S-1 1 d45301ds1.htm REGISTRATION STATEMENT ON FORM S-1 Registration Statement on Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on February 17, 2012

Registration No. 333-             

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

E2open, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware   7372   94-3366487
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (IRS Employer
Identification No.)

4100 East Third Avenue, Suite 400

Foster City, California 94404

(650) 645-6500

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

 

 

Mark E. Woodward

President and Chief Executive Officer

4100 East Third Avenue, Suite 400

Foster City, California 94404

(650) 645-6500

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

 

 

Copies to:

 

Larry W. Sonsini

Aaron J. Alter

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Peter J. Maloney

Chief Financial Officer

4100 East Third Avenue, Suite 400 Foster City, California 94404

(650) 645-6500

 

Richard A. Kline

Christopher J. Austin

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, California 94025

(650) 752-3100

 

 

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

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 statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.. (Check one):

 

Large accelerated filer ¨

  Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨
   

(Do not check if a smaller reporting company)

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities

to be Registered

  Proposed Maximum
Aggregate Offering Price (1)
  Amount of
Registration Fee (2)

Common Stock, par value $0.001 per share

 

$86,250,000

 

$9,884.25

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(o) under the Securities Act based on an estimate of the proposed maximum offering price.

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 which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may 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 it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated February 17, 2012

PROSPECTUS

             Shares

 

LOGO

Common Stock

 

 

This is E2open, Inc.’s initial public offering. We are selling              shares of our common stock and the selling stockholders are selling              shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.

We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the                      under the symbol “        .”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 13 of this prospectus.

 

 

 

      

Per Share

      

Total

 

Public offering price

     $           $     

Underwriting discount

     $           $     

Proceeds, before expenses, to us

     $                          $                        

Proceeds, before expenses, to the selling stockholders

     $           $     

The underwriters may also exercise their option to purchase up to an additional             shares from us, and up to an additional              shares from the selling stockholders, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

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

The shares will be ready for delivery on or about                     , 2012.

 

 

 

BofA Merrill Lynch
William Blair & Company   Pacific Crest Securities   Canaccord Genuity   Needham & Company

 

 

The date of this prospectus is                     , 2012.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements and Industry Data

     33   

Use of Proceeds

     35   

Dividend Policy

     35   

Capitalization

     36   

Dilution

     38   

Selected Consolidated Financial Data

     40   

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

     45   

Business

     77   

Management

     96   

Executive Compensation

     104   

Certain Relationships and Related Party Transactions

     128   

Principal and Selling Stockholders

     132   

Description of Capital Stock

     136   

Shares Eligible for Future Sale

     141   

Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders

     143   

Underwriting

     147   

Legal Matters

     153   

Experts

     153   

Where You Can Find More Information

     153   

Index to Consolidated Financial Statements

     F-1   

You should rely only on the information contained in this prospectus and in any free writing prospectus prepared by or on behalf of us and delivered or made available to you. We have not, the selling stockholders 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. Neither we nor the selling stockholders take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including,                     , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

No action is being taken in any jurisdiction outside the United States to permit a public offering of our common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in a jurisdiction outside the United States are required to inform themselves about, and to observe any restrictions as to, this offering and the distribution of this prospectus applicable to that jurisdiction.

 

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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. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Company Overview

We are a leading provider of cloud-based, on-demand software solutions delivered on an integrated platform that enables companies to collaborate with their trading partners to procure, manufacture, sell and distribute products more efficiently. Our customers depend on outsourced manufacturing strategies and complex trading networks to compete in today’s global economy. They use our solutions to gain visibility into and control over their trading networks through the real-time information, integrated business processes and advanced analytics that we provide. Our solutions enable our customers and their trading partners to overcome problems arising from communications across disparate systems by offering a reliable source of data, processes and analytics, which our customers rely on as the single version of the truth. Our solutions empower our customers to manage demand they cannot predict and supply they do not control.

We refer to the combination of our software applications delivered on our cloud-based platform, the content contributed by our network participants and our enabling services as the E2open Business Network. The E2open Business Network has grown to over 29,000 unique registered trading partners. It allows our network participants to access and share data and execute business processes in a secure, real-time manner, while providing them with collaboration tools and analytics so that our customers can make more informed and efficient decisions. Our customer base includes companies that represent five of the top eight supply chains in the world, according to Gartner, Inc., and spans several industries including many large multinational companies such as Boeing, Cisco, Dell, the Gap, GE, Flextronics, IBM, Lab126 (part of the Amazon.com, Inc. group of companies), Motorola and Vodafone. To date, our target markets have been Technology, Telecommunications, Aerospace and Defense, and Consumer Products.

E2open transcends traditional supply chain software categories, which include business-to-business, or B2B, integration, procurement, forecasting, planning and execution, by enabling coordination and collaboration among enterprises, which we call “collaborative execution.” By providing our solutions in an integrated cloud-based environment, our customers and their trading partners can easily share detailed and relevant content and data to gain the visibility they need for collaborative execution across their extended trading network.

Our customers benefit from the following key differentiating features of the E2open Business Network:

 

   

Cross-network analytics. We provide cross-network analytics for real-time monitoring and control of large volumes of data to sense and respond quickly and collaboratively to changes, opportunities or disruptions in the supply chain.

 

   

Multi-enterprise, multi-tier supply and demand process management. We support key operational processes, such as forecast, order and inventory management, for our customers and their multi-tiered supply and demand trading networks.

 

   

Scalable, secure cloud-based connectivity platform. Our solutions combine B2B connectivity and integration capabilities that allow our customers to securely connect, share and act on information across their trading networks that can include thousands of partners.

 

 

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Integration with existing systems. Our highly-configurable solutions integrate with many leading Enterprise Resource Planning, or ERP, systems to efficiently manage complex networks and facilitate the interchange of transactions.

We believe that the E2open Business Network is strategic to our customers in that it enables them to increase revenue and productivity, and to reduce operating expenditures, working capital and cost of goods sold. Our solutions seamlessly integrate with and enhance our customers’ mission critical business systems and processes across their trading networks.

We have achieved strong growth as our network has scaled and as we have expanded our solutions. Our platform originated as a solution to help our customers connect with their manufacturing and distribution partners in their trading network. Next, we introduced solutions for multi-enterprise supply management, and then we introduced solutions to help our customers coordinate multi-enterprise demand management. Our revenue has grown from $37.7 million in fiscal 2009 to $44.4 million in fiscal 2010 to $55.5 million in fiscal 2011, representing a compound annual growth rate of 21.3% over this period. We generated $42.7 million of revenue for the nine months ended November 30, 2011. Additionally, from March 1, 2008 through November 30, 2011, we increased backlog from $24.4 million to $82.6 million, representing a 238.4% increase.

Our Opportunity

The accelerating trends of supply chain globalization and outsourced manufacturing and distribution have combined to increase complexity and risk for brand owners while decreasing visibility into their expanding and evolving supply chains and distribution networks. These trends have created a fundamental shift in the way companies source and distribute goods and services. They have led to an ever more complex product and service delivery paradigm which increasingly relies on specialized, globally distributed trading partners to reduce costs.

As trading networks become more complex, companies are increasingly demanding integrated solutions that facilitate not only collaborative inventory management, but also the demand and supply forecasts, procurement systems, order management and analytics required to efficiently coordinate a company’s entire business ecosystem. We believe a significant opportunity exists to help companies improve their competitive advantage by delivering the visibility and control once characteristic of vertically integrated companies while retaining the advantages of outsourcing. The ability to navigate modern supply chain complexities and to resolve problems in a timely and collaborative manner, combined with enhanced knowledge of end customer demand, is critical to enabling businesses to better match supply and demand.

Our collaborative execution solutions address an opportunity comprised of three markets that include integration brokerage software, supply chain execution software and supply chain planning software. These three markets are forecasted by Gartner, Inc. to grow collectively at an 11.3% compound annual growth rate from $5.5 billion in 2010 to $9.4 billion in 2015.

Our Solutions

We develop, operate and market an integrated cloud-based platform that addresses supply chain management challenges by providing cross-network analytics, multi-enterprise business process management and B2B integration solutions for companies seeking visibility across and control over their trading networks. We deliver our solutions in a highly secure, cloud-based computing environment. Our customers subscribe to our on-demand software-as-a-service solutions with multi-year contract terms that are typically three years in length.

 

 

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The E2open Business Network enables integrated planning and execution across trading partner networks. Our cloud-based technology stack is purpose-built for managing trading partner networks and enables our customers and their partners to increase their revenues while reducing costs by minimizing errors and maximizing efficiency. The key characteristics of the E2open Business Network that drive customer adoption include:

 

   

Large global business network. Our solutions have been designed for companies that either manage or participate in distributed supply chains and whose business processes require collaboration among numerous entities performing multiple interdependent activities to source, produce and fulfill demand for their products across disparate geographies.

 

   

Demand-driven model. Our solutions enable our customers to transform their trading networks from a forecast-driven production model, where products are manufactured in anticipation of future demand, to a demand-driven fulfillment model, which is responsive to changes in actual current end-user demand or constraints in supply.

 

   

Multi-tier functionality. Our solutions allow trading network participants to better manage processes and information, relating to raw materials, products, finished goods and related services across multiple tiers—from the extended supply base, to their outsourced manufacturing partners, then on to their distribution channels and ultimately to the end customer.

 

   

Cloud-based platform. Unlike many companies operating legacy on-premise solutions that are difficult and costly to configure and support, our customers and their trading partners using the E2open Business Network are able to share, analyze and act on information in real time on a common platform. Our cloud-based platform enables process management and information exchange among our customers and their trading partners.

Enterprises can leverage our enabling expertise and services when they need to change or deploy a new process capability or add a trading partner. By creating a single, unified source of information within the trading network, we enable enterprises to operate and make decisions based on reliable and trustworthy information in real time, allowing our customers and their trading partners to improve communication, multi-enterprise process performance, and tactical and strategic decision making. Our customers use our solutions to:

 

   

Increase sales by optimizing inventory levels;

 

   

Achieve greater revenue assurance and customer satisfaction through timely order fulfillment;

 

   

Reduce costs and working capital requirements through automation of operations, inventory reduction and enhanced procurement efficiency;

 

   

Achieve faster and easier on-boarding of trading partners to our platform by utilizing each partner’s existing technological infrastructure; and

 

   

Reduce deployment risk, streamline operations and lower maintenance costs, without a significant upfront investment in on-premise software or ongoing investments in software maintenance.

 

 

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Our Strategy for Growth

Our objective is to be the leading provider of multi-enterprise, cloud-based, on-demand software enabling enterprises to more efficiently and profitably procure, manufacture, sell and distribute products through collaborative execution. The key elements of our strategy include:

 

   

Leverage our existing network to add customers. The E2open Business Network creates a network effect by attracting the largest suppliers and customers in a particular industry vertical to establish and grow our presence. We intend to leverage our customers’ expanding ecosystems to attract new customers and convert trading partners from within our network into direct customers.

 

   

Up-sell additional solutions to our existing customers. Once our customers begin to rely on the real-time data and visibility provided by our platform and solutions, they typically purchase additional solutions from us. We intend to continue to leverage our knowledge of and familiarity with our existing customers to deliver additional solutions to them.

 

   

Expand into new verticals. We believe our experience with our customers in our initial target markets provides a successful model for future growth. We have found that the challenges presented by managing inventory, orders and planning are similar across many industries which makes our solutions applicable to a wide array of industry verticals. We intend to leverage our experience, expertise and proven customer success within our current key verticals to accelerate entry into and delivery of our solutions to these new vertical markets.

 

   

Introduce new products. We will continue to expand our portfolio of solutions by leveraging our familiarity with advanced supply chains and over 29,000 of our partners in our trading network to develop new applications and introduce new products that are strategic to our customers and their trading networks.

 

   

Expand our international presence. In 2010, we grew our sales team in Europe and we intend to hire additional sales personnel in Germany, France and the Nordic countries. In 2011, we opened an office and established a direct sales force and a sales, hosting and distribution alliance with a local partner in China. We intend to make additional investments outside of the United States in order to expand our geographic reach.

 

   

Expand our target market to include mid-market customers. Historically, we have focused our sales and marketing efforts on the largest companies within specific vertical markets. By leveraging our established trading network and cloud-based subscription model, we can now offer cost-effective, pre-packaged solutions to expand our target market to include mid-market customers.

 

   

Make targeted, strategic acquisitions. We intend to complement our organic growth with strategic acquisitions of technologies, solutions and businesses that enhance and expand our existing offerings.

 

 

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Risk Factors

Investing in our common stock involves risks and uncertainties. You should carefully read “Risk Factors” for an explanation of these risks before investing in our common stock. In particular, the following considerations, among others, may offset our competitive strengths or have a negative effect on our growth strategy, which could cause a decline in the price of our common stock and result in a loss of all or a portion of your investment:

 

   

We have incurred operating losses in the past and may incur operating losses in the future;

 

   

If we are unable to attract new customers or sell additional products to our existing customers, our revenue growth and profitability will be adversely affected;

 

   

We derive a significant portion of our revenue from a relatively small number of customers, and our growth depends on our ability to retain existing customers and add new customers;

 

   

We encounter long sales cycles, particularly with our larger customers, and seasonality in sales, which could have an adverse effect on the amount, timing and predictability of our revenue;

 

   

Our quarterly results of operations may fluctuate. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline;

 

   

We operate in an emerging and evolving market, which may make it difficult to evaluate our business and future prospects. If this market does not develop or develops more slowly than we expect, our revenue may decline or fail to grow, and we may incur additional operating losses;

 

   

Downturns in general economic and market conditions and reductions in information technology spending may reduce demand for our solutions, which could negatively affect our revenue, results of operations and cash flows; and

 

   

If we are unable to develop new products and services, sell our solutions into new markets or further penetrate our existing markets, our revenue will not grow as expected.

Corporate Information

E2open, LLC commenced operations in 2000 as a venture between a number of strategic corporate investors, financial investors and advisors. In 2003, E2open, Inc. was incorporated in Delaware, and merged with E2open, LLC, with E2open, Inc. becoming the surviving entity in the merger. Our principal executive offices are located at 4100 East Third Avenue, Suite 400, Foster City, California 94404, and our telephone number is (650) 645-6500. Our website address is www.e2open.com. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. Unless the context requires otherwise, the words “E2open,” “we,” “company,” “us” and “our” refer to E2open, Inc. and our wholly owned subsidiaries.

E2open, the E2open logo and other trademarks of E2open appearing in this prospectus are the property of E2open. Trade names and trademarks of other companies appearing in this prospectus are the property of the respective holders.

 

 

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THE OFFERING

 

Common stock offered by E2open, Inc

             shares

The selling stockholders

             shares

 

Shares outstanding after the offering

             shares

 

Overallotment option offered by E2open, Inc.

             shares

 

Use of proceeds

The net proceeds to us from this offering, after expenses, will be approximately $         million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the shares sold by selling stockholders. We intend to use the net proceeds from this offering for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds for acquisitions of complementary technologies, solutions or businesses and repayment of up to $         million of our existing indebtedness.

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed              symbol

“                    ”

The number of shares of our common stock to be outstanding after the completion of this offering is based on 733,124,343 shares outstanding as of November 30, 2011, and excludes:

 

   

98,566,958 shares of common stock issuable upon the exercise of options outstanding as of November 30, 2011 at a weighted average exercise price of $0.06 per share;

 

   

6,620,369 shares of common stock issuable upon the conversion of convertible Series BB preferred stock issuable upon the exercise of warrants outstanding as of November 30, 2011 at an exercise price of $0.32 per share; and

 

   

             shares reserved for future issuance under our 2012 Equity Compensation Plan, as well as shares originally reserved for issuance under our 2003 Stock Plan, but which may become available for awards under our 2012 Equity Compensation Plan, which plan will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation—Employee Benefit Plans.”

Except for historical financial statements or as otherwise indicated, information in this prospectus reflects or assumes the following:

 

   

a one-for-      reverse stock split of our common stock effected on                     , 2012;

 

   

the filing of our amended and restated certificate of incorporation immediately prior to the closing of this offering;

 

 

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the conversion of all of our outstanding convertible preferred stock into an aggregate of 517,002,101 shares of common stock immediately prior to the closing of this offering;

 

   

the automatic conversion of all of our outstanding warrants to purchase convertible preferred stock into warrants to purchase an aggregate of 6,620,369 shares of common stock immediately prior to the closing of this offering;

 

   

no exercise after November 30, 2011 of outstanding options or warrants; and

 

   

no exercise of the underwriters’ overallotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

We have derived the summary consolidated financial data for the fiscal years ended February 28, 2009, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated financial data for the nine months ended November 30, 2010 and 2011 and as of November 30, 2011 from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended February 28,     Nine Months Ended
November 30,
 
     2009     2010     2011     2010     2011  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenue

          

Subscription and support

   $ 21,107      $ 29,976      $ 39,419      $ 26,973      $ 26,563   

Professional services

     16,627        14,401        16,104        10,380       16,099   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     37,734        44,377        55,523        37,353        42,662   

Cost of revenue

          

Subscription and support

     8,885        9,269        7,531        5,774        5,599   

Professional services

     14,685        11,493        11,774        8,764        10,224   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     23,570        20,762        19,305        14,538        15,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

          

Subscription and support

     12,222        20,707        31,888        21,199        20,964   

Professional services

     1,942        2,908        4,330        1,616        5,875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     14,164        23,615        36,218        22,815        26,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     12,943        13,077        11,463        8,474        9,880   

Sales and marketing

     11,792        11,421        12,756        9,027        13,161   

General and administrative

     6,448        4,884        5,064        3,745        4,305   

Restructuring costs

     1,146                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,329        29,382        29,283        21,246        27,346   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (18,165     (5,767     6,935        1,569        (507

Interest and other expense, net

     (1,618     (532     (259     (219     (457
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (19,783     (6,299     6,676        1,350        (964

Provision for income taxes

     (60     (349     (33            (122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (19,843     (6,648     6,643        1,350        (1,086

Undistributed earnings allocated to preferred stockholders

         (6,643     (1,350  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

   $ (19,843   $ (6,648   $      $      $ (1,086
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

          

Basic

   $ (0.17   $ (0.05   $      $      $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.17   $ (0.05   $      $      $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute income (loss) per share attributable to common stockholders:

          

Basic

     115,390        147,342        202,569        199,486        205,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     115,390        147,342        202,569        199,486        205,796   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders (unaudited) (1)

          

Basic

       $ 0.01        $   
      

 

 

     

 

 

 

Diluted

       $ 0.01        $   
      

 

 

     

 

 

 

Pro forma weighted average shares used to compute pro forma net income (loss) per share attributable to common stockholders (unaudited):

          

Basic

         726,191          729,368   
      

 

 

     

 

 

 

Diluted

         759,769          729,368   
      

 

 

     

 

 

 

 

 

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     Year Ended February 28,     Nine Months
Ended
November 30,
 
     2009     2010     2011     2010     2011  
     (Dollars in thousands)  

Other Financial and Operational Data:

          

Adjusted EBITDA (2)

   $ (15,163   $ (2,999   $ 9,371      $ 3,320      $ 1,053   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow (3)

   $ (16,453   $ (5,325   $ (697   $ (1,950   $ (2,621
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of unique registered trading partners (at period end) (4)

     18,117        22,529        26,440        25,554        29,599   

Number of unique registered users (at period end) (4)

     48,918        62,528        73,377        70,847        84,461   

 

(1) Pro forma net income (loss) per share has been calculated assuming the conversion of all outstanding shares of our preferred stock as of November 30, 2011 into 517,002,101 shares of common stock and issuance of 6,620,369 shares of common stock upon the conversion of convertible Series BB preferred stock issuable upon the exercise of warrants outstanding as of November 30, 2011 prior to completion of this offering.
(2) We define Adjusted EBITDA as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. Please see “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.
(3) We define free cash flow as net cash provided by (used in) operating activities less capital expenditures. Please see “Free Cash Flow” below for more information and for a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(4) We define unique registered trading partners and unique registered users as entities and individuals, respectively, that have used our network as of the balance sheet date. We view the number of unique registered trading partners and unique registered users as key indicators of the reach of our network and the value our enterprise customers are deriving from our solutions.

Stock-based compensation included in the consolidated statements of operations data above was as follows:

 

     Year Ended February 28,      Nine Months Ended
November 30,
 
         2009              2010              2011              2010              2011      
     (In thousands)  

Cost of revenue

   $ 85       $ 106       $ 223       $ 111       $ 122   

Research and development

     58         82         108         61         53   

Sales and marketing

     107         155         154         80         135   

General and administrative

     92         102         92         59         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 342       $ 445       $ 577       $ 311       $ 410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth our summary consolidated balance sheet data as of November 30, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the conversion of all outstanding shares of our convertible preferred stock into 517,002,101 shares of our common stock, which will occur immediately prior to the closing of this offering, and the conversion of warrants to purchase convertible preferred stock into warrants to purchase 6,620,369 shares of common stock, which will occur immediately prior to the closing of this offering, and the filing of our post-offering amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and

 

   

on a pro forma as adjusted basis to reflect the pro forma adjustments described above and our receipt of the net proceeds from our sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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     As of November 30, 2011
     Actual     Pro forma (1)    Pro forma as
adjusted
     (In thousands)

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 10,043        

Property and equipment, net

     1,444        

Working capital, excluding deferred revenue

     8,320        

Total assets

     28,549        

Convertible preferred stock

     83,491        

Total stockholders’ deficit

   $ (34,595     

 

(1) 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents and each of working capital, excluding deferred revenue, total assets and total stockholders’ deficit by $         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 estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1.0 million shares in the number of shares offered by us would increase cash and cash equivalents and each of working capital, excluding deferred revenue, total assets and total stockholders’ deficit by $         million. Similarly, each decrease of 1.0 million shares in the number of shares offered by us would decrease cash and cash equivalents and each of working capital, excluding deferred revenue, total assets and total stockholders’ deficit by $         million. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

Key Financial Performance Metrics

We monitor the key financial metrics set forth below as well as revenue, gross profit, gross margin, cash and cash equivalents, and available debt capacity, which are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” to help us evaluate trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational effectiveness and efficiencies.

Adjusted EBITDA

We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans.

Adjusted EBITDA is defined as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. Management believes that the use of Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period to period comparisons of results of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

Management believes that it is useful to exclude certain non-cash charges, such as depreciation, amortization and stock-based compensation, and non-core operational charges, such as interest and other expense, net from Adjusted EBITDA because (1) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (2) such expenses can vary significantly between periods as a result of the timing of new stock-based awards, acquisitions or restructurings, as the case may be.

 

 

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Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;

 

   

Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect the future need to augment or replace such assets; and

 

   

Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods indicated:

 

     Year Ended February 28,      Nine Months Ended
November 30,
 
     2009     2010     2011      2010      2011  
     (In thousands)  

Reconciliation of Adjusted EBITDA:

            

Net income (loss)

   $ (19,843   $ (6,648   $ 6,643       $ 1,350       $ (1,086

Interest and other expense, net

     1,618        532        259         219         457   

Provision for income taxes

     60        349        33                 122   

Depreciation and amortization

     2,660        2,323        1,859         1,440         1,150   

Stock-based compensation

     342        445        577         311         410   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (15,163   $ (2,999   $ 9,371       $ 3,320       $ 1,053   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Free Cash Flow

Free cash flow is a key measure used in our internal operating reports and allows us to manage the cash available to fund our debt obligations and potential strategic initiatives. Management believes that free cash flow is useful to investors as a supplemental measure to evaluate our business over time.

Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures. Capital expenditures consist of purchases of property, equipment and software. Management believes that the use of free cash flow provides consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operating performance and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

 

 

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Free cash flow should not be considered a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. Management compensates for the inherent limitations associated with measuring free cash flow through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of free cash flow to the most directly comparable GAAP measure, net cash provided by (used in) operating activities. A reconciliation of net cash provided by (used in) operating activities to free cash flow is presented below:

 

     Year Ended February 28,     Nine Months Ended
November 30,
 
     2009     2010     2011     2010     2011  
     (In thousands)  

Free Cash Flow Data:

          

Net cash provided by (used in) operating activities

   $ (14,607   $ (4,401   $ 88      $ (1,287   $ (2,126

Capital expenditures

     (1,846     (924     (785     (663     (495
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (16,453   $ (5,325   $ (697   $ (1,950 )   $ (2,621
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Industry

We have incurred operating losses in the past and may incur operating losses in the future.

We began our operations in 2000. Throughout most of our history, we have experienced net losses and negative cash flows from operations. As of November 30, 2011, we had an accumulated deficit of $341.5 million. We expect our operating expenses to increase in the future as we expand our operations. Furthermore, as a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. If our revenue does not grow to offset these increased expenses, we will not be profitable. We cannot assure you that we will be able to achieve or maintain profitability. You should not consider recent revenue growth as indicative of our future performance.

If we are unable to attract new customers or sell additional products to our existing customers, our revenue growth and profitability will be adversely affected.

To increase our revenue and achieve and maintain profitability, we must regularly add new customers or sell additional solutions to our existing customers, which we plan to do. Numerous factors, however, may impede our ability to add new customers and sell additional solutions to our existing customers, including our inability to convert companies that have been referred to us by our existing network into paying customers, failure to attract and effectively train new sales and marketing personnel, failure to retain and motivate our current sales and marketing personnel, failure to develop relationships with resellers or failure to ensure the effectiveness of our marketing programs. In addition, if prospective customers do not perceive our solutions to be of sufficiently high value and quality, we will not be able to attract the number and types of new customers that we are seeking.

We derive a significant portion of our revenue from a relatively small number of customers, and our growth depends on our ability to retain existing customers and add new customers.

We derive a significant percentage of our revenue from a relatively small number of customers, and the loss of any one or more of those customers could decrease our revenue and harm our current and future results of operations. For the nine months ended November 30, 2011, our top ten customers accounted for 72.6% of our revenue, and two customers each accounted for at least 10% of our revenues. Although our largest customers may vary from period to period, we anticipate that we will continue to depend on revenue from a relatively small number of customers.

We encounter long sales cycles, particularly with our larger customers, and seasonality in sales, which could have an adverse effect on the amount, timing and predictability of our revenue.

Our products have lengthy sales cycles, which typically extend from four to 12 months and may in some instances take longer than one year. Potential and existing customers, particularly larger enterprises, often commit significant resources to an evaluation of available solutions and services and require us to expend substantial time and resources in connection with our sales efforts. The length of our sales cycles also varies depending on the type of customer to which we are selling, the product being sold and customer requirements. We may incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale. Many of the risks relating to sales processes are beyond our control, including:

 

   

Our customers’ budgetary and scheduling constraints;

 

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The timing of our customers’ budget cycles and approval processes;

 

   

Our customers’ willingness to augment or replace their currently deployed software products; and

 

   

General economic conditions.

As a result of the lengthy and uncertain sales cycles of our products and services, it is difficult for us to predict when customers may purchase products or services from us, thereby affecting when we can recognize the associated revenue, and our results of operations may vary significantly and may be adversely affected. The length of our sales cycle makes us susceptible to having pending transactions delayed or terminated by our customers if they decide to delay or withdraw funding for information technology, or IT, projects. Our customers may decide to delay or withdraw funding for IT projects for various reasons, including global economic cycles and capital market fluctuations.

In addition, we may experience seasonality in the sales of our solutions. For instance, historically, the agreements we have signed in our fiscal first quarter have had an aggregate value less than that of the agreements signed in our preceding fiscal fourth quarter. Seasonal variations in our sales may lead to significant fluctuations in our cash flows and deferred revenue on a quarterly basis. If we experience a delay in signing or a failure to sign a significant customer agreement in any particular quarter, then our results of operations for such quarter and for subsequent quarters may be below the expectations of securities analysts or investors, which may result in a decline in our stock price.

Our quarterly results of operations may fluctuate. As a result, we may fail to meet or exceed the expectations of investors or securities analysts which could cause our stock price to decline.

Our quarterly revenue and results of operations may fluctuate as a result of a variety of factors, many of which are outside of our control. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Fluctuations in our results of operations may be due to a number of factors, including, but not limited to, those listed below:

 

   

Demand for and market acceptance of our products;

 

   

Our ability to retain and increase sales to customers and attract new customers;

 

   

The timing of product deployment which determines when we can recognize the associated revenue;

 

   

The timing and success of introductions of new solutions or upgrades by us or our competitors;

 

   

The strength of the economy;

 

   

Changes in our pricing policies or those of our competitors;

 

   

Competition, including entry into the industry by new competitors and new offerings by existing competitors;

 

   

The impact of seasonality on our business;

 

   

The amount and timing of expenditures related to expanding our operations, research and development or introducing new solutions; and

 

   

Changes in the payment terms for our solutions.

Due to the foregoing factors, and the other risks discussed in this prospectus, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

 

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We operate in an emerging and evolving market, which may make it difficult to evaluate our business and future prospects. If this market does not develop or develops more slowly than we expect, our revenue may decline or fail to grow, and we may incur additional operating losses.

The market for trading network solutions, including our integrated platform, is in an early stage of development, and it is uncertain how rapidly this market will develop, and even if it does develop, whether our software and solutions will achieve and sustain high levels of demand and market acceptance. In addition, we sell our solutions as an on-demand, software-as-a-service, or SaaS, solution, which is an alternative to the traditional licensed hardware and software solutions, and solutions developed in-house to which many of our customers or potential customers are accustomed. Our software relies on the acceptance and proliferation of cloud computing, which may not be widespread or happen in a timely fashion.

Some companies may be reluctant or unwilling to use our solutions for a number of reasons, including existing investments in demand and supply network management technology. For example, supply chain management functions traditionally have been performed using purchased or licensed hardware and software implemented by each company in the supply chain. Because this traditional approach often requires significant initial investments to purchase the necessary technology and to establish systems that comply with customers’ unique requirements, suppliers may be unwilling to abandon their current options for our integrated, multi-enterprise solution.

Other factors that may limit market acceptance of our solutions include:

 

   

Our ability to maintain high levels of customer satisfaction;

 

   

Our ability to maintain availability of service across all users of our products;

 

   

The price, performance and availability of competing products;

 

   

Our ability to address confidentiality concerns about information stored outside of our customers’ controlled computing environments; and

 

   

Concerns about data protection and confidentiality of data stored in the United States, for customers with headquarters outside of the United States.

If companies do not perceive or value the benefits of our solutions, or if companies are unwilling to accept our platform as an alternative to the traditional approach, the market for our products might not continue to develop or might develop more slowly than we expect, either of which would significantly adversely affect our revenue and growth prospects.

Downturns in general economic and market conditions and reductions in IT spending may reduce demand for our solutions, which could negatively affect our revenue, results of operations and cash flows.

Our revenue, results of operations and cash flows depend on the overall demand for our solutions. Concerns about the systemic impact of a potential widespread recession, energy costs, geopolitical issues, the availability and cost of credit and the global housing and mortgage markets have contributed to increased market volatility, decreased consumer confidence and diminished growth expectations in the U.S. economy and abroad. This in turn has resulted in reductions in IT spending by some of our customers.

Further worsening, broadening or protracted extension of the economic downturn could have a significant negative impact on our business, revenue, results of operations and cash flows. Prolonged economic slowdowns may result in customers requiring us to renegotiate existing contracts on less advantageous terms to us than those currently in place or defaulting on payments due on existing contracts.

 

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Furthermore, during weak economic times, there is an increased risk that one or more of our customers will file for bankruptcy protection, which may adversely affect our revenue, profitability and results of operations. If a customer files for bankruptcy, we may be required to forego collection of pre-petition amounts owed and to repay amounts remitted to us during the 90-day preference period preceding the filing, which may be significant due to extended payment terms for software contract fees, and significant billings for professional services on large projects. We also face risk from international customers that file for bankruptcy protection in foreign jurisdictions, in that the outcome of the application of foreign bankruptcy laws may be more difficult to predict. In addition, we may determine that the cost of pursuing any claim may outweigh the recovery potential of such claim.

If we are unable to develop new products and services, sell our solutions into new markets or further penetrate our existing markets, our revenue will not grow as expected.

Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our solutions, to introduce new products and services in a timely manner, to sell into new markets and to further penetrate our existing markets. The success of any enhancement or new product or service depends on several factors, including the timely completion, introduction and market acceptance of the enhancement or new product or service. Any new product or service we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to generate significant revenue. Any new markets into which we attempt to sell our solutions, including new vertical markets and new countries or regions, may not be receptive. If we are unable to successfully develop or acquire new products or services, enhance our existing products or services to meet customer requirements, sell products and services into new markets or sell our products and services to additional customers in our existing markets, our revenue will not grow as expected. Moreover, we are frequently required to enhance and update our products and services as a result of changing standards and technological developments, which makes it difficult to recover the cost of development and forces us to continually qualify new products with our customers.

If we do not maintain the compatibility of our solutions with third-party applications that our customers use in their business processes, demand for our solutions could decline.

Our solutions can be used alongside a wide range of other systems, such as enterprise software systems and business software applications used by our customers in their businesses. If we do not support the continued integration of our solutions with third-party applications, including through the provision of application programming interfaces that enable data to be transferred readily between our solutions and third-party applications, demand for our solutions could decline, and we could lose sales. We will also be required to make our solutions compatible with new or additional third-party applications that are introduced into the markets that we serve. We may not be successful in making our solutions compatible with these third-party applications, which could reduce demand for our solutions. In addition, prospective customers, especially large enterprise customers, may require heavily customized features and functions unique to their business processes. If prospective customers require customized features or functions that we do not offer, then the market for our solutions will be adversely affected.

Our inability to adapt to rapid technological change could impair our ability to remain competitive.

The industry in which we compete is characterized by rapid technological change, frequent introductions of new products and evolving industry standards. Our ability to attract new customers and increase revenue from customers will depend in significant part on our ability to anticipate industry standards and to continue to enhance existing solutions or introduce or acquire new solutions on a timely basis to keep pace with technological developments. The success of any enhancement or new solution depends on several factors, including the timely completion and market acceptance of the enhancement or new solution. Any new solution we develop or acquire might not be introduced in a timely or cost-effective manner and might not achieve the broad market acceptance necessary to generate significant revenue. If any of our competitors implements new technologies before we are able to implement them, those competitors may be able to provide more effective

 

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solutions than ours at lower prices. Any delay or failure in the introduction of new or enhanced solutions could adversely affect our business, results of operations and financial condition.

Our solutions are complex and customers may experience difficulty in implementing or upgrading our products successfully or otherwise achieving the benefits attributable to our products.

Due to the scope and complexity of the solutions that we provide, our implementation cycle can be lengthy and unpredictable. Our products may require modification or customization and must integrate with many existing computer systems and software programs of our customers and their trading partners. This can be time-consuming and expensive for our customers and can result in delays in the implementation and deployment of our products. As a result, some customers have had, and may in the future have, difficulty implementing our products successfully or otherwise achieving the expected benefits of our products. Delayed or ineffective implementation or upgrades of our software may limit our future sales opportunities, impact revenue, result in customer dissatisfaction and harm our reputation.

The markets in which we participate are highly competitive, and our failure to compete successfully would make it difficult for us to add and retain customers and would reduce or impede the growth of our business.

The markets for supply chain management solutions are increasingly competitive and global. We expect competition to increase in the future both from existing competitors and new companies that may enter our markets. Increased competition could result in pricing pressure, reduced sales, lower margins or the failure of our solutions to achieve or maintain broad market acceptance. We currently face, or may face in the future, competition from:

 

   

SaaS providers that deliver business-to-business information systems;

 

   

Traditional on-premise software providers; and

 

   

Managed service providers that combine traditional on-premise software with professional information technology services.

To remain competitive, we will need to invest continuously in software development, marketing, customer service and support and product delivery infrastructure. However, we cannot assure you that new or established competitors will not offer solutions that are superior to or lower in price than ours. We may not have sufficient resources to continue the investments in all areas of software development and marketing needed to maintain our competitive position. In addition, some of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than us, which may provide them with an advantage in developing, marketing or servicing new solutions. Increased competition could reduce our market share, revenue and operating margins, increase our operating costs and otherwise adversely affect our business.

If we are unable to manage our diverse and complex operations, our reputation in the market and our ability to generate revenue from new or existing customers may be adversely affected.

Because our operations are geographically diverse and complex, our personnel resources and infrastructure could become strained and our reputation in the market and our ability to successfully implement our business plan may be adversely affected. We have experienced a period of rapid growth in our headcount and operations. From November 30, 2010 to November 30, 2011, our employee headcount grew from 273 to 320. The growth in the size, complexity and diverse nature of our business and the expansion of our product lines and customer base have placed increased demands on our management and operations, and further growth, if any, may place additional strains on our resources in the future. Our ability to effectively compete and to manage our planned future growth will depend on, among other things, the following:

 

   

Maintaining continuity in our senior management and key personnel;

 

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Increasing the productivity of our existing employees;

 

   

Attracting, retaining, training and motivating our employees, particularly our technical and management personnel;

 

   

Deploying our solutions using third-party systems integrators, which will require changes to our applications, documentation and operational processes;

 

   

Improving our operational, financial and management controls; and

 

   

Improving our information reporting systems and procedures.

If we do not manage the size, complexity and diverse nature of our business effectively, we could experience delayed software releases and longer response times for assisting our customers with implementation of our products and services, and could lack adequate resources to support our customers on an ongoing basis, any of which could adversely affect our reputation in the market, our ability to successfully implement our business plan and our ability to generate revenue from new or existing customers.

If we fail to retain our key employees, our business would be harmed and we might not be able to implement our business plan successfully.

Given the complex nature of the technology on which our business is based and the speed with which such technology advances, our future success is dependent, in large part, upon our ability to attract and retain highly qualified managerial, technical and sales personnel. In particular, Mark E. Woodward, our Chief Executive Officer, is critical to the management of our business and operations. Competition for talented personnel is intense, and we cannot be certain that we can retain our managerial, technical and sales personnel or that we can attract, assimilate or retain such personnel in the future. Our inability to attract and retain such personnel could have an adverse effect on our business, results of operations and financial condition.

Our growth is dependent upon the continued development of our direct sales force.

We believe that our future growth will depend on the continued development of our direct sales force and their ability to obtain new customers, particularly large enterprise customers, and to manage our existing customer base. Our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New sales personnel require significant training and may, in some cases, take more than a year before becoming productive, if at all. If we are unable to hire and develop sufficient numbers of productive direct sales personnel, sales of our software and services will suffer and our growth will be impeded.

If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed.

Due to our evolving business model and the unpredictability of future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. We may not be able to adjust our spending quickly enough if the addition of new subscriptions or the renewal rate for existing subscriptions falls short of our expectations. As a result, we expect that our revenues, operating results and cash flows may fluctuate significantly on a quarterly basis. We believe that period to period comparisons of our revenues, operating results and cash flows may not be meaningful and should not be relied upon as an indication of future performance.

Interruptions or delays in the services provided by third-party data centers and/or internet service providers could impair the delivery of our solutions and our business could suffer.

We host our solutions in Equinix co-location facilities in Sunnyvale and San Jose, California and a suburb of Chicago, Illinois. Exostar hosts our solutions for the aerospace and defense industry in third party data

 

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centers and with third-party internet service providers outside of Washington, D.C. All of our solutions reside on hardware owned or leased and operated by us and Exostar in these locations. Our operations depend on the protection of the equipment and information we store in these third-party data centers and which third-party internet service providers transmit against damage or service interruptions that may be caused by fire, flood, severe storm, earthquake, power loss, telecommunications failures, unauthorized intrusion, computer viruses and disabling devices, natural disasters, war, criminal act, military action, terrorist attack and other similar events beyond our control. A prolonged service disruption affecting our solutions for any of the foregoing reasons could damage our reputation with current and potential customers, expose us to liability, cause us to lose customers from whom we receive recurring revenue or otherwise adversely affect our business. We may also incur significant costs for using alternative equipment or taking other actions in preparation for, or in reaction to, events that damage the data centers we use.

Our solutions are accessed by a large number of customers often at the same time. As we continue to expand the number of our customers and solutions available to our customers, we may not be able to scale our technology to accommodate the increased capacity requirements, which may result in interruptions or delays in service. In addition, the failure of our third-party data centers or third-party internet service providers to meet our capacity requirements could result in interruptions or delays in access to our solutions or impede our ability to scale our operations. In the event that our data center or third-party internet service provider arrangements are terminated, or there is a lapse of service, interruption of internet service provider connectivity, or damage to such facilities, we could experience interruptions in access to our solutions as well as delays and additional expense in arranging new facilities and services.

We may experience service failures or interruptions due to defects in the software, infrastructure, third-party components or processes that comprise our existing or new solutions, any of which could adversely affect our business.

Our products may contain undetected defects in the software, infrastructure, third-party components or processes that are part of the solutions we provide. If these defects lead to service failures after introduction of a solution or an upgrade to the solution, we could experience delays or lost revenue during the period required to correct the cause of the defects. We cannot be certain that defects will not be found in new solutions or upgraded solutions, resulting in loss of, or delay in, market acceptance, which could have an adverse effect on our business, results of operations and financial condition.

Because customers use our solutions for critical business processes, any defect in our solutions, any disruption to our solutions or any error in execution could cause recurring revenue customers to cancel their contracts with us, prevent potential customers from purchasing our solutions and harm our reputation. Although our contracts with our customers limit our liability to our customers for these defects, disruptions or errors, we nonetheless could be subject to litigation for actual or alleged losses to our customers’ businesses, which may require us to spend significant time and money in litigation or arbitration or to pay significant settlements or damages. We do not currently maintain any warranty reserves. Defending a lawsuit, regardless of its merit, could be costly and divert management’s attention and could cause our business to suffer.

The insurers under our existing liability insurance policy could deny coverage of a future claim that results from an error or defect in our technology or a resulting disruption in our solutions, or our existing liability insurance might not be adequate to cover all of the damages and other costs of such a claim. Moreover, we cannot assure you that our current liability insurance coverage will continue to be available to us on acceptable terms or at all. The successful assertion against us of one or more large claims that exceeds our insurance coverage, or the occurrence of changes in our liability insurance policy, including an increase in premiums or imposition of large deductible or co-insurance requirements, could have an adverse effect on our business, financial condition and results of operations. Even if we succeed in litigation with respect to a claim, we are likely to incur substantial costs and our management’s attention will be diverted from our operations.

 

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We may be required to defer recognition of some of our revenue, which may adversely affect our financial results in any given period.

We may be required to defer recognition of revenue for a significant period of time after entering into an agreement due to a variety of factors, including whether:

 

   

The transaction involves both current on-demand software solutions and on-demand software solutions that are under development;

 

   

The customer requires significant modifications, configurations or complex interfaces that could delay delivery or acceptance of our solutions;

 

   

The transaction involves extended payment terms;

 

   

The transaction involves acceptance criteria or other terms that may delay revenue recognition; or

 

   

The transaction involves performance milestones or payment terms that depend upon contingencies.

Because of these factors and other specific revenue recognition requirements under generally accepted accounting principles in the United States, or GAAP, we must have very precise terms in our contracts in order to recognize revenue when we initially provide access to our software solutions or perform services. Although we strive to enter into agreements that meet the criteria under GAAP for current revenue recognition on delivered elements, our agreements are often subject to negotiation and revision based on the demands of our customers. The final terms of our agreements sometimes result in deferred revenue recognition well after the time of delivery, which may adversely affect our financial results in any given period. In addition, because of prevailing economic conditions, more customers may require extended payment terms, shorter term contracts or alternative licensing arrangements that could reduce the amount of revenue we recognize upon delivery of our solutions and could adversely affect our short-term profitability.

Furthermore, the presentation of our financial results requires us to make estimates and assumptions that may affect revenue recognition. In some instances, we could reasonably use different estimates and assumptions, and changes in estimates are likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates.

If we are unable to substantially utilize our net operating loss carryforward, our financial results will be adversely affected.

As of February 28, 2011, our net operating loss, or NOL, carryforward amounts for U.S. federal income and state tax purposes were approximately $306.7 million and $158.5 million, respectively. Under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” may be subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders (generally 5% stockholders, applying certain look-through and aggregation rules) increases by more than 50% over such stockholders’ lowest percentage ownership during the testing period (generally three years). We believe that there was an ownership change in a prior year, which resulted in an annual NOL limitation. In addition, purchases of our common stock in amounts greater than specified levels, which will be beyond our control, could create an additional limitation on our ability to utilize our NOLs for tax purposes in the future. Limitations imposed on our ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs before they expire. If any of these events occur, we may not derive some or all of the expected benefits from our NOLs. In addition, at the state level there may be periods during which the use of NOLs is suspended or otherwise limited, which would accelerate or may permanently increase state taxes owed.

 

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A failure to protect the integrity and security of our customers’ information could expose us to litigation, materially damage our reputation and harm our business. Furthermore, the unanticipated costs of protecting against such a failure could adversely affect our results of operations.

Our business involves the collection and use of confidential information of our customers and their trading partners. We cannot assure you that our efforts to protect this confidential information will be successful. If any compromise of this information security were to occur, we could be subject to legal claims and government action, experience an adverse effect on our reputation and need to incur significant additional costs to protect against similar information security breaches in the future, each of which could adversely affect our financial condition, results of operations and growth prospects. In addition, because of the critical nature of data security, any perceived breach of our security measures could cause existing or potential customers not to use our solutions and could harm our reputation.

Evolving regulation of the Internet may increase our expenditures related to compliance efforts, which may adversely affect our financial condition.

As Internet commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. We are particularly sensitive to these risks because the Internet and cloud computing are critical components of our business model. For example, we believe that increased regulation is likely in the area of data privacy on the Internet, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our customers’ ability to use and share data, potentially reducing demand for solutions accessed via the Internet and restricting our ability to store, process and share data with our clients via the Internet. In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by private organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of Internet-based services, which could harm our business.

If we fail to protect our intellectual property and proprietary rights adequately, our business could be adversely affected.

We believe that proprietary technology is essential to establishing and maintaining our leadership position. We seek to protect our intellectual property through trade secrets, copyrights, confidentiality, non-compete and nondisclosure agreements, patents, trademarks, domain names and other measures, some of which afford only limited protection. We also rely on patent, trademark, trade secret and copyright laws to protect our intellectual property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our technology or to obtain and use information that we regard as proprietary. We cannot assure you that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar or superior technology or design around our intellectual property. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States. Intellectual property protections may also be unavailable, limited or difficult to enforce in some countries, which could make it easier for competitors to capture market share. Our failure to adequately protect our intellectual property and proprietary rights could adversely affect our business, financial condition and results of operations.

An assertion by a third party that we are infringing its intellectual property could subject us to costly and time-consuming litigation or expensive licenses which could harm our business.

The industries in which we compete are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we seek to extend our solutions, we could be constrained by the intellectual property rights of others. In addition, our customer contracts require us to indemnify our customers against certain liabilities they may incur as a result of our infringement of any third-party intellectual property.

 

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We might not prevail in any intellectual property infringement litigation given the complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays or require us to enter into royalty or licensing agreements. Furthermore, if our solutions exceed the scope of in-bound licenses or violate any third-party proprietary rights, we could be required to withdraw those solutions from the market, re-develop those solutions or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all. Any efforts to re-develop our solutions, obtain licenses from third parties on favorable terms or license a substitute technology might not be successful and, in any case, might substantially increase our costs and harm our business, financial condition and results of operations. If we were compelled to withdraw any of our solutions from the market, our business, financial condition and results of operations could be harmed.

The use of open source software in our products may expose us to additional risks and harm our intellectual property.

We incorporate open source software into our platform. Given the nature of open source software, third parties might assert copyright and other intellectual property infringement claims against us based on our use of certain open source software programs. The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our solutions, to re-develop our solutions, to discontinue sales of our solutions or to release our proprietary software code under the terms of an open source license, any of which could adversely affect our business.

Some of our products use or incorporate software that is subject to one or more open source licenses. Open source software is typically freely accessible, usable and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on unfavorable terms or at no cost. This can subject previously proprietary software to open source license terms.

While we monitor the use of all open source software in our products, processes and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product or solution when we do not wish to do so, such use may have inadvertently occurred in deploying our proprietary solutions. Additionally, if a third-party software provider has incorporated certain types of open source software into software we license from such third party for our products and solutions, we could, under certain circumstances, be required to disclose the source code to our products and solutions. This could harm our intellectual property position and have a material adverse effect on our business, results of operations and financial condition.

Our strategy includes pursuing acquisitions and our potential inability to successfully integrate newly-acquired companies or businesses may adversely affect our financial results.

We believe part of our growth will be driven by acquisitions of other companies or their businesses. Any acquisitions we complete will give rise to risks, including:

 

   

Incurring significantly higher than anticipated capital expenditures and operating expenses;

 

   

Failing to assimilate the operations and personnel or failing to retain the key personnel of the acquired company or business;

 

   

Failing to integrate the acquired technologies, or incurring significant expense to integrate acquired technologies into our solutions;

 

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Disrupting our ongoing business;

 

   

Incurring significant accounting charges;

 

   

Dissipating our management resources;

 

   

Failing to maintain uniform standards, controls and policies;

 

   

Impairing relationships with employees and customers as a result of changes in management;

 

   

Finding that the acquired company, asset or technology does not further our business strategy, that we overpaid for the company, asset or technology or that we may be required to write off acquired assets or investments partially or entirely;

 

   

Not realizing the expected synergies of the transaction;

 

   

Facing delays in customer purchases due to difficulty in retaining customers of acquired businesses;

 

   

Exposure to unforeseen liabilities and contingencies that were not identified prior to acquiring the company; and

 

   

An inability to generate sufficient revenue from acquisitions to offset the associated acquisition costs.

Fully integrating an acquired company or business into our operations may take a significant amount of time. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered with acquisitions. To the extent we do not successfully avoid or overcome the risks or problems related to any acquisitions, our results of operations and financial condition could be adversely affected. Acquisitions also could impact our financial position and capital needs, and could cause substantial fluctuations in our quarterly and annual results of operations. Acquisitions could include significant goodwill and intangible assets, which may result in future impairment charges that would reduce our stated earnings. We may incur significant costs in our efforts to engage in strategic transactions and these expenditures may not result in successful acquisitions.

Future acquisitions of technologies or companies, which are paid for partially or entirely through the issuance of stock or stock rights, could dilute the ownership of our existing stockholders.

We expect that the consideration we might pay for any future acquisitions of companies or technologies could include stock, rights to purchase stock, cash or some combination of the foregoing. If we issue stock or rights to purchase stock in connection with future acquisitions, net income (loss) per share and then-existing holders of our common stock may experience dilution.

Mergers or other strategic transactions involving our competitors could weaken our competitive position, which could harm our results of operations.

Our industry is highly fragmented, and we believe it is likely that some of our existing competitors will consolidate or will be acquired. In addition, some of our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships with systems integrators, third-party consulting firms or other parties. Any such consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure and our loss of market share and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which could have a material adverse effect on our business, results of operations and financial condition.

 

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We may not receive significant revenue as a result of our current research and development efforts.

We have made and expect to continue to make significant investments in research and development and related product opportunities. In the year ended February 28, 2011 and the nine months ended November 30, 2011, we spent $11.5 million and $9.9 million on research and development expenses, respectively. High levels of expenditures for research and development could adversely affect our results of operations if not offset by corresponding future revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, it is difficult to estimate when, if ever, we will receive significant revenue as a result of these investments.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our results of operations and our ability to attract and retain qualified executives and board members.

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, as well as rules implemented by the Securities and Exchange Commission, or SEC,                      and other applicable securities or exchange-related rules and regulations. In addition, our management team will also have to adapt to the requirements of being a public company. We expect complying with these rules and regulations will substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly.

The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, our results of operations could be adversely effected.

As a public company, we also expect that it may be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

We rely significantly on recurring revenue, which may decline or fail to be renewed, and our future results of operations could be harmed.

Our revenue from subscriptions to our software and software-related support services accounted for approximately 71.0% of our total revenue for the year ended February 28, 2011. Revenue from our subscriptions is recognized over the contractual term of the license, which is typically three years, and is generally recurring in nature. Sales of new or recurring subscriptions and software-related support service contracts and renewals after expiration of the initial term may decline or fluctuate as a result of a number of factors, including end customers’ level of satisfaction with our software solutions, the prices of our software solutions, the prices of products and services offered by our competitors or reductions in our customers’ spending levels. A software industry-wide movement towards shorter contractual license terms led by other SaaS providers, which competitive pressures may compel us to follow, could lead to increased volatility and diminished visibility into future recurring revenue. If our sales of new or recurring subscriptions and software related support service contracts decline, our revenue and revenue growth may decline, and our business will suffer.

Because we recognize revenue from subscriptions and support services over the term of the relevant service period, downturns or upturns in sales are not immediately fully reflected in our results of operations.

We recognize recurring subscriptions and software-related support services revenue monthly over the term of the relevant service period, which is typically three years. As a result, much of the revenue we report

 

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each quarter is the recognition of deferred revenue from recurring subscriptions and software-related support service contracts entered into during previous quarters. Consequently, a decline in new or renewed recurring subscriptions and software-related support service contracts in any one quarter will not be fully reflected in revenue in that quarter, but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our recurring subscriptions and software-related support services are not reflected in full in our results of operations until future periods. Revenue from our recurring subscriptions and software-related support services also makes it difficult for us to rapidly increase our revenue through additional service sales in any period, as revenue from new and renewal software-related service contracts must be recognized over the applicable service period.

Our failure to raise additional capital or generate cash flows necessary to expand our operations and invest in new technologies in the future could reduce our ability to compete successfully and adversely affect our results of operations.

We may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests and the value of shares of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions. If we need additional capital and cannot raise it on acceptable terms, if at all, we may not be able to, among other things:

 

   

Develop and enhance our solutions;

 

   

Continue to expand our technology development, sales and marketing organizations;

 

   

Hire, train and retain employees;

 

   

Respond to competitive pressures or unanticipated working capital requirements; or

 

   

Pursue acquisition opportunities.

Our inability to do any of the foregoing could reduce our ability to compete successfully and adversely affect our results of operations.

Because our long-term success depends, in part, on our ability to expand the sales of our solutions to customers located outside of the United States, our business will be susceptible to risks associated with international operations.

We have limited experience operating in foreign jurisdictions. Conducting and launching operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones and consumes significant management resources. Customers in countries outside of the United States accounted for 36.9% of our revenue for the fiscal year ended February 28, 2011. Our limited experience in operating our business outside of the United States increases the risk that our current and any future international expansion efforts will not be successful. Conducting international operations subjects us to new risks that, generally, we have not faced in the United States, including:

 

   

Fluctuations in currency exchange rates;

 

   

Unexpected changes in foreign regulatory requirements;

 

   

Longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

   

Difficulties in managing and staffing international operations, including differences in labor laws;

 

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Potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;

 

   

Localization of our solutions, including translation into foreign languages and associated expenses;

 

   

The burdens of complying with a wide variety of foreign laws and different legal standards, including laws and regulations related to privacy and data security;

 

   

Requirements for regional hosting of customer solutions and data, which may require additional capital expenditures necessary to set up new data centers;

 

   

Increased financial accounting and reporting burdens and complexities;

 

   

Political, social and economic instability abroad, terrorist attacks and security concerns in general; and

 

   

Reduced or varied protection for intellectual property rights in some countries.

The occurrence of any one of these risks could negatively affect our international business and, consequently, our results of operations generally. Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing, acquiring or integrating operations in other countries will produce desired levels of revenue or profitability.

From time to time, we may become defendants in legal proceedings as to which we are unable to assess our exposure and which could become significant liabilities in the event of an adverse judgment.

We may become defendants in legal proceedings from time to time. Companies in our industry have been subject to claims related to patent infringement and product liability, as well as contract and employment-related claims. We may not be able to accurately assess the risk related to these suits, and we may be unable to accurately assess our level of exposure.

We are required to comply with U.S. export control laws and regulations. Noncompliance with those laws and regulations could have a material adverse effect on our business.

Our solutions are subject to U.S. export controls and we incorporate encryption technology into certain of our solutions. These encrypted solutions and the underlying technology may be exported outside the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations, including the filing of an encryption registration. U.S. export control laws and economic sanctions prohibit the shipment of certain solutions and services to U.S. embargoed or sanctioned countries, governments and persons and complying with export control and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Penalties for violations of the U.S. export control laws include fines of up to $250,000 or twice the value of the transaction, whichever is greater, per violation, the possible loss of export or import privileges and criminal action for knowing or willful violations.

Further, if our operating partners fail to obtain appropriate import, export or re-export licenses or permits, we may also be adversely affected, become the subject of government investigations or penalties, and incur reputational harm.

In addition, various countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to sell our solutions or could limit our customers’ ability to implement our solutions in those countries. Changes in our solutions or changes in export and import regulations may create delays in the introduction of our solutions in international markets, prevent our customers with international operations from deploying our solutions globally or, in some

 

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cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. Any change in export or import regulations, economic sanctions or related legislation, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions by, or in our decreased ability to export or sell our solutions to, existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business, financial condition and results of operations.

Our facilities in California are located near known earthquake faults, and the occurrence of an earthquake or other catastrophic disaster could cause damage to our facilities and equipment, which could negatively impact our operations.

Our facilities in the San Francisco Bay Area are located near known earthquake fault zones and are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.

We may be subject to additional tax liabilities.

We are subject to income, sales, use, value added and other taxes in the United States and other countries in which we conduct business, which such laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect sales, use, value added or other taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Significant judgment is required in determining our worldwide provision for income taxes. These determinations are highly complex and require detailed analysis of the available information and applicable statutes and regulatory materials. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical tax practices, provisions and accruals. If we receive an adverse ruling as a result of an audit, or we unilaterally determine that we have misinterpreted provisions of the tax regulations to which we are subject, there could be a material effect on our tax provision, net income or cash flows in the period or periods for which that determination is made. In addition, liabilities associated with taxes are often subject to an extended or indefinite statute of limitations period. Therefore, we may be subject to additional tax liability (including penalties and interest) for a particular year for extended periods of time.

Changes in existing financial accounting standards or practices, or taxation rules or practices, may adversely affect our results of operations.

Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective.

Risks Relating to Owning Our Common Stock and this Offering

Our share price may be volatile and you may be unable to sell your shares at or above the offering price.

The initial public offering price for our shares was determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

   

Actual or anticipated fluctuations in our financial condition and results of operations;

 

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Overall conditions in our industry and market;

 

   

Addition or loss of significant customers;

 

   

Changes in laws or regulations applicable to our products;

 

   

Actual or anticipated changes in our growth rate relative to our competitors;

 

   

Announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

Additions or departures of key personnel;

 

   

Competition from existing products or new products that may emerge;

 

   

Issuance of new or updated research or reports by securities analysts;

 

   

Fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

   

Disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain intellectual property protection for our technologies;

 

   

Sales of our common stock by us or our stockholders;

 

   

Share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

   

The expiration of contractual lock-up agreements with our executive officers, directors and stockholders; and

 

   

General economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market for our common stock. An active trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

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If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Future sales of our common stock in the public market could cause our share price to fall.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Based on the number of shares of common stock outstanding as of                     , 2012, upon the closing of this offering, we will have              shares of common stock outstanding, assuming no exercise of outstanding options or the underwriters’ over-allotment option.

All of the common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. The remaining             shares of common stock outstanding after this offering, based on shares outstanding as of                     , 2012, will be restricted as a result of securities laws, lock-up agreements or other contractual restrictions that restrict transfers for at least 180 days after the date of this prospectus, subject to certain extensions.

The underwriters may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements with the underwriters prior to expiration of the lock-up period. See the section titled “Shares Eligible for Future Sale.”

The holders of 320,932,465 shares of common stock, or 43.7% based on shares outstanding as of November 30, 2011, will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to a registration rights agreement between such holders and us. See the section titled “Description of Capital Stock—Registration Rights.” If such holders, by exercising their registration rights, sell a large number of shares, the market price for our common stock could be adversely affected. If we file a registration statement for the purpose of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired. We intend to file a registration statement on Form S-8 under the Securities Act to register              shares for issuance under our 2003 Stock Plan and 2012 Equity Compensation Plan. Our 2012 Equity Compensation Plan provides for automatic increases in the shares reserved for issuance under the plan which could result in additional dilution to our stockholders. Once we register these shares, they can be freely sold in the public market upon issuance and vesting, subject to a lock-up period of at least 180 days and other restrictions provided under the terms of the applicable plan and/or the option agreements entered into with option holders.

As a result of becoming a public company, we will be obligated to develop and maintain a system of effective internal controls over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first

 

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fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on effectiveness of our internal controls.

We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to remediate future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.

Our management team may invest or spend the proceeds of this offering in ways with which you may not agree or in ways which may not yield a return.

The net proceeds from this offering may be used for working capital purposes and for other general corporate purposes, including the research and development of new products, sales and marketing activities, to finance acquisition opportunities and other capital expenditures. Although we may also use a portion of the net proceeds to acquire complementary products, services, technologies or businesses, we have no current understandings, agreements or commitments to do so at this time.

Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our results of operations or increase our market value.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The anticipated initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur immediate dilution of $         in net tangible book value per share from the price you paid. In addition, following this offering, purchasers in this offering will have contributed     % of the total consideration paid by our stockholders to purchase shares of common stock, in exchange for acquiring approximately     % of our total outstanding shares as of              after giving effect to this offering. In addition, if outstanding options or warrants to purchase our common stock are exercised, you will experience additional dilution.

Our directors, executive officers and principal stockholders will continue to have substantial control over us after this offering and could delay or prevent a change in corporate control.

After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, approximately     % of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock in this offering. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:

 

   

Delaying, deferring or preventing a change in corporate control;

 

   

Impeding a merger, consolidation, takeover or other business combination involving us; or

 

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Discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, as amended and restated upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective upon the closing of this offering, include provisions that:

 

   

Authorize our board of directors to issue, without further action by the stockholders up to              shares of undesignated preferred stock;

 

   

Require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

 

   

Specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of the Board, the Chief Executive Officer or the President;

 

   

Establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

 

   

Provide that directors may be removed only for cause;

 

   

Provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

   

Establish that our board of directors is divided into three classes — Class I, Class II and Class III — with each class serving staggered terms; and

 

   

Require a super-majority of votes to amend certain of the above-mentioned provisions.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control. These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

We do not intend to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the

 

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operation of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in, but not limited to, the “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Executive Compensation.” Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. Forward-looking statements include, but are not limited to, statements about:

 

   

Our growth strategy;

 

   

Our plans for future products;

 

   

Our operating results;

 

   

Our ability to anticipate future market demands and future needs of our customers;

 

   

Our customer concentration;

 

   

Our ability to effectively manage our growth;

 

   

Our expectations regarding the use of proceeds;

 

   

Our expectations regarding our expenses, sales and operations;

 

   

Our anticipated trends and challenges in the markets in which we operate;

 

   

Our ability to successfully enter new markets and manage our international expansion; and

 

   

Our intellectual property.

Forward-looking 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, performance or achievements expressed or implied by the forward-looking statements. We discuss these risks in greater detail in “Risk Factors” and elsewhere in this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we 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.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

This prospectus also contains estimates and other information concerning our industry, including market size and growth rates, that are based on industry publications, surveys and forecasts, including those generated by Gartner, Inc., or Gartner. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in “Risk Factors.”

 

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Each of the Gartner publications referenced herein, Forecast: Enterprise Software Markets, Worldwide, 2008-2015, 4Q11 Update by Colleen Graham, Joanne M. Correia, Fabrizio Biscotti, Matthew Cheung, Ruggero Contu, Alan Dayley, Yanna Dharmasthira, Tom Eid, Chad Eschinger, Bianca Granetto, Hai Hong Swinehart, Sharon Mertz, Chris Pang, Asheesh Raina, Dan Sommer, Bhavish Sood and Laurie Wurster, December 2011, Market Trends: Multienterprise/B2B Infrastructure Market, Worldwide, 2010-2015, 1Q11 Update by Fabrizio Biscotti, Thomas Skybakmoen, Benoit J. Lheureux and Paulo Malinverno, February 2011 and The Gartner Supply Chain Top 25 for 2011 by Debra Hofman, Kevin O’Marah and Carla Elvy, June 2011, speaks as of its original publication date (and not as of the date of this prospectus). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice. All statements in this prospectus attributable to Gartner represent our interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service provided by Gartner, and the statements attributable to The Gartner Supply Chain Top 25 for 2011 have not been reviewed by Gartner.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our sale of             shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $         million, or $         million if the underwriters’ option to purchase additional shares is exercised in full. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares.

We intend to use the net proceeds of this offering primarily for general corporate purposes and other operating expenses, including: capital expenditures, expenditures relating to the expansion of our operations; sales and marketing expenses; and general and administrative expenses.

In addition, if appropriate opportunities arise to acquire or invest in complementary businesses, product lines, products or technologies, we may use a portion of the net proceeds for such acquisition or investment. However, we are not currently discussing any such potential acquisition or investment with any third party. We may also use a portion of the net proceeds for repayment of up to $         million of our existing indebtedness as more fully described in “Management’s Discussion and Analysis of Financial Condition and Results—Liquidity and Capital Resources.” The amount and timing of these expenditures will vary depending on a number of factors, including competitive and technological developments and the rate of growth, if any, of our business.

Pending their use, we plan to invest our net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors 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. In addition, our credit facility prohibits us from declaring or paying cash dividends on our capital stock.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of November 30, 2011:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect the conversion of all outstanding shares of our convertible preferred stock into 517,002,101 shares of our common stock, which will occur immediately prior to the closing of this offering, and the conversion of warrants to purchase convertible preferred stock into warrants to purchase 6,620,369 shares of common stock, which will occur immediately prior to the closing of this offering, and the filing of our post-offering amended and restated certificate of incorporation, which will occur immediately prior to the closing of this offering; and

 

   

on a pro forma as adjusted basis to reflect the pro forma adjustments described above and our receipt of the net proceeds from our sale of              shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

     November 30, 2011
     Actual     Pro Forma    Pro Forma
As Adjusted
    

(Unaudited)

(In thousands)

Cash and cash equivalents

   $ 10,043        

Current liabilities

     53,812        

Long-term liabilities

     9,332        

Stockholders’ deficit

       

Preferred stock, $0.001 par value, Authorized, 612,500,000 shares, issued and outstanding, 483,232,209, shares outstanding, aggregate liquidation preference of $126,913

     83,491        

Common stock, $0.001 par value. Authorized, 877,000,000 shares issued and outstanding, 209,795,137 shares, 735,526,456 shares issued and outstanding proforma

     210        

Additional paid-in capital

     223,178        

Accumulated other comprehensive income

     3        

Accumulated deficit

     (341,477     
  

 

 

   

 

  

 

Total stockholders’ deficit

     (34,595     
  

 

 

   

 

  

 

Total capitalization

   $ 28,549        
  

 

 

   

 

  

 

 

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The number of shares of our common stock outstanding after the completion of this offering is based on 733,124,343 shares outstanding as of November 30, 2011, and excludes:

 

   

98,566,958 shares of common stock issuable upon the exercise of options outstanding as of November 30, 2011 at a weighted average exercise price of $0.06 per share;

 

   

6,620,369 shares of common stock issuable upon the conversion of convertible Series BB preferred stock issuable upon the exercise of warrants outstanding as of November 30, 2011 at an exercise price of $0.32 per share; and

 

   

             shares reserved for future issuance under our 2012 Equity Compensation Plan, as well as shares originally reserved for issuance under our 2003 Stock Plan, but which may become available for awards under our 2012 Equity Compensation Plan, which plan will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation-Employee Benefit Plans.”

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) cash and cash equivalents and total stockholders’ equity (deficit) and total capitalization by $         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 estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1.0 million shares in the number of shares offered by us, assuming that the assumed initial public offering price remains the same, would increase cash and cash equivalents and total stockholders’ equity (deficit) by $         million. Similarly, each decrease of 1.0 million shares in the number of shares offered by us, assuming that the assumed initial public offering price remains the same, would decrease cash and cash equivalents and total stockholders’ equity by $         million.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering.

At November 30, 2011, our net tangible book value was approximately $(34.6) million, or $(0.16) per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the shares of common stock outstanding at November 30, 2011. After giving effect to our sale of             shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value at November 30, 2011 would have been $        , or $         per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to existing stockholders and an immediate dilution of $         per share to new investors.

The following table illustrates this dilution:

 

Assumed initial public offering price per share

     $                

Net tangible book value per share as of November 30, 2011

   $ (0.16  

Increase per share attributable to this offering

    
  

 

 

   

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

    
    

 

 

 

Net tangible book value dilution per share to investors in this offering

     $     
    

 

 

 

If all our outstanding options had been exercised, the pro forma net tangible book value as of November 30, 2011 would have been $         million, or $         per share, and the pro forma net tangible book value after this offering would have been $         million, or $         per share, causing dilution to new investors of $         per share.

If the underwriters fully exercise their over-allotment option, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $         per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $         per share.

The following table summarizes, on a pro forma as adjusted basis as of November 30, 2011, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering at the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100   $           100   $                
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

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The foregoing calculations are based on 733,124,343 shares of our common stock outstanding as of November 30, 2011, and excludes:

 

   

98,566,958 shares of common stock issuable upon the exercise of options outstanding as of November 30, 2011 at a weighted average exercise price of $0.06 per share;

 

   

6,620,369 shares of common stock issuable upon the conversion of convertible Series BB preferred stock issuable upon the exercise of warrants outstanding as of November 30, 2011 at an exercise price of $0.32 per share;

 

   

             shares reserved for future issuance under our 2012 Equity Compensation Plan, as well as shares originally reserved for issuance under our 2003 Stock Plan, but which may become available for awards under our 2012 Equity Compensation Plan, which plan will become effective in connection with this offering and contains provisions that will automatically increase its share reserve each year, as more fully described in “Executive Compensation-Employee Benefit Plans;” and

 

   

Sales by the selling stockholders in this offering will cause the number of shares owned by the existing stockholders to be reduced by              shares or     % of the total number of shares of our common stock outstanding upon the closing of the offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $         million, or $         per share, and the pro forma dilution per share to investors in this offering by the $         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 estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1.0 million 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 to investors in this offering would be $         per share, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each decrease of 1.0 million 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 to investors in this offering would be $         per share, assuming that the assumed initial public offering price remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We have derived the selected consolidated statement of operations data for the fiscal years ended February 28, 2009, 2010 and 2011 and selected consolidated balance sheet data as of February 28, 2010 and 2011 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the summary unaudited consolidated statement of income data for the nine months ended November 30, 2010 and 2011 and the consolidated balance sheet data as of November 30, 2011 from our unaudited consolidated financial statements included elsewhere in this prospectus. We have derived the statement of income data for the fiscal years ended February 28, 2007 and February 29, 2008 and the balance sheet data as of February 28, 2007, February 29, 2008 and February 28, 2009, from our audited consolidated financial statements not included in this prospectus. Our unaudited selected consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of these statements in all material respects. The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results to be expected in the full year.

 

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    Year Ended February 28,     Nine Months
Ended

November 30,
 
    2007     2008     2009     2010     2011     2010     2011  
    (Dollars and shares in thousands, except per share data)  

Consolidated Statements of Operations Data:

             

Revenue

             

Subscription and support

  $ N/A (1)    $ N/A (1)    $ 21,107      $ 29,976      $ 39,419      $ 26,973      $ 26,563   

Professional services

  $ N/A (1)     $ N/A (1)      16,627        14,401        16,104        10,380        16,099   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    26,647        32,721        37,734        44,377        55,523        37,353        42,662   

Cost of revenue

             

Subscription and support

  $
N/A
(1) 
  $ N/A (1)      8,885        9,269        7,531        5,774        5,599   

Professional services

  $ N/A (1)    $ N/A (1)      14,685        11,493        11,774        8,764        10,224   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    19,670        22,072        23,570        20,762        19,305        14,538        15,823   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

             

Subscription and support

  $ N/A (1)    $ N/A (1)      12,222        20,707        31,888        21,199        20,964   

Professional services

  $ N/A (1)    $ N/A (1)      1,942        2,908        4,330        1,616        5,875   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross margin

    6,977        10,649        14,164        23,615        36,218        22,815        26,839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Research and development

    9,261        10,412        12,943        13,077        11,463        8,474        9,880   

Sales and marketing

    9,044        14,012        11,792        11,421        12,756        9,027        13,161   

General and administrative

    9,144        8,193        6,448        4,884        5,064        3,745        4,305   

Restructuring costs

                  1,146                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    27,449        32,617        32,329        29,382        29,283        21,246        27,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (20,472     (21,968     (18,165     (5,767     6,935        1,569        (507

Interest and other expense, net

    (790     (886     (1,618     (532     (259     (219     (457
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (21,262     (22,854     (19,783     (6,299     6,676        1,350        (964

Provision for income taxes

    (2     (190     (60     (349     (33            (122
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (21,264   $ (23,044   $ (19,843   $ (6,648   $ 6,643      $ 1,350      $ (1,086

Undistributed earnings allocated to preferred stockholders

                                (6,643     (1,350       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders:

  $ (21,264   $ (23,044   $ (19,843   $ (6,648                 $ (1,086
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

             

Basic

  $ (0.20   $ (0.21   $ (0.17   $ (0.05   $      $      $ (0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.20   $ (0.21   $ (0.17   $ (0.05   $      $      $ (0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute net income (loss) per share attributable to common stockholders:

             

Basic

    106,043        108,852        115,390        147,342        202,569        199,486       205,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    106,043        108,852        115,390        147,342        202,569        199,486       205,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per share attributable to common stockholders (unaudited) (2):

             

Basic

          $ 0.01       $   
         

 

 

     

 

 

 

Diluted

          $ 0.01       $   
         

 

 

     

 

 

 

Pro forma weighted average shares used to compute pro forma net income (loss) per share attributable to common stockholders (unaudited):

             

Basic

            726,191         729,368   
         

 

 

     

 

 

 

Diluted

            759,769         729,368   
         

 

 

     

 

 

 

Other Financial and Operational Data:

             

Adjusted EBITDA (3)

  $ (18,271   $ (20,316   $ (15,163   $ (2,999   $ 9,371      $ 3,320      $ 1,053   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow (4)

  $ (8,489   $ (17,799   $ (16,453   $ (5,325   $ (697   $ (1,950 )   $ (2,621
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of unique registered trading partners (5)

  $ N/A (6)    $ N/A (6)      18,117       22,529        26,440       25,554       29,599   

Number of unique registered users (5)

  $ N/A (6)    $ N/A (6)      48,918       62,528        73,377       70,847       84,461   

 

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(1) 

Historically, we presented our revenue as one line item in the statement of operations. Prior to fiscal 2009, we did not for accounting purposes differentiate between subscription and support and professional services revenue.

(2) 

Pro forma net income (loss) per share has been calculated assuming the conversion of all outstanding shares of our preferred stock as of November 30, 2011 into 517,002,101 shares of common stock and issuance of 6,620,369 shares of common stock upon the conversion of convertible Series BB preferred stock issuable upon the exercise of warrants outstanding as of November 30, 2011 prior to completion of this offering.

(3) 

We define Adjusted EBITDA as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. Please see “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

(4) 

We define free cash flow as net cash provided by (used in) operating activities less capital expenditures. Please see “Free Cash Flow” below for more information and for a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

(5) 

We define unique registered trading partners and unique registered users as entities and individuals, respectively, that have used our network as of the balance sheet dates. We view the number of unique registered trading partners and unique registered users as key indicators of the reach of our network and the value our enterprise customers are deriving from out solutions.

(6) 

The information of unique registered trading partners and unique registered users prior to fiscal 2009 is not available.

Stock-based compensation included in the consolidated statements of operations data above was as follows:

 

     Year Ended February 28,      Nine Months Ended
November 30,
 
     2007      2008      2009      2010      2011          2010              2011      
     (In thousands)  

Cost of revenue

   $ 33       $ 9       $ 85       $ 106       $ 223       $ 111       $ 122   

Research and development

     36         20         58         82         108         61         53   

Sales and marketing

     15         16         107         155         154         80         135   

General and administrative

     10         9         92         102         92         59         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 94       $ 54       $ 342       $ 445       $ 577       $ 311       $ 410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth our selected consolidated balance sheet data as of the dates presented:

 

     Year Ended February 28,     As of
November 30,
2011
 
     2007     2008     2009     2010     2011    
     (In thousands)  

Consolidated Balance Sheet Data:

            

Cash and cash equivalents

   $ 6,190      $ 12,727      $ 15,645      $ 9,530      $ 10,060      $ 10,043   

Property and equipment, net

     1,995        2,864        3,149        2,720        1,889        1,444   

Working capital, excluding deferred revenue

     (1,776     (5,098     (2,835     7,678        10,287        8,320   

Total assets

     14,008        26,603        30,834        24,474        26,418        28,549   

Convertible preferred stock

     44,342        54,342        73,212        83,346        83,346        83,491   

Total stockholders’ deficit

   $ (39,221   $ (52,069   $ (52,134   $ (41,827   $ (34,157   $ (34,595

 

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Key Financial Performance Metrics

We monitor the key financial metrics set forth below as well as revenue, gross profit, gross margin, cash and cash equivalents and available debt capacity, which are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to help us evaluate trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational effectiveness and efficiencies.

Adjusted EBITDA

We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans.

Adjusted EBITDA is defined as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. Management believes that the use of Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period to period comparisons of results of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

Management believes that it is useful to exclude certain non-cash charges, such as depreciation and amortization, and stock-based compensation, and non-core operational charges, such as interest and other expense, net from Adjusted EBITDA because (1) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (2) such expenses can vary significantly between periods as a result of the timing of new stock-based awards, acquisitions or restructurings, as the case may be.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation;

 

   

Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect the future need to augment or replace such assets; and

 

   

Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

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Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of Adjusted EBITDA for each of the periods indicated:

 

     Year Ended February 28,      Nine Months Ended
November 30,
 
     2007     2008     2009     2010     2011      2010      2011  
     (In thousands)  

Reconciliation of Adjusted EBITDA:

                

Net income (loss)

   $ (21,264   $ (23,044   $ (19,843   $ (6,648   $ 6,643       $ 1,350       $ (1,086

Interest and other expense, net

     790        886        1,618        532        259         219         457   

Provision for income taxes

     2        190        60        349        33                 122   

Depreciation and amortization

     2,107        1,598        2,660        2,323        1,859         1,440         1,150   

Stock-based compensation

     94        54        342        445        577         311         410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (18,271   $ (20,316 )   $ (15,163   $ (2,999   $ 9,371       $ 3,320       $ 1,053   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Free Cash Flow

Free cash flow is a key measure used in our internal operating reports and allows us to manage the cash available to fund our debt obligations and potential strategic initiatives. Management believes that free cash flow is useful to investors as a supplemental measure to evaluate our business over time.

Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures. Capital expenditures consist of purchases of property, equipment and software. Management believes that the use of free cash flow provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operating performance and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

Free cash flow should not be considered a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. Management compensates for the inherent limitations associated with measuring free cash flow through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of free cash flow to the most directly comparable GAAP measure, net cash provided by (used in) operating activities. A reconciliation of net cash provided by (used in) operating activities to free cash flow is presented below:

 

     Year Ended February 28,     Nine Months Ended
November 30,
 
     2007     2008     2009     2010     2011     2010     2011  
     (In thousands)  

Free Cash Flow Data:

              

Net cash provided by (used in) operating activities

   $ (6,583   $ (15,331   $ (14,607   $ (4,401   $ 88      $ (1,287   $ (2,126

Capital expenditures

     (1,906     (2,468     (1,846     (924     (785     (663     (495
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

   $ (8,489   $ (17,799   $ (16,453   $ (5,325   $ (697   $ (1,950   $ (2,621 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial Data” and the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus. Our fiscal year end is the last day of February and our fiscal quarters end on May 31, August 31, November 30 and February 28. We refer to our fiscal years ended February 28, 2009, 2010 and 2011 as fiscal 2009, fiscal 2010 and fiscal 2011.

Overview

We are a leading provider of cloud-based, on-demand software solutions delivered on an integrated platform that enables companies to collaborate with their trading partners to procure, manufacture, sell and distribute products more efficiently. Our software applications allow network participants to input, access and share data and execute business processes across internal operating units and external entities in a secure, real-time and cost-effective manner. We refer to the combination of our software applications delivered on our cloud-based platform, the content contributed by our network participants and our enabling services as the E2open Business Network. The E2open Business Network supports key operational business processes of our customers and their trading partners, including supply chain management, procurement, sales and finance functions. These functions enable our customers to share product information, forecasts, inventory positions, sales orders, purchase orders, manufacturing work orders, quality and environmental data, shipments, invoices and payments with their trading partners.

Our agreements with customers are typically three years in length with annual billings in advance. The annual contract value for each customer agreement is largely related to the size of the customer, the number of solutions the customer has purchased, the number of the customer’s unique registered users, and the maturity of our relationship with the customer. Average annual contract value can therefore fluctuate period to period depending upon the size of new customers and the pace at which we up-sell additional solutions and services to existing customers. Additionally, these new and up-sell customer agreements can create significant variability in the aggregate annual contract value of agreements signed in any given fiscal quarter.

We have 239 customers, of which 55 are what we refer to as Enterprise Customers who purchase both on-demand software solutions and network connectivity solutions. The remaining 184 customers purchase our network connectivity solutions directly. For fiscal 2011, Enterprise Customers represented 99.1% of our total revenue. During fiscal 2011, the average annual billing for Enterprise Customers was $1.3 million. Our customers represent a wide range of industries and include many of the leading brand owners in the Fortune 500, among them five of the top eight as designated in the Gartner Supply Chain Top 25. The E2open Business Network is a community comprised of our customers, over 29,000 unique registered trading partners and over 84,000 unique registered users.

During the nine months ended November 30, 2011, we retained 97.7% of our Enterprise Customers and the total dollars billed to these customers was over 100% of the dollars billed to the same customers for the comparable period in the prior year. This reflects our ability to both retain and increase the revenue generated by our existing customers. We believe we have yet to significantly penetrate our customer base and have a significant opportunity to up-sell additional solutions to our existing customers.

We are headquartered in Foster City, California. We continue to expand our operations internationally. We currently generate a portion of our revenue outside the United States, including through our offices in the United Kingdom, Germany, China, Malaysia and Taiwan. For fiscal 2009, 2010 and 2011 and the nine months ended November 30, 2011, the percentage of our revenue generated from customers in the United States was

 

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70.9%, 77.1%, 63.1% and 63.4%, respectively. As part of our growth strategy, we expect the percentage of our revenue generated outside of the United States to continue to increase as we invest in and enter new and emerging markets.

We have achieved strong growth as our network has scaled and as we have expanded our solutions. Our platform originated as a solution to help our customers connect with their manufacturing and distribution partners in their trading network. Next, we introduced solutions for multi-enterprise supply management, and then we introduced solutions to help our customers coordinate multi-enterprise demand management. Our revenue has grown from $37.7 million in fiscal 2009 to $44.4 million in fiscal 2010 to $55.5 million in fiscal 2011, representing a compound annual growth rate of 21.3% over this period. We generated $42.7 million of revenue for the nine months ended November 30, 2011. Additionally, from March 1, 2008 through November 30, 2011, we increased backlog from $24.4 million to $82.6 million, representing a 238.4% increase.

During the period from March 1, 2008 through February 28, 2011, we focused on cost management and increased investments in research and development and operating infrastructure. This resulted in improving gross profits and gross margins from $14.2 million, or 37.5%, for fiscal 2009 to $36.2 million, or 65.2%, for fiscal 2011 and increasing Adjusted EBITDA from $(15.2) million, or (40.2%), of revenue, for fiscal 2009 to $9.4 million, or 16.9%, of revenue for fiscal 2011. As we have improved our business model, we have made additional investments in sales and marketing, research and development, and operating infrastructure. Starting in fiscal 2011 we have increased our investment in sales and marketing including hiring additional quota carrying sales people, and increased the number of Enterprise Customers by 61.8% from 34 to 55 between February 28, 2010 and November 30, 2011. During fiscal 2012, we began to increase our investment in research and development to introduce new solutions, including enhanced analytics and business intelligence, in order to enable our customers to derive greater value from our platform.

Our financial objective is to create sustainable revenue, earnings and cash flow growth over the long term. Consistent with this objective, we intend to continue to invest in the development of our solutions and network. We expect to continue the aggressive expansion of our field sales organization and alliances to market our solutions both in the United States and internationally. We intend to continue making focused investments to upgrade our network infrastructure in order to improve our ability to profitably scale the business.

Sources of Revenue

We generate our revenue primarily from selling access to our cloud-based platform of on-demand software solutions, which we refer to as subscription and support revenue, through our field sales organization and alliance partners. We also generate revenue from professional services by helping our customers deploy, manage and support our software applications. Our customer contracts typically have a term of three years in length and we invoice our customers for subscription and support in advance for annual use of our software solutions.

 

     Year Ended February 28,     Nine Months Ended
November 30,
 
           2009                 2010                 2011                 2010                 2011        
     (In thousands)  

Revenue by type:

          

Subscription and support

   $ 21,107      $ 29,976      $ 39,419      $ 26,973      $ 26,563   

Professional services

     16,627        14,401        16,104        10,380       16,099   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 37,734      $ 44,377      $ 55,523      $ 37,353      $ 42,662   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of revenue by type:

          

Subscription and support

     55.9     67.5     71.0     72.2     62.3

Professional services

     44.1        32.5        29.0        27.8        37.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Subscription and Support. We offer on-demand software solutions, which enable our customers to have constant access to our solutions without the need to manage and support the software and associated hardware themselves. We house the hardware and software in third-party facilities, and provide our customers with access to the software applications, along with data security and storage, backup, and recovery services. We invoice our customers for subscription and support in advance for annual use of our software solutions.

Professional Services. Professional services revenue is primarily derived from fees for enabling services, such as solution consulting, solution deployment, B2B on-boarding and solution support, that help our customers deploy, manage and support our solutions. These services are sold in conjunction with the sale of our on-demand software solutions or on a standalone basis. We provide professional services both on a fixed fee and a time and materials basis, and invoice our customers in advance, monthly, or upon reaching project milestones.

Our future revenue growth will depend on our ability to increase sales of our existing and new on-demand software solutions and services to new and existing customers. Our revenue generally fluctuates, and we expect it to continue to fluctuate, between periods primarily due to inconsistent timing of sales of our software solutions, revenue recognition requirements and seasonality, among other factors. As a result, transactions that were expected to be recognized in one period may be recognized in a subsequent period, which may materially affect our financial performance in a reporting period.

Key Operating Performance Measures

We regularly review a number of metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Bookings, Billings and Backlog. We generally recognize subscription and support revenue from our customer agreements ratably over the terms of those agreements. For this reason, a significant portion of our revenue in any period will be from customer agreements signed in prior periods rather than new business activity signed during such period. In order to assess our business performance with metrics that more fully reflect current period business activity, we track bookings, billings and backlog. Bookings represent the full value of customer orders or contracts signed during a reporting period. The value of our bookings is impacted by new contracts, renewals, amendments and terminations. Billings represent invoices issued to customers during the period. Backlog represents the cumulative value of bookings existing at the end of the period less the cumulative amount billed to customers. Due to the seasonality of our sales, bookings and backlog fluctuate from quarter to quarter throughout the fiscal year.

Number of Unique Registered Trading Partners. We define the number of unique registered trading partners as the number of distinct trading partner entities connected to the E2open Business Network that use our solutions. We believe the number of unique registered trading partners is a key indicator of the growth of our network and both our and our customers’ ability to receive the benefits of the network effects resulting from such growth. Growth in the number of unique registered trading partners depends, in part, on our ability to successfully develop and market our solutions to our existing customers and companies that have not yet become part of our network. In addition to the growth in number of these entities, we view a large, existing network as providing greater incentive and ease for new customers seeking to join if they share existing trading partners already operating on our system.

 

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From February 28, 2009 to November 30, 2011, the number of unique registered trading partners in the E2open Business Network increased from 18,117 to 29,599, or by over 63.4%. While growth in the number of unique registered trading partners is an important indicator of expected revenue growth, it also informs our management of areas of our business that will require further investment to support such growth.

 

LOGO

Number of Unique Registered Users. We define the number of unique registered users as individuals within our customers’ organizations and their trading partners who are authorized to use and access our software applications. We view unique registered users as a key indicator of growth and whether we are providing our customers with useful tools and applications, thereby increasing user engagement. Growth in unique registered users will be driven by our business expansion, growth in the number of unique registered trading partners and improvements to features and products available to our customers. From February 28, 2009 to November 30, 2011, the number of unique registered users increased from 48,918 to 84,461, or by 72.7%.

 

LOGO

Key Financial Performance Measures

We monitor the key financial metrics set forth below as well as cash and cash equivalents and available debt capacity, which are discussed in “—Liquidity and Capital Resources,” to help us evaluate trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational effectiveness and efficiencies.

 

     Year Ended February 28,     Nine Months Ended
November 30,
 
           2009                 2010                 2011                 2010                 2011        
     (Dollars in thousands)  

Revenue

   $ 37,734      $ 44,377      $ 55,523      $ 37,353      $ 42,662   

Gross profit

   $ 14,164      $ 23,615      $ 36,218      $ 22,815      $ 26,839   

Gross margin

     37.5     53.2     65.2     61.1     62.9

Adjusted EBITDA (1)

   $ (15,163   $ (2,999   $ 9,371      $ 3,320      $ 1,053   

Free cash flow (2)

   $ (16,453   $ (5,325   $ (697   $ (1,950   $ (2,621

 

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(1) 

We define Adjusted EBITDA as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. Please see “Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

(2) 

Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures. Please see “Free Cash Flow” below for more information and for a reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Gross Profit and Gross Margin. Gross profit and gross margin have been and will continue to be affected by a variety of factors, including the average sales price of our products, the mix of solutions sold, the mix of revenue between subscription and support and professional services, and our level of investment in operating infrastructure. Our gross profit and gross margin have improved in each of the last three fiscal years, from $14.2 million, or 37.5%, in fiscal 2009 to $23.6 million, or 53.2%, in fiscal 2010 to $36.2 million, or 65.2%, in fiscal 2011, and we expect them to continue improving year-on-year though at a slower rate. For the nine months ended November 30, 2010, our gross profit and gross margin was $22.8 million, or 61.1%, compared to $26.8 million, or 62.9%, for the nine months ended November 30, 2011. Gross margin on subscription and support revenue was 78.9% and gross margin on professional services revenue was 36.5% for the nine months ended November 30, 2011.

An increase in the proportion of our total revenue generated by sales of subscription and support for our on-demand software applications would increase our overall margins, due to the higher margins on subscription and support revenue compared to professional services. Our gross margin may also fluctuate due to the timing of revenue recognition for our on-demand solutions and services, since our cost of revenue is recognized as incurred whereas revenue on certain arrangements with customers is recognized ratably over the contract term.

Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) adjusted for interest and other expense, net, provision for income taxes, depreciation and amortization, and stock-based compensation expense. Management believes that the use of Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their reported GAAP results.

Management believes that it is useful to exclude certain non-cash charges, such as depreciation and amortization and stock-based compensation, and non-core operational charges, such as other expense, net from Adjusted EBITDA because (1) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (2) such expenses can vary significantly between periods as a result of the timing of new stock-based awards, acquisitions or restructurings, as the case may be.

Our Adjusted EBITDA improved from $(15.2) million in fiscal 2009 to $(3.0) million in fiscal 2010 to $9.4 million in fiscal 2011. This growth was a result of the combination of an increase in revenue and a decrease in operating expenses as we improved our business model.

During the nine months ended November 30, 2011, Adjusted EBITDA was $1.1 million compared to $3.3 million over the same period in the prior fiscal year as we increased our investment in research and development and sales and marketing, to drive future revenue growth, which increased expenses and decreased Adjusted EBITDA.

 

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The following table presents a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods indicated:

 

     Year Ended February 28,      Nine Months Ended
November 30,
 
     2009     2010     2011      2010      2011  
     (In thousands)  

Reconciliation of Adjusted EBITDA

            

Net income (loss)

   $ (19,843   $ (6,648   $ 6,643       $ 1,350       $ (1,086

Interest and other expense, net

     1,618        532        259         219         457   

Provision for income taxes

     60        349        33                 122   

Depreciation and amortization

     2,660        2,323        1,859         1,440         1,150   

Stock-based compensation

     342        445        577         311         410   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ (15,163   $ (2,999   $ 9,371       $ 3,320       $ 1,053   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Free Cash Flow. Free cash flow is defined as net cash provided by (used in) operating activities less capital expenditures. Capital expenditures consist of purchases of property, equipment and software. The following table details our calculation (and reconciliation to net cash provided by (used in) operating activities) of free cash flow. Free cash flow is a key measure used in our internal operating reports and allows us to manage the cash available to fund our debt obligations and potential strategic initiatives. Management believes that free cash flow is useful to investors as a supplemental measure to evaluate our business over time. Further, the use of free cash flow provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.

We have historically made significant investments in product development and in marketing our solutions, resulting in net use of cash in operating activities since inception. However, we significantly improved free cash flow, from $(16.5) million in fiscal 2009 to $(5.3) million in fiscal 2010 to $(0.7) million in fiscal 2011 through increased sales, improved management of our spending and focus on profitability and working capital management.

In the nine months ended November 30, 2011, our free cash flow was $(2.6) million compared to $(2.0) million in the nine months ended November 30, 2010. The change was due to our increased investment in research and development, sales and marketing and deployment capacity. This is consistent with our strategy for fiscal 2012 to expand our product offerings and customer base to help drive future revenue growth.

 

     Year Ended February 28,     Nine Months Ended
November 30,
 
     2009     2010     2011     2010     2011  
     (In thousands)  

Free Cash Flow Data:

          

Net cash (used in) provided by operating activities

   $ (14,607   $ (4,401   $ 88      $ (1,287   $ (2,126

Capital expenditures

     (1,846     (924     (785     (663     (495
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (16,453   $ (5,325   $ (697   $ (1,950 )   $ (2,621 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We expect to continue to incur negative free cash flow for fiscal 2012 as we continue to invest in the development and implementation of new solutions and software applications, and expand our sales and marketing resources in order to further penetrate our market both in the United States and internationally.

Costs and Expenses

Cost of Revenue

Total cost of revenue consists of costs related to third party hosting of our equipment and delivery of our software solutions, software license fees, salaries, and benefits and personnel-related expenses included in our

 

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operations, professional services, and support departments, as well as allocated facilities, information technology and supporting overhead costs. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our on-demand software applications due to the labor intensive nature of providing professional services.

Our total cost of revenue has declined in the last three fiscal years as a percentage of revenue, and while we expect absolute cost of revenue to increase as we continue to invest in our business, we expect cost of revenue to increase at a slower rate than that of our total revenue on an annual basis.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses.

Research and Development

Research and development expense consists of salaries, benefits and personnel-related expenses, software development tools, as well as allocated facilities, information technology and supporting overhead costs. We expect to continue to invest in research and development to enhance and expand our existing solutions and develop new solutions and tools for improved deployment and customer support and, consequently, we expect research and development expense to increase in absolute dollars in future periods.

Sales and Marketing

Sales and marketing expense consists of salaries, benefits and personnel-related expenses, including sales commissions, advertising and marketing materials, trade shows and other marketing events, travel and entertainment expenses, as well as an allocation of facilities, information technology and supporting overhead expenses. We intend to continue to invest in sales and marketing to pursue new customers and expand relationships with existing customers. Accordingly, we expect sales and marketing expense to increase in absolute dollars in future periods.

General and Administrative

General and administrative expense consists of salaries, benefits and personnel-related expenses for our finance, accounting, legal, human resources, facilities and information technology employees; third-party professional fees; communication expenses; allocated facilities expenses; and other administrative expenses. We expect that the costs of being a public company, including the costs of compliance with the Sarbanes-Oxley Act of 2002 and other regulations governing public companies, increased directors and officers insurance, and professional and other services, will increase our general and administrative expense in absolute dollars in future periods.

Interest and Other Expense, Net

Interest and other expense, net, consists primarily of interest income on our cash and cash equivalents, interest expense on our credit facilities, notes payable and capital leases, amortization of deferred financing fees, and foreign exchange currency transaction and translation gains and losses.

Provision for Income Taxes

We are subject to tax in the United States as well as other jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax. Our effective tax rates differ from the statutory rate primarily due to valuation allowances on our deferred taxes, state taxes, foreign taxes, research and development tax credits and tax contingencies.

 

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Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenue:

 

     Year Ended February 28,     Nine Months Ended
November 30,
 
     2009     2010     2011     2010     2011  
     (In thousands)  

Consolidated Statements of Operations Data:

          

Revenue

          

Subscription and support

   $ 21,107      $ 29,976      $ 39,419      $ 26,973      $ 26,563   

Professional services

     16,627        14,401        16,104        10,380        16,099   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

     37,734        44,377        55,523        37,353        42,662   

Cost of revenue

          

Subscription and support

     8,885        9,269        7,531        5,774        5,599   

Professional services

     14,685        11,493        11,774        8,764        10,224   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cost of revenue

     23,570        20,762        19,305      $ 14,538        15,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

          

Subscription and support

     12,222        20,707        31,888        21,199        20,964   

Professional services

     1,942        2,908        4,330        1,616        5,875   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Gross profit

     14,164        23,615        36,218        22,815        26,839   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

          

Research and development

     12,943        13,077        11,463        8,474        9,880   

Sales and marketing

     11,792        11,421        12,756        9,027        13,161   

General and administrative

     6,448        4,884        5,064        3,745        4,305   

Restructuring costs

     1,146                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,329        29,382        29,283        21,246        27,346   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (18,165     (5,767     6,935        1,569        (507

Interest and other expense, net

     (1,618     (532     (259     (219     (457
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (19,783     (6,299     6,676        1,350        (964

Provision for income taxes

     (60     (349     (33            (122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (19,843   $ (6,648   $ 6,643      $ 1,350      $ (1,086
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Year Ended February 28,     Nine Months Ended
November 30,
 
         2009             2010             2011             2010             2011      

Consolidated Statements of Operations Data:

          

Revenue

          

Subscription and support

     55.9     67.5     71.0     72.2     62.3

Professional services

     44.1        32.5        29.0        27.8        37.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100.0        100.0        100.0        100.0        100.0   

Cost of revenue

          

Subscription and support

     23.6        20.9        13.6        15.5        13.1   

Professional services

     38.9        25.9        21.2        23.4        24.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     62.5        46.8        34.8        38.9        37.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin (1)

          

Subscription and support

     57.9        69.1        80.9        78.6        78.9   

Professional services

     11.7        20.2        26.9        15.6        36.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross margin

     37.5        53.2        65.2        61.1        62.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     34.3        29.5        20.6        22.7        23.2   

Sales and marketing

     31.3        25.7        23.0        24.2        30.8   

General and administrative

     17.1        11.0        9.1        10.0        10.1   

Restructuring costs

     3.0                               
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     85.7        66.2        52.7        56.9        64.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (48.2     (13.0     12.5        4.2        (1.2

Interest and other expense, net

     (4.2     (1.2     (0.5     (0.6     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (52.4     (14.2     12.0        3.6        (2.3

Provision for income taxes

     (0.2     (0.8     (0.1     0.0        (0.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (52.6 )%      (15.0 )%      12.0     3.6     (2.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The table shows gross margin as a percentage of each component of revenue.

Nine Months Ended November 30, 2010 and 2011

Revenue

 

     Nine Months Ended November 30,      Change  
                 2010                               2011                               $                              %               
     (Dollars in thousands)  

Revenue

          

Subscription and support

   $ 26,973       $ 26,563       $ (410     (1.5 )% 

Professional services

     10,380         16,099         5,719        55.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

   $ 37,353       $ 42,662       $ 5,309        14.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Bookings

   $ 27,629       $ 58,121       $ 30,492        110.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue increased by $5.3 million, or 14.2%, in the nine months ended November 30, 2011, compared to the nine months ended November 30, 2010. The increase was primarily due to a $5.7 million, or 55.1%, increase in professional services revenue from the 2010 period to 2011 period.

Effective March 1, 2011, we adopted the new accounting guidance relating to multiple-element arrangements, which had the effect of increasing subscription and support revenue by $0.9 million, and professional services revenue by $6.3 million, or a total of $7.2 million, for the nine months ended November 30, 2011 more than would have been recognized in the nine-month period had such accounting guidance not been adopted.

 

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Excluding the effect of the adoption of the new accounting guidance on multiple-element arrangements in the nine months ended November 30, 2011, total revenue decreased by $1.9 million, or 5.0%, in the nine months ended November 30, 2011 over the same period in the prior year primarily due to $1.3 million lower subscription and support fees and $0.6 million lower professional service fees.

Bookings increased by $30.5 million, or 110.4%, from the nine months ended November 30, 2010 to the nine months ended November 30, 2011 due to the addition of new customers and sales of additional software solutions and professional services to existing customers. The growth rates for revenue and bookings are not necessarily directly correlated with each other in a given year due to the seasonality of our customer agreements, the recognition in most cases of subscription revenue on a straight-line basis over the term of each customer agreement, and the recognition of professional services revenue over the period the services are performed or upon project completion.

In the nine months ended November 30, 2010 and November 30, 2011, we had two customers that each accounted for more than 10% of revenue. Revenue generated from customers headquartered within the United States accounted for 63.4% of total revenue in the nine months ended November 30, 2011.

Cost of Revenue, Gross Profit and Gross Margin

 

     Nine Months Ended November 30,     Change  
                 2010                              2011                              $                              %               
     (Dollars in thousands)  

Cost of revenue

        

Subscriptions and support

   $ 5,774      $ 5,599      $ (175     (3.03 )% 

Professional services

     8,764        10,224        1,460        16.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

   $ 14,538      $ 15,823      $ 1,285        8.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

        

Subscriptions and support

   $ 21,199      $ 20,964      $ (235     (1.1 )% 

Professional services

     1,616        5,875        4,259        263.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

   $ 22,815      $ 26,839      $ 4,024        17.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

        

Subscriptions and support

     78.6     78.9       0.3

Professional services

     15.6        36.5          20.9   
  

 

 

   

 

 

     

 

 

 

Total gross margin

     61.1     62.9       1.8
  

 

 

   

 

 

     

 

 

 

Total cost of revenue increased $1.3 million, or 8.8%, for the nine months ended November 30, 2011 compared to the nine months ended November 30, 2010. The increase in total cost of revenue is primarily driven by increased headcount resulting in a $1.3 million increase in employee-related expense and an increase of $0.6 million in fees paid for externally-sourced professional services. These increases were partially offset by a decrease of $0.3 million in hosting costs and $0.3 million in software and hardware maintenance costs. Total cost of revenue fluctuates period-to-period depending on the growth of our professional services business and any associated increased costs relating to the delivery of our on-demand software solutions and professional services, as well as the timing of significant expenditures.

The increase in revenue associated with the adoption of the new revenue accounting guidance in the nine months ended November 30, 2011 impacted our margins positively as our revenue increased without a corresponding increase in our cost of revenue since our cost of revenue is recognized as incurred and would have been the same without the increase in revenue. The adoption of the new revenue accounting guidance also had the effect of increasing gross margin on professional services by 41.1% from (4.6)% to 36.5%. Overall, the adoption of the new revenue accounting guidance had the effect of increasing gross margin by 7.5% from 55.4% to 62.9%.

 

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Gross margin is impacted by the timing of when we record our revenue and costs related to arrangements with customers. We recognize revenue on certain arrangements ratably over the contract term or only upon completion of work performed, whereas we recognize costs as incurred. As such, this may cause our gross margins to fluctuate between periods.

Operating Expenses

 

     Nine Months Ended November 30,      Change  
                 2010                               2011                               $                               %               
     (Dollars in thousands)  

Operating Expenses:

           

Research and development

   $ 8,474       $ 9,880       $ 1,406         16.6

Sales and marketing

     9,027         13,161         4,134         45.8   

General and administrative

     3,745         4,305         560         15.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 21,246       $ 27,346       $ 6,100         28.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and Development

In the nine months ended November 30, 2011, research and development expense increased $1.4 million, or 16.6%, over the nine months ended November 30, 2010. The increase was primarily attributable to $0.7 million of higher employee-related costs and $0.5 million in fees paid for third-party contract developers attributed to increased software development activities.

Sales and Marketing

In the nine months ended November 30, 2011, sales and marketing expense increased by $4.1 million, or 45.8%, over the nine months ended November 30, 2010. The increase was primarily attributable to a $3.5 million increase in employee-related costs as we expanded our field sales organization globally. Average headcount in sales and marketing increased from 36 in the nine months ended November 30, 2010 to 48 in the nine months ended November 30, 2011. Total sales and marketing headcount increased by 70.6% from 34 as of March 1, 2010 to 58 as of November 30, 2011. We also incurred $0.3 million of additional fees paid to sales representatives in China and Europe in order to expand our customer base in those geographic locations. Additionally, our marketing expenses increased by $0.2 million as a result of additional marketing and branding programs in the nine months ended November 30, 2011 compared to the prior period.

General and Administrative

In the nine months ended November 30, 2011, general and administrative expense increased $0.6 million, or 15.0%, over the nine months ended November 30, 2010. The increase was primarily attributable to higher employee-related costs of $0.3 million, $0.2 million higher legal and accounting fees, and $0.1 million increase in communication costs. These increases were offset by a $0.1 million decrease in fees paid to contractors for administrative services.

Interest and Other Expense, Net

 

     Nine Months Ended November 30,     Change  
                 2010                              2011                              $                              %               
     (Dollars in thousands)  

Interest income

   $ 4      $ 3      $ (1     (25.0 )% 

Interest expense

     (84     (138     (54     64.3   

Other expense, net

     (139     (322     (183     131.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and other expense, net

   $ (219   $ (457   $ (238     108.7
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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In the nine months ended November 30, 2011, interest and other expense increased $0.2 million, or 108.7%, over the nine months ended November 30, 2010. The increase was largely driven by net transaction and translation losses on foreign exchange.

Fiscal Years Ended February 28, 2009, 2010 and 2011

Revenue

 

     Year Ended February 28,      2009 to 2010 change     2010 to 2011 change  
           2009                  2010                  2011                  $                 %                 $                 %        
     (Dollars in thousands)  

Subscriptions and support

   $ 21,107       $ 29,976       $ 39,419       $ 8,869        42.0   $ 9,443        31.5

Professional services

     16,627         14,401         16,104         (2,226     (13.4     1,703        11.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 37,734       $ 44,377       $ 55,523       $ 6,643        17.6   $ 11,146        25.1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Bookings

   $ 59,443       $ 57,517       $ 56,916       $ (1,926     (3.2 )%    $ (601     (1.0 )% 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

We experienced growth in our revenue for the last three fiscal years, largely due to the addition of new customers, renewals and sales of additional solutions and services to our existing customer base. During this time, we have leveraged our customer network to add new customers while expanding further into adjacent verticals to create new markets for our products both domestically and abroad. Due to our past successes with our customers, we have been able to sell additional solutions to them and we continue to develop new products and services to introduce to them.

2011 compared to 2010. Total revenue increased $11.1 million, or 25.1%, from fiscal 2010 to fiscal 2011. The increase was primarily due to a $9.4 million, or 31.5%, growth in subscription and support revenue. Subscription and support revenue, and professional services revenue comprised 71.0% and 29.0% of total revenue in fiscal 2011, respectively.

Prior to our adoption of the new revenue accounting guidance at the beginning of fiscal 2012, the timing of when we recognized revenue on customer arrangements depended in large part upon customer acceptance of our deployment of on-demand solutions, and as such, resulted in fluctuations in revenue between periods. For fiscal 2011, our revenue included $6.4 million of subscriptions and support revenue and $4.8 million of professional services revenue, or a total of $11.2 million in revenue, related to multiple-element arrangements with a single customer which were executed between fiscal 2008 and fiscal 2011 and treated as a single unit of accounting for revenue recognition purposes. All revenue related to these arrangements was recognized from the acceptance of the final deliverable in November 2010 ratably through February 2011, the remaining term of the on-demand subscription and support. Typically, our first arrangement with a customer is for the initial deployment of our software solutions, and prior to adoption of the new accounting guidance, we commence revenue recognition once we complete such deployment and recognize the fees ratably over the contractual term. Subsequent arrangements are then generally treated as separate units of accounting for revenue recognition purposes. Had the revenue on this arrangement been recognized in a pattern similar to our typical customer arrangements, we would have recognized that $11.2 million in revenue over three years, with $4.2 million of subscription and support revenue and $2.3 million of professional services revenue in years prior to fiscal 2011, and $2.2 million of subscription and support revenue and $2.5 million of professional services revenue in fiscal 2011. Our deferred revenue as of February 28, 2011 did not include a similar arrangement. Additionally, with the adoption of the new revenue accounting guidance in fiscal 2012, relating to multiple-element arrangements, we recognize revenue for the estimated selling price of each element that is delivered to our customers. As such, it is unlikely that we will experience a similar fluctuation in our revenue resulting from such type of arrangement in the future.

For fiscal 2010, we had an increase in revenue of $5.1 million due, in part, to the mutual termination of a certain customer contract that resulted in recognition of the total arrangement fees during the fiscal year rather than ratably over the contract term.

 

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Excluding the revenue from these arrangements, revenue increased by $5.7 million, or 13.2%, from fiscal 2010 to fiscal 2011. The increase resulted from the growth in our customer base, up-sell to existing customers and commencement of revenue recognition on customer arrangements upon implementation of our on-demand solutions and delivery of professional services.

In fiscal 2011, we had two customers that each accounted for more than 10% of revenue. In fiscal 2010, we had three customers that each accounted for more than 10% of revenue. For the fiscal years ended 2010 and 2011, revenue generated within the United States accounted for 77.1% and 63.1% of total revenue, respectively.

2010 compared to 2009. Total revenue increased $6.6 million, or 17.6%, from fiscal 2009 to fiscal 2010. The increase was primarily due to an $8.9 million, or 42.0%, increase in subscription and support revenue, slightly offset by a decrease in professional services revenue of $2.2 million, or 13.4%. The increase in revenue from fiscal 2009 to fiscal 2010 was primarily attributable to growth in our customer base, and the implementation of on-demand solutions provided to our existing customers during fiscal 2010. We also experienced an increase in revenue of $5.1 million in fiscal 2010 due, in part, to the mutual termination of certain customer contracts that resulted in recognition of the total arrangement fees during the fiscal year rather than ratably over the contract term.

In both fiscal 2009 and fiscal 2010, we had three customers that each accounted for more than 10% of revenue. For fiscal 2009 and fiscal 2010, revenue generated within the United States accounted for 70.9% and 77.1% of total revenue, respectively.

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended February 28,     2009 to 2010 change     2010 to 2011 change  
     2009     2010     2011           $                 %                 $                 %        
     (Dollars in thousands)  

Cost of Revenue

              

Subscriptions and support

   $ 8,885      $ 9,269      $ 7,531      $ 384        4.3   $ (1,738     (18.8 )% 

Professional services

     14,685        11,493        11,774        (3,192     (21.7     281        2.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

   $ 23,570      $ 20,762      $ 19,305      $ (2,808     (11.9 )%    $ (1,457     (7.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  

Subscriptions and support

   $ 12,222      $ 20,707      $ 31,888      $ 8,485        69.4   $ 11,181        54.0

Professional services

     1,942        2,908        4,330        966        49.7        1,422        48.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

   $ 14,164      $ 23,615      $ 36,218      $ 9,451        66.7   $ 12,603        53.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

              

Subscriptions and support

     57.9     69.1     80.9       11.2       11.8

Professional services

     11.7        20.2        26.9          8.5          6.7   
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total gross margin

     37.5     53.2     65.2       15.7       12.0
  

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

2011 compared to 2010. Total cost of revenue decreased by $1.5 million, or 7.0%, from fiscal 2010 to fiscal 2011. The decrease in total cost of revenue was primarily due to a $1.2 million decrease in hosting fees attributable to process efficiencies implemented in our data centers, a $0.4 million decrease in fees paid for externally-sourced professional services, a $0.3 million decrease in facilities and internal information technology costs, and a $0.3 million decrease in depreciation and amortization expense. These decreases were partially offset by a $0.7 million increase in employee related costs resulting from changes in staffing levels.

Gross margin was 53.2% in fiscal 2010 and 65.2% in fiscal 2011. For fiscal 2011, our revenue included $4.2 million of subscriptions and support revenue and $2.3 million of professional services revenue, or a total of $6.5 million in revenue, related to multiple arrangements with a single customer executed between fiscal 2008

 

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and fiscal 2011 and treated as a single unit of accounting for revenue recognition purposes, which would have been recorded in prior years had the revenue on this arrangement been recognized in a pattern similar to our typical customer arrangements. With no corresponding cost recorded for this arrangement in fiscal 2011, gross margin on subscriptions and support was positively affected by 2.3%, from 78.6% to 80.9%, and professional services by 12.1%, from 14.8% to 26.9%, resulting in an overall increase in gross margin of 4.6%. Excluding the revenue from these arrangements, fiscal 2011 gross margin would have been 78.6% on subscriptions and support and 14.8% on professional services, or a total gross margin of 60.6%, or 7.4% higher compared to 53.2% in fiscal 2010.

2010 compared to 2009. Total cost of revenue decreased $2.8 million, or 11.9%, from fiscal 2009 to fiscal 2010. The decrease was primarily driven by a decrease of $1.3 million in employee-related costs attributable to a decrease in staffing levels and a redeployment of certain professional services personnel to research and development projects and sales activities, a $0.3 million decrease in facilities and information technology costs, a $0.3 million decrease in travel costs and a $0.2 million decrease in telephone and internet costs. We also paid $0.8 million less in fees for externally-sourced professional services.

Gross margin increased from 37.5% in fiscal 2009 to 53.2% in fiscal 2010. The increase in gross margin resulted from growth in revenue of 17.6% and a decrease in total cost of revenue of 11.9%.

Operating Expenses

 

     Year Ended February 28,      2009 to 2010 change     2010 to 2011 change  
     2009      2010      2011              $                     %                     $                     %          
     (Dollars in thousands)  

Research and development

   $ 12,943       $ 13,077       $ 11,463       $ 134