coordination of large and sometimes geographically dispersed development teams required by the increasing complexity of our mobile data services. Any failure to meet anticipated development or release schedules would likely result in a delay of revenues or possibly a significant shortfall in our revenues and cause our operating results to be materially different than anticipated.

If we become profitable, we cannot assure you that our net operating losses will be available to reduce our tax liability.

Our ability to use our tax net operating loss carryforwards may be limited or reduced. Generally, a change of more than 50 percentage points in the ownership of our shares, by value, over the three-year period ending on the date any shares are acquired constitutes an ownership change and may limit our ability to use net operating loss carryforwards. Furthermore, the number of shares of our common stock issued in our initial public offering may be sufficient, taking into account prior or future changes in our ownership over a three-year period, to cause us to undergo an ownership change. As a result, our ability to use our existing net operating losses to offset U.S. taxable income may become subject to substantial limitations. Further, the amount of our net operating losses could be reduced if any tax deductions taken by us are limited or disallowed by the Internal Revenue Service. All of these limitations could potentially result in increased future tax liability for us.

 

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Our business could be seriously harmed by earthquakes and other natural disasters.

Our headquarters and our current data center facilities are located in Palo Alto, California and San Jose, California, respectively, and our largest mobile operator customer has facilities located elsewhere in the Pacific Rim, which are areas subject to significant earthquake risks. Any disruption to the networks of this mobile operator customer or our data center facilities resulting from earthquakes or other natural disasters could significantly harm our business.

Risks Related to Our Industry

Changes in the wireless communications industry may adversely affect our business.

The wireless communications industry may experience significant growth and change which could adversely affect our business. New technologies such as Wi-Fi, worldwide interoperability for microwave access, or WiMAX, and voice over Internet protocol, or VOIP, are challenging existing wireless communication technologies. Future growth and adoption of these or other technologies may cause our mobile operator customers to revise or abandon their relationships with us and may cause other mobile operators not to become our customers. This would have an adverse effect on our business, operating results and financial condition. In addition, new entrants to the wireless communication industry offering new business models may challenge existing norms and disrupt the industry. For instance, Google recently announced the formation of the Open Handset Alliance, a consortium of mobile operators, mobile handset manufacturers and software and mobile computing companies focused on developing an open source software platform for mobile devices. In addition, Verizon Wireless recently announced that it will open its network to wireless devices, software and applications that are not sold by Verizon Wireless in an effort to expand its customer base. Changes in the industry caused by such new developments or other entrants, may cause our mobile operator customers to revise or abandon their relationships with us and may cause other mobile operators to choose our competitors. This would have an adverse effect on our business, operating results and financial condition.

Changes in government regulation of the wireless communications industry may adversely affect our business.

It is possible that a number of laws and regulations may be adopted in the United States and elsewhere that could restrict the wireless communications industry, including laws and regulations regarding lawful interception of personal data, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of the market for electronic storage of personal information may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours that store personal information. We anticipate that regulation of our industry will increase and that we will be required to devote legal and other resources to address this regulation. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the media and wireless communications industries may lessen the growth of wireless communications services and may materially reduce our ability to increase or maintain sales of our mobile data services.

A number of studies have examined the health effects of mobile device use, and the results of some of the studies have been interpreted as evidence that mobile device use causes adverse health effects. The establishment of a link between the use of mobile devices and health problems, or any media reports suggesting such a link, could increase government regulation of, and reduce demand for, mobile devices and, accordingly, the demand for our mobile data services, and this could harm our business, operating results and financial condition.

The transmission and storage of personal information could give rise to liabilities or additional costs of operation as a result of governmental regulation, legal requirements or differing views of personal privacy rights.

We transmit and store a large volume of personal information in the course of providing our mobile data services. This information is increasingly subject to legislation and regulations in numerous jurisdictions around

 

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the world. This government action is typically intended to protect the privacy and security of personal information that is collected, stored and transmitted in or from the governing jurisdiction.

We could be adversely affected if domestic or international legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business. For example, the USA PATRIOT Act provides certain rights to U.S. law enforcement authorities to obtain personal information in the control of U.S. persons and entities without notifying the affected individuals. If we are required to allocate significant resources to modify our mobile data services platform to enable enhanced legal interception of the personal information that we transmit and store, our financial condition and results of operations may be adversely affected.

In addition, because various foreign jurisdictions have different laws and regulations concerning the storage and transmission of personal information, we may face unknown requirements that pose compliance challenges in new international markets that we seek to enter. Such variation could subject us to costs, liabilities or negative publicity that could impair our ability to expand our operations into some countries and therefore limit our future growth.

As privacy and data protection have become more sensitive issues, we may also become exposed to potential liabilities as a result of differing views on the privacy of personal information. These and other privacy concerns, including security breaches, could adversely impact our business, financial condition and results of operations.

Reduced spending by our customers due to the uncertainty of economic and geopolitical conditions may negatively affect our business and results of operations.

Economic and geopolitical uncertainties may directly affect the marketing and distribution of our mobile data services by mobile operators. As current and future conditions in the domestic and global economies remain uncertain, it is difficult to estimate the level of economic growth, which may cause some mobile operators to reduce capital spending on technology products. Accordingly, the future direction of the overall domestic and global economies will have an impact on our overall performance. Economic conditions in the United States, Japan, Europe and elsewhere affecting the wireless industry in which we compete, are beyond our control. If these economic conditions worsen or fail to improve, we may experience reduced demand for and pricing pressure on our mobile data services, which could harm our operating results. In addition, acts of terrorism and the outbreak of hostilities and armed conflicts between countries have created uncertainties that may affect the global economy and could have a material adverse effect on our business, operating results and financial condition.

Mergers, consolidation or other strategic transactions in the communications industry could weaken our competitive position, reduce the number of our mobile operator customers and adversely affect our business.

The communications industry continues to experience consolidation and an increased formation of alliances among communications service providers and between communications service providers and other entities. Should one of our significant mobile operator customers, such as T-Mobile USA, consolidate or enter into an alliance with another entity, this could have a negative material impact on our business. Such a consolidation and alliance may cause us to lose a mobile operator customer or require us to reduce prices as a result of enhanced customer leverage, which would have a material adverse effect on our business. We may not be able to offset the effects of any price reductions. We may not be able to expand our base of mobile operator customers to make up any revenue declines if we lose a mobile operator customer or if our transaction volumes decline.

In addition, if two or more of our competitors or mobile operator customers were to merge or partner, the change in the competitive landscape could adversely affect our ability to compete effectively. Our competitors

 

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may also establish or strengthen co-operative relationships with their mobile operator customers, sales channel partners or other parties with whom we have strategic relationships, thereby limiting our ability to promote our mobile data services. These events could reduce revenue and adversely affect our operating results.

Risks Related to the Offering and Our Common Stock

There has been no prior public market for our common stock, the trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. Investors who purchase our common stock in this offering may not be able to sell their shares at or above the initial public offering price. Market prices for companies similar to us experience significant price and volume fluctuations. An active or liquid market in our common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable. The following factors, in addition to other risks described in this prospectus, may have a significant effect on our common stock market price:

 

   

variations in our operating results;

 

   

announcements of technological innovations, new services or service enhancements, strategic alliances or agreements by us, our partners or by our competitors;

 

   

the gain or loss of mobile operator customers;

 

   

disputes or other developments relating to proprietary rights, including patents, litigation matters and related indemnity claims against us by our mobile operator customers or our OEM partners;

 

   

changes in the market prices for our mobile data services;

 

   

recruitment or departure of key personnel;

 

   

actual or anticipated changes in the estimates of our operating results or changes in stock market analyst recommendations regarding our common stock, other comparable companies or our industry generally;

 

   

market conditions in our industry, the industries of our customers and the economy as a whole;

 

   

our ability or inability, if needed, to raise additional capital and the terms on which we raise it;

 

   

actual or expected changes in our growth rates or our competitors’ growth rates;

 

   

changes in the market valuation of similar companies;

 

   

trading volume of our common stock;

 

   

sales of our common stock by us or our stockholders; and

 

   

adoption or modification of regulations, policies, procedures or programs applicable to our business.

In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our common stock. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our business, financial condition, results of operations and growth prospects.

 

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Our securities have no prior market and an active trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. Although we expect that our common stock will be approved for listing on the NASDAQ Global Market, an active trading market for our shares may never develop or, even if developed, may not be sustained following this offering. The initial public offering price for our common stock was determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. This initial public offering price may vary from the market price of our common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price.

Future equity issuances or sales of our common stock in the public market could cause our stock price to decline.

If we issue equity securities in the future or if our stockholders sell a substantial number of shares of our common stock in the public market after this offering, or if there is a perception that these sales or issuances might occur, the market price of our common stock could decline. Based on the number of shares of common stock outstanding as of September 30, 2007, upon the closing of this offering, and assuming no outstanding options are exercised prior to the closing of this offering, we will             have shares of common stock outstanding (including             shares of common stock to be issued upon the exercise of outstanding warrants that, by their terms, provide for automatic exercise on a cashless basis immediately prior to the closing of this offering, assuming a deemed market price equal to the assumed initial public offering price of $             per share, and             shares of common stock to be issued upon the exercise of other outstanding warrants for cash that will terminate if not exercised prior to the closing of this offering). All of the             shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, except for any shares purchased by our affiliates as defined in Rule 144 under the Securities Act of 1933, as amended. The remaining             shares of common stock outstanding upon the closing of this offering will be restricted as a result of securities laws or lock-up agreements. These remaining shares will generally become available for sale in the public market as follows:

 

   

no restricted shares will be eligible for immediate sale upon the closing of this offering; and

 

   

all of the restricted shares of common stock, less shares subject to a repurchase option in our favor tied to the holders’ continued service to us (which will be eligible for sale upon lapse of the repurchase option), will be eligible for sale upon expiration of lock-up agreements 180 days after the date of this prospectus, which period may be extended in certain limited circumstances.

Deutsche Bank Securities Inc. and UBS Securities LLC may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements prior to the expiration of the lock-up period. See “Shares Eligible for Future Sale.”

After this offering, the holders of approximately             shares of common stock, based on shares outstanding as of September 30, 2007, including             shares underlying outstanding warrants, will be entitled to rights with respect to registration of such shares under the Securities Act of 1933, as amended. If such holders, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our common stock. If we file a registration statement and include shares held by these holders pursuant to the exercise of their registration rights, these sales may impair our ability to raise capital. In addition, prior to the consummation of this offering, we intend to file a registration statement on Form S-8 under Securities Act to register up to shares of our common stock for issuance under our stock option and employee stock purchase plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements, if applicable, described above.

 

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Our executive officers, directors and principal stockholders will continue to have substantial control over us after this offering and will be able to exercise significant influence over matters subject to stockholder approval.

Our executive officers, directors and principal stockholders, together with their respective affiliates, beneficially owned approximately 53.9% of our capital stock as of September 30, 2007, and we expect that upon completion of this offering, that same group will beneficially own at least     % of our outstanding common stock, of which     % will be beneficially owned by our executive officers, assuming no exercise of the underwriters’ over-allotment option. Accordingly, these stockholders, if they act together, will be able to exercise influence over all matters requiring stockholder approval, including the election of directors and approval of corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material adverse effect on the market value of our common stock. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, please see the section entitled “Principal Stockholders.”

As a new investor, you will experience substantial dilution as a result of this offering.

Our assumed initial public offering price per share is substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock in this offering will experience immediate substantial dilution of $             a share. In addition, we have issued options and warrants to acquire common stock at prices below the assumed initial public offering price. To the extent outstanding options and warrants are ultimately exercised, including warrants that will terminate if not exercised prior to the closing of this offering, there will be further dilution to investors in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially less than the assumed initial public offering price when they purchased their shares of common stock. In addition, if the underwriters exercise their over-allotment option, you will experience additional dilution.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent an acquisition of us by others, even if an acquisition would be beneficial to our stockholders, and may affect the trading price of our common stock.

We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, that apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. For more information, see the section entitled “Description of Capital Stock—Anti-Takeover Effects of Our Charter and Bylaws and Delaware Law.”

In addition, our amended and restated certificate of incorporation and amended and restated bylaws, which will be in effect as of the closing of this offering, could make it more difficult for a third party to acquire us, or for a change in the composition of our board of directors or management to occur, even if doing so would benefit our stockholders. These provisions include:

 

   

authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval to thwart a takeover attempt;

 

   

establishing 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;

 

   

requiring that directors only be removed from office for cause and only upon a supermajority stockholder vote;

 

   

providing that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders;

 

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eliminating the ability of stockholders to call a special meeting of stockholders;

 

   

prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at stockholder meetings.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. This provision could have the effect of delaying or preventing a change of control, whether or not it is desired by or beneficial to our stockholders.

Restrictions in our material agreements with our mobile operator customers and OEM partners may prevent us from being acquired.

Several of our major agreements with our mobile operator customers, including T-Mobile USA, and with our OEM partners contain provisions that do not allow assignment of our agreement without the prior consent of the mobile operator customer or OEM partner, as the case may be. These provisions could deter a potential acquirer from acquiring us and therefore limit the liquidity opportunities for our stockholders.

Our management will have broad discretion over the use and investment of the net proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion over the use and investment of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these net proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. Our management intends to use the net proceeds from this offering to repay certain of our credit facilities and for general corporate purposes, including to finance the expansion of our data centers and to fund capital expenditures, or for investments in, or acquisitions of, complementary companies, technologies, products or assets. Pending these uses, we intend to invest the net proceeds of this offering in a variety of investment-grade capital preservation investments, including short- and intermediate-term interest bearing obligations, certificates of deposit or direct or guaranteed obligations of the U.S. government. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how the net proceeds from this offering are used.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our common stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, and rules of the Securities and Exchange

 

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Commission and the NASDAQ Global Market, have imposed various requirements on public companies including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, beginning with our annual report on Form 10-K for the fiscal year ending September 30, 2009. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts. We currently do not have an internal audit group, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.

Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for our common stock, and could adversely affect our ability to access the capital markets.

We have never declared or paid dividends on our capital stock and we do not anticipate paying dividends in the foreseeable future.

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support the operation of and to finance the growth and development of our business. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with applicable laws and covenants under current or future credit facilities, which may restrict or limit our ability to pay dividends, and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. As a result, a return on your investment will only occur if our stock price appreciates.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements made herein include, but are not limited to, statements about:

 

   

anticipated trends and challenges in our business and the markets in which we operate;

 

   

our ability to successfully maintain and expand our current, and develop new, mobile operator relationships and relationships with OEM partners;

 

   

future development and distribution by our OEM partners of mobile devices that utilize our mobile data services platform;

 

   

our ability to compete in our industry and respond to competitive developments;

 

   

our ability to address market needs or develop new or enhanced mobile data services to meet those needs;

 

   

expected adoption of our mobile data services by subscribers;

 

   

our ability to grow our revenues and improve our operating results;

 

   

our ability to protect our confidential information and intellectual property rights;

 

   

our ability to attract, integrate and retain qualified personnel;

 

   

our ability to scale our mobile data services platform, manage our growth and expand into new geographic and consumer markets;

 

   

our need to obtain additional funding and our ability to obtain funding in the future on acceptable terms; and

 

   

our expectations regarding the use of proceeds from this offering.

In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “intend,” “should,” “could,” “can,” “would,” “expect,” “target,” “believe,” “estimate,” “predict,” “potential,” “plan,” “anticipate,” “seek,” “project,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Also, these forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. Unless required by U.S. federal securities laws, we do not intend to update any of these forward-looking statements to reflect circumstances or events that occur after the statement is made.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 do not protect any forward-looking statements that we make in connection with this offering.

 

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USE OF PROCEEDS

We estimate that our net proceeds from the sale of the common stock that we are offering will be approximately $             million, assuming an initial public offering price of $             per share, which is the mid-point of the range reflected on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $             million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Each $             increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of             shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

We intend to use approximately $7.2 million of the net proceeds of this offering to repay in full the principal and accrued interest on our outstanding term loan from Silicon Valley Bank and the principal and accrued interest on, together with the payment of additional fees related to, our outstanding equipment lease advances from Atel Ventures, Inc. Our intent to use approximately $7.2 million of the net proceeds of this offering to repay these credit facilities is based on amounts outstanding under these credit facilities as of November 30, 2007. Our outstanding term loan from Silicon Valley Bank carries an interest rate of 8.3% and matures in December 2010. Our outstanding equipment lease advances from Atel Ventures carry a weighted average interest rate of 11.9% and mature in November 2009, January 2010 and February 2010. We have used the proceeds of these credit facilities primarily to finance data center equipment and software development license acquisitions.

We intend to use the remaining net proceeds of this offering for working capital and other general corporate purposes, including to finance the expansion and operation of our data centers, to fund capital expenditures and to support our research and development and sales and marketing activities. We may also use a portion of the net proceeds of this offering for the acquisition of, or investment in, companies, technologies, products or assets that complement our business. However, we have no present understandings, commitments or agreements to enter into any acquisitions or to make any of these types of investments.

We have not yet determined our anticipated expenditures and therefore cannot estimate the amounts to be used for each of the purposes discussed above. The amounts and timing of our expenditures will depend on several factors, including the amount of cash generated by our operations, competitive and technological developments, the rate of growth, if any, of our business and actual expenses to operate our business. Accordingly, our management will have significant flexibility in applying the net proceeds of this offering, and investors will be relying on the judgment of our management regarding the application of these net proceeds. Pending use of proceeds from this offering, we intend to invest the net proceeds of this offering in a variety of investment-grade capital preservation investments, including short- and intermediate-term interest bearing obligations, certificates of deposit or direct or guaranteed obligations of the U.S. government. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds.

DIVIDEND POLICY

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support the operation of and to finance the growth and development of our business. We do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to compliance with applicable laws and covenants under current or future credit facilities, which may restrict or limit our ability to pay dividends, and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2007:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to:

 

   

the conversion of all of our outstanding shares of our preferred stock into 168,133,864 shares of common stock upon the closing of this offering;

 

   

the exercise of warrants that, by their terms, provide for automatic exercise on a cashless basis immediately prior to the closing of this offering, resulting in the net issuance of             shares of common stock, assuming a deemed market price equal to the assumed initial public offering price of $             per share, the mid-point of the price range reflected on the cover page of this prospectus; and

 

   

the reclassification of preferred stock warrant liability to common stock and additional paid-in capital upon the closing of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to the sale by us of             shares of common stock in this offering at an assumed initial public offering price of $             per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the repayment of amounts outstanding under an equipment lease line, which had an outstanding balance of approximately $3.8 million as of September 30, 2007.

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes, each appearing elsewhere in this prospectus.

 

     As of September 30, 2007
     Actual     Pro Forma    Pro Forma As
Adjusted(2)
     (In thousands, except per share data)

Cash and cash equivalents

   $ 12,979     $                 $             
                     

Installment payable, including current portion

   $ 885     $      $  

Capital lease obligations, including current maturities

     4,501       

Preferred stock warrant liability

     12,180       

Redeemable convertible preferred stock, $0.0001 par value; 175,440,562 authorized, 148,902,132 shares issued and outstanding actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     197,623       

Stockholders’ equity (deficit):

       

Preferred stock, $0.0001 par value; no shares authorized, issued and outstanding, actual and pro forma; 20,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

           

Common stock, $0.0001 par value, 260,000,000 shares authorized, 17,930,106 shares issued and outstanding, actual; 260,000,000 shares authorized,              shares issued and outstanding, pro forma; 200,000,000 shares authorized,              shares issued and outstanding, pro forma as adjusted(1)

     2       

Additional paid-in capital

     1,687       

Accumulated deficit

     (188,101 )     
                     

Total stockholders’ equity (deficit)

     (186,412 )     
                     

Total capitalization

   $ 28,777     $      $  
                     

 

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(1) The pro forma and pro forma as adjusted issued and outstanding shares of common stock assumes the issuance of             shares of common stock upon the exercise of warrants that, by their terms, provide for automatic exercise on a cashless basis immediately prior to the closing of this offering, assuming a deemed market price equal to the assumed initial public offering price of $             per share. The actual number of shares of our common stock to be issued upon the automatic cashless exercise of these warrants depends on the deemed market price of our common stock immediately prior to the date of exercise. See “Description of Capital Stock—Warrants.” A $             increase in the assumed deemed market price of $             per share would increase the number of shares of common stock to be issued upon the automatic cashless exercise of these warrants by approximately             shares of common stock, and a $             decrease in the assumed deemed market price of $             per share would decrease the number of shares of common stock to be issued upon the automatic cashless exercise of these warrants by approximately             shares of common stock.

 

(2) Each $             increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of             shares in the number of shares offered by us would increase (decrease) each of additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming that the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

The table above excludes, as of September 30, 2007, the following shares:

 

   

42,861,396 shares of common stock issuable upon the exercise of options outstanding under our 2000 Stock Option/Stock Issuance Plan, or 2000 plan, having a weighted average exercise price of $0.35 per share;

 

   

6,525,841 shares of common stock issuable upon the exercise of outstanding warrants, having a weighted average exercise price of $0.83 per share, of which warrants to purchase 6,415,222 shares of common stock will terminate if not exercised prior to the closing of this offering;

 

   

2,056,194 shares of common stock reserved for future issuance under our 2000 plan; provided, however, that immediately upon the signing of the underwriting agreement for this offering, our 2000 plan will terminate so that no further awards may be granted under our 2000 plan; and

 

   

an aggregate of up to             shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan and 2008 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under these benefit plans, both of which will become effective immediately upon the signing of the underwriting agreement for this offering.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our historical net tangible book value per share is determined by dividing our total tangible assets (total assets less intangible assets), less total liabilities, redeemable convertible preferred stock and common stock subject to repurchase, by the number of outstanding shares of our common stock. As of September 30, 2007, our historical net tangible book value (deficit) was $(186.4) million, or $(10.40) per share of our common stock. Our pro forma net tangible book value as of September 30, 2007 was approximately $             million, or $             per share of our common stock, based on the number of shares of common stock outstanding as of September 30, 2007, after giving effect to the conversion of all of our outstanding redeemable convertible preferred stock into shares of our common stock, the exercise of warrants that, by their terms, provide for automatic exercise on a cashless basis immediately prior to the closing of this offering, and the reclassification of the preferred stock warrant liability to stockholders’ equity upon the closing of this offering.

Investors participating in this offering will incur immediate and substantial dilution. After giving effect to the sale of common stock offered by us at an assumed initial public offering price of $             per share, the mid-point of the price range reflected on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2007 would have been $             million, or $             per share of our common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to our existing stockholders, and an immediate dilution of $             per share to new investors participating in this offering. The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $             

Historical net tangible book value (deficit) per share as of September 30, 2007

   $ (10.40 )  

Pro forma increase in net tangible book value per share attributable to conversion of redeemable convertible preferred stock and automatic cashless exercise of certain warrants

    
          

Pro forma net tangible book value per share before this offering

   $                 

Pro forma increase in net tangible book value per share attributable to investors participating in this offering

    
          

Pro forma as adjusted net tangible book value per share after this offering

    
        

Pro forma dilution per share to new investors participating in this offering

     $             
        

A $             increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) our pro forma as adjusted net tangible book value by approximately $             million, or approximately $             per share, and the pro forma dilution per share to new investors in this offering by approximately $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of             shares in the number of shares offered by us would increase our pro forma as adjusted net tangible book value by approximately $             million, or $             per share, and the pro forma dilution per share to new investors in this offering would be $             per share, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of             shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $             million, or $             per share, and the pro forma dilution per share to new investors in this offering would be $             per share, assuming that the assumed initial public offering price remains the same, and after deducting the

 

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underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will adjust based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters exercise their option in full to purchase             additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $             per share, the increase in the pro forma as adjusted net tangible book value per share to existing stockholders would be $             per share and the pro forma dilution to new investors purchasing common stock in this offering would be $             per share.

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2007, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted average price per share paid by existing stockholders and by new investors participating in this offering at an assumed initial public offering price of $             per share, before deducting underwriting discounts and commissions and estimated offering expenses:

 

     Shares Purchased     Total Consideration    

Weighted
Average Price

Per Share

      Number    Percent     Amount    Percent    

Existing stockholders

                   %   $                              %   $             

New investors

            
                          

Total

      100 %   $                 100 %  
                          

The above discussion and tables are based on             shares of common stock outstanding as of September 30, 2007, assuming the conversion of all outstanding redeemable convertible preferred stock into shares of common stock and the exercise of warrants that, by their terms, provide for automatic exercise on a cashless basis immediately prior to the closing of this offering. This number excludes, as of September 30, 2007:

 

   

42,861,396 shares of common stock issuable upon the exercise of options outstanding under our 2000 Stock Option/Stock Issuance Plan, or 2000 plan, having a weighted average exercise price of $0.35 per share;

 

   

6,525,841 shares of common stock issuable upon the exercise of outstanding warrants, having a weighted average exercise price of $0.83 per share, of which warrants to purchase 6,415,222 shares of common stock will terminate if not exercised prior to the closing of this offering;

 

   

2,056,194 shares of common stock reserved for future issuance under our 2000 plan; provided, however, that immediately upon the signing of the underwriting agreement for this offering, our 2000 plan will terminate so that no further awards may be granted under our 2000 plan; and

 

   

an aggregate of up to             shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan and 2008 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of our common stock reserved for future issuance under these benefit plans, both of which will become effective immediately upon the signing of the underwriting agreement for this offering.

 

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The following table summarizes, on a pro forma as adjusted basis as of September 30, 2007, after giving effect to the exercise in full of all of our stock options outstanding at September 30, 2007 and our issuance of 6,525,841 shares of common stock upon the exercise of warrants outstanding at September 30, 2007, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted average price per share paid by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of $             per share, before deducting underwriting discounts and commissions and estimated offering expenses:

 

     Shares Purchased     Total Consideration    

Weighted
Average Price

Per Share

      Number    Percent     Amount    Percent    

Existing stockholders

                   %   $                              %   $             

New investors

            
                          

Total

      100 %   $                 100  %  
                          

The number of shares of common stock outstanding in the table above is based on the pro forma number of shares outstanding as of September 30, 2007 and assumes no exercise of the underwriters’ option to purchase additional shares. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to    % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by new investors purchasing common stock in this offering will be increased to             shares or    % of the total number of shares of common stock to be outstanding after this offering.

Effective upon the closing of this offering, an aggregate of up to             shares of our common stock will be reserved for future issuance under our equity benefit plans, and these share reserves will also be subject to automatic annual increases in accordance with the terms of the plans. To the extent that new options are issued under our equity benefit plans or we issue additional shares of common stock in the future, there will be further dilution to new investors purchasing common stock in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We present below our selected consolidated financial data. The selected consolidated statements of operations data for each of the years ended September 30, 2005, 2006 and 2007, and the selected consolidated balance sheet data as of September 30, 2006 and 2007, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for each of the years ended September 30, 2003 and 2004, and the selected consolidated balance sheet data as of September 30, 2003, 2004 and 2005, have been derived from our audited consolidated financial statements that are not included in this prospectus. You should read this information together with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of the results to be expected in any future period.

 

     Years Ended September 30,  
     2003     2004     2005     2006     2007  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenues:

          

Service

   $     $ 481     $ 21,669     $ 38,895     $ 50,581  

Product

     72       1,257       15,121       10,416       5,832  
                                        

Total revenues

     72       1,738       36,790       49,311       56,413  

Cost of revenues:

          

Cost of service revenues

     4,886       6,381       10,701       17,755       26,846  

Cost of product revenues

     9,165       10,814       16,220       9,130       5,276  
                                        

Total cost of revenues

     14,051       17,195       26,921       26,885       32,122  
                                        

Gross profit (loss)

     (13,979 )     (15,457 )     9,869       22,426       24,291  

Operating expenses:

          

Research and development

     11,141       13,135       11,317       17,746       22,497  

Sales and marketing

     3,989       4,834       5,211       5,723       7,020  

General and administrative

     3,165       3,519       3,610       6,999       6,541  
                                        

Total operating expenses

     18,295       21,488       20,138       30,468       36,058  
                                        

Loss from operations

     (32,274 )     (36,945 )     (10,269 )     (8,042 )     (11,767 )

Other income (expense), net

     176       165       359       107       (520 )
                                        

Loss before provision for income taxes and cumulative effect of change in accounting principle

     (32,098 )     (36,780 )     (9,910 )     (7,935 )     (12,287 )

Provision for income taxes

                       (54 )     (74 )
                                        

Loss before cumulative effect of change in accounting principle

     (32,098 )     (36,780 )     (9,910 )     (7,989 )     (12,361 )

Cumulative effect of change in accounting principle

                       1,421        
                                        

Net loss

     (32,098 )     (36,780 )     (9,910 )     (6,568 )     (12,361 )

Accretion of redemption value on redeemable convertible preferred stock

     (7,324 )     (10,218 )     (12,309 )     (14,477 )     (15,710 )
                                        

Net loss attributable to common stockholders

   $ (39,422 )   $ (46,998 )   $ (22,219 )   $ (21,045 )   $ (28,071 )
                                        

Net loss per share attributable to common stockholders—basic and diluted:

          

Loss before cumulative effect of change in accounting principle

   $ (2.45 )   $ (2.67 )   $ (0.69 )   $ (0.53 )   $ (0.76 )

Cumulative effect of change in accounting principle

                       0.09        

Accretion of redemption value on redeemable convertible preferred stock

     (0.56 )     (0.74 )     (0.85 )     (0.95 )     (0.96 )
                                        

Net loss per share attributable to common stockholders—basic and diluted

   $ (3.01 )   $ (3.42 )   $ (1.54 )   $ (1.39 )   $ (1.72 )
                                        

Weighted average common shares outstanding—basic and diluted

     13,097       13,756       14,396       15,142       16,353  
                                        

Pro forma net loss per share—basic and diluted (unaudited)(1)

           $ (0.06 )
                

Pro forma weighted average common shares outstanding—basic and diluted (unaudited)(1)

             184,463  
                

(1) Please see Note 3 to our consolidated financial statements for an explanation of the method used to compute pro forma basic and diluted net loss per common share and the number of shares used in computing per share amounts.

 

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     As of September 30,  
     2003     2004     2005     2006     2007  
     (In thousands)  

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

   $ 19,329     $ 34,293     $ 10,720     $ 17,179     $ 12,979  

Short-term investments

     8,356       2,501       902              

Working capital

     20,828       8,026       (7,126 )     6,943       8,961  

Property and equipment, net

     2,120       2,664       6,405       12,574       17,358  

Total assets

     45,607       72,276       46,250       47,626       49,024  

Deferred revenues, including current portion

     14,812       41,670       26,202       12,196       10,630  

Installment payable, including current portion

                       1,550       885  

Capital lease obligations, including current maturities

     1,188       1,619       3,853       1,006       4,501  

Preferred stock warrant liability

                       11,124       12,180  

Redeemable convertible preferred stock

     88,039       134,980       147,289       171,667       197,623  

Total stockholders’ deficit

     (69,435 )     (116,348 )     (138,323 )     (159,001 )     (186,412 )

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. In addition to historical financial information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a software-as-a-service company that provides mobile operators with an integrated end-to-end solution to deliver mobile data and Internet services to their subscribers. As advanced Internet and messaging services are increasingly becoming available on mobile devices, our solution enables mobile operators to offer their subscribers a differentiated and more compelling mobile data and Internet experience and, consequently, helps our operator customers increase their average revenue per user. Our solution is deployed in the United States and certain international markets through the T-Mobile Sidekick family of mobile devices and in other international markets, such as Australia and Europe, through mobile devices utilizing our “hiptop” brand.

We sell the Danger solution directly to mobile operators through an internal sales force and in conjunction with our original equipment manufacturer, or OEM, partners. Under our agreements with mobile operators, we are paid recurring monthly service fees for each of their subscribers that can access our mobile data services and a share of fees for each premium application, content or service transaction with such subscriber. Our mobile data services run on Danger-enabled mobile devices which are designed and manufactured by our OEM partners and sold by them to our mobile operator customers under separate contractual arrangements. We are responsible for hosting our mobile data services, for which we utilize a third-party hosting data center.

We depend on T-Mobile USA, Inc., or T-Mobile USA, for substantially all of our revenues. For the years ended September 30, 2005, 2006 and 2007, T-Mobile USA represented 92.1%, 88.5% and 92.0% of our revenues, respectively. We expect that we will continue to generate a substantial majority of our revenues from T-Mobile USA for the foreseeable future.

The number of our customers’ subscribers using Danger-enabled mobile devices has increased substantially from approximately 136,000 as of September 30, 2004 to approximately 923,000 as of September 30, 2007. Our total revenues have grown from $49.3 million in the year ended September 30, 2006 to $56.4 million in the year ended September 30, 2007, and our service revenues have grown from $38.9 million in the year ended September 30, 2006 to $50.6 million in the year ended September 30, 2007. Since our inception, we have not been profitable. Our loss from operations was $10.3 million, $8.0 million and $11.8 million in the years ended September 30, 2005, 2006 and 2007, respectively and we expect to continue to incur operating losses for the foreseeable future. As of September 30, 2007 our accumulated deficit was $188.1 million. The last day of our fiscal year is September 30.

Our revenue growth will depend significantly on increasing the number of our customers’ subscribers using our mobile data services, as well as our ability to attract additional mobile operator customers. In an effort to increase the value of our solution for mobile operators, we intend to invest significantly in the development of compelling new features, applications and services, the establishment of new and broader relationships with mobile device OEMs, and the expansion of our hosting capabilities and other network infrastructure. Our ability to attain profitability will depend upon the extent to which these additional investments generate increased revenues from our mobile operator customers.

We were incorporated in Delaware in December 1999 and from our inception until September 2002, we were engaged principally in the development of our mobile data services platform and the design and

 

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development of the initial Danger-enabled mobile devices. Under our initial mobile operator customer contracts, we were responsible for the manufacture, sale and after market support of Danger-enabled mobile devices. In addition to monthly recurring service fees, these initial contractual arrangements with mobile operators included product revenues from the sale of Danger-enabled mobile devices to our mobile operator customers and client license fee revenues associated with the shipment of Danger-enabled mobile devices or the activation of our mobile data services on Danger-enabled mobile devices. We shipped the first Danger-enabled mobile device in September 2002.

In April 2004, we licensed the reference design for our Danger-enabled mobile device to Sharp Corporation, or Sharp, and Sharp assumed direct responsibility for the manufacture and sale of Danger-enabled mobile devices to mobile operators. Sharp commenced sales of Danger-enabled mobile devices in September 2004, and since that time, substantially all sales of Danger-enabled mobile devices have been made directly to mobile operators by our OEM partners, although we did continue to sell low volumes of Danger-enabled mobile devices manufactured by Sharp directly to certain mobile operator customers until March 2006. In connection with a new contractual arrangement with T-Mobile USA, which was effective June 2005, we ceased charging client license fees in connection with the shipment of Danger-enabled mobile devices to T-Mobile USA. In September 2006, we entered into an agreement with Motorola Corporation, or Motorola, for Motorola to design, manufacture and sell Danger-enabled mobile devices. In November 2007, T-Mobile USA commercially launched Motorola’s first Danger-enabled mobile device.

Overview of Consolidated Financial Data

Revenues

Our revenues include service revenues associated with monthly service fees, our share of fees associated with premium applications, content and services, client license fees and non-recurring engineering, or NRE, fees as well as product revenues associated with the sale of Danger-enabled mobile devices by us prior to March 2006.

The following table reflects our service and product revenues for the years ended September 30, 2005, 2006 and 2007:

 

     Years Ended September 30,

Revenues

   2005    2006    2007
     (In thousands)

Service revenues

   $ 21,669    $ 38,895    $ 50,581

Product revenues

     15,121      10,416      5,832
                    
   $ 36,790    $ 49,311    $ 56,413
                    

Service Revenues.    We generate substantially all of our service revenues from mobile operators that provide our mobile data services to their subscribers through Danger-enabled mobile devices. We charge our mobile operator customers recurring monthly service fees based on the number of their subscribers that can access our mobile data services. We also generate revenues from the sale of premium applications, content and services, such as games, productivity applications, networked services, ringtones and background themes, offered by our mobile operator customers for download using Danger-enabled mobile devices and charged as a one-time fee or a monthly subscription fee. Our share of the fees generated from the sale of premium applications, content and services varies by mobile operator, content type and content source. Premium applications, content and services revenues are deferred and amortized over the longer of the remaining mobile operator’s contract term or the expected period of performance under the mobile operator’s contract. Our mobile operator customers are responsible for billing and collections of fees from their subscribers that can access our mobile data services, including our premium applications, content and services.

From time to time, we also generate service revenues associated with NRE fees charged for the initial deployment of our mobile data services or for customized development of specific features or applications for

 

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our mobile operator customers or the acceleration of certain features on their behalf. These revenues are deferred and amortized ratably over the longer of the remaining mobile operator’s contract term or the expected period of performance under the mobile operator’s contract. We do not expect revenues from NRE fees to be a substantial portion of our revenues in future periods.

Our service revenues also include revenues associated with client license fees paid to us upon the activation of our service or shipment of Danger-enabled mobile devices. We ceased charging these fees to T-Mobile USA effective June 2005 and our client license fee revenues have subsequently decreased significantly. Client license fee revenues are deferred and amortized ratably over the longer of the remaining mobile operator’s contract term, the expected period of performance under the mobile operator’s contract or in cases where the mobile operators had refund rights, the refund period. As of September 30, 2007, we had recognized all of the revenues associated with client license fees paid by T-Mobile USA. We continue to charge client license fees to certain mobile operator customers pursuant to contractual arrangements entered into prior to June 2005, but revenues associated with these client license fees have not been significant nor do we expect them to be significant in future periods.

Product Revenues.    Our product revenues are associated with the sale of Danger-enabled mobile devices by us to our mobile operator customers prior to March 2006. Product revenues from these sales are deferred and amortized over the longer of the remaining mobile operator contract term, the expected period of performance under the mobile operator’s contract or, in cases where the mobile operator has refund rights, over the duration of any refund period. Since September 2004, our OEM partners have been primarily responsible for the manufacture and sale of Danger-enabled mobile devices to our mobile operator customers and our product revenues from device sales have decreased substantially. We expect that substantially all of our deferred product revenues will be amortized by September 30, 2008. We also receive minimal fees related to device accessories sold by third parties which we classify as product revenue.

Deferred Revenues

Our arrangements with our mobile operator customers constitute a subscription model that requires our premium applications, content and services revenues to be deferred and amortized ratably over the longer of the mobile operators’ remaining contract term or the expected period of performance under the mobile operators’ contract, commencing the month after the premium applications, content and services are provided. We also defer revenues associated with client license fees, NRE fees and the sale of Danger-enabled mobile devices. Deferred revenues increase in a given period by the amount of our invoiced fees required to be deferred and decrease by the amount of our service and product revenues recognized.

In addition, when a specified deliverable is deemed present in our arrangements with a mobile operator, all revenues associated with that arrangement, including monthly service revenues, are deferred until the specified deliverable is provided. Our initial contract with T-Mobile USA contained commitments to provide specified deliverables. In the year ended September 30, 2005, we recognized $12.6 million of accumulated deferred revenues associated with product sales and fees invoiced in the years ended September 30, 2003 and 2004. These deferred revenues were recognized upon delivery of a specified deliverable to T-Mobile USA and consisted of $5.9 million of monthly service revenues, $1.0 million of client license fee revenue, $5.6 million of product revenues, $117,000 of revenues associated with NRE fees and $37,000 of premium application, content and services revenues. As of September 30, 2007, one of our contracts with a mobile operator customer contained a commitment for a specified deliverable that had yet to be provided. We currently cannot determine when the specified deliverable will be provided and, therefore, when deferred revenues associated with that arrangement can be recognized. At September 30, 2007, deferred revenues under this arrangement were not material.

 

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The following table reflects the amounts of service fees and product sales we billed and revenues we recognized for the years ended September 30, 2005, 2006 and 2007, and the balance of our deferred revenues at September 30 of each such year:

 

     Years Ended September 30,

Billed Fees and Product Sales

   2005    2006    2007
     (In thousands)

Service

        

Monthly service

   $ 10,083    $ 29,469    $ 44,785

Premium applications, content and services

     2,705      4,443      7,676

NRE

     473      661      2,215

Client license

     5,848      283      46
                    

Total service

     19,109      34,856      54,722

Product

     2,212      449      125
                    

Total billed fees and product sales

   $ 21,321    $ 35,305    $ 54,847
                    
     Years Ended September 30,

Revenues

   2005    2006    2007
     (In thousands)

Service

        

Monthly service

   $ 15,655    $ 29,566    $ 44,575

Premium applications, content and services

     903      2,964      4,177

NRE

     329      392      219

Client license

     4,782      5,973      1,610
                    

Total service

     21,669      38,895      50,581

Product

     15,121      10,416      5,832
                    

Total revenues

   $ 36,790    $ 49,311    $ 56,413
                    
     As of September 30,

Deferred Revenues Balance

   2005    2006    2007
     (In thousands)

Service

        

Monthly service

   $ 81    $    $ 209

Premium applications, content and services

     2,371      3,859      7,358

NRE

     527      781      2,779

Client license

     7,332      1,632      68
                    

Total service

     10,311      6,272      10,414

Product

     15,891      5,924      216
                    

Total deferred revenues

     26,202      12,196      10,630

Less current portion of deferred revenues

     18,003      9,140      6,097
                    

Long-term portion of deferred revenues

   $ 8,199    $ 3,056    $ 4,533
                    

Cost of Revenues

The following table reflects our cost of revenues for the years ended September 30, 2005, 2006 and 2007:

 

     Years Ended September 30,

Cost of Revenues

   2005    2006    2007
     (In thousands)

Cost of service revenues

   $ 10,701    $ 17,755    $ 26,846

Cost of product revenues

     16,220      9,130      5,276
                    
   $ 26,921    $ 26,885    $ 32,122
                    

 

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Cost of Service Revenues.    Our cost of service revenues consists primarily of personnel related costs associated with employees and contractors responsible for the design, development, and quality assurance of our service delivery engine, or SDE, and costs associated with hosting and managing our mobile data services, including personnel related costs, hosting and bandwidth charges and depreciation expense related to the operation of our data center. In addition, cost of service revenues includes costs associated with our premium applications, content and services, including third-party developer royalties and personnel related costs. Third-party developer royalties, and any other direct incremental premium applications, content and services costs are deferred, although not in amounts exceeding deferred premium applications, content and services revenues, and amortized to cost of service revenues over a period commensurate with the amortization period for the related revenues. We expect cost of service revenues to increase in absolute dollars and as a percentage of revenues in the near term as we expand and improve our data centers and as we continue to develop and enhance our SDE.

Cost of Product Revenues.    Our cost of product revenues primarily includes the cost to purchase Danger-enabled mobile devices and other costs associated with the sale of Danger-enabled mobile devices by us prior to March 2006. These, and any other, direct incremental product costs are deferred, although not in amounts exceeding deferred product revenues, and amortized to cost of product revenues over a period commensurate with the amortization period for the related revenues. As of September 30, 2007, deferred cost of product revenues was $187,000 and we expect that substantially all of our deferred cost of product revenues will be amortized by September 30, 2008.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses and are recognized when incurred. Personnel related costs are the most significant component of each of these categories and include salary, fringe benefits and allocated facilities overhead.

Research and Development.    Our research and development expenses consist primarily of the personnel related costs of employees and contractors responsible for the design, development, porting and quality assurance of our client software and costs associated with the purchase of prototype devices used to develop and test our client software. We devote substantial resources to the ongoing development and enhancement of our client software and, in order to maintain our competitive position, we intend to continue to invest significantly in research and development in future periods. We expect our research and development expenses will increase in absolute dollars as we continue to develop and enhance our client software but that research and development expenses will decline as a percentage of revenues over time.

Sales and Marketing.    Our sales and marketing expenses consist primarily of personnel related costs, costs related to marketing programs and travel costs. We expect that our sales and marketing expenses will increase in future periods in absolute dollars as we continue to seek additional mobile operator customers and increase subscribers to our mobile data services, particularly in international markets, but that sales and marketing expenses will decline as a percentage of revenues over time.

General and Administrative.    Our general and administrative expenses consist primarily of personnel related costs related to our executive, finance, legal, human resource and information technology organizations and fees for professional services. We expect that our general and administrative expenses will increase in absolute dollars and as a percentage of revenue in the near term as we add personnel and incur costs to support the growth in our business, including our efforts to expand internationally and manage our operations as a public company, including compliance with the Sarbanes-Oxley Act of 2002 and related regulations.

Other Income (Expense), Net

Other income (expense), net includes interest income, interest expense, changes in the fair value of our preferred warrant liability as required under FASB Staff Position No. 150-5, Issuer’s Accounting under FASB

 

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Statement No. 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable, or FSP 150-5, and foreign currency transaction gains and losses. As a result of the additional cash and cash equivalents resulting from the net proceeds of this offering, we expect our interest income to increase. Upon the conversion of our redeemable convertible preferred stock in conjunction with the completion of this offering, our preferred warrant liability will be reclassified to stockholders’ deficit, and we will no longer be required to record changes in our preferred warrant liability under FSP 150-5.

Provision for Income Taxes

Since inception, we have incurred annual operating losses. Our provision for income taxes is comprised of foreign taxes recognized for our subsidiary in the United Kingdom. No Federal or state income taxes have been recognized to date due to losses incurred in all U.S. tax jurisdictions.

Due to uncertainty surrounding the realization of deferred tax assets through future taxable income, we have provided a full valuation allowance and no current benefit has been recognized for the net operating loss and other deferred tax assets. Accordingly, deferred tax asset valuation allowances have been established as of September 30, 2006 and 2007 to reflect these uncertainties. Federal and state net operating loss carryforwards begin to expire in 2020 and 2007, respectively, unless these net operating losses are utilized. At September 30, 2007, the balance of our Federal net operating loss carryforwards was $110.0 million. Our ability to use our net operating loss carryforwards to offset any future taxable income may be subject to restrictions attributable to equity transactions that result in changes in ownership as defined by section 382 of the Internal Revenue Code of 1986, as amended.

Accretion of Redemption Value on Redeemable Convertible Preferred Stock

Our redeemable convertible preferred stock has a mandatory redemption provision of approximately $255.2 million as of September 30, 2007. In each reporting period, we accrete the amount that is necessary to adjust the recorded balance of our outstanding redeemable convertible preferred stock to an amount equal to its redemption price over the redemption period. Upon the conversion of our outstanding redeemable convertible preferred stock at the closing of this offering we will cease this accretion.

Critical Accounting Policies and Significant Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Although we believe that our estimates and judgments are reasonable under the circumstances existing at the time these estimates are made, actual results may differ from those estimates, which could affect our consolidated financial statements.

Our critical accounting policies and estimates have been reviewed and discussed with our audit committee. Critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of these uncertainties increases, those judgments become even more subjective and complex. In order to provide an understanding about how our management forms its judgments about future events, including the variables and assumptions underlying the estimates and the sensitivity of those judgments to different circumstances, we have identified the following as our critical accounting policies:

 

   

revenue recognition; and

 

   

stock-based compensation.

 

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Revenue Recognition

Under our software-as-a-service business model, we enter into service contracts with mobile operators and generate revenues primarily from the following sources:

 

   

monthly service fees for each of our mobile operator customer’s subscribers that can access our mobile data services;

 

   

premium applications, content and services fees charged as a one-time fee or a monthly subscription fee, derived from downloads of games, productivity applications, networked services, ringtones and background themes; and

 

   

NRE fees related to the initial deployment of the Danger solution with a mobile operator and custom development projects for our mobile operator customers.

We recognize revenues in accordance with accounting standards for software and service companies, including American Institute of Certified Public Accountants, or AICPA, Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, or SOP 97-2, as amended by SOP 98-9, the consensus reached in Emerging Issues Task Force, or EITF, Issue No. 03-5, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software, or EITF 03-5, and related interpretations, including AICPA Technical Practice Aids, or TPAs.

Our client software, which is provided to our OEM partners on a royalty-free basis, is embedded in Danger-enabled mobile devices. Our OEM partners sell the Danger-enabled mobile devices directly to our mobile operator customers. Therefore, we account for our client software as an element in our arrangements with the mobile operator customers. Since our client software is more than incidental to the arrangement, we recognize revenue in accordance with SOP 97-2.

We evaluate whether our mobile data services are essential to the functionality of any other elements under the arrangements, including our client software embedded in Danger-enabled mobile devices. We provide a fully integrated solution, in which a mobile operator’s subscribers must purchase a Danger-enabled mobile device in order to obtain access to our mobile data services. Accessing our mobile data services is essential to allow the mobile operator’s subscribers to have full use of Danger-enabled mobile devices as they would not have full functionality without our mobile data services. However, contract accounting is not required because the client software is fully functional upon delivery, as it allows the mobile operator’s subscribers to gain access to our mobile data services upon delivery without significant modifications or additions to the client software.

Premium applications, content and services fees are earned based upon applying a constant multiplier, which varies based on the type of premium application, content or service, to the number of successful downloads. Our customers’ subscribers may also subscribe to network-aware premium applications, content and services, for which we charge monthly subscription fees. Premium applications, content and services fees are billed to the mobile operators on a monthly basis. As premium applications, content and services are offered to the mobile operators as an option to purchase unlimited future software products at a predetermined price and we do not have vendor specific objective evidence, or VSOE, of fair value nor do we offer a comparable discount for premium applications, content and services, in accordance with TPA, 5100.50, Definition of More-Than-Insignificant Discount and Software Revenue Recognition, and TPA 5100.51, Accounting for Significant Incremental Discounts on Future Purchases, a significant incremental discount on premium applications, content and services is deemed existent in our arrangements. Since future purchases of premium applications, content and services are not limited by quantity, this significant incremental discount effectively creates a subscription model for other elements in our arrangements with our mobile operator customers. Therefore, premium applications, content and services revenues are deferred and amortized ratably over the longer of the remaining mobile operator’s contract term or the expected period of performance under the mobile operator’s contract, commencing the month after the premium applications, content and services are provided. Any direct incremental premium applications, content and services costs are also deferred and amortized over the same

 

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period, although not in amounts exceeding the premium applications, content and services revenues that are deferred. Premium applications, content and services revenues and costs are recorded as service revenues and cost of service revenues, respectively, on our consolidated statements of operations.

Revenues associated with NRE fees related to the initial deployment of the Danger solution with a mobile operator and to custom development projects are also accounted for under the subscription model as a result of the presence of the significant incremental discount on premium applications, content and services. Therefore, these revenues are deferred and amortized ratably over the longer of the applicable mobile operator’s remaining contract term or the expected period of performance under the mobile operator’s contract, commencing the month after our mobile data services are first launched with the mobile operator or when the applicable mobile operator accepts the custom development project. Any associated direct incremental costs are also deferred, although not in amounts exceeding the deferred revenues associated with NRE fees, and amortized over the same period. Revenues and costs associated with NRE fees are recorded as service revenues and cost of service revenues, respectively, on our consolidated statements of operations.

Monthly service fees under our arrangements with mobile operators are earned based on the number of days that our customers’ subscribers are able to use our service, and are billed to the mobile operator on a monthly basis. Post-contract customer support services are provided to the mobile operators at no additional charge throughout the contract term. We recognize revenue based on the guidance in TPA 5100.76, Fair Value in Multiple-Element Arrangements That Include Contingent Usage-Based Fees and Software Revenue Recognition. Our monthly service fees are analogous to the contingent usage-based fees under TPA 5100.76. The TPA 5100.76 accounting model is considered a subscription model for usage based revenues. Therefore, we recognize revenues on the monthly service fees as the fee becomes fixed or determinable at the time actual usage occurs and collectibility is probable. This occurs at the end of each month when we have a reliable measure of usage. At that time, we have also satisfied the other revenue recognition criteria contained in SOP 97-2 as we have persuasive evidence that an arrangement exists, services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. Monthly service revenues and costs are recorded as service revenues and cost of service revenues, respectively, on our consolidated statements of operations.

When a specified deliverable is deemed present in an arrangement with a mobile operator and we do not have VSOE of fair value of this specified deliverable, we defer the recognition of all revenues under the particular arrangement until the commitment to provide the specified deliverable is fulfilled. We deferred all of our revenues generated from our arrangement with T-Mobile USA during the years ended September 30, 2003 and 2004, and recognized these cumulative deferred revenues during the year ended September 30, 2005 upon the fulfillment of our commitment to provide certain specified deliverables under our arrangement with T-Mobile USA.

In addition to the aforementioned revenue sources, we sold Danger-enabled mobile devices to certain of our mobile operator customers until March 2006. We also charged client license fees upon device shipment or activation to our mobile operator customers prior to June 2005, and we still charge client license fees to certain of our mobile operator customers that account for a relatively small number of subscribers that access our mobile data services. Revenues associated with the sale of Danger-enabled mobile devices and client license fees are deferred and amortized to revenue ratably over the longer of the remaining contract term, the expected period of performance under the mobile operator’s contract or, in cases where the mobile operator had refund rights, over the duration of any refund period. Any direct incremental costs, although not in amounts exceeding associated deferred revenues, are deferred and amortized over the same period. Product sales and costs are recorded as product revenues and cost of product revenues, respectively, on our consolidated statements of operations. Client license fee revenues and costs are recorded as service revenues and costs of service revenues, respectively, on our consolidated statements of operations.

Stock-Based Compensation

Prior to October 1, 2006, as permitted by Statement of Financial Accounting, or SFAS, No. 123, Accounting for Stock-Based Compensation, or SFAS 123, and SFAS No. 148, Accounting for Stock-Based Compensation-

 

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Transition and Disclosure, or SFAS 148, we accounted for stock-based employee compensation using the intrinsic method of accounting under Accounting Principles Board, or APB Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and presented disclosure of pro forma information as required under SFAS 123, as amended by SFAS 148. Under APB 25, no compensation expense was recognized unless the exercise price was less than the estimated fair market value at the date of grant. All option grants made prior to September 30, 2006 were made at fair market value, as determined by our board of directors, and consequently no stock-based employee compensation expense was reflected in our consolidated statements of operations for the years ended September 30, 2005 and 2006.

Effective October 1, 2006, we began accounting for share-based awards under the provisions of SFAS No. 123(R), Share-Based Payment, or SFAS 123(R), which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financials statements based on fair value. SFAS 123(R) requires us to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The fair value of that portion of the share-based awards expected to vest is recognized as expense ratably over the requisite service period of the award.

We adopted SFAS 123(R) using the prospective method which requires the application of the accounting standard as of October 1, 2006. Our consolidated financial statements as of and for year ended September 30, 2007 reflect the impact of SFAS 123(R). In accordance with the prospective method, our consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). We use the straight-line method to allocate compensation cost to reporting periods under SFAS 123(R).

As a result of adopting SFAS 123(R) on October 1, 2006, our loss before provision for income taxes and cumulative effect of change in accounting principle and net loss for the year ended September 30, 2007 is $329,000 higher than if we had continued to account for stock-based compensation under APB 25. Diluted net loss per share for the year ended September 30, 2007 is $0.02 higher than if we had continued to account for stock-based compensation under APB 25. There was no compensation cost capitalized as part of an asset in the year ended September 30, 2007. We have not recognized, and we do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation cost as a result of the full valuation allowance on our net deferred tax assets and our net operating loss carryforwards.

As of September 30, 2007, we had $3.8 million of unrecognized stock-based compensation expense remaining to be amortized over a period of 3.7 years.

For the year ended September 30, 2007, we estimated the fair value of each option award under SFAS 123(R) on the date of grant using the Black-Scholes-Merton, or Black-Scholes, option-pricing model utilizing the following assumptions:

 

Estimated volatility

   59.4 %

Expected dividend yield

   0.0 %

Expected life (years)

   5.3  

Weighted average risk-free interest rate

   5.0 %

The weighted average grant date fair value per share of employee stock options granted during the year ended September 30, 2007 was $0.31.

Estimated volatility.    Since our adoption of SFAS 123(R), we have calculated estimated volatility based upon the trading history and implied volatility of the common stock of comparable technology companies. Comparable companies include other public companies in the technology industry similar in size, stage of development and financial leverage.

Expected dividend yield.    We have not declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Therefore, we use an expected dividend yield of zero.

 

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Expected life.    The expected life of share-based awards represents the period that share-based awards are expected to be outstanding. Upon our adoption of SFAS 123(R) on October 1, 2006, as permitted by Staff Accounting Bulletin No. 107, Share Based Payment, we adopted a temporary “shortcut approach” to estimate the expected life of employee stock options through March 31, 2007. Under this approach, the expected life is presumed to be the mid-point between the vesting date and the contractual end of the option. Since April 1, 2007, we have estimated the expected life of employee stock options based on the expected terms of options granted by publicly-traded comparable companies and our historical exercise experience.

Weighted average risk-free interest rate.    We base the weighted average risk-free interest rate on the implied yield currently available on U.S. Treasury constant maturity securities with the same or substantially equivalent remaining term as our stock options.

Estimated forfeitures.    SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. When estimating forfeitures, we consider voluntary and involuntary termination behavior as well as analysis of actual option forfeitures.

The determination of fair value of stock-based compensation involves significant judgments, assumptions, estimates and complexities. The assumptions discussed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the recorded stock-based compensation expense could have been materially different.

The following table summarizes information concerning all options granted during the period from October 1, 2006 through September 30, 2007:

 

Grant Date

   Number of
Options
Granted
   Option
Exercise
Price
   Fair
Value of
Common
Stock on
Grant Date

October 2006

   585,000    $ 0.37    $ 0.37

December 2006

   442,200      0.37      0.37

March 2007

   403,000      0.55      0.55

June 2007

   11,987,500      0.55      0.55

September 2007

   1,872,500      0.65      0.65

At each of these dates, our board of directors determined the value of our common stock on the basis of the most recent contemporaneous valuation presented by management, as updated since the date of such valuation to account for developments in our business, and the additional factors summarized below.

Valuation of Common Stock.    We have historically granted stock options at exercise prices not less than the fair value of our common stock. Given the absence of an active market for our common stock, our board of directors, the members of which have extensive business, finance and venture capital experience, estimated the fair value of our common stock at each grant date, based in part on an analysis of factors including:

 

   

the price of our redeemable convertible preferred stock sales in arms-length transactions, and the rights, preferences and privileges, including liquidation value, of our redeemable convertible preferred stock and our common stock;

 

   

the introduction of new mobile data services and Danger-enabled mobile devices;

 

   

our entry into mobile operator and OEM agreements;

 

   

our current and expected future operating and financial performance;

 

   

the marketability of our equity securities;

 

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the market multiples of publicly-held technology companies with similar business models and similar financial results;

 

   

comparable merger and acquisitions of technology companies with similar business models and similar financial results;

 

   

the likelihood of achieving a liquidity event for the shares of common stock underlying the stock options, such as an initial public offering, or a sale of our company, given the prevailing market conditions and our relative financial condition at the time of grant; and

 

   

in-depth contemporaneous valuations as of September 8, 2006, February 7, 2007, June 1, 2007 and August 31, 2007 presented by management.

Each of the contemporaneous valuations presented by management to the board of directors used a two-step process for determining the fair value of the common stock in which our aggregate business enterprise value was first estimated and subsequently allocated to each class of our outstanding stock. Our aggregate business enterprise value at each valuation date was determined using a market multiple method and a comparable transaction method, each of which was weighted equally. The aggregate enterprise value was allocated to our common stock on a per-share basis at each valuation date using an option-pricing methodology that included a probability weighted scenario analysis. This two-step approach is consistent with the methods outlined in the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

The market multiple method estimated aggregate enterprise value by applying risk adjusted revenue multiples of publicly traded companies in similar lines of business and similar financial results to our revenues. Significant estimates used in the market multiple approach included the selection of comparable companies, market multiples and the relative weighting of the different market multiples. The comparable transaction approach to determining aggregate enterprise value involved the identification of similar transactions, such as mergers and acquisitions, for companies in similar lines of business and with similar financial results. Risk adjusted revenue multiples were then applied to the revenues of those companies in much the same manner as the market multiple method. In both instances, comparable companies included mobile content providers, software-as-a-service companies, and high technology communications and entertainment companies that were selected based on various factors, including, but not limited to, industry, product offering, growth and future growth expectations, financial risk, market position and company size.

The aggregate business enterprise value determined through the methods described above was allocated to each class of our capital stock using an option-pricing methodology that included a probability weighted scenario analysis of four potential liquidity scenarios, one of which involved the completion of an initial public offering and three of which involved the sale of the company at various values. For purposes of the liquidity scenarios involving the sale of the company, a value was first assigned to each share of redeemable convertible preferred stock and the remaining equity securities were analyzed as an option on some portion of the remaining business enterprise value. In undertaking this analysis, the rights and privileges of each class of capital stock were considered, including such factors as liquidation rights, conversion rights, and the manner in which each class of capital stock affects the other. In each of these scenarios, a large proportion of our aggregate business enterprise value was allocated to our redeemable convertible preferred stock because of the significant liquidation preferences associated with the outstanding redeemable convertible preferred stock and the rights of certain series of our outstanding redeemable convertible preferred stock to participate with the common stock after payment of the liquidation preferences. For purposes of the liquidity scenario involving an initial public offering, options and warrants were valued based solely on the Black-Scholes option-pricing model. The aggregate value related to options and warrants was subtracted from the aggregate business enterprise value for purposes of determining the redeemable convertible preferred stock and common stock values on an as-if converted, per share basis. After accounting for the value of the options and warrants, the remaining business enterprise value was apportioned equally among the shares of common stock and each series of redeemable convertible preferred stock, which resulted in the common stock having a higher relative value per share than under the other liquidity scenarios.

 

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The anticipated timing of a potential liquidity event, the estimated volatility, the discount for lack of marketability and the probability of an initial public offering were the key assumptions used in the determination of the common stock value per share in connection with each valuation. These assumptions are set forth below for each of the contemporaneous valuations presented by management since September 8, 2006:

 

     Sep. 8,
2006
    Feb. 7,
2007
    June 1,
2007
    Aug. 31,
2007
 

Common stock value per share

   $ 0.37     $ 0.55     $ 0.55     $ 0.65  

Risk-free interest rate

     4.8 %     5.1 %     5.1 %     4.2 %

Time to liquidity event (in years)

     1.8       1.3       1.3       0.6  

Estimated volatility

     68.0 %     60.0 %     60.0 %     60.0 %

Marketability discount rate

     17.5 %     12.5 %     12.5 %     6.3 %

Probability of an initial public offering

     20.0 %     40.0 %     40.0 %     60.0 %

October 2006 Grants.    The contemporaneous valuation presented by management as of September 8, 2006 determined the fair value of our common stock to be between $0.36 and $0.38 per share. For purposes of the October 2006 grants, our board of directors determined, in light of all relevant facts and circumstances, that the fair value of our common stock was $0.37 per share. In addition to the contemporaneous valuation, significant factors considered by our board of directors in determining the fair value of our common stock included the following:

 

   

growth in our revenues;

 

   

increases in the trading multiples of comparable companies and value of comparable sale transactions;

 

   

the execution of a new contract with T-Mobile USA in March 2006;

 

   

the execution of a product development and distribution agreement with Motorola;

 

   

the negotiation and execution of a term sheet for the purchase of our Series E redeemable convertible preferred stock by Sharp; and

 

   

ongoing developments associated with certain intellectual property litigation.

December 2006 Grants.    The contemporaneous valuation presented by management as of September 8, 2006 determined the fair value of our common stock to be between $0.36 and $0.38 per share. For purposes of the December 2006 grants, our board of directors determined that the fair value of our common stock remained $0.37 per share due to the absence of material events in the interim period that would increase our aggregate business enterprise value.

March 2007 Grants.    The contemporaneous valuation presented by management as of February 7, 2007 determined the fair value of our common stock to be between $0.54 and $0.57 per share. For purposes of the March 2007 grants, our board of directors determined, in light of all relevant facts and circumstances, that the fair value of our common stock was $0.55 per share. In addition to the contemporaneous valuation, significant factors considered by our board of directors in determining the fair value of our common stock included the following:

 

   

growth in our revenues and the launch of our mobile data services with a new mobile operator customer;

 

   

increases in the trading multiples of comparable companies and the values of comparable sale transactions; and

 

   

our commencement of discussions with certain investment banks about an initial public offering of our common stock.

June 2007 Grants.    The contemporaneous valuation presented by management as of June 1, 2007 determined the fair value of our common stock to be between $0.51 and $0.54 per share. For purposes of the June

 

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2007 grants, our board of directors determined, in light of all relevant facts and circumstances, that the fair value of our common stock was $0.55 per share. In addition to the contemporaneous valuation, significant factors considered by our board of directors in determining the fair value of our common stock included the following:

 

   

sales results associated with the launch of a new Danger-enabled mobile device;

 

   

the anticipated launch of certain competitive devices, particularly Apple, Inc.’s iPhone; and

 

   

relative stability in the trading multiples of comparable companies and the values of comparable sale transactions.

September 2007 Grants.    The contemporaneous valuation presented by management as of August 31, 2007 determined the fair value of our common stock to be between $0.64 and $0.66 per share. For purposes of the September 2007 grants, our board of directors determined, in light of all relevant facts and circumstances, that the fair value of our common stock was $0.65 per share. In addition to the contemporaneous valuation, significant factors considered by our board of directors in determining the fair value of our common stock included the following:

 

   

growth in our revenues;

 

   

our selection of investment bankers and our decision to pursue an initial public offering; and

 

   

relative stability in the trading multiples of comparable companies and value of comparable sale transactions.

 

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Results of Operations

The following table is derived from our consolidated statements of operations and sets forth our historical operating results as a percentage of total revenues for the years ended September 30, 2005, 2006 and 2007:

 

     Years Ended September 30,  
     2005     2006     2007  

Consolidated Statements of Operations Data:

      

Revenues:

      

Service

   58.9 %   78.9 %   89.7 %

Product

   41.1     21.1     10.3  
                  

Total revenues

   100.0     100.0     100.0  
                  

Cost of revenues:

      

Cost of service revenues

   29.1     36.0     47.6  

Cost of product revenues

   44.1     18.5     9.3  
                  

Total cost of revenues

   73.2     54.5     56.9  

Gross margin

   26.8     45.5     43.1  

Operating expenses:

      

Research and development

   30.7     36.0     39.9  

Sales and marketing

   14.2     11.6     12.4  

General and administrative

   9.8     14.2     11.6  
                  

Total operating expenses

   54.7     61.8     63.9  
                  

Loss from operations

   (27.9 )   (16.3 )   (20.8 )

Other income (expense), net

   1.0     0.2     (1.0 )
                  

Loss before provision for income taxes and cumulative effect of change in accounting principle

   (26.9 )   (16.1 )   (21.8 )

Provision for income taxes

       (0.1 )   (0.1 )
                  

Loss before cumulative effect of change in accounting principle

   (26.9 )   (16.2 )   (21.9 )

Cumulative effect of change in accounting principle

       2.9      
                  

Net loss

   (26.9 )   (13.3 )   (21.9 )

Accretion of redemption value on redeemable convertible preferred stock

   (33.5 )   (29.4 )   (27.9 )
                  

Net loss attributable to common stockholders

   (60.4 )%   (42.7 )%   (49.8 )%
                  

Comparison of Years Ended September 30, 2006 and 2007

Revenues

The following sets forth our service and product revenues and the related increase (decrease) in such revenues on an absolute and percentage basis for the years ended September 30, 2006 and 2007:

 

     Years Ended September 30,    Change  
         2006            2007        $     %  
     (Dollars in thousands)        

Service revenues

   $ 38,895    $ 50,581    $ 11,686     30.0 %

Product revenues

     10,416      5,832      (4,584 )   (44.0 )
                        

Total revenues

   $ 49,311    $ 56,413    $ 7,102     14.4  
                        

 

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The increase in service revenues in the year ended September 30, 2007 was primarily due to an increase of $15.0 million in monthly service revenues from $29.6 million in the year ended September 30, 2006 to $44.6 million in the year ended September 30, 2007. The increase in monthly service revenues was associated with growth in the number of our customers’ subscribers that had access to our mobile data services. Premium applications, content and services revenues increased $1.2 million to $4.2 million in the year ended September 30, 2007 from $3.0 million in the year ended September 30, 2006. We invoiced $7.7 million of premium applications, content and services fees in the year ended September 30, 2007, and those fees will be recognized as revenue over an average of 21 months. Increases in monthly service revenues and premium applications, content and services revenues were offset by a decrease of $4.4 million in client license fee revenues and a decrease of $173,000 in revenues associated with NRE fees in the year ended September 30, 2007. We expect to recognize, in decreasing amounts, substantially all remaining client license fee revenues by September 30, 2008.

The decrease in product revenues in the year ended September 30, 2007 was due to a decrease in amortization of deferred product revenues associated with the sale of Danger-enabled mobile devices prior to March 2006. We expect to recognize, in decreasing amounts, substantially all remaining product revenues by September 30, 2008.

Cost of Revenues and Gross Profit

The following sets forth our cost of revenues and gross profit and related increase (decrease) in cost of revenues and gross profit on an absolute and percentage basis for the years ended September 30, 2006 and 2007:

 

     Years Ended September 30,    Change  
         2006            2007        $     %  
     (Dollars in thousands)        

Cost of service revenues

   $ 17,755    $ 26,846    $ 9,091     51.2 %

Cost of product revenues

     9,130      5,276      (3,854 )   (42.2 )
                        

Total cost of revenues

   $ 26,885    $ 32,122    $ 5,237     19.5  
                        

Gross profit—service

   $ 21,140    $ 23,735    $ 2,595     12.3  

Gross profit—product

     1,286      556      (730 )   (56.8 )
                        

Total gross profit

   $ 22,426    $ 24,291    $ 1,865     8.3  
                        

The increase in cost of service revenues in the year ended September 30, 2007 was primarily due to an increase of $4.2 million in personnel related costs associated with increased headcount in our service engineering, network operations and premium services organizations. In addition, hosting and bandwidth charges increased $2.0 million in the year ended September 30, 2007 as a result of growth in the number of our customers’ subscribers that had access to our mobile data services and the full annual impact of expenses associated with a data center colocation facility in Europe that we began to incur in the second quarter of the year ended September 30, 2006. Depreciation increased $2.0 million in the year ended September 30, 2007 as a result of ongoing data center capital expenditures, including the expansion of our data center in San Jose, California. Amortization of third-party developer royalties increased approximately $817,000, in the year ended September 30, 2007, in connection with the increase in premium applications, content and services revenues.

The decrease in cost of product revenues in the year ended September 30, 2007 was due to a decrease in the amortization of deferred product costs of $4.2 million associated with the sale of Danger-enabled mobile devices prior to March 2006. We expect to recognize, in a decreasing amount, substantially all remaining deferred product costs by September 30, 2008. In addition, in September 2006, we reduced our cost of product revenues by $1.4 million as a one-time adjustment of our accrual for estimated settlement costs related to certain patent and trade secret litigation to reflect a reduction in such estimated costs.

 

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For the year ended September 30, 2007, our gross profit increased $1.9 million and our gross margin decreased to 43.1% from 45.5% in the year ended September 30, 2006. Our gross profit and gross margin are significantly influenced by the relative mix of our revenues between service revenues and product revenues as well as the relative mix of our various service revenues. The gross margins associated with our monthly service revenues and premium applications, content and services revenues are substantially higher than gross profit associated with the sale of Danger-enabled mobile devices to our mobile operator customers. As a result, the decrease in product revenues and related costs associated with the termination of our sales of Danger-enabled mobile devices has had and will continue to have a positive impact on our gross margin through the year ended September 30, 2008. The gross margins associated with our monthly service revenues have higher gross margins than our other service revenues, including our premium applications, content and services revenues. Gross margin associated with our service revenues decreased from 54.4% in the year ended September 30, 2006 to 46.9% in the year ended September 30, 2007 due an increase in premium applications, content and services revenues relative to other service revenues. Gross margins associated with product revenues decreased from 12.3% in the year ended September 30, 2006 to 9.5% in the year ended September 30, 2007 due to our one-time adjustment of estimated costs related to certain patent and trade secret litigation in the year ended September 30, 2006.

In addition, our gross profits and gross margins have been and will continue to be affected by a variety of factors, including:

 

   

the timing of new product introductions;

 

   

costs associated with the development of new or expansion of or improvements to existing data centers;

 

   

costs associated with licensing in technology for the development of enhanced features for our mobile data services;

 

   

the existence of commitments to provide specified deliverables that result in revenue deferral;

 

   

pricing changes;

 

   

the period over which our premium applications, content and services revenues are recognized; and

 

   

software warranty costs and indemnification obligations associated with our mobile operator customer and OEM relationships.

Operating Expenses

The following sets forth our operating expenses and the related increase (decrease) in such expenses on an absolute and percentage basis for the years ended September 30, 2006 and 2007:

 

     Years Ended September 30,    Change  
         2006            2007        $     %  
     (Dollars in thousands)        

Research and development

   $ 17,746    $ 22,497    $ 4,751     26.8 %

Sales and marketing

     5,723      7,020      1,297     22.7  

General and administrative

     6,999      6,541      (458 )   (6.5 )
                        

Total operating expenses

   $ 30,468    $ 36,058    $ 5,590     18.3  
                        

Research and Development.    The increase in research and development expense in the year ended September 30, 2007 was primarily due to an increase of $5.1 million in personnel related costs associated with increased headcount and an increase of $818,000 in consulting expenses to design, develop and test our client software. The increase in headcount was necessitated by our entry into an OEM arrangement with Motorola in September 2006, and the development of our client software to support multiple Danger-enabled mobile devices sold by Sharp in the year ended September 30, 2007. Research and development expenses in the year ended September 30, 2006 also included a one-time charge of $982,000 associated with the vested portion of a warrant to purchase our Series D’ redeemable convertible preferred stock issued to Motorola in connection with our OEM arrangement.

 

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Sales and Marketing.    The increase in sales and marketing expense in the year ended September 30, 2007 was primarily due to a $1.1 million increase in personnel related costs, including costs associated with the expansion of our sales force outside the United States.

General and Administrative.    The decrease in general and administrative expense in the year ended September 30, 2007 was primarily due to a decrease of approximately $2.2 million in legal fees and other costs associated with certain patent and trade secret litigation settled in November 2006. The decrease in legal expenses was partially offset by an increase of $1.1 million in personnel related costs associated with increased headcount and $838,000 in professional fees to support company growth and our preparations to become a public company.

Other Income (Expense), Net.

The following sets forth our other income (expense), net and the related increase (decrease) in other income (expense), net on an absolute basis for the years ended September 30, 2006 and 2007:

 

     Years Ended September 30,     Change  
         2006            2007     $  
     (In thousands)  

Other income (expense), net

   $ 107    $ (520 )   $ (627 )

The change in other income (expense), net is primarily due to an increase in interest expense of $352,000, which was attributable to higher average debt balances during the year ended September 30, 2007, lower interest income of $136,000, which resulted from lower average cash balances, partially offset by higher average interest rates in the year ended September 30, 2007, and an increase of $110,000 in the charge associated with the measurement of our preferred warrant liability to fair value. Preferred warrants are recorded at fair value each period using the Black-Scholes option-pricing model and the change is recorded in other income (expense), net. The increase in the fair value resulted from an increase in the fair market value of the underlying redeemable convertible preferred stock, partially offset by a decrease in the volatility and remaining terms of the warrants.

Comparison of Years Ended September 30, 2005 and 2006

Revenues

The following sets forth our service and product revenues and the related increase (decrease) in such revenues on an absolute and percentage basis for the years ended September 30, 2005 and 2006:

 

     Years Ended September 30,    Change  
         2005            2006        $     %  
     (Dollars in thousands)        

Service revenues

   $ 21,669    $ 38,895    $ 17,226     79.5 %

Product revenues

     15,121      10,416      (4,705 )   (31.1 )
                        

Total revenues

   $ 36,790    $ 49,311    $ 12,521     34.0  
                        

The increase in service revenues in the year ended September 30, 2006 was primarily due to an increase of $13.9 million in monthly service revenues from $15.7 million in the year ended September 30, 2005 to $29.6 million in the year ended September 30, 2006. The increase in monthly service revenues was associated with growth in the number of our customers’ subscribers that had access to our mobile data services and the full annual effect of an increase in the per subscriber monthly service fee charged to T-Mobile USA which became effective in June 2005. Premium applications, content and services revenues increased $2.1 million to $3.0 million in the year ended September 30, 2006 from $903,000 in the year ended September 30, 2005. We invoiced

 

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$4.4 million of premium applications, content and services fees in the year ended September 30, 2006, and those fees will be recognized as revenue over an average of 25 months. Client license fee revenues increased by $1.2 million in the year ended September 30, 2006, because the period over which we amortized our deferred client license fee revenues decreased relative to amortization period applicable in the year ended September 30, 2005. The change in the amortization period for the year ended September 30, 2006 resulted from the shift in manufacturing responsibility for Danger-enabled mobile devices to our OEM partner which eliminated our refund obligations associated with such devices. Revenues associated with NRE fees increased $63,000 in the year ended September 30, 2006.

The decrease in product revenues in the year ended September 30, 2006 was due to a decrease in amortization of deferred product revenues associated with the sale of Danger-enabled mobile devices, our sales of which substantially decreased following the commencement of sales by our OEM partner, Sharp, in September 2004.

In addition, in the year ended September 30, 2005, we recognized $12.6 million of accumulated deferred revenues associated with product sales and service fees invoiced in the years ended September 30, 2003 and 2004. These deferred revenues were recognized upon delivery of specified deliverables to T-Mobile USA and consisted of $5.9 million of monthly service revenues, $1.0 million of client license fee revenues, $5.6 million of product revenues, $117,000 of revenues associated with NRE fees and $37,000 of premium applications, content and services revenues.

Cost of Revenues and Gross Profit (Loss)

The following sets forth our cost of revenues and gross profit (loss) and related increase (decrease) in cost of revenues and gross profit (loss) on an absolute and percentage basis for the years ended September 30, 2005 and 2006:

 

     Years Ended September 30,    Change  
         2005             2006        $     %  
     (Dollars in thousands)        

Cost of service revenues

   $ 10,701     $ 17,755    $ 7,054     65.9 %

Cost of product revenues

     16,220       9,130      (7,090 )   (43.7 )
                         

Total cost of revenues

   $ 26,921     $ 26,885    $ (36 )   (0.1 )
                         

Gross profit—service

   $ 10,968     $ 21,140    $ 10,172     92.7  

Gross profit (loss)—product

     (1,099 )     1,286      2,385     NM  
                         

Total gross profit

   $ 9,869     $ 22,426    $ 12,557     127.2  
                         

The increase in cost of service revenues in the year ended September 30, 2006 was primarily due to an increase of approximately $3.3 million in personnel related costs associated with increased headcount in our service engineering, network operations and premium services organizations. In addition, hosting and bandwidth charges increased by $906,000 in the year ended September 30, 2006 as a result of growth in the number of our customers’ subscribers that had access to our mobile data services and our expenses associated with a data center colocation facility in Europe that we began to incur in the second quarter of the year ended September 30, 2006. Depreciation increased by $1.0 million in the year ended September 30, 2006 as a result of ongoing data center capital expenditures, including the expansion of our data center in San Jose, California. Amortization of third-party developer royalties increased by approximately $1.2 million in the year ended September 30, 2006 in connection with the increase in premium applications, content and services revenues.

The decrease in cost of product revenues in the year ended September 30, 2006 was due to a decrease in the amortization of deferred product costs associated with the sale of Danger-enabled mobile devices. In addition, in

 

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September 2006, we adjusted our deferred cost of product revenues by $1.4 million as a one-time adjustment of our accrual for estimated settlement costs related to certain patent and trade secret litigation to reflect a reduction in such estimated costs.

For the year ended September 30, 2006, our gross profit increased $12.6 million and our profit margin increased to 45.5% from 26.8% in the year ended September 30, 2005. The increase in gross profit associated with services revenue of $10.2 million in the year ended September 30, 2006 was primarily the result of increases in our monthly service revenues of $13.9 million and client license fee revenues of $1.2 million, each of which have higher gross margins than other components of our service revenues. The increase in gross profit and gross margin associated with product revenues in the year ended September 30, 2006 was primarily the result of a one-time adjustment to reflect reduced estimated settlement costs related to certain patent and trade secret litigation and decreases in device warranty expenses and other product related costs associated with the decrease in our sales of Danger-enabled mobile devices as our OEM partners increasingly became responsible for such sales.

Operating Expenses

The following sets forth our operating expenses and the related increase in such expenses on an absolute and percentage basis for the years ended September 30, 2005 and 2006:

 

     Years Ended September 30,    Change  
         2005            2006        $    %  
     (Dollars in thousands)       

Research and development

   $ 11,317    $ 17,746    $ 6,429    56.8 %

Sales and marketing

     5,211      5,723      512    9.8  

General and administrative

     3,610      6,999      3,389    93.9  
                       

Total operating expenses

   $ 20,138    $ 30,468    $ 10,330    51.3  
                       

Research and Development.    The increase in research and development expense in the year ended September 30, 2006 was primarily due to an increase of $4.2 million in personnel related costs associated with increased headcount and an increase of $855,000 in consulting expenses to design, develop and test our client software. The increase in headcount was necessitated by the launch of a new Danger-enabled mobile device in July 2006 and preparations for and in connection with our entry into an OEM arrangement with Motorola in September 2006. Research and development expenses in the year ended September 30, 2006 also included a one-time charge of $982,000 associated with the vested portion of a warrant to purchase our Series D’ redeemable convertible preferred stock issued to Motorola in connection with our OEM arrangement.

Sales and Marketing.    The increase in sales and marketing expense in the year ended September 30, 2006 was primarily due to an increase in personnel related costs and increased spending on marketing programs associated with the launch of new mobile operator customers in Europe.

General and Administrative.    The increase in general and administrative expense in the year ended September 30, 2006 was primarily due to an increase of approximately $2.4 million in legal fees and other costs associated with certain patent and trade secret litigation. In addition, personnel related costs increased $848,000 associated with headcount necessary to support our growth.

Other Income (Expense), Net.

The following sets forth our other income (expense), net and the related increase (decrease) in such other income (expense), net on an absolute and percentage basis for the years ended September 30, 2005 and 2006:

 

     Years Ended September 30,    Change  
         2005            2006        $     %  
     (Dollars in thousands)        

Other income (expense), net

   $ 359    $ 107    $ (252 )   (70.2 )%

 

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The change in other income (expense), net in the year ended September 30, 2006, as compared with the year ended September 30, 2005, was primarily a result of a $907,000 charge associated with the measurement of our preferred warrant liability to fair value in the year ended September 30, 2006, partially offset by a $572,000 increase in interest income resulting from higher cash balances during the year ended September 30, 2006 as compared to the year ended September 30, 2005. The increase in fair value resulted from an increase in the fair market value of the underlying redeemable convertible preferred stock, partially offset by a decrease in the estimated volatility and remaining terms of the warrants.

Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period ended September 30, 2007. The data has been prepared on the same basis as the audited consolidated financial statements and related notes included in this prospectus and you should read the following table in conjunction with such financial statements. The table includes all necessary adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of this data.

 

    Three Months Ended  
   

Dec. 31,

2005

   

March 31,

2006

   

June 30,

2006

   

Sep. 30,

2006

   

Dec. 31,

2006

   

March 31,

2007

   

June 30,

2007

   

Sep. 30,

2007

 
   

(In thousands, except per share data)

 

Revenues:

               

Service

  $ 8,210     $ 6,275     $ 12,657     $ 11,753     $ 11,312     $ 11,564     $ 13,007     $ 14,698  

Product

    3,027       2,502       2,493       2,394       2,203       1,442       1,709       478  
                                                               

Total revenues

    11,237       8,777       15,150       14,147       13,515       13,006       14,716       15,176  

Cost of revenues:

               

Cost of service revenues

    3,536       4,029       4,968       5,222       5,679       6,282       7,176       7,709  

Cost of product revenues

    2,775       2,277       3,324       754       1,962       1,371       1,531       412  
                                                               

Total cost of revenues

    6,311       6,306       8,292       5,976       7,641       7,653       8,707       8,121  

Gross profit

    4,926       2,471       6,858       8,171       5,874       5,353       6,009       7,055  

Operating expenses:

               

Research and development

    3,315       4,391       4,622       5,418       4,633       5,684       6,081       6,099  

Sales and marketing

    1,218       1,433       1,746       1,326       1,866       1,967       1,663       1,524  

General and administrative

    1,060       1,953       1,886       2,100       1,496       1,198       1,832       2,015  
                                                               

Total operating expenses

    5,593       7,777       8,254       8,844       7,995       8,849       9,576       9,638  

Loss from operations

    (667 )     (5,306 )     (1,396 )     (673 )     (2,121 )     (3,496 )     (3,567 )     (2,583 )

Other income (expense), net

    686       587       683       (1,849 )     525       (2,235 )     1,048       142  
                                                               

Income (loss) before provision for income taxes and cumulative effect of change in accounting principle

    19       (4,719 )     (713 )     (2,522 )     (1,596 )     (5,731 )     (2,519 )     (2,441 )

Provision for income taxes

    (11 )     (9 )     (18 )     (16 )     (9 )     (20 )     (17 )     (28 )
                                                               

Income (loss) before cumulative effect of change in accounting principle

    8       (4,728 )     (731 )     (2,538 )     (1,605 )     (5,751 )     (2,536 )     (2,469 )

Cumulative effect of change in accounting principle

    1,421                                            
                                                               

Net income (loss)

    1,429       (4,728 )     (731 )     (2,538 )     (1,605 )     (5,751 )     (2,536 )     (2,469 )

Accretion of redemption value on redeemable convertible preferred stock

    (3,427 )     (3,670 )     (3,683 )     (3,697 )     (3,912 )     (3,921 )     (3,933 )     (3,944 )
                                                               

Net loss per share attributable to common stockholders

  $ (1,998 )   $ (8,398 )   $ (4,414 )   $ (6,235 )   $ (5,517 )   $ (9,672 )   $ (6,469 )   $ (6,413 )
                                                               

Net loss per share attributable to common stockholders—basic and diluted

  $ (0.13 )   $ (0.56 )   $ (0.29 )   $ (0.40 )   $ (0.35 )   $ (0.60 )   $ (0.39 )   $ (0.38 )
                                                               

Includes the following stock-based compensation expense:

               

Cost of revenues

  $     $     $     $     $ 3     $ 5     $ 17     $ 57  

Research and development

    1       1                   7       14       38       105  

Sales and marketing

                            1       1       6       23  

General and administrative

    2                         6       3       12       56  

 

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We may experience spikes in new subscriber activations and in premium applications, content and services revenues as a result of the release of new Danger-enabled mobile device models or new premium applications, content and services. In addition, our and our mobile operator customers’ marketing efforts tend to increase to support the launches of new devices. New Danger-enabled mobile devices were launched in July 2006 and April 2007 and subscribers and premium applications, content and services revenues increased accordingly.

During the holiday shopping season, mobile device sales typically increase, driving new subscriber activations and an increase in premium applications and content downloads. However, since we account for our premium applications, content and services revenues using a subscription model, we do not experience a noticeable spike in revenues during the three months ending December 31, but rather an acceleration of our growth rate.

In addition, if a specified deliverable is deemed present in our arrangements with a mobile operator, all revenues associated with that arrangement, including monthly service revenues, are deferred until the specified deliverable is provided. Our new contract with T-Mobile USA included a specified deliverable and, as a result, we deferred all revenue under that arrangement from March 2006, when we signed the arrangement, until we provided the specified deliverable in May 2006, at which point we recognized $2.9 million of monthly service revenues in the three month period ended June 30, 2006 that had been invoiced in the three month period ended March 2006.

As a result of these and other factors impacting our revenues, costs of revenues and operating expenses, our operating results have fluctuated significantly from period to period and can be expected to fluctuate significantly in future periods. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

Liquidity and Capital Resources

Since inception, we have generated significant operating losses and as a result have not generated sufficient cash flow to fund our operations. As of September 30, 2007, our accumulated deficit was $188.1 million. We have financed our operations primarily through the sale of redeemable convertible preferred stock for total consideration of approximately $144.0 million, capital lease financing arrangements for approximately $13.6 million and other indebtedness of approximately $2.1 million. As of September 30, 2007, our cash and cash equivalents were $13.0 million and our working capital was $9.0 million. We invest our excess cash in short-term investments in a variety of high credit quality securities, including obligations of U.S. government agencies, corporate bonds, repurchase agreements, commercial paper, master notes and money market funds.

In October 2007, we entered into a loan and security agreement with Silicon Valley Bank providing for maximum borrowings of $12.0 million. Our agreement with Silicon Valley Bank provides for up to $5.0 million of revolving loans which may be drawn through October 2008 and for 36-month term loans with maximum aggregate borrowings of $7.0 million. Our agreement requires that the term loans be advanced on or before March 31, 2008. Borrowings under our agreement with Silicon Valley Bank are secured by substantially all of our tangible assets and certain of our intangible assets.

Our agreement with Silicon Valley Bank includes several covenants that place restrictions on the incurrence of additional debt and liens; certain changes in management or ownership, investments, the payment of dividends; and limitations on our ability sell or dispose of any of our assets outside the normal course of business and our ability to engage in mergers and acquisitions.

 

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Summary of Cash Flows

The following table shows a summary of our cash flows for the years ended September 30, 2005, 2006 and 2007:

 

     Years Ended September 30,  
     2005     2006     2007  
     (In thousands)  

Cash flows used in operating activities

   $ (17,883 )   $ (7,618 )   $ (6,395 )

Cash flows used in investing activities

     (8,107 )     (1,999 )     (6,267 )

Cash flows provided by financing activities

     2,417       16,076       8,459  

Operating Activities

Cash used in operating activities for the year ended September 30, 2007 reflected our net loss of $12.4 million, offset by adjustments for non-cash expenses consisting primarily of depreciation and amortization of $5.7 million and charges of $1.0 million associated with the measurement of our preferred warrant liability to fair value. Cash used in operating activities is significantly affected by the timing in accounts receivable payments from T-Mobile USA. Accounts receivable at September 30, 2007 were $11.9 million as compared to $7.4 million at September 30, 2006. The increase in accounts receivable was primarily related to an increase in the number of T-Mobile USA’s subscribers that had access to our mobile data services and also to one-time billings related to premium applications, content and services and services generating NRE fees. Deferred revenues and deferred costs decreased by $1.6 million and $3.6 million respectively, representing the recognition of revenues from previously invoiced client license fees as well as revenues and costs associated with the sale of Danger-enabled mobile devices by us prior to March 2006.

Cash used in operating activities for the year ended September 30, 2006 reflected our net loss of $6.6 million, offset by non-cash adjustments consisting primarily of depreciation and amortization of $3.6 million, the cumulative effect of change in accounting principle of $1.4 million, a charge of $907,000 associated with the measurement of our preferred warrant liability to fair value, and a charge of $860,000 associated with the issuance of a performance warrant. In addition, deferred revenues and deferred costs decreased by $14.0 million and $8.6 million, respectively, representing the recognition of revenues from previously invoiced client license fees as well as revenues and costs associated with the sale of Danger-enabled mobile devices by us prior to March 2006.

Cash used in operating activities for the year ended September 30, 2005 reflected our net loss of $9.9 million, offset by non-cash adjustments consisting primarily of depreciation and amortization of $2.5 million. In addition, accounts receivable increased $3.2 million due to an increase in the number of our customers’ subscribers that had access to our mobile data services and due to an increase in our accounts receivable days sales outstanding at September 30, 2005 as compared with September 30, 2004. In addition, accrued expenses and other liabilities decreased $4.4 million, resulting primarily from a decrease in accrued warranty due to the payment of $6.0 million to settle hardware warranty obligations during the year ended September 30, 2005. In addition, deferred revenues and deferred costs decreased $15.5 million and $11.1 million, respectively, for the year ended September 30, 2005, representing the recognition of revenues from previously invoiced client license fees as well as revenues and costs associated with the sale of Danger-enabled mobile devices by us to our mobile operator customers.

Investing Activities

Cash used in investing activities relates primarily to capital expenditures for the expansion of our data centers and to a lesser extent purchases of software development licenses and leasehold improvements. We expect to increase our capital expenditures for data center equipment and software significantly in the year ending September 30, 2008 as we commence operations in an additional data center location and increase the

 

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capacity of our mobile data services. Capital expenditures in the years ended September 30, 2005, 2006 and 2007 were $6.1 million, $6.4 million and $6.5 million, respectively. Cash used in investing activities during the year ending September 30, 2005 included purchases of short-term investments and an increase in restricted cash, partially offset by sales of short-term investments. During the year ended September 30, 2005, we entered into an equipment lease agreement that required a deposit of $3.6 million in a restricted bank account. We terminated the lease during the year ending September 30, 2006 and the cash held in the restricted bank account was released.

Financing Activities

Net cash provided by financing activities in the years ended September 30, 2007 and 2006, consisted primarily of proceeds from our sale of redeemable convertible preferred stock, and borrowings pursuant to our capital lease financing arrangements. Net cash provided by financing activities during the year ended September 30, 2005 consisted primarily of $3.5 million in borrowings pursuant to our capital lease financing arrangements. During the year ended September 30, 2006 we terminated the lease and paid the outstanding principal and interest accrued of $2.8 million.

Capital Requirements

Our future liquidity and capital requirements will be influenced by numerous factors, including:

 

   

the extent and duration of future operating losses;

 

   

the level and timing of future sales and expenditures;

 

   

the results and scope of ongoing research and development programs;

 

   

working capital required to support our growth and data center expansions;

 

   

our sales and marketing programs;

 

   

the continuing acceptance of our mobile data services in the marketplace;

 

   

competing technologies; and

 

   

market developments.

We believe that our existing working capital and borrowings available under our loan agreement with Silicon Valley Bank will be sufficient to fund our working capital requirements, capital expenditures and operations for at least the next 12 months.

Our ability to fund our longer-term cash needs is subject to various risks, many of which are beyond our control. Should we require additional funding, such as to satisfy our short-term and long-term obligations when due, fund our operations, or to make additional capital investments, we may need to raise the required additional funds through bank borrowings or public or private sales of debt or equity securities. We cannot guarantee that such funding will be available on terms favorable to us, or at all. If we raise additional funds through the incurrence of additional indebtedness, our lenders could demand rights that are senior to holders of our common stock and could require covenants that restrict our operations. Any additional equity financing may be dilutive to our stockholders. In addition, if we raise additional funds through the sale of equity securities, new investors could have rights superior to our existing stockholders. The terms of future financings may also restrict our ability to raise additional capital.

Off-balance Sheet Arrangements and Other Contractual Obligations

Other than operating leases, we do not have any off-balance sheet financing arrangements. In conjunction with our arrangements with mobile operator customers and OEM partners in the ordinary course of business, we provide standard indemnification for losses suffered or incurred for patent, copyright or any other intellectual

 

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property infringement claims brought by third parties relating to the Danger solution. The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments we could be required to make under these arrangements is unlimited. In prior periods, we have incurred significant costs related to defending claims, including $2.5 million in the year ended September 30, 2006.

The following table summarizes our significant contractual obligations and commercial commitments as of September 30, 2007:

 

Contractual Obligations and Commercial Commitments

   Payment Due By Period
     Total    Less Than
1 Year
   1-3 Years    3-5 Years    More Than
5 Years
     (In thousands)

Operating lease obligations(1)

   $ 5,047    $ 1,710    $ 2,693    $ 644    $

Capital lease obligations (including interest)(2)

     5,182      2,445      2,737          

Purchase obligations(3)

     7,921      3,134      4,670      117     

Installment payable (including interest)(4)

     895      784      111          
                                  
   $ 19,045    $ 8,073    $ 10,211    $ 761    $
                                  

(1) We lease our facilities and office space in the United States. Operating lease obligations include total future payments under all of our operating leases as of September 30, 2007. Under certain operating leases, we have an option to terminate the lease early by providing advance notice and paying an early termination fee. Since we do not contemplate terminating these leases early, our future payments under operating lease obligations includes total future payments through the end of the initial lease terms.
(2) We lease equipment in the United States under capital lease obligations.
(3) Purchase obligations reflect total future payments on agreements related to our data centers as of September 30, 2007, certain of which are cancelable subject to penalty. In October 2007, we entered into an agreement for our planned new data center in Phoenix, Arizona. This agreement has a four year term with payments totaling $3.9 million over the term of the agreement. In November 2007, we entered into an agreement to upgrade our current multiple point-to-point internet connectivity to support future growth. This agreement has a four year term with payments totaling $3.7 million over the term of the agreement. As a result of this new agreement, existing commitments to such vendor of $743,000 as of September 30, 2007, which are reflected in the table above, were included in the new agreement.
(4) The installment payable is related to purchases of enterprise software and system maintenance as of September 30, 2007. In November 2007, we entered into an agreement to purchase additional enterprise software and system maintenance. This agreement has a three year term with payments totaling $4.9 million over the term of the agreement. Of the amounts outstanding as of September 30, 2007, $484,000 is included in this new agreement and the remaining balance has been paid in full.

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in our results of operations and cash flows. In the ordinary course of business, we are exposed to interest rate and foreign exchange risk. Fluctuations in interest rates and the rate of exchange between the U.S. dollar and foreign currencies, primarily the British Pound, could adversely affect our financial results.

Substantially all of our sales are denominated in U.S dollars. We therefore have limited foreign currency risk associated with the sale of our service. Expenses associated with our European colocation data services facility are denominated in Euros. Our international sales and marketing operations incur expenses that are denominated in foreign currencies, primarily the British Pound. These expenses could be materially affected by currency fluctuations; however, we do not consider this currency risk to be material as the related costs do not constitute a significant portion of our total operating expenses.

 

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We had cash and cash equivalents of $13.0 million at September 30, 2007, all of which was held for working capital purposes. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy allows us to maintain a portfolio of cash, cash equivalents and short-term investments in a variety of high credit quality securities, including obligations of U.S. government agencies, corporate bonds, repurchase agreements, commercial paper, master notes and money market funds. If short-term interest rates were to increase or decrease by 10% from the rate on September 30, 2007, the increase or decrease in interest income would not have a material effect on our cash flows or results of operations.

We believe that inflation has not had a material impact on our historical results of operations; however, there can be no assurance that our business will not be affected by inflation in the future.

In addition, we have outstanding credit facilities under which we incur interest expense. If short-term interest rates were to increase or decrease by 10% from the rate on September 30, 2007 the increase or decrease in interest expense would not have a material effect on our cash flows or results of operations.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 was effective for us beginning October 1, 2007. We are currently evaluating the impact that the adoption of FIN 48 will have, if any, on our consolidated financial position, results of operations or cash flows.

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157, which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in the financial statements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact that the adoption of SFAS 157 will have, if any, on our consolidated financial position, results of operations or cash flows.

In September 2006, FASB ratified EITF Issue No. 06-1, Accounting for Consideration Given by a Service Provider to a Manufacturer or Reseller of Equipment Necessary for an End-Customer to Receive Service from the Service Provider, or EITF 06-1. Under EITF 06-1, consideration received by a service provider’s end-customer from a manufacturer or reseller constitutes consideration given by the service provider to the end-customer if the manufacturer or reseller is required by contract with the service provider to provide consideration to the end-customer. If such a contractual arrangement exists, classification of the consideration in the service provider’s income statement depends on the form of the consideration received by the end-customer. Cash consideration would be reported as a reduction of revenue; non-cash consideration, as defined in EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products), including free or discounted product, would be reported as an expense. EITF 06-1 is effective for the first annual reporting period beginning after June 15, 2007. We do not expect that the adoption of EITF 06-1 will have a material effect on our consolidated financial position, results of operations or cash flows.

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, or SFAS 159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required

 

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to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We do not expect that the adoption of SFAS 159 will have a material effect on our consolidated financial position, results of operations or cash flows.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. Registrants must begin to apply the provisions of SAB 108 no later than the annual financial statements for their first fiscal year ending after November 15, 2006. We do not expect that the adoption of SAB 108 will have a material effect on our consolidated financial position, results of operations or cash flows.

 

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BUSINESS

Overview

We are a software-as-a-service company that provides mobile operators with an integrated end-to-end solution to deliver mobile data and Internet services to their subscribers. As advanced Internet and messaging services are increasingly becoming available on mobile devices, our solution enables operators to offer their subscribers a differentiated and compelling mobile data and Internet experience and, consequently, helps our operator customers increase their average revenue per user, or ARPU. Our solution is deployed in the United States and certain international markets through the T-Mobile Sidekick family of mobile devices and in other international markets, including Australia and Europe, through mobile devices utilizing our “hiptop” brand.

The Danger solution integrates our hosted service delivery engine, or SDE, and our client software with Danger-enabled mobile devices manufactured by Sharp Corporation and Motorola, Inc., our original equipment manufacturer, or OEM, partners. Our technology platform enables fast subscriber access to data services, provides data compression and optimization, and provides users with the ability to run multiple applications simultaneously. Our solution offers real-time email, instant messaging and social networking services, and HTML web browsing, as well as premium applications, content and services developed internally and through our third-party developer program.

We leverage the expertise and scale of our mobile operator customers and our OEM partners to help manufacture, market and distribute Danger-enabled mobile devices to a broad consumer audience. By delivering the Danger solution as a service, we allow our mobile operator customers to leverage our infrastructure, third-party developer program and expertise in deploying an end-to-end mobile data service offering with minimal capital investment.

We receive recurring monthly service fees from our mobile operator customers for each subscriber that has access to our mobile data services, and we also generate revenues from the premium applications, content and services that we provide. From the introduction of our solution in October 2002 through September 30, 2007, the number of subscribers to our mobile data services has grown to approximately 923,000. Our total revenues have grown from $49.3 million in the year ended September 30, 2006 to $56.4 million in the year ended September 30, 2007, and our service revenues have grown from $38.9 million in the year ended September 30, 2006 to $50.6 million in the year ended September 30, 2007.

Industry Overview

The mobile data services market is in a period of transition and growth fueled by consumer adoption, mobile operator competition, advances in mobile device technologies and the convergence of the traditional Internet and mobile communications industries. As a result of these trends, mobile devices are no longer predominantly used for a single function, such as voice, but are increasingly becoming an important platform for multiple forms of communication, access to information, consumption of media and content creation.

Increased adoption of mobile data services.    Mobile data services have been rapidly adopted by particular demographic segments due to the emergence of compelling services and applications. For example, business end-users have adopted email and personal information management solutions, while young adults and teens have actively embraced mobile data services such as text messaging, ringtones and graphics. We believe that these early adopters have laid the foundation for mass market use of these and more enhanced mobile data offerings, such as Internet services traditionally accessed through a personal computer. Mobile data services are expected to have broad consumer appeal and represent a key source of growth for the mobile industry. According to Yankee Group Research, Inc., a technology research and consulting firm, the number of global mobile data service users will increase to approximately 2.5 billion in 2011, with mobile data revenues expected to grow to $200.8 billion in 2011, from 1.5 billion and $108.8 billion, respectively, in 2006.

Aggressive pursuit of data revenue by mobile operators.    As the market for mobile voice services matures and barriers for consumers to switch providers have been reduced, competition among mobile operators has intensified. As a result, prices for core voice services in mature markets are expected to decrease. According to

 

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IDC, an independent market research firm, ARPU for voice services in the United States is expected to decline from $45.71 in 2006 to $36.64 by 2011. In response to this pricing dynamic, mobile operators are offering new and enhanced mobile data services to increase competitive differentiation, appeal to new consumers and increase ARPU. To further these goals, many mobile operators have begun to offer fixed-rate, unlimited mobile data service plans and have begun partnering with leading technology and media companies to offer a broad range of innovative applications, content and services. IDC estimates that the ARPU for consumer wireless data subscribers in the United States will grow from $5.56 per month in 2006 to $12.35 per month in 2011, representing a compound annual growth rate of 17.3%.

Proliferation of converged mobile devices.    Mobile device manufacturers are developing advanced, converged mobile devices, commonly known as smartphones, that can be marketed to consumers at affordable prices. Relative to basic mobile phones and feature phones, or basic mobile phones that support certain advanced data features such as cameras, music players and text messaging, smartphones have faster processors, greater storage, Internet connectivity and high-resolution color screens, and are capable of supporting advanced operating systems and enhanced applications. We believe that smartphones, particularly those with tightly-integrated software and services, have the potential to blur the lines between mobile and personal computer data services. IDC estimates that the total number of converged mobile devices shipped globally will grow from 80.9 million in 2006 to 304.4 million in 2011, representing a compound annual growth rate of 30.3%. In 2006, these converged mobile devices comprised approximately 7.9% of worldwide mobile phone shipments and are expected to comprise approximately 21.3% of worldwide mobile phone shipments in 2011, according to IDC.

Emergence of social networking, peer communications and user-generated content.    Consumers are increasingly utilizing the Internet as a means of social interaction, self-expression and entertainment by accessing leading social networking sites such as MySpace and Facebook, and instant messaging platforms such as AOL Instant Messenger, Yahoo! Messenger and Microsoft Corporation’s Windows Live Messenger. For example, in October 2007, there were 509.6 million unique visitors to social networking sites globally, according to comScore, Inc., an Internet industry research firm. According to comScore, use of many of these sites has grown rapidly, as users spent 39.4 billion minutes at the top five global social networking sites in October 2007, an increase of 94.1% from the 20.3 billion minutes spent on those same sites in October 2006.

The increased capabilities of converged mobile devices to enable messaging and user-generated content makes them a desirable platform to provide anytime, anywhere participation in these social networking and other online communities. Additionally, by leveraging uniquely mobile attributes to enable real-time or location-specific services, the shared experiences offered by these communities can be enhanced. IDC estimates that in the United States alone, the number of mobile instant messaging users will grow at a compound annual growth rate of 44.9%, from 12.4 million in 2006 to 79.3 million in 2011.

Challenges for mobile operators in delivering a compelling mobile data and Internet experience.     Notwithstanding the market opportunity and consumer demand for mobile data services, mobile operators face significant challenges in delivering a compelling mobile data and Internet experience that combines the ease of use and capabilities of personal computers with the unique attributes of mobile devices. These challenges include the following:

 

   

Rising consumer expectations.    Consumers are increasingly expecting their mobile data experience to be a seamless extension of their personal computer experience. Relative to the consumer experience on the personal computer, the consumer mobile data and Internet experience has been limited due to lost or intermittent data connections, lack of access to particular Internet sites, poor rendering of Internet sites on small mobile device screens, inability to run concurrent applications and lack of real-time interactivity and communication.

 

   

Increasing complexity of Internet applications and services.    The emergence of new Internet service categories, such as social networking, together with the proliferation of enhanced personal computer browser technologies, such as Flash and AJAX, has led to increased complexity in the applications and

 

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services delivered over the Internet. Many current mobile data platforms are not capable of delivering compelling mobile versions of these complex Internet services.

 

   

Lack of services for advanced handsets.    Advances in handset technology have led to the development of an increasing number of mobile devices capable of providing advanced data services. However, there is a lack of mobile data and Internet services that enable consumers to utilize many of the advanced capabilities of these devices.

 

   

Inefficient service platforms.    Mobile operators have traditionally relied on mobile devices to process content and messages, or required Internet providers to reconstitute their sites into specific, limited wireless application protocol web browser, or WAP, implementations. While this approach might have been satisfactory for the delivery of basic data services, enhanced mobile data services require a more sophisticated back-end service infrastructure to process, compress and optimize data, push content to users and maintain persistent connectivity with both the device and the Internet.

 

   

Lack of integration in mobile data delivery platforms.    The legacy systems of many mobile operators entail loose integration of disparate hardware, software and service delivery technologies from multiple vendors to reach the broadest possible audience. We believe that the fragmentation of these multiple components on mobile data delivery platforms inhibits operators from offering optimized solutions to the handsets in their mobile device portfolio. In particular, we believe that the lack of a single, tightly-integrated solution often compromises consumers’ experiences by not utilizing the full potential of each component.

 

   

Limited internal development, deployment and management resources.    Mobile operators have traditionally limited their internal investment in the deployment, development and management of mobile applications, content and services, focusing instead on network infrastructure and basic service delivery. The lack of internal resources dedicated to providing a compelling mobile data and Internet solution has led to the deployment of poorly integrated mobile data service offerings that we believe fail to fully capitalize on the opportunities created by consumer adoption trends, developments in handset technology and the emergence of new Internet services.

As a result of the above, we believe that existing mobile consumer data solutions not only provide suboptimal consumer experiences, but also result in lost revenue opportunities, longer development cycles, more costly overall development and deployment, and ongoing management, billing and customer service challenges. In order to overcome these challenges and successfully capitalize on the market opportunity for the deployment of a compelling mobile data and Internet solution to consumers, we believe that mobile operators will increasingly turn to third parties to provide end-to-end integrated solutions.

Our Solution

We provide mobile operators with an integrated end-to-end solution for delivering an enhanced mobile data and Internet experience to their subscribers. The Danger solution powers advanced data applications and services on Danger-enabled mobile devices developed and manufactured by our OEM partners, and features premium applications, content and services developed internally and through our third-party developer program. The Danger solution is designed to be easy for our mobile operator customers to deploy and manage, and to integrate seamlessly with their back-end systems. Key features of the Danger solution include the following:

Superior mobile data and Internet experience for consumers.    The Danger solution adds real-time email, popular instant messaging and social networking services, HTML web browsing, and easy access to premium applications, content and services to standard voice and personal information management features, and provides an intuitive user-interface to mimic a personal computer experience on a mobile device. The Danger solution devices enhance consumers’ experiences by actively pushing email, instant messages and other content to Danger-enabled mobile devices; notifying users of new communications; and promoting messaging, content sharing and other forms of online social interaction. Our client software and integrated applications enable users to run different applications simultaneously and to easily switch among these applications. For example, while a

 

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consumer is using the web browser to access a web page, she can reply to an instant message, type an email, build a playlist in the MP3 player, and then return to the same web page without losing her place. In addition, our data optimization technology speeds consumer access to mobile data services and optimizes content for viewing on Danger-enabled mobile devices.

The strength of our solution is demonstrated by the frequent use of interactive mobile applications and heavy consumption of downloadable mobile content by consumers using Danger-enabled mobile devices. During the quarter ended September 30, 2007, consumers using Danger-enabled mobile devices, on a monthly basis:

 

   

sent and received an average of 3,223 instant messages;

 

   

viewed an average of 481 web pages; and

 

   

sent and received an average of 930 text messages.

Additionally, more than 60% of consumers using Danger-enabled mobile devices purchased downloadable content during the quarter ended September 30, 2007, with each purchaser buying an average of four downloadable content items during the quarter ended September 30, 2007.

End-to-end integrated mobile data and Internet solution for mobile operators.    We offer mobile operators a single, tightly-integrated solution that enables them to capitalize on advances in mobile devices, network technologies and Internet services to offer consumers a more compelling mobile data and Internet experience. The Danger solution manages many of the components of the mobile data offerings of our operator customers, including: mobile device integration; access to and delivery of premium applications, content and services; subscriber data management and storage; and integration with back-end systems for marketing, billing, provisioning and support. Our solution also provides mobile operators with the flexibility to utilize their own brands to target particular consumer demographics with differentiated mobile data applications and services designed to drive subscriber retention, attract new customers and increase voice and data revenue.

Powerful technology platform enabling optimized delivery of enhanced mobile data services.    The Danger technology platform consists of our hosted SDE and client software for mobile devices. The tight coupling of our SDE and client software optimizes the delivery of enhanced mobile data services by compressing content, managing network and device communications, facilitating the real-time delivery of software upgrades and additional features, and synchronizing and storing data in a manner easily accessible by the consumer. Our SDE communicates with our client software, which provides a PC-like experience on a mobile device by enabling multiple applications to run and use the network simultaneously. Our client software also seamlessly integrates our core applications as well as premium applications, content and services. Our solution is supported by our portfolio of intellectual property, including, as of September 30, 2007, 34 U.S. patents, eight foreign patents, 40 pending U.S. patent applications and 47 pending foreign patent applications.

Close collaboration with mobile device manufacturers.    We collaborate closely with our OEM partners throughout the design and development process of Danger-enabled mobile devices, allowing us to better integrate our software into their devices and to optimize performance, minimize design flaws and accelerate device development. Our close collaboration enables our OEM partners to offer mobile operators intuitive, converged mobile devices that provide consumers with access to enhanced data mobile services. We provide reference designs and software to our OEM partners to closely couple the hardware layout and form factor of Danger-enabled mobile devices with the desired functionality and user experience. We also license our client software, which includes an integrated suite of software applications, to our OEM partners to pre-install on Danger-enabled mobile devices.

Large and growing third-party developer program.    In addition to the internal development of our core data applications, we have cultivated a large and growing third-party developer program for the creation of premium applications, content and services to be distributed on our platform. Our third-party developer program is designed to foster a steady and competitive pipeline of premium applications, content and services that we believe enhance the overall consumer experience. Our third-party developers leverage our integrated technology platform and our operator and OEM relationships to commercialize and distribute premium applications, content

 

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and services to a broad audience through a single point of distribution. By encouraging third-party development of content for our platform, we are able to continuously extend the functionality and breadth of our offering and enhance the value of our solution. We have experienced rapid growth in our developer program, with more than 50 of our third-party developers publishing an aggregate of 218 games, applications and networked services as of September 30, 2007.

Leveraged, software-as-a-service business model aligned with customer interests.    We deploy our solution through a software-as-a-service business model that enables us to leverage the reach and expertise of our mobile operator customers, OEM partners and third-party developers so we can scale rapidly while minimizing our investment. We apply our OEM partners’ technology expertise and manufacturing capabilities to manufacture Danger-enabled mobile devices. In addition, we use our mobile operator customers’ brands, marketing efforts and existing retail distribution to attract subscribers to our mobile data services, and draw on our third-party developers’ software development expertise to introduce compelling new applications, content and services. We also believe that our software-as-a-service business model is attractive to mobile operator customers because it allows them to leverage our infrastructure, partnerships, expertise and resources to deploy an end-to-end mobile data service offering with minimal capital investment. In addition, because our business model only requires our operator customers to pay ongoing fees for subscribers that are active on our platform, our operator customers are not required to make large financial commitments in advance of acquiring subscribers.

Our Strategy

Our objective is to expand our position as a leading provider of mobile consumer data services and to increase the value of our solution for mobile operators worldwide. The principal elements of our strategy are to:

Extend our leadership position by strengthening and broadening our solution.    We believe that our advanced technology architecture, focus on the consumer market, and software-as-a-service business model have made us a leading provider of end-to-end integrated mobile consumer data solutions. We seek to extend our leadership position and enhance our solution by developing new features, applications and services that utilize our technology platform to create a compelling mobile data and Internet experience for consumers. In particular, we expect to continue to expand our integration with popular email and emerging consumer Internet sites and services, as well as various multimedia, location-based and social networking services.

Pursue new mobile operator relationships and expand our distribution globally.    We intend to increase the number of subscribers using Danger-enabled mobile devices by adding new mobile operator customers, particularly in Europe and other international markets. We believe that we are well positioned to add new mobile operator customers because we offer a highly scalable end-to-end mobile data solution and provide unique and differentiated applications, content and services. We expect to aggressively pursue new relationships in select international markets where consumer behavior and the adoption of enhanced mobile data services lend themselves to the Danger solution. Additionally, we believe that we can leverage the close relationships between our OEM partners and their existing mobile operator customers to develop new mobile operator relationships.

Extend and deepen our OEM partnerships.    We seek to continue to enhance our existing OEM partnerships and develop new relationships with leading global OEMs to produce a greater number of Danger-enabled mobile devices for marketing to a broader global audience. We believe that our advanced and flexible technology platform and our close development collaboration with our OEM partners will enable them to produce mobile devices with a variety of features, form factors and price points that appeal to diverse consumer segments in various geographies, thereby increasing the potential adoption of the Danger solution. In addition, we plan to continue our close collaboration with our existing OEM partners to enable them to reduce development time and achieve lower costs for Danger-enabled mobile devices.

Increase the number of subscribers using our mobile data services.    We also intend to increase the number of subscribers using our mobile data services through the growth of our relationships with our existing mobile operator customers. We believe that we can create unique services for targeting new demographic segments and

 

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leverage the sales and marketing efforts of our mobile operator customers to extend our subscriber reach with each of our existing customers. In addition, we believe that we can also extend subscriber reach by working closely with our existing and potential future OEM partners to produce a greater number of Danger-enabled mobile devices at various price points.

Expand the development of third-party applications, content and services for our platform.    We expect to continue growing our third-party developer program to increase the rapid development of new premium applications, content and services that we believe enhance the overall consumer experience, increase our competitive differentiation and monetize the mobile subscriber base. By providing our third-party developers with access to a subscriber base that frequently downloads applications and content, and integrated programming tools that streamline the development, deployment and billing of downloadable applications and content, we believe that we can successfully encourage third-party developers to continue to provide their services through the Danger platform as well as add new third-party developers to our developer program.

 

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Our Platform and Services

Our solution consists of our tightly-integrated hosted SDE, client software for mobile devices, and premium applications, content and services offerings. We receive recurring monthly service fees from our operator customers for each of their subscribers that are able to access our mobile data services, and we also generate revenues from the premium applications, content and services solution that we provide to our mobile operator customers. During the year ended September 30, 2007, the number of subscribers to our mobile data services increased by approximately 360,000, from approximately 563,000 subscribers as of September 30, 2006 to approximately 923,000 subscribers as of September 30, 2007.

The diagram below shows the elements of the Danger solution and how we interact with our mobile operator customers, OEM partners and content providers to deliver our mobile data services to subscribers.

LOGO

Danger Service Delivery Engine.    Our server-based hosted SDE communicates with our client software, enhancing and optimizing the delivery of mobile data services to Danger-enabled mobile devices. We have designed our SDE to provide a high level of service reliability and scalability to support wireless network traffic and subscriber base growth. Key features of our SDE include:

 

   

Data optimization.    Our SDE compresses and packages data to speed consumer access to mobile data services while simultaneously reducing wireless network traffic for our mobile operator customers. We believe that our data optimization capabilities allow our mobile operator customers to more efficiently offer mobile data services to subscribers. Our SDE also processes content for viewing on Danger-enabled mobile devices before content is transmitted. For example, our SDE resizes email message images and attachments to fit the Danger-enabled mobile device screen dimensions, and modifies web page layouts in an effort to provide subscribers with an experience that more closely resembles email use and internet browsing on a personal computer.

 

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Always-on connection and push delivery.    Our SDE is designed to maintain a persistent connection to Danger-enabled mobile devices, allowing for a constant stream of emails, instant messages and notifications to be delivered to the device. The SDE actively transfers, or pushes, messages to Danger-enabled mobile devices, eliminating the need for subscribers to initiate a connection to receive messages, notifications or to request web pages and other data. Similarly, if a subscriber loses a wireless connection, our SDE manages the subscriber’s data session and queues incoming messages, such as those from an active instant messaging conversation, for delivery to the mobile device when wireless network coverage is restored.

 

   

Integration with third-party Internet services.    Our SDE enables a unique degree of integration with popular third-party Internet services including email, instant messaging and social networking services. We have collaborated with Yahoo! Inc., Microsoft Corporation, AOL LLC, a majority-owned subsidiary of Time Warner Inc., and MySpace, Inc., a unit of News Corporation, to allow our SDE to access their proprietary application programming interfaces, or APIs, so that we can deliver enhanced implementations of their respective services for Danger-enabled mobile devices. We believe that due to the integration and tight coupling of our SDE to the associated client applications, our implementations of these third-party Internet services are superior to what can be offered on other mobile devices. For instance, because our SDE maintains a private connection to MySpace, Inc. through proprietary APIs, Danger-enabled mobile device users can generally maintain a persistent connection to their MySpace, Inc. account and automatically receive messages and notifications, rather than having to constantly refresh a web browser to view their account activity.

 

   

Over-the-air software delivery.    Our SDE is designed to deliver additional applications and features over-the-air to Danger-enabled mobile devices as well as to deliver software upgrades and modifications. We believe that by delivering new applications and features over-the-air to older device models, we extend the useful life of Danger-enabled mobile devices. Additionally, our over-the-air software delivery helps our operator customers to retain subscribers, reduce device returns and minimize warranty program costs.

 

   

Data synchronization and storage.    Our SDE provides an automated synchronization and storage service to ensure that data on Danger-enabled mobile devices is updated on our hosted platform and is not lost. In addition, subscribers can seamlessly upgrade to a new Danger-enabled mobile device without having to re-enter data or re-personalize their settings. Subscribers can also access and manage data on their device from any PC-based web browser by logging into a personal website to view their synchronized and stored data.

 

   

Subscriber analytics.    Our SDE collects aggregate subscriber data that we analyze on an anonymous basis to better understand subscriber behavior trends and preferences. Based on this analysis, we can enhance our solution in an effort to deliver a more compelling mobile data and Internet experience and to capitalize on subscriber trends. For example, because we can see which websites are most popular with end-users, we can alter how our SDE renders these websites to provide enhanced viewing in addition to the data optimization we already provide. We are also able to better position our premium applications, content and services offerings by utilizing our SDE to adjust on-device promotion and content placement.

Danger Client Software.    Our client software provides a PC-like experience on a mobile device by enabling multiple applications to run simultaneously and allowing consumers to switch among them without having to close an application. For example, while a subscriber is using the web browser to access a web page, she can reply to an instant message, type an email, build a playlist in the MP3 player, and then return to the same web page without losing her place. Our client software features an intuitive user interface that makes the discovery, use of and navigation within and among applications easy, and allows subscribers to personalize their Danger-enabled mobile devices in a variety of ways. We internally developed all of the core applications that run on Danger-enabled mobile devices so that they are integrated with one another, our operating system and our SDE. As an example of this integration, if a subscriber clicks on a web page link sent in an instant message, our

 

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web browser instantly launches and communicates with our SDE to obtain the web page and the user can toggle between the two applications.

We license our client software to our OEM partners, which they pre-install on Danger-enabled mobile devices so that subscribers may connect to our SDE immediately after activation. The applications we provide with our client software include:

 

   

Web browser—HTML rendering with JavaScript support;

 

   

Email—push email from operator-branded accounts and popular email services such as AOL, Yahoo! and Hotmail, as well as support for viewing email message attachments;

 

   

Instant messaging—support for AOL Instant Messenger, Yahoo! Messenger and Microsoft’s Windows Live Messenger;

 

   

Premium content catalog—storefront for purchasing games, ringtones and other applications;

 

   

Personal information management—calendar, address book, notes and to-do lists;

 

   

Media player—MP3 player;

 

   

Camera—image gallery with the ability to send images via text message or email;

 

   

Text messaging—text and picture messaging, emoticons, voice notes and auto-responses; and

 

   

Phone—voice calling, teleconferencing, speaker phone and Bluetooth support.

Premium Applications, Content and Services.

Content management and delivery.    We provide our mobile operator customers with an end-to-end solution to offer premium applications, content and services to subscribers using Danger-enabled mobile devices. Subscribers access a premium content catalog on the Danger-enabled mobile device that provides efficient browsing, preview, purchase and management of premium applications, content and services. Subscribers can download games, productivity applications, networked services, ringtones and background themes, all of which are hosted, provisioned and delivered by our SDE. We actively source and publish new premium application, content and service titles in an effort to maintain a steady and competitive premium content catalog for our subscribers.

Our managed premium applications, content and services solution provides our mobile operator customers with a single point for content sourcing, testing, promotion, delivery and billing. Elements of our solution are configurable to allow our mobile operator customers to reflect the branding, organizational and pricing strategies that they offer in their own content portals. However, we typically recommend the merchandizing and pricing for premium applications, content and services for the mobile operator’s approval. Our solution supports several payment models, including one-time fees and monthly recurring fees, and delivers billing records to our mobile operator customers through billing system integration. Our mobile operator customers are responsible for billing and collections with respect to all premium applications, content and services sold, and pay us a share of revenue for every transaction. Our share of revenue varies by mobile operator, content type and content source.

Enhanced content offering.    The collection of the premium applications, content and services available to end users of Danger-enabled mobile devices ranges from traditional mobile content, including basic games and ringtones, to highly differentiated applications, content and services, including networked services, multi-player networked games, multimedia themes and productivity tools. As of September 30, 2007, our master catalog of premium applications, content and services included 161 games, 43 applications, 14 networked services, more than 2,700 ringtones and 66 background themes. The premium applications, content and services available to individual subscribers vary by mobile operator, market and Danger-enabled mobile device model.

Networked services represent a key strategic growth area for our premium applications, content and services offerings, both because of their direct revenue potential as well as their tendency to leverage the greatest number

 

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of unique capabilities of our technology platform. We believe that services such as these, which are developed internally and through our third-party developer program, allow us to further differentiate our platform and drive value for consumers and our mobile operator customers. Examples of premium networked services include:

 

   

MySpace:    a dedicated client application which provides a personalized, always-on extension of a user’s MySpace account, with push messaging and notifications, optimized posting of messages, blogs and photos and low-latency, or reduced delay, browsing of content; and

 

   

MyAuctioneer:    a real-time, personalized dashboard of a user’s eBay account, including dynamic auction status, bidding capability and persistent notifications for outbid alerts.

Third-party developer program.    A critical component of our premium applications, content and services business is our third-party developer program. We have distributed premium applications, content and services on our platform developed by more than 50 third-party developers, including Gameloft Inc., Digital Chocolate, Inc., Namco Networks America Inc., Konami Digital Entertainment, I-play, and Sony BMG Music Entertainment. We either license content from our third-party developers and pay them a portion of the revenue share we receive from our operator customers or we host content acquired by our operator customers and receive a revenue share for our hosting and delivery services. Our premium applications, content and services business model derives leverage from our developers, who typically bear the up-front costs of development, and from our mobile operator customers, who bear the costs of billing, customer care and subscriber acquisition.

We provide our third-party developers with a suite of development tools and resources to create, simulate and debug premium applications, content and services in a standard Windows-based environment. We also provide extensive developer support and information through both our website and various support groups in order to generate efficiencies in application development and to accelerate submission of content and applications to us for certification and eventual deployment. In addition to our suite of development tools, we have developed a set of APIs that we license on a limited basis and through which we can allow third-party providers to access our SDE and to build implementations of their services for delivery through our platform. We believe that this positions us well to extend our platform to emerging consumer Internet sites and services such as social networking.

Custom development.    At times we enter into custom development contracts with certain of our mobile operator customers to enable us to more closely integrate our platform with their networks, or to develop specialized products or software. We may also charge additional fees to our mobile operators to customize our client software to meet their branding specifications prior to deploying a Danger-enabled mobile device.

OEM Partner Relationships

We work closely with our OEM partners to design, manufacture, market and distribute mobile devices that utilize our mobile data services platform. We license our client software to our OEM partners and in turn, they provide industry-leading mobile device technology, device design competencies, sophisticated manufacturing resources and the infrastructure and working capital necessary to support the ordering, inventory and repair requirements of global mobile operators.

We currently have relationships with two OEM partners, Sharp Corporation, or Sharp, and Motorola, Inc., or Motorola. We grant each of our current OEM partners a royalty-free license to distribute our client software and provide them with reference designs to use as the basis for developing Danger-enabled mobile devices. In addition, we work closely with and provide support to our OEM partners through various phases of product design, development and testing to integrate our client software into the Danger-enabled mobile devices that they manufacture. Our close collaboration with our OEM partners yields mobile devices with more tightly-integrated software and services that we believe differentiate Danger-enabled mobile devices from competing smartphones and feature phones. Under our agreements with our OEM partners, the OEMs are responsible for the sales of mobile devices, including providing marketing support to mobile operators and handling warranty returns and

 

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repairs. Our OEM partners are also responsible for testing Danger-enabled mobile devices with the networks of our mobile operator customers and for obtaining operator, industry and government certifications and approvals that are necessary to commercially launch a mobile device. In addition to our client software, we provide to our OEM partners certain support for obtaining these approvals and certifications. Our OEM partners have agreed to indemnify us for intellectual property claims related to patents that are essential for complying with wireless technology standards and for product liability claims related to Danger-enabled mobile devices. Our OEM partners also agree to pay certain per unit royalties that are due to third parties for the commercial distribution of software that we incorporate into our client software. We, in turn, indemnify our OEM partners for intellectual property claims related to our client software or our SDE.

Sharp Corporation.    Sharp launched its first Danger-enabled mobile device in September 2004 in the United States. Since 2004, Sharp has launched three additional Danger-enabled mobile devices. Pursuant to a master manufacturing and distribution agreement dated April 28, 2004 and subsequently amended, we license to Sharp the right to distribute our client software for the Danger-enabled mobile devices that they have developed. Our agreement with Sharp terminates in April 2008, but will automatically renew for successive one-year periods unless either we or Sharp notifies the other of its intent not to renew. Our agreement with Sharp also allows us or Sharp to terminate the agreement if the other party materially breaches its obligations and fails to cure such breach, or if the other party ceases operations or is subject to bankruptcy proceedings. In addition, if defects in our client software cause Danger-enabled mobile devices manufactured by Sharp to become unusable, we would be obligated to correct the defects and, in certain instances, be required pay for any out-of-pocket costs incurred by Sharp as a result of the defects.

Motorola, Inc.    In September 2006, we entered into a master software license, product development and distribution agreement with Motorola. Motorola’s first Danger-enabled mobile device launched in November 2007 with T-Mobile USA, Inc., or T-Mobile USA, in the United States. Our agreement with Motorola terminates in September 2009, but will automatically renew for successive one-year periods unless either we or Motorola notifies the other of its intent not to renew. Our agreement with Motorola also allows us or Motorola to terminate the agreement if the other party materially breaches its obligations and fails to cure such breach, or if the other party ceases operations or is subject to bankruptcy proceedings. In addition, we agreed to pay Motorola per unit warranty payments in the event certain client software defects thresholds are reached, as well as to take corrective action to cure the defects. Under our agreement with Motorola, if Motorola meets certain performance thresholds, we cannot allow another OEM (subject to limited exceptions) to distribute our client software until one year after Motorola’s first commercial shipment of a Danger-enabled mobile device.

Customers

We sell the Danger solution directly to mobile operators. Our OEM partners sell Danger-enabled mobile devices to mobile operators, and, under separate contractual relationships, we provide mobile data services to our operator customers. Our mobile operator customers bundle the Danger-enabled mobile devices and our mobile data services with an airtime and data plan, and sell the complete solution to their subscribers.

We are substantially dependent on T-Mobile USA for our sales. For the fiscal years ended September 30, 2006 and 2007, T-Mobile USA represented 88.5% and 92.0% of our revenues, respectively, and we expect T-Mobile USA to represent a significant portion of our revenues for the foreseeable future.

We currently provide the Danger solution to the following mobile operator customers in the geographies indicated below:

 

   

North America and the Caribbean: T-Mobile USA, Rogers Communications Inc. (Canada) and Cable and Wireless (Cayman Islands) Ltd.

 

   

Asia: Telstra Corporation Limited (Australia).

 

   

Europe: T-Mobile (UK) Limited, T-Mobile Deutschland GmbH, E-Plus Mobilfunk GmbH (Germany) and T-Mobile Austria GmbH.

 

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Under our agreements with our mobile operator customers, the mobile operators pay us recurring monthly service fees for each subscriber that is able to access our SDE. Our mobile operator customers also pay us a share of revenue for each premium application, content or service transaction with a subscriber. We record and report on the number of active subscribers and the volume of premium applications, content and service transactions, and electronically deliver these records to our mobile operator customers to enable them to bill their subscribers appropriately. Our mobile operator customers are responsible for billing and collection from subscribers. Our mobile operator customer contracts include service level agreements that set forth the performance standards for our hosted services and give the mobile operators rights to receive credits towards our monthly service fees if the availability of our SDE degrades or our SDE experiences outages that, when measured on a monthly basis, exceed minimum performance thresholds. In addition, our agreements with mobile operator customers provide that we indemnify mobile operator customers for intellectual property claims related to our client software and SDE.

Our current agreement with T-Mobile USA was effective as of June 1, 2005 and expires on December 31, 2008. T-Mobile USA has the right, but not the obligation, to renew our current agreement for a single additional period of up to three years, unless we notify T-Mobile USA of our intent not to renew. Pursuant to our agreement with T-Mobile USA, T-Mobile USA has certain exclusivity rights and rights of first refusal in the United States for new Danger services and mobile device designs owned or controlled by us. Our agreement with T-Mobile USA also allows us or T-Mobile USA to terminate the agreement if the other party materially breaches its obligations and fails to cure such breach. T-Mobile USA also has the right to immediately terminate the agreement in the event of certain breaches by us.

Sales, Marketing and Distribution

We sell the Danger solution directly to mobile operators through an internal sales force and in conjunction with our OEM partners. Our mobile operator customers are the primary source of marketing to consumers and are primarily responsible for generating sales of Danger-enabled mobile devices. Our mobile operator customers employ a variety of marketing programs to sell Danger-enabled mobile devices to consumers, including television, Internet and print advertising, product placement in films and television shows, and celebrity and professional athlete influencer programs. Our current mobile operator customers have generally focused their marketing programs for our solution on young adults and teens, a particularly attractive demographic because of usage of social networking sites and instant messaging platforms by young adults and teens, as well as their ability to influence their peers to adopt mobile data services as a means to participate in these online social interaction activities. We believe that, as mobile use of social networking sites and instant messaging increases, our solution is well positioned to help operators take advantage of the opportunity for mobile data services revenue growth that we believe this demographic presents.

We rely on the extensive distribution channels of our mobile operator customers to expand the adoption of Danger-enabled mobile devices. For example, Danger-enabled mobile devices are sold in T-Mobile USA’s direct channels, such as retail stores and the T-Mobile USA website, as well as indirect channels such as national retail partners, indirect dealers and Internet dealers such as Amazon.com.

Our sales and marketing organizations provide training and channel marketing support to both our mobile operator customers and our OEM partners in order to maximize the effectiveness of their respective sales and distribution channels. We create point-of-sale content and collateral templates and implement selected public relations activities to support the launch of new Danger-enabled mobile devices or new premium applications, content or services. We also selectively sponsor sales incentives programs and contests in conjunction with our OEM partners to encourage the retail and channel sales personnel of our mobile operator customers to sell Danger-enabled mobile devices.

 

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Technology, Research and Development, and Network Operations

Technology.    Our technology consists of our SDE, which is managed by our data center operations, our client software for mobile devices, and publishing tools and additional server-based software for our premium applications, content and services platform.

Our SDE is the modular and scalable hosted platform that connects Danger-enabled mobile devices to the Internet, converting content and protocols as needed. Our SDE runs on multiple operator-grade service components, including Oracle Corporation RAC (Real Application Clusters) database software, Hitachi, Ltd. SAN (Storage Area Network) storage systems, Cisco Systems, Inc. networking equipment, Sun Microsystems, Inc. database servers and Network Appliance, Inc. file storage systems. Our SDE uses proprietary software to manage each connected Danger-enabled mobile device and to route data traffic among various application proxies and the database. Additional technology load balances the data traffic, providing scalability across multiple collections of application proxies. Our SDE is architected to easily add capacity for subscriber base growth through the addition of individual service elements such as proxy servers or database nodes.

Our client software is a mobile device platform that makes efficient use of processing, memory and power to help reduce mobile device complexity and cost. Our multi-layer client software is comprised of applications, a Java virtual machine, an operating system and libraries that support each of these layers. All applications for Danger-enabled mobile devices are written in the Java programming language to make them easy to develop and easy to port. Our Java virtual machine enables multitasking among various programs at the application layer and interoperates with our SDE allowing the Danger solution to provide improved Java execution performance with reduced processing power and memory usage. We have historically relied on a proprietary operating system, but we are in the process of developing a portable operating system interface, or POSIX, compliant, open source operating system to enable our OEMs and third-party developers to more efficiently work with our platform. Our client software libraries simplify application development and facilitate a consistent user interface across applications developed for our platform.

Our premium applications, content and services platform is comprised of publishing tools and server-based software from the Apache Software Foundation and a Java catalog application on Danger-enabled mobile devices. Our premium applications, content and services are transmitted from our SDE’s database to Danger-enabled mobile devices through our proprietary protocols to ensure secure delivery. Our web servers also interface with our SDE’s billing server to facilitate the transmission of charging records to the billing systems of our mobile operator customers. The Java catalog application on Danger-enabled mobile devices communicates with our server-based software to control the merchandising, previewing, installation and user management of content.

Research and Development.    Our research and development strategy is to continue the development of our SDE, client software and premium applications, content and services platform to deliver the functionality that we expect will drive adoption of our solution. As of September 30, 2007, we had 139 employees on our research and development team and 60 employees on our service engineering and service operations teams. We have also sought to scale our research and development capacity by establishing offshore engineering centers with consulting companies in India, Romania and Ukraine. As of September 30, 2007, we had engaged 39 research and development consultants and six services engineering and operations consultants through these relationships. Our research and development efforts are focused primarily on the following areas:

 

   

improving the functionality, security and performance of our SDE and client software;

 

   

developing new client software for new mobile devices and for current and emerging wireless network technologies;

 

   

abstracting elements of our client software so that we may port our client software and enable our SDE to work with other mobile device platforms;

 

   

developing and scaling our SDE infrastructure to provide the underlying support for our continued growth; and

 

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providing a platform and tools for third-party developers to write applications that extend our solution.

Research and development expense, as determined in accordance with accounting principles generally accepted in the United States, was $11.3 million in the year ended September 30, 2005 compared to $17.7 million in the year ended September 30, 2006 and $22.5 million in the year ended September 30, 2007.

Network Operations.    We serve our mobile operator customers from third-party data center facilities located in San Jose, California, which is now operated by Verizon Business Network Services, Inc., or Verizon, following its acquisition of MCI Communications Services. These facilities are secured by around-the-clock security and escort-controlled access, and our service agreement with Verizon requires it to provide us with space as well as redundant systems for power, cooling and Internet connectivity. Under the terms of our service agreement, we occupy two hosting spaces, each in a separate Verizon facility, that are connected by dedicated point-to-point fiberoptic lines. For the first hosting space, our services with Verizon expire on January 1, 2009, but will automatically renew for successive one-year periods unless either we or Verizon notifies the other of its intent not to renew. During any such renewal term, either we or Verizon may terminate the services upon 60 days notice. In the event of a termination of the services or the expiration of the initial or any renewal service term, we have a limited right to extend the services on a month-to-month basis for a maximum of up to six months. For the second hosting space, Verizon has agreed to provide us with services until November 1, 2010, which termination date may not be extended by us absent a subsequent agreement with Verizon. Our service agreement with Verizon also allows us or Verizon to terminate the service agreement if the other party materially breaches its obligations and fails to cure such breach. Verizon also has the right to discontinue providing service to us if Verizon determines that its personnel or facilities are at risk of harm or damage.

In October 2007, we entered into an agreement with an affiliate of Digital Realty Trust, or DRT, for additional hosted data center facilities located in Phoenix, Arizona to accommodate anticipated growth of our mobile data services. We are planning to complete the set up of our DRT facilities to support commercial operation of our SDE by June 1, 2008. These facilities are secured by around-the-clock security and restricted key card access, and the agreement requires DRT to provide us with space as well as power, cooling and access to utilities. This agreement has a 48-month term, but we may exercise an extension option at least nine months prior to the expiration of the initial term, in which case the agreement will be extended for one additional term of 48 months. The agreement with DRT also allows us to terminate the agreement if an interruption of DRT’s services occurs and continues for 30 consecutive days or if three or more 12-hour interruptions of DRT’s services occur within a 12-month period. We also have an agreement for a data center colocation facility in the Netherlands which we could build out to support mobile operator customers in Europe and other international markets.

We continuously monitor and adjust the performance of our SDE. The monitoring features we have built or licensed include centralized performance consoles, automated load distribution tools and various self-diagnostic tools and programs.

Intellectual Property

We seek to protect our technology through a combination of patents, trademarks, copyrights, trade-secrets and contractual arrangements. Our trademarks include Danger and hiptop, which are currently registered in the United States and 20 other countries, as well as with the European Community.

We seek to patent key concepts, components, protocols, processes and other inventions. As of September 30, 2007, we held 34 U.S. patents and eight foreign patents expiring between August 16, 2021 and April 20, 2024, and have 40 U.S. and 47 pending foreign patent applications. These patent and patent applications cover claims associated with features and functionality of our SDE and our client software. Although we apply for patent protection primarily in the United States, we have filed, and will continue to file, patent applications in other countries where there exists a strategic technological or business reason to do so.

 

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The patent positions of companies in our industry are highly uncertain and involve complex legal and factual questions. As a result, the patents we own and any further patents we may own or license may not prevent other companies from developing similar products or ensure that others will not be issued patents that may prevent the sale of the Danger solution or require licensing and the payment of significant fees or royalties. In addition, we cannot be certain that any of our patent applications will result in issued patents. Furthermore, to the extent that any of our future products, services or methods are not patentable or infringe the patents of third parties, or in the event that our patents or future patents fail to give us an exclusive position in the subject matter claimed by those patents, our business could be adversely affected.

It is our general practice to enter into confidentiality and non-disclosure agreements with our employees, consultants, OEM partners, customers, potential customers and others to attempt to limit access to and distribution of our proprietary information. In addition, we generally enter into agreements with employees and consultants that include an assignment of all intellectual property developed in the course of their employment or service.

We also enter into various types of licensing agreements related to technology and intellectual property rights. We enter into certain of these agreements to obtain rights that may be necessary to produce and sell our products and services. For example, we have an agreement with Sun Microsystems, Inc. under which we license specifications to develop, test and distribute software that we certify as compliant with Sun Microsystems Inc.’s Java standards. These licenses are generally non-exclusive and vary in duration, some having perpetual terms and others requiring renewals after one or more years. We may also license our technology and intellectual property to third parties through various licensing agreements.

Competition

The mobile consumer data services market is highly competitive and subject to rapid change. We believe that the principal criteria that mobile operator customers use in selecting solutions include increased ARPU, perception of mobile device sales potential, subscriber satisfaction, availability of an integrated technology platform, technology architecture, OEM partnerships, content offering, ease of implementation, scalability, customer support, availability of applications, and third-party developer support. While we compete most closely with Research In Motion Limited, an integrated mobile data service provider that markets BlackBerry wireless devices, and with smartphone software providers such as Microsoft Corporation and Symbian Software Limited, we believe that we are the only software-as-a-service platform provider focused primarily on the consumer data services market. In addition to our consumer market focus, other key aspects of our competitive differentiation include our advanced technology architecture, our highly scalable end-to-end mobile data services solution and our managed premium applications, content and services offerings.

We also compete broadly with a significant number of firms that market single elements of our platform, such as Internet services, mobile device operating systems software, mobile device applications, server-based software that delivers content to mobile devices, and content intermediaries. These competitors may in the future create an integrated platform with features similar to ours, such as might result from the Google-led Open Handset Alliance. The Open Handset Alliance, announced in November 2007, is a consortium of more than 30 companies focused on developing an open source software platform for mobile devices. Members of the Open Handset Alliance include mobile operators such as China Mobile Communications Corporation, KDDI Corporation, NTT DoCoMo, Inc., Sprint Nextel, T-Mobile USA, Telecom Italia and Telefónica; and mobile handset manufacturers such as HTC Corporation, LG Electronics, Inc., Motorola and Samsung Electronics, as well as software and mobile computing companies. In addition, some mobile operators have started to develop, either internally or through managed third parties, their own mobile devices, software and services for distribution.

In addition to integrated mobile data service providers and firms that market single elements of our platform, we also face competition from mobile device manufacturers and mobile virtual network operators that

 

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market devices that compete with Danger-enabled mobile devices. Accordingly, our business is also affected by subscriber adoption of Danger-enabled mobile devices and the competitive factors influencing these decisions, including handset form factor, features, services, brand, price, marketing, styling, product quality and time to market. Although Danger-enabled mobile devices compete primarily with smartphones such as the BlackBerry Pearl, the Palm Treo, the Apple iPhone and the Helio Ocean, certain feature phones with more limited mobile data services capabilities such as the LG Chocolate and the Sony Ericsson Walkman may also compete with Danger-enabled mobile devices.

Seasonality

We experience some seasonality in our business with respect to new subscriber activations in our fiscal first quarter, which ends December 31, reflecting the fact that mobile device sales accelerate in late November and December during the holiday shopping season. The impact of this seasonal activity is generally reflected through a higher sequential quarterly growth rate for monthly service and premium applications, content and services revenues in our fiscal second quarter financial results. In addition to holiday shopping seasonality, we may experience spikes in new subscriber activations and premium applications, content and services revenues as a result of the release of new Danger-enabled mobile device models or new premium applications, content and services.

Employees

As of September 30, 2007, we had 300 employees. Of these employees, 287 were in the United States, 12 were in Europe and one was in Australia. We also engage a number of temporary employees and consultants. None of our employees is represented by labor unions or covered by a collective bargaining agreement. We have not experienced any work stoppages, and we consider our employee relationships to be good.

Facilities

Our headquarters are located in Palo Alto, California, where we lease approximately 58,850 square feet of office space pursuant to leases that expire between December 31, 2009 and December 31, 2011. We lease approximately 5,639 square feet of office space in Duluth, Georgia, and 5,730 square feet in Billerica, Massachusetts pursuant to leases that expire on March 31, 2011 and May 31, 2010, respectively. Internationally, we lease sales office space in Reading, England on a month-to-month basis. We intend to add new facilities and to expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

Legal Proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently a party to any material litigation, however, we have received, and may in the future continue to receive, claims from third parties asserting infringement of their intellectual property rights. For instance, in 2005, a patent holding company filed lawsuits alleging patent infringement and trade secret misappropriation against us, T-Mobile USA, Sharp and an affiliate of Sharp. We incurred expense of approximately $2.7 million in defending ourselves, T-Mobile USA and Sharp before settling the litigation in November 2006. Future litigation may be necessary to defend ourselves, our OEM partners and our mobile operator customers by determining the scope, enforceability and validity of third-party proprietary rights or to establish our proprietary rights.

In addition, we have received, and expect to continue to receive, demands for indemnification from our mobile operator customers and OEM partners, which demands can be very expensive to settle or defend, and we have in the past contributed to settlement amounts and incurred substantial legal fees in connection with certain of these indemnity demands. A number of these indemnity demands, including demands from T-Mobile USA and Sharp, relate to pending litigation and remain outstanding and unresolved as of the date of this prospectus. For example, in October 2007, T-Mobile USA demanded that we indemnify and defend T-Mobile USA against a lawsuit brought by NTP, Inc. alleging that T-Mobile USA is infringing certain patents held by NTP relating to

 

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the use of wireless communications in electronic mail systems and seeking unspecified damages. NTP is a patent holding company that sued Research in Motion Limited, which markets BlackBerry wireless devices, for patent infringement in 2001, and settled such litigation with Research in Motion Limited in 2006 for $612.5 million. Although NTP’s lawsuit against T-Mobile USA was recently stayed pending the U.S. Patent and Trademark Office’s ongoing review of NTP’s patents, the stay could be lifted at any time. As of the date of this prospectus, we have not accepted or rejected T-Mobile USA’s indemnity demand related to this litigation. Large future indemnity payments and associated legal fees and expenses, including potential indemnity payments and legal fees and expenses relating to T-Mobile USA’s indemnity demand with respect to the NTP lawsuit, could materially harm our business, operating results and financial condition.

Although we have not agreed to defend or indemnify our mobile operator customers or OEM partners for any outstanding and unresolved indemnity demands, we may in the future agree to defend and indemnify them in connection with these demands, irrespective of whether we believe that we have an obligation to indemnify them or whether we believe our solution infringes the asserted intellectual property rights. Alternatively, we may reject certain of our mobile operator customers’ or OEM partners’ indemnity demands, including outstanding demands from T-Mobile USA or Sharp, which rejections may lead to disputes with our mobile operator customers or OEM partners and may negatively impact our relationships with them or result in litigation against us. Our mobile operator customers or OEM partners may also claim that any rejection of their indemnity demands constitutes a material breach of our agreements with them, allowing them to terminate such agreements. If, as a result of indemnity demands, we make substantial payments, our relationships with our mobile operator customers or OEM partners are negatively impacted, or if any of our mobile operator customer or OEM partner agreements is terminated, our business, financial condition and operational results could be materially adversely affected.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information concerning our directors and executive officers as of September 30, 2007:

 

Name

   Age   

Position

Executive Officers:

     

Henry R. Nothhaft

   63    Chief Executive Officer and Chairman of the Board of Directors

Joe F. Britt, Jr.

   38    Senior Vice President, Chief Technology Officer and Director

Donn Dobkin

   46    Senior Vice President of Service Operations

Mark W. Fisher

   47    Senior Vice President of Marketing and Business Development

Les Hamilton

   63    Senior Vice President of Engineering

Matt Hershenson

   40    Senior Vice President of Advanced Products

Nancy J. Hilker

   50    Senior Vice President and Chief Financial Officer

James L. Isaacs

   47    Senior Vice President of Worldwide Sales and Alliances

Sandra J. Taylor

   45    Vice President of Finance, Controller and Chief Accounting Officer

Non-Employee Directors:

     

Jeffrey D. Brody(1)(2)

   47    Director

Gregory P. Galanos(2)(3)

   50    Director

Richard S. Gilbert(3)(4)

   55    Director

Eric Hippeau(1)(2)(3)