As filed with the Securities and Exchange Commission on April 18, 2011

Registration No. 333-172683

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 1

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

Fusion-io, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

 

 

 

 

 

2855 E. Cottonwood Parkway, Suite 100

Salt Lake City, Utah 84121

801.424.5500

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

 

 

 

 

David A. Flynn

Chief Executive Officer and President

Fusion-io, Inc.

2855 E. Cottonwood Parkway, Suite 100

Salt Lake City, Utah 84121

801.424.5500

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

 

 

 

 

Copies to:

 

 

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, check the following box: o

 

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

 

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. o

 

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. o

 

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):

 

 

 

 

 

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 Commission, acting pursuant to said Section 8(a), may determine.

 

 

Subject To Completion. Dated April 18, 2011.

           Shares

 

Common Stock

 

 

 

 

This is an initial public offering of shares of common stock of Fusion-io, Inc.

 

Fusion-io is offering           shares of its common stock in this offering.

 

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $      and $     . Application will be made for listing on the New York Stock Exchange under the symbol “FIO”.

 

See “Risk Factors” on page 7 to read about factors you should consider before buying shares of the common stock.

 

 

 

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

 

 

To the extent that the underwriters sell more than           shares of common stock, the underwriters have the option to purchase up to an additional           shares from Fusion-io and           shares from the selling stockholders identified in this prospectus at the initial public offering price, in each case, less the underwriting discount. Fusion-io will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

 

 

 

 

 

The underwriters expect to deliver the shares against payment in New York, New York on             , 2011.

 

 

 

 

 

Prospectus dated          , 2011

 

TABLE OF CONTENTS

 

Prospectus

 

 

 

 

 

Through and including          , 2011 (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.

 

 

 

 

We have not authorized anyone to provide you with information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and 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 the date of its date.

 

PROSPECTUS SUMMARY

	•	Manage Growth in Quantity of Data — By transforming commodity non-volatile memory into a high capacity storage memory tier in the server and leveraging our automated data-tiering software, we enable enterprises to more efficiently manage the exponential growth in data;
	•	Manage Increasing Frequency of Access to Data — By providing memory-like performance and allowing multiple processor cores to access active data simultaneously, our platform allows enterprises to handle hundreds of thousands of data requests per second; and
	•	Improve Response Times, Relevancy, and Value from Data — By allowing enterprises to rapidly access more data, perform deeper analytics and produce more relevant responses, our platform helps enterprises extract greater value from their information assets.

	•	Reduce Total Cost of Ownership and Environmental Impact — Our platform enables customers to reduce their datacenter infrastructure footprint, administrative expenses and energy consumption related to power and cooling;
	•	Unlock the Potential of Virtualization — Our platform enables more virtual servers and desktops to be deployed per physical server without experiencing the performance issues caused by data supply constraints; and
	•	Enhance the Performance of Clouds and SaaS — Our platform allows cloud service providers and software-as-a-service vendors to significantly enhance the performance of the services they offer and improve their underlying cost structures.

	•	leverage our first-to-market and leading position in data decentralization;
	•	continue our focus on platform solutions;
	•	extend our platform differentiation through software innovation;
	•	develop and maintain direct customer engagement;
	•	leverage and expand our server OEM customer relationships; and
	•	pursue international growth opportunities.

	•	our limited operating history makes it difficult to evaluate our current business and future prospects;
	•	our revenue growth rate in recent periods is not expected to recur in the near term and may not be indicative of our future performance;
	•	we have incurred significant net losses to date and may not achieve or maintain profitability;
	•	we expect large and concentrated purchases by a limited number of customers to continue to represent a substantial majority of our revenue, and any loss or delay of expected purchases could adversely affect our operating results;
	•	we expect that we will depend on OEMs incorporating our products into their product offerings and their sales efforts to increase our revenue;
	•	ineffective management of inventory levels could adversely affect our operating results; and
	•	we compete with large storage and software providers and expect competition to intensify in the future.

Common stock offered by us		shares
Common stock to be outstanding after this offering		shares
Option to purchase additional shares from us and the selling stockholders		shares
Use of Proceeds		We plan to use the net proceeds of this offering for working capital and general corporate purposes, including possible acquisitions of, or investments in, businesses, technologies or other assets. See “Use of Proceeds”.
Proposed NYSE symbol		“FIO”

	•	21,938,786 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2010 at a weighted-average exercise price of $1.11 per share;
	•	4,898,550 shares of common stock issuable upon the exercise of options granted between January 1, 2011 and February 28, 2011 at an exercise price of $5.12 per share;
	•	60,000 shares of common stock issued in February 2011;
	•	12,500 shares of common stock issuable upon the exercise of an outstanding warrant to purchase common stock, with an exercise price of $1.96 per share;
	•	125,800 shares of common stock issuable upon the exercise of an outstanding warrant to purchase convertible preferred stock, at an exercise price of $1.093 per share, which will be exercisable for an equivalent number of shares of common stock following this offering; and
	•	unallocated shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of 6,050,466 shares of common stock reserved for future issuance under our 2010 Executive Stock Incentive Plan or our 2008 Stock Incentive Plan (including options to purchase shares of common stock granted between January 1, 2011 and February 28, 2011),           shares of common stock reserved for future issuance under our 2011 Equity Stock Incentive Plan, which will become effective upon completion of this offering, and           shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective upon completion of this offering.

	•	the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 52,489,072 shares of common stock, effective immediately prior to the completion of this offering;
	•	the filing of our amended and restated certificate of incorporation in Delaware upon the completion of this offering; and
	•	no exercise by the underwriters of their right to purchase up to an additional           shares of common stock from us and the selling stockholders.

														Six Months
		Year Ended June 30,												Ended December 31,
		2008				2009				2010				2009				2010
		(As restated)
		(In thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue		$	648			$	10,150			$	36,216			$	11,927			$	58,264
Cost of revenue(1)			377				5,000				16,018				4,782				28,290
Gross profit			271				5,150				20,198				7,145				29,974
Operating expenses:
Sales and marketing(1)			2,856				13,476				23,386				8,424				20,416
Research and development(1)			5,603				11,707				15,977				7,336				10,541
General and administrative(1)			1,712				4,849				12,383				4,508				6,711
Total operating expenses			10,171				30,032				51,746				20,268				37,668
Loss from operations			(9,900	)			(24,882	)			(31,548	)			(13,123	)			(7,694	)
Other income (expense), net			(75	)			(690	)			(156	)			(14	)			(506	)
Loss before income taxes			(9,975	)			(25,572	)			(31,704	)			(13,137	)			(8,200	)
Income tax expense			—				(1	)			(12	)			(2	)			(44	)
Net loss			(9,975	)			(25,573	)			(31,716	)			(13,139	)			(8,244	)
Deemed dividend on repurchase of Series B convertible preferred stock			—				—				(748	)			—				—
Net loss attributable to common stockholders		$	(9,975	)		$	(25,573	)		$	(32,464	)		$	(13,139	)		$	(8,244	)
Net loss per common share, basic and diluted		$	(1.73	)		$	(3.27	)		$	(2.95	)		$	(1.25	)		$	(0.64	)
Weighted-average number of shares, basic and diluted			5,773				7,829				11,012				10,483				12,924
Pro forma net loss per common share, basic and diluted (unaudited)										$	(0.60	)						$	(0.13	)
Pro forma weighted-average number of common shares, basic and diluted (unaudited)											54,273								65,413

(1)		Includes stock-based compensation expense as follows:

														Six Months
		Year Ended June 30,												Ended December 31,
		2008				2009				2010				2009				2010
		(In thousands)
Cost of revenue		$	—			$	1			$	9			$	5			$	6
Sales and marketing			101				461				738				358				650
Research and development			211				382				492				289				403
General and administrative			29				155				628				166				930
Total stock-based compensation		$	341			$	999			$	1,867			$	818			$	1,989

	•	an actual basis;
	•	a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into shares of common stock upon completion of this offering and (ii) the reclassification of the convertible preferred stock warrant liability to additional paid-in-capital; and
	•	a pro forma as adjusted basis, giving effect to the pro forma adjustments and the sale of           shares of common stock by us in this offering, based on an assumed initial public offering price of $      per share, the midpoint of the range reflected on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses to be paid by us.

		December 31, 2010
										Pro Forma As
		Actual				Pro Forma				Adjusted(1)
		(As restated)
		(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	3,493			$	3,493			$
Inventories			48,450				48,450				48,450
Working capital			39,194				39,742
Total assets			71,256				71,256
Current and long-term deferred revenue			4,745				4,745				4,745
Current and long-term notes payable and capital lease obligations			11,309				11,309				11,309
Total liabilities			38,830				38,282
Total stockholders’ (deficit) equity			(72,087	)			32,974

(1)		Each $1.00 increase or decrease in the assumed initial public offering price of $      per share, the midpoint of the range reflected on the cover page of this prospectus, would increase or decrease, as applicable, our cash, cash equivalents and short-term investments, working capital, total assets and total stockholders’ (deficit) equity by approximately $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses to be paid by us.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks actually occur, our business, financial condition, operating results 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

 

Our limited operating history makes it difficult to evaluate our current business and future prospects, and may increase the risk of your investment.

 

We were founded in December 2005 and sold our first products in April 2007. The majority of our revenue growth has occurred since the quarter ended December 31, 2009, and we are still in the process of introducing critical components of our software offerings, including our ioSphere and directCache software, which are currently in customer trials and will be released for general availability in the second half of fiscal 2011. In addition, our current management team has only been working together for a short period of time. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, such as the risks described in this prospectus. If we do not address these risks successfully, our business and operating results would be adversely affected, and our stock price could decline.

 

Our revenue growth rate in recent periods is not expected to recur in the near term and may not be indicative of our future performance.

 

You should not consider our revenue growth in recent periods as indicative of our future performance. In fact, in future periods, our revenue could decline. We do not expect to achieve similar percentage revenue growth rates in future periods. We have experienced in the past, and continue to expect to experience, substantial concentrated purchases by customers to complete or upgrade large-scale datacenter deployments. Our revenue in any particular quarterly period could be disproportionately affected if this trend continues. For example, we expect the three months ending March 31, 2011 to include revenue associated with significant deployments by two customers that we do not expect to make purchases at similar levels in the subsequent three months. Accordingly, we currently expect our revenue for the three months ending June 30, 2011 to be below the three months ending March 31, 2011. You should not rely on our revenue for any prior quarterly or annual periods as an indication of our future revenue growth. If we are unable to maintain consistent revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability.

 

We have experienced rapid growth in recent periods and we may not be able to sustain or manage any future growth effectively.

 

We have significantly expanded our overall business, customer base, headcount and operations since December 2009, and we anticipate that we will continue to grow our business. For example, from December 31, 2009 to December 31, 2010, our headcount increased from 183 to 348 employees. Our future operating results depend to a large extent on our ability to successfully manage our anticipated expansion and growth.

 

To manage our growth successfully, we believe we must effectively, among other things:

 

 

 

We expect that our future growth will continue to place a significant strain on our managerial, administrative, operational, financial and other resources. We are likely to incur costs associated with our future growth earlier than we realize some of the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect or may be nonexistent. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products or enhancements to existing products and we may fail to satisfy end-users’ requirements, maintain product quality, execute on our business plan or respond to competitive pressures, each of which could adversely affect our business and operating results.

 

We have incurred significant net losses during our limited operating history, expect to continue to incur net losses for the foreseeable future and may not achieve or maintain profitability.

 

We have incurred net losses in each quarter since our inception. We incurred net losses of $8.2 million in the six months ended December 31, 2010 and $31.7 million in fiscal 2010, and, as of December 31, 2010, we had an accumulated deficit of approximately $77.1 million. We expect to continue to incur losses in future periods as we increase our expenses in all areas of our operations. If our revenue does not increase to offset these expected increases in operating expenses, we will not be profitable. Accordingly, we cannot assure you that we will be able to achieve or maintain profitability in the future.

 

We expect large and concentrated purchases by a limited number of customers to continue to represent a substantial majority of our revenue, and any loss or delay of expected purchases could adversely affect our operating results.

 

Historically, large purchases by a relatively limited number of customers have accounted for a substantial majority of our revenue, and the composition of the group of our largest customers changes from period to period. Many of our customers make concentrated purchases to complete or upgrade specific large-scale data storage installations. These concentrated purchases are short-term in nature and are typically made on a purchase order basis rather than pursuant to long-term contracts. During fiscal 2010 and the six months ended December 31, 2010, sales to the 10 largest customers in each period, including the applicable OEMs, accounted for approximately 75% and 92% of revenue, respectively. Facebook, Inc. is currently our largest customer and accounted for a substantial portion of revenue during the six months ended December 31, 2010. We expect revenue from sales to Facebook and one other end-user to account for a substantial portion of revenue for the three months ending March 31, 2011, but that revenue from sales to Facebook and the other end-user will decline significantly for the three months ending June 30, 2011 as they complete their planned deployments.

As a consequence of our limited number of customers and the concentrated nature of their purchases, our quarterly revenue and operating results may fluctuate from quarter to quarter and are difficult to estimate. For example, any acceleration or delay in anticipated product purchases or the acceptance of shipped products by our larger customers could materially impact our revenue and operating results in any quarterly period. We cannot provide any assurance that we will be able to sustain or increase our revenue from our large customers or that we will be able to offset the discontinuation of concentrated purchases by our larger customers with purchases by new or existing customers. We expect that sales of our products to a limited number of customers will continue to contribute materially to our revenue for the foreseeable future. The loss of, or a significant delay or reduction in purchases by, a small number of customers could materially harm our business and operating results.

 

Some of our large customers require more favorable terms and conditions from their vendors and may request price concessions. As we seek to sell more products to these customers, we may be required to agree to terms and conditions that may have an adverse effect on our business or ability to recognize revenue.

 

Some of our large customers have significant purchasing power and, accordingly, have requested and received more favorable terms and conditions, including lower prices, than we typically provide. As we seek to sell more products to this class of customer, we may be required to agree to these terms and conditions, which may include terms that affect the timing of our revenue recognition or may reduce our gross margins and have an adverse effect on our business and operating results.

 

The future growth of our sales to OEMs is dependent on OEM customers incorporating our products into their server and data storage systems and the OEM’s sales efforts. Any failure to grow our OEM sales and maintain relationships with OEMs could adversely affect our business, operating results and financial condition.

 

Sales of our products to OEMs represent a significant portion of our revenue and we anticipate that our OEM sales will constitute a substantial portion of our future sales. In some cases, our products must be designed into the OEM’s products. If that fails to occur for a given product line of an OEM, we would likely be unable to sell our products to that OEM for such product line during the life cycle of that product. Even if an OEM integrates one or more of our products into its server, data storage systems or appliance solutions, we cannot be assured that its product will be commercially successful, and as a result, our sales volumes may be less than anticipated. Our OEM customers are typically not obligated to purchase our products and can choose at any time to stop using our products, if their own systems are not commercially successful or if they decide to pursue other strategies or for any other reason, including the incorporation or development of competing products by these OEMs. Moreover, our OEM customers may not devote sufficient attention and resources to selling our products. We may not be able to develop or maintain relationships with OEMs for a number of reasons, including because of the OEM’s relationships with our competitors or prospective competitors or other incentives that may not motivate their internal sales forces to promote our products. Even if we are successful in selling through OEMs, we expect that sales through OEMs will be a lower gross margin business than our direct sales business. If we are unable to grow our OEM sales, if our OEM customers’ systems incorporating our products are not commercially successful, if our products are not designed into a given OEM product cycle or if our OEM customers significantly reduce, cancel or delay their orders with us, our revenue would suffer and our business, operating results and financial condition could be materially adversely affected.

 

Ineffective management of our inventory levels could adversely affect our operating results.

 

If we are unable to properly forecast, monitor, control and manage our inventory and maintain appropriate inventory levels and mix of products to support our customers’ needs, we may incur increased and unexpected costs associated with our inventory. Sales of our products are generally

made through individual purchase orders and some of our customers place large orders with short lead times, which makes it difficult to predict demand for our products and the level of inventory that we need to maintain to satisfy customer demand. If we build our inventory in anticipation of future demand that does not materialize, or if a customer cancels or postpones outstanding orders, we could experience an unanticipated increase in levels of our finished products. For example, as of December 31, 2010, we had $48.5 million of inventory, a large portion of which we purchased in anticipation of sales during the following quarterly period. For some customers, even if we are not contractually obligated to accept returned products, we may determine that it is in our best interest to accept returns in order to maintain good relationships with those customers. Product returns would increase our inventory and reduce our revenue. If we are unable to sell our inventory in a timely manner, we could incur additional carrying costs, reduced inventory turns and potential write-downs due to obsolescence.

 

Alternatively, we could carry insufficient inventory, and we may not be able to satisfy demand, which could have a material adverse effect on our customer relationships or cause us to lose potential sales.

 

We have recently experienced order changes including delivery delays and fluctuations in order levels from period-to-period, and we expect to continue to experience similar delays and fluctuations in the future, which could result in fluctuations in inventory levels, cash balances and revenue.

 

The occurrence of any of these risks could adversely affect our business, operating results and financial condition.

 

Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below expectations.

 

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company, the price of our common stock would likely decline.

 

Factors that are difficult to predict and that could cause our operating results to fluctuate include:

 

 

The occurrence of any one of these risks could negatively affect our operating results in any particular quarter and which could cause the price of our common stock to decline.

 

Our sales cycles can be long and unpredictable, particularly with respect to large orders and OEM relationships, and our sales efforts require considerable time and expense. As a result, it can be difficult for us to predict when, if ever, a particular customer will choose to purchase our products, which may cause our operating results to fluctuate significantly.

 

Our sales efforts involve educating our customers about the use and benefits of our products, including their technical capabilities and cost saving potential. Customers often undertake an evaluation and testing process that can result in a lengthy sales cycle. We spend substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals and unplanned administrative, processing and other delays. Additionally, a significant portion of our sales personnel have been with us for less than a year, and we continue to increase our number of sales personnel, which could further extend the sales cycle as these new personnel are typically not immediately productive. These factors, among others, could result in long and unpredictable sales cycles, particularly with respect to large orders.

 

We also sell to OEMs that incorporate our solutions into their products, which can require an extended evaluation and testing process before our product is approved for inclusion in one of their product lines. We also may be required to customize our product to interoperate with an OEM’s product, which could further lengthen the sales cycle for OEM customers. The length of our sales cycle for an OEM makes us susceptible to the risk of delays or termination of orders if end-users decide to delay or withdraw funding for datacenter projects, which could occur for various reasons, including global economic cycles and capital market fluctuations.

 

As a result of these lengthy and uncertain sales cycles of our products, it is difficult for us to predict when customers may purchase and accept products from us and as a result, our operating results may vary significantly and may be adversely affected.

 

We compete with large storage and software providers and expect competition to intensify in the future from established competitors and new market entrants.

 

The market for data storage products is highly competitive, and we expect competition to intensify in the future. Our products compete with various traditional datacenter architectures, including high performance server and storage approaches. These may include the traditional data storage providers, including storage array vendors such as EMC Corporation, Hitachi Data Systems and NetApp, Inc., which typically sell centralized storage products as well as high performance storage approaches utilizing solid state drives, or SSDs, as well as vertically integrated appliance vendors such as Oracle. In addition, we may also compete with enterprise solid state disk vendors such as Huawei Technologies, Co., Intel Corp., LSI Corporation, Micron Technology, Inc., Samsung Electronics, Inc., Seagate Technology, STEC, Inc., Toshiba Corp. and Western Digital Corp. A number of new, privately held companies are currently attempting to enter our market, some of which may become significant competitors in the future.

 

Many of our current competitors have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. New start-up companies continue to innovate and may invent similar or superior products and technologies that may compete with our products and technology. Some of our competitors have made acquisitions of businesses that may allow them to offer more directly competitive and comprehensive solutions than they had previously offered. In addition, some of our competitors, including our OEM customers, may develop competing technologies and sell at zero or negative margins, through

product bundling, closed technology platforms or otherwise, to gain business. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties. As a result, we cannot assure you that our products will continue to compete favorably, and any failure to do so could seriously harm our business, operating results and financial condition.

 

Competitive factors could make it more difficult for us to sell our products, resulting in increased pricing pressure, reduced gross margins, increased sales and marketing expenses, longer customer sales cycles and failure to increase, or the loss of, market share, any of which could seriously harm our business, operating results and financial condition. Any failure to meet and address these competitive challenges could seriously harm our business and operating results.

 

The market for non-volatile, storage memory products is relatively undeveloped and rapidly evolving, which makes it difficult to forecast end-user adoption rates and demand for our products.

 

The market for non-volatile, storage memory products is relatively undeveloped and rapidly evolving. Accordingly, our future financial performance will depend in large part on growth in this market and on our ability to adapt to emerging demands in this market. Sales of our products currently are dependent in large part upon demand in markets that require high performance data storage solutions such as computing, Internet and financial services. It is difficult to predict with any precision end-user adoption rates, end-user demand for our products or the future growth rate and size of our market. The rapidly evolving nature of the technology in the data storage products market, as well as other factors that are beyond our control, reduce our ability to accurately evaluate our future outlook and forecast quarterly or annual performance. Our products may never reach mass adoption, and changes or advances in technologies could adversely affect the demand for our products. Further, although Flash-based data storage products have a number of advantages compared to other data storage alternatives, Flash-based storage devices have certain disadvantages as well, including a higher price per gigabyte of storage, potentially shortened product lifespan, more limited methods for data recovery and lower performance for certain uses, including sequential input / output transactions and increased utilization of host system resources than traditional storage, and may require end-users to modify or replace network systems originally made for traditional storage media. A reduction in demand for Flash-based data storage caused by lack of end-user acceptance, technological challenges, competing technologies and products or otherwise would result in a lower revenue growth rate or decreased revenue, either of which could negatively impact our business and operating results.

 

If our industry experiences declines in average sales prices, it may result in declines in our revenue and gross profit.

 

The data storage products industry is highly competitive and has historically been characterized by declines in average sales prices. It is possible that the market for decentralized storage solutions could experience similar trends. Our average sales prices could decline due to pricing pressure caused by several factors, including competition, the introduction of competing technologies, overcapacity in the worldwide supply of Flash-based or similar memory components, increased manufacturing efficiencies, implementation of new manufacturing processes and expansion of manufacturing capacity by component suppliers. If we are required to decrease our prices to be competitive and are not able to offset this decrease by increases in volume of sales or the sales of new products with higher margins, our gross margins and operating results would likely be adversely affected.

 

Developments or improvements in storage system technologies may materially adversely affect the demand for our products.

 

Significant developments in data storage systems, such as advances in solid state storage drives or improvements in non-volatile memory, may materially and adversely affect our business and prospects in ways we do not currently anticipate. For example, improvements in existing data storage technologies, such as a significant increase in the speed of traditional interfaces for transferring data

between storage and a server or the speed of traditional embedded controllers could emerge as preferred alternative to our products especially if they are sold at lower prices. This could be the case even if such advances do not deliver all of the benefits of our products. Any failure by us to develop new or enhanced technologies or processes, or to react to changes or advances in existing technologies, could materially delay our development and introduction of new products, which could result in the loss of competitiveness of our products, decreased revenue and a loss of market share to competitors.

 

We derive all of our revenue from a single line of products, and a decline in demand for these products would cause our revenue to grow more slowly or to decline.

 

Our storage memory product line accounts for substantially all of our revenue and will continue to do so for the foreseeable future. As a result, our revenue could be reduced by:

 

 

If the storage markets grow more slowly than anticipated or if demand for our products declines, we may not be able to increase our revenue sufficiently to achieve and maintain profitability and our stock price would decline.

 

If we fail to develop and introduce new or enhanced products on a timely basis, including innovations in our software offerings, our ability to attract and retain customers could be impaired and our competitive position could be harmed.

 

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance, capacity and reliability and meet the cost expectations of our customers. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies, or the emergence of new industry standards could render our existing or future products obsolete. Our failure to anticipate or timely develop new or enhanced products or technologies in response to technological shifts could result in decreased revenue and harm our business. If we fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating results will be adversely affected.

 

In order to maintain or increase our gross margins, we will need to continue to create valuable software solutions to be integrated with our storage memory products. Any new feature or application that 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 help increase our overall gross margins. If we are unable to successfully develop or acquire, and then market and sell, additional software functionality, such as our recently introduced ioSphere and directCache software, our ability to increase our revenue and gross margin will be adversely affected.

Our products are highly technical and may contain undetected defects, which could cause data unavailability, loss or corruption that might, in turn, result in liability to our customers and harm to our reputation and business.

 

Our storage memory products and related software are highly technical and complex and are often used to store information critical to our customers’ business operations. Our products may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss or corruption or other harm to our customers. Some errors in our products may only be discovered after they have been installed and used by customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release could result in a loss of revenue or delay in revenue recognition, injury to our reputation, a loss of customers or increased service and warranty costs, any of which could adversely affect our business. In addition, we could face claims for product liability, tort or breach of warranty. Many of our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, would be costly and might divert management’s attention and adversely affect the market’s perception of us and our products. In addition, our business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us and our business could be adversely impacted.

 

Our products must interoperate with operating systems, software applications and hardware that is developed by others and if we are unable to devote the necessary resources to ensure that our products interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience a weakening demand for our products.

 

Our products must interoperate with our customers’ existing infrastructure, specifically their networks, servers, software and operating systems, which may be manufactured by a wide variety of vendors and OEMs. When new or updated versions of these software operating systems or applications are introduced, we must sometimes develop updated versions of our software so that our products will interoperate properly. We may not accomplish these development efforts quickly, cost-effectively or at all. These development efforts require capital investment and the devotion of engineering resources. If we fail to maintain compatibility with these applications, our customers may not be able to adequately utilize the data stored on our products, and we may, among other consequences, fail to increase, or we may lose, market share and experience a weakening in demand for our products, which would adversely affect our business, operating results and financial condition.

 

Our products must conform to industry standards in order to be accepted by customers in our markets.

 

Generally, our products comprise only a part of a datacenter. The servers, network, software and other components and systems of a datacenter must comply with established industry standards in order to interoperate and function efficiently together. We depend on companies that provide other components of the servers and systems in a datacenter to support prevailing industry standards. Often, these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected, which would harm our business, operating results and financial condition.

We rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key employees or the inability to attract and retain qualified personnel could harm our business.

 

Our success and future growth depends to a significant degree on the skills and continued services of our key technical, sales and management personnel. In particular, we are highly dependent on the services of our Chief Executive Officer, David Flynn. All of our employees work for us on an at-will basis, and we could experience difficulty in retaining members of our senior management team. We do not have “key person” life insurance policies that cover any of our officers or other key employees, other than our Chief Executive Officer. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our products, and negatively impact our business, prospects and operating results.

 

We plan to hire additional personnel in all areas of our business, particularly for sales and research and development. Competition for these types of personnel is intense. We cannot assure you that we will be able to successfully attract or retain qualified personnel. Our inability to retain and attract the necessary personnel could adversely affect our business, operating results and financial condition.

 

Our current research and development efforts may not produce successful products that result in significant revenue in the near future, if at all.

 

Developing our products and related enhancements is expensive. Our investments in research and development may not result in marketable products or may result in products that are more expensive than anticipated, take longer to generate revenue or generate less revenue, than we anticipate. Our future plans include significant investments in research and development and related product opportunities. 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, we may not receive significant revenue from these investments in the near future, if at all, which could adversely affect our business and operating results.

 

Our ability to sell our products is dependent in part on ease of use and the quality of our support offerings, and any failure to offer high-quality technical support would harm our business, operating results and financial condition.

 

Although our products are designed to be interoperable with existing servers and systems, we may need to provide customized installation and configuration support to our customers before our products become fully operational in their environments. Once our products are deployed within our customers’ datacenters, they depend on our support organization to resolve any technical issues relating to our products. Our ability to provide effective support is largely dependent on our ability to attract, train and retain qualified personnel. In addition, our sales process is highly dependent on our product and business reputation and on strong recommendations from our existing customers. Any failure to maintain high-quality installation and technical support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our ability to sell our products to existing and prospective customers, and could harm our business, operating results and financial condition.

 

If we fail to successfully maintain or grow our reseller and other channel partner relationships, our business and operating results could be adversely affected.

 

Our ability to maintain or grow our revenue will depend, in part, on our ability to maintain our arrangements with our existing channel partners and to establish and expand arrangements with new channel partners. Our channel partners may choose to discontinue offering our products or may not devote sufficient attention and resources toward selling our products. For example, our competitors may provide incentives to our existing and potential channel partners to use or purchase their

products and services or to prevent or reduce sales of our products. The occurrence of any of these events could adversely affect our business and operating results.

 

We are exposed to the credit risk of some of our customers and to credit exposure in weakened markets, which could result in material losses.

 

Most of our sales are on an open credit basis. As a general matter, we monitor individual customer payment capability in granting open credit arrangements and may limit these open credit arrangements based on creditworthiness. We also maintain reserves we believe are adequate to cover exposure for doubtful accounts. Although we have programs in place that are designed to monitor and mitigate these risks, we cannot assure you these programs will be effective in reducing our credit risks, especially as we expand our business internationally. If we are unable to adequately control these risks, our business, operating results and financial condition could be harmed.

 

We currently rely on contract manufacturers to manufacture our products, and our failure to manage our relationship with our contract manufacturers successfully could negatively impact our business.

 

We rely on contract manufacturers, AlphaEMS Manufacturing Corporation and Jabil Circuit, Inc., to manufacture our products. We currently do not have any long-term manufacturing contracts with these contract manufacturers. Our reliance on these contract manufacturers reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationship with these contract manufacturers effectively, or if these contract manufacturers experience delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. If we are required to change contract manufacturers or assume internal manufacturing operations, we may lose revenue, incur increased costs and damage our customer relationships. Qualifying a new contract manufacturer and commencing production is expensive and time-consuming. We may need to increase our component purchases, contract manufacturing capacity, and internal test and quality functions if we experience increased demand. The inability of these contract manufacturers to provide us with adequate supplies of high-quality products, could cause a delay in our order fulfillment, and our business, operating results and financial condition would be adversely affected.

 

We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of these supply arrangements could delay shipments of our products and could materially and adversely affect our relationships with current and prospective customers.

 

We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key components of our products, and we have not entered into agreements for the long-term purchase of these components. This reliance on a limited number of suppliers and the lack of any guaranteed sources of supply exposes us to several risks, including:

 

 

As a result of these risks, we cannot assure you that we will be able to obtain enough of these key components in the future or that the cost of these components will not increase. If our supply of certain components is disrupted, our lead times are extended or the cost of our components increases our business, operating results and financial condition could be materially adversely affected. If we are successful in growing our business, we may not be able to continue to procure components at current prices, which would require us to enter into longer term contracts with component suppliers to obtain these components at competitive prices. This could increase our costs and decrease our gross margins, harming our operating results.

 

To the extent we do not purchase sufficient inventory in connection with discontinuations by our vendors of components used in our products, our business or operating results may be adversely affected.

 

It is common in the storage and networking industries for component vendors to discontinue the manufacture of certain types of components from time to time due to evolving technologies and changes in the market. A supplier’s discontinuation of a particular type of component, such as a specific size of NAND Flash memory, may require us to make significant “last time” purchases of component inventory that is being discontinued by the vendor to ensure supply continuity until the transition to products based on next generation components or until we are able to secure an alternative supply. To the extent that we do not purchase sufficient inventory in connection with these discontinuations, we may experience delayed shipments, order cancellations or otherwise purchase more expensive components to meet customer demand, which could result in reduced gross margins.

 

If we fail to remediate deficiencies in our control environment or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

 

In connection with the audit of our consolidated financial statements for fiscal 2008, 2009 and 2010, our independent registered public accounting firm noted certain material weaknesses in our internal control over financial reporting. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

 

For fiscal 2008 and 2009, our independent registered public accounting firm noted a material weakness related to our financial statement close process that resulted in the recording of a substantial number of audit adjustments over the two fiscal years ended June 30, 2009. This was primarily the result of the early stage of our business and the lack of a sufficient number of accounting personnel, including personnel with technical accounting and financial reporting experience.

 

For fiscal 2010, our independent registered public accounting firm noted a material weakness related to our financial statement close process that resulted in audit adjustments. This was a result of the lack of a sufficient number of accounting personnel and a lack of formal accounting policies and procedures related to identification of unique contract terms that affected revenue recognition, proper identification and accounting for inventory in transit and evaluation units and the recording of certain expenses in the proper period. We also restated our consolidated financial statements for fiscal 2010 to reflect a deemed dividend associated with a repurchase of a portion of our convertible preferred stock.

 

Since July 1, 2010, we have taken and continue to take additional steps to upgrade our finance and accounting function, including the hiring of additional accounting personnel, currently with aggregate related annualized salary expense of approximately $1.0 million, and implemented additional policies and procedures associated with the financial statement close process. Based on our efforts to date, we believe that the material weaknesses can be remediated by June 30, 2011; however, we cannot assure you that we will succeed in remediating these material weaknesses by that time.

 

We cannot assure you that these or other similar issues will not arise in future periods.

 

We will need to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and the failure to do so could have a material adverse effect on our business and stock price.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, commencing in fiscal 2012, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. If we are unable to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm continues to note or identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the New York Stock Exchange, the Securities and Exchange Commission, or the SEC, or other regulatory authorities, which would require additional financial and management resources.

 

If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or expensive licenses, and our business could be harmed.

 

The storage and networking industries 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 expand our presence in the market and face increasing competition, the possibility of intellectual property infringement claims against us grows. Our products may not be able to withstand any third-party claims against their use. We currently have a number of agreements in effect pursuant to which we have agreed to defend, indemnify and hold harmless our customers, suppliers and channel partners from damages and costs which may arise from the infringement by our products of third-party patents, trademarks or other proprietary rights. The scope of these indemnity obligations varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. Our insurance may not cover intellectual property infringement claims. A claim that our products infringe a third party’s intellectual property rights, if any, could harm our relationships with our customers, may deter future customers from purchasing our products and could expose us to costly litigation and settlement expenses. Even if we are not a party to any litigation between a customer and a third party relating to infringement by our products, an adverse outcome in any such litigation could make it more difficult for us to defend our products against intellectual property infringement claims in any subsequent litigation in which we are a named party. Any of these results could harm our brand and operating results.

 

Any intellectual property rights claim against us or our customers, suppliers and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management resources and attention. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. An adverse determination also could prevent us from offering our products to our customers and may require that we procure or develop substitute products that do not infringe, which could require significant effort and expense. We may have to seek a license for the technology, which may not be available on reasonable terms or at all, may significantly increase our operating expenses or require us to restrict our business activities in one or more respects. Any of these events could seriously harm our business, operating results and financial condition.

The success of our business depends in part on our ability to protect and enforce our intellectual property rights.

 

We rely on a combination of patent, copyright, service mark, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. As of February 28, 2011, we had 3 issued patents and 59 patent applications in the United States and 84 corresponding patent applications in foreign countries. We cannot assure you that any patents will issue with respect to our currently pending patent applications in a manner that gives us the protection that we seek, if at all, or that any patents issued to us will not be challenged, invalidated or circumvented. Our currently issued patents and any patents that may issue in the future with respect to pending or future patent applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property.

 

Protecting against the unauthorized use of our intellectual property, products and other proprietary rights is expensive and difficult. Litigation may be necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition. Further, many of our current and potential competitors have the ability to dedicate substantially greater resources to defending intellectual property infringement claims and to enforcing their intellectual property rights than we have. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our products are available. An inability to adequately protect and enforce our intellectual property and other proprietary rights could seriously harm our business, operating results and financial condition.

 

Our use of open source and third-party technology could impose limitations on our ability to commercialize our software.

 

We use open source software in our products. Although we monitor our use of open source software closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products for certain uses, to license portions of our source code at no charge, to re-engineer our technology or to discontinue offering some of our software in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

 

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.

 

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products or enhance our existing products, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing in the future could involve additional restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to

obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.

 

We may expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.

 

Our business strategy may, from time to time, include acquiring complementary products, technologies or businesses. We also may enter into relationships with other businesses in order to expand our product offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulation, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.

 

An acquisition or investment may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired business choose not to work for us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures, and become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could adversely affect our business, operating results and financial condition.

 

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

 

While we currently maintain limited operations outside of the United States, we intend to expand these operations in the future. We have limited experience operating in foreign jurisdictions. Our inexperience in operating our business outside of the United States increases the risk that any international expansion efforts that we may undertake will not be successful. In addition, conducting and expanding international operations subjects us to new risks that we have not generally faced in the United States. These include: exposure to foreign currency exchange rate risk; difficulties in managing and staffing international operations; the increased travel, infrastructure and legal compliance costs associated with multiple international locations; potentially adverse tax consequences; the burdens of complying with a wide variety of foreign laws, including trade barriers, and different legal standards; 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 business, operating results and financial condition generally.

Adverse economic conditions or reduced datacenter spending may adversely impact our revenues and profitability.

 

Our operations and performance depend in part on worldwide economic conditions and the impact these conditions have on levels of spending on datacenter technology. Our business depends on the overall demand for datacenter infrastructure and on the economic health of our current and prospective customers. Weak economic conditions, or a reduction in datacenter spending, would likely adversely impact our business, operating results and financial condition in a number of ways, including by reducing sales, lengthening sales cycles and lowering prices for our products and services.

 

Governmental regulations affecting the import or export of products could negatively affect our revenue.

 

The U.S. and various foreign governments have imposed controls, export license requirements, and restrictions on the import or export of some technologies, especially encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental recovery of private encryption keys. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international and domestic sales and adversely affect our revenue. In addition, failure to comply with such regulations could result in penalties, costs, and restrictions on export privileges, which would harm our operating results.

 

The terms of our loan and security agreement with a financial institution may restrict our ability to engage in certain transactions.

 

Pursuant to the current terms of our loan and security agreement with a financial institution, we are subject to financial covenants and cannot engage in certain transactions, including disposing of certain assets, incurring additional indebtedness, declaring dividends, acquiring or merging with another entity or leasing additional real property unless certain conditions are met or unless we receive prior approval from the financial institution. Our obligations under the loan and security agreement are secured by substantially all of our assets. The loan and security agreement further limits our ability to make material changes to our management team or enter into transactions with affiliates. If the financial institution does not consent to any of these actions or if we are unable to comply with these covenants, we could be prohibited from engaging in transactions which could be beneficial to our business and our stockholders.

 

Our business is subject to the risks of earthquakes and other natural catastrophic events, and to interruption by man-made problems such as computer viruses or terrorism.

 

Our sales headquarters and our current contract manufacturers are located in the San Francisco Bay area, which has a heightened risk of earthquakes. We may not have adequate business interruption insurance to compensate us for losses that may occur from a significant natural disaster, such as an earthquake, which could have a material adverse impact on our business, operating results and financial condition. In addition, acts of terrorism or malicious computer viruses could cause disruptions in our or our customers’ businesses or the economy as a whole. To the extent that these disruptions result in delays or cancellations of customer orders or the deployment of our products, our business, operating results and financial condition would be adversely affected.

 

Failure to comply with governmental laws and regulations could harm our business.

 

Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in the United States. Noncompliance with

applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.

 

Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock

 

We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.

 

Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock will be determined by negotiations with the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business.

 

The price of our common stock may be volatile and the value of your investment could decline.

 

Technology stocks have historically experienced high levels of volatility. The trading price of our common stock following this offering may fluctuate substantially. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

 

In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our

business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results and financial condition.

 

Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the contractual lock-up and other legal restrictions on resale lapse, the trading price of our common stock could decline. After this offering, approximately           shares of common stock will be outstanding. Of these shares, the           shares of our common stock to be sold in this offering will be freely tradable, without restriction, in the public market.

 

Our directors, officers, employees and current stockholders are subject to a 180-day contractual lock-up that prevents them from selling their shares prior to the expiration of this lock-up period. The lock-up is subject to extension under certain circumstances. Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated may, in their sole discretion, permit shares subject to this lock-up to be sold prior to its expiration. For additional information, see “Shares Eligible for Future Sale — Lock-Up Agreements”.

 

At various times after the lock-up agreements pertaining to this offering expire, up to an additional           shares will be eligible for sale in the public market,           of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, and various vesting agreements.

 

The aggregate of           shares underlying outstanding warrants and our equity incentive plans and agreements that were outstanding as of December 31, 2010 will also become eligible for sale in the public market to the extent permitted by the provisions of various option agreements and warrants, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. For additional information, see “Shares Eligible for Future Sale”.

 

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

 

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $      per share based on an assumed initial public offering price of $      per share, which is the midpoint of the range as reflected on the cover page of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. In addition, investors who purchase shares in this offering will contribute approximately     % of the total amount of equity capital raised by us through the date of this offering, but will only own approximately     % of our outstanding shares. In addition, we have issued options and warrants to acquire common stock at prices significantly below the assumed initial public offering price. To the extent outstanding options and warrants are ultimately exercised, there will be further dilution to investors in this offering.

If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

 

The trading market for our common stock could be influenced by any research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event securities or industry analysts cover our company and one or more of these analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

 

Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, will beneficially own approximately     % of the outstanding shares of our common stock after this offering. As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

 

We have broad discretion in the use of the net proceeds that we receive in this offering.

 

The principal purposes of this offering are to raise additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. We have not yet determined the specific allocation of the net proceeds that we receive in this offering. Rather, we intend to use the net proceeds that we receive in this offering for working capital and general corporate purposes, including expansion of our sales organization, further development and expansion of our product offerings and possible acquisitions of, or investments in, businesses, technologies or other assets. Accordingly, our management will have broad discretion over the specific use of the net proceeds of this offering and might not be able to obtain a significant return, if any, on investment of these net proceeds. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds from this offering effectively, our business, operating results and financial condition could be harmed.

 

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

 

We have never declared or paid any dividends on our common stock. In addition, our credit facility with a financial institution restricts our ability to pay dividends. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, new rules implemented by the SEC and the New York Stock Exchange, require changes in corporate governance practices of public companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make some

activities more time-consuming and costly. We will also incur additional costs associated with our public company reporting requirements. We expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to 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 people to serve on our board of directors or as executive officers.

 

Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

 

 

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change of control of our company.

 

Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in 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.

 

This prospectus, including the sections entitled “Prospectus Summary”, “Risk Factors”, “Use of Proceeds”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and “Compensation Discussion and Analysis” contains forward-looking statements. The words “believe”, “may”, “will”, “potentially”, “estimate”, “continue”, “anticipate”, “intend”, “could”, “would”, “project”, “plan” and “expect”, and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

 

These forward-looking statements include, but are not limited to, statements concerning the following: our ability to achieve or maintain profitability; our business plan and growth management; our operating expenses; our business expansion, including expansion of our sales and research and development capabilities; certain critical accounting policies and estimates; our ability to remediate previously identified material weaknesses; our competitors’ and our ability to compete effectively in the market; the ability of our platform to address industry problems; the data supply problem; our ability to innovate new products and bring them to market in a timely manner; our ability to expand internationally; the impact of quarterly fluctuations of revenue and operating results; the compliance costs of being a public company; our expectations concerning relationships with third parties, including channel partners, key customers and OEMs; levels and sources of revenue; our estimates regarding market size, market position, and market opportunity; levels of capital expenditures; future capital requirements and availability to fund operations and growth; the adequacy of our facilities; future headcount needs; future acquisitions of or investments in complementary companies, products, services or technologies; the adequacy of our intellectual property; and the sufficiency of our issued patents and patent applications to protect our intellectual property.

 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors”. Moreover, we operate in a competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.

 

You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including International Data Corporation, or IDC, IMS Research, or IMS, The TABB Group, Gartner, Inc. and the U.S. Department of Energy, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our products. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third party information. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

The Gartner Report referred to in this prospectus represents data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc., and are not representations of fact. The Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Report are subject to change without notice.

 

The superscript notations in this prospectus identify IDC data. The source of the IDC data and our estimates based on such data, if any, are provided below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We estimate that we will receive net proceeds of approximately $      million from our sale of the           shares of common stock offered by us in this offering, based upon an assumed initial public offering price of $      per share, which is the midpoint of the range reflected on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses to be paid by us. If the underwriters’ option to purchase additional shares is exercised in full, we estimate that our net proceeds will be approximately $      million, assuming an initial public offering price of $      per share, which is the midpoint of the range reflected on the cover page of this prospectus.

 

Each $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the range reflected on the cover page of this prospectus, would increase or decrease, as applicable, the net proceeds to us by approximately $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses to be paid by us.

 

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders if the underwriters’ exercise their option to purchase additional shares, although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares.

 

We currently intend to use the net proceeds to us from this offering primarily for working capital and general corporate purposes, including expansion of our sales organization, further development and expansion of our product offerings and possible acquisitions of, or investments in, businesses, technologies or other assets. We have no present understandings, commitments or agreements to enter into any acquisitions or investments.

 

Other principal purposes of this offering include creating a public market for our common stock and increasing our visibility in the market. A public market for our common stock will facilitate future access to public equity markets and enhance our ability to use common stock as a means of attracting and retaining key employees and as consideration for acquisitions or strategic transactions.

 

Our management will have broad discretion in the application of the net proceeds of this offering, and investors will be relying on the judgment of our management regarding the treatment of these proceeds. Pending the uses described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

 

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. In addition, the terms of our loan and security agreement with a financial institution currently prohibits us from paying cash dividends on our common stock. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and compliance with certain covenants under our loan and security agreement with the financial institution, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of December 31, 2010 on:

 

 

The pro forma as adjusted information set forth in the table below is illustrative only and 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 audited and unaudited consolidated financial statements and the related notes that are included elsewhere in this prospectus.

 

 

The number of shares of our common stock set forth in the table excludes:

 

 

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

 

As of December 31, 2010, our pro forma net tangible book value was approximately $32.9 million, or $0.49 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2010, assuming conversion of all outstanding shares of convertible preferred stock into common stock.

 

After giving effect to our sale in this offering of           shares of our common stock, at the assumed initial public offering price of $      per share, which is the midpoint of the range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses to be paid by us, our pro forma net tangible book value as of December 31, 2010 would have been approximately $      million, or $      per share of our common stock. This represents an immediate increase in pro forma net tangible book value of $      per share to our existing stockholders and an immediate dilution of $      per share to investors purchasing shares in this offering.

 

The following table illustrates this dilution:

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the range reflected on the cover page of this prospectus, would increase or decrease our pro forma net tangible book value, as adjusted to give effect to this offering, by $      per share, the increase or decrease per share attributable to this offering by $      per share and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $      per share, assuming 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 expenses to be paid by us.

 

If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be $      per share, and the dilution in 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 December 31, 2010 after giving effect to the conversion of our convertible preferred stock into common stock and this offering on an assumed initial public offering price of $      per share, which is the midpoint of the range reflected on the cover page of this prospectus, the difference between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total

cash consideration paid to us and the average price per share paid, before deducting estimated underwriting discounts and commissions and estimated offering expenses:

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $      per share, which is the midpoint of the range reflected on the cover page of this prospectus, would increase or decrease, respectively, total consideration paid by new investors and total consideration paid by all stockholders by approximately $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses to be paid by us.

 

To the extent that any outstanding options are exercised, new investors will experience further dilution.

 

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full from us and the selling stockholders, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the completion of this offering.

 

The consolidated statements of operations data presented below for the fiscal years ended June 30, 2008, 2009 and 2010 and the consolidated balance sheet data as of June 30, 2009 and 2010 are derived from our audited consolidated financial statements, which are included in this prospectus. The consolidated balance sheet data as of June 30, 2008 are derived from audited consolidated financial statements not included in this prospectus. The consolidated statements of operations for the period from December 23, 2005 (Inception) to June 30, 2006 and for the fiscal year ended June 30, 2007 and the consolidated balance sheet data as of June 30, 2006 and 2007 are derived from unaudited consolidated financial statements that are not included in this prospectus. The consolidated statements of operations data for the six months ended December 31, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2010 are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with our audited financial statements and include all adjustments, consisting of normal and recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations as of and for such periods. Operating results for the six months ended December 31, 2010 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2011. You should read the following selected consolidated financial data with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the notes to consolidated financial statements, which are included in this prospectus.

 

 

 

 

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. Our fiscal year end is June 30 and our fiscal quarters end on September 30, December 31, March 31, and June 30. Our fiscal years ended June 30, 2008, 2009 and 2010 and our fiscal year ending June 30, 2011 are referred to as fiscal 2008, 2009, 2010 and 2011, respectively.

 

Overview

 

We have pioneered a next generation storage memory platform for data decentralization. Our data decentralization platform includes our ioMemory hardware, VSL virtualization software, directCache automated data-tiering software and ioSphere platform management software.

 

We were incorporated in December 2005, and we initially focused on the engineering and development of our platform. We have experienced significant growth over the past few years with revenue of $0.6 million, $10.2 million, $36.2 million and $58.3 million in fiscal years 2008, 2009 and 2010, and the six months ended December 31, 2010, respectively. From December 31, 2009 to December 31, 2010, our headcount has increased from 183 to 348.

 

We sell our products through our global direct sales force, OEMs, including Dell, HP and IBM, and other channel partners. Some of our OEMs and channel partners integrate our platform into their own proprietary product offerings. Our primary sales office is located in San Jose, California, and we also have a sales presence in the United Kingdom, Germany, Japan, Hong Kong, Singapore, Australia and Canada.

 

Large purchases by a limited number of customers have accounted for a substantial majority of our revenue, and the composition of the group of our largest customers changes from period to period. Many of our customers make concentrated purchases to complete or upgrade specific large-scale data storage installations. These concentrated purchases are short-term in nature and are typically made on a purchase order basis rather than pursuant to long-term contracts. During fiscal 2010 and the six months ended December 31, 2010, sales to the 10 largest customers in each period, including the applicable OEMs, accounted for approximately 75% and 92% of revenue, respectively. During fiscal 2010 and the six months ended December 31, 2010, sales to two OEMs accounted for approximately 23% and 32% of our revenue, respectively. Facebook, Inc. is currently our largest customer and accounted for a substantial portion of revenue during the six months ended December 31, 2010. We expect revenue from sales to Facebook and one other end-user to account for a substantial portion of revenue for the three months ending March 31, 2011, but that revenue from sales to Facebook and the other end-user will decline significantly for the three months ending June 30, 2011 as they complete their planned deployments. As a result, our quarterly revenue and operating results are likely to fluctuate in the future and will be difficult to estimate. We expect that sales to a limited number of customers will continue to contribute materially to our revenue for the foreseeable future.

 

We anticipate that sales through OEMs will continue to constitute a substantial portion of our future revenue. In some cases, our products must be designed into the OEM’s products. If that fails to occur for a given product line of an OEM, we would likely be unable to sell our products to that OEM during the life cycle of that product, which would adversely affect our revenue. We expect that as we expand our global presence and business overseas that we will increasingly depend on our OEM relationships in such markets.

 

We believe that extending our platform differentiation through software innovation will be critical to achieving broader market acceptance and maintaining or increasing our gross margins. In this

regard, we have recently developed our directCache data-tiering software and ioSphere platform management software for incorporation into our solutions and intend to continue to add software functionality to differentiate our products. Our directCache software and ioSphere software were announced in November 2010 and will be released for general availability in the first half of 2011. We are devoting the majority of our research and development resources to software development, and if we are unable to successfully develop or acquire, and then market and sell additional software functionality, our ability to increase our revenue and gross margins will be adversely affected.

 

We outsource the manufacturing of our hardware products to our two primary contract manufacturers. We procure a majority of the components used in our products directly from third-party vendors and have them delivered to our contract manufacturers for manufacturing and assembly. Once our products are assembled, we perform quality assurance testing, labeling, final configuration, including a final firmware installation, and shipment to our customers.

 

As a consequence of the rapidly evolving nature of our business and our limited operating history, we believe that period-to-period comparisons of revenue and other operating results, including gross margin and operating expenses as a percentage of our revenue, are not necessarily meaningful and should not be relied upon as indications of future performance. Although we have experienced significant percentage growth in our revenue, we do not believe that our historical growth rates are likely to be sustainable or indicative of future growth.

 

Components of Consolidated Statements of Operations

 

Revenue

 

We derive revenue from the sale of our storage memory products and support services. We sell our storage memory platform through our direct sales force, OEMs and channel partners. We provide our support services pursuant to support contracts, which involve hardware support, software support and software upgrades on a when-and-if available basis, and typically have a one-year term. Revenue from support services represented less than $1.0 million for fiscal 2010 and less than $1.1 million for the six months ended December 31, 2010.

 

Cost of Revenue

 

Cost of revenue consists primarily of inventory costs including amounts paid to our suppliers and contract manufacturers for hardware components and assembly of those components into our products. The largest portion of our cost of revenue consists of the cost of non-volatile memory components. Given the commodity nature of memory components, neither we nor our contract manufacturers enter into long-term supply contracts for our product components, which can cause our cost of revenue to fluctuate. Cost of revenue is recorded when the related product revenue is recognized. Cost of revenue also includes costs of shipping, personnel expenses related to customer support, warranty reserves and carrying value adjustments recorded for excess and obsolete inventory.

 

Operating Expenses

 

The largest component of our operating expenses is personnel costs, consisting of salaries, benefits and incentive compensation for our employees, which includes stock-based compensation. Our headcount increased from 86 as of June 30, 2008 to 172 as of June 30, 2009, to 262 as of June 30, 2010 and to 348 as of December 31, 2010. As a result, operating expenses have increased significantly over these periods. In December 2010, we entered into an agreement terminating the lease for our prior corporate offices effective as of April 30, 2011. The net book value of the related leasehold improvements of $1.3 million as of December 31, 2010 will be amortized on a straight-line basis over the remaining lease term ending April 30, 2011.

Sales and Marketing

 

Sales and marketing expenses consist primarily of personnel costs, incentive compensation, marketing programs, travel-related costs, consulting expenses associated with sales and marketing activities, and facilities-related costs. We plan to continue to invest heavily in sales by increasing our sales headcount. Our sales personnel are typically not immediately productive and therefore the increase in sales and marketing expense we incur when we add new sales representatives is not immediately offset by increased revenue and may not result in increased revenue over the long-term. The timing of our hiring of new sales personnel and the rate at which they generate incremental revenue could therefore affect our future period-to-period financial performance. We expect that sales and marketing expenses will continue to increase in absolute dollars as we expect to continue hiring.

 

Research and Development

 

Research and development expenses consist primarily of personnel costs, prototype expenses, consulting services and depreciation associated with research and development equipment. We expense research and development costs as incurred. We expect to continue to devote substantial resources to the development of our products including the development of new software products. We believe that these investments are necessary to maintain and improve our competitive position. We expect that our research and development expenses will continue to increase in absolute dollars as we continue to invest in additional engineering personnel and infrastructure required to support the development of new products and to enhance existing products.

 

General and Administrative

 

General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, audit costs, and facility-related expenses for our executive, finance, human resources, information technology and legal organizations. While we expect personnel costs to be the primary component of general and administrative expenses, we also expect to incur significant additional legal and accounting costs after this offering related to compliance with rules and regulations implemented by the SEC, as well as additional insurance, investor relations and other costs associated with being a public company.

 

Results of Operations for the Six Months Ended December 31, 2009 and 2010

 

Revenue

 

The following table presents our revenue for the periods indicated and related changes as compared to the prior period (dollars in thousands):

 

 

Revenue increased $46.3 million from the six months ended December 31, 2009 to the six months ended December 31, 2010, primarily due to an increase in the volume of products shipped.

 

Revenue from our 10 largest customers, including the applicable OEMs, was 69% and 92% of revenue for the six months ended December 31, 2009 and December 31, 2010, respectively. Facebook accounted for greater than 10% of revenue for the six months ended December 31, 2009 and 2010. In addition, two other customers each accounted for greater than 10% of revenue for the six months ended December 31, 2009 and 2010. Revenue from customers with a ship-to location in the United States was 70% and 75% of revenue for the six months ended December 31, 2009 and

2010, respectively. Revenue from customers with a ship-to address in China was 14% of revenue for the six months ended December 31, 2010.

 

Cost of Revenue and Gross Margin

 

The following table presents our cost of revenue, gross profit and gross margin for the periods indicated and related changes as compared to the prior period (dollars in thousands):

 

 

Cost of revenue increased $23.5 million and gross profit increased $22.8 million from the six months ended December 31, 2009 to the six months ended December 31, 2010, primarily due to the increase in volume of product shipped to one significant customer. Gross margin decreased due to a higher concentration of lower gross margin sales to one significant customer and our OEM customers.

 

Operating Expenses

 

Sales and Marketing

 

The following table presents our sales and marketing expenses for the periods indicated and related changes as compared to the prior period (dollars in thousands):

 

 

Sales and marketing expenses increased $12.0 million from the six months ended December 31, 2009 to the six months ended December 31, 2010, primarily due to an increase in the number of sales and marketing employees, from 78 as of December 31, 2009 to 181 as of December 31, 2010. This resulted in a $9.3 million increase in personnel-related costs, including a $2.4 million increase in commission expense. The increase was also due to a $1.0 million increase in travel-related costs, a $0.9 million increase in marketing program costs and a $0.2 million increase in allocated rent and facilities expenses.

 

Research and Development

 

The following table presents our research and development expenses for the periods indicated and related changes as compared to the prior period (dollars in thousands):

 

Research and development expenses increased $3.2 million from the six months ended December 31, 2009 to the six months ended December 31, 2010, primarily due to an increase in the number of research and development employees, from 78 as of December 31, 2009 to 114 as of December 31, 2010. This resulted in a $2.1 million increase in personnel-related costs. The increase was also due to a $0.5 million increase in allocated rent and facilities expenses, a $0.4 million increase in manufacturing costs for new product prototypes and a $0.1 million increase in depreciation expense.

 

General and Administrative

 

The following table presents our general and administrative expenses for the periods indicated and related changes as compared to the prior period (dollars in thousands):

 

 

General and administrative expenses increased $2.2 million from the six months ended December 31, 2009 to the six months ended December 31, 2010, primarily due to an increase in the number of general and administrative employees, from 27 as of December 31, 2009 to 53 as of December 31, 2010. This resulted in a $2.5 million increase in personnel-related costs. This increase was offset by a $1.0 million insurance claim reimbursement and a $1.2 million decrease in legal costs, both related to the resolution of litigation that was ongoing in 2009. The majority of the remaining increase was due to a $0.6 million increase in depreciation expense, a $0.4 million increase in consulting services, $0.3 million increase in professional accounting services and a $0.2 million increase in allocated rent and facilities expenses.

 

Other Income (Expense), Net

 

The following table presents our other income and expense for the periods indicated and related changes as compared to the prior period (dollars in thousands):

 

 

Other income (expense), net increased $0.5 million from the six months ended December 31, 2009 to the six months ended December 31, 2010, primarily due to increased borrowings under the revolving line of credit and increased expense attributable to the revaluation of a warrant to purchase shares of convertible preferred stock.

Results of Operations for the Fiscal Years Ended June 30, 2008, 2009 and 2010

 

Revenue

 

The following table presents our revenue for the periods indicated and related changes as compared to the prior periods (dollars in thousands):

 

 

2009 Compared to 2010.  Revenue increased $26.1 million from fiscal 2009 to fiscal 2010, primarily due to the increase in the overall volume of our products shipped.

 

2008 Compared to 2009.  Revenue increased $9.5 million from fiscal 2008 to fiscal 2009, primarily due to the increase in our customer base and the expansion of our product line.

 

Revenue from the 10 largest customers, including the applicable OEMs, for each fiscal year was 71%, 47% and 75% of revenue for fiscal 2008, 2009 and 2010, respectively. Two other customers and Facebook each accounted for greater than 10% of our revenue in fiscal 2010 and one customer accounted for greater than 10% of our revenue in fiscal 2008. No other customer accounted for greater than 10% of revenue in fiscal 2008, 2009 and 2010. Revenue from customers with a ship-to location in the United States accounted for 100%, 86% and 76% of revenue for fiscal 2008, 2009 and 2010, respectively.

 

Cost of Revenue and Gross Margin

 

The following table presents our cost of revenue and gross margin for the periods indicated and related changes as compared to the prior periods (dollars in thousands):

 

 

2009 Compared to 2010.  Cost of revenue increased $11.0 million from fiscal 2009 to fiscal 2010, primarily due to the increase in the volume of our products shipped. Our gross margin increased from fiscal 2009 to fiscal 2010 due to favorable pricing of NAND Flash raw materials and efficiencies resulting from economies of scale as our revenue has increased. The increase in gross margin in fiscal 2010 was offset by a $0.6 million inventory carrying value adjustment that we recorded for obsolete inventory.

 

2008 Compared to 2009.  Cost of revenue increased $4.6 million from fiscal 2008 to fiscal 2009 primarily due to the corresponding increase in our revenue driven by the increase in our customer base and the expansion of our product line. Our gross margin increased from fiscal 2008 to fiscal 2009 due to changes in the mix of our products sold and efficiencies resulting from economies of scale as our revenue increased.

Operating Expenses

 

Sales and Marketing

 

The following table presents our sales and marketing expenses for the periods indicated and related changes as compared to the prior periods (dollars in thousands):

 

 

2009 Compared to 2010.  Sales and marketing expenses increased $9.9 million from fiscal 2009 to fiscal 2010, primarily due to an increase in sales and marketing personnel from 76 employees at the end of fiscal 2009 to 123 at the end of fiscal 2010, as we hired additional employees to focus on acquiring new customers and expanding our business into new geographic regions. This increase in headcount resulted in an $8.1 million increase in personnel-related costs, including a $2.6 million increase in sales commissions. The majority of the remaining increase in sales and marketing expenses from fiscal 2009 to fiscal 2010 was due to a $0.8 million increase in travel-related costs, a $0.5 million increase in product demonstration expenses, a $0.4 million increase in consulting services, and a $0.2 million increase in allocated rent and facilities expenses. These increases were offset by a $0.3 million decrease in marketing program costs, primarily related to tradeshows.

 

2008 Compared to 2009.  Sales and marketing expenses increased $10.6 million from fiscal 2008 to fiscal 2009, primarily due to an increase in sales and marketing personnel from 43 employees at the end of fiscal 2008 to 76 at the end of fiscal 2009. This increase in headcount resulted in a $6.9 million increase in personnel-related costs, including a $1.4 million increase in sales commissions. The majority of the remaining increase consisted of a $0.9 million increase in marketing program costs, a $0.9 million increase in travel-related costs, a $0.6 million increase in telecommunications and allocated internal information systems infrastructure, a $0.4 million increase in consulting services and a $0.4 million increase in allocated rent and facilities expenses.

 

Research and Development

 

The following table presents our research and development expenses for the periods indicated and related changes as compared to the prior periods (dollars in thousands):

 

 

2009 Compared to 2010.  Research and development expenses increased $4.3 million from fiscal 2009 to fiscal 2010, primarily due to an increase in research and development personnel from 74 employees at the end of fiscal 2009 to 97 at the end of fiscal 2010, resulting in a $3.4 million increase in personnel-related costs. The increase was also due to a $0.4 million increase in manufacturing costs for new product prototypes, a $0.3 million increase in engineering consulting services and a $0.2 million increase in depreciation expense.

 

2008 Compared to 2009.  Research and development expenses increased $6.1 million from fiscal 2008 to fiscal 2009, primarily due to an increase in research and development personnel from 33 employees at the end of fiscal 2008 to 74 at the end of fiscal 2009, resulting in a $5.7 million increase in personnel-related costs. The majority of the remaining increase was due to a $0.4 million increase in allocated rent and facilities expenses, a $0.3 million increase in travel-related expenses, a

$0.3 million increase in telecommunications and allocated internal information systems infrastructure, a $0.2 million increase in depreciation expense, a $0.2 million increase in small equipment expense and a $0.2 million increase in engineering consulting services. These increases were offset by a $1.7 million decrease in manufacturing costs for product prototypes.

 

General and Administrative

 

The following table presents our general and administrative expenses for the periods indicated and related changes as compared to the prior periods (dollars in thousands):

 

 

2009 Compared to 2010.  General and administrative expenses increased $7.5 million from fiscal 2009 to fiscal 2010, in part due to an increase in general and administrative personnel from 22 employees at the end of fiscal 2009 to 42 employees at the end of fiscal 2010, resulting in a $2.6 million increase in personnel-related costs. In addition, there was a $2.7 million increase in legal costs related to the resolution of legal proceedings. The majority of the remaining increase from 2009 to fiscal 2010 consisted of a $0.6 million increase in depreciation expense, primarily related to computer equipment and leasehold improvements, a $0.4 million increase in software support and expensed equipment, a $0.3 million increase in professional accounting fees, a $0.3 million increase in allocated rent and facilities expenses and a $0.2 million increase in travel-related expenses.

 

2008 Compared to 2009.  General and administrative expenses increased $3.1 million from fiscal 2008 to fiscal 2009, primarily due to an increase in general and administrative personnel from 10 employees at the end of fiscal 2008 to 22 at the end of fiscal 2009, resulting in a $1.3 million increase in personnel-related costs, a $0.9 million increase in legal costs, a $0.6 million increase in consulting services, a $0.3 million increase in software support and expensed equipment, a $0.2 million increase in depreciation expense and a $0.2 million increase in sales tax expense.

 

Other Income (Expense), net

 

The following table presents our other income (expense) for the periods indicated and related changes as compared to the prior periods (dollars in thousands):