As filed with
the Securities and Exchange Commission on June 7,
2011
Registration
No. 333-172683
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Fusion-io, Inc.
(Exact name of Registrant as
specified in its charter)
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Delaware
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3572
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20-4232255
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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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 Registrants
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:
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Larry W. Sonsini
Patrick J. Schultheis
Robert G. Day
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
650.493.9300
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Shawn J. Lindquist
Chief Legal Officer
Fusion-io, Inc.
2855 E. Cottonwood Parkway, Suite 100
Salt Lake City, Utah 84121
801.424.5500
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Gordon K. Davidson
Jeffrey R. Vetter
James D. Evans
Fenwick & West LLP
801 California Street
Mountain View, California 94041
650.988.8500
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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):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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CALCULATION OF
REGISTRATION FEE
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Proposed
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Proposed
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Maximum
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Maximum
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Title of Each Class of
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Amount to be
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Offering Price
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Aggregate
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Amount of
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Securities to be Registered
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Registered (1)
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Per Share
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Offering Price(2)
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Registration Fee(3)
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Common Stock, $0.0002 par value per share
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14,145,000
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$18.00
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$254,610,000
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$29,560.23
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(1)
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Estimated pursuant to Rule 457(a) under the Securities Act
of 1933, as amended. Includes the aggregate offering price of
additional shares that the underwriters have the option to
purchase.
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(2)
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Estimated solely for the purpose of calculating the registration
fee.
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(3) |
The Registrant previously paid $24,633.52 of the registration
fee with the prior filings of this Registration Statement.
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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.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
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Subject To Completion. Dated
June 7, 2011.
12,300,000 Shares
This is an initial public offering of shares of common stock of
Fusion-io, Inc.
Fusion-io is offering 10,755,607 shares of its common stock and
the selling stockholders are offering 1,544,393 shares of
common stock in this offering. Fusion-io will not receive any of
the proceeds from the sale of the shares being sold by the
selling stockholders.
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 $16.00 and $18.00. The
common stock of
Fusion-io
has been approved for listing on the New York Stock Exchange
under the symbol FIO.
See Risk Factors on page 8 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to Fusion-io
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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To the extent that the underwriters sell more than
12,300,000 shares of common stock, the underwriters have
the option to purchase up to an additional 1,845,000 shares
from Fusion-io at the initial public offering price less the
underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2011.
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Goldman, Sachs & Co.
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Morgan Stanley
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J.P. Morgan
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Credit Suisse
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Prospectus
dated ,
2011
SAN LEVEL
PERFORMANCE
FORM A
SINGLE
DATA DECENTRALIZATION |
TABLE OF
CONTENTS
Prospectus
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Page
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1
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8
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27
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28
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30
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31
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32
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34
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36
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38
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63
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78
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86
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111
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114
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116
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120
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122
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126
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131
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131
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131
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F-1
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EX-23.1 |
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 dealers obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
We, the underwriters and the selling stockholders 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, the
underwriters and the selling stockholders 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
This summary highlights information contained elsewhere in
this prospectus. You should read the following summary together
with the more detailed information appearing in this prospectus,
including Risk Factors, Selected Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Business and our consolidated financial statements
and related notes, before deciding whether to purchase shares of
our capital stock. Unless the context otherwise requires, the
terms Fusion-io, the company,
we, us and our in this
prospectus refer to Fusion-io, Inc., and its subsidiaries. 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 herein as fiscal 2008, 2009, 2010 and 2011,
respectively.
FUSION-IO,
INC.
Our
Company
We have pioneered a next generation storage memory platform for
data decentralization. Our platform significantly improves the
processing capabilities within a datacenter by relocating
process-critical, or active, data from centralized
storage to the server where it is being processed, a methodology
we refer to as data decentralization. Our integrated hardware
and software solutions leverage non-volatile memory to
significantly increase datacenter efficiency and offers
enterprise grade performance, reliability, availability and
manageability. We sell our solutions through our global direct
sales force, original equipment manufacturers, including Dell,
HP and IBM, and other channel partners. Since inception, we have
shipped solutions aggregating over 22 petabytes of enterprise
class storage memory capacity to more than 1,500 end-users.
Our data decentralization platform can transform legacy
architectures into next generation datacenters and allows
enterprises to consolidate or significantly reduce complex and
expensive high performance storage, high performance networking
and memory-rich servers. Our platform enables enterprises to
increase the utilization, performance and efficiency of their
datacenter resources and extract greater value from their
information assets. Many users of our platform have reported
achieving greater than 10 times the application throughput per
server through increased server utilization, resulting in
reductions to ongoing facility, energy and cooling expenses.
Industry
Background
Enterprises are increasingly dependent on their ability to
rapidly extract value from their information assets. At the same
time, enterprises are facing multiple challenges associated with
managing their information assets. These challenges include: the
exponential growth in data; increasing demand for frequent
access to this data from the growing number of
Internet-connected devices; and growing demand by users for
faster and more relevant information. Enterprises are deploying
increasing amounts of datacenter infrastructure in an attempt to
address these challenges, which, in turn, is creating pressure
on their budgets and administrative resources.
Legacy datacenter architectures using centralized storage cannot
effectively supply the increasingly large quantities of
process-critical data quickly enough to fully utilize the
processing capacity of todays servers, creating what we
refer to as the data supply problem. This problem results in an
increasing number of underutilized servers. While processing
performance has doubled approximately every 18 months, the
performance of the storage infrastructure has not kept pace, and
this increasing gap between processing and storage performance
is amplifying the data supply problem.
Traditional approaches that attempt to address the growing data
supply problem are inadequate. These approaches include:
deploying higher performance storage and networking; deploying
memory-rich servers; scaling out datacenters; tuning and
redesigning applications; utilizing cloud-based
1
services; and deploying virtual servers. Based on IDC data, we
estimate that approximately $52 billion will be spent in
2011 on high performance storage and networking and memory-rich
servers, excluding related spending on software and
services.(1)
Our
Solution
Our purpose-built storage memory platform for data
decentralization addresses the data supply problem while
providing enterprise grade performance, reliability,
availability and manageability in an industry standard
server-based form factor. Our ioMemory hardware uses
non-volatile memory to create a high capacity memory tier with
fast access rates, integrates with our VSL virtualization
software, and leverages our recently released directCache
automated data-tiering software and ioSphere platform management
software. Our data decentralization platform enables enterprises
to:
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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;
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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
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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.
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Our data decentralization solution also enables enterprises to:
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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;
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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
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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.
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Our
Strategy
Our objective is to expand our position as the leading provider
of storage memory platforms for data decentralization. The
principal elements of our strategy include:
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leverage our first-to-market and leading position in data
decentralization;
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continue our focus on platform solutions;
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extend our platform differentiation through software innovation;
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develop and maintain direct customer engagement;
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leverage and expand our server OEM customer relationships; and
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pursue international growth opportunities.
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(1) See
note (1) set forth in the section entitled Market,
Industry and Other Data.
2
Risks Affecting
Us
Our business is subject to numerous risks and uncertainties,
including those highlighted in the section entitled Risk
Factors immediately following this prospectus summary.
Some of these risks are:
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our limited operating history makes it difficult to evaluate our
current business and future prospects;
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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;
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we have incurred significant net losses to date and may not
consistently achieve or maintain profitability;
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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;
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we expect that we will depend on OEMs incorporating our products
into their product offerings and their sales efforts to increase
our revenue;
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ineffective management of inventory levels could adversely
affect our operating results; and
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we compete with large storage and software providers and expect
competition to intensify in the future.
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Corporate
Information
Our principal executive offices are located at
2855 E. Cottonwood Parkway, Suite 100, Salt Lake
City, Utah 84121, and our telephone number is 801.424.5500. Our
website is www.fusionio.com. Information contained on, or that
can be accessed through, our website is not incorporated by
reference into this prospectus, and you should not consider
information on our website to be part of this prospectus. We
were incorporated in December 2005 as Canvas Technologies, Inc.,
a Nevada corporation. In June 2006, we changed our name to
Fusion Multisystems, Inc. In June 2010, we changed our name to
Fusion-io, Inc. and reincorporated as a Delaware corporation.
The Fusion-io design logo and the marks Fusion-io,
directCache, ioDirector,
ioDrive, ioDrive Duo, ioDrive
Octal, ioManager, ioMemory and
ioSphere are our trademarks. This prospectus
contains additional trade names, trademarks and service marks of
other companies. We do not intend our use or display of other
companies trade names, trademarks or service marks to
imply a relationship with, or endorsement or sponsorship of us
by, these other companies.
3
THE
OFFERING
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Common stock offered by us |
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10,755,607 shares |
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Common stock offered by the selling stockholders
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1,544,393 shares |
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Common stock to be outstanding after this offering
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77,809,084 shares |
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Option to purchase additional shares
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1,845,000 shares |
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Use of proceeds |
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We plan to use the net proceeds that we receive in this offering
for working capital and general corporate purposes, including
possible acquisitions of, or investments in, businesses,
technologies or other assets. We will not receive any proceeds
from the sale of shares of common stock by the selling
stockholders. See Use of Proceeds. |
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Directed share program |
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The underwriters have reserved for sale, at the initial public
offering price, up to 615,000 shares of the common stock
being offered to business associates, directors, employees and
friends and family members of our employees and directors. See
Underwriting. |
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NYSE symbol |
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FIO |
The number of shares of common stock that will be outstanding
after this offering is based on 67,053,477 shares
outstanding as of March 31, 2011, and excludes:
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26,140,906 shares of common stock issuable upon the
exercise of options outstanding as of March 31, 2011 at a
weighted-average exercise price of $1.87 per share (including
1,024,000 shares of our common stock that we expect to be
sold in this offering by certain selling stockholders upon the
exercise of vested options at the closing of this offering);
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648,344 shares of common stock issuable upon the exercise
of options granted subsequent to March 31, 2011 at a
weighted average exercise price of $8.46 per share;
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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;
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165,000 shares of common stock we repurchased on
May 2, 2011; and
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unallocated shares of common stock reserved for future issuance
under our stock-based compensation plans, consisting of
1,364,001 shares of common stock reserved for future
issuance under our 2010 Executive Stock Incentive Plan and our
2008 Stock Incentive Plan (including options to purchase 648,344
shares of common stock granted in April and May 2011), which
shares, if unallocated as of the closing of this offering, shall
be terminated and no longer reserved for future issuance under
our 2010 Executive Stock Incentive Plan or our 2008 Stock
Incentive Plan, 12,132,430 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 500,000 shares of common stock reserved for future
issuance under our 2011 Employee Stock Purchase Plan, which will
become effective upon completion of this offering.
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4
Except as otherwise indicated, all information in this
prospectus assumes:
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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;
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the filing of our amended and restated certificate of
incorporation in Delaware upon the completion of this offering;
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no exercise of options outstanding as of March 31, 2010
(including 1,024,000 shares of our common stock that we
expect to be sold in this offering by certain selling
stockholders upon the exercise of vested options at the closing
of this offering); and
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no exercise by the underwriters of their right to purchase up to
an additional 1,845,000 shares of common stock from us.
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5
SUMMARY
CONSOLIDATED FINANCIAL DATA
The summary consolidated statements of operations data presented
below for the fiscal years ended June 30, 2008, 2009, and
2010 are derived from audited consolidated financial statements
that are included in this prospectus. The summary consolidated
statements of operations data for the nine months ended
March 31, 2010 and 2011 and the consolidated balance sheet
data as of March 31, 2011 are derived from unaudited
consolidated financial statements that are included 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 nine
months ended March 31, 2011 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 summary
consolidated financial data with Managements
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.
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Nine Months
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Year Ended June 30,
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Ended March 31,
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2008
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2009
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2010
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2010
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2011
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(In thousands, except per share data)
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Consolidated Statements of Operations Data:
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Revenue
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$
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648
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$
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10,150
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$
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36,216
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$
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25,290
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$
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125,515
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Cost of revenue(1)
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377
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5,000
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16,018
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10,208
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59,788
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Gross profit
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271
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5,150
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20,198
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15,082
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65,727
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Operating expenses:
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Sales and marketing(1)
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2,856
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13,476
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23,386
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14,637
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35,176
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Research and development(1)
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5,603
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11,707
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15,977
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11,669
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18,272
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General and administrative(1)
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1,712
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4,849
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12,383
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8,588
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12,244
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Total operating expenses
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10,171
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30,032
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51,746
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34,894
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65,692
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(Loss) income from operations
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(9,900
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(24,882
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(31,548
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(19,812
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35
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Other income (expense), net
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(75
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)
|
|
|
(690
|
)
|
|
|
(156
|
)
|
|
|
(30
|
)
|
|
|
(810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,975
|
)
|
|
|
(25,572
|
)
|
|
|
(31,704
|
)
|
|
|
(19,842
|
)
|
|
|
(775
|
)
|
Income tax expense
|
|
|
|
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,975
|
)
|
|
|
(25,573
|
)
|
|
|
(31,716
|
)
|
|
|
(19,844
|
)
|
|
|
(1,209
|
)
|
Deemed dividend on repurchase of Series B convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
(748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(9,975
|
)
|
|
$
|
(25,573
|
)
|
|
$
|
(32,464
|
)
|
|
$
|
(19,844
|
)
|
|
$
|
(1,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(1.73
|
)
|
|
$
|
(3.27
|
)
|
|
$
|
(2.95
|
)
|
|
$
|
(1.85
|
)
|
|
$
|
(0.09
|
)
|
Weighted-average number of shares, basic and diluted
|
|
|
5,773
|
|
|
|
7,829
|
|
|
|
11,012
|
|
|
|
10,707
|
|
|
|
13,289
|
|
Pro forma net loss per common share, basic and diluted
(unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
$
|
(0.02
|
)
|
Pro forma weighted-average number of common shares, basic and
diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
54,273
|
|
|
|
|
|
|
|
65,778
|
|
|
|
|
(1)
|
|
Includes stock-based compensation
expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended June 30,
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
7
|
|
|
$
|
16
|
|
Sales and marketing
|
|
|
101
|
|
|
|
461
|
|
|
|
738
|
|
|
|
544
|
|
|
|
1,156
|
|
Research and development
|
|
|
211
|
|
|
|
382
|
|
|
|
492
|
|
|
|
422
|
|
|
|
762
|
|
General and administrative
|
|
|
29
|
|
|
|
155
|
|
|
|
628
|
|
|
|
269
|
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
341
|
|
|
$
|
999
|
|
|
$
|
1,867
|
|
|
$
|
1,242
|
|
|
$
|
3,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Our unaudited consolidated balance sheet as of March 31,
2011 is presented on:
|
|
|
|
|
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 10,755,607 shares of common
stock by us in this offering, based on an assumed initial public
offering price of $17.00 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.
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
Pro Forma As
|
|
|
Actual
|
|
Pro Forma
|
|
Adjusted(1)
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments(2)
|
|
$
|
15,947
|
|
|
$
|
15,947
|
|
|
$
|
182,493
|
|
Inventories
|
|
|
38,959
|
|
|
|
38,959
|
|
|
|
38,959
|
|
Working capital(2)
|
|
|
41,794
|
|
|
|
42,542
|
|
|
|
209,088
|
|
Total assets(2)
|
|
|
85,574
|
|
|
|
85,574
|
|
|
|
252,120
|
|
Current and long-term deferred revenue
|
|
|
10,691
|
|
|
|
10,691
|
|
|
|
10,691
|
|
Current and long-term notes payable and capital lease
obligations(2)
|
|
|
5,153
|
|
|
|
5,153
|
|
|
|
5,153
|
|
Total liabilities(2)
|
|
|
43,758
|
|
|
|
43,010
|
|
|
|
43,010
|
|
Total stockholders (deficit) equity
|
|
|
(62,697
|
)
|
|
|
42,564
|
|
|
|
209,110
|
|
|
|
|
(1) |
|
Each $1.00 increase or decrease in the assumed initial public
offering price of $17.00 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
$10.0 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. |
|
|
|
(2) |
|
In April 2011, we repaid the remaining outstanding balance under
our revolving line of credit of $5.0 million. |
7
RISK
FACTORS
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. We are still in
the process of introducing central components of our software
offerings and have only recently released for general
availability our ioSphere and directCache software. 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. 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 June 2010, and we
anticipate that we will continue to grow our business. For
example, from June 30, 2010 to March 31, 2011, our
headcount increased from 262 to 395 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:
|
|
|
|
|
maintain and extend our leadership in data decentralization;
|
|
|
|
maintain and expand our existing original equipment
manufacturer, or OEM, and channel partner relationships and
develop new OEM and channel partner relationships;
|
|
|
|
forecast and control expenses;
|
|
|
|
recruit, hire, train and manage additional research and
development and sales personnel;
|
|
|
|
expand our support capabilities;
|
|
|
|
enhance and expand our distribution and supply chain
infrastructure;
|
8
|
|
|
|
|
manage inventory levels;
|
|
|
|
enhance and expand our international operations; and
|
|
|
|
implement and improve our administrative, financial and
operational systems, and procedures and controls.
|
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 and may not consistently achieve or maintain
profitability.
Prior to the quarter ended March 31, 2011, we had incurred
net losses in each quarter since our inception. We incurred net
losses of $1.2 million in the nine months ended
March 31, 2011 and net losses of $31.7 million in
fiscal 2010, and, as of March 31, 2011, we had an
accumulated deficit of approximately $70.1 million. We may
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 consistently 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 nine months ended
March 31, 2011, sales to the 10 largest customers in each
period, including the applicable OEMs, accounted for
approximately 75% and 91% of revenue, respectively. Facebook,
Inc. is currently our largest customer and accounted for 47% of
revenue during the nine months ended March 31, 2011.
Revenue from sales to Facebook and Apple, through a reseller,
accounted for 52% and 20% of revenue, respectively, for the
three months ended March 31, 2011; however, we expect that
revenue from sales to Facebook will decline significantly for
the three months ending June 30, 2011.
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.
9
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 OEMs 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 OEMs 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 OEMs 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 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.
10
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 timing and magnitude of orders, shipments and acceptance of
our products in any quarter;
|
|
|
|
our ability to control the costs of the components we use in our
hardware products;
|
|
|
|
reductions in customers budgets for information technology
purchases;
|
|
|
|
delays in customers purchasing cycles or deferments of
customers product purchases in anticipation of new
products or updates from us or our competitors;
|
|
|
|
fluctuations in demand and prices for our products;
|
|
|
|
changes in industry standards in the data storage industry;
|
|
|
|
our ability to develop, introduce and ship in a timely manner
new products and product enhancements that meet customer
requirements;
|
|
|
|
the timing of product releases or upgrades or announcements by
us or our competitors;
|
|
|
|
any change in the competitive dynamics of our markets, including
new entrants or discounting of product prices;
|
|
|
|
our ability to control costs, including our operating
expenses; and
|
|
|
|
future accounting pronouncements and changes in accounting
policies.
|
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.
11
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 OEMs 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, Marvell
Semiconductor, Inc., Micron Technology, Inc., Samsung
Electronics, Inc., OCZ Technology Group, Inc., Seagate
Technology, STEC, Inc., Toshiba Corp. and Western Digital Corp.
Our directCache data-tiering software competes with products
from suppliers of software-hardware cache solutions, including
LSI Corporation and Adaptec, Inc., as well as several open
source software solutions and other software-based hardware
cache solutions being developed by privately held companies.
Although our ioSphere platform management software is
specifically designed to manage solid state storage, it competes
with products of developers of general-purpose distributed
management and monitoring software solutions, including HP, IBM,
CA, Inc. and Nagios Enterprises, LLC. 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.
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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.
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We derive
substantially 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:
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the failure of our storage memory products to achieve broad
market acceptance;
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any decline or fluctuation in demand for our storage memory
products, whether as a result of product obsolescence,
technological change, customer budgetary constraints or other
factors;
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the introduction of products and technologies that serve as a
replacement or substitute for, or represent an improvement over,
these products; and
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our inability to release enhanced versions of our products,
including any related software, on a timely basis.
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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 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
14
liability limitations, which may be difficult to enforce.
Defending a lawsuit, regardless of its merit, would be costly
and might divert managements attention and adversely
affect the markets 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.
15
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
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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:
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the inability to obtain an adequate supply of key components,
including non-volatile memory and reprogrammable controllers;
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price volatility for the components of our products;
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failure of a supplier to meet our quality, yield or production
requirements;
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failure of a key supplier to remain in business or adjust to
market conditions; and
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consolidation among suppliers, resulting in some suppliers
exiting the industry or discontinuing the manufacture of
components.
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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.
Our results of
operations could be affected by natural events in locations in
which our customers or suppliers operate.
Several of our customers and suppliers have operations in
locations that are subject to natural disasters, such as severe
weather and geological events, which could disrupt the
operations of those customers and suppliers. For example, in
March 2011, the northern region of Japan experienced a severe
earthquake followed by a tsunami. These geological events caused
significant damage in that region and have adversely affected
Japans infrastructure and economy. Some of our customers
and suppliers are located in Japan and they have experienced,
and may experience in the future, shutdowns as a result of these
events, and their operations may be negatively impacted by these
events. Our customers affected by this or a future natural
disaster could postpone or cancel orders of our products, which
could negatively impact our business. Moreover, should any of
our key suppliers fail to deliver components to us as a result
of this or a future natural disaster, we may be unable to
17
purchase these components in necessary quantities or may be
forced to purchase components in the open market at
significantly higher costs. We may also be forced to purchase
components in advance of our normal supply chain demand to avoid
potential market shortages. In addition, if we are required to
obtain one or more new suppliers for components or use
alternative components in our solutions, we may need to conduct
additional testing of our solutions to ensure those components
meet our quality and performance standards, all of which could
delay shipments to our customers and adversely affect our
financial condition and results of operations.
To the extent
we purchase excess or insufficient component 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 suppliers
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 we purchase insufficient
component 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.
Alternatively, to the extent we purchase excess component
inventory that we cannot use in our products due to
obsolescence, we could be required to reduce the carrying value
of inventory or be required to sell the components at or below
our carrying value, which could reduce our gross margins. For
example, in the quarter ended March 31, 2011, we sold
excess raw materials related to end-of life products at their
carrying value of approximately $4.0 million, which
resulted in a decrease to our gross margins for that period.
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 entitys 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 finance and accounting
personnel, currently
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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. We have in the past received and may in the
future receive inquiries from other intellectual property
holders and may become subject to claims that we infringe their
intellectual property rights, particularly as we expand our
presence in the market and face increasing competition. For
example, on April 22, 2011, we received a letter from Entorian
Technologies, Inc. that alleged that memory stacks included in
our products infringe one or more claims of one or two of
Entorians patents. Based upon our preliminary
investigation of the Entorian patents, we believe that our
products do not infringe the claims of the two Entorian patents.
If Entorian were to choose to pursue litigation, however, the
costs associated with any resulting litigation could negatively
impact our operating results regardless of the outcome of the
litigation. In addition, on May 17, 2011, Internet Machines
LLC filed a lawsuit in U.S. District Court for the Eastern
District of Texas against us and 20 other companies. The
complaint alleges that our products infringe U.S. Patent
Nos. 7,454,552; 7,421,532; 7,814,259; and 7,945,722. The
complaint seeks both damages and a permanent injunction against
us. As of June 6, 2011, we had not been served with the
complaint, and we have limited information about the specific
infringement allegations, but they appear to focus on a PCI
switch component that, while used in some of our products, is
manufactured by a third-party supplier. Based upon our
preliminary investigation of the patents identified in the
complaint, we do not believe that our products infringe any
valid or enforceable claim of these patents. Nevertheless, the
costs associated with any actual, pending or threatened
litigation could negatively impact our operating results
regardless of the actual outcome.
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
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cover intellectual property infringement claims. A claim that
our products infringe a third partys 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,
could divert management resources and attention and could force
us to acquire intellectual property rights and licenses, which
may involve substantial royalty payments. 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 invalidate our intellectual property rights and
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 April 30, 2011, we had
4 issued patents and 63 patent applications in the
United States and 85 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
20
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 managements 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.
21
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.
22
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 and Salt Lake City
areas, which have heightened risks 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 managements 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:
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price and volume fluctuations in the overall stock market from
time to time;
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significant volatility in the market price and trading volume of
technology companies in general, and of companies in our
industry;
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actual or anticipated changes in our results of operations or
fluctuations in our operating results;
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whether our operating results meet the expectations of
securities analysts or investors;
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actual or anticipated changes in the expectations of investors
or securities analysts;
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23
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actual or anticipated developments in our competitors
businesses or the competitive landscape generally;
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litigation involving us, our industry or both;
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regulatory developments in the United States, foreign countries
or both;
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general economic conditions and trends;
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major catastrophic events;
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sales of large blocks of our stock; or
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departures of key personnel.
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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
companys 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 managements 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 77,809,084 shares of common stock will be
outstanding. Of these shares, the 12,300,000 shares of our
common stock to be sold in this offering will be freely
tradable, unless such shares are held by affiliates,
as that term is defined in Rule 144 of the Securities Act.
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. LLC 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 66,533,084 shares will be eligible for sale in
the public market, 43,716,165 of which are, based on the number
of shares outstanding as of March 31, 2011 and after giving
effect to the exercise of options and the sale of shares by the
selling stockholders in connection with this offering, 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 26,266,706 shares underlying outstanding
stock options and an outstanding convertible preferred stock
warrant (convertible into 125,800 shares of common stock) that
were outstanding as of March 31, 2011, and
648,344 shares of common stock issuable upon the exercise
of options granted in April and May 2011, 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.
In addition, as of March 31, 2011, 1,364,001 shares of
common stock were reserved for future issuance under our stock
plans (including options to purchase shares of common stock
granted in April and May 2011) and upon the consummation of
this offering options to purchase approximately
12,132,430 shares of our common stock will be reserved for
future issuance under our 2011 Equity Stock Incentive Plan and
500,000 shares of our common stock will be reserved for
future issuance under our 2011 Employee Stock Purchase Plan. If
these additional shares are sold, or if it is perceived that
they will be sold, in the public market, the trading
24
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 $14.31 per
share based on an assumed initial public offering price of
$17.00 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 63.2% of the total
amount of equity capital raised by us through the date of this
offering, but will only own approximately 14.5% 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 own approximately 55.5%
of the outstanding shares of our common stock after this
offering, based on the number of shares outstanding as of
March 31, 2011 and after giving effect to the exercise of
options and the sale of shares by the selling stockholders in
connection with 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
25
proceeds that we receive in 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 that we receive in
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:
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establish a classified board of directors so that not all
members of our board of directors are elected at one time;
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authorize the issuance of blank check preferred
stock that our board of directors could issue to increase the
number of outstanding shares to discourage a takeover attempt;
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prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our
stockholders;
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prohibit stockholders from calling a special meeting of our
stockholders;
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provide that the board of directors is expressly authorized to
make, alter or repeal our bylaws; and
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establish advance notice requirements for nominations for
elections to our board of directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings.
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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.
26
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled
Prospectus Summary, Risk Factors,
Use of Proceeds, Managements 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; intellectual property claims; the
sufficiency of our issued patents and patent applications to
protect our intellectual property; the effects of a natural
disaster on us or our suppliers; our ability to resell inventory
that we cannot use in our products due to obsolescence; our
OEMs continuing to design our products into their
products; and the importance of software innovation.
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.
27
MARKET, INDUSTRY
AND OTHER DATA
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:
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High Performance
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Hardware Market
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2011 Market Size
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Source Data
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(billions)
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Storage
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$18.0
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IDC, Worldwide Enterprise Storage Systems 20102014
Forecast Update, IDC #226223, December 2010.
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Memory-Rich Servers
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$23.7
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IDC, Server Workloads 2010, July 2010.
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Networking
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$10.4
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Fusion-io estimate of high performance networking as provided in
note 9 below.
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Total
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$52.1
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Fusion-io estimate (based on the sum of the above data).
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(2)
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IDC, Worldwide Enterprise Server 2011 Top 10 Predictions An
Outlook, IDC #226698, February 2011.
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(3)
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IMS Research, Internet Connected Devices About to Pass the 5
Billion Milestone, August 19, 2010.
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(4)
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TABB Group, Long Distance Latency: Straightest and Fastest
Equals Profit, Kevin McPartland, June 21, 2010.
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(5)
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Gartner, Inc., Market Databook, December 2010 Update, K.
Newbury et al, January 4, 2011.
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(6)
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U.S. Department of Energy, Data Center Emergency
Trends, May 30, 2009.
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(7)
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IDC, Worldwide Server Energy Expense 20092013
Forecast, IDC #221346, December 2009.
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(8)
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IDC, Server Workloads 2010, July 2010.
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(9)
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IDC, Worldwide Hard Disk Drive 20102014 Forecast
Update, IDC #226082, December 2010.
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(10)
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IDC, Worldwide Enterprise Storage Systems 20102014
Forecast Update, IDC #226223, December 2010.
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(11)
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IDC, Worldwide Ethernet Switch 20102014 Forecast,
IDC #221612, January 2010.
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(12)
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See table below:
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FC Switch Market
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2011
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Source Data
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Revenue (millions)
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$1,810
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IDC, Worldwide Storage Networking Infrastructure
20102014 Forecast: Converged IT Infrastructure Changes the
Game and Ushers in 10GbE Solutions, IDC #225899,
December 2010.
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Ports (millions)
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7.3
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IDC, Worldwide Storage Networking Infrastructure
20102014 Forecast: Converged IT Infrastructure Changes the
Game and Ushers in 10GbE Solutions, IDC #225899,
December 2010.
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Cost/Port
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$248
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Fusion-io estimate (based on the quotient of the above data)
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Market
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2011 Market Size
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Source Data
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(millions)
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Datacenter Layer 4-7 switch
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$1,275
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IDC, Worldwide Datacenter Network 20102015 Forecast and
Analysis, IDC #226224, December 2010.
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WAN Application Delivery
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$428
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IDC, Worldwide Datacenter Network 20102015 Forecast and
Analysis, IDC #226224, December 2010.
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Fibre Channel Switch
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$1,765
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IDC, Worldwide Datacenter Network 20102015 Forecast and
Analysis, IDC #226224, December 2010.
|
Infiniband Switch
|
|
|
$147
|
|
|
IDC, Worldwide Datacenter Network 20102015 Forecast and
Analysis, IDC #226224, December 2010.
|
10GbE Switch
|
|
|
$5,389
|
|
|
IDC, Worldwide Ethernet Switch 20102014 Forecast,
IDC#221612, January 2010.
|
HBA and CNA Market
|
|
|
$1,360
|
|
|
IDC, Worldwide Storage Networking Infrastructure
20102014 Forecast: Converged IT Infrastructure Changes the
Game and Ushers in 10GbE Solutions, IDC #225899,
December 2010.
|
Total
|
|
|
$10,364
|
|
|
Fusion-io estimate (based on the sum of the above data)
|
|
|
(14) |
IDC, Server Workloads 2010, July 2010.
|
29
USE OF
PROCEEDS
We estimate that we will receive net proceeds of approximately
$166.5 million from our sale of the 10,755,607 shares
of common stock offered by us in this offering, based upon an
assumed initial public offering price of $17.00 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 $195.7 million, assuming an initial
public offering price of $17.00 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 $17.00 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 $10.0 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, although we will bear
the costs, other than the 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 that we receive in 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.
30
DIVIDEND
POLICY
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.
31
CAPITALIZATION
The following table sets forth our cash, cash equivalents and
short-term investments and capitalization as of March 31,
2011 on:
|
|
|
|
|
an actual basis;
|
|
|
|
a pro forma basis, giving effect to (i) the automatic
conversion of all outstanding shares of our 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 10,755,607 shares of common
stock by us in this offering, based on an assumed initial public
offering price of $17.00 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.
|
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 Managements
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Adjusted(1)
|
|
|
|
(In thousands, except share and
|
|
|
|
per share data)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
15,947
|
|
|
$
|
15,947
|
|
|
$
|
182,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current and long-term notes payable and capital lease
obligations(2)
|
|
|
5,153
|
|
|
|
5,153
|
|
|
|
5,153
|
|
Convertible preferred stock warrant liability
|
|
|
748
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0002 par value;
53,069,497 shares authorized, 52,489,072 issued and
outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted
|
|
|
104,513
|
|
|
|
|
|
|
|
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, par value $0.0002; no shares authorized, issued
and outstanding, actual; 10,000,000 shares authorized, no
shares issued and outstanding, pro forma and pro forma as
adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0002 par value; 95,000,000 authorized,
14,564,405 issued and outstanding, actual; 95,000,000
authorized, 67,053,477 issued and outstanding, pro forma;
500,000,000 shares authorized, 77,809,084 shares
issued and outstanding, pro forma as adjusted
|
|
|
3
|
|
|
|
13
|
|
|
|
15
|
|
Additional paid-in capital
|
|
|
7,352
|
|
|
|
112,603
|
|
|
|
279,147
|
|
Accumulated other comprehensive income
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
Accumulated deficit
|
|
|
(70,061
|
)
|
|
|
(70,061
|
)
|
|
|
(70,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(62,697
|
)
|
|
|
42,564
|
|
|
|
209,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization(2)
|
|
$
|
47,717
|
|
|
$
|
47,717
|
|
|
$
|
214,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
(1) |
|
Each $1.00 increase or decrease in the assumed initial public
offering price of $17.00 per share, the midpoint of the range
reflected on the cover page of this prospectus, would increase
or decrease, as applicable, our pro forma as adjusted cash, cash
equivalents and short-term investments, additional paid-in
capital, total stockholders (deficit) equity and total
capitalization by approximately $10.0 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. |
|
|
|
(2) |
|
In April 2011, we repaid the remaining outstanding balance under
our revolving line of credit of $5.0 million. |
The number of shares of our common stock set forth in the table
excludes:
|
|
|
|
|
26,140,906 shares of common stock issuable upon the
exercise of options outstanding as of March 31, 2011 at a
weighted-average exercise price of $1.87 per share (including
1,024,000 shares of our common stock that we expect to be
sold in this offering by certain selling stockholders upon the
exercise of vested options at the closing of this offering);
|
|
|
|
648,344 shares of common stock issuable upon the exercise
of options granted subsequent to March 31, 2011 at a
weighted average exercise price of $8.46 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;
|
|
|
|
165,000 shares of common stock we repurchased on May 2, 2011 for
an aggregate purchase price of approximately $1.2
million; and
|
|
|
|
unallocated shares of common stock reserved for future issuance
under our stock-based compensation plans, consisting of
1,364,001 shares of common stock reserved for future
issuance under our 2010 Executive Stock Incentive Plan and our
2008 Stock Incentive Plan (including the options to purchase
648,344 shares of common stock granted in April and May 2011),
which shares, if unallocated as of the closing of this offering,
shall be terminated and no longer reserved for future issuance
under our 2010 Executive Stock Incentive Plan or our 2008 Stock
Incentive Plan, 12,132,430 shares of common stock reserved
for future issuance under our 2011 Equity Stock Incentive Plan,
which will become effective in connection with this offering,
and 500,000 shares of common stock reserved for future
issuance under our 2011 Employee Stock Purchase Plan, which will
become effective in connection with this offering.
|
33
DILUTION
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 March 31, 2011, our pro forma net tangible book value
was approximately $42.6 million, or $0.63 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
March 31, 2011, assuming conversion of all outstanding
shares of convertible preferred stock into common stock.
After giving effect to our sale in this offering of
10,755,607 shares of our common stock, at the assumed
initial public offering price of $17.00 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 March 31, 2011
would have been approximately $209.1 million, or $2.69 per
share of our common stock. This represents an immediate increase
in pro forma net tangible book value of $2.06 per share to our
existing stockholders and an immediate dilution of $14.31 per
share to investors purchasing shares in this offering.
The following table illustrates this dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
17.00
|
|
Pro forma net tangible book value per share as of March 31,
2011
|
|
$
|
0.63
|
|
|
|
|
|
Increase per share attributable to this offering
|
|
|
2.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share as of March 31,
2011, as adjusted to give effect to this offering
|
|
|
|
|
|
|
2.69
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors in this offering
|
|
|
|
|
|
$
|
14.31
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public
offering price of $17.00 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 $0.13 per share and
the dilution in pro forma as adjusted net tangible book value
per share to new investors in this offering by $0.87 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 $2.99 per share, and the dilution in net tangible book value
per share to investors in this offering would be $14.01 per
share.
The following table summarizes, on a pro forma as adjusted basis
as of March 31, 2011 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 $17.00
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
34
consideration paid to us and the average price per share paid,
before deducting estimated underwriting discounts and
commissions and estimated offering expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
67,053,477
|
|
|
|
86.2
|
%
|
|
$
|
106,382,492
|
|
|
|
36.8
|
%
|
|
$
|
1.59
|
|
New public investors
|
|
|
10,755,607
|
|
|
|
13.8
|
|
|
|
182,845,319
|
|
|
|
63.2
|
|
|
|
17.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
77,809,084
|
|
|
|
100.0
|
%
|
|
$
|
289,227,811
|
|
|
|
100.0
|
%
|
|
|
3.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of shares of common stock by the selling stockholders in
this offering will reduce the number of shares of common stock
held by existing stockholders to 66,533,084, or approximately
85.5% of the total shares of common stock outstanding after this
offering, and will increase the number of shares held by new
investors to 11,276,000, or approximately 14.5% of the total
shares of common stock outstanding after this offering.
A $1.00 increase or decrease in the assumed initial public
offering price of $17.00 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 $10.0 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, our existing stockholders
would own 83.5% and our new investors would own 16.5% of the
total number of shares of our common stock outstanding upon the
completion of this offering.
35
SELECTED
CONSOLIDATED FINANCIAL DATA
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 nine months ended March 31, 2010 and 2011 and the
consolidated balance sheet data as of March 31, 2011 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 nine months ended March 31, 2011
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 Managements 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period From
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 23,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands, except for per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
648
|
|
|
$
|
10,150
|
|
|
$
|
36,216
|
|
|
$
|
25,290
|
|
|
$
|
125,515
|
|
Cost of revenue(1)
|
|
|
|
|
|
|
2
|
|
|
|
377
|
|
|
|
5,000
|
|
|
|
16,018
|
|
|
|
10,208
|
|
|
|
59,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
2
|
|
|
|
271
|
|
|
|
5,150
|
|
|
|
20,198
|
|
|
|
15,082
|
|
|
|
65,727
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(1)
|
|
|
|
|
|
|
128
|
|
|
|
2,856
|
|
|
|
13,476
|
|
|
|
23,386
|
|
|
|
14,637
|
|
|
|
35,176
|
|
Research and development(1)
|
|
|
122
|
|
|
|
1,077
|
|
|
|
5,603
|
|
|
|
11,707
|
|
|
|
15,977
|
|
|
|
11,669
|
|
|
|
18,272
|
|
General and administrative(1)
|
|
|
12
|
|
|
|
228
|
|
|
|
1,712
|
|
|
|
4,849
|
|
|
|
12,383
|
|
|
|
8,588
|
|
|
|
12,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
134
|
|
|
|
1,433
|
|
|
|
10,171
|
|
|
|
30,032
|
|
|
|
51,746
|
|
|
|
34,894
|
|
|
|
65,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(134
|
)
|
|
|
(1,431
|
)
|
|
|
(9,900
|
)
|
|
|
(24,882
|
)
|
|
|
(31,548
|
)
|
|
|
(19,812
|
)
|
|
|
35
|
|
Other income (expense), net
|
|
|
(3
|
)
|
|
|
(20
|
)
|
|
|
(75
|
)
|
|
|
(690
|
)
|
|
|
(156
|
)
|
|
|
(30
|
)
|
|
|
(810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(137
|
)
|
|
|
(1,451
|
)
|
|
|
(9,975
|
)
|
|
|
(25,572
|
)
|
|
|
(31,704
|
)
|
|
|
(19,842
|
)
|
|
|
(775
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(137
|
)
|
|
|
(1,451
|
)
|
|
|
(9,975
|
)
|
|
|
(25,573
|
)
|
|
|
(31,716
|
)
|
|
|
(19,844
|
)
|
|
|
(1,209
|
)
|
Deemed dividend on repurchase of Series B convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(137
|
)
|
|
$
|
(1,451
|
)
|
|
$
|
(9,975
|
)
|
|
$
|
(25,573
|
)
|
|
$
|
(32,464
|
)
|
|
$
|
(19,844
|
)
|
|
$
|
(1,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
|
|
|
|
$
|
(0.14
|
)
|
|
$
|
(1.73
|
)
|
|
$
|
(3.27
|
)
|
|
$
|
(2.95
|
)
|
|
$
|
(1.85
|
)
|
|
$
|
(0.09
|
)
|
Weighted-average number of shares, basic and diluted
|
|
|
|
|
|
|
10,525
|
|
|
|
5,773
|
|
|
|
7,829
|
|
|
|
11,012
|
|
|
|
10,707
|
|
|
|
13,289
|
|
36
|
|
|
(1)
|
|
Includes stock-based compensation
expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period From
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 23,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Inception) to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
June 30,
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
$
|
7
|
|
|
$
|
16
|
|
Sales and marketing
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
461
|
|
|
|
738
|
|
|
|
544
|
|
|
|
1,156
|
|
Research and development
|
|
|
|
|
|
|
7
|
|
|
|
211
|
|
|
|
382
|
|
|
|
492
|
|
|
|
422
|
|
|
|
762
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
155
|
|
|
|
628
|
|
|
|
269
|
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
341
|
|
|
$
|
999
|
|
|
$
|
1,867
|
|
|
$
|
1,242
|
|
|
$
|
3,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
2,097
|
|
|
$
|
17,533
|
|
|
$
|
21,193
|
|
|
$
|
15,947
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
707
|
|
|
|
3,993
|
|
|
|
25,148
|
|
|
|
38,959
|
|
Working capital (deficiency)
|
|
|
(101
|
)
|
|
|
(510
|
)
|
|
|
766
|
|
|
|
17,485
|
|
|
|
32,157
|
|
|
|
41,794
|
|
Total assets
|
|
|
5
|
|
|
|
33
|
|
|
|
4,566
|
|
|
|
28,216
|
|
|
|
59,452
|
|
|
|
85,574
|
|
Current and long-term deferred revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838
|
|
|
|
839
|
|
|
|
10,691
|
|
Current and long-term notes payable and capital lease obligations
|
|
|
39
|
|
|
|
266
|
|
|
|
|
|
|
|
279
|
|
|
|
444
|
|
|
|
5,153
|
|
Total liabilities
|
|
|
142
|
|
|
|
787
|
|
|
|
2,590
|
|
|
|
7,067
|
|
|
|
21,048
|
|
|
|
43,758
|
|
Total stockholders deficit
|
|
|
(137
|
)
|
|
|
(1,580
|
)
|
|
|
(11,214
|
)
|
|
|
(35,647
|
)
|
|
|
(66,109
|
)
|
|
|
(62,697
|
)
|
37
MANAGEMENTS
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, and
leverages our recently released 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 $125.5 million in fiscal years 2008,
2009 and 2010, and the nine months ended March 31, 2011,
respectively. From June 30, 2010 to March 31, 2011,
our headcount has increased from 262 to 395 employees.
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, Canada, France, China, Denmark and
the Netherlands.
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
nine months ended March 31, 2011, sales to the 10 largest
customers in each period, including the applicable OEMs,
accounted for approximately 75% and 91% of revenue,
respectively. During fiscal 2010 and the nine months ended
March 31, 2011, sales to two OEMs accounted for
approximately 23% and 22% of our revenue, respectively.
Facebook, Inc. is currently our largest customer and accounted
for 47% of revenue during the nine months ended March 31,
2011. Revenue from sales to Facebook and Apple, through a
reseller, accounted for 52% and 20% of revenue, respectively,
for the three months ended March 31, 2011. Consistent with
the short-term nature of our customers purchases, we
expect that revenue from sales to Facebook will decline
significantly for the three months ending June 30, 2011 as
it completes its 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 OEMs
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.
38
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 recently
released for general availability. 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 global direct sales force, OEMs and other 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 $2.6 million for the nine months ended
March 31, 2011.
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 employees as
of June 30, 2008 to 172 employees as of June 30,
2009, to 262 employees as of June 30, 2010 and to
395 employees as of March 31, 2011. 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,
39
2010 was amortized on a straight-line basis over the remaining
lease term, which ended 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 Nine Months Ended March 31, 2010 and
2011
Revenue
The following table presents our revenue for the periods
indicated and related changes as compared to the prior period
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended March 31,
|
|
Change in
|
|
|
2010
|
|
2011
|
|
$
|
|
%
|
|
|
(unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
25,290
|
|
|
$
|
125,515
|
|
|
$
|
100,225
|
|
|
|
396%
|
|
Revenue increased $100.2 million from the nine months ended
March 31, 2010 to the nine months ended March 31,
2011, primarily due to an increase in the volume of products
shipped.
Revenue from our 10 largest customers, including the applicable
OEMs, was 76% and 91% of revenue for the nine months ended
March 31, 2010 and March 31, 2011, respectively.
Facebook accounted for 12% and 47% of revenue, respectively, for
the nine months ended March 31, 2010 and 2011. In addition,
two other customers accounted for 14% and 13% of revenue,
respectively, for the nine months ended March 31, 2010 and
two other customers each accounted for 13% and 11% of
40
revenue for the nine months ended March 31, 2011. Revenue
from customers with a ship-to location in the United States was
70% and 82% of revenue for the nine months ended March 31,
2010 and 2011, respectively.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended March 31,
|
|
Change in
|
|
|
2010
|
|
2011
|
|
$
|
|
%
|
|
|
(unaudited)
|
|
|
|
|
|
Cost of revenue
|
|
$
|
10,208
|
|
|
$
|
59,788
|
|
|
$
|
49,580
|
|
|
|
486%
|
|
Gross profit
|
|
|
15,082
|
|
|
|
65,727
|
|
|
|
50,645
|
|
|
|
336
|
|
Gross margin
|
|
|
60
|
%
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
Cost of revenue increased $49.6 million and gross profit
increased $50.6 million from the nine months ended
March 31, 2010 to the nine months ended March 31,
2011, primarily due to the increase in volume of product
shipped. Gross margin for the nine months ended March 31,
2011 decreased primarily due to sales of excess raw materials of
approximately $4.0 million related to end-of-life products,
which were sold at their approximate carrying value and due to
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended March 31,
|
|
Change in
|
|
|
2010
|
|
2011
|
|
$
|
|
%
|
|
|
(unaudited)
|
|
|
|
|
|
Sales and marketing
|
|
$
|
14,637
|
|
|
$
|
35,176
|
|
|
$
|
20,539
|
|
|
|
140%
|
|
Sales and marketing expenses increased $20.5 million from
the nine months ended March 31, 2010 to the nine months
ended March 31, 2011, primarily due to an increase in the
number of sales and marketing employees, from 98 as of
March 31, 2010 to 208 as of March 31, 2011. This
resulted in a $15.9 million increase in personnel-related
costs, including a $4.4 million increase in commission
expense. The increase was also due to a $1.7 million
increase in travel-related costs, a $1.5 million increase
in marketing program costs and a $0.6 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended March 31,
|
|
Change in
|
|
|
2010
|
|
2011
|
|
$
|
|
%
|
|
|
(unaudited)
|
|
|
|
|
|
Research and development
|
|
$
|
11,669
|
|
|
$
|
18,272
|
|
|
$
|
6,603
|
|
|
|
57%
|
|
41
Research and development expenses increased $6.6 million
from the nine months ended March 31, 2010 to the nine
months ended March 31, 2011, primarily due to an increase
in the number of research and development employees, from 84 as
of March 31, 2010 to 128 as of March 31, 2011. This
resulted in a $4.4 million increase in personnel-related
costs. The increase was also due to a $0.9 million increase
in allocated rent and facilities expenses, a $0.8 million
increase in manufacturing costs for new product prototypes and a
$0.3 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended March 31,
|
|
Change in
|
|
|
2010
|
|
2011
|
|
$
|
|
%
|
|
|
(unaudited)
|
|
|
|
|
|
General and administrative
|
|
$
|
8,588
|
|
|
$
|
12,244
|
|
|
$
|
3,656
|
|
|
|
43
|
%
|
General and administrative expenses increased $3.7 million
from the nine months ended March 31, 2010 to the nine
months ended March 31, 2011, primarily due to an increase
in the number of general and administrative employees, from 34
as of March 31, 2010 to 59 as of March 31, 2011. This
resulted in a $3.8 million increase in personnel-related
costs. This increase was offset by a $1.0 million insurance
claim reimbursement and a $2.8 million decrease in legal
costs, both related to the resolution of litigation that was
ongoing in fiscal 2010. The majority of the remaining increase
was due to a $1.8 million increase in depreciation expense,
a $0.5 million increase in consulting services,
$0.5 million increase in professional accounting services
and a $0.3 million increase in allocated rent and
facilities expenses.
Other Income
(Expense), Net
The following table presents our other income and expense, net
for the periods indicated and related changes as compared to the
prior period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
Ended March 31,
|
|
Change in
|
|
|
2010
|
|
2011
|
|
$
|
|
%
|
|
|
(unaudited)
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
(30
|
)
|
|
$
|
(810
|
)
|
|
$
|
(780
|
)
|
|
|
(2,600
|
%)
|
Other income (expense), net increased $0.8 million from the
nine months ended March 31, 2010 to the nine months ended
March 31, 2011, primarily due to increased expense
attributable to the revaluation of a warrant to purchase shares
of convertible preferred stock and increased borrowings under
the revolving line of credit.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
Change in
|
|
June 30,
|
|
Change in
|
|
|
2008
|
|
2009
|
|
$
|
|
%
|
|
2009
|
|
2010
|
|
$
|
|
%
|
|
Revenue
|
|
$
|
648
|
|
|
$
|
10,150
|
|
|
$
|
9,502
|
|
|
|
1,466
|
%
|
|
$
|
10,150
|
|
|
$
|
36,216
|
|
|
$
|
26,066
|
|
|
|
257
|
%
|
42
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 13%, 10%, and 10% of our
revenue, respectively, in fiscal 2010 and one customer accounted
for 36% 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
Change in
|
|
June 30,
|
|
Change in
|
|
|
2008
|
|
2009
|
|
$
|
|
%
|
|
2009
|
|
2010
|
|
$
|
|
%
|
|
Cost of revenue
|
|
$
|
377
|
|
|
$
|
5,000
|
|
|
$
|
4,623
|
|
|
|
1,226
|
%
|
|
$
|
5,000
|
|
|
$
|
16,018
|
|
|
$
|
11,018
|
|
|
|
220
|
%
|
Gross profit
|
|
|
271
|
|
|
|
5,150
|
|
|
|
4,879
|
|
|
|
1,800
|
|
|
|
5,150
|
|
|
|
20,198
|
|
|
|
15,048
|
|
|
|
292
|
|
Gross margin
|
|
|
42
|
%
|
|
|
51
|
%
|
|
|
|
|
|
|
|
|
|
|
51
|
%
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
Change in
|
|
June 30,
|
|
Change in
|
|
|
2008
|
|
2009
|
|
$
|
|
%
|
|
2009
|
|
2010
|
|
$
|
|
%
|
|
Sales and marketing
|
|
$
|
2,856
|
|
|
$
|
13,476
|
|
|
$
|
10,620
|
|
|
|
372%
|
|
|
$
|
13,476
|
|
|
$
|
23,386
|
|
|
$
|
9,910
|
|
|
|
74%
|
|
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
43
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
Change in
|
|
June 30,
|
|
Change in
|
|
|
2008
|
|
2009
|
|
$
|
|
%
|
|
2009
|
|
2010
|
|
$
|
|
%
|
|
Research and development
|
|
$
|
5,603
|
|
|
$
|
11,707
|
|
|
$
|
6,104
|
|
|
|
109%
|
|
|
$
|
11,707
|
|
|
$
|
15,977
|
|
|
$
|
4,270
|
|
|
|
36%
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
Change in
|
|
June 30,
|
|
Change in
|
|
|
2008
|
|
2009
|
|
$
|
|
%
|
|
2009
|
|
2010
|
|
$
|
|
%
|
|
General and administrative
|
|
$
|
1,712
|
|
|
$
|
4,849
|
|
|
$
|
3,137
|
|
|
|
183%
|
|
|
$
|
4,849
|
|
|
$
|
12,383
|
|
|
$
|
7,534
|
|
|
|
155%
|
|
44
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
June 30,
|
|
Change in
|
|
June 30,
|
|
Change in
|
|
|
2008
|
|
2009
|
|
$
|
|
%
|
|
2009
|
|
2010
|
|
$
|
|
%
|
|
Other income (expense), net
|
|
$
|
(75
|
)
|
|
$
|
(690
|
)
|
|
$
|
(615
|
)
|
|
|
(820%
|
)
|
|
$
|
(690
|
)
|
|
$
|
(156
|
)
|
|
$
|
534
|
|
|
|
77%
|
|
2009 Compared to 2010. Interest expense
decreased by $0.5 million from fiscal 2009 to fiscal 2010,
primarily due to a $0.5 million decrease in interest
expense related to the conversion or repayment of
$15.4 million of outstanding convertible notes.
2008 Compared to 2009. Interest expense
increased by $0.7 million from fiscal 2008 to fiscal 2009
due to a $0.5 million increase in interest expense related
to convertible notes, a $0.1 million increase in interest
expense attributable to a warrant to purchase convertible
preferred stock and a $0.1 million increase in interest
expense on debt and capital leases.
45
Quarterly
Results of Operations
The following tables present, in dollars and as a percentage of
revenue, unaudited quarterly consolidated results of operations
data for each of the quarters presented. The unaudited
consolidated financial statements for each of these quarters
were prepared on a basis consistent with our audited
consolidated 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. You should
read these tables in conjunction with our consolidated financial
statements and the related notes located elsewhere in this
prospectus. The results of operations for any quarter are not
necessarily indicative of the results of operations for any
future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
4,173
|
|
|
$
|
4,790
|
|
|
$
|
7,137
|
|
|
$
|
13,363
|
|
|
$
|
10,926
|
|
|
$
|
27,046
|
|
|
$
|
31,218
|
|
|
$
|
67,251
|
|
Cost of revenue(1)
|
|
|
1,952
|
|
|
|
2,065
|
|
|
|
2,717
|
|
|
|
5,426
|
|
|
|
5,810
|
|
|
|
15,412
|
|
|
|
12,878
|
|
|
|
31,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,221
|
|
|
|
2,725
|
|
|
|
4,420
|
|
|
|
7,937
|
|
|
|
5,116
|
|
|
|
11,634
|
|
|
|
18,340
|
|
|
|
35,753
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(1)
|
|
|
3,703
|
|
|
|
3,622
|
|
|
|
4,802
|
|
|
|
6,213
|
|
|
|
8,749
|
|
|
|
9,109
|
|
|
|
11,307
|
|
|
|
14,760
|
|
Research and development(1)
|
|
|
3,601
|
|
|
|
3,748
|
|
|
|
3,588
|
|
|
|
4,333
|
|
|
|
4,308
|
|
|
|
4,820
|
|
|
|
5,721
|
|
|
|
7,731
|
|
General and administrative(1)
|
|
|
1,392
|
|
|
|
2,161
|
|
|
|
2,347
|
|
|
|
4,080
|
|
|
|
3,795
|
|
|
|
3,450
|
|
|
|
3,261
|
|
|
|
5,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,696
|
|
|
|
9,531
|
|
|
|
10,737
|
|
|
|
14,626
|
|
|
|
16,852
|
|
|
|
17,379
|
|
|
|
20,289
|
|
|
|
28,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(6,475
|
)
|
|
|
(6,806
|
)
|
|
|
(6,317
|
)
|
|
|
(6,689
|
)
|
|
|
(11,736
|
)
|
|
|
(5,745
|
)
|
|
|
(1,949
|
)
|
|
|
7,729
|
|
Other income (expense), net
|
|
|
34
|
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
(16
|
)
|
|
|
(126
|
)
|
|
|
(7
|
)
|
|
|
(499
|
)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(6,441
|
)
|
|
|
(6,808
|
)
|
|
|
(6,329
|
)
|
|
|
(6,705
|
)
|
|
|
(11,862
|
)
|
|
|
(5,752
|
)
|
|
|
(2,448
|
)
|
|
|
7,425
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(19
|
)
|
|
|
(25
|
)
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,441
|
)
|
|
$
|
(6,808
|
)
|
|
$
|
(6,331
|
)
|
|
$
|
(6,705
|
)
|
|
$
|
(11,872
|
)
|
|
$
|
(5,771
|
)
|
|
$
|
(2,473
|
)
|
|
$
|
7,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
10
|
|
Sales and marketing
|
|
|
180
|
|
|
|
176
|
|
|
|
182
|
|
|
|
186
|
|
|
|
194
|
|
|
|
254
|
|
|
|
396
|
|
|
|
506
|
|
Research and development
|
|
|
107
|
|
|
|
145
|
|
|
|
144
|
|
|
|
133
|
|
|
|
70
|
|
|
|
199
|
|
|
|
204
|
|
|
|
359
|
|
General and administrative
|
|
|
81
|
|
|
|
78
|
|
|
|
88
|
|
|
|
103
|
|
|
|
359
|
|
|
|
437
|
|
|
|
493
|
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
369
|
|
|
$
|
401
|
|
|
$
|
417
|
|
|
$
|
424
|
|
|
$
|
625
|
|
|
$
|
893
|
|
|
$
|
1,096
|
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of revenue
|
|
|
47
|
|
|
|
43
|
|
|
|
38
|
|
|
|
41
|
|
|
|
53
|
|
|
|
57
|
|
|
|
41
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
53
|
|
|
|
57
|
|
|
|
62
|
|
|
|
59
|
|
|
|
47
|
|
|
|
43
|
|
|
|
59
|
|
|
|
53
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
89
|
|
|
|
76
|
|
|
|
68
|
|
|
|
46
|
|
|
|
80
|
|
|
|
33
|
|
|
|
36
|
|
|
|
22
|
|
Research and development
|
|
|
86
|
|
|
|
78
|
|
|
|
50
|
|
|
|
32
|
|
|
|
39
|
|
|
|
18
|
|
|
|
18
|
|
|
|
11
|
|
General and administrative
|
|
|
33
|
|
|
|
45
|
|
|
|
33
|
|
|
|
31
|
|
|
|
35
|
|
|
|
13
|
|
|
|
11
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
208
|
|
|
|
199
|
|
|
|
151
|
|
|
|
109
|
|
|
|
154
|
|
|
|
64
|
|
|
|
65
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(155
|
)
|
|
|
(142
|
)
|
|
|
(89
|
)
|
|
|
(50
|
)
|
|
|
(107
|
)
|
|
|
(21
|
)
|
|
|
(6
|
)
|
|
|
11
|
|
Other income (expense), net
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(154
|
)
|
|
|
(142
|
)
|
|
|
(89
|
)
|
|
|
(50
|
)
|
|
|
(109
|
)
|
|
|
(21
|
)
|
|
|
(8
|
)
|
|
|
11
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(154
|
)%
|
|
|
(142
|
)%
|
|
|
(89
|
)%
|
|
|
(50
|
)%
|
|
|
(109
|
)%
|
|
|
(21
|
)%
|
|
|
(8
|
)%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue has increased sequentially in most of the quarters
presented due to increases in the volume of products sold.
Revenue increased $6.2 million from the three months ended
December 31, 2009 to the three months ended March 31,
2010 primarily due to sales to three customers. Revenue
increased $16.1 million from the three months ended
June 30, 2010 to the three months ended September 30,
2010 primarily due to sales to one customer. Revenue increased
$36.0 million from the three months ended December 31, 2010
to the three months ended March 31, 2011 primarily due to
sales to two customers.
Gross margin for the three months ended June 30, 2010 was
lower due to a $0.6 million inventory carrying value
adjustment that we recorded for obsolete inventory. Gross margin
for the three months ended September 30, 2010 decreased
sequentially, primarily due to lower gross margins on high
volume sales to one significant customer. The gross margin for
the three months ended December 31, 2010 increased
sequentially due to a significantly lower volume of sales to the
same significant customer. Gross margin for the three months
ended March 31, 2011 decreased sequentially primarily due
to sales of excess raw materials of approximately $4.0 million
related to end-of-life products, which were sold at their
approximate carrying values and to a higher concentration of
lower gross margin sales to this same significant customer.
Operating expenses in all quarters increased sequentially as we
continued to add headcount and incurred related costs to
accommodate our growth.
For the three months ended June 30, 2010, sales and
marketing expenses were 80% of revenue compared to 46% of
revenue in the prior quarter, primarily due to a
$2.0 million increase in personnel-related expenses. This
increase was due to bonuses earned by certain sales employees
for achieving fiscal 2010 sales goals and due to the overall
growth in the number of employees in our sales and marketing
organizations.
For each of the three months ended September 30, 2009,
March 31, 2010 and June 30, 2010, our general and
administrative expenses trended higher compared to the other
quarters presented, primarily due to an increase in legal costs
related to the resolution of litigation. General and
47
administrative expenses for the three months ended
December 31, 2010 were partially offset by a
$1.0 million insurance reimbursement of legal fees related
to the resolution of litigation.
Liquidity and
Capital Resources
Primary
sources of liquidity
As of March 31, 2011, our principal sources of liquidity
consisted of cash and cash equivalents of $15.9 million,
accounts receivable of $13.1 million and amounts available
under our revolving line of credit of approximately
$16.7 million. We had working capital of $41.8 million
as of March 31, 2011.
Historically, our primary sources of liquidity have been from
customer payments for our products and services, proceeds from
the issuance of convertible preferred stock and convertible
notes and proceeds from our revolving line of credit. From
inception through March 31, 2011, we issued convertible
preferred stock with aggregate net proceeds of
$79.8 million, issued convertible notes with aggregate net
proceeds of $25.8 million and borrowed an aggregate of
$21.0 million from a financial institution.
Cash Flow
Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended June 30,
|
|
March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(In thousands)
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(8,733
|
)
|
|
$
|
(24,816
|
)
|
|
$
|
(39,553
|
)
|
|
$
|
(23,672
|
)
|
|
$
|
(1,544
|
)
|
Investing activities
|
|
|
(1,224
|
)
|
|
|
(3,577
|
)
|
|
|
(14,298
|
)
|
|
|
(855
|
)
|
|
|
1,973
|
|
Financing activities
|
|
|
12,051
|
|
|
|
42,648
|
|
|
|
46,719
|
|
|
|
12,541
|
|
|
|
6,279
|
|
Operating
Activities
Our operating cash flow primarily depends on the timing and
amount of cash receipts from our customers, inventory purchases
and payments for operating expenses.
Our net cash used in operating activities for the nine months
ended March 31, 2011 was $1.5 million. During this
period our operating cash outflows, which consisted primarily of
purchases of inventory and investments made to hire additional
headcount to support our current and anticipated growth, were
nearly offset by cash collections from our customers.
Our net cash used in operating activities for fiscal 2010 was
$39.6 million and was primarily due to an increase in our
inventory balance of $21.2 million as a result of the
increasing demand for our products. We also had headcount
increases in all areas of our business from 172 employees
as of June 30, 2009 to 262 employees as of
June 30, 2010. Our net loss for 2010 was
$31.7 million. Significant non-cash expenses included in
net loss were stock-based compensation of $1.9 million and
depreciation and amortization expense of $1.5 million.
Our net cash used in operating activities for fiscal 2008 and
2009 was $8.7 million and $24.8 million, respectively,
and was primarily due to the investments we made during those
periods to grow the operating infrastructure necessary to
support the growth in our business. From June 30, 2008 to
June 30, 2009, we increased the total number of employees
in our company from 86 to 172. Our inventory balances also
increased from $0.7 million as of June 30, 2008 to
$4.0 million as of June 30, 2009 due to increased
demand for our products. Our net loss for fiscal 2008 was
$10.0 million compared to a net loss of $25.6 million
for fiscal 2009. Our fiscal 2008 net loss included non-cash
48
stock-based compensation expense of $0.3 million and for
fiscal 2009, the net loss included non cash depreciation and
amortization of $0.7 million and stock-based compensation
expense of $1.0 million.
Investing
Activities
Cash flows from investing activities primarily relate to
purchases of computer equipment, leasehold improvements and
machinery and equipment to support our growth. Investing
activities also includes purchases, sales and maturities of our
short-term investments in
available-for-sale
securities.
During the nine months ended March 31, 2011, our net cash
provided by investing activities was $2.0 million and was
primarily due to the net proceeds from the sale of short-term
investments of $12.0 million, less cash used for the
purchases of property and equipment of $10.0 million. For
fiscal 2010, our net cash used in investing activities was
$14.3 million, including $13.9 million for purchases
of short-term investments and $3.4 million for purchases of
property and equipment. For fiscal 2009, our net cash used in
investing activities was $3.6 million, including
$2.4 million from purchases of property and equipment and
$1.2 million from purchases of short-term investments. In
fiscal 2008, our cash used in investing activities was
$1.2 million, all related to purchases of property and
equipment.
Financing
Activities
Cash flows from financing activities primarily include net
proceeds from issuances of convertible preferred stock and
proceeds and payments related to issuances of convertible notes
and loans from a financial institution.
We generated $6.3 million of net cash from financing
activities during the nine months ended March 31, 2011,
primarily due to $11.0 million that we borrowed from a
financial institution offset by the repayment of
$6.3 million of notes payable and capital lease obligations.
We generated $46.7 million in net cash from financing
activities in fiscal 2010, including $43.8 million of net
proceeds from the issuance of our Series C convertible
preferred stock, $5.0 million from the issuance of
convertible notes and $4.0 million from a loan with a
financial institution. We repaid the $4.0 million loan
prior to the end of fiscal 2010. We generated $42.6 million
in cash from financing activities in fiscal 2009, primarily due
to the $28.1 million received from the issuance of our
Series B convertible preferred stock, the
$15.4 million from the issuance of convertible notes and
the $6.0 million from a loan with a financial institution.
We repaid the $6.0 million loan prior to the end of fiscal
2009. We generated $12.1 million in cash from financing
activities in fiscal 2008, primarily due to the
$7.2 million received from the issuance of our
Series A convertible preferred stock and $5.2 million
from the issuance of convertible notes.
Revolving Line
of Credit
In September 2010, we amended and restated our loan and security
agreement, or the revolving line of credit, with a financial
institution. The revolving line of credit allows us to borrow up
to a limit of $25.0 million, with a sublimit of
$6.0 million for letters of credit, certain cash management
services and foreign exchange forward contracts. As of
March 31, 2011, we had $5.0 million outstanding under
the revolving line of credit and had obtained letters of credit
totaling approximately $3.3 million. The borrowing limit
can fluctuate due to a borrowing base consisting of our combined
accounts receivable and inventory balances. Borrowings under the
revolving line of credit accrue interest at a floating per annum
rate equal to one-half of one percentage point (0.50%) above the
prime rate as published in the Wall Street Journal. An unused
commitment fee equal to 0.375% of the difference between the
$25.0 million limit and the average daily balance of
borrowings outstanding each quarter is due on the last day of
such quarter. The revolving line of credit includes a prepayment
penalty of approximately $0.3 million if outstanding
advances are prepaid and the line is cancelled prior to
September 2011. The revolving line of credit is secured by
substantially all our assets. As of March 31, 2011, the
interest rate on the outstanding principal balance was 3.75% per
annum with interest due and payable on a monthly basis.
49
We can borrow against the revolving line of credit until its
maturity date in September 2012, at which time all unpaid
principal and interest shall be due and payable. Under the terms
of the revolving line of credit, we are required to maintain the
following minimum financial covenants on a consolidated basis:
|
|
|
|
|
A ratio of current assets to current liabilities plus, without
duplication, any of our obligations to the financial
institution, of at least 1.25 to 1.00 measured on a quarterly
basis.
|
|
|
|
A tangible net worth of at least $25.0 million, plus 25% of
the net proceeds received by us from the sale or issuance of our
equity or subordinated debt, such increase, which, following the
completion of this offering, will be measured on a quarterly
basis.
|
As of March 31, 2011, we were in compliance with these
covenants.
In April 2011, we repaid the remaining outstanding balance on
the revolving line of credit of $5.0 million.
Future Capital
Requirements
Our future capital requirements will depend on many factors,
including our rate of revenue growth, the expansion of our sales
and marketing activities, the timing and extent of spending to
support product development efforts and the expansion into new
territories, the timing of new product introductions, the
building of infrastructure to support our growth and the
continued market acceptance of our products.
We believe that our cash and cash equivalents and available
amounts under the revolving line of credit, will be sufficient
to meet our working capital and capital expenditure requirements
for at least the next 12 months. Although we are not
currently a party to any agreement or letter of intent regarding
potential investments in, or acquisitions of, complementary
businesses, applications or technologies, we may enter into
these types of arrangements, which could require us to seek
additional equity or debt financing. If required, additional
financing may not be available on terms that are favorable to
us, if at all. If we raise additional funds through the issuance
of equity or convertible debt securities, the percentage
ownership of our stockholders will be reduced and these
securities might have rights, preferences and privileges senior
to those of our current stockholders. We cannot assure you that
additional financing will be available or that, if available,
such financing can be obtained on terms favorable to our
stockholders and us.
Off Balance Sheet
Arrangements
During the periods presented, we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purpose.
Contractual
Obligations and Material Commitments
The following is a summary of our contractual obligations as of
June 30, 2010 (in thousands):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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Payments Due by Period
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|
|
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Less Than
|
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1 to 3
|
|
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3 to 5
|
|
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After 5
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Operating lease obligations(1)
|
|
$
|
39,641
|
|
|
$
|
1,334
|
|
|
$
|
7,824
|
|
|
$
|
7,196
|
|
|
$
|
23,287
|
|
Capital lease obligations
|
|
|
485
|
|
|
|
295
|
|
|
|
190
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|
|
|
|
|
|
|
|
|
Purchase obligations(2)
|
|
|
8,737
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|
|
|
8,737
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|
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|
|
|
|
|
|
|
|
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|
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|
|
|
|
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Total
|
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$
|
48,863
|
|
|
$
|
10,366
|
|
|
$
|
8,014
|
|
|
$
|
7,196
|
|
|
$
|
23,287
|
|
|
|
|
|
|
|
|
|
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|
50
|
|
|
(1) |
|
In December 2010, we terminated leases for certain office
facilities. As a result, the operating lease obligations
disclosed above were decreased by $2.9 million in total,
comprised of decreases of $0.1 million, $1.4 million,
$1.4 million and $0.0 due in less than one year, one to
three years, three to five years and more than five years from
June 30, 2010, respectively. |
|
(2) |
|
Purchase obligations include non-cancelable purchase orders for
raw materials inventory. Purchase obligations under purchases
orders or contracts that we can cancel without a significant
penalty, such as routine purchases for operating expenses are
not included in the above table. As of March 31, 2011,
these purchase obligations were $2.7 million. |
Operating lease payments primarily relate to our leases of
office space with various expiration dates through 2021. The
terms of these leases often include periods of free rent, or
rent holidays, and increasing rental rates over time. In May
2010, we entered into new leases to expand our primary office
facilities in Salt Lake City, Utah. The term of these leases
include an initial lease term that ends in September 2021, plus
the option for us to extend the lease for an additional five
years. These leases include rent holidays during the first year
beginning with the lease effective date and also require us to
provide the lessor letters of credit in aggregate amount of
$3.0 million.
In addition, on May 2, 2011, we repurchased a total of
165,000 shares of our common stock from two of our
stockholders, in separate transactions, for a total purchase
price of approximately $1.2 million. The terms of the
repurchase transaction for 150,000 of such shares require us to
pay additional consideration to one of the stockholders if a
liquidity event occurs at any time prior to May 2, 2012 in
which the price per share of our common stock is greater than
$15.00. For this purpose, a liquidity event is defined as either
a change of control or sale of substantially all of our assets
or the initial public offering of our common stock, or IPO. The
amount of the additional per share consideration payable would
be equal to half the difference between the applicable liquidity
event price per share and $15.00. In the event of an IPO
liquidity event, the liquidity event price per share is the
closing per share sale price as of the first trading day
following the expiration of the
lock-up
period applicable to us in connection with this offering. See
Underwriting.
Indemnification
We agreed to indemnify our officers and directors for certain
events or occurrences, while the officer or director is or was
serving at our request in such capacity. The maximum amount of
potential future indemnification is unlimited; however, we have
a director and officer insurance policy that limits our exposure
and could enable us to recover a portion of any future amounts
paid. We are unable to reasonably estimate the maximum amount
that could be payable under these arrangements since these
obligations are not capped but are conditional to the unique
facts and circumstances involved. Accordingly, we have no
liabilities recorded for these agreements as of March 31,
2011.
Many of our agreements with channel partners and customers
generally include certain provisions for indemnifying the
channel partners and customers against liabilities if our
products infringe a third partys intellectual property
rights. To date, we have not incurred any material costs as a
result of such indemnification provisions and have not accrued
any liabilities related to such obligations in our consolidated
financial statements.
Controls and
Procedures
In connection with its 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 deficiency in internal control exists when the design or
operation of a control does not allow management or employees,
in the normal course of performing their assigned functions, to
prevent, or detect and correct misstatements on a timely basis.
A material weakness is a deficiency, or combination of
deficiencies, in internal control, such that there is a
reasonable possibility that a
51
material misstatement of the entitys financial statements
will not be prevented, or detected and corrected on a timely
basis.
In connection with the audit of our financial statements for
fiscal 2008 and 2009, our independent registered public
accounting firm noted a material weakness in our financial
statement close process. This was primarily the result of the
early stage of our business and the lack of a sufficient number
of accounting personnel, including accounting personnel with
technical accounting and financial reporting experience. This
material weakness resulted in the recording of a substantial
number of audit adjustments over the two fiscal years ended
June 30, 2009.
In connection with the audit of our financial statements for
fiscal 2010, our independent registered public accounting firm
noted that we had a material weakness specifically relating to
the financial statement close process as of June 30, 2010.
Specifically, we had a lack of formal accounting policies and
procedures related to the identification of unique contract
terms that affected revenue recognition, proper identification
and accounting for inventory in transit and evaluation units,
the recording of certain expenses in the proper period, and the
accounting for a deemed dividend associated with a repurchase of
a portion of our convertible preferred stock. While we had taken
steps to remedy the material weakness noted in the prior audit,
as of June 30, 2010, we still had not fully staffed our
accounting department with technical accounting and financial
reporting experience, given our rapid growth in fiscal 2010.
Since July 1, 2010, we have taken and are continuing to
take additional steps intended to remedy these matters,
including hiring additional finance and accounting personnel and
implementing additional policies and procedures associated with
our financial statement close process. Since July 1, 2010,
we have added 10 employees with technical accounting and
financial reporting experience in our accounting department,
currently with aggregate related annualized salary expense of
approximately $1.0 million. Additionally, we are working
with an outside firm to help document and structure our internal
controls over our financial statement close process. However, we
will not be able to fully address these matters until our newly
hired professionals have had time to implement the new policies
and procedures. Based on our efforts to date, we believe that
the identified material weaknesses can be remediated by
June 30, 2011; however, we cannot assure you that we will
succeed in remediating these weaknesses by that time.
Certain Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles, or
GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expenses and
related disclosures. These estimates and assumptions are often
based on judgments that we believe to be reasonable under the
circumstances at the time made, but all such estimates and
assumptions are inherently uncertain and unpredictable. Actual
results may differ from those estimates and assumptions, and it
is possible that other professionals, applying their own
judgment to the same facts and circumstances, could develop and
support alternative estimates and assumptions that would result
in material changes to our operating results and financial
condition. We evaluate our estimates and assumptions on an
ongoing basis. Our estimates are based on historical experience
and various other assumptions that we believe to be reasonable
under the circumstances. Our actual results could differ from
these estimates.
We believe that the assumptions and estimates associated with
revenue recognition, stock-based compensation, inventory
valuation, warranty liability and income taxes have the greatest
potential impact on our consolidated financial statements.
Therefore, we consider these to be our critical accounting
policies and estimates. For further information on all of our
significant accounting policies, see note 1 of the
accompanying notes to our consolidated financial statements.
52
Revenue
Recognition
We derive our revenue from sales of products and support
services and enter into multiple-element arrangements in the
normal course of business with our customers and channel
partners. In all of our arrangements, we do not recognize
revenue until we can determine that persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or
determinable, and we deem collection to be reasonably assured.
In making these judgments, we evaluate these criteria as follows:
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|
Evidence of an Arrangement We consider a
non-cancelable agreement signed by a customer or channel partner
or purchase order generated by a customer or channel partner to
be persuasive evidence of an arrangement.
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|
Delivery has Occurred We consider delivery to
have occurred when product has been delivered to the customer
and no post-delivery obligations exist other than ongoing
support obligations under sold support services. In instances
where customer acceptance is required, delivery is deemed to
have occurred when customer acceptance has been achieved.
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|
|
Fees are Fixed or Determinable We consider
the fee to be fixed or determinable unless the fee is subject to
refund or adjustment or is not payable within normal payment
terms. If the fee is subject to refund or adjustment, we
recognize revenue net of estimated returns or if a reasonable
estimate cannot be made, when the right to a refund or
adjustment lapses.
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|
Collection is Reasonably Assured We conduct a
credit worthiness assessment on all our customers, OEMs and
channel partners. Generally we do not require collateral. We
continue to evaluate collectability by reviewing our
customers and channel partners credit worthiness
including a review of past transaction history. Our payment
terms are typically net-30 days with terms up to net-60
days for certain customers and channel partners. Collection is
reasonably assured if, based upon our evaluation, we expect that
the customer will be able to pay amounts under the arrangement
as payments become due. If we determine that collection is not
reasonably assured, revenue is deferred and recognized upon the
receipt of cash.
|
For multiple-element arrangements originating on or prior to
June 30, 2009, the total consideration in these
arrangements was not allocated between product and support
services revenue because we did not have objective and reliable
evidence of fair value of the support services. Accordingly, the
total consideration in such arrangements is deferred and
recognized ratably over the support service period ranging from
one to three years.
In October 2009, the Financial Accounting Standards Board
(FASB) amended the accounting standards for
multiple-element revenue arrangements. One of the new standards
amends previously issued guidance to exclude tangible products
containing software components and non-software components that
function together to deliver the tangible products
essential functionality from the scope of the software revenue
recognition rules. The other new standard related to
multiple-element arrangements changed the requirements for
establishing separate units of accounting in a multiple-element
arrangement and requires the allocation of arrangement
consideration to each deliverable using the relative selling
price of each element. We early adopted these accounting
standards effective as of the beginning of fiscal year 2010.
The impact of adopting these new accounting standards was as
follows on our consolidated statements of operations (in
thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
June 30,
|
|
|
2010
|
|
Increase in revenue
|
|
$
|
1,574
|
|
Increase in cost of revenue
|
|
|
409
|
|
Decrease to loss before income taxes
|
|
|
1,165
|
|
Decrease to net loss
|
|
|
1,165
|
|
53
For multiple-element arrangements originating or materially
modified on or after July 1, 2009, we evaluated whether
each deliverable could be accounted for as separate units of
accounting. A deliverable constitutes a separate unit of
accounting when it has stand-alone value and for an arrangement
where a general right of return exists relative to a delivered
item, delivery or performance of the undelivered item must be
considered probable and substantially in our control.
Stand-alone value exists if the product or service is sold
separately.
Our multiple-element arrangements typically include two
elements: ioDrive hardware, which includes embedded VSL
virtualization software, and support services. We have
determined that our ioDrive hardware and the embedded VSL
virtualization software are considered a single unit of
accounting because the hardware and software individually do not
have standalone value and are never sold separately. Support
services are considered a separate unit of accounting as they
are sold separately and have standalone value.
We allocate arrangement consideration at the inception of an
arrangement to all deliverables based on the relative selling
price method in accordance with the selling price hierarchy,
which includes: (1) vendor-specific objective evidence, or
VSOE, if available; (2) third-party evidence, or TPE, if
vendor-specific objective evidence is not available; and
(3) best estimate of selling price, or BESP, if neither
VSOE nor TPE is available.
|
|
|
|
|
VSOE We determine VSOE based on our
historical pricing and discounting practices for the specific
product or support service when sold separately. In determining
VSOE, we require that a substantial majority of the selling
prices for products or support services fall within a reasonably
narrow pricing range. We have historically priced our products
within a narrow range and have used VSOE to allocate the selling
price of deliverables for product sales.
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|
|
|
TPE When VSOE cannot be established for
deliverables in multiple element arrangements, we apply judgment
with respect to whether we can establish selling price based on
TPE. TPE is determined based on competitor prices for similar
deliverables when sold separately. Generally, our products
differ from those of our peers such that the comparable pricing
of support services with similar functionality cannot be
obtained. Furthermore, we are unable to reliably determine what
similar competitor services selling prices are on a
stand-alone basis. As a result, we have not been able to
establish selling price based on TPE.
|
|
|
|
BESP When we are unable to establish selling
price using VSOE or TPE, we use BESP in our allocation of
arrangement consideration. The objective of BESP is to determine
the price at which we would transact a sale if the product or
support service was sold on a stand-alone basis. We determine
BESP for deliverables by considering multiple factors including,
but not limited to, prices we charge for similar offerings,
sales volume, geographies, market conditions, competitive
landscape and pricing practices.
|
Our agreements with certain customers, including certain OEMs
and other channel partners, contain provisions for sales returns
in limited circumstances, price protection and rebates. In
limited circumstances and on an infrequent basis, even if we are
not obligated to accept returned products, we may determine it
is in our best interest to accept returns in order to maintain
good relationships with our customers. We recognize revenue net
of the effects of these estimated obligations at the time
revenue is recorded.
We estimate product returns based upon our periodic analysis of
historical returns as a percentage of revenue as well as known
future returns. We periodically assess the accuracy of our
historical estimates and to date the actual results have been
reasonably consistent with our estimates. While we believe we
have sufficient experience and knowledge of the market and
customer buying patterns to reasonably estimate such returns,
actual market conditions or customer behavior could differ from
our expectations and as a result, our actual results could
change materially.
Our price protection obligations with certain OEMs and other
channel partners require us to notify them of any decreases in
pricing and to provide them with a refund or credit for any
units of our
54
product that they have on hand as of the date of the pricing
change. Historically, most of our sales to our OEMs and other
channel partners have an identified end-user at the time we ship
our products and thus the amount of inventory carried by our
OEMs and other channel partners at any given time is limited. To
date, we have not issued refunds or credits to our OEMs and
other channel partners for price protection.
Certain of our contracts allow for rebates that are based on a
fixed percentage of our sales to the customer or sales to the
end-user or a fixed dollar amount per unit.
Deferred revenue resulted from the deferral of product and
support service revenue from multiple element arrangements prior
to June 30, 2009 and from July 1, 2009 deferred
revenue represents customer billings in excess of revenue
recognized, primarily for support services. Support services are
typically billed on an annual basis in advance and revenue is
recognized ratably over the support period of one to three years.
Stock-Based
Compensation
Under ASC 718, stock-based compensation cost for each award
is estimated at the grant date based on the awards fair
value as calculated by an option-pricing model and is recognized
as expense over the requisite service period. We use the
Black-Scholes-Merton option-pricing model which requires various
highly judgmental assumptions including the estimated fair value
of our common stock, volatility over the expected life of the
option, stock option exercise and cancellation behaviors,
risk-free interest rate and expected dividends. We estimated the
fair value of each employee option granted using the following
assumptions for the periods presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Year Ended June 30,
|
|
Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Fair value of common stock
|
|
$0.358
|
|
$0.358-0.65
|
|
$0.65-1.96
|
|
$0.65
|
|
$1.96-5.12
|
Expected stock price volatility
|
|
49-50%
|
|
49%
|
|
49%
|
|
49%
|
|
48-49%
|
Expected life of options
|
|
6.1 years
|
|
6.1 years
|
|
6.1 years
|
|
6.1 years
|
|
3.2-7.0 years
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
2.6-3.6%
|
|
2.8-3.4%
|
|
2.4-2.9%
|
|
2.6-2.9%
|
|
0.6-2.7%
|
|
|
|
|
|
Volatility As we do not have a trading
history for our common stock, the expected stock price
volatility for our common stock was estimated by taking the
average historic price volatility for a group of companies we
consider our peers based on a number of factors including, but
not limited to, similarity to us with respect to industry,
business model, stage of growth, financial risk or other
factors, along with considering the future plans of our company
to determine the appropriate volatility over the expected life
of the option. We used the daily price of these peers over a
period equivalent to the expected term of the stock option
grants. We did not rely on implied volatilities of traded
options in our peers common stock because the volume of
activity was relatively low. We intend to continue to
consistently apply this process using the same or similar public
companies until a sufficient amount of historical information
regarding the volatility of our own common stock share price
becomes available, or unless circumstances change such that the
identified companies are no longer similar to us, in which case,
more suitable companies whose share prices are publicly
available would be utilized in the calculation.
|
|
|
|
Expected Life The expected life was based on
the simplified method allowed under SEC guidance, which is
calculated as the average of the options contractual term
and weighted-average vesting period. We use this method as we
have limited historical stock option data that is sufficient to
derive a reasonable estimate of the expected life of an option.
|
55
|
|
|
|
|
Dividend Yield We have never declared or paid
any cash dividends and do not presently plan to pay cash
dividends in the foreseeable future. Consequently, we used an
expected dividend yield of zero.
|
|
|
|
Risk-free Interest Rate The risk-free
interest rate was determined by reference to the
U.S. Treasury rates with the remaining term approximating
the expected option life assumed at the date of grant.
|
In addition, we are required to estimate the expected forfeiture
rate and only recognize expense for those options expected to
vest. We estimate the forfeiture rate based on our historical
experience. Further, to the extent our actual forfeiture rate is
different from our estimate, stock-based compensation expense is
adjusted accordingly. If any of the assumptions used in the
Black-Scholes-Merton stock-option model change significantly,
the fair value and stock-based compensation expense on future
grants is impacted accordingly and stock-based compensation
expense may differ materially in the future from that recorded
in the current period.
The following table sets forth all stock option grants since
July 1, 2009 through May 16, 2011:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
Number of Shares
|
|
|
|
Fair Value per
|
|
Intrinsic Value
|
|
|
Subject to Options
|
|
|
|
Share at
|
|
per Share at
|
Grant Date
|
|
Granted
|
|
Exercise Price
|
|
Grant Date
|
|
Grant Date
|
|
September 22, 2009
|
|
|
1,261,800
|
|
|
$
|
0.65
|
|
|
$
|
0.65
|
|
|
$
|
|
|
November 18, 2009
|
|
|
1,165,000
|
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
|
|
December 15, 2009
|
|
|
262,950
|
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
|
|
February 12, 2010
|
|
|
310,000
|
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
|
|
March 2, 2010
|
|
|
1,061,638
|
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
|
|
March 16, 2010
|
|
|
625,000
|
|
|
|
0.65
|
|
|
|
0.65
|
|
|
|
|
|
May 28, 2010
|
|
|
2,484,646
|
|
|
|
1.96
|
|
|
|
1.96
|
|
|
|
|
|
July 27, 2010
|
|
|
1,991,131
|
|
|
|
1.96
|
|
|
|
1.96
|
|
|
|
|
|
September 12, 2010
|
|
|
1,300,000
|
|
|
|
1.96
|
|
|
|
4.07
|
|
|
|
2.11
|
|
October 26, 2010
|
|
|
1,136,300
|
|
|
|
4.07
|
|
|
|
4.07
|
|
|
|
|
|
January 25, 2011
|
|
|
4,307,050
|
|
|
|
5.12
|
|
|
|
5.12
|
|
|
|
|
|
February 19, 2011
|
|
|
591,500
|
|
|
|
5.12
|
|
|
|
5.12
|
|
|
|
|
|
April 14, 2011
|
|
|
495,844
|
|
|
|
6.76
|
|
|
|
10.88
|
|
|
|
4.12
|
|
May 16, 2011
|
|
|
152,500
|
|
|
|
14.00
|
|
|
|
14.00
|
|
|
|
|
|
The estimates of the fair value of our common stock were made
based on information from contemporaneous valuations on the
following valuation dates:
|
|
|
|
|
|
|
Fair Value
|
Valuation Date
|
|
per Share
|
|
March 9, 2009
|
|
$
|
0.65
|
|
May 21, 2010
|
|
|
1.96
|
|
October 8, 2010
|
|
|
4.07
|
|
December 31, 2010
|
|
|
5.12
|
|
April 5, 2011
|
|
|
6.76
|
|
The fair value of the common stock underlying our stock options
was determined by our board of directors, which intended all
options granted to be exercisable at a price per share not less
than the per share fair value of our common stock underlying
those options on the date of grant. Since our common stock is
not publicly traded, we considered objective and subjective
factors in valuing our common stock at each valuation date in
accordance with the guidance in the American Institute of
Certified Public Accountants Practice Aid Valuation of
Privately-Held-Company Equity Securities Issued as
Compensation, or Practice Aid. The assumptions we use in the
valuation model are based on managements future
56
expectations combined with managements judgment. Objective
and subjective factors to determine the fair value of our common
stock as of the date of each option grant, including the
following:
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our stage of development;
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our future financial projections and changes to those
projections due to large customer orders and timing of shipments
for those orders;
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the risks associated with achieving our financial projections
based on limited history of selling our products and recognizing
revenue;
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the introduction of new products;
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our operating performance and financial position including the
value of our assets;
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the market performance of comparable publicly traded companies;
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rights, preferences and privileges of our convertible preferred
stock relative to the common stock;
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the prices of our convertible preferred stock sold to outside
investors in arms-length transactions; and
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individual sales of common stock.
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In the contemporaneous common stock valuations performed on
March 9, 2009, May 21, 2010, October 8, 2010,
December 31, 2010 and April 5, 2011, the fair value of
our common stock was determined considering two valuation
approaches, the income approach and the market approach. Due to
our early stage of development and the lack of directly
comparable financial performance and trends as compared to a
peer group, we only used the income approach for valuations on
March 9, 2009 and May 21, 2010. For the
October 8, 2010, December 31, 2010 and April 5,
2011 valuations, we used both approaches and weighted the
results equally. The equal weighting of these two approaches
reflects our view that both these valuation methods provide a
reasonable estimate of fair value, are equally reliable and
resulted in similar values at those dates. For the stock option
grants on May 16, 2011, we used as the fair value the
midpoint of the estimated offering price range, which was
calculated based solely on the market approach.
The income approach quantifies the present value of the future
cash flows that management expects to achieve over a certain
period and estimates the present value of cash flows beyond that
period, which is referred to as the terminal value. These future
cash flows were discounted to their present values using a
discount rate determined from industry studies that compare
venture capital required rates of return on investments at
different stages of a companys development. The discount
rate reflects the risks inherent in the cash flows and the
market rates of return available from alternative investments of
similar type and quality as of the valuation date. The discount
rates used in the common stock valuations on March 9, 2009,
May 21, 2010, October 8, 2010, December 31, 2010
and April 5, 2011 were 60.0%, 50.0%, 50.0%, 50.0% and
25.0%, respectively. The higher discount rates in earlier
valuations were principally due to perceived risks in achieving
financial results projecting substantial growth with our limited
history of generating revenues or achieving forecasts.
The market approach considers multiples of financial metrics
based on acquisition
and/or
trading multiples of a peer group of companies. These multiples
were then applied to our financial metrics to derive an
indication of value. The contemporaneous valuations on
October 8, 2010, December 31, 2010 and April 5,
2011 used a range of the average of comparable company multiples
for estimated enterprise value to sales. The October 8,
2010 valuation used a range from 2.00x to 2.50x, the
December 31, 2010 valuation used a range from 2.25x to
2.75x and the original April 5, 2011 valuation used an
implied range from 2.37x to 2.94x to determine an implied low
and high estimated enterprise value.
57
The resulting fair value obtained by these approaches was then
allocated to our equity using the option-pricing method. For the
May 21, 2010, October 8, 2010, December 31, 2010
and the April 5, 2011 valuations, we allocated the value
under a sale/merger scenario and a scenario that considers us
completing an initial public offering, or IPO of our common
stock. The weighting of these scenarios at these valuation dates
was as follows:
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Sale/Merger
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IPO
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May 21, 2010
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62.5
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%
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37.5
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%
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October 8, 2010
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50.0
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%
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50.0
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%
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December 31, 2010
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30.0
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%
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70.0
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%
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April 5, 2011
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10.0
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%
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90.0
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%
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After the equity value was determined and allocated to our
respective stock from the above methods, a discount for the lack
of marketability of our common stock was applied for us being a
private company with a lack of a trading market for our common
stock. The marketability discount used was 46.9%, 36.9%, 15.0%,
10.0% and 0.0%, respectively, for the valuations on
March 9, 2009, May 21, 2010, October 8, 2010,
December 31, 2010, and April 5, 2011. No discount for
lack of marketability was applied to determine the fair value of
our common stock for the May 16, 2011 grants.
At each grant date from June 2, 2009 through March 16,
2010, our board of directors considered objective and subjective
factors outlined above including the most recent contemporaneous
valuation of our common stock on March 9, 2009 and the
various closings of our Series B convertible preferred
stock financing at a consistent value from April 2009 to October
2009. For the stock option grants in March 2010, our board of
directors considered the increase in revenue for the quarter
ended December 31, 2009 and the prospects for increased revenue
for the quarter ended March 31, 2010 as compared to our
forecasts, our financial position, the need for additional
equity funding, the probability of receiving additional funding,
the ability to draw on a current revolving line of credit, and
the status of outstanding litigation and disputes.
For the stock option grants on May 28, 2010, our board of
directors considered objective and subjective factors including
the most recent contemporaneous valuation of our common stock on
May 21, 2010, the recent closing of our Series C
convertible preferred stock financing and current signed
customer orders. The May 21, 2010 valuation was higher than
the March 9, 2009 valuation principally due to an increase
in forecasted revenue as a result of recent sales orders and a
lower discount for lack of marketability. We considered the
proximity of our valuation on May 21, 2010 to our March 2010
grants to evaluate whether the previously determined exercise
price was appropriate. We believe that the exercise price for
the March 2010 grants was appropriate due to certain events that
occurred subsequent to the March 2010 grants that we believed
increased the value of our stock between the grant date and the
May 21, 2010 valuation including: (1) the appointment of our new
CEO at the end of March, (2) the closing of our Series C
convertible preferred stock offering in early April 2010, (3)
the receipt of a large order from a significant customer at the
end of April 2010, and (4) improved financial outlook.
For the stock option grants on July 27, 2010 and
September 12, 2010, our board of directors considered
objective and subjective factors including the most recent
contemporaneous valuation of our common stock on May 21,
2010, the current financial position including cash needs for
inventory and the current revenue and projected revenue from
recently signed sales orders. For the September 12, 2010
grants, our board also considered the recent closing of our
revolving line of credit and the borrowings against that line of
revolving credit for financing our inventory growth.
Due to the proximity of the stock option grants on
September 12, 2010 to the October 8, 2010 valuation
and because in October 2010 our board of directors became more
optimistic that we could consider an IPO in the nearer term, we
decided to use the October 8, 2010 common stock valuation
of $4.07 as the fair value in our calculation of stock
compensation expense for the September 12, 2010 stock
option grants.
58
For the stock option grants on October 26, 2010, our board
of directors considered objective and subjective factors
including the most recent contemporaneous valuation of our
common stock on October 8, 2010, our current financial
position, including the need for cash to finance inventory, and
our recorded first quarter revenue and projected fiscal year-end
revenue. The October 8, 2010 valuation was higher than the
May 21, 2010 valuation principally due to an increase in
the terminal value multiple from 2.25x to 2.50x due to higher
projected cash flows, a larger allocation of value to the
possibility of an IPO versus a sale/merger, and a lower discount
for lack of marketability from 36.9% to 15.0% due to the
increased likelihood of an IPO.
For the stock option grants on January 25, 2011 and
February 19, 2011, our board of directors considered
objective and subjective factors including the most recent
contemporaneous valuation of our common stock on
December 31, 2010, our current financial position, our
recorded second quarter revenue, our projected revenue for the
third quarter, the risk of achieving our projected third quarter
revenue and future revenue projections, the current economic
environment, and the likelihood of an IPO in the near term.
While the revenue and expense factors used for the income
approach in our valuation did not change materially between the
October 8, 2010 valuation and the December 31, 2010
valuation, the terminal value multiple was increased from 2.50x
to 2.75x due to an increase in the latest
12-month
multiples indicated by our comparable public companies, the
market approach multiples increased, more weight was placed on
the probability of the completion of an IPO versus a
sale/merger, and the discount for lack of marketability went
from 15% to 10% as a result of various initial public offerings
being favorably received, indicating a significant improvement
in the market, and our board of directors increased interest in
pursuing an IPO in the nearer term.
For the stock option grants on April 14, 2011, our board of
directors considered objective and subjective factors, including
the most recent contemporaneous valuation of our common stock on
April 5, 2011, our current financial position, our updated
projected revenue, the risk of achieving our updated projected
revenue and future revenue projections, the current economic
environment, the filing of our registration statement for this
offering and the increased likelihood of an IPO in the near term.
Due to the proximity of the grant on September 12, 2010 to
the October 8, 2010 valuation and because in October 2010
our board of directors became more optimistic that we could
consider an IPO in the nearer term, we decided to use the
October 8, 2010 common stock valuation as fair value in our
calculation of stock compensation expense for the
September 12, 2009 grants. We determined, however, that the
July 27, 2010 option grant was properly granted at an
exercise price equal to the fair value determined as of
May 21, 2010, because at the time of grant the board of
directors believed the inputs used in the May 21, 2010
valuation were comparable to activity at July 27, 2010 and
the prospect of an IPO in the near term was comparable to that
at the time of the May 21, 2010 valuation and that the
decreased discount for marketability used in the October 8,
2010 valuation was therefore not appropriate to apply
retrospectively to the July 27, 2010 grant.
On May 11, 2011, the lead underwriters for this initial
public offering of our common stock recommended to us, based on
the then-current market conditions, a midpoint of the range of
the estimated offering price of $14.00 per share. Due to the
proximity of the stock option grants on April 14, 2011 to
the date of the recommendation of the midpoint of the estimated
offering price range, we reassessed the common stock fair value
as of April 14, 2011, resulting in a common stock fair
value of $10.88.
The reassessed $10.88 common stock fair value was determined
using the same valuation methodology used in the recent
contemporaneous valuations. However, we revised the group of
comparable companies used in the market approach from primarily
storage systems companies to selective data center
infrastructure, other high-growth infrastructure and storage
systems companies that are more relevant in the current market
environment and more comparable to our current stage of
development and growth projections, which increased the
enterprise value to sales multiples implied range from 2.25x to
2.75x used in the December 31, 2010 contemporaneous
valuation to an implied range of 4.4x to 5.1x. This change in
the comparable company multiples was the most significant
59
factor that impacted our estimated common stock fair value from
December 2010 to April 2011. The next most significant factor
that impacted our estimated common stock fair value from
December 2010 to April 2011 was due to a decrease in the
discount rate from 50.0% to 25.0%, which reflected our
continuing development and corresponded to the decreased risk of
achieving our forecasted operating results due to continued
strong historical results, including exceeding our
March 31, 2011 quarterly targets, resulting in our first
quarter of net income, and increased probability of achieving
our forecasts. The increase in our estimated common stock fair
value from December 2010 to April 2011 was also affected by a
decrease in the discount for the lack of marketability from
10.0% to 0.0% due to the filing of our registration statement
for this offering on March 9, 2011 and the increased
likelihood of an IPO in the near term.
The difference between the $10.88 reassessed fair value of our
common stock on April 14, 2011 and the $14.00 midpoint of
the offering price range was primarily due to only using the
market approach and continued and accelerating improvement in
our operating performance, in particular, continued growth in
our revenue as a result of unexpected significant orders from a
strategic customer received in May 2011; and to a lesser extent
the increased likelihood of consummating our IPO since
April 14, 2011 as a result of our board of directors
increased commitment to completing the offering, including the
filing of two amendments to our registration statement, the
successful completion of IPOs of other companies and the
positive aftermarket performance of these companies and general
market increases since April 14, 2011.
For the stock option grants on May 16, 2011, our board of
directors considered objective and subjective factors including
the midpoint of the offering price range. Due to the proximity
of the May 16, 2011 grants to the date of the anticipated
IPO, the board of directors used the $14.00 midpoint of the
estimated offering price range as the fair value of our common
stock to determine the exercise price for the options granted.
Subsequently, in June 2011, as a result of marketing this
offering, we increased the offering price range to $16.00 to
$18.00 per share, increasing the midpoint of the estimated
offering price range to $17.00 per share.
For fiscal 2008, 2009 and 2010 and the nine months ended
March 31, 2010 and 2011, we had variable stock-based
compensation from grants to non-employees which accounted for
approximately $4,000, $18,000, $54,000, $25,000 and $411,000 of
stock-based compensation expense, respectively. We expect
variable stock based compensation to increase significantly in
future periods due to expected increases in the value of our
common stock.
As of June 30, 2009 and 2010 and March 31, 2011, there
was approximately $3.3 million, $5.6 million and
$20.7 million, respectively, of unrecognized stock-based
compensation expense related to employee non-vested stock option
awards that we expect to be recognized over a weighted-average
service period of 3.5, 3.2 and 3.7 years, respectively.
Assuming an initial public offering price of $17.00 per share,
the midpoint of the price range set forth on the cover page of
this prospectus, the intrinsic value of the options outstanding
as of March 31, 2011, was $395.4 million, of which
$126.2 million related to the options that were vested and
$269.2 million related to the options that were not vested.
Inventory
Valuation
Inventories consist of raw materials, work in progress, and
finished goods and are stated at the lower of cost, on the
average cost method, or market value. Our finished goods consist
of manufactured finished goods.
A portion of our inventory also relates to evaluation units
located at customer locations, as some of our customers test our
equipment prior to purchasing. The number of evaluation units
has increased due to our overall growth and an increase in our
customer base. We assess the valuation of all inventories,
including raw materials, work in progress and finished goods, on
a periodic basis. Inventory carrying value adjustments are
established to reduce the carrying amounts of our inventories
60
to their net estimated realizable values. Carrying value
adjustments are based on historical usage, expected demand and
evaluation unit conversion rate. Inherent in our estimates of
market value in determining inventory valuation are estimates
related to economic trends, future demand for our products and
technological obsolescence of our products. For example, because
our revenue often is comprised of large, concentrated sales to a
limited number of customers, we may carry high levels of
inventory prior to shipment. In addition, in circumstances where
a supplier discontinues the production of a key raw material
component, such as a specific type of NAND Flash memory, we may
be required to make significant last-time purchases
in order to ensure supply continuity until the transition is
made to products based on next generation components. If a
significant order were cancelled after we had purchased the
related inventory, or if estimates of last-time
purchases exceed actual demand, we may be required to record
additional inventory carrying value adjustments.
Warranty
Liability
We provide our customers a limited product warranty of three
years for products shipped prior to January 1, 2010 and
five years for products shipped on or after January 1,
2010. Our standard warranties require us to repair or replace
defective products during such warranty period at no cost to the
customer. We estimate the costs that may be incurred under our
basic limited warranty and record a liability in the amount of
such costs at the time product sales are recognized. Factors
that affect our warranty liability include the number of
installed units, historical experience and managements
judgment regarding anticipated rates of warranty claims and cost
per claim. We assess the adequacy of our recorded warranty
liability each period and make adjustments to the liability as
necessary.
Income
Taxes
Significant judgment is required in determining our provision
for income taxes and evaluating our uncertain tax positions. We
record income taxes using the asset and liability method, which
requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have
been recognized in our financial statements or tax returns. In
estimating future tax consequences, generally all expected
future events other than enactments or changes in the tax law or
rates are considered. Valuation allowances are provided when
necessary to reduce deferred tax assets to the amount expected
to be realized.
We provide reserves as necessary for uncertain tax positions
taken on our tax filings. First, we determine if the weight of
available evidence indicates that a tax position is more likely
than not to be sustained upon audit, including resolution of
related appeals or litigation processes, if any. Second, based
on the largest amount of benefit, which is more likely than not
to be realized on ultimate settlement we recognize any such
differences as a liability. Because of our full valuation
allowance against the net deferred tax assets, any change in our
uncertain tax positions would not impact our effective tax rate.
In evaluating our ability to recover our deferred tax assets, in
full or in part, we consider all available positive and negative
evidence, including our past operating results, our forecast of
future market growth, forecasted earnings, future taxable income
and prudent and feasible tax planning strategies. The
assumptions utilized in determining future taxable income
require significant judgment and are consistent with the plans
and estimates we are using to manage the underlying businesses.
Due to the net losses incurred and the uncertainty of realizing
the deferred tax assets, for all the periods presented, we have
a full valuation allowance against our deferred tax assets.
As of June 30, 2010, we had federal and state net operating
loss carryforwards of $58.0 million and $54.3 million,
respectively, and federal and state research and development tax
credit carryforwards in the amount of $0.5 million and
$0.2 million, respectively. In the future, we intend to
utilize any carryforwards available to us to reduce our tax
payments. A limited amount of these carryforwards will be
subject to annual limitations that may result in their
expiration before some portion of them has been fully utilized.
61
Recently
Issued and Adopted Accounting Pronouncements
Fair Value
Measurements
In January 2010, the FASB issued new accounting guidance
expanding disclosures regarding fair value measurements by
adding disclosures about the different classes of assets and
liabilities measured at fair value, the valuation techniques and
inputs used, the activity in Level 3 fair value
measurements and the transfers between Levels 1, 2 and 3.
The new disclosures and clarifications of existing disclosures
were effective for interim and annual reporting periods
beginning after December 15, 2009, except for the
disclosure requirements related to the activity in Level 3
fair value measurements. Those disclosure requirements are
effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. We
adopted the new disclosures for fiscal 2011. Since the adoption
of the new standards only required additional disclosure, the
adoption did not have an impact on our consolidated financial
position, results of operations or cash flows.
Quantitative and
Qualitative Disclosures About Market Risk
Foreign
Currency Risk
Our international sales and marketing operations incur expenses
that are denominated in foreign currencies. Although our
international operations are currently immaterial compared to
our operations in the United States, we expect to continue to
expand our international operations which will increase our
potential exposure to fluctuations in foreign currencies. Our
exposures are to fluctuations in exchange rates primarily for
the U.S. dollar versus the euro and the British pound.
Changes in currency exchange rates could adversely affect our
consolidated results of operations or financial position.
Additionally, our international sales and marketing operations
maintain cash balances denominated in foreign currencies. In
order to decrease the inherent risk associated with translation
of foreign cash balances into our reporting currency, we have
not maintained excess cash balances in foreign currencies. As of
March 31, 2011, we had $0.2 million of cash in foreign
accounts. To date, we have not hedged our exposure to changes in
foreign currency exchange rates and, as a result, could incur
unanticipated translation gains and losses. Through
March 31, 2011, all of our sales were billed in
U.S. dollars and therefore not subject to direct foreign
currency risk.
62
BUSINESS
Overview
We have pioneered a next generation storage memory platform for
data decentralization. Our platform significantly improves the
processing capabilities within a datacenter by relocating
process-critical, or active, data from centralized
storage to the server where it is being processed, a methodology
we refer to as data decentralization. Our integrated hardware
and software solutions leverage non-volatile memory to
significantly increase datacenter efficiency and offers
enterprise grade performance, reliability, availability and
manageability. We sell our solutions through our global direct
sales force, OEMs, including Dell, HP and IBM, and other channel
partners. Since inception, we have shipped solutions aggregating
over 22 petabytes of enterprise class storage memory capacity to
more than 1,500 end-users.
Our data decentralization platform can transform legacy
architectures into next generation datacenters and allows
enterprises to consolidate or significantly reduce complex and
expensive high performance storage, high performance networking,
and memory-rich servers. Our platform enables enterprises to
increase the utilization, performance and efficiency of their
datacenter resources and to extract greater value from their
information assets. Many users of our platform have reported
achieving greater than 10 times the application throughput per
server through increased server utilization, resulting in
reductions to ongoing facility, energy and cooling expenses.
Our purpose-built storage memory platform integrates our
industry standard server-based hardware with our virtualization
software, and incorporates our automated data-tiering and
platform management software. Our ioMemory hardware uses
non-volatile memory to create a high capacity memory tier with
fast access rates in a small form factor. Our VSL software
virtualizes the ioMemory hardware and allows the
decentralization of active data from centralized storage systems
into the server. Our recently released directCache software
provides automated data-tiering, which accelerates access to
active data from centralized storage. Our recently released
ioSphere management software centrally configures, monitors and
manages all of our distributed ioMemory hardware and software.
We were founded in 2005 and are based in Salt Lake City, Utah
and have significant operations in San Jose, California. As
of March 31, 2011, we had 395 employees globally,
including 128 research and development personnel. In the nine
months ended March 31, 2011, we had three greater-than 10%
customers, including Facebook and Apple, through a reseller, and
one of our OEMs, HP. We have experienced substantial growth over
the past three years; our revenue was $0.6 million,
$10.2 million and $36.2 million in fiscal 2008, 2009
and 2010, respectively, and $25.3 million and
$125.5 million in the nine months ended March 31, 2010
and March 31, 2011, respectively.
Industry
Background
The profitability and long-term competitiveness of enterprises
increasingly depend on their ability to rapidly extract value
from their information assets while addressing the following key
challenges:
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Growth in Quantity of Data The amount of data
that enterprises are processing is growing at an exponential
rate. IDC predicts that by 2020 the amount of digital data will
grow 44 times to 35 zettabytes, or 35 billion terabytes,
from
2010.(2)
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Growth in Frequency of Access to Data The
number of people accessing information systems and the frequency
of their access are also growing substantially. More devices,
applications and services are being used more frequently. For
example, IMS Research estimates that by 2020, 22 billion
independent devices will be connected to the Internet, up from
approximately 5 billion in
2010.(3)
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(2)-(3) See
notes (2) and (3) in the section entitled Market,
Industry and Other Data.
63
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Growing Demand for Faster, More Relevant
Responses Enterprises and consumers expect
information systems to be real-time, on-demand, always-on and
highly responsive with relevant information. For example,
according to the TABB Group, in order to speed application
response times, financial services firms spent approximately
$15 billion in 2009 on datacenter relocation and
consolidation primarily to reduce electronic trading
latency.(4)
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These challenges require datacenter infrastructure that can
process ever-increasing amounts of data at ever-increasing
rates. Since the value an enterprise can extract from its
information assets is determined by both the quantity and rate
at which data is processed, enterprises must address these
challenges. However, they are subject to many constraints,
including the following:
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Limited Financial Resources All enterprises
must prioritize their finite financial and other resources to
invest in their datacenter infrastructure and operations.
Despite the rapid growth in data, the increasing frequency of
data access, and the need for faster, more relevant responses,
worldwide spending on hardware, software and IT services is
expected to grow at only 5.9% in 2011 and at a 5.4% cumulative
annual growth rate from 2010 to 2014 according to
Gartner.(5)
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Limited Resources for Datacenters Datacenters
are highly specialized, require substantial energy, cooling and
space and require long lead times to build. Therefore,
enterprises face a practical limit on their ability to expand
existing datacenters or build new ones to meet the rapidly
growing demands to process data.
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Pressure to be Energy Efficient Building new
datacenters or expanding the capacity of existing datacenters
causes substantial increases in energy consumption. According to
the U.S. Department of Energy, datacenters can consume more
than 100 times more energy than a standard office
building.(6)
Further, according to IDC, in 2010 for every $1.00 of new server
expenditure, an incremental $0.62 was spent on power and cooling
expenses.(7)
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To address the increased growth in quantity of data, frequency
of data access and performance demands, enterprises are
increasingly deploying costly and inefficient datacenter
infrastructure.
The Data Supply
Problem
The performance and efficiency of a datacenter is largely
determined by the quantity and rate at which data can be
supplied from storage to the server for processing. We refer to
this flow of data from storage through networking to servers for
processing as the data supply chain.
Legacy datacenter architectures using centralized storage cannot
effectively supply the increasingly large quantities of
process-critical data quickly enough to fully utilize the
processing capacity of todays servers, leading to low
levels of server utilization. We refer to this limitation as the
data supply problem. As a result of servers waiting idle,
processing capabilities are significantly underutilized.
According to IDC, in 2009 over 80% of servers were idle half of
the time and 37% of servers were idle 80% of the
time.(8)
While processing performance has doubled approximately every
18 months, the performance of other elements in the data
supply chain has not kept pace. This is especially true for the
storage infrastructure, which has been designed primarily to
optimize capacity growth, rather than performance growth. This
increasing gap between processing and storage performance
amplifies the data supply problem.
Traditional
Approaches Do Not Efficiently Address the Data Supply
Problem
We believe that traditional datacenter architectures cannot
adequately address the data supply problem, as they have not
scaled with the growth of processing performance. This leads to
greater
(4)-(8) See
notes (4) through (8) in the section entitled Market,
Industry and Other Data.
64
complexity in the datacenter and ever increasing inefficiencies
in utilization, cost, physical space and energy consumption.
Traditional approaches used to address the data supply problem
include the following:
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Deploy More Expensive Storage To alleviate
the restriction that storage places on the data supply chain,
enterprises must deploy storage systems with a substantial
number of performance optimized hard disk drives in parallel.
These performance optimized drives are significantly more
expensive than commodity storage. According to IDC estimates in
2010, commodity performance optimized 3.5 hard disk drives
cost roughly $0.49 per
gigabyte(9) and
performance optimized storage hardware cost $2.42 per
gigabyte.(10)
We estimate additional software and services typically bundled
with storage systems added another $3.96 per gigabyte on average
in the storage industry, for a total of $6.38 per gigabyte.
Based on these estimates, we believe enterprises spend up to
13 times the cost of commodity disk drives to increase the
performance of slow disk drives. Additionally, according to IDC
estimates in 2010, input / output intensive storage
systems (inclusive of solid state drives) cost $23.16 per
gigabyte.(10)
We believe input / output intensive storage systems
provide incremental performance benefits but represent a
significant per gigabyte cost premium over performance optimized
storage. In aggregate, IDC estimates that enterprises will spend
roughly $18 billion on performance optimized storage
equipment in
2011.(10)
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Deploy More Expensive Networking Even after
deploying costly high performance storage, enterprises must then
deploy high performance networking infrastructure to transport
the data between the storage and the server. IDC estimates the
2011 cost of high performance 10 gigabit Ethernet networking
equipment to be roughly $1,319 per port, while the cost of 1
gigabit Ethernet networking equipment is estimated to be $77 per
port.(11)
Similarly, based on IDC data, we estimate the cost of a Fibre
Channel switch in 2011 to be $248 per
port.(12)
Based on these estimates, we believe high performance networking
infrastructure (Fibre Channel or 10 gigabit Ethernet) costs
from 3 to 17 times that of commodity networking infrastructure.
In aggregate, based on IDC data, we estimate the market for high
performance networking infrastructure to be approximately
$10 billion in
2011.(13)
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Deploy More Expensive Servers Even after
deploying costly high performance storage and high performance
networking, the data cannot be supplied at the necessary rates
to avoid server underutilization. To address this bottleneck in
the data supply chain, enterprises are deploying more richly
configured servers that contain higher amounts of memory to hold
more active data within the server to avoid going back and forth
to storage through networking as frequently. Based on IDC
estimates in 2009, memory-rich servers, which IDC defines as
servers with greater than 16 gigabytes of memory, generally cost
over 50% more than general-purpose servers and enterprises will
spend approximately $24 billion on memory-rich servers in
2011, accounting for over 51% of all server
spending.(14)
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Scale Out Datacenters Despite the
underutilization of physical servers, when deployed in large
enough quantities, lower cost, data supply constrained servers
can reach acceptable aggregated performance levels. Depending on
the degree of underutilization, the initial capital expenditure
of this type of server scale-out may be less expensive than
deploying a combination of performance-oriented storage and
networking and memory-rich servers. However, this approach leads
to increased numbers of servers, additional software licenses
and related infrastructure within datacenters which we refer to
as either datacenter or server sprawl.
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Tune and Redesign Software Applications
Because deploying high performance storage, networking and
additional servers does not resolve the data supply problem,
enterprises may invest heavily to tune or even redesign their
software applications to improve performance in a data supply
constrained environment. However, this increases the need for
expensive
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(9)-(14) See
notes (9) through (14), respectively, in the section
entitled Market, Industry and Other Data.
65
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engineering and consulting resources, requires significant
investments of time, and can compromise application reliability
and time-to-market.
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Utilize Cloud Computing Because of the cost
and complexity of server sprawl caused by datacenter scale-out,
many enterprises are transferring the burden of this scale-out
to third-party hosted datacenter providers. Although this
approach reduces the cost associated with scale-out for a
particular enterprise, it fails to address the underlying
performance and efficiency limitations of the data supply
problem. Rather the data supply problem is transferred to the
third-party provider.
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Introduce Server Virtualization Server
virtualization allows multiple server workloads to be
consolidated on a single physical server. However, data for each
of these workloads must still be supplied to the physical
server, compounding the data supply problem. While
virtualization brings significant benefits in terms of workload
consolidation, its full potential to improve datacenter
efficiency remains constrained by the data supply problem.
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In response to the challenges associated with the increased
growth in quantities of data, increased frequency of data access
and increased performance demands, enterprises continue to
deploy more costly infrastructure. Based on IDC data, we
estimate that approximately $52 billion will be spent in
2011 on high performance storage and networking and memory-rich
servers, excluding related spending on software and
services.(15)
As a result, incumbent storage, networking and memory vendors
have been reluctant to disrupt traditional approaches and seek
more efficient solutions.
Need for a Data
Decentralization Solution
A fundamentally new approach is needed to address the data
supply problem. We believe that this problem is analogous to the
challenges faced in manufacturing, where materials are
transported to the factory for assembly. If the manufacturing
supply chain is unable to provide a sufficient rate and quantity
of materials to meet production capacity, the factory becomes
underutilized. The concept of
just-in-time
manufacturing emerged to address underutilization by introducing
an inventory hub near the factory to ensure a steady and
uninterrupted flow of materials, optimizing production
utilization.
Similarly, in the datacenter, data is retrieved from centralized
storage and transported to the server where it is processed.
Applying the principle of
just-in-time
manufacturing to the data supply problem requires relocating
process-critical, or active, data from centralized
storage to the server where it is being processed, a methodology
we refer to as data decentralization.
We believe that effectively addressing the data supply problem
requires a decentralized storage-based solution that includes
the following:
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hardware with sufficient capacity and rate of access, in a form
factor that can be integrated within industry-standard servers;
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software that virtualizes storage resources and governs the flow
and management of data between storage and the server;
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software that enables this platform to be utilized within both
new and existing datacenter architectures; and
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software that centrally configures, manages and monitors this
new distributed infrastructure.
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This platform must also meet enterprise reliability,
availability and serviceability requirements.
(15)
See note (1) in the section entitled Market, Industry
and Other Data.
66
Our
Solution
We have pioneered a next generation storage memory platform for
data decentralization. Our platform significantly improves the
processing capabilities within a datacenter by relocating
process-critical, or active, data from centralized
storage to the server where it is being processed. Our platform
enables enterprises to increase the utilization, performance and
efficiency of their datacenter resources and to extract greater
value from their information assets. Many users of our products
have reported achieving greater than 10 times the application
throughput per server through increased server utilization,
resulting in reductions to ongoing facility, energy and cooling
expenses. Our data decentralization platform can transform
legacy architectures into next generation datacenters and allows
enterprises to consolidate or significantly reduce complex and
expensive high performance storage, high performance networking
and memory-rich servers.
67
Our purpose-built storage memory platform for data
decentralization addresses the data supply problem while
providing enterprise grade performance, reliability,
availability and manageability. Our integrated hardware and
software solutions operate in industry standard servers, where
the data is being processed. Our ioMemory hardware integrates
with our VSL virtualization software, and leverages our recently
released directCache data-tiering software and ioSphere platform
management software. Our ioMemory hardware uses non-volatile
memory to create a high capacity memory tier with fast access
rates in a small form factor that integrates with an
industry-standard server. Our VSL software virtualizes the
ioMemory hardware and allows the decentralization of active data
from centralized storage systems into the server. Our
directCache automated data-tiering software provides automated
data-tiering, which accelerates access to active data from
centralized storage. Our ioSphere platform management software
centrally configures, monitors and manages all of our
distributed hardware and software. Our products help enterprises
transform their datacenters to this next generation architecture
in a cost-effective manner.
Our data decentralization platform enables our customers to
address the following fundamental industry challenges:
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Manage Growth in Quantity of Data With our
ioMemory, a server can currently hold over 10 terabytes of
active data. Since our platform utilizes non-volatile memory, we
believe our platform will scale capacity and performance in line
with processing growth over time. Further, our directCache
software is designed to enable enterprises to efficiently manage
greater amounts of data by automating the movement of the active
data to ioMemory from traditional high capacity, centralized
storage.
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Manage Increasing Frequency of Access to Data
Our platform can respond to hundreds of thousands of
requests for data per second, a significant improvement compared
to traditional approaches. This is possible because our ioMemory
connects a large array of non-volatile memory directly to a
servers high-speed system bus allowing data to be accessed
with memory-like performance. Further, our VSL software
integrates within a servers operating system and allows
multiple processor cores to simultaneously access the active
data in our ioMemory.
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Improve Response Times, Relevancy and Value from
Data By decentralizing data within the server,
our platform enables applications to rapidly and efficiently
access more data, perform deeper analytics on the data, and
produce more relevant responses in shorter periods of time. This
allows enterprises to extract greater value from their
information assets, including systems dedicated to decision
support, high performance financial analysis, web search,
content delivery and enterprise resource planning.
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Further, our data decentralization platform enables enterprises
to transform legacy architectures into next generation
datacenters that can:
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Reduce Total Cost of Ownership and Environmental
Impact Through the use of our platform, our
customers can reduce, simplify and consolidate their purchases
of expensive storage, networking and memory-rich server
infrastructure and reduce their spending on costly software and
services. As a result, our platform enables customers to reduce
their datacenter infrastructure footprint, administrative
expenses and energy consumption related to power and cooling.
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Unlock the Potential of Virtualization Our
platform can significantly increase the processing capabilities
of server and desktop virtualization by allowing more active
data to quickly reach the numerous virtual servers inside a
single physical server. Further, by addressing the data supply
problem, our platform also enables data-intensive workloads to
be virtualized and enables more virtual servers and desktops to
be employed per physical server without experiencing performance
issues caused by data supply constraints.
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Support More Cost-Effective Clouds and SaaS
By enabling rapid access to large quantities of data, our
platform allows both cloud service providers and
software-as-a-service vendors to
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significantly enhance the performance of the services they offer
and improve their underlying cost structures.
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Case
Studies
The following are examples of how
end-users
have benefited from our solution:
Internet Web
Property
A leading Internet web property struggled with its growing
number of queries as traffic and data on the website increased.
The company was looking for a cost-effective, scalable solution
in order to improve query performance and provide real-time,
accurate results to its users. The company adopted our solution
in the first half of 2009. By using our solution, the company
reported that it:
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increased query processing throughput by 9 times;
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improved database replication by 30 times, ensuring that
responses included the most
up-to-date
data; and
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reduced server footprint, power costs and datacenter overhead by
75%.
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IT Security
Service Provider
A leading and fast-growing security service providers
datacenter infrastructure suffered from frequent performance
bottlenecks that required upgrading its server and storage
systems. The company was looking for a cost-effective, scalable
performance solution in order to improve response times to
end-users.
The provider adopted our solution in the first half of 2008. By
using our solution, the provider reported that it:
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improved application performance between 5 and 10 times;
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reduced server footprint by more than 50%; and
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lowered datacenter energy consumption by more than 40%.
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Digital Media
Sharing Provider
With growing website traffic, it became increasingly critical
for this digital media sharing website to focus on the
availability and responsiveness of its website for customer
retention. Due to the large number of requests to view and
upload content and social interactions, the companys
website performance was constrained by the constant need for its
databases to access disk-based storage. The provider adopted our
solution in the second half of 2010. By using our solution, the
provider reported that it:
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increased database response time by more than 10 times;
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improved its customers access speeds by approximately 66%;
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achieved high reliability through just two servers; and
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realized immediate 100% return on investment through the cost
savings by eliminating costly disk-based storage.
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U.S. National
Laboratory
One of the premier national laboratories in the United States
was preparing a data intensive test bed for a nuclear related
simulation and computing project. The test bed was required to
provide supercomputing-level performance while also reducing
power consumption to meet the laboratorys
69
energy efficiency initiatives. The laboratory adopted our
solution in the first half of 2009. By using our solution, the
laboratory reported that it:
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significantly increased performance to 52 million data
operations per second and 380 gigabytes per second aggregated
bandwidth;
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utilized only 2 racks rather than the 54 racks needed by
comparable hard disk-based solutions; and
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achieved the performance of over $300 million worth of
alternative all Flash-based systems.
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Our
Strategy
Our objective is to expand our position as the leading provider
of storage memory platforms for data decentralization. The
principal elements of our strategy include:
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Leverage Our First-to-Market Position in Data
Decentralization As the pioneer in data
decentralization, we created an important new market category
with our next generation storage memory platform. We believe
that early leadership in data decentralization has afforded us a
strong leadership position and recognized brand, as evidenced by
having shipped solutions aggregating over 22 petabytes of
storage memory capacity to more than 1,500 end-users since our
inception. We intend to extend our position as the leader in
data decentralization by focusing on continued development and
extension of our technology and brand.
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Continue Our Focus on Platform Solutions We
have designed a comprehensive platform that includes our
ioMemory hardware, VSL virtualization software, automated
data-tiering
and platform management software into a single solution. This
approach allows our platform to be optimized for performance and
high reliability. It also facilitates our ability to introduce
new platform elements over time. Finally, this platform approach
enables us to realize the potential of non-volatile memory by
leveraging commodity non-volatile memory, such as NAND Flash, to
deliver a robust enterprise grade system. We believe this
differentiated platform approach will enable us to continue to
rapidly innovate and bring new elements of our data
decentralization solutions to market.
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Extend Our Platform Differentiation Through Software
Innovation We believe that continued software
innovation is critical to addressing the data supply problem.
Our extensible architecture allows us to enhance the
capabilities of our platform by adding additional software
components over time. In this regard, we have recently developed
our directCache and ioSphere software for incorporation into our
solution and intend to continue to add software functionality
either from internal development or licensing from third parties
to differentiate our products and extend our technology
leadership position.
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Develop and Maintain Direct Customer Engagement
Direct engagement with customers enables us to accelerate
the adoption of our platform through the direct and OEM-assisted
portions of our multi-tier distribution model. We have developed
and maintained a specialized global direct sales and sales
engineering team. This direct engagement strategy provides us
valuable feedback on our products and technology, allowing us to
continually enhance and expand our product offerings.
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Leverage and Expand Our Server OEM Relationships
We have established OEM relationships with Dell, HP and IBM.
We combine our direct engagement approach with our OEMs
substantial
go-to-market
resources to expand our reach and target potential customers.
Moreover, our OEMs provide a single point of accountability
where needed and supplement our internal customer service and
support capabilities. These OEMs also provide important product
validation for potential customers through their endorsement of
our technology and by integrating our platform into products
they offer to end-users. We also believe that our close OEM
relationships will allow us to collaborate in the development of
new applications using our platform. We intend to pursue
additional OEM relationships in the future to expand our market
reach.
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Pursue International Opportunities We believe
that international markets represent a significant growth
opportunity. We are expanding our global presence by growing
direct sales teams in international markets, leveraging our
established OEM relationships and pursuing additional channel
partners in those regions. We intend to focus our near term
international efforts in Asia Pacific and Europe.
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Technology
Our next generation storage memory platform for data
decentralization integrates a diverse portfolio of enterprise
grade technologies. Our sophisticated hardware and software
design transforms commodity non-volatile memory into enterprise
class storage memory and provides interfaces between storage
memory resources and operating systems. In addition, our
advanced software capabilities include the development of new
and innovative storage applications, as well as platform
management software.
ioMemory
Hardware and Systems Architecture
Our ioMemory forms the basis of our hardware offering and is
designed as a portfolio of upgradeable modules, enabling faster
time-to-market and increased extensibility. ioMemory provides a
new type of server-based storage memory, integrates our
proprietary field programmable data-path controller and connects
a large array of non-volatile memory that provides up to 100
times the capacity density of dynamic random access memory, or
DRAM. Our ioMemory modules, which currently use NAND Flash
memory, can be aggregated to build storage systems of varying
capacity, performance and form factors. At the heart of the
ioMemory hardware is our proprietary data-path controller. It
connects a large array of non-volatile memory chips natively to
the servers PCI-Express peripheral bus, or PCIe, and
addresses the reliability issues of non-volatile memory with our
Flashback Protection advanced self-healing technology, which is
capable of restoring, correcting and resurrecting lost data in
the Flash-based storage
sub-system.
This is accomplished by using an advanced bit error correction,
proactive data integrity monitoring of stored data and dedicated
memory chips to automate the repair of failed devices in
real-time.
The modularity of ioMemory provides both manufacturing
flexibility and the ability to design and build new products
quickly. Traditional storage approaches use application specific
integrated circuits for their embedded controllers that are not
fully reprogrammable, creating the need for periodic redesigns,
which can be expensive and time consuming. ioMemory uses our
proprietary data-path controller that can be reprogrammed and
upgraded with new firmware, allowing the features of our
products to be expanded, customized, and upgraded by our
customers. In addition, by directly attaching to a servers
peripheral bus through the industry-standard PCIe interface, our
products can be installed into a servers PCIe expansion
slots, allowing customers to use our products either in new or
existing server datacenter equipment. Because our data-path
controllers are reprogrammable, our products can incorporate
non-volatile memory from a variety of suppliers and are more
readily adaptable to changes in non-volatile memory over time.
Although we use NAND Flash today, we believe we are unique in
our capability to quickly integrate the newest and highest
density non-volatile memory technologies as they become
available.
Our architecture allows our ioMemory to achieve access rates
approximately 1,000 times that of traditional hard disk drives
by combining the parallel performance from an array of
non-volatile memory devices, while avoiding the bottlenecks of
slow storage networks, controllers, buses and protocols. Our
approach differs substantially from those approaches used by
hybrid disk drive and most solid-state drive, or SSD, vendors
that are forced to emulate traditional hard disk drives and
utilize legacy interfaces and embedded controllers, which
constrain the flow of data between device and operating system,
resulting in low application performance due to the higher
access latency. Our technology manages the non-volatile memory
directly from the operating system, eliminating the need for
these legacy interfaces and embedded controllers in our solution.
71
Virtual
Storage Layer Software
Our VSL virtualization software enables ioMemory to operate as a
new data storage memory tier within the enterprise server and
with more efficiency and capability than traditional storage
devices using embedded controllers. VSL software integrates with
the servers operating system and provides native access to
data stored on ioMemory, bypassing legacy storage input / output
interfaces. In doing so, VSL software allows servers to achieve
significantly increased application performance and data
processing with low latency access and high bandwidth throughput
from the ioMemory hardware. Non-volatile memory, including NAND
Flash memory, is inherently asymmetrical in that read, program
and erase times are different, resulting in divergent read and
write access times. VSL software allows the non-volatile memory
in ioMemory to read and write with nearly equivalent times by
means of a log-structured data store that completes data
transactions in microseconds as opposed to alternative high
performance filing systems that complete data transactions in
milliseconds, which implies an approximately 1,000 times
improvement in storage performance. Because VSL software is
extensible, we are able to add new features such as our recently
released directCache data-tiering software and ioSphere
management software. VSL software runs on a variety of operating
systems, including Windows, Linux, VMware ESX/ESXi, Solaris and
Mac OS X.
Products
Our portfolio of storage memory products incorporates our
ioMemory hardware modules and related VSL software into our
family of ioDrive enterprise grade products. Our ioDrive
products work in conjunction with our directCache data-tiering
software and ioSphere management system software.
ioDrive
Products
Our ioDrive product families are a line of PCIe standard
form-factor storage memory platforms that combine one or more
ioMemory modules with our VSL software. We classify our ioDrive
products based on capacity, latency, bandwidth and input /
output operations per second, or IOPS. Our ioDrive products
offer the following standard specifications:
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NAND
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Product
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ioMemory
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Type and
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VSL
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Family
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Modules
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Capacity
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Software
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Performance
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ioDrive
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1
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SLC-160GB
SLC-320GB
MLC-320GB
MLC-640GB
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Yes
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26uS latency, up to 790MB/sec and up to 145,000 IOPS
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ioDrive Duo
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2
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SLC-320GB
SLC-640GB
MLC-640GB
MLC-1.28TB
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Yes
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26uS latency, up to 1.5GB/sec and up to 285,000 IOPS
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ioDrive Octal
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8
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MLC-5.12TB
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Yes
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30uS latency, up to 6GB/sec and up to 1,190,000 IOPS
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72
directCache
Data-Tiering Software
Our directCache software extends our ioMemory platform and
permits interoperability with traditional direct-attached,
network-attached, storage area network attached and appliance
attached backend storage systems. This software is designed to
intelligently identify, copy and cache to ioMemory the most
frequently accessed blocks of storage data from very large-scale
backend datasets. This active data can then be retrieved
significantly faster, allowing the applications accessing the
data to achieve performance as if the entire dataset were stored
locally on the ioMemory. This capability allows enterprises to
realize the benefits of our technology without replacing or
modifying their existing datacenter infrastructure. directCache
software was recently released for general availability in the
fourth quarter of fiscal 2011. directCache software is
compatible with all of our ioDrive products.
ioSphere
Platform Management Software
ioSphere is a suite of management software purpose-built for our
storage memory infrastructure and designed around our data
decentralization platform. ioSphere software is accessible
through a graphical user interface that enables datacenter
administrators to centrally configure, monitor, manage and tune
all distributed ioMemory devices throughout the datacenter. In
addition, this software offers real-time, predictive and
historical reporting of ioMemorys performance and wear.
ioSphere software also includes our ioManager and ioDirector
modules. ioManager is a local device management software module
that allows customers to manage one or more ioMemory platforms
installed in a single server. ioDirector provides centralized
management of ioMemory platforms across multiple servers within
a datacenter. ioSphere management software was recently released
for general availability in the fourth quarter of fiscal 2011.
OEM
Products
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Our OEMs, including Dell, HP and IBM, sell branded storage
memory solutions based on our standard products as well as
custom form-factor versions to fit specific applications. For
example, HP offers a tailored version of our technology in a
form-factor specific to its C-class blade servers, which it
markets as HP StorageWorks IO Accelerator.
Similarly, IBM incorporates a tailored version of our ioDrive
product into its InfoSphere Smart Analytics System
5600 and WebSphere XC10 Middleware appliances.
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HPs StorageWorks IO
Accelerator
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Sales and
Marketing
We sell our products through our global direct sales force, OEMs
and other channel partners.
Our direct sales teams are typically comprised of a combination
of a field sales representative, a systems engineer, and an
inside sales development representative. Each sales team is
responsible for either a geographical territory or has
responsibility for a number of named major accounts. The sales
cycle from the time of initial prospect qualification to
completion of an initial sale may take a few days or several
months. After initial deployment, our sales teams focus on
ongoing account management and the development of follow-on
sales. A majority of the sales opportunities that we generate
directly are fulfilled via one of our existing OEM partners.
We also have OEM-focused sales teams. These sales teams are
dedicated to working exclusively with each of our OEM partners
to maximize the global market penetration of our technology.
Current OEMs include Dell, HP, IBM, and others. Our OEMs sell
and support our products through their respective sales
channels, their direct distribution, their value added resellers
and their systems integrators. Our OEMs may integrate our
platform into their own proprietary product offerings or sell a
customized or branded version of our standard products.
73
We also work closely with a variety of other OEM and channel
partners to promote and sell our products. These companies
include appliance builders, systems integrators, and various
private label system manufacturers. We offer a technology
alliance partnership program to jointly create and develop
hardware and software solutions with a number of independent
software and appliance vendors. We believe these types of
partner efforts will facilitate broader and faster adoption of
our products and technology.
We focus our marketing efforts on increasing brand awareness,
communicating product advantages and generating qualified leads
for our sales force, OEMs and other channel partners. We rely on
a variety of marketing vehicles, including trade shows,
advertising, public relations, industry research, our website
and collaborative relationships with technology vendors.
Customers
Since inception, we have shipped our solutions to more than
1,500 end-users. Our products are used in a variety of markets
such as financial services, Internet, technology, education,
retail, manufacturing, energy, life sciences and government.
We generally sell pursuant to individual purchase orders from
direct customers and under various master supply or reseller
agreements. Our ten largest customers, including the applicable
OEM customers, accounted for an aggregate of 47% of our revenue
in fiscal 2009, 75% of our revenue in fiscal 2010 and 91% for
the nine months ended fiscal 2011. The composition of the group
of our largest customers changes from period to period. Our OEM
customers IBM and HP and direct customer Facebook, each
accounted for 13%, 10%, and 10% of our revenue, respectively, in
fiscal 2010. Revenue from sales to Facebook and Apple, through a
reseller, accounted for 52% and 20% of revenue, respectively,
for the three months ended March 31, 2011; however, we
expect that revenue from sales to Facebook will decline
significantly for the three months ending June 30, 2011. We
expect that sales of our products to a limited number of
customers will continue to account for a majority of our revenue
in the foreseeable future.
Customer
Support
We offer standard warranty service and support with our
products, including those sold directly or through resellers.
This includes periodic software updates and maintenance releases
and patches, if-and-when available, and other product support
such as Internet access to technical content and
24-hour
telephone and email access to technical support personnel. Our
OEMs provide primary product support for our products sold by
them. We also sell premium-tiered support pursuant to service
contracts. Service contracts typically have a one-year term,
though some customers contract for longer terms. Our support
personnel are based in San Jose, California and Salt Lake
City, Utah. As we expand internationally, we expect to continue
to hire additional technical support personnel to service our
global customer base.
Research and
Development
Our research and development efforts are focused primarily on
improving and enhancing our existing products and developing new
hardware and software solutions. We believe that software is
critical to expanding our leadership in data decentralization.
Accordingly, we are devoting the majority of our research and
development resources to software development including value
added software such as third party infrastructure and
applications. We also intend to enhance our ioManager, ioSphere
and directCache software, including adding monitoring service
capabilities. We also intend to further enhance our VSL
software. Our engineering team has deep operating system
expertise, including Linux kernel contributors and developers
with expertise in a variety of other operating systems. We work
closely with our customers to understand their current and
future needs and have designed a product development process
that integrates our customers feedback.
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We believe the timely development of new products is essential
to maintaining our competitive position. As of March 31,
2011, we had 128 employees in our research and development
organization, substantially all of whom were located at our
locations in Salt Lake City, Utah, Boulder, Colorado and
San Jose, California. We also supplement our research and
development efforts with third-party developers and contractors.
We also test our products to certify and ensure interoperability
with third-party hardware and software products, including PCIe
interoperability and OEM certification. We plan to dedicate
significant resources to these continued research and
development efforts.
Our research and development expenses were $18.3 million in
the nine months ended March 31, 2011, $16.0 million in
fiscal 2010, $11.7 million in fiscal 2009 and
$5.6 million in fiscal 2008.
Manufacturing
We outsource the manufacturing of our hardware products to our
contract manufacturers, AlphaEMS Manufacturing Corporation and
Jabil Circuit, Inc. We currently procure a majority of the
components used in our products directly from third-party
vendors and have them delivered to our contract manufacturers.
AlphaEMS and Jabil manufacture and assemble our products and
deliver them to us for labeling, quality assurance testing,
final configuration, including a final firmware installation,
and shipment to our customers.
Our manufacturing process is designed to minimize the amount of
inventory that we are required to retain to meet customer
demand. We place orders with our contract manufacturers on a
purchase order basis, and in general, we engage our contract
manufacturers to manufacture products to meet our forecasted
demand or when our inventories drop below certain levels. Our
agreements with our contract manufacturers require us to provide
regular forecasts for orders. However, we may cancel or
reschedule orders, subject to applicable notice periods and
fees, and delivery schedules requested by us in these purchase
orders vary based upon our particular needs. Our contract
manufacturers work closely with us to ensure design for
manufacturability and product quality.
Backlog
We do not believe that our backlog at any particular time is
meaningful because it is not necessarily indicative of future
revenue. In particular, customers may generally cancel or
reschedule orders without penalty, and delivery schedules
requested by customers in their purchase orders frequently vary
based upon each customers particular needs. Additionally,
shipments to customers may be delayed due to inventory
constraints.
Competition
We believe that the most important competitive factor in our
market is to provide a comprehensive platform with the following
attributes:
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hardware incorporating sufficient capacity and rate of access,
in a form factor that can be integrated within industry-standard
servers;
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software that virtualizes storage resources and governs the flow
and management of data between storage and the server;
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software that enables this platform to be utilized within both
new and existing datacenter architectures; and
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software that centrally configures, manages and monitors this
new distributed infrastructure.
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Other principal factors affecting our market include:
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application performance, including consistent low latency and
high bandwidth;
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providing enterprise grade data endurance, reliability,
retention and availability not inherent in NAND Flash memory;
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ease of management;
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space efficiency;
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energy efficiency; and
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total cost of ownership.
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We believe that we compete favorably with our competitors on the
basis of these factors.
Our storage memory platform competes with various traditional
data center architectures, including high performance server and
storage approaches. These may include offerings from traditional
data storage providers, including storage array vendors such as
EMC Corporation, Hitachi Data Systems and NetApp Inc., who
typically sell centralized storage products as well as
high-performance storage approaches utilizing solid state disks,
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, Marvell Semiconductor, Inc., Micron
Technology, Inc., OC2 Technology Group, Inc., Samsung
Electronics, Inc., Seagate Technology, STEC, Inc., Toshiba Corp.
and Western Digital Corp. Our directCache data-tiering software
competes with products of suppliers of software-hardware cache
solutions, including LSI Corporation and Adaptec, Inc., as well
as several open source software solutions and other
software-based hardware cache solutions being developed by
privately held companies. Although our ioSphere platform
management software is specifically designed to manage solid
state storage, it competes with products of developers of
general-purpose distributed management and monitoring software
solutions, including HP, IBM, CA, Inc. and Nagios Enterprises,
LLC. A number of new, privately held companies are currently
attempting to enter our market, one or more 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. Some of our competitors have
made acquisitions of businesses that allow them to offer more
directly competitive and comprehensive solutions than they had
previously offered. In addition, some of our competitors may
sell at zero or negative margins 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 that our products will continue to
compete favorably, and any failure to do so could seriously harm
our business, operating results and financial condition.
Intellectual
Property
Our success depends in part upon our ability to protect our core
technology and intellectual property. We rely on patents,
trademarks, copyrights and trade secret laws, confidentiality
procedures, and employee disclosure and invention assignment
agreements to protect our intellectual property rights.
We have 4 issued patents and 63 patent applications in the
United States and 85 corresponding patent applications in
foreign countries, as of April 30, 2011 relating to non-volatile
solid-state storage, non-volatile solid-state memory, software
acceleration, and related technologies. We cannot assure you
whether any of our patent applications will result in the
issuance of a patent or whether the examination process will
require us to narrow our claims. Any patents that may issue may
be contested, circumvented, found unenforceable or invalidated,
and we may not be able to prevent third parties from infringing
them.
We generally control access to and use of our proprietary
software and other confidential information through the use of
internal and external controls, including contractual
protections with employees, contractors, customers and partners,
and our software is protected by U.S. and
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international copyright laws. Despite our efforts to protect our
trade secrets and proprietary rights through intellectual
property rights, licenses and confidentiality agreements,
unauthorized parties may still copy or otherwise obtain and use
our software and technology. In addition, we intend to expand
our international operations, and effective patent, copyright,
trademark and trade secret protection may not be available or
may be limited in foreign countries.
Third parties could claim that our products or technologies
infringe their proprietary rights. The data storage industry is
characterized by the existence of a large number of patents,
trademarks and copyrights and by frequent litigation based on
allegations of infringement or other violations of intellectual
property rights. We expect that infringement claims may further
increase as the number of products and competitors in our market
increase. In addition, to the extent that we gain greater
visibility and market exposure as a public company, we face a
higher risk of being the subject of intellectual property
infringement claims from third parties. We cannot assure you
that we do not currently infringe, or that we will not in the
future infringe, upon any third-party patents or other
proprietary rights. See Risk Factors for additional
information.
Employees
We believe the expertise of our people and our technology
focused culture is a key enabler of our technology leadership.
Our team has a broad range of expertise across operating
systems, datacenter software, systems, storage, networking and
servers. As of March 31, 2011, we had 395 employees,
including 208 in sales and marketing, 128 in research and
development and 59 in general and administrative activities.
None of our employees is represented by a labor organization or
is a party to any collective bargaining arrangement, we have
never had a work stoppage and we consider our relationship with
our employees to be good.
Facilities
Our headquarters occupy approximately 118,000 square feet
in Salt Lake City, Utah under leases that expire in September
2021. We have an option to extend these leases to September
2026. Our principal office for sales and marketing occupies
approximately 14,000 square feet in San Jose,
California, under a lease that expires in May 2013. We have an
additional research and development office in Boulder, Colorado.
We lease space in locations throughout the United States and
various international locations for operations and sales
personnel. We believe that our current facilities are adequate
to meet our ongoing needs and that, if we require additional
space, we will be able to obtain additional facilities on
commercially reasonable terms.
Legal
Proceedings
On May 17, 2011, Internet Machines LLC filed a lawsuit in
U.S. District Court for the Eastern District of Texas
against us and 20 other companies. The complaint alleges that
our products infringe U.S. Patent Nos. 7,454,552;
7,421,532; 7,814,259; and 7,945,722. The complaint seeks both
damages and a permanent injunction against us. As of
June 6, 2011, we had not been served with the complaint,
and we have limited information about the specific infringement
allegations, but they appear to focus on a PCI switch component
that, while used in some of our products, is manufactured by a
third-party supplier. Based upon our preliminary investigation
of the patents identified in the complaint, we do not believe
that our products infringe any valid or enforceable claim of
these patents. Nevertheless, the costs associated with any
actual, pending or threatened litigation could negatively impact
our operating results regardless of the actual outcome.
We may, from time to time, be involved in various legal
proceedings arising from the normal course of business
activities, and an unfavorable resolution of any of these
matters could materially affect our future results of
operations, cash flows or financial position.
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MANAGEMENT
Executive
Officers, Directors and Key Employee
The following table provides information regarding our executive
officers, a key employee and directors as of June 6, 2011:
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Name
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Age
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Position(s)
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Executive Officers:
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David A. Flynn
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Chief Executive Officer, President and Chairman
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Dennis P. Wolf
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Chief Financial Officer and Executive Vice President
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Neil A. Carson
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Chief Technology Officer and Executive Vice President
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James L. Dawson
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Executive Vice President, Worldwide Sales
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Shawn J. Lindquist
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Chief Legal Officer, Executive Vice President and Secretary
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Lance L. Smith
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Chief Operating Officer and Executive Vice President
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Rick C. White
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Chief Marketing Officer, Executive Vice President and Director
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Key Employee:
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Stephen G. Wozniak
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Chief Scientist
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Other Directors:
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Forest Baskett, Ph.D.(3)
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Director
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H. Raymond Bingham(1)(2)
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Director
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Dana L. Evan(1)(2)
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Director
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Scott D. Sandell(2)(3)
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Lead Independent Director
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Christopher J. Schaepe(1)(3)
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Director
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(1) |
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Member of our audit committee. |
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Member of our compensation committee. |
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Member of our nominating and governance committee. |
David A. Flynn is one of our founders and has served as a
director since July 2006 and was appointed as the Chairman of
our board of directors in May 2011. Mr. Flynn has
served as our Chief Executive Officer and President since March
2010 and previously served as our President from inception to
February 2009 and Chief Technology Officer from inception to
March 2010. From November 2004 to October 2006, Mr. Flynn
served as chief scientist of Realm Systems, Inc., a company
offering research and development services for developing mobile
computing platforms. From January 2002 to November 2004,
Mr. Flynn served as chief architect software engineer of
Linux Networx, Inc., a developer of high performance computing
technology. From 1996 to 2002, Mr. Flynn served as senior
software engineer of Liberate Technologies, Inc. From 1995 to
1996, Mr. Flynn founded the Utah research and development
satellite office of Oracle Corporation, which subsequently
became a founding part of Network Computer Inc., later renamed
Liberate Technologies. Mr. Flynn holds a B.S. in Computer
Science from Brigham Young University. We believe Mr. Flynn
possesses specific attributes that qualify him to serve as a
member of our board of directors, including the perspective and
experience he brings as our Chief Executive Officer and
President, one of our founders and a significant stockholder.
Dennis P. Wolf has served as our Chief Financial Officer
and Executive Vice President since October 2010, as our Chief
Financial Officer and Senior Vice President from March 2010 to
October 2010, and as our Chief Financial Officer from November
2009 to March 2010. From January 2009 to April 2009,
Mr. Wolf served as interim chief executive officer and
chief financial officer of Finjan Software, Inc., a provider of
web security solutions. From March 2005 to June 2008,
Mr. Wolf served as executive vice president and chief
financial officer of MySQL AB, an open source database software
company. Prior to MySQL, Mr. Wolf held financial management
positions for public high technology companies, including Apple
Computer, Inc., Centigram Communications, Inc., Credence
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Systems Corporation, Omnicell, Inc., Redback Networks Inc. and
Sun Microsystems, Inc. Mr. Wolf currently serves as a
director of Codexis Inc. and Quantum Corporation, where he is
also a member of their respective audit committees, and has been
a director and chair of the audit committee for other publicly
and privately held companies including BigBand Networks, Inc.,
Registry Magic, Inc., Avanex Corporation, Komag, Inc. and Vitria
Technology, Inc. He holds a B.A. from the University of Colorado
and an M.B.A. from the University of Denver.
Neil A. Carson has served as our Chief Technology Officer
and Executive Vice President since October 2010, and as our
Chief Technology Officer from March 2010 to October 2010. From
December 2007 to January 2010, Mr. Carson served as chief
application architect for Dell services, Dell Inc., a computer
hardware, software and peripherals company. From June 2005 to
December 2007, Mr. Carson served as chief architect of
Everdream Corporation, a software-as-a-service systems
management company. From 2003 to June 2005, Mr. Carson
served as principal engineer of Remedy software products at BMC
Software, Inc., an IT service management company. From 1997 to
2003, Mr. Carson served as principal architect of Liberate
Technologies, Inc. From 1995 to 1997, Mr. Carson served as
director of Causality Limited, an embedded systems software
company. Mr. Carson holds a B.Eng. degree from the Royal
Military College of Science at Cranfield University.
James L. Dawson has served as our Executive Vice
President, Worldwide Sales since October 2010, and as our Senior
Vice President of Sales from April 2009 to October 2010. From
2004 to April 2009, Mr. Dawson served as vice president of
worldwide sales of 3PAR Inc., a storage solutions company. From
2002 to 2004, Mr. Dawson served as vice president,
strategic sales and business development of Neoscale Systems,
Inc., an enterprise storage security company. From 2000 to 2002,
Mr. Dawson served as vice president of worldwide sales for
Scale Eight, Inc., a storage solutions company. From 1987 to
2000, Mr. Dawson served in various positions with Data
General Corporation, a supplier of storage and enterprise
computing solutions, most recently as vice president of EMEA and
Asia Pacific for its CLARiiON Storage Division. Mr. Dawson
holds a B.A. in Economics from Weber State University.
Shawn J. Lindquist has served as our Chief Legal Officer,
Executive Vice President and Secretary since October
2010, and as our Chief Legal Officer, Senior Vice President
and Secretary from February 2010 to October 2010. From 2005 to
January 2010, Mr. Lindquist served as chief legal officer,
senior vice president and secretary of Omniture, Inc., an online
marketing and web analytics company. Mr. Lindquist was a
corporate and securities attorney at Wilson Sonsini
Goodrich & Rosati, P.C. from 2001 to 2005 and
from 1997 to 1999. Mr. Lindquist has also served as
in-house corporate and mergers and acquisitions counsel for
Novell, Inc., and as vice president and general counsel of a
privately held, venture-backed company. Mr. Lindquist is
also an adjunct professor of law at the J. Reuben Clark Law
School at Brigham Young University. Mr. Lindquist holds a
B.S. in Business Management-Finance and a J.D. from Brigham
Young University.
Lance L. Smith has served as our Chief Operating Officer
since April 2010, as our Executive Vice President since October
2010, as our Senior Vice President of Engineering from September
2009 to October 2010, and as our Senior Vice President of
Product Management and Marketing from May 2008 to September
2009. From January 2003 to May 2008, Mr. Smith served as
vice president and general manager of RMI Corporation, a
semiconductor company. From 2000 to 2002, Mr. Smith served
as senior vice president, business development of Raza
Foundries, Inc., a broadband networking and communications
investment company, and served in various interim executive
roles at Pacific Broadband Communications, Inc., Acirro, Inc.
and Omnishift Technologies Inc. He also served as the director
of commercial segment marketing and director of technical
marketing for the computational products group of Advanced Micro
Devices, Inc., the x86 microprocessor and video card maker, and
had management roles at technology companies NexGen, Inc. and
Chips and Technologies, Inc. Mr. Smith holds a B.S. in
Electrical Engineering from Santa Clara University.
Rick C. White is one of our founders and has served as a
director since April 2009. He also served as a director from
inception to March 2008. Mr. White has served as our Chief
Marketing Officer since 2008. From inception to February 2008,
Mr. White served as our Chief Executive Officer.
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From 2006 to January 2007, Mr. White served as Chairman of
DAZ Productions, Inc., a developer of 3D graphics software and
content. From 2002 to 2005, Mr. White served as chief
executive officer of Realm Systems, Inc. From 2000 to 2005,
Mr. White served as Chairman of Forum Systems, Inc. a
developer of XML enterprise messaging systems. From 1997 to
2000, Mr. White served as chief executive officer and
chairman of Phobos Corporation, a developer of PCI based
switching and load balancing technology for data centers. In
April 2005, Mr. White filed for personal bankruptcy and was
discharged under Chapter 7 of the U.S. Bankruptcy Code
in February 2009. We believe Mr. White brings to our board
of directors the perspective and experience he brings as an
officer, one of our founders and a significant stockholder.
Stephen G. Wozniak has served as our Chief Scientist
since December 2008. From 1971 to 1976, Mr. Wozniak held
engineering positions within HP. In 1976, Mr. Wozniak
co-founded Apple Computer, Inc., now Apple Inc. In 1985,
Mr. Wozniak was awarded the National Medal of Technology,
for his role in the development and introduction of the personal
computer. After leaving Apple in 1985, Mr. Wozniak was
involved in various business and philanthropic ventures,
focusing primarily on computer capabilities in schools,
stressing hands-on learning and encouraging creativity for
students. In 2000, Mr. Wozniak was inducted into the
National Inventors Hall of Fame, and he was awarded the Heinz
Award in Technology, the Economy and Employment. He also
co-founded the Electronic Frontier Foundation, and was a
founding sponsor of the Tech Museum, Silicon Valley Ballet and
Childrens Discovery Museum of San Jose.
Mr. Wozniak holds a B.S. in Electrical Engineering and
Computer Sciences from the University of California, Berkeley.
Forest Baskett, Ph.D. has served as a director since
March 2008. Dr. Baskett has been a general partner of New
Enterprise Associates, a venture capital firm, since 2004.
Dr. Baskett joined New Enterprise Associates in 1999. From
1986 to 1999, Dr. Baskett served as chief technology
officer and senior vice president, research and development of
Silicon Graphics, Inc. Dr. Baskett founded and directed the
Western Regional Laboratory of Digital Equipment Corporation
from 1982 to 1986. From 1971 to 1982, Dr. Baskett was a
professor of Computer Science and Electrical Engineering at
Stanford University. In addition to serving on our board of
directors, Dr. Baskett serves on various private company
boards. Dr. Baskett holds a B.A. in Mathematics from Rice
University, a Ph.D. in Computer Science from the University of
Texas at Austin and is a member of the National Academy of
Engineering. We believe that Dr. Baskett possesses specific
attributes that qualify him to serve as a member of our board of
directors, including his experience with a wide range of
technology companies and the venture capital industry.
H. Raymond Bingham has served as a director since
February 2011. Mr. Bingham has been an advisory director of
General Atlantic LLC, a private equity firm, since January 2010
and managing director and head of the Palo Alto office from
September 2006 to December 2009. From August 2005 to August
2006, Mr. Bingham was a self-employed private investor.
From 1993 to 2005, Mr. Bingham served in various positions
at Cadence Design Systems, Inc., a supplier of electronic design
automation software and services, including executive chairman
of the board of directors, president and chief executive officer
and executive vice president and chief financial officer.
Mr. Bingham also currently serves as a director of Oracle
Corporation, Flextronics International Ltd., STMicroelectronics
N.V., Spansion Inc. and Dice Holdings, Inc. Mr. Bingham
holds a B.S. from Weber State University and an M.B.A. from
Harvard Business School. We believe that Mr. Bingham
possesses specific attributes that qualify him to serve as a
member of our board of directors, including his experience in
leading and managing a large, complex global organization in the
technology industry and financial expertise and significant
audit and financial reporting knowledge.
Dana L. Evan has served as a director since February
2011. Since July 2007, Ms. Evan has invested in and served
on the boards of directors of companies in the Internet,
technology and media sectors, including Omniture, Inc. From May
1996 until July 2007, Ms. Evan served as chief financial
officer of VeriSign, Inc., a provider of intelligent
infrastructure services for the Internet and telecommunications
networks. Previously, Ms. Evan worked as a financial
consultant in the capacity of chief financial officer, vice
president of finance or corporate controller over an eight-year
period for various public and private companies and
partnerships, including VeriSign, Inc., Delphi Bioventures, a
venture
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capital firm, and Identix Incorporated, a multi-biometric
technology company. Prior to serving as a financial consultant,
Ms. Evan worked in a variety of positions at KPMG LLP, most
recently as senior manager. Ms. Evan also serves on the
board of directors of a number of privately held companies.
Ms. Evan is a certified public accountant (inactive) and
holds a B.S. in Commerce with a concentration in Accounting and
Finance from Santa Clara University. We believe that
Ms. Evan possesses specific attributes that qualify her to
serve as a member of our board of directors, including broad
expertise in operations, strategy, accounting, financial
management and investor relations at both publicly and privately
held technology and Internet companies.
Scott D. Sandell has served as a director since March
2008 and was appointed as our lead independent director in
May 2011. In 1996, Mr. Sandell joined New Enterprise
Associates, where he became a general partner in 2000. In
addition to serving on our board of directors, Mr. Sandell
is a director of Spreadtrum Communications, Inc. and various
private companies. Mr. Sandell started his career at the
Boston Consulting Group and later joined C-ATS Software, Inc.
Later, he worked as a Product Manager for Windows 95 at
Microsoft Corporation before joining New Enterprise Associates
in 1996. Mr. Sandell is a member of the board of directors
of the National Venture Capital Association. Mr. Sandell
holds an A.B. in Engineering Sciences from Dartmouth College and
an M.B.A. from the Stanford Graduate School of Business. We
believe that Mr. Sandell possesses specific attributes that
qualify him to serve as a member of our board of directors,
including his experience with a wide range of technology
companies and the venture capital industry.
Christopher J. Schaepe has served as a director since
April 2009. Mr. Schaepe is a founding managing director of
Lightspeed Venture Partners, a venture capital firm. Prior to
joining Lightspeed in September 2000, he was a general partner
at Weiss, Peck & Greer Venture Partners, a venture
capital firm, which he joined in 1991. In addition to serving on
our board of directors, Mr. Schaepe is a director of
Riverbed Technology, Inc. and various private companies.
Mr. Schaepe holds B.S. and M.S. degrees in Computer Science
and Electrical Engineering from the Massachusetts Institute of
Technology and an M.B.A. from the Stanford Graduate School of
Business. We believe that Mr. Schaepe possesses specific
attributes that qualify him to serve as a member of our board of
directors, including his experience with a wide range of
technology companies and the venture capital industry.
Our executive officers are appointed by our board of directors
and serve until their successors have been duly elected and
qualified. There are no family relationships among any of our
directors or executive officers.
Codes of Business
Conduct and Ethics
Our board of directors has adopted a code of business conduct
and ethics that applies to all of our employees, officers and
directors, including our Chief Executive Officer, Chief
Financial Officer and other executive and senior financial
officers.
Board of
Directors
Our bylaws permit our board of directors to establish by
resolution the authorized number of directors. Currently, seven
directors are authorized, consisting of members determined as
follows:
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holders of shares of our Series A convertible preferred
stock, voting as a separate class, are entitled to elect two
members (currently Dr. Baskett and Mr. Sandell);
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holders of shares of our Series B convertible preferred
stock, voting as a separate class, are entitled to elect one
member (currently Mr. Schaepe);
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holders of shares of common stock, voting as a separate class,
are entitled to elect three members (currently Ms. Evan and
Messrs. Flynn and White); and
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holders of shares of our convertible preferred stock, voting as
a separate class, and holders of shares of our common stock,
voting as a separate class, are entitled to elect one member
(currently Mr. Bingham).
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The current members of our board of directors will continue to
serve as directors until their resignations or until their
successors are duly elected by the holders of our common stock,
notwithstanding the automatic conversion of all outstanding
shares of convertible preferred stock into shares of our common
stock and the termination of a voting agreement between us and
certain of our stockholders upon the completion of this offering.
As of the completion of this offering, our certificate of
incorporation and bylaws will provide for a classified board of
directors consisting of three classes of directors, each serving
staggered three-year terms, as follows:
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the Class I directors will be Messrs. Schaepe, and
White, and their terms will expire at the annual meeting of
stockholders to be held in 2011;
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the Class II directors will be Dr. Baskett and
Ms. Evan, and their terms will expire at the annual meeting
of stockholders to be held in 2012; and
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the Class III directors will be Messrs. Bingham,
Flynn, and Sandell, and their terms will expire at the annual
meeting of stockholders to be held in 2013.
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Upon expiration of the term of a class of directors, directors
for that class will be elected for three-year terms at the
annual meeting of stockholders in the year in which that term
expires. Each directors term continues until the election
and qualification of his successor, or his earlier death,
resignation or removal. Any increase or decrease in the number
of directors will be distributed among the three classes so
that, as nearly as possible, each class will consist of
one-third of the directors. This classification of our board of
directors may have the effect of delaying or preventing changes
in control of our company.
Director
Independence
Upon the completion of this offering, our common stock will be
listed on the New York Stock Exchange. Under the rules of the
New York Stock Exchange, independent directors must comprise a
majority of a listed companys board of directors within a
specified period of the completion of this offering. In
addition, the rules of the New York Stock Exchange require that,
subject to specified exceptions, each member of a listed
companys audit, compensation and nominating and governance
committees be independent. Under the rules of the New York Stock
Exchange, a director will only qualify as an independent
director if, in the opinion of that companys board
of directors, that person does not have a relationship that
would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. Audit committee
members must also satisfy the independence criteria set forth in
Rule 10A-3
under the Securities Exchange Act of 1934, as amended.
In order to be considered to be independent for purposes of
Rule 10A-3,
a member of an audit committee of a listed company may not,
other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee:
(1) accept, directly or indirectly, any consulting,
advisory, or other compensatory fee from the listed company or
any of its subsidiaries; or (2) be an affiliated person of
the listed company or any of its subsidiaries.
In March 2011, our board of directors undertook a review of the
independence of each director and considered whether each
director had a material relationship with us that could
compromise his or her ability to exercise independent judgment
in carrying out his or her responsibilities. As a result of this
review, our board of directors determined that Ms. Evan,
Dr. Baskett and Messrs. Bingham, Sandell and Schaepe,
representing five of our seven directors, were independent
directors as defined under the applicable rules and
regulations of the Securities and Exchange Commission, or SEC,
and the listing requirements and rules of the New York Stock
Exchange.
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Committees of the
Board of Directors
Our board of directors has an audit committee, a compensation
committee and a nominating and governance committee, each of
which will have the composition and responsibilities described
below. Members serve on these committees until their resignation
or until otherwise determined by our board of directors.
Audit
Committee
Ms. Evan and Messrs. Bingham and Schaepe, each of whom
is a non-employee member of our board of directors, comprise our
audit committee. Ms. Evan is the chair of our audit
committee. Our board of directors has determined that each of
the members of our audit committee satisfies the requirements
for independence and financial literacy under the rules and
regulations of the New York Stock Exchange and the SEC. Our
board of directors has also determined that Ms. Evan
qualifies as an audit committee financial expert as
defined in the SEC rules and satisfies the financial
sophistication requirements of the New York Stock Exchange. The
audit committee is responsible for, among other things:
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selecting and hiring our independent registered public
accounting firm, and approving the audit and pre-approving any
non-audit services to be performed by our independent registered
public accounting firm;
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evaluating the performance and independence of our independent
registered public accounting firm;
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monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate
to financial statements or accounting matters;
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reviewing the adequacy and effectiveness of our internal control
policies and procedures and our disclosure controls and
procedures;
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overseeing procedures for the treatment of complaints on
accounting, internal accounting controls or audit matters;
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overseeing our internal auditors;
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discussing the scope and results of our annual audit with the
independent registered public accounting firm and reviewing with
management and the independent registered public accounting firm
our interim and year-end operating results; and
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preparing the audit committee report that the SEC will require
in our annual proxy statement.
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Compensation
Committee
Ms. Evan and Messrs. Bingham and Sandell, each of whom
is a non-employee member of our board of directors, comprise our
compensation committee. Mr. Bingham is the chair of our
compensation committee. Our board of directors has determined
that each member of our compensation committee meets the
requirements for independence under the rules of the New York
Stock Exchange and is an outside director for
purposes of Section 162(m) of the Internal Revenue Code.
The compensation committee is responsible for, among other
things:
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reviewing and approving our Chief Executive Officers and
other executive officers annual base salaries, equity
compensation, annual incentive bonuses and severance, change in
control and other compensation arrangements;
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overseeing our overall compensation philosophy, compensation
plans and benefits programs; and
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preparing the compensation committee report that the SEC will
require in our annual proxy statement.
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Nominating and
Governance Committee
Messrs. Sandell and Schaepe and Dr. Baskett, each of
whom is a non-employee member of our board of directors,
comprise our nominating and governance committee.
Dr. Baskett is the chair of our nominating and governance
committee. Our board of directors has determined that each
member of our nominating and governance committee meets the
requirements for independence under the rules of the New York
Stock Exchange. The nominating and governance committee is
responsible for, among other things:
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assisting our board of directors in identifying prospective
director nominees and recommending nominees for each annual
meeting of stockholders to the board of directors;
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developing and recommending governance principles applicable to
our board of directors;
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overseeing the evaluation of our board of directors and
management;
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reviewing and monitoring compliance with our code of business
conduct and ethics; and
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recommending potential members for each board committee to our
board of directors.
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Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee is an officer
or employee of our company. None of our executive officers
currently serves, or in the past year has served, as a member of
the compensation committee (or other board committee performing
equivalent functions or, in the absence of any such committee,
the entire board of directors) of any entity that has one or
more executive officers serving on our compensation committee.
Non-Employee
Director Compensation
Our directors do not currently receive any cash compensation for
their services as directors or as board committee members. Other
than reimbursement of reasonable travel and related expenses
incurred by non-employee directors in connection with their
attendance at meetings of the board of directors and its
committees, we did not pay any other fees or make any non-equity
awards to or pay any other compensation to our non-employee
directors in fiscal 2010.
On February 19, 2011, Dr. Baskett and
Messrs. Sandell and Schaepe were each granted an option to
purchase 50,000 shares of common stock at an exercise price
per share of $5.12, and Mr. Bingham and Ms. Evan were
each granted an option to purchase 100,000 shares of common
stock at an exercise price per share of $5.12. These options
vest as to 25% of the total number of shares issued pursuant to
the exercise of the option will become vested on the first
anniversary of the vesting commencement date and the remaining
shares subject to the option shall vest at a rate of
1/48th of
the total number of shares subject to the option on the last day
of each month thereafter, subject to such directors
continued service to us on each such vesting date. These options
will fully vest following a change of control as defined in the
respective option agreements.
In May 2011, our board of directors approved the following
annual compensation package for our non-employee directors:
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Annual Cash Retainer
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Annual retainer
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$
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38,500
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Additional retainer for audit committee chair
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$
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20,500
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Additional retainer for audit committee member
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$
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10,000
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Additional retainer for compensation committee chair
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$
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15,500
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Additional retainer for compensation committee member
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$
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8,500
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Additional retainer for nominating and governance committee chair
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$
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9,250
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Additional retainer for nominating and governance committee
member
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$
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4,375
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In addition, each non-employee director who first joins us will
be granted an initial equity award with a value of $470,000 and
each non-employee director will be granted an annual equity
award with a value of $200,000 on each of our annual stockholder
meetings. The initial or annual award may take the form of a
stock option with an exercise price equal to the fair market
value on the grant date, restricted stock unit, or other type of
award as determined by our board of directors in advance of the
grant. To the extent the grant is awarded as a stock option, the
number of shares to be granted will be determined using the
Black-Scholes or similar valuation model. If the grant is
awarded as a restricted stock unit or other type of full value
award, the number of shares to be granted will be determined by
the closing price of our shares on the grant date.
An initial award will vest on each of the first four
anniversaries of the date the non-employee director joins our
board of directors, subject to continued service as a board
member through each such date. Annual awards will vest on the
day prior to annual meeting immediately following the annual
meeting at which the award is granted, subject to continued
service as a board member through the vesting date. If a
directors service is terminated on or following a change
in control other than as the result of a voluntary resignation
that is not at the request of the buyer, then the
directors award will immediately vest in full.
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EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
The following is a discussion and analysis of the compensation
arrangements of our named executive officers who are listed in
the 2010 Summary Compensation Table, which provides detailed
compensation information related to these individuals. This
discussion contains forward-looking statements that are based on
our current considerations, expectations and determinations
regarding future compensation programs. The actual amount and
form of compensation and the compensation programs that we adopt
may differ materially from current or planned programs as
summarized in this discussion.
General
Compensation Philosophy
Our general executive compensation philosophy is to provide
programs that attract, motivate, reward and retain highly
qualified executives and motivate them to pursue our corporate
objectives while encouraging the creation of long-term value for
our stockholders. We evaluate and reward our executive officers
through compensation intended to motivate them to identify and
capitalize on opportunities to grow our business and maximize
stockholder value over time. We strive to provide an executive
compensation program that is market competitive, rewards
achievement of our business objectives and is designed to
provide a foundation of fixed compensation (base salary) and a
significant portion of performance-based compensation
(short-term and long-term incentive opportunities) that are
intended to align the interests of executives with those of our
stockholders.
Compensation
Decision Process
Our historical executive compensation program reflects our
relatively short operating history and small size. Until
recently, in efforts to control expenditures and allocate our
limited resources, we had not engaged compensation consultants
or established formal benchmark processes against any set of
peer group companies.
Prior to July 2010, our compensation program was administered by
our board of directors with substantial input from our Chief
Executive Officer. Our Chief Executive Officer periodically
reviewed the compensation of our executive management and made
recommendations with respect to base salary and other cash
incentive compensation for each named executive officer to our
board of directors. With respect to his own compensation, the
Chief Executive Officer engaged the board of directors in
discussions and made recommendations to them for his own
compensation. The board of directors made the final decision on
named executive officer compensation and has had the ability to
accept or reject the Chief Executive Officers
recommendations for all named executive officers, including the
Chief Executive Officer. Additionally, the board of directors
discussed the Chief Executive Officers compensation with
him, but made final decisions regarding his compensation in
meetings outside of his presence.
In determining compensation for fiscal 2010, the board of
directors relied on its general experience in reviewing the
recommendations of the Chief Executive Officer and approving
each compensation element.
In July 2010, we initiated efforts with respect to our
compensation program that we expect to use on an ongoing basis
and determined that our compensation committee will be
responsible for reviewing and approving compensation for our
executive officers in future periods.
Subsequent to fiscal 2010, the compensation committee engaged
Compensia, Inc., or Compensia, an independent executive
compensation consulting firm from which we have obtained
relevant compensation data and will continue to do so in the
future. Our compensation committee, Compensia and our management
will work together to choose a public company peer group for
executive compensation purposes in the future. These companies
will be chosen from a group of similar publicly
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traded companies, taking into account size and growth potential.
We consulted with Compensia to establish reference points and
guidelines with respect to equity compensation as well as with
respect to change of control and severance arrangements. We
expect that following our initial public offering we will
benchmark our compensation relative to data from our public
company peer group (which may change over time). The
compensation committee also intends to review industry survey
data prepared by Compensia, including Compensias executive
and equity compensation assessment, and the Radford Global
Technology Survey.
Weighting of
Elements of Compensation Program
We do not have any predetermined formula or target for
allocating compensation between short- and long-term, fixed and
variable or cash and non-cash compensation. As a privately held
company, executive compensation has been weighted toward equity,
which has been awarded in the form of stock options. The board
of directors determined that this form of compensation focused
our executives on driving achievement of our strategic and
financial goals. The board of directors also believes that
making stock options a key component of executive compensation
aligns the executive team with the long-term interests of our
stockholders. We have also offered cash compensation in the form
of base salaries to reward individual contributions and
compensate our employees for their
day-to-day
responsibilities, and annual bonuses to drive excellence and
leadership and reward our employees in the achievement of our
short-term objectives.
Principal
Elements of Executive Compensation
Components of
Named Executive Officer Compensation
The compensation program for our named executive officers
consists of:
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base salary;
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incentive cash compensation;
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stock options; and
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change of control and severance arrangements.
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We believe that our compensation packages are properly designed
to attract and retain qualified individuals, link individual
performance to company performance, focus the efforts of our
named executive officers on the achievement of both our
short-term and long-term objectives, and align the interests of
our named executive officers with those of our stockholders.
As our needs evolve and circumstances require, we intend to
continue to evaluate our philosophy and compensation program. At
a minimum, we intend to review executive compensation annually.
Base
Salaries
Base salary typically will be used to recognize the experience,
skills, knowledge and responsibilities required of each named
executive officer, although competitive market conditions also
may play a role in setting the level of base salary. We do not
apply specific formulas to determine changes in base salary.
Rather, the base salaries of our named executive officers have
historically been reviewed on a periodic basis and adjustments
have been made to reflect our economic condition and future
expected performance, as well as what our named executive
officers could be expected to receive if employed at companies
similarly situated to ours and our overall subjective assessment
of appropriate salary levels, while being mindful of the need to
conserve cash resources.
2010 Base
Salaries
The fiscal 2010 base salaries were set by our board of directors
based on the recommendations of our Chief Executive Officer and
were set to reflect our status as a private company. Based on
the
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general knowledge and experience of the board of directors and
the Chief Executive Officer, we believe our 2010 base salary
ranges for our named executive officers were within the ranges
of base salaries for private companies.
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Name
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FY 2010 Base
Salary ($)
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David A. Flynn
Chief Executive Officer and President
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240,000
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(1)
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Dennis P. Wolf
Chief Financial Officer and Executive Vice President
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220,000
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James L. Dawson
Executive Vice President of Worldwide Sales
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225,000
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Rick C. White
Chief Marketing Officer and Executive Vice President
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220,000
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Lance L. Smith
Chief Operating Officer and Executive Vice President
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220,000
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David R. Bradford
Former Chief Executive Officer
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240,000
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Mr. Flynns annual base salary was increased from
$220,000 to $240,000, effective in April 2010. |
Effective as of March 23, 2010, Mr. Bradford resigned
as our President and Chief Executive Officer and assumed the
position of Chairman of the board of directors until February
2011. Mr. Bradford continued to serve as our full-time
employee until September 30, 2010. Since that time, he has
provided advisory services to the Chief Executive Officer and
the board of directors. The board of directors took into
consideration the responsibilities and role of
Mr. Bradford, and determined to maintain his base salary at
the same level that he was paid prior to his resignation as
President and Chief Executive Officer through December 31,
2010, as part of transitioning his duties to Mr. Flynn.
Concurrent with Mr. Bradfords resignation,
Mr. Flynn was promoted to Chief Executive Officer,
effective April 7, 2010, and received an increase to his
base salary to $240,000.
Incentive Cash
Compensation
Our compensation objective is to have a significant portion of
each named executive officers compensation tied to
performance. We provide performance-based cash incentive
opportunities for certain employees, including our named
executive officers, that are paid based on corporate and/or
individual performance. Other than Mr. Dawson, each of our named
executive officers has a pre-set bonus target that is stated as
a percentage of base salary 66
2/3%
for Mr. Flynn and 50% for the remainder. Actual cash incentive
payouts have been determined historically by our board of
directors, in consultation with our Chief Executive Officer. In
future fiscal years, our compensation committee, in consultation
with our Chief Executive Officer, will be responsible for
setting the parameters for performance-based cash incentives,
including, but not limited to, determining applicable
performance objectives and target and actual achievement of
these objectives. These parameters may change from year to year,
as we and our market mature and different priorities are
established, but they will continue to be set, and performance
against them determined or approved, by our compensation
committee.
2010 Incentive
Cash Compensation
Although we did not have a formal performance-based cash
incentive plan in place during fiscal 2010, in July 2010, our
board of directors reviewed our business performance and its
desire to recognize the achievements of our management team. The
board of directors did not have pre-set goals and did not base
the overall bonus pool or the individual bonus payouts on a
specific formula, although it did consider the target
percentages of base salary listed above. Instead, the board of
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directors approval of bonus payouts for fiscal 2010 in
general was based on our positive operating results, such as
increased revenue, expansion and enhancement of our product
lines, and growth in our customer base, and the total bonus pool
was based on its subjective view of a reasonable and appropriate
amount. The board of directors approved the largest bonus
payout, in the amount of $192,000, to Mr. Flynn because of his
leadership of the entire company and our overall improving
business results. For our other named executive officers, Mr.
Flynn recommended individual bonus payouts to our board of
directors, which then approved the amounts listed below in the
2010 Summary Compensation Table. The amounts vary because of the
different levels of responsibilities and length of service
during the fiscal year as well as differences among base
salaries and, but they do not reflect a specific percentage
achievement of goals.
Mr. Dawson participated in a sales commission plan, based
on the achievement of quarterly bookings and certain additional
commissions if target bookings were exceeded. We have not
disclosed the specific formulae or performance targets contained
in this plan for several reasons, including our belief that
disclosure would result in competitive harm.
Mr. Dawsons bonus formula includes bookings quotas,
revenue and gross margin targets and commission rates. The
specific targets for bookings quotas, revenue and gross margin
for Mr. Dawson were established by our board of directors,
with input from our CEO. These targets were based on our
historical operating results and growth rates, as well as our
expected future results, and were designed to require
significant effort on the part of Mr. Dawson. In
particular, the bookings quotas, revenue and gross margin
targets were viewed as difficult to achieve, because these
targets represented significant increases over the comparable
results for fiscal 2009, and attaining those goals further
required Mr. Dawson and his sales teams to engage with a
substantially higher number of potential customers and book a
higher aggregate number of purchase commitments. We do not
publicly disclose this information and, if disclosed, we believe
the information would provide competitors and others with
insights into our operations and sales compensation programs
that would be harmful to us. Concurrent with the annual bonus
payouts described above, the compensation committee agreed to
pay to Mr. Dawson aggregate commissions of $277,973, which
reflected achievement of the quarterly booking quotas plus
additional amounts for exceeding the annual bookings quotas and
quarterly gross margin targets.
Long-Term
Equity-Based Incentive Compensation
We believe that strong long-term corporate performance is
achieved with a corporate culture that encourages a long-term
focus by our named executive officers through the use of
equity-based awards, the value of which depends on our stock
performance. Our equity-based incentives to date have been
granted in the form of stock options. We grant stock options to
provide our named executive officers with incentives to help
align their interests with the interests of our stockholders and
to enable them to participate in the long-term appreciation of
the value of our stock. Additionally, stock options provide an
important tool for us to retain our named executive officers, as
the options are subject to vesting over an extended period of
time subject to continued service with us.
Historically, we have not had an established set of criteria for
granting equity awards; instead, the board of directors
exercised its judgment and discretion, in consultation with our
Chief Executive Officer, and considered, among other things, the
role and responsibility of the named executive officer,
competitive factors, the amount of stock-based equity
compensation already held by the named executive officer, and
the cash-based compensation received by the named executive
officer, to determine its recommendations for stock options. We
do not have, nor do we plan to establish, any program, plan or
practice to time stock option grants in coordination with
releasing material non-public information.
Equity
Grants
In May 2010, Mr. Flynn was granted an option to purchase
2,484,646 shares of our common stock, in connection with
his promotion to the role of Chief Executive Officer. In
determining the numbers of shares covered by this option grant,
the board of directors reviewed Mr. Flynns equity
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holdings, and considered that this number of shares would
provide Mr. Flynn with appropriate incentives to remain
with us and continue to drive the success of our business.
In September 2009, Mr. Smith was granted an option to purchase
100,000 shares of our common stock. In determining the numbers
of shares covered by this option grant, the board of directors
reviewed Mr. Smiths equity holdings, and determined that
this number of shares would provide Mr. Smith with appropriate
incentives to remain with us and continue to drive the success
of our business.
In November 2009, Mr. Wolf was granted an option to purchase
730,000 shares of our common stock, in connection with the
commencement of his employment by us. The numbers of shares
covered by this option grant was negotiated with Mr. Wolf in
connection with the start of his employment.
Stock Ownership
Guidelines
At this time, the board of directors has not adopted stock
ownership guidelines with respect to the named executive
officers or for the board of directors itself although it may
consider doing so in the future. In connection with this
offering, we will establish an insider trading compliance policy
that prohibits, among other things, short sales, hedging of
stock ownership positions, and transactions involving derivative
securities relating to our common stock.
Perquisites
Our named executive officers are eligible to participate in the
same group insurance and employee benefit plans as our other
salaried employees. We provide employee benefits to all eligible
employees, including our named executive officers, which the
compensation committee believes are reasonable and consistent
with our overall compensation objective to better enable us to
attract and retain employees. These benefits include 401(k),
medical, dental, vision, life insurance and disability benefits
and other plans and programs made available to other eligible
employees in the applicable country of residence. At this time,
we do not provide special plans or programs for our named
executive officers. Accordingly, employee benefits and
perquisites are reviewed from time to time only to ensure that
benefit levels remain competitive for the company as a whole,
but are not included in the compensation committees annual
determination of a named executive officers compensation
package.
Change of
Control and Severance Benefits
Our board of directors and compensation committee consider
maintaining a stable and effective management team to be
essential in protecting and enhancing the best interests of us
and our stockholders. We have established change of control and
severance arrangements with our named executive officers to
provide assurances of specified severance benefits if their
employment is subject to involuntary termination or voluntary
termination for good reason other than for death, disability or
cause. We believe that it is imperative to provide these
individuals with severance benefits upon certain reasons for
terminations of employment, which we recognize can be triggered
at any time, to secure their continued dedication to their work,
notwithstanding the possibility of a termination by us, and
provide these individuals with an incentive to continue
employment with us. We believe that the severance benefits are
competitive relative to the severance protection provided to
similarly situated individuals at companies with which we
compete for talent and appropriate because the benefits are
subject to the executives entry into a release of claims
in favor of us.
We also recognize that the possibility of a change of control
may exist from time to time, and that this possibility, and the
uncertainty and questions it may raise among management, may
result in the departure or distraction of management to our and
our stockholders detriment. Accordingly, our board of
directors decided to take appropriate steps to encourage the
continued attention, dedication
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and continuity of members of our management to their assigned
duties without the distraction that may arise from the
possibility or occurrence of a change of control.
As a result, we have agreements with each of our named executive
officers that provide additional benefits in the event of a
change of control. For more detail, see Potential Payments
Upon Termination or Change of Control.
Tax and
Accounting Treatment of Compensation
Deductibility
of Executive Compensation
Generally, Section 162(m) of the Internal Revenue Code
disallows a tax deduction to any publicly held corporation for
any remuneration in excess of $1.0 million paid in any
taxable year to its chief executive officer and to certain other
highly compensated officers. Remuneration in excess of
$1.0 million may be deducted if, among other things, it
qualifies as performance-based compensation within
the meaning of the Internal Revenue Code.
As we have been a privately held corporation, we have not
previously taken the deductibility limit imposed by
Section 162(m) into consideration in setting compensation
for our executive officers. Further, under a certain
Section 162(m) exception, any compensation paid pursuant to
a compensation arrangement in existence before the effective
date of this public offering will not be subject to the
$1.0 million limitation. In addition, any equity awards we
make under our 2011 Equity Incentive Plan will not be subject to
this limitation, provided such awards are made prior to the
earliest of: the expiration of the plan; a material modification
of the plan (as determined under Section 162(m)); the
issuance of all the employer stock and other compensation
allocated under the plan; or the first meeting of stockholders
at which directors are elected after the close of the third
calendar year following the year in which the public offering
occurs. We may, where reasonably practicable, seek to qualify
the variable compensation paid to our executive officers for the
performance-based compensation exemption from the
deductibility limit. As such, in approving the amount and form
of compensation for our executive officers in the future, we
will consider all elements of the cost to us of providing such
compensation, including the potential impact of
Section 162(m). Our compensation committee may, in its
judgment, authorize compensation payments that do not comply
with an exemption from the deductibility limit when it believes
that such payments are appropriate to attract and retain
executive talent.
Taxation of
Parachute Payments and Deferred
Compensation
We have not provided any named executive officer with a
gross-up
or other reimbursement payment for any tax liability that he
might owe as a result of the application of Sections 280G,
4999, or 409A of the Internal Revenue Code and we have not
agreed and are not otherwise obligated to provide any named
executive officer with such a
gross-up
or other reimbursement. Sections 280G and 4999 of the Code
provide that executive officers and directors who hold
significant equity interests and certain other service providers
may be subject to an excise tax if they receive payments or
benefits in connection with a change in control that exceeds
certain prescribed limits, and that the company, or a successor,
may forfeit a deduction on the amounts subject to this
additional tax. Section 409A also imposes additional
significant taxes on the individual in the event that an
executive officer, director or other service provider receives
deferred compensation that does not meet the
requirements of Section 409A of the Code.
Accounting
Treatment
We follow Financial Accounting Standards Board Accounting
Standards Codification Topic 718, or ASC Topic 718, for our
stock-based awards. ASC Topic 718 requires companies to measure
the compensation expense for all share-based payment awards made
to employees and directors, including stock options and
restricted stock awards, based on the grant date fair
value of these awards. This calculation is performed for
accounting purposes and reported in the compensation
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tables below, even though our named executive officers may never
realize any value from their awards. FASB ASC Topic 718 also
requires companies to recognize the compensation cost of their
stock-based compensation awards in their income statements over
the period that an executive officer is required to render
service in exchange for the option or other award.
We account for equity compensation paid to our employees under
the rules of FASB ASC Topic 718, which requires us to estimate
and record an expense for each award of equity compensation over
the service period of the award. Accounting rules also require
us to record cash compensation as an expense at the time the
obligation is incurred.
2010 Summary
Compensation Table
The following table summarizes the compensation that we paid to
or was earned by our chief executive officer, chief financial
officer, each of our three other most highly compensated
executive officers and our former chief executive officer during
fiscal 2010. We refer to these officers in this prospectus as
our named executive officers.
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Non-Equity
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Option
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Incentive Plan
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Name and Principal
Position
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Year
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Salary ($)
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Bonus ($)
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Awards ($)(1)
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Compensation ($)
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Total ($)
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David A. Flynn
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2010
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224,849
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192,000
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2,395,458
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(2)
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2,812,307
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Chief Executive Officer and President
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Dennis P. Wolf
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2010
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140,039
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83,540
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235,875
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459,454
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Chief Financial Officer and Executive Vice President
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James L. Dawson
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2010
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225,000
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277,973
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(3)
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502,973
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Executive Vice President, Worldwide Sales
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Lance L. Smith
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2010
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220,000
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132,000
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32,671
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384,671
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Chief Operating Officer and Executive Vice President
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Rick C. White
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2010
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220,000
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132,000
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352,000
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Chief Marketing Officer and Executive Vice President
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David R. Bradford(4)
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2010
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240,000
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144,000
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384,000
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Former Chief Executive Officer
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(1) |
|
The amounts included in the Option Awards column
represent the aggregate grant date fair value of option awards
calculated in accordance with FASB ASC Topic 718. The valuation
assumptions used in determining such amounts are described in
the notes to our consolidated financial statements included
elsewhere in this prospectus. |
|
(2) |
|
Includes $96,410 of grant date fair value for a portion of an
option that was canceled following the end of fiscal 2010. |
|
(3) |
|
Represents amount paid to Mr. Dawson pursuant to his sales
commission plan. |
|
(4) |
|
Mr. Bradford was appointed as our chairman in May 2010 and
resigned as our chief executive officer starting in March 2010. |
92
Grants of
Plan-Based Awards For Fiscal Year Ended June 30,
2010
The following table provides information regarding grants of
non-equity incentive plan-based awards made during fiscal 2010,
to each of our named executive officers.
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Estimated
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Payouts
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Under
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Non-Equity
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Exercise or
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Grant Date
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Incentive
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Number of
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Base Price
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FairValue
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Plan
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Securities
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of Option
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of Stock
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Awards ($)
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Underlying
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Awards
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and Option
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Name
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Grant Date
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Target
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Options (#)
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($/Sh)
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Awards ($)
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David A. Flynn
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5/28/2010
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2,484,646
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(1)
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1.96
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2,395,458
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Dennis P. Wolf
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11/18/2009
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730,000
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0.65
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235,875
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James L. Dawson
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225,000
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(2)
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Lance L. Smith
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9/22/2009
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100,000
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0.65
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32,671
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Rick C. White
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David R. Bradford
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(1) |
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This option award was reduced by 100,000 shares following
the end of fiscal 2010. |
|
(2) |
|
This amount relates to commission amount payable to
Mr. Dawson under his sales commission plan, assuming
achievement of the bookings and margin targets. Payments under
this sales commission plan are not subject to a minimum or
maximum payment limitation. The actual amount paid to
Mr. Dawson is set forth in the table above titled
2010 Summary Compensation Table. |
In September 2010, our board of directors approved the grant of
stock options to the named executive officers listed in the
table below each with an exercise price per share of $1.96.
These stock options grants were made in order to continue to
create incentives for performance among our executive team to
enhance our value, better align the interests of our named
executive officers with the interests of our stockholders, and
address potential retention concerns. In particular, the board
of directors wanted to ensure that the executives were properly
incentivized to pursue an initial public offering.
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Name
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Option Grants (Number of
Shares)
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Dennis P. Wolf
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100,000
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Lance L. Smith
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300,000
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Rick C. White
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600,000
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|
In January 2011, our board of directors reviewed each named
executive officers equity holdings with the intent to
harmonize equity positions of our executive team. In particular,
the board of directors wanted to ensure that the executives were
properly incentivized to pursue an initial public offering and
remain with us for a substantial time following our initial
public offering. Our board of directors approved the grant of
stock options to the named executive officers listed in the
table below, each with an exercise price per share of $5.12 and
subject to a five year vesting schedule with no shares vesting
during the first three years, and 1/24th of the shares vesting
each month beginning February 25, 2014. Our board of
directors believed an extended vesting schedule would continue
to drive performance among our executive team to enhance our
value, better align the interests of our named executive
officers with the interests of our stockholders, and address
potential retention concerns.
93
|
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Name
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Option Grants (Number of
Shares)
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|
David A. Flynn
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500,000
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Dennis P. Wolf
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200,000
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James L. Dawson
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100,000
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Lance L. Smith
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300,000
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Rick C. White
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200,000
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|
Outstanding
Equity Awards at June 30, 2010
The following table shows grants of stock options outstanding at
June 30, 2010 for each of our named executive officers.
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Option Awards
|
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|
|
Number of
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Number of
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Securities
|
|
Securities
|
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Underlying
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Underlying
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Option
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Unexercised
|
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Unexercised
|
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Exercise
|
|
Option
|
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|
|
|
|
|
Options
|
|
Options
|
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Price Per
|
|
Expiration
|
|
|
Name
|
|
Date of Grant
|
|
Exercisable (#)
|
|
Unexercisable (#)
|
|
Share ($)
|
|
Date
|
|
|
|
David A. Flynn
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|
6/2/2009
|
(1)
|
|
|
503,580
|
|
|
|
1,222,982
|
|
|
|
0.650
|
|
|
|
6/1/2019
|
|
|
|
|
|
|
|
|
5/28/2010
|
(1)
|
|
|
99,360
|
|
|
|
2,285,286
|
|
|
|
1.960
|
|
|
|
5/27/2020
|
|
|
|
|
|
Dennis P. Wolf
|
|
|
11/18/2009
|
(2)
|
|
|
|
|
|
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730,000
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|
|
|
0.650
|
|
|
|
11/17/2019
|
|
|
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|
|
James L. Dawson
|
|
|
6/2/2009
|
(2)
|
|
|
306,250
|
|
|
|
743,750
|
|
|
|
0.650
|
|
|
|
6/1/2019
|
|
|
|
|
|
Lance L. Smith
|
|
|
6/24/2008
|
(2)
|
|
|
180,000
|
|
|
|
180,000
|
|
|
|
0.358
|
|
|
|
6/23/2018
|
|
|
|
|
|
|
|
|
6/2/2009
|
(1)
|
|
|
122,500
|
|
|
|
367,500
|
|
|
|
0.650
|
|
|
|
6/1/2019
|
|
|
|
|
|
|
|
|
6/2/2009
|
(1)
|
|
|
12,500
|
|
|
|
37,500
|
|
|
|
0.650
|
|
|
|
6/1/2019
|
|
|
|
|
|
|
|
|
9/22/2009
|
(1)
|
|
|
18,750
|
|
|
|
81,250
|
|
|
|
0.650
|
|
|
|
9/21/2019
|
|
|
|
|
|
Rick C. White
|
|
|
6/2/2009
|
(1)
|
|
|
503,580
|
|
|
|
1,222,982
|
|
|
|
0.650
|
|
|
|
6/1/2019
|
|
|
|
|
|
David R. Bradford
|
|
|
8/5/2008
|
(3)
|
|
|
9,166
|
|
|
|
834
|
|
|
|
0.358
|
|
|
|
8/4/2018
|
|
|
|
|
|
|
|
|
10/21/2008
|
(2)
|
|
|
48,437
|
|
|
|
126,563
|
|
|
|
0.358
|
|
|
|
10/20/2018
|
|
|
|
|
|
|
|
|
6/2/2009
|
(1)
|
|
|
405,104
|
|
|
|
810,208
|
|
|
|
0.650
|
|
|
|
6/1/2019
|
|
|
|
|
|
|
|
|
(1) |
|
The option vests monthly as to
1/48th of
the total number of shares on the vesting commencement date,
subject to the officers continued service to us on each
vesting date. The options held by Mr. Flynn have vesting
commencement dates of April 3, 2009 and April 7, 2010,
respectively. The options held by Mr. Smith have vesting
commencement dates of June 10, 2008, June 2, 2009 and
September 22, 2009, respectively, and the options held by
Messrs. White and Bradford have vesting commencement dates
of April 3, 2009 and February 23, 2009, respectively. |
|
(2) |
|
The option vests as to
1/4th of the
total number of shares on the first anniversary of the vesting
commencement date and the remaining shares subject to the option
vests at a rate of 1/48th of the total number of shares subject
to the option on the last day of each month thereafter, subject
to the officers continued service to us on each vesting
date. The options held by Messrs. Wolf, Dawson, Smith and
Bradford have vesting commencement dates of November 11,
2009, April 30, 2009, June 10, 2008 and
September 16, 2008, respectively. |
|
(3) |
|
The option vests monthly as to
1/24th of
the total number of shares on August 5, 2008, subject to
Mr. Bradfords continued service to us on each vesting
date. |
94
Option Exercises
and Stock Vested in Fiscal Year Ended June 30,
2010
The following table shows information regarding options that
were exercised by our named executive officers during fiscal
2010. None of our named executive officers hold any stock awards.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of
|
|
|
|
|
Shares
|
|
|
|
|
Acquired on
|
|
Value Realized
|
Name
|
|
Exercise (#)
|
|
on Exercise ($)
|
|
David A. Flynn
|
|
|
|
|
|
|
|
|
Dennis P. Wolf
|
|
|
|
|
|
|
|
|
James L. Dawson
|
|
|
|
|
|
|
|
|
Lance L. Smith
|
|
|
|
|
|
|
|
|
Rick C. White
|
|
|
|
|
|
|
|
|
David R. Bradford
|
|
|
50,000
|
|
|
|
80,100
|
|
|
|
|
(1) |
|
The aggregate dollar amount realized upon the exercise of
options represents the amount by which (x) the aggregate
market price of the shares of our common stock on the date of
exercise, as calculated by using a per share fair market value
of $1.96, which is the fair market value as determined by our
board of directors as of the most recent option grant date prior
to the date of exercise, exceeds (y) the aggregate exercise
price of the option, as calculated using a per share exercise
price of $0.358. |
Employment
Agreements and Offer Letters
David A.
Flynn
We entered into a second amended and restated employment
agreement with David A. Flynn, dated April 7, 2010, in
connection with his appointment as our Chief Executive Officer
and President. This agreement has no specific term and
constitutes at-will employment. Mr. Flynns current
annual base salary is $240,000, and he is eligible to earn bonus
compensation of up to
2/3rds of
his base salary. In connection with Mr. Flynns
execution of the second amended and restated employment
agreement, Sandusky Investments, Ltd., or Sandusky, an entity
formed by Mr. Flynn for his estate planning purposes,
granted to us a repurchase right with respect to
5,000,000 shares of our common stock owned by Sandusky. The
repurchase right lapsed with respect to 2,500,000 shares of
our common stock as of March 21, 2008, and in equal monthly
installments thereafter for 36 months, subject to
Mr. Flynns continued employment through each
applicable vesting date. The second amended and restated
employment agreement provides for severance and change of
control benefits to Mr. Flynn, as described below under the
Agreements Providing for Severance or Change of Control
Benefits section.
Dennis P.
Wolf
We entered into an offer letter agreement with Dennis P. Wolf,
our Chief Financial Officer and Executive Vice President, dated
November 4, 2009. The offer letter agreement has no
specific term and constitutes at-will employment.
Mr. Wolfs current annual base salary is $220,000, and
he is eligible to earn bonus compensation of up to fifty percent
of his base salary. Mr. Wolf was initially granted an
option to purchase 730,000 shares of our common stock at an
exercise price per share of $0.65, which was equal to the fair
value of our common stock on the date this option was granted,
as determined by the board of directors. The option was subject
to a four-year vesting schedule with 25% of the shares subject
to the option vesting on the 12-month anniversary of the vesting
commencement date, and the remaining shares vesting in equal
monthly installments thereafter over a period of 36 months,
subject to Mr. Wolfs continued employment. In August
2010, Mr. Wolf entered into an involuntary termination
severance agreement providing for severance and change of
control benefits
95
to Mr. Wolf, as described below under the Agreements
Providing for Severance or Change of Control Benefits
section.
James L.
Dawson
We entered into an offer letter agreement with James L. Dawson,
our Executive Vice President of Worldwide Sales, dated
April 1, 2008. The offer letter agreement has no specific
term and constitutes at-will employment. Mr. Dawsons
current annual base salary is $225,000, and he is eligible to
earn commissions based on achievement of sales goals.
Mr. Dawson was initially granted an option to purchase
1,050,000 shares of our common stock at an exercise price
per share of $0.65, which was equal to the fair value of our
common stock on the date this option was granted, as determined
by the board of directors. The option was subject to a four-year
vesting schedule with 25% of the shares subject to the option
vesting on the 12 month anniversary of the vesting
commencement date, and the remaining shares vesting in equal
monthly installments thereafter over a period of 36 months,
subject to his continued employment. In August 2010,
Mr. Dawson entered into an involuntary termination
severance agreement providing severance and change of control
benefits to Mr. Dawson, as described below under the
Agreements Providing for Severance or Change of Control
Benefits section.
Lance L.
Smith
We entered into an offer letter agreement with Lance L. Smith,
our Chief Operations Officer and Executive Vice President, dated
April 29, 2008. The offer letter agreement has no specific
term and constitutes at-will employment. Mr. Smiths
current annual base salary is $220,000, and he is eligible to
earn bonus compensation of up to fifty percent of his base
salary. Mr. Smith was initially granted an option to
purchase 72,000 shares of our common stock at an exercise
price per share of $1.79, which was equal to the fair value of
our common stock on the date this option was granted, as
determined by the board of directors. The option was
subsequently adjusted in connection with our forward stock split
on July 14, 2008, to cover 360,000 shares of our
common stock at an exercise price per share of $0.358. This
option was subject to a four-year vesting schedule with 25% of
the shares subject to the option vesting on the 12 month
anniversary of the vesting commencement date, and the remaining
shares vesting in equal monthly installments thereafter over a
period of 36 months, subject to his continued employment.
In August 2010, Mr. Smith entered into an involuntary
termination severance agreement providing for severance and
change of control benefits to Mr. Smith, as described below
under the Agreements Providing for Severance or Change of
Control Benefits section.
Rick C.
White
We entered into an amended and restated employment agreement
with Rick C. White, our Chief Marketing Officer and Executive
Vice President, dated December 31, 2008. This agreement has
no specific term and constitutes at-will employment.
Mr. Whites current annual base salary is $220,000,
and he is eligible to earn bonus compensation of up to 50% of
his base salary. In connection with Mr. Whites
execution of the amended and restated employment agreement, West
Coast VC, LLC, or WCV, an entity Mr. White formed for his
estate planning purposes, granted to us a repurchase right with
respect to 5,000,000 shares of our common stock owned by
WCV. The repurchase right lapsed with respect to
2,500,000 shares of our common stock as of March 21,
2008, and in equal monthly installments thereafter for
36 months, subject to Mr. Whites continued
employment through each applicable vesting date. The amended and
restated employment agreement provides for severance and change
of control benefits to Mr. White, as described below under
the Agreements Providing for Severance or Change of
Control Benefits section.
David R.
Bradford
We entered into a transition agreement and release with David R.
Bradford, dated September 21, 2010 and effective
October 1, 2010, in connection with his transition from the
position of Chief Executive
96
Officer to consultant. There is no specific term for the
consultant services, and the consultant relationship will
continue until either party provides notice to terminate. As
part of Mr. Bradfords on-going consulting
arrangement, Mr. Bradford will continue to chair our
strategic advisory board. Mr. Bradford continued to receive
his annual base salary of $240,000 through December 31,
2010, but is not entitled to any cash compensation for his
consultant services thereafter. Mr. Bradford also is
receiving reimbursement for the premiums for him and his
eligible dependents to continue health coverage under COBRA
until September 30, 2011 (unless he or his eligible
dependents become covered under similar plans before then).
During the consultant term, Mr. Bradford will continue to
vest in the unvested equity awards he held at the time of his
termination of employment. The transition agreement and release
provides for certain equity acceleration benefits if we
terminate Mr. Bradfords service without cause or if
we experience a change of control, as described below under the
Agreements Providing for Severance or Change of Control
Benefits section.
Agreements
Providing for Severance or Change of Control Benefits
We have entered into agreements with each of our named executive
officers that may provide for benefits under the circumstances
described below, if the named executive officers
employment is terminated under certain conditions, and enhanced
benefits, if the termination occurs in connection with a change
of control.
David A.
Flynn
Under the terms of Mr. Flynns April 2010 second
amended and restated employment agreement, if
Mr. Flynns employment is terminated without cause or
he resigns for good reason, he will be eligible to receive the
following benefits if he timely signs a release of claims:
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continued payment of base salary for a period of 12 months
(18 months, if his termination occurs on or following a
change of control);
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an amount equal to 150% of his target annual bonus and payable
over a period of 18 months following his termination, but
only if his termination occurs on or following a change of
control;
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accelerated vesting of outstanding equity awards equal to the
lesser of (x) the remaining vesting schedule or
(y) 12 months (100% accelerated vesting, if his
termination occurs on or following a change of control); and
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payment by us for up to 18 months of COBRA premiums to
continue health insurance coverage for him and his eligible
dependents.
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In addition, if Mr. Flynns employment terminates as a
result of death or disability, he will be eligible to receive
100% accelerated vesting of his outstanding equity awards.
Rick C.
White
Under the terms of Mr. Whites December 2008 amended
and restated employment agreement, if Mr. Whites
employment terminates without cause or he resigns for good
reason, he will be eligible to receive the following benefits if
he timely signs a release of claims:
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continued payment of base salary for a period of 12 months;
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accelerated vesting of outstanding equity awards equal to the
lesser of (x) the remaining vesting schedule or
(y) 12 months (100% accelerated vesting, if his
termination occurs on or following a change of control); and
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payment by us for up to 12 months of COBRA premiums to
continue health insurance coverage for him and his eligible
dependents.
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In addition, if Mr. Whites employment terminates as a
result of death or disability, he will be eligible to receive to
100% accelerated vesting of his outstanding equity awards.
97
David R.
Bradford
Under the terms of Mr. Bradfords September 2010
transition agreement and release, Mr. Bradford agreed to
serve as a consultant until either party terminates the
consultant relationship. During the consultant term, he will
continue to vest in his outstanding equity awards, except that
if a change of control occurs prior to the end of the consulting
relationship or we terminate that consultant relationship
without cause, he will be eligible to receive 100% accelerated
vesting of his outstanding equity awards.
Other Named
Executive Officers
Each of our other named executive officers (Messrs. Wolf,
Dawson and Smith) entered into involuntary termination severance
agreements in August 2010, which provide for the severance and
change of control benefits described below.
If, prior to the three month period before a change of
control, his employment is terminated without cause or he
resigns for good reason, he will be eligible to receive the
following benefits if he timely signs a release of claims:
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continued payment of base salary for a period of 12 months
(except that if a change of control occurs while he is receiving
this benefit, he will be entitled to receive a lump sum payment
equal to the remaining unpaid amount on the date of the change
of control in lieu of the continuing payments); and
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payment by us for up to 12 months of COBRA premiums to
continue health insurance coverage for him and his eligible
dependents.
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If, within the period commencing three months before change
of control and ending 12 months after a change of control,
his employment is terminated without cause or he resigns for
good reason, he will be entitled to the following benefits if he
timely signs a release of claims:
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lump sum payment equal to (x) 1 times his annual base
salary (for the year of the change of control or his
termination, whichever is greater), plus (y) 1 times his
target annual bonus (for the year of the change of control or
his termination, whichever is greater);
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100% accelerated vesting of all outstanding equity
awards; and
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payment by us for up to 12 months of COBRA premiums to
continue health insurance coverage for him and his eligible
dependents.
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In addition, in the event any of the amounts provide for under
these agreements or otherwise payable to Messrs. Wolf,
Dawson or Smith would constitute parachute payments
within the meaning of Section 280G of the Internal Revenue
Code and could be subject to the related excise tax, the named
executive officer would be entitled to receive either full
payment of benefits under this agreement or such lesser amount
which would result in no portion of the benefits being subject
to the excise tax, whichever results in the greater amount of
after-tax benefits to the named executive officer. The
agreements do not require us to provide any tax
gross-up
payments.
For purposes of the agreements above, the terms shall have the
following meanings:
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Cause means any of the following occurring
during the named executive officers employment by or
service to us (except with respect to clause (v) below):
(i) personal dishonesty by the named executive officer
involving company business or participation in a fraud against
us, or breach of the named executive officers fiduciary
duty to the company; (ii) indictment or conviction of a
felony or other crime involving moral turpitude or dishonesty;
(iii) the named executive officers willful refusal to
comply with the lawful requests made of the named executive
officer by our board of directors reasonably related to his
employment by us and the performance of his employment duties
(but which shall not include a request to waive or amend any
portion of his agreement or terminate his agreement or to
consent to an action that
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would result in the named executive officers loss of a
right under his agreement); (iv) material violation of our
policies, after written notice to the named executive officer
and an opportunity to be heard by our board of directors and his
failure to fully cure such violations within a reasonable period
of time of not less than 30 days after such hearing;
(v) threats or acts of violence in the workplace;
(vi) unlawful harassment in the course of any business
activity of any of our employees, independent contractors,
vendors or suppliers; (vii) theft or unauthorized
conversion by or transfer of any company asset or business
opportunity to the named executive officer or any third party;
and (viii) a material breach by the named executive officer
of any material provision of his agreement or any other
agreement with us after written notice to the named executive
officer and an opportunity to be heard by our board of directors
and his failure to fully cure such breach within a reasonable
period of time of not less than 30 days after such hearing.
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Change of Control means the occurrence of any
of the following events (i) any person or group of persons
acquiring ownership of more than 50% of the total voting power
of our stock; (ii) certain changes in the majority of our
board of directors; (iii) the sale of all or substantially
all of our assets.
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Disability means that the named executive
officer has been unable to perform his employment duties as the
result of named executive officers incapacity due to
physical or mental illness, and such inability, at least
26 weeks after its commencement, is determined to be total
and permanent by a physician selected by us or our insurers and
acceptable to the named executive officer or the named executive
officers legal representative (such agreement as to
acceptability not to be unreasonably withheld).
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Good Reason (applies to all named executive
officers, except Messrs. White, Wolf and Bradford) means
the named executive officers resignation within
90 days following the expiration of any company cure period
(discussed below) following the occurrence of one or more of the
following, without the named executive officers express
written consent: (i) prior to a change of control a
material reduction of the named executive officers duties,
authority, or responsibilities, relative to the named executive
officers title, duties, authority, or responsibilities as
in effect immediately prior to such reduction; or following a
change of control, (A) the removal of the named executive
officer from the position held by the named executive officer
immediately prior to the change of control, provided that
continued employment following the change of control with
substantially the same responsibility with respect to our
business and operations shall not constitute Good
Reason (for example, the named executive officer
shall not have been removed from his position if he is employed
by us, the acquiring company or one of our affiliates and the
named executive officer has substantially the same
responsibilities with respect to our business as he had
immediately prior to the change of control whether the named
executive officers title is revised to reflect his
placement within the overall corporate hierarchy and whether the
named executive officer provides services to a subsidiary,
affiliate, business unit or otherwise), or (B) a material
reduction in the named executive officers
responsibilities, authority or status as such (which for this
purpose shall include a material reduction in the resources
(financial, personnel and other) allocated to our business and
under the named executive officers direction, including
reallocation of key personnel engaged in our business to other
businesses of the acquiring company); (ii) a material
reduction of the named executive officers base
compensation (base salary or bonus or benefits) in effect
immediately prior to such reduction, other than reductions
implemented as part of an overall company-wide reduction program
that is applied similarly to all executive officers and is no
more than 20%; (iii) a material change in the geographic
location at which the named executive officer must perform
services (in other words, the named executive officers
relocation to a facility or an office location more than a
50-mile
radius from the named executive officers then current
location); or (iv) a material breach by us of a material
provision of his agreement. Notwithstanding the foregoing, the
named executive officer agrees not to resign for Good Reason
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99
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without first providing us with written notice of the acts or
omissions constituting the grounds for Good Reason within
90 days of the initial existence of the grounds for Good
Reason and a reasonable cure period of 30 days following
the date of such notice.
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Good Reason (Mr. White only) means
Mr. Whites resignation from employment with us within
90 days after any of the following occurs, without his
prior written consent: (i) our failure to pay
Mr. White any earned salary or annual bonus or other bonus
or payment that has become due and payable, provided that we
receive written notice from Mr. White of the deficient
payment and have been given 30 days to cure; or
(ii) prior to a change of control, removal of
Mr. White as our Chief Marketing Officer and Executive Vice
President or a material reduction in his responsibilities,
authority or status as such; or (iii) following a change of
control, removal of Mr. White as our Chief Marketing
Officer and Executive Vice President or a division or a
principal business unit of the acquiring company or a material
reduction in his responsibilities, authority or status as such;
or (iv) a reduction in Mr. Whites salary by more
than 10%, except in connection with a cost-reduction program
which applies to all of our executive officers; or (v) a
relocation of our principal executive officer by more than
50 miles from the current location in Salt Lake City, Utah;
or (vi) any material breach by us of a material provision
of his agreement, which the board of directors fails to cure
within 30 days of receiving written notice from
Mr. White.
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Good Reason (Mr. Wolf only) means
Mr. Wolfs resignation within 90 days following
the expiration of any company cure period (discussed below)
following the occurrence of one or more of the following,
without Mr. Wolfs express written consent:
(i) prior to a change of control, a material reduction of
Mr. Wolfs duties, authority, or responsibilities,
relative to Mr. Wolfs title, duties, authority, or
responsibilities as in effect immediately prior to such
reduction; or (ii) following a change of control, a change
in Mr. Wolfs reporting position such that
Mr. Wolf no longer reports directly to the chief executive
officer of the parent corporation in a group of controlled
corporations; provided, however, that in the event of change of
control, Mr. Wolf agrees to continue his employment with
the company or its successor to help ensure a smooth transition
of his responsibilities on mutually agreeable terms for a period
of up to six months following the change of control. If the
company or its successor, or any parent corporation in a control
group of corporations that includes the company or its
successor, whose securities are listed, admitted to trade, or
quoted on a national securities exchange, then Mr. Wolf not
serving as the Chief Financial Officer of the publicly traded
company (other than as the result of his voluntary resignation
not at the request of the company or its successor or its
parent) shall be deemed to constitute a material change or
reduction in Mr. Wolfs authority and responsibilities
constituting grounds for a Good Reason termination; or
(iii) a material reduction of Mr. Wolfs base
compensation (in other words, a material reduction in
Mr. Wolfs base salary or bonus or benefits) as in
effect immediately prior to such reduction, other than
reductions implemented as part of an overall company-wide
reduction program that is applied similarly to all executive
officers and is no more than 20%; or (iv) a material change
in the geographic location at which Mr. Wolf must perform
services (in other words, Mr. Wolfs relocation to a
facility or an office location more than a 50 mile radius
from Mr. Wolfs then current location); or (v) a
material breach by the company of a material provision of this
agreement. Notwithstanding the foregoing, Mr. Wolf agrees
not to resign for Good Reason without first providing the
company with the written notice of the acts or omissions
constituting the grounds for Good Reason within 90 days of
the initial existence of the grounds for Good Reason and a
reasonable cure period of 30 days following the date of
such notice.
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Potential
Payments Upon Termination or Change of Control
The tables below provide an estimate of the value of the
compensation and benefits due to each of our named executive
officers in the events described below, assuming that the
termination of employment
and/or
change in control was effective on June 30, 2010, under the
agreements
100
described above. The actual amounts to be paid can only be
determined at the time of the termination of employment or
change of control, as applicable.
Termination
without Cause or Resignation for Good Reason
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Value of
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Continuation of
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Accelerated
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Healthcare
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Salary
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Equity
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Coverage
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Continuation ($)
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Awards ($)(1)
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Premiums ($)
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Total ($)
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David A. Flynn
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240,000
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16,023,591
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(2)
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21,839
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16,285,430
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Dennis P. Wolf
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James L. Dawson
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Lance L. Smith
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Rick C. White
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220,000
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7,057,322
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(3)
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14,559
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7,291,881
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David R. Bradford
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15,367,042
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(4)
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15,367,042
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(1) |
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Amounts indicated in the table are calculated as the difference
between $17.00, which is the midpoint of the range reflected on
the cover page of this prospectus, and the exercise price of
these options, multiplied by the number of accelerated shares. |
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(2) |
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As of June 30, 2010, 1,027,802 shares of common stock
subject to Mr. Flynns options would accelerate if he
were either terminated without cause or resigns for good reason,
which is 29% of the shares subject to the options granted to
Mr. Flynn that were unvested as of June 30, 2010. |
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(3) |
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As of June 30, 2010, 431,641 shares of common stock
subject to Mr. Whites options would accelerate if he
were either terminated without cause or resigns for good reason,
which is 35% of the shares subject to the options granted to
Mr. White that were unvested as of June 30, 2010. |
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(4) |
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As of June 30, 2010, 937,605 shares of common stock
subject to Mr. Bradfords options would accelerate if
he were terminated without cause, which is 100% of the shares
subject to the options granted to Mr. Bradford that were
unvested as of June 30, 2010. |
Termination
without Cause or Resignation for Good Reason
on or following a Change of Control
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Continuation of
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Value of
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Healthcare
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Salary
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Accelerated
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Coverage
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Continuation ($)
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Bonus ($)
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Equity Awards ($)(1)
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Premiums ($)
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Total ($)
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David A. Flynn
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360,000
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240,000
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49,883,319
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(2)
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21,839
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50,505,158
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Dennis P. Wolf
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220,000
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110,000
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11,935,500
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(3)
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14,559
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12,280,059
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James L. Dawson
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225,000
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225,000
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12,160,313
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(4)
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14,559
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12,624,872
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Lance L. Smith
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220,000
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132,000
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10,945,748
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(5)
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9,767
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11,307,515
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Rick C. White
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220,000
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19,995,756
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(6)
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14,559
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20,230,315
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David R. Bradford
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15,367,042
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(7)
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15,367,042
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(1)
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Amounts indicated in the table are
calculated as the difference between $17.00, which is the
midpoint of the range reflected on the cover page of this
prospectus, and the exercise price of these options, multiplied
by the number of accelerated shares.
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(2)
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As of June 30, 2010,
3,508,267 shares of common stock subject to
Mr. Flynns options would accelerate if he is
terminated without cause or resigns for good reason on or
following a change of control, which is 100% of the shares
subject to the options granted to Mr. Flynn that were
unvested as of June 30, 2010. This assumes that the
reduction of the original option by 100,000 shares was
effective on June 30, 2010.
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(3)
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As of June 30, 2010,
730,000 shares of common stock subject to
Mr. Wolfs options would accelerate if he is
terminated without cause or resigns for good reason within the
period commencing three months before and
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101
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ending twelve months after a change
of control, which is 100% of the shares subject to the options
granted to Mr. Wolf that were unvested as of June 30,
2010.
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(4)
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As of June 30, 2010,
743,750 shares of common stock subject to
Mr. Dawsons options would accelerate if he is
terminated without cause or resigns for good reason within the
period commencing three months before and ending twelve months
after a change of control, which is 100% of the shares subject
to the options granted to Mr. Dawson that were unvested as
of June 30, 2010.
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(5)
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As of June 30, 2010,
666,250 shares of common stock subject to
Mr. Smiths options would accelerate if he is
terminated without cause or resigns for good reason within the
period commencing three months before and ending twelve months
after a change of control, which is 100% of the shares subject
to the options granted to Mr. Smith that were unvested as
of June 30, 2010.
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(6)
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As of June 30, 2010,
1,222,982 shares of common stock subject to
Mr. Whites options would accelerate if he is
terminated without cause or resigns for good reason on or
following a change of control, which is 100% of the shares
subject to the options granted to Mr. White that were
unvested as of June 30, 2010.
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(7)
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As of June 30, 2010,
937,605 shares of common stock subject to
Mr. Bradfords options would accelerate if he there
were a change of control, which is 100% of the shares subject to
the options granted to Mr. Bradford that were unvested as
of June 30, 2010.
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Employee Benefit
Plans
2011 Employee
Stock Purchase Plan
Our executive officers and all of our other employees will be
allowed to participate in our 2011 Employee Stock Purchase Plan,
which will be offered effective upon the completion of our
public offering. We believe that providing them the opportunity
to participate in the 2011 Employee Stock Purchase Plan provides
them with a further incentive towards ensuring our success and
accomplishing our corporate goals.
The specific provisions of our 2011 Employee Stock Purchase Plan
are as provided for below.
Our board of directors adopted, and our stockholders approved,
the 2011 Employee Stock Purchase Plan. The 2011 Employee Stock
Purchase Plan will become effective upon the effective date of
this registration statement.
A total of 500,000 shares of our common stock will be made
available for sale under the 2011 Employee Stock Purchase Plan.
In addition, our 2011 Employee Stock Purchase Plan provides for
annual increases in the number of shares available for issuance
under the plan on the first day of each fiscal year beginning in
2013, equal to the least of:
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1% of the outstanding shares of our common stock on the first
day of such fiscal year;
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2,000,000 shares; or
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such amount as determined by our board of directors.
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Our compensation committee administers the 2011 Employee Stock
Purchase Plan, and will have full and exclusive authority to
interpret the terms of the plan and determine eligibility to
participate subject to the conditions of the plan as described
below.
All of our employees are eligible to participate if they are
employed by us, or any participating subsidiary, for at least
20 hours per week and more than five months in any calendar
year. However, an employee may not be granted an option to
purchase stock under the 2011 Employee Stock Purchase Plan if
such employee:
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immediately after the grant would own stock possessing 5% or
more of the total combined voting power or value of all classes
of our capital stock; or
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holds rights to purchase stock under all of our employee stock
purchase plans that accrue at a rate that exceeds $25,000 worth
of stock for each calendar year.
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102
Our 2011 Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Code. Each offering period will be
the approximately six month period. The offering periods
are scheduled to start on the first trading day on or after
February 15 and August 15 of each year, except for the
first such offering period, which will commence on the first
trading day on or after completion of this offering and will end
on the first trading day on or after February 15, 2012.
Our 2011 Employee Stock Purchase Plan permits participants to
purchase common stock through payroll deductions of up to 15% of
their eligible compensation, which includes a participants
base straight time gross earnings, certain commissions, overtime
and shift premium, but exclusive of payments for incentive
compensation, bonuses and other compensation. A participant may
purchase a maximum of 1,500 shares during a six month
period.
Amounts deducted and accumulated by the participant are used to
purchase shares of our common stock at the end of each six-month
offer period. The purchase price of the shares will be 85% of
the lower of the fair market value of our common stock on the
first trading day of each offering period or on the exercise
date. Participants may end their participation at any time
during an offering period, and will be paid their accrued
contributions that have not yet been used to purchase shares of
common stock. Participation ends automatically upon termination
of employment with us.
A participant may not transfer rights granted under the 2011
Employee Stock Purchase Plan. If the compensation committee
permits the transfer of rights, it may only be done by will, the
laws of descent and distribution, or as otherwise provided under
the 2011 Employee Stock Purchase Plan.
In the event of our merger or change in control, as defined
under the 2011 Employee Stock Purchase Plan, a successor
corporation may assume or substitute for each outstanding
option. If the successor corporation refuses to assume or
substitute for the option, the offering period then in progress
will be shortened, and a new exercise date will be set. The
administrator will notify each participant that the exercise
date has been changed and that the participants option
will be exercised automatically on the new exercise date unless
prior to such date the participant has withdrawn from the
offering period.
Our 2011 Employee Stock Purchase Plan will automatically
terminate in 2031, unless we terminate it sooner. Our board of
directors has the authority to amend, suspend or terminate our
2011 Employee Stock Purchase Plan, except that, subject to
certain exceptions described in the 2011 Employee Stock Purchase
Plan, no such action may adversely affect any outstanding rights
to purchase stock under our 2011 Employee Stock Purchase Plan.
2011 Equity
Incentive Plan
Our board of directors adopted, and our stockholders approved,
our 2011 Equity Incentive Plan. Subject to stockholder approval,
the 2011 Equity Incentive Plan is effective upon the effective
date of this offering. Our 2011 Equity Incentive Plan provides
for the grant of incentive stock options, within the meaning of
Section 422 of the Internal Revenue Code, to our employees
and any of our parent and subsidiary corporations
employees, and for the grant of nonstatutory stock options,
restricted stock, restricted stock units, stock appreciation
rights, performance units and performance shares to our
employees, directors and consultants and our parent and
subsidiary corporations employees and consultants.
A total of 12,132,430 shares of our common stock are
reserved for issuance pursuant to the 2011 Equity Incentive
Plan, of which no awards are issued and outstanding. In
addition, the shares reserved for issuance under our 2011 Equity
Incentive Plan will also include shares returned to the Stock
Plans (as defined below) as the result of expiration or
termination of options (provided that the maximum number of
shares that may be added to the 2011 Equity Incentive Plan
pursuant to the Stock Plans is 25,867,172 shares). The
number of shares available for issuance under the 2011
103
Equity Incentive Plan will also include an annual increase on
the first day of each fiscal year beginning in 2013, equal to
the least of:
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10,000,000 shares;
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5% of the outstanding shares of common stock as of the last day
of our immediately preceding fiscal year; or
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such other amount as our board of directors may determine.
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Our compensation committee will administer our 2011 Equity
Incentive Plan after the completion of this offering. In the
case of options intended to qualify as performance-based
compensation within the meaning of Section 162(m) of
the Internal Revenue Code, the committee will consist of two or
more outside directors within the meaning of
Section 162(m).
Subject to the provisions of our 2011 Equity Incentive Plan, the
administrator has the power to determine the terms of the
awards, including the exercise price, the number of shares
subject to each such award, the exercisability of the awards and
the form of consideration, if any, payable upon exercise. The
administrator also has the authority to amend existing awards to
reduce their exercise price, to allow participants the
opportunity to transfer outstanding awards to a financial
institution or other person or entity selected by the
administrator and to institute an exchange program by which
outstanding awards may be surrendered in exchange for awards
with a higher or lower exercise price.
The exercise price of options granted under our 2011 Equity
Incentive Plan must at least be equal to the fair market value
of our common stock on the date of grant. The term of an
incentive stock option may not exceed 10 years, except that
with respect to any participant who owns 10% of the voting power
of all classes of our outstanding stock, the term must not
exceed five years and the exercise price must equal at least
110% of the fair market value on the grant date. Subject to the
provisions of our 2011 Equity Incentive Plan, the administrator
determines the term of all other options.
After the termination of service of an employee, director or
consultant, he or she may exercise his or her option or stock
appreciation right for the period of time stated in his or her
award agreement. Generally, if termination is due to death or
disability, the option or stock appreciation right will remain
exercisable for 12 months. In all other cases, the option
or stock appreciation right will generally remain exercisable
for three months following the termination of service. However,
in no event may an option be exercised later than the expiration
of its term.
Stock appreciation rights may be granted under our 2011 Equity
Incentive Plan. Stock appreciation rights allow the recipient to
receive the appreciation in the fair market value of our common
stock between the exercise date and the date of grant. Subject
to the provisions of our 2011 Equity Incentive Plan, the
administrator determines the terms of stock appreciation rights,
including when such rights become exercisable and whether to pay
any increased appreciation in cash or with shares of our common
stock, or a combination thereof, except that the per share
exercise price for the shares to be issued pursuant to the
exercise of a stock appreciation right will be no less than 100%
of the fair market value per share on the date of grant.
Awards of restricted stock may be granted under our 2011 Equity
Incentive Plan, which are grants of shares of our common stock
that vest in accordance with terms and conditions established by
the administrator. The administrator will determine the number
of shares granted and may impose whatever conditions to vesting
it determines to be appropriate (for example, the administrator
may set restrictions based on the achievement of specific
performance goals or continued service to us). The
administrator, in its sole discretion, may accelerate the time
at which any restrictions will lapse or be removed. Shares of
restricted stock that do not vest are subject to our right of
repurchase or forfeiture.
Awards of restricted stock units may be granted under our 2011
Equity Incentive Plan, which are bookkeeping entries
representing an amount equal to the fair market value of one
share of our
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common stock. The administrator determines the terms and
conditions of restricted stock units including the number of
units granted, the vesting criteria (which may include
accomplishing specified performance criteria or continued
service to us) and the form and timing of payment. The
administrator, in its sole discretion may accelerate the time at
which any restrictions will lapse or be removed.
Awards of performance units and performance shares may be
granted under our 2011 Equity Incentive Plan, which are awards
that will result in a payment to a participant only if
performance goals established by the administrator are achieved
or the awards otherwise vest. The administrator will establish
organizational or individual performance goals in its
discretion, which, depending on the extent to which they are
met, will determine the number
and/or the
value of performance units and performance shares to be paid out
to participants. After the grant of a performance unit or
performance share, the administrator, in its sole discretion,
may reduce or waive any performance objectives or other vesting
provisions for such performance units or performance shares. The
administrator, in its sole discretion, may pay earned
performance units or performance shares in the form of cash, in
shares or in some combination thereof.
Our 2011 Equity Incentive Plan provides that all non-employee
directors will be eligible to receive all types of awards
(except for incentive stock options) under the 2011 Equity
Incentive Plan.
Unless the administrator provides otherwise, our 2011 Equity
Incentive Plan generally does not allow for the transfer of
awards and only the recipient of an award may exercise an award
during his or her lifetime.
Our 2011 Equity Incentive Plan provides that in the event of a
merger or change in control, as defined in the 2011
Equity Incentive Plan, each outstanding award will be treated as
the administrator determines, including that the successor
corporation or its parent or subsidiary will assume or
substitute an equivalent award for each outstanding award. The
administrator is not required to treat all awards similarly. If
there is no assumption or substitution of outstanding awards,
the awards will fully vest, all restrictions will lapse, all
performance goals or other vesting criteria will be deemed
achieved at 100% of target levels and the awards will become
fully exercisable.
2010 Executive
Stock Incentive Plan and 2008 Stock Incentive Plan, as
amended
Our 2010 Executive Stock Incentive Plan, or the 2010 Plan, was
adopted by our board of directors and approved by our
stockholders in July 2010. Our 2008 Stock Incentive Plan, or the
2008 Plan, and together with the 2010 Plan, the Stock Plans, was
adopted by our board of directors and approved by our
stockholders in March 2008, and was subsequently amended by our
board of directors in June 2008, July 2010 and January 2011,
respectively.
The Stock Plans provide for the grant of incentive stock
options, within the meaning of Section 422 of the Internal
Revenue Code, to our employees and any affiliates
employees, and for the grant of nonstatutory stock options and
awards of restricted or unrestricted shares of common stock to
our employees, consultants, and advisors and our
affiliates employees, consultants, and advisors. However,
no advisor or consultant is eligible to receive an award under
the 2008 Plan if such persons participation in the 2008
Plan adversely affects our compliance with Rule 701 of the
Securities Act of 1933 or with any other applicable law. The
Stock Plans will terminate upon the completion of this offering.
However, each Stock Plan will continue to govern the terms and
conditions of the outstanding stock options and stock awards
previously granted under the respective Stock Plan.
Subject to the provisions of the Stock Plans, the maximum
aggregate number of shares (subject to adjustment) of our common
stock, par value $0.0002 per share, that may be subject to
awards and sold under the Stock Plans as of March 31, 2011
was 18,984,159 shares. Shares issued pursuant to awards
under the Stock Plans that we repurchase or that expire or are
forfeited, as well as shares used to pay the exercise price of
an award or to satisfy the tax withholding obligations related
to an award, will become available for future grant under the
Stock Plans. In addition, to the extent that an
105
award is paid out in cash rather than shares, such cash payment
will not reduce the number of shares available for issuance
under the Stock Plans.
Our board of directors currently administers the Stock Plans.
Under the Stock Plans, the administrator has the authority and
discretion to select those individuals who will receive awards,
choose the type or types of awards to be granted to selected
individuals, and determine the terms that will apply to the
awards granted (including the number of shares of common stock
that the recipient may be entitled to receive or purchase),
which terms may vary from award to award. The administrator also
may authorize generally or in specific cases any adjustment in
the exercise price, vesting schedule, number of shares subject
to, or the term of any option by cancelling an outstanding
option and subsequently regranting the option by amendment,
substitution, waiver, or other legally valid means. The
administrator also has the authority to determine the fair
market value of a share of our common stock for purposes of the
Stock Plans and the awards granted thereunder. The administrator
is authorized to interpret the provisions of the Stock Plans and
individual award agreements, and generally take any other
actions that are contemplated by the Stock Plans or necessary or
appropriate in the administration of the Stock Plans and
individual award agreements. All decisions of the administrator
are final and binding on all persons.
The administrator may grant incentive
and/or
nonstatutory stock options under the Stock Plans, provided that
incentive stock options are only granted to employees. The
exercise price of such options must equal at least the fair
market value of our common stock on the date of grant, provided,
however, that the administrator may authorize the repricing of
the option without stockholder approval. The term of an
incentive stock option may not exceed ten years; provided,
however, that an incentive stock option held by a participant
who owns more than 10% of the total combined voting power of all
classes of our stock, or of certain of our affiliates, may not
have a term in excess of five years and must have an exercise
price of at least 110% of the fair market value of our common
stock on the grant date. The administrator will determine the
methods of payment of the exercise price of an option, which may
include cash, check, promissory note, shares or other property
acceptable to the administrator. Subject to the provisions of
the Stock Plans, the administrator determines the remaining
terms of the options (e.g., vesting). After the termination of
service of an employee, consultant, or advisor, the participant
generally may exercise his or her option, to the extent vested
as of such date of termination, for three months if he or she
terminates for reasons other than cause (12 months for
terminations as a result of death or disability); otherwise, the
option terminates as of the termination date, unless the
administrator provides differently in an award agreement.
However, in no event may an option be exercised later than the
expiration of its term. The specific term will be set forth in
an award agreement.
Stock awards may be granted under the Stock Plans in the form of
unrestricted or restricted shares of our common stock. The
administrator will determine the purchase price per share of the
common stock covered by each stock award, but in no case will
the purchase price be less than the par value of our common
stock.
The purchase price must be paid in full at the time of purchase,
in such form or forms of consideration that the administrator
may prescribe. Restricted stock awards are grants of shares of
our common stock that are subject to various restrictions,
including restrictions on transferability and forfeiture
provisions. Shares of restricted stock will vest and the
restrictions on such shares will lapse, in accordance with terms
and conditions established by the administrator. The
administrator, in its sole discretion, may accelerate the time
at which any restrictions will lapse or be removed. Recipients
of restricted stock awards generally will have voting and
dividend rights with respect to such shares upon grant without
regard to vesting, unless the administrator provides otherwise.
Shares of restricted stock that do not vest for any reason will
be forfeited by the recipient and will revert to the share
reserve available for grant under the Stock Plans. The specific
terms will be set forth in an award agreement.
Unless the administrator provides otherwise, the Stock Plans
generally do not allow for the transfer of awards and only the
recipient of an award may exercise an award during his or her
lifetime.
106
In the event of certain changes in our capitalization, to
prevent diminution or enlargement of the benefits or potential
benefits available under the Stock Plans, the administrator will
make proportionate adjustments to the exercise price
and/or the
number
and/or type
of shares covered by each award. The administrator may also
provide for cash payments, or for the exchange of outstanding
options granted under the Stock Plans for other awards in such
circumstances, such as by conversion, assumption, or
substitution of an option for another companys options on
a ratio corresponding to the terms of a merger or other
reorganization.
Our Stock Plans provide that in the event of a change in control
event, as defined under the Stock Plans, each outstanding award
will be treated as the administrator determines, except that if
the administrator does not make a provision for the
substitution, assumption, exchange, or other continuation or
cash payment in settlement of an award, or such award would not
otherwise in accordance with its terms, then each outstanding
option will fully vest and all restrictions on restricted shares
will lapse upon the occurrence of a change in control event. The
awards will then terminate upon the expiration of the specified
period of time.
Our board of directors has the authority to amend, alter,
suspend or terminate the Stock Plans Plan provided such action
does not impair the existing rights of any participant. Our 2010
Stock Plan will automatically terminate in 2020, and our 2008
Stock Plan will automatically terminate in 2018, in each case,
unless we terminate it sooner.
2006 Stock
Option Plan
Our 2006 Stock Option Plan, or the 2006 Plan, was adopted by our
board of directors and approved by our stockholders on
July 15, 2006. The 2006 Plan was terminated on
March 20, 2008. Following the termination of our 2006 Plan,
we did not grant any additional awards under the 2006 Plan, but
the 2006 Plan will continue to govern the terms and conditions
of the outstanding awards previously granted thereunder.
Our 2006 Plan provided for the grant of incentive stock options,
within the meaning of Section 422 of the Internal Revenue
Code, to our employees and any affiliates employees, and
for the grant of nonqualified stock options to our employees,
directors and consultants and our affiliates employees and
consultants.
As of March 31, 2011, options to purchase
535,000 shares of our common stock were outstanding under
the 2006 Plan. If an option expires or becomes unexercisable
without having been exercised in full, such shares will become
available for future grant or sale.
Our board of directors currently administers our 2006 Plan.
Under our 2006 Plan, the administrator has the power to
determine the terms of options, including the employees,
directors and consultants who will receive options, the
conditions on the ability to exercise all or any part of an
option granted under the 2006 Plan, and any vesting acceleration
applicable thereto. The administrator also may modify any
outstanding option, provided that no modification, without a
participants consent, may adversely affect any rights of a
participant. The administrator may have the authority to
interpret all provisions of the 2006 Plan, to prescribe the form
of stock option agreements, and to adopt, amend, and rescind
rules pertaining to the administration of the 2006 Plan. Any
decision made, or action taken, by the administrator or in
connection with the administration of the 2006 Plan shall be
final and conclusive on all persons.
The exercise price of options granted under our 2006 Plan had to
be at least equal to the fair market value of our common stock
on the date of grant. The term of an incentive stock option had
to not exceed 10 years, except that with respect to any
optionee who owned 10% of the voting power of all classes of our
outstanding stock as of the grant date, the term could not
exceed 5 years and the exercise price had to equal at least
110% of the fair market value on the grant date. Unless
otherwise provided in the option agreement, payment of the
exercise price of an option will be made in cash or a cash
equivalent acceptable to the administrator. The administrator
also may provide for the payment
107
of the exercise price of an option by shares. Subject to the
provisions of our 2006 Plan, the administrator determined the
terms of all other options in its discretion.
After the termination of service of an employee, director or
consultant, he or she may exercise his or her option to the
extent vested for the period of time stated in his or her option
agreement. Generally, if termination is due to death or
disability, the option will remain exercisable for one year. In
all other cases, the option will generally remain exercisable
for three months following the termination of service. However,
in no event may an option be exercised later than the expiration
of its term.
Unless the administrator provides otherwise, our 2006 Plan
generally does not allow for the transfer of awards (except by
will or descent) and only the recipient of an award may exercise
an award during his or her lifetime.
In the event of certain changes in our capitalization, a
liquidation, or a merger or consolidation that does not result
in us being the surviving company, we or the administrator may
make adjustments to the number, value, and class of stock
represented by the options in accordance with such terms as we
or the administrator may determine.
In the event of a merger or consolidation of our company
(regardless of whether we are the surviving corporation), or a
sale of substantially all of our assets, we or the administrator
may terminate, modify, amend, substitute and compromise
outstanding options. The administrator also has the discretion
to provide that upon a change in control, an option held by an
optionee who has not terminated his or her employment shall
become fully vested.
Our board of directors has the authority to amend, suspend or
terminate the 2006 Plan provided such action does not impair the
rights of any optionee without his or her written consent.
Executive
Incentive Compensation Plan
Our Executive Incentive Compensation Plan, or the Bonus Plan,
was adopted by our board of directors in May 2011. The Bonus
Plan allows our board of directors or its committee to provide
cash incentive awards to selected employees of the Company,
including our named executive officers, based upon performance
goals established by our board of directors or its committee.
Under the Bonus Plan, our board of directors or its committee
determines the performance goals applicable to any award, which
goals may include, without limitation, the attainment of
research and development milestones, sales bookings, business
divestitures and acquisitions, cash flow, cash position,
contract awards or backlog, customer renewals, customer
retention rates from an acquired company, business unit or
division, earnings (which may include earnings before interest
and taxes, earnings before taxes and net earnings), earnings per
share, expenses, gross margin, growth in stockholder value
relative to the moving average of the S&P 500 Index or
another index, internal rate of return, inventory turns,
inventory levels, market share, net income, net profit, net
sales, new product development, new product invention or
innovation, number of customers, operating cash flow, operating
expenses, operating income, operating margin, overhead or other
expense reduction, product defect measures, product release
timelines, productivity, profit, return on assets, return on
capital, return on equity, return on investment, return on
sales, revenue, revenue growth, sales results, sales growth,
stock price, time to market, total stockholder return, and
working capital, and individual objectives such as peer reviews
or other subjective or objective criteria. Performance goals
that include the Companys financial results may be
determined in accordance with U.S. generally accepted
accounting principles, or GAAP, or such financial results may
consist of non-GAAP financial measures. The performance goals
may differ from participant to participant and from award to
award.
Our board of directors or its committee may, in its sole
discretion and at any time, increase, reduce or eliminate a
participants actual award,
and/or
increase, reduce or eliminate the amount allocated to the bonus
pool for a particular performance period. The actual award may
be below, at or above a participants target award, in the
board of directors discretion. Our board of directors or
its committee may determine the amount of any reduction on the
basis of such factors as it deems
108
relevant, and it is not be required to establish any allocation
or weighting with respect to the factors it considers.
Actual awards are paid in cash only after they are earned, which
usually requires continued employment through the date a bonus
is paid. Payment of bonuses occurs as soon as administratively
practicable after they are earned, but no later than the dates
set forth in the Bonus Plan.
Our board of directors has the authority to amend, alter,
suspend or terminate the Bonus Plan provided such action does
not impair the existing rights of any participant with respect
to any earned bonus.
Limitation on
Liability and Indemnification Matters
Our amended and restated certificate of incorporation and
amended and restated bylaws, each to be effective upon the
completion of this offering, will provide that we will indemnify
our directors and officers, and may indemnify our employees and
other agents, to the fullest extent permitted by the Delaware
General Corporation Law, which prohibits our amended and
restated certificate of incorporation from limiting the
liability of our directors for the following:
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any breach of the directors duty of loyalty to us or to
our stockholders;
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acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
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unlawful payment of dividends or unlawful stock repurchases or
redemptions; and
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any transaction from which the director derived an improper
personal benefit.
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If Delaware law is amended to authorize corporate action further
eliminating or limiting the personal liability of a director,
then the liability of our directors will be eliminated or
limited to the fullest extent permitted by Delaware law, as so
amended. Our amended and restated certificate of incorporation
does not eliminate a directors duty of care and, in
appropriate circumstances, equitable remedies, such as
injunctive or other forms of non-monetary relief, remain
available under Delaware law. This provision also does not
affect a directors responsibilities under any other laws,
such as the federal securities laws or other state or federal
laws. Under our amended and restated bylaws, we will also be
empowered to purchase insurance on behalf of any person whom we
are required or permitted to indemnify.
In addition to the indemnification required in our amended and
restated certificate of incorporation and amended and restated
bylaws, we have entered into indemnification agreements with
each of our current directors and officers and some employees.
These agreements provide for the indemnification of our
directors, officers and some employees for certain expenses and
liabilities incurred in connection with any action, suit,
proceeding or alternative dispute resolution mechanism, or
hearing, inquiry or investigation that may lead to one of the
foregoing, to which the officer, director or employee is a
party, or is threatened to be made a party, or is a witness, by
reason of the fact that he is or was a director, officer,
employee, agent or fiduciary of our company, or any of our
subsidiaries, by reason of any action or inaction by him while
serving as an officer, director, agent or fiduciary, or by
reason of the fact that he is or was serving at our request as a
director, officer, employee, agent or fiduciary of another
entity. In the case of an action or proceeding by or in the
right of our company or any of our subsidiaries, no
indemnification will be provided for any claim where a court
determines that the indemnified party is prohibited from
receiving indemnification. We believe that these bylaw
provisions and indemnification agreements are necessary to
attract and retain qualified persons as directors and officers.
We also maintain directors and officers liability
insurance. We have also entered into indemnification agreements
with certain stockholders affiliated with our directors. Under
the indemnification agreements, we agreed to indemnify these
stockholders to the fullest extent allowable under applicable
law for lawsuits, inquiries, investigations and similar
proceedings in which they are involved by reason of the fact
that they are our stockholders or lenders to us, the fact that
they appointed or
109
were affiliated with our directors, by reason of anything done
or not done by such affiliated directors or because the
affiliated directors were our agents, or by reason of the fact
that the stockholders are or were acting as our express agent.
The limitation of liability and indemnification provisions in
our amended and restated certificate of incorporation and
amended and restated bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their
fiduciary duties. They may also reduce the likelihood of
derivative litigation against directors and officers, even
though an action, if successful, might benefit us and our
stockholders. A stockholders investment may be harmed to
the extent we pay the costs of settlement and damage awards
against directors and officers pursuant to these indemnification
provisions. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the foregoing
provisions, or otherwise, we have been advised that, in the
opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act, and is, therefore,
unenforceable. There is no pending litigation or proceeding
naming any of our directors or officers as to which
indemnification is being sought, nor are we aware of any pending
or threatened litigation that may result in claims for
indemnification by any director or officer.
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Other than compensation arrangements, we describe below
transactions and series of similar transactions, during our last
three fiscal years, to which we were a party or will be a party,
in which:
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the amounts involved exceeded or will exceed $120,000; and
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any of our directors, executive officers or beneficial holders
of more than 5% of any class of our capital stock had or will
have a direct or indirect material interest.
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Compensation arrangements for our directors and named executive
officers are described elsewhere in this prospectus.
Preferred Stock
Financings
Series A
Convertible Preferred Stock Financing
Between March 2008 and May 2008, we issued and sold an aggregate
of 10,978,950 shares of Series A convertible preferred
stock at a per share purchase price of $1.093, each as adjusted
for a
5-for-1
forward stock split of the Series A convertible preferred
stock in July 2008, for aggregate consideration of approximately
$12.0 million. Purchasers of the Series A convertible
preferred stock included New Enterprise Associates 12, Limited
Partnership, or NEA 12, which holds more than 5% of our
outstanding capital stock and whose general partners include
Forest Baskett and Scott D. Sandell, both of whom are members of
our board of directors. NEA 12 purchased 8,647,755 shares
of Series A convertible preferred stock for an aggregate
purchase price of $9,451,996.
Series B
Convertible Preferred Stock Financing
Between April 2009 and October 2009, we issued and sold an
aggregate of 24,009,902 shares of Series B convertible
preferred stock at a per share purchase price of $2.00, for
aggregate consideration of approximately $48.0 million.
Purchasers of the Series B convertible preferred stock
include NEA 12 and Lightspeed Venture Partners VIII, L.P., or
Lightspeed VIII, which holds more than 5% of our outstanding
capital stock and whose representative, Christopher J. Schaepe,
is a member of our board of directors. The following table
summarizes purchases of Series B convertible preferred
stock from us by the above-listed investors:
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Shares
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of Series B
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Total Purchase
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Name of Stockholder
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Preferred Stock
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Price
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New Enterprise Associates 12, Limited Partnership
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9,000,000
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$
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18,000,000
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Lightspeed Venture Partners VIII, L.P.
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7,500,000
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$
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15,000,000
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Series C
Convertible Preferred Stock Financing
Between April 2010 and May 2010, we issued and sold an aggregate
of 11,576,681 shares of Series C convertible preferred
stock at a per share purchase price of $3.869 pursuant to a
stock purchase agreement for an aggregate purchase price of
approximately $44.8 million. Purchasers of the
Series C convertible preferred stock include NEA 12, and
Lightspeed VIII. The following table summarizes purchases of
Series C convertible preferred stock by the above-listed
investors:
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Shares
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of Series C
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Total Purchase
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Name of Stockholder
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Preferred Stock
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Price
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New Enterprise Associates 12, Limited Partnership
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2,843,112
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$
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11,000,000
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Lightspeed Venture Partners VIII, L.P.
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1,292,324
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$
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5,000,002
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Bridge Note
Financings
In November 2007, we issued convertible promissory notes in an
aggregate principal amount of $616,000. These promissory notes
accrued interest at the rate of 10% per annum, compounded
annually. In March 2008, the outstanding principal and interest
due under these notes converted into 616 shares of
Series Angel preferred stock, which were converted into
554,400 shares of Series A convertible preferred stock
in connection with the Series A convertible preferred stock
financing. Sandusky Investments, Ltd., which is affiliated with
David A. Flynn, one of our executive officers and directors,
purchased notes from us with a principal amount of $214,000,
which later converted into 192,600 shares of Series A
convertible preferred stock in the Series A convertible
preferred stock financing.
Between November 2007 and May 2008, we issued convertible
promissory notes in an aggregate principal amount of
approximately $4.6 million. These promissory notes accrued
interest at the rate of 10% per annum, compounded annually. In
March 2008, the outstanding principal and interest due under
these notes converted into 4,190,620 shares of
Series A convertible preferred stock at $1.093 per share,
each as adjusted for a
5-for-1
forward stock split in July 2008. Purchasers of the notes
included NEA 12. NEA 12 purchased notes from us with a principal
amount of $4.1 million, which later converted into
3,812,210 shares of Series A convertible preferred
stock, on a split-adjusted basis.
Between August 2008 and March 2009, we issued convertible
promissory notes in an aggregate principal amount of
approximately $15.0 million. These promissory notes accrued
interest at the rate of 10% per annum, compounded annually. In
April 2009, the outstanding principal and interest due under
these notes converted into 7,763,668 shares of
Series B convertible preferred stock at $2.00 per share.
Purchasers of the notes included NEA 12. NEA 12 purchased notes
from us with a principal amount of $4.5 million, which
later converted into 2,328,766 shares of Series B
convertible preferred stock.
In March 2010, we issued convertible promissory notes in an
aggregate principal amount of $5.0 million. These
promissory notes accrued interest at the rate of 10% per annum,
compounded annually. In April 2010, the outstanding principal
and interest due under these notes converted into
1,302,237 shares of Series C convertible preferred
stock at $3.869 per share. Purchasers of the notes included NEA
12 and Lightspeed VIII. The following table summarizes purchases
of Series C convertible preferred stock from us by the
above-listed investors:
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Shares of Series C
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Note Principal
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Name of Stockholder
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Preferred Stock
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Amount
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New Enterprise Associates 12, Limited Partnership
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911,566
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$
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3,500,000
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Lightspeed Venture Partners VIII, L.P.
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390,671
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$
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1,500,000
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Common Stock
Purchases
On February 19, 2011, two of our directors, Dana L. Evan
and H. Raymond Bingham, each purchased 30,000 shares of our
common stock at a price per share of $5.12, in each case for an
aggregate purchase price of $153,600.
Investors Rights
Agreement
We are party to an investors rights agreement which
provides, among other things, that holders of our preferred
stock have the right to demand that we file a registration
statement or request that their shares be covered by a
registration statement that we are otherwise filing. For a more
detailed description of these registration rights, see
Description of Capital Stock Registration
Rights.
112
Employment
Arrangements and Indemnification Agreements
We have entered into employment and consulting arrangements with
certain of our current and former executive officers. See
Executive Compensation Employment Agreements
and Offer Letters.
We have also entered into indemnification agreements with each
of our directors and officers, as well as certain stockholders
affiliated with our directors. The indemnification agreements
and our certificate of incorporation and bylaws in effect upon
the completion of this offering require us to indemnify our
directors and officers to the fullest extent permitted by
Delaware law. See Executive Compensation
Limitation on Liability and Indemnification Matters.
Policies and
Procedures for Related Party Transactions
The audit committee of our board of directors has the primary
responsibility for reviewing and approving transactions with
related parties. Our audit committee charter provides that the
audit committee shall review and approve in advance any related
party transactions. As of the date of this prospectus, we have
not adopted any formal standards, policies or procedures
governing the review and approval of related-party transactions,
but we intend to do so in the future.
113
PRINCIPAL AND
SELLING STOCKHOLDERS
The following table sets forth certain information with respect
to the beneficial ownership of our common stock at May 16,
2011 and as adjusted to reflect the sale of common stock in this
offering, for:
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each of our directors;
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each of our named executive officers;
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all of our current directors and executive officers as a group;
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each person, or group of affiliated persons, who we know
beneficially owned more than 5% of our common stock; and
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all selling stockholders.
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We have determined beneficial ownership in accordance with the
rules of the SEC and the information is not necessarily
indicative of beneficial ownership for any other purpose,
including for purposes of Sections 13(d) and 13(g) of the
Securities Act. Except as indicated by the footnotes below, we
believe, based on information furnished to us, that the persons
and entities named in the table below have sole voting and sole
investment power with respect to all shares of common stock that
they beneficially owned, subject to applicable community
property laws.
Applicable percentage ownership prior to this offering is based
on 67,258,264 shares of common stock outstanding at
May 16, 2011, assuming conversion of our convertible
preferred stock into common stock. Applicable percentage
ownership after this offering is based on 78,013,871 shares
of common stock outstanding at May 16, 2011, after giving
effect to the issuance of 10,755,607 shares of our common
stock and the exercise of 1,024,000 shares of our common
stock that we expect to be sold in this offering by certain
selling stockholder upon the exercise of vested options at the
closing of this offering. In computing the number of shares of
common stock beneficially owned by a person and the percentage
ownership of such person, we deemed to be outstanding all shares
of common stock subject to options held by the person that are
currently exercisable or exercisable within 60 days of
May 16, 2011. We did not deem such shares outstanding,
however, for the purpose of computing the percentage ownership
of any other person.
Unless otherwise indicated, the address of each beneficial owner
listed in the table below is
c/o Fusion-io,
Inc., 2855 E. Cottonwood Parkway, Suite 100, Salt
Lake City, Utah 84121.
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Shares Beneficially Owned
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Shares Beneficially Owned
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Prior to this Offering
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Number of Shares
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After this Offering
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Name of Beneficial Owner
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Number
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%
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being Offered
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Number
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%
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Directors, Named Executive Officers and other Selling
Stockholders:
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David A. Flynn(1)
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6,872,886
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9.99
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500,000
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6,372,886
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7.96
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Dennis P. Wolf(2)
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344,999
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*
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105,000
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239,999
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*
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James L. Dawson(3)
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593,750
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*
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117,500
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476,250
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*
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Lance L. Smith(4)
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664,999
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*
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160,000
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504,999
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*
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Rick C. White(5)
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5,296,584
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7.75
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500,393
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4,796,191
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5.99
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Forest Baskett(6)
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25,935,930
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38.56
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25,935,930
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32.81
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H. Raymond Bingham(7)
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35,000
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*
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35,000
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*
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Dana L. Evan
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30,000
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*
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30,000
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*
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Scott D. Sandell(8)
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25,935,930
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38.56
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25,935,930
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32.81
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Christopher J. Schaepe(9)
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8,823,741
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13.12
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8,823,741
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11.16
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David R. Bradford(10)
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673,619
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*
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673,619
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*
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Neil A. Carson(11)
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182,292
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*
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85,000
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97,292
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*
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Shawn J. Lindquist(12)
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195,207
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*
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76,500
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118,707
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*
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All directors and executive officers as a group
(12 Persons)(13)
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48,975,388
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68.17
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1,544,393
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47,430,995
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56.72
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Other 5% Stockholders:
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New Enterprise Associates 12, Limited Partnership(14)
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25,935,930
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38.56
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25,935,930
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32.81
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Lightspeed Venture Partners VIII, L.P.(15)
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8,823,741
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13.12
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8,823,741
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11.16
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114
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*
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Less than one percent (1%).
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(1)
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Mr. Flynn is the Chief Executive
Officer, President and a Director of Fusion-io. Consists of
(i) 5,000,000 shares held of record by Sandusky
Investments, Ltd., which is controlled by Mr. Flynn and
co-owned by Mr. Flynn and other affiliated persons,
(ii) 314,955 shares held of record by Mr. Flynn,
and (iii) 1,557,931 shares issuable pursuant to stock
options exercisable within 60 days of May 16, 2011.
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(2)
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Mr. Wolf is the Chief Financial
Officer and an Executive Vice President of Fusion-io. Consists
of (i) 20,000 shares of record held by the Wolf 1996
Revocable Trust, and (ii) 324,999 shares, issuable
pursuant to stock options exercisable within 60 days of
May 16, 2011. Of the shares being sold in the offering,
85,000 shares are being sold by Mr. Wolf and 20,000
are being sold by the Wolf 1996 Trust.
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(3)
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Mr. Dawson is the Executive Vice
President of Worldwide Sales of Fusion-io. Consists of
(i) 25,000 shares held by the Dawson Family Trust, and
(ii) 568,750 shares issuable pursuant to stock options
exercisable within 60 days of May 16, 2011.
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(4)
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Mr. Smith is the Chief Operating
Officer and an Executive Vice President of Fusion-io. Consists
of 664,999 shares issuable pursuant to stock options
exercisable within 60 days of May 16, 2011.
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(5)
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Mr. White is the Chief Marketing
Officer, an Executive Vice President and a Director of
Fusion-io. Consists of (i) 4,200,393 shares held of
record by West Coast VC, LLC, which is indirectly owned by
Mr. White and his spouse, and
(ii) 1,096,191 shares issuable pursuant to stock
options exercisable within 60 days of May 16, 2011. Of
the shares being sold in the offering, 500,393 are being sold by
West Coast VC, LLC.
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(6)
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See footnote (14) below
regarding Dr. Basketts relationship with New
Enterprise Associates, Inc. and its affiliated entities.
Dr. Baskett does not have voting or dispositive power over
the shares held of record by Ven 2008.
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(7)
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Consists of
(i) 30,000 shares held by The Lyman and Thora Bingham
Revocable Living Trust, and (ii) 5,000 shares issuable
pursuant to stock options exercisable within 60 days of
May 16, 2011.
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(8)
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See footnote (14) below
regarding Mr. Sandells relationship with New
Enterprise Associates, Inc. and its affiliated entities.
Mr. Sandell does not have voting or dispositive power over
the shares held of record by Ven 2008.
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(9)
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See footnote (15) below
regarding Mr. Schaepes relationship with Lightspeed
Venture Partners VIII, L.P. (Lightspeed VIII).
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(10)
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Consists of
(i) 12,500 shares held of record by Mr. Bradford,
and (ii) 661,119 shares issuable pursuant to stock
options exercisable within 60 days of May 16, 2011.
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(11)
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Mr. Carson is the Chief Technology
Officer and an Executive Vice President of Fusion-io. Consists
of 182,292 shares issuable pursuant to stock options
exercisable within 60 days of May 16, 2011.
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(12)
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Mr. Lindquist is the Chief Legal
Officer, Secretary and an Executive Vice President of Fusion-io.
Consists of (i) 15,000 shares of record held by
Bentbrook Holdings, LLC, controlled by Mr. Lindquists
spouse, and (ii) 180,207 shares issuable pursuant to
stock options exercisable within 60 days of May 16,
2011.
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(13)
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Includes 4,580,369 shares
issuable pursuant to stock options exercisable within
60 days of May 16, 2011.
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(14)
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Consists of
(i) 25,829,872 shares held of record by New Enterprise
Associates 12, Limited Partnership (NEA 12);
(ii) 92,333 shares held of record by New Enterprise
Associates 13, L.P. (NEA 13); and
(iii) 13,725 shares held of record by NEA Ventures
2008, L.P. (Ven 2008). The shares directly held by
NEA 12 are indirectly owned by NEA Partners 12, Limited
Partnership (NEA Partners 12), the sole general
partner of NEA 12, NEA 12 GP, LLC (NEA 12 LLC), the
sole general partner of NEA Partners 12 and each of the
individual Managers of NEA 12 LLC. The individual Managers
(collectively, the Managers) of NEA 12 LLC are M.
James Barrett, Peter J. Barris, Forest Baskett (a member of our
board of directors), Ryan D. Drant, Patrick J. Kerins, Krishna
Kittu Kolluri, C. Richard Kramlich, Charles W.
Newhall III, Mark W. Perry and Scott D. Sandell (a member of our
board of directors). The shares directly held by NEA 13 are
indirectly owned by NEA Partners 13, L.P. (NEA Partners
13), the sole general partner of NEA 13, NEA 13 GP, LTD
(NEA 13 LTD), the sole general partner of NEA
Partners 13 and each of the individual Directors of NEA 13 LTD.
The individual Directors (collectively, the
Directors) of NEA 13 LTD are M. James Barrett, Peter
J. Barris, Forest Baskett (a member of our board of directors),
Ryan D. Drant, Patrick J. Kerins, Krishna Kittu
Kolluri, C. Richard Kramlich, David M. Mott, Scott D. Sandell (a
member of our board of directors), Ravi Viswanathan and Harry R.
Weller. The shares directly held by Ven 2008 are indirectly
owned by Karen P. Welsh, the general partner of Ven 2008. NEA
12, NEA Partners 12, NEA 12 LLC and the Managers share voting
and dispositive power with regard to the shares directly held by
NEA 12. NEA 13, NEA Partners 13, NEA 13 LTD and the Directors
share voting and dispositive power with regard to the shares
directly held by NEA 13. Karen P. Welsh, the general partner of
Ven 2008, holds voting and dispositive power over the shares
held by Ven 2008. The principal business address of New
Enterprise Associates, Inc. is 1954 Greenspring Drive,
Suite 600, Timonium, MD 21093.
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(15)
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Consists of 8,823,741 shares
held of record by Lightspeed VIII. The shares directly held by
Lightspeed VIII are indirectly owned by Lightspeed Ultimate
General Partner VIII, Ltd. (GP VIII), the sole
general partner of Lightspeed General Partner VIII, L.P., which
is the sole general partner of Lightspeed VIII. The individual
directors of GP VIII are Christopher J. Schaepe (a member of our
board of directors), Barry Eggers, Ravi Mhatre, and Peter Nieh.
The address for this entity is 2200 Sand Hill Road, Menlo Park,
CA 94025.
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115
DESCRIPTION OF
CAPITAL STOCK
General
The following is a summary of the rights of our common stock and
preferred stock and certain provisions of our certificate of
incorporation and bylaws as they will be in effect upon the
completion of this offering. This summary does not purport to be
complete and is qualified in its entirety by the provisions of
our certificate of incorporation and bylaws, copies of which
have been filed as exhibits to the registration statement of
which this prospectus is a part.
Immediately following the completion of this offering, our
authorized capital stock will consist of
510,000,000 shares, with a par value of $0.0002 per share,
of which:
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500,000,000 shares will be designated as common
stock; and
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10,000,000 shares will be designated as preferred stock.
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As of March 31, 2011, we had outstanding
67,053,477 shares of common stock, held by approximately
113 stockholders of record, and no shares of preferred
stock, assuming the automatic conversion of all outstanding
shares of our convertible preferred stock into common stock
effective immediately prior to the completion of this offering.
In addition, as of March 31, 2011, we had outstanding
options to acquire 26,140,906 shares of our common stock
and a warrant to purchase 125,800 shares of our common
stock, assuming that the outstanding warrant for outstanding
shares of our convertible preferred stock becomes exercisable
for an equivalent number of shares of our common stock upon
completion of this offering.
Common
Stock
The holders of common stock are entitled to one vote per share
on all matters submitted to a vote of our stockholders and do
not have cumulative voting rights. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing
for election. Subject to preferences that may be applicable to
any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled to receive
ratably any dividends declared by our board of directors out of
assets legally available. See the section entitled
Dividend Policy. Upon our liquidation, dissolution
or winding up, holders of our common stock are entitled to share
ratably in all assets remaining after payment of liabilities and
the liquidation preference of any then outstanding shares of
preferred stock. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common
stock.
Preferred
Stock
After the completion of this offering, no shares of preferred
stock will be outstanding. Pursuant to our certificate of
incorporation, the board of directors will have the authority,
without further action by the stockholders, to issue from time
to time up to 10,000,000 shares of preferred stock in one
or more series. Our board of directors may designate the rights,
preferences, privileges and restrictions of the preferred stock,
including dividend rights, conversion rights, voting rights,
redemption rights, liquidation preference, sinking fund terms
and the number of shares constituting any series or the
designation of any series. The issuance of preferred stock could
have the effect of restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the
liquidation rights of the common stock or delaying deterring or
preventing a change in control. Such issuance could have the
effect of decreasing the market price of the common stock. The
issuance of preferred stock or even the ability to issue
preferred stock could also have the effect of delaying,
deterring or preventing a change in control. We currently have
no plans to issue any shares of preferred stock.
116
Warrants
As of March 31, 2011, a warrant to purchase
125,800 shares of our Series A convertible preferred
stock was issued and outstanding with an exercise price of
$1.093 per share. This warrant expires in September 2018. Upon
completion of this offering, this warrant will be exercisable
for an equivalent number of shares of our common stock.
Registration
Rights
Following this offerings completion, the holders of an
aggregate of 52,489,072 shares of our common stock, or
their permitted transferees, are entitled to rights with respect
to the registration of these shares under the Securities Act.
These rights are provided under the terms of an investors
rights agreement between us and the holders of these shares,
which was entered into in connection with our convertible
preferred stock financings, and include demand registration
rights, short-form registration rights and piggyback
registration rights.
The registration rights terminate with respect to the
registration rights of an individual holder upon the earlier of
the date two years following the completion of this offering or
the time when (i) the holder or its affiliates owns less
than five percent of all outstanding registrable securities and
(ii) the holder can sell all of the holders shares in
any three month period under Rule 144.
Demand
Registration Rights
The holders of an aggregate of 52,489,072 shares of our
common stock, or their permitted transferees, are entitled to
demand registration rights. Under the terms of the
investors rights agreement, we will be required, upon the
written request of holders of a majority of the shares that are
entitled to rights under the investors rights agreement,
to use commercially reasonable efforts to register all or a
portion of these shares for public resale. We are required to
effect only two registrations pursuant to this provision of the
investors rights agreement. We are not required to effect
a demand registration earlier than six months after the
effective date of this registration statement.
Short-Form Registration
Rights
The holders of an aggregate of 52,489,072 shares of our
common stock, or their permitted transferees, are also entitled
to short-form registration rights. If we are eligible to file a
registration statement on
Form S-3,
these holders have the right, upon written request from holders
of these shares to us, to have such shares registered by us if
the proposed aggregate offering price of the shares to be
registered by the holders requesting registration, net of
underwriting discounts and commissions, is at least
$1.0 million, subject to certain exceptions.
Piggyback
Registration Rights
The holders of an aggregate of 52,489,072 shares of our
common stock, or their permitted transferees, are entitled to
piggyback registration rights. If we register any of our
securities for our own account, after the completion of this
offering the holders of these shares are entitled to include
their shares in the registration. The underwriters of any
underwritten offering have the right to limit the number of
shares registered by these holders for marketing reasons,
subject to certain limitations.
In any registration made pursuant to such investors rights
agreement, all fees, costs and expenses of underwritten
registrations will be borne by us and all selling expenses,
including estimated underwriting discounts and selling
commissions, will be borne by the holders of the shares being
registered.
Anti-Takeover
Effects of Delaware Law and Our Certificate of Incorporation and
Bylaws
Our certificate of incorporation and bylaws contain certain
provisions that could have the effect of delaying, deferring or
discouraging another party from acquiring control of us. These
provisions and
117
certain provisions of Delaware law, which are summarized below,
could discourage takeovers, coercive or otherwise. These
provisions are also designed, in part, to encourage persons
seeking to acquire control of us to negotiate first with our
board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with an
unfriendly or unsolicited acquirer outweigh the disadvantages of
discouraging a proposal to acquire us.
Undesignated
Preferred Stock
As discussed above, our board of directors has the ability to
designate and issue preferred stock with voting or other rights
or preferences that could deter hostile takeovers or delay
changes in our control or management.
Limits on
Ability of Stockholders to Act by Written Consent or Call a
Special Meeting
Our certificate of incorporation provides that our stockholders
may not act by written consent. This limit on the ability of
stockholders to act by written consent may lengthen the amount
of time required to take stockholder actions. As a result, the
holders of a majority of our capital stock would not be able to
amend bylaws or remove directors without holding a meeting of
stockholders called in accordance with our bylaws.
In addition, our bylaws provide that special meetings of the
stockholders may be called only by the chairman of the board,
the chief executive officer, the president (in the absence of a
chief executive officer) or our board of directors. A
stockholder may not call a special meeting, which may delay the
ability of our stockholders to force consideration of a proposal
or for holders controlling a majority of our capital stock to
take any action, including the removal of directors.
Requirements
for Advance Notification of Stockholder Nominations and
Proposals
Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of our board of directors or a committee of the board
of directors. These may have the effect of precluding the
conduct of certain business at a meeting if the proper
procedures are not followed, and may also discourage or deter a
potential acquirer from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempt to obtain
control of our company.
Board
Classification
Our board of directors is divided into three classes. The
directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. This system
of electing and removing directors may tend to discourage a
third party from making a tender offer or otherwise attempting
to obtain control of us, because it generally makes it more
difficult for stockholders to replace a majority of our
directors.
Delaware
Anti-Takeover Statute
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
In general, Section 203 prohibits a publicly held Delaware
corporation from engaging, under certain circumstances, in a
business combination with an interested stockholder for a period
of three years following the date the person became an
interested stockholder unless:
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prior to the date of the transaction, our board of directors
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
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upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining
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118
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the voting stock outstanding, but not the outstanding voting
stock owned by the interested stockholder, (1) shares owned
by persons who are directors and also officers and
(2) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a
tender or exchange offer; or
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at or subsequent to the date of the transaction, the business
combination is approved by our board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least
662/3%
of the outstanding voting stock that is not owned by the
interested stockholder.
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Generally, a business combination includes a merger, asset or
stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An interested stockholder
is a person who, together with affiliates and associates, owns
or, within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporations
outstanding voting stock. We expect the existence of this
provision to have an anti-takeover effect with respect to
transactions our board of directors does not approve in advance.
We also anticipate that Section 203 may discourage attempts
that might result in a premium over the market price for the
shares of common stock held by stockholders.
The provisions of Delaware law and the provisions of our
certificate of incorporation and bylaws could have the effect of
discouraging others from attempting hostile takeovers and, as a
consequence, they might also inhibit temporary fluctuations in
the market price of our common stock that often result from
actual or rumored hostile takeover attempts. These provisions
might also have the effect of preventing changes in our
management. It is also possible that these provisions could make
it more difficult to accomplish transactions that stockholders
might otherwise deem to be in their best interests.
Transfer Agent
and Registrar
Upon the completion of this offering, the transfer agent and
registrar for our common stock will be American Stock Transfer
& Trust Company, LLC. The transfer agents address is
6201 15th Avenue, Brooklyn, NY 11219.
New York Stock
Exchange Listing
The common stock of Fusion-io has been approved for listing on
the New York Stock Exchange under the symbol FIO.
119
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for
shares of our common stock. Future sales of substantial amounts
of shares of common stock, including shares issued upon the
exercise of outstanding options, in the public market after this
offering, or the possibility of these sales occurring, could
adversely affect the prevailing market price for our common
stock or impair our ability to raise equity capital.
Upon the completion of this offering, a total of
77,809,084 shares of common stock will be outstanding,
assuming the automatic conversion of all outstanding shares of
preferred stock into shares of common stock upon the completion
of this offering. Of these shares, all 12,300,000 shares of
common stock sold in this offering by us and the selling
stockholders, plus any shares sold upon exercise of the
underwriters option to purchase additional shares, will be
freely tradable in the public market, except that any shares
held by our affiliates, as that term is defined in Rule 144
under the Securities Act, will only be able to be sold in
compliance with the limitations described below.
66,533,084 shares of our common stock, after giving effect
to the exercise of options and the sale of shares by the selling
stockholders in connection with this offering, will be
restricted securities, as that term is defined in
Rule 144 under the Securities Act. These restricted
securities are eligible for public sale only if they are
registered under the Securities Act or if they qualify for an
exemption from registration under Rules 144 or 701 under
the Securities Act, which are summarized below.
Subject to the
lock-up
agreements described below and the provisions of Rules 144
and 701 under the Securities Act, these restricted securities
will be available for sale in the public market at various times
beginning more than 180 days (subject to extension) after the
date of this prospectus.
In addition, of the 26,140,906 shares of our common stock
that were subject to stock options outstanding as of
March 31, 2011, options to purchase 7,748,084 shares
of common stock were vested as of March 31, 2011 and will
be eligible for sale 180 days following the effective date
of this offering, subject to extension as described in the
section entitled Underwriting. In addition, as
of March 31, 2011, 1,364,001 shares of common stock were
reserved for future issuance under our stock plans (including
options to purchase shares of common stock granted in April and
May of 2011) and upon the consummation of this offering, options
to purchase approximately 12,132,430 shares of our common stock
under our 2011 Equity Stock Incentive Plan and 500,000 shares of
our common stock will be reserved for future issuance under our
2011 Employee Stock Purchase Plan.
Rule 144
In general, under Rule 144 as currently in effect, once we
have been subject to public company reporting requirements for
at least 90 days, a person who is not deemed to have been
one of our affiliates for purposes of the Securities Act at any
time during 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
six months, including the holding period of any prior owner
other than our affiliates, is entitled to sell such shares
without complying with the manner of sale, volume limitation or
notice provisions of Rule 144, subject to compliance with
the public information requirements of Rule 144. If such a
person has beneficially owned the shares proposed to be sold for
at least one year, including the holding period of any prior
owner other than our affiliates, then such person is entitled to
sell such shares without complying with any of the requirements
of Rule 144.
In general, under Rule 144, as currently in effect, our
affiliates or persons selling shares on behalf of our affiliates
are entitled to sell upon expiration of the
lock-up
agreements described above, within any three month period
beginning 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
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1% of the number of shares of common stock then outstanding,
which will equal approximately 788,331 shares immediately
after this offering; or
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the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to such sale.
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120
Sales under Rule 144 by our affiliates or persons selling
shares on behalf of our affiliates are also subject to certain
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Rule 701
Rule 701 generally allows a stockholder who purchased
shares of our common stock pursuant to a written compensatory
plan or contract and who is not deemed to have been an affiliate
of our company during the immediately preceding 90 days to
sell these shares in reliance upon Rule 144, but without
being required to comply with the public information, holding
period, volume limitation, or notice provisions of
Rule 144. Rule 701 also permits affiliates of our
company to sell their Rule 701 shares under
Rule 144 without complying with the holding period
requirements of Rule 144. All holders of
Rule 701 shares, however, are required to wait until
90 days after the date of this prospectus before selling
such shares pursuant to Rule 701.
Lock-Up
Agreements
We, the selling stockholders, all of our directors and officers
and the other holders of shares of common stock and holders of
securities exercisable for or convertible into our common stock
outstanding immediately prior to this offering have agreed that,
without the prior written consent of Goldman, Sachs & Co.
and Morgan Stanley & Co. LLC on behalf of the underwriters,
we and they will not, during the period ending 180 days
after the date of this prospectus:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common
stock; or
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enter into any hedge or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of our common stock;
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whether any transaction described above is to be settled by
delivery of shares of our common stock or such other securities,
in cash or otherwise. This agreement is subject to certain
exceptions, and is also subject to extension for up to an
additional 34 days, as set forth in the section entitled
Underwriting.
Registration
Rights
Upon completion of this offering, the holders of
52,489,072 shares of common stock or their transferees will
be entitled to various rights with respect to the registration
of these shares under the Securities Act. Registration of these
shares under the Securities Act would result in these shares
becoming fully tradable without restriction under the Securities
Act immediately upon the effectiveness of the registration,
except for shares purchased by affiliates. See Description
of Capital Stock Registration Rights for
additional information.
Registration
Statements on
Form S-8
We intend to file a registration statement on
Form S-8
under the Securities Act to register all of the shares of common
stock issued or reserved for issuance under our stock option
plans. We expect to file this registration statement after this
offering. Shares covered by this registration statement will be
eligible for sale in the public market, upon the expiration or
release from the terms of the
lock-up
agreements, and subject to vesting of such shares.
121
MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S.
HOLDERS
The following is a summary of the material U.S. federal
income tax consequences of the ownership and disposition of our
common stock to
non-U.S. holders,
but does not purport to be a complete analysis of all the
potential tax considerations relating thereto. This summary is
based upon the provisions of the Internal Revenue Code of 1986,
as amended, or the Code, Treasury regulations promulgated
thereunder, administrative rulings and judicial decisions, all
as of the date hereof. These authorities may be changed,
possibly retroactively, so as to result in U.S. federal
income tax consequences different from those set forth below. We
have not sought any ruling from the Internal Revenue Service, or
the IRS, with respect to the statements made and the conclusions
reached in the following summary, and there can be no assurance
that the IRS will agree with such statements and conclusions.
This summary also does not address the tax considerations
arising under the laws of any
non-U.S.,
state or local jurisdiction or under U.S. federal gift and
estate tax laws, except to the limited extent set forth below.
In addition, this discussion does not address tax considerations
applicable to an investors particular circumstances or to
investors that may be subject to special tax rules, including,
without limitation:
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banks, insurance companies or other financial institutions;
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persons subject to the alternative minimum tax;
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tax-exempt organizations;
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controlled foreign corporations, passive foreign investment
companies and corporations that accumulate earnings to avoid
U.S. federal income tax;
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dealers in securities or currencies;
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traders in securities that elect to use a
mark-to-market
method of accounting for their securities holdings;
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persons that own, or are deemed to own, more than five percent
of our capital stock (except to the extent specifically set
forth below);
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certain former citizens or long-term residents of the United
States;
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persons who hold our common stock as a position in a hedging
transaction, straddle, conversion
transaction or other risk reduction transaction;
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persons who do not hold our common stock as a capital asset
within the meaning of Section 1221 of the Code; or
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persons deemed to sell our common stock under the constructive
sale provisions of the Code.
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In addition, if a partnership or entity classified as a
partnership for U.S. federal income tax purposes holds our
common stock, the tax treatment of a partner generally will
depend on the status of the partner and upon the activities of
the partnership. Accordingly, partnerships that hold our common
stock, and partners in such partnerships, should consult their
tax advisors.
You are urged to consult your tax advisor with respect to the
application of the U.S. federal income tax laws to your
particular situation, as well as any tax consequences of the
purchase, ownership and disposition of our common stock arising
under the U.S. federal estate or gift tax rules or under
the laws of any state, local,
non-U.S. or
other taxing jurisdiction or under any applicable tax treaty.
122
Non-U.S.
Holder Defined
For purposes of this discussion, you are a
non-U.S. holder
if you are any holder other than:
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an individual citizen or resident of the United States (for tax
purposes);
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a corporation or other entity taxable as a corporation created
or organized in the United States or under the laws of the
United States or any political subdivision thereof;
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an estate whose income is subject to U.S. federal income
tax regardless of its source; or
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a trust (x) whose administration is subject to the primary
supervision of a U.S. court and which has one or more
U.S. persons who have the authority to control all
substantial decisions of the trust or (y) which has made an
election to be treated as a U.S. person.
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Distributions
We have not made any distributions on our common stock. However,
if we do make distributions on our common stock, those payments
will constitute dividends for U.S. tax purposes to the
extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax
principles. To the extent those distributions exceed both our
current and our accumulated earnings and profits, they will
constitute a return of capital and will first reduce your basis
in our common stock, but not below zero, and then will be
treated as gain from the sale of stock.
Any dividend paid to you generally will be subject to
U.S. withholding tax either at a rate of 30% of the gross
amount of the dividend or such lower rate as may be specified by
an applicable income tax treaty. In order to receive a reduced
treaty rate, you must provide us with an IRS
Form W-8BEN
or other appropriate version of IRS
Form W-8
certifying qualification for the reduced rate. A
non-U.S. holder
of shares of our common stock eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may
obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund with the IRS. If the
non-U.S. holder
holds the stock through a financial institution or other agent
acting on the
non-U.S. holders
behalf, the
non-U.S. holder
will be required to provide appropriate documentation to the
agent, which then will be required to provide certification to
us or our paying agent, either directly or through other
intermediaries.
Dividends received by you that are effectively connected with
your conduct of a U.S. trade or business (and, if an income
tax treaty applies, such dividends are attributable to a
permanent establishment maintained by you in the U.S.), are
includible in your gross income in the taxable year received,
are exempt from such withholding tax. In order to obtain this
exemption, you must provide us with an IRS
Form W-8ECI
or other applicable IRS
Form W-8
properly certifying such exemption. Such effectively connected
dividends, although not subject to withholding tax, are taxed at
the same graduated rates applicable to U.S. persons, net of
certain deductions and credits, subject to an applicable income
tax treaty providing otherwise. In addition, if you are a
corporate
non-U.S. holder,
dividends you receive that are effectively connected with your
conduct of a U.S. trade or business may also be subject to
a branch profits tax at a rate of 30% or such lower rate as may
be specified by an applicable income tax treaty.
Gain on
Disposition of Common Stock
You generally will not be required to pay U.S. federal
income tax on any gain realized upon the sale or other
disposition of our common stock unless:
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the gain is effectively connected with your conduct of a
U.S. trade or business (and, if an income tax treaty
applies, the gain is attributable to a permanent establishment
maintained by you in the United States);
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123
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you are an individual who is present in the United States for a
period or periods aggregating 183 days or more during the
calendar year in which the sale or disposition occurs and
certain other conditions are met; or
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our common stock constitutes a U.S. real property interest
by reason of our status as a United States real property
holding corporation, or USRPHC, for U.S. federal
income tax purposes (a USRPHC) at any time within
the shorter of the five-year period preceding your disposition
of, or your holding period for, our common stock.
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We believe that we are not currently and will not become a
USRPHC. However, because the determination of whether we are a
USRPHC depends on the fair market value of our U.S. real
property relative to the fair market value of our other business
assets, there can be no assurance that we will not become a
USRPHC in the future. Even if we become a USRPHC, however, as
long as our common stock is regularly traded on an established
securities market, such common stock will be treated as
U.S. real property interests only if you actually or
constructively hold more than five percent of such regularly
traded common stock at any time during the shorter of the
five-year period preceding your disposition of, or your holding
period for, our common stock.
If you are a
non-U.S. holder
described in the first bullet above, you will be required to pay
tax on the net gain derived from the sale under regular
graduated U.S. federal income tax rates, and a corporate
non-U.S. holder
described in the first bullet above also may be subject to the
branch profits tax at a 30% rate, or such lower rate as may be
specified by an applicable income tax treaty. If you are an
individual
non-U.S. holder
described in the second bullet above, you will be required to
pay a flat 30% tax on the gain derived from the sale, which tax
may be offset by U.S. source capital losses for the year.
You should consult any applicable income tax or other treaties
that may provide for different rules.
Federal Estate
Tax
Our common stock beneficially owned by an individual who is not
a citizen or resident of the United States (as defined for
U.S. federal estate tax purposes) at the time of their
death will generally be includable in the decedents gross
estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.
Backup
Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of
dividends paid to you, your name and address, and the amount of
tax withheld, if any. A similar report will be sent to you.
Pursuant to applicable income tax treaties or other agreements,
the IRS may make these reports available to tax authorities in
your country of residence.
Payments of dividends or of proceeds on the disposition of stock
made to you may be subject to information reporting and backup
withholding at a current rate of 28% (such rate scheduled to
increase to 31% for payments made after December 31,
2012) unless you establish an exemption, for example, by
properly certifying your non U.S. status on a
Form W-8BEN
or another appropriate version of IRS
Form W-8.
Notwithstanding the foregoing, backup withholding and
information reporting may apply if either we or our paying agent
has actual knowledge, or reason to know, that you are a
U.S. person.
Backup withholding is not an additional tax; rather, the
U.S. income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund or
credit may generally be obtained from the IRS, provided that the
required information is furnished to the IRS in a timely manner.
124
Recently Enacted
Legislation Affecting Taxation of our Common Stock Held by or
through
Foreign Entities
Recently enacted legislation generally will impose a
U.S. federal withholding tax of 30% on dividends, and the
gross proceeds of a disposition of our common stock, paid after
December 31, 2012 to a foreign financial
institution (as specially defined under these rules),
unless such institution enters into an agreement with the
U.S. government to withhold on certain payments and to
collect and provide to the U.S. tax authorities substantial
information regarding the U.S. account holders of such
institution (which includes certain equity and debt holders of
such institution, as well as certain account holders that are
foreign entities with U.S. owners). The legislation also
generally will impose a U.S. federal withholding tax of 30%
on dividends and the gross proceeds of a disposition of our
common stock paid after December 31, 2012 to a
non-financial foreign entity unless such entity provides the
withholding agent with a certification identifying the direct
and indirect U.S. owners of the entity. Under certain
circumstances, a
non-U.S. holder
might be eligible for refunds or credits of such taxes.
Prospective investors are encouraged to consult with their own
tax advisors regarding the possible implications of this
legislation on their investment in our common stock.
The preceding discussion of U.S. federal tax
considerations is for general information only. It is not tax
advice. Each prospective investor should consult its own tax
advisor regarding the particular U.S. federal, state and
local and
non-U.S. tax
consequences of purchasing, holding and disposing of our common
stock, including the consequences of any proposed change in
applicable laws.
125
UNDERWRITING
We, the selling stockholders and the underwriters named below
have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co. and Morgan Stanley & Co. LLC are
the representatives of the underwriters.
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Underwriters
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Number of Shares
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Goldman, Sachs & Co.
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Morgan Stanley & Co. LLC
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J.P. Morgan Securities LLC
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Credit Suisse Securities (USA) LLC
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Total
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12,300,000
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The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an additional 1,845,000 shares to cover such sales.
They may exercise that option for 30 days. If any shares
are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total estimated
underwriting discounts and commissions to be paid to the
underwriters by us and the selling stockholders. Such amounts
are shown assuming both no exercise and full exercise of the
underwriters option to
purchase
additional shares.
Paid by
Us
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No Exercise
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Full Exercise
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Per Share
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$
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$
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Total
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$
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$
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Paid by the
Selling Stockholders
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No Exercise
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Full Exercise
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Per Share
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$
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$
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Total
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$
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$
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Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms. The offering of
the shares by the underwriters is subject to receipt and
acceptance and subject to the underwriters right to reject
any order in whole or in part.
The underwriters have agreed to reimburse us for certain
expenses in connection with this offering. We estimate that the
total expenses of the offering to be paid by us, excluding
estimated underwriting discounts and commissions and excluding
amounts that we anticipate will be reimbursed by the
underwriters, will be approximately $3.5 million. We will
not receive any proceeds from the sale of shares of common stock
by the selling stockholders, although we will bear the costs,
other than the underwriting discounts and commissions,
associated with the sale of these shares.
126
We, our officers and directors, and holders of substantially all
of our outstanding common stock, including all of the selling
stockholders, have agreed with the underwriters, subject to
certain exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase, make any short sale or
otherwise dispose of or hedge any of their common stock or
securities convertible into, exchangeable for or that represent
the right to receive shares of common stock, whether now owned
or hereafter acquired, during the period from the date of this
prospectus continuing through the date 180 days after the
date of this prospectus, except with the prior written consent
of the representatives. This agreement does not apply to any
existing employee benefit plans. See Shares Eligible for
Future Sale for a discussion of certain transfer
restrictions.
The 180-day
restricted period described in the preceding paragraph will be
automatically extended if: (1) during the last 17 days
of the
180-day
restricted period we issue an earnings release or announce
material news or a material event; or (2) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period beginning on the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event.
Prior to the offering, there has been no public market for our
common stock. The initial public offering price has been
negotiated among us and the representatives. Among the factors
to be considered in determining the initial public offering
price of the shares, in addition to prevailing market
conditions, will be our historical performance, estimates of our
business potential and earnings prospects, an assessment of our
management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
The common stock has been approved for listing on the New York
Stock Exchange, or the NYSE, under the symbol FIO.
In order to meet one of the requirements for listing the common
stock on the NYSE, the underwriters have undertaken to sell lots
of 100 or more shares to a minimum of 400 beneficial holders.
At our request, the underwriters have reserved for sale at the
initial public offering price up to 615,000 shares of
common stock offered for sale to business associates, directors,
employees and friends and family members of our employees and
directors. The number of shares of common stock available for
sale to the general public will be reduced to the extent that
such persons purchase reserved shares. Any reserved shares not
so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.
Other than the underwriting discount described on the front
cover of this prospectus, the underwriters will not be entitled
to any commission with respect to shares of common stock sold
pursuant to the directed share program.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares in the offering. The underwriters may close
out any covered short position by either exercising their option
to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
additional shares pursuant to the option granted to them.
Naked short sales are any sales in excess of such
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing
transactions consist of various bids for or purchases of common
stock made by the underwriters in the open market prior to the
completion of the offering.
127
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of our stock, and
together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of our common
stock. As a result, the price of our common stock may be higher
than the price that otherwise might exist in the open market. If
these activities are commenced, they may be discontinued at any
time. These transactions may be effected on the NYSE, in the
over-the-counter
market or otherwise.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive, each of which is
referred to as a Relevant Member State, each underwriter has
represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that
Relevant Member State, referred to as the Relevant
Implementation Date, it has not made and will not make an offer
of shares to the public in that Relevant Member State prior to
the publication of a prospectus in relation to the shares which
has been approved by the competent authority in that Relevant
Member State or, where appropriate, approved in another Relevant
Member State and notified to the competent authority in that
Relevant Member State, all in accordance with the Prospectus
Directive, except that it may, with effect from and including
the Relevant Implementation Date, make an offer of shares to the
public in that Relevant Member State at any time:
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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|
to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts;
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|
to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the representatives for any such
offer; or
|
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|
in any other circumstances which do not require the publication
by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive.
|
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Each underwriter has represented and agreed that:
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|
it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection
with the issue or sale of the shares in circumstances in which
Section 21(1) of the FSMA does not apply to the
Issuer; and
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it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to
the shares in, from or otherwise involving the United Kingdom.
|
128
The shares may not be offered or sold by means of any document
other than (1) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (2) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong)
and any rules made thereunder, or (3) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (1) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, (2) to a relevant
person, or any person pursuant to Section 275(1A), and in
accordance with the conditions, specified in Section 275 of
the Securities and Futures Act or (3) otherwise pursuant
to, and in accordance with the conditions of, any other
applicable provision of the Securities and Futures Act.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for six months after that
corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the Securities and Futures Act or to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the Securities and Futures Act;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan, referred to as the
Securities and Exchange Law, and each underwriter has agreed
that it will not offer or sell any securities, directly or
indirectly, in Japan or to, or for the benefit of, any resident
of Japan (which term as used herein means any person resident in
Japan, including any corporation or other entity organized under
the laws of Japan), or to others for re-offering or resale,
directly or indirectly, in Japan or to a resident of Japan,
except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the
Securities and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
We and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
including securities trading, commercial and investment banking,
financial advisory, investment management, investment research,
principal investment, hedging, financing and brokerage
activities. Certain of the underwriters and their respective
affiliates have, from time to time, performed,
129
and may in the future perform, various financial advisory and
investment banking services for the issuer, for which they
received or will receive customary fees and expenses.
In the ordinary course of business, we have, and may in the
future, sell products to one or more of the underwriters in arms
length transactions on market competitive terms.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers and such investment and
securities activities may involve securities
and/or
instruments of the issuer. The underwriters and their respective
affiliates may also make investment recommendations
and/or
publish or express independent research views in respect of such
securities or instruments and may at any time hold, or recommend
to clients that they acquire, long
and/or short
positions in such securities and instruments.
130
LEGAL
MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for us by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
Fenwick & West LLP, Mountain View, California, is
acting as counsel to the underwriters.
EXPERTS
The consolidated financial statements of
Fusion-io,
Inc. as of June 30, 2009 and 2010, and for each of the
three fiscal years ended June 30, 2010, appearing in this
prospectus and registration statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
ADDITIONAL
INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock offered by this prospectus. This prospectus, which
constitutes a part of the registration statement, does not
contain all of the information set forth in the registration
statement, some of which is contained in exhibits to the
registration statement as permitted by the rules and regulations
of the SEC. For further information with respect to us and our
common stock, we refer you to the registration statement,
including the exhibits filed as a part of the registration
statement. Statements contained in this prospectus concerning
the contents of any contract or any other document is not
necessarily complete. If a contract or document has been filed
as an exhibit to the registration statement, please see the copy
of the contract or document that has been filed. Each statement
is this prospectus relating to a contract or document filed as
an exhibit is qualified in all respects by the filed exhibit.
You may obtain copies of this information by mail from the
Public Reference Section of the SEC, 100 F Street,
N.E., Room 1580, Washington, D.C. 20549, at prescribed
rates. You may obtain information on the operation of the public
reference rooms by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains
reports, proxy statements and other information about issuers,
like us, that file electronically with the SEC. The address of
that website is www.sec.gov.
As a result of this offering, we will become subject to the
information and reporting requirements of the Securities
Exchange Act of 1934 and, in accordance with this law, will file
periodic reports, proxy statements and other information with
the SEC. These periodic reports, proxy statements and other
information will be available for inspection and copying at the
SECs public reference facilities and the website of the
SEC referred to above. We also maintain a website at
www.fusionio.com. Upon completion of this offering, you may
access these materials free of charge as soon as reasonably
practicable after they are electronically filed with, or
furnished to, the SEC. Information contained on our website is
not a part of this prospectus and the inclusion of our website
address in this prospectus is an inactive textual reference only.
131
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Fusion-io, Inc.
We have audited the accompanying consolidated balance sheets of
Fusion-io, Inc. (the Company) as of June 30, 2010 and 2009,
and the related consolidated statements of operations,
convertible preferred stock, stockholders deficit and
comprehensive loss, and cash flows for each of the three years
in the period ended June 30, 2010. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Fusion-io, Inc. at June 30, 2010 and
2009, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
June 30, 2010, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
revenue recognition effective July 1, 2009 as a result of
new revenue recognition guidance related to multiple-element
arrangements.
/s/ Ernst & Young LLP
Salt Lake City, Utah
April 18, 2011, except for Note 11, as to which the
date is June 7, 2011
F-2
FUSION-IO,
INC.
CONSOLIDATED
BALANCE SHEETS
(In thousands, except share and per
share data)
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|
|
|
|
|
|
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|
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|
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|
Pro Forma
|
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|
|
|
|
|
|
|
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Stockholders
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
Equity as of
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,352
|
|
|
$
|
9,219
|
|
|
$
|
15,947
|
|
|
|
|
|
Short-term investments
|
|
|
1,181
|
|
|
|
11,974
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowances of $433, $912 and $1,485
(unaudited) as of June 30, 2009 and 2010 and March 31,
2011, respectively
|
|
|
2,161
|
|
|
|
5,581
|
|
|
|
13,139
|
|
|
|
|
|
Inventories
|
|
|
3,993
|
|
|
|
25,148
|
|
|
|
38,959
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
634
|
|
|
|
1,020
|
|
|
|
3,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total current assets
|
|
|
24,321
|
|
|
|
52,942
|
|
|
|
71,558
|
|
|
|
|
|
Property and equipment, net
|
|
|
3,228
|
|
|
|
5,468
|
|
|
|
12,175
|
|
|
|
|
|
Restricted cash
|
|
|
529
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
138
|
|
|
|
347
|
|
|
|
1,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,216
|
|
|
$
|
59,452
|
|
|
$
|
85,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, Convertible Preferred Stock and
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,832
|
|
|
$
|
11,050
|
|
|
$
|
12,508
|
|
|
|
|
|
Accrued and other current liabilities
|
|
|
3,166
|
|
|
|
8,896
|
|
|
|
10,151
|
|
|
|
|
|
Deferred revenue
|
|
|
838
|
|
|
|
839
|
|
|
|
7,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,836
|
|
|
|
20,785
|
|
|
|
29,764
|
|
|
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
Deferred revenue, less current portion
|
|
|
|
|
|
|
|
|
|
|
3,586
|
|
|
|
|
|
Other liabilities
|
|
|
231
|
|
|
|
263
|
|
|
|
5,408
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0002 par value; 41,321,250,
53,069,497 and 53,069,497 (unaudited) shares authorized as of
June 30, 2009 and 2010 and March 31, 2011,
respectively; 39,380,352, 52,489,072 and
52,489,072 (unaudited) shares issued and outstanding as of
June 30, 2009 and 2010 and March 31, 2011,
respectively (aggregate liquidation preference of $62,938,
$110,792 and $110,792 (unaudited) as of June 30, 2009 and
2010 and March 31, 2011, respectively)
|
|
|
56,796
|
|
|
|
104,513
|
|
|
|
104,513
|
|
|
$
|
|
|
Stockholders (deficit) equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0002 par value; 73,515,605, 95,000,000 and
95,000,000 (unaudited) shares authorized as of June 30,
2009 and 2010 and March 31, 2011, respectively; 12,990,019,
13,610,481 and 14,564,405 (unaudited) shares issued and
outstanding as of June 30, 2009 and 2010 and March 31,
2011, respectively
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
13
|
|
Additional paid-in capital
|
|
|
1,486
|
|
|
|
2,738
|
|
|
|
7,352
|
|
|
|
112,603
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
2
|
|
|
|
9
|
|
|
|
9
|
|
Accumulated deficit
|
|
|
(37,136
|
)
|
|
|
(68,852
|
)
|
|
|
(70,061
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)
|
|
|
(70,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(35,647
|
)
|
|
|
(66,109
|
)
|
|
|
(62,697
|
)
|
|
$
|
42,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
stockholders deficit
|
|
$
|
28,216
|
|
|
$
|
59,452
|
|
|
$
|
85,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements
F-3
FUSION-IO,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share
data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
Nine Months Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Revenue
|
|
$
|
648
|
|
|
$
|
10,150
|
|
|
$
|
36,216
|
|
|
$
|
25,290
|
|
|
|
|
$
|
125,515
|
|
|
|
Cost of revenue
|
|
|
377
|
|
|
|
5,000
|
|
|
|
16,018
|
|
|
|
10,208
|
|
|
|
|
|
59,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
271
|
|
|
|
5,150
|
|
|
|
20,198
|
|
|
|
15,082
|
|
|
|
|
|
65,727
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,856
|
|
|
|
13,476
|
|
|
|
23,386
|
|
|
|
14,637
|
|
|
|
|
|
35,176
|
|
|
|
Research and development
|
|
|
5,603
|
|
|
|
11,707
|
|
|
|
15,977
|
|
|
|
11,669
|
|
|
|
|
|
18,272
|
|
|
|
General and administrative
|
|
|
1,712
|
|
|
|
4,849
|
|
|
|
12,383
|
|
|
|
8,588
|
|
|
|
|
|
12,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,171
|
|
|
|
30,032
|
|
|
|
51,746
|
|
|
|
34,894
|
|
|
|
|
|
65,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(9,900
|
)
|
|
|
(24,882
|
)
|
|
|
(31,548
|
)
|
|
|
(19,812
|
)
|
|
|
|
|
35
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
43
|
|
|
|
90
|
|
|
|
60
|
|
|
|
|
|
24
|
|
|
|
Interest expense
|
|
|
(75
|
)
|
|
|
(733
|
)
|
|
|
(246
|
)
|
|
|
(90
|
)
|
|
|
|
|
(865
|
)
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,975
|
)
|
|
|
(25,572
|
)
|
|
|
(31,704
|
)
|
|
|
(19,842
|
)
|
|
|
|
|
(775
|
)
|
|
|
Income tax expense
|
|
|
|
|
|
|
(1
|
)
|
|
|
(12
|
)
|
|
|
(2
|
)
|
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(9,975
|
)
|
|
|
(25,573
|
)
|
|
|
(31,716
|
)
|
|
|
(19,844
|
)
|
|
|
|
|
(1,209
|
)
|
|
|
Deemed dividend on repurchase of Series B convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
(748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(9,975
|
)
|
|
$
|
(25,573
|
)
|
|
$
|
(32,464
|
)
|
|
$
|
(19,844
|
)
|
|
|
|
$
|
(1,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(1.73
|
)
|
|
$
|
(3.27
|
)
|
|
$
|
(2.95
|
)
|
|
$
|
(1.85
|
)
|
|
|
|
$
|
(0.09
|
)
|
|
|
Weighted-average number of shares, basic and diluted
|
|
|
5,773
|
|
|
|
7,829
|
|
|
|
11,012
|
|
|
|
10,707
|
|
|
|
|
|
13,289
|
|
|
|
Pro forma net loss per common share, basic and diluted
(unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(0.60
|
)
|
|
|
|
|
|
|
|
$
|
(0.02
|
)
|
|
|
Pro forma weighted-average number of common shares, basic and
diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
54,273
|
|
|
|
|
|
|
|
|
|
65,778
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
FUSION-IO,
INC.
CONSOLIDATED
STATEMENTS OF CONVERTIBLE PREFERRED STOCK,
STOCKHOLDERS DEFICIT AND COMPREHENSIVE LOSS
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Deficit
|
|
|
Loss
|
|
|
Balance as of July 1, 2007
|
|
|
4,130
|
|
|
$
|
826
|
|
|
|
10,677,000
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
(1,588
|
)
|
|
$
|
(1,580
|
)
|
|
|
|
|
Issuance of common stock for services
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
Issuance of Series Angel convertible preferred stock for
cash
|
|
|
225
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of Series Angel convertible preferred stock
|
|
|
(250
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes into Series Angel
convertible preferred stock
|
|
|
3,080
|
|
|
|
616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization of convertible preferred stock from
Series Angel into Series A convertible preferred stock
|
|
|
6,459,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes into Series A convertible
preferred stock
|
|
|
4,190,620
|
|
|
|
4,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series A convertible preferred stock for cash,
net of issuance costs of $247
|
|
|
6,788,330
|
|
|
|
7,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,975
|
)
|
|
|
(9,975
|
)
|
|
$
|
(9,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
|
|
17,445,450
|
|
|
|
13,190
|
|
|
|
10,852,000
|
|
|
|
2
|
|
|
|
347
|
|
|
|
|
|
|
|
(11,563
|
)
|
|
|
(11,214
|
)
|
|
$
|
(9,975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,138,019
|
|
|
|
1
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
Conversion of convertible notes into Series B convertible
preferred stock
|
|
|
7,763,669
|
|
|
|
15,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B convertible preferred stock for cash,
net of issuance costs of $264
|
|
|
14,171,233
|
|
|
|
28,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,573
|
)
|
|
|
(25,573
|
)
|
|
$
|
(25,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2009
|
|
|
39,380,352
|
|
|
|
56,796
|
|
|
|
12,990,019
|
|
|
|
3
|
|
|
|
1,486
|
|
|
|
|
|
|
|
(37,136
|
)
|
|
|
(35,647
|
)
|
|
$
|
(25,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
620,462
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
|
|
|
Issuance of Series B convertible preferred stock, net of
issuance costs of $43
|
|
|
2,075,000
|
|
|
|
4,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of Series B convertible preferred stock (as
restated)
|
|
|
(542,961
|
)
|
|
|
(1,086
|
)
|
|
|
|
|
|
|
|
|
|
|
(748
|
)
|
|
|
|
|
|
|
|
|
|
|
(748
|
)
|
|
|
|
|
Conversion of convertible notes into Series C convertible
preferred stock
|
|
|
1,302,237
|
|
|
|
5,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series C convertible preferred stock, net of
issuance costs of $94
|
|
|
10,274,444
|
|
|
|
39,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrant to purchase common stock for services
provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,856
|
|
|
|
|
|
|
|
|
|
|
|
1,856
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
$
|
(2
|
)
|
Unrealized gain on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,716
|
)
|
|
|
(31,716
|
)
|
|
|
(31,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
|
52,489,072
|
|
|
|
104,513
|
|
|
|
13,610,481
|
|
|
|
3
|
|
|
|
2,738
|
|
|
|
2
|
|
|
|
(68,852
|
)
|
|
|
(66,109
|
)
|
|
$
|
(31,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options (unaudited)
|
|
|
|
|
|
|
|
|
|
|
881,424
|
|
|
|
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
550
|
|
|
|
|
|
Stock-based compensation (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,732
|
|
|
|
|
|
|
|
|
|
|
|
3,732
|
|
|
|
|
|
Issuance of common stock for cash (unaudited)
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
|
|
|
|
Exercise of common stock warrant (unaudited)
|
|
|
|
|
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
Foreign currency translation adjustment (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
|
$
|
11
|
|
Unrealized loss on available for sale securities (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Net loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,209
|
)
|
|
|
(1,209
|
)
|
|
|
(1,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011 (unaudited)
|
|
|
52,489,072
|
|
|
$
|
104,513
|
|
|
|
14,564,405
|
|
|
$
|
3
|
|
|
$
|
7,352
|
|
|
$
|
9
|
|
|
$
|
(70,061
|
)
|
|
$
|
(62,697
|
)
|
|
$
|
(1,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
FUSION-IO,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended June 30,
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,975
|
)
|
|
$
|
(25,573
|
)
|
|
$
|
(31,716
|
)
|
|
$
|
(19,844
|
)
|
|
$
|
(1,209
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
81
|
|
|
|
671
|
|
|
|
1,498
|
|
|
|
1,016
|
|
|
|
3,230
|
|
Stock-based compensation
|
|
|
341
|
|
|
|
999
|
|
|
|
1,867
|
|
|
|
1,242
|
|
|
|
3,732
|
|
Interest on convertible notes
|
|
|
56
|
|
|
|
538
|
|
|
|
38
|
|
|
|
28
|
|
|
|
|
|
Other non-cash items
|
|
|
|
|
|
|
94
|
|
|
|
193
|
|
|
|
72
|
|
|
|
632
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(241
|
)
|
|
|
(1,912
|
)
|
|
|
(3,420
|
)
|
|
|
(4,827
|
)
|
|
|
(7,558
|
)
|
Inventories
|
|
|
(707
|
)
|
|
|
(3,286
|
)
|
|
|
(21,155
|
)
|
|
|
(6,736
|
)
|
|
|
(13,811
|
)
|
Prepaid expenses and other assets
|
|
|
(348
|
)
|
|
|
(424
|
)
|
|
|
(607
|
)
|
|
|
(195
|
)
|
|
|
(3,961
|
)
|
Accounts payable
|
|
|
1,131
|
|
|
|
1,497
|
|
|
|
8,222
|
|
|
|
3,157
|
|
|
|
1,448
|
|
Accrued and other liabilities
|
|
|
929
|
|
|
|
1,742
|
|
|
|
5,526
|
|
|
|
2,938
|
|
|
|
6,101
|
|
Deferred revenue
|
|
|
|
|
|
|
838
|
|
|
|
1
|
|
|
|
(523
|
)
|
|
|
9,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,733
|
)
|
|
|
(24,816
|
)
|
|
|
(39,553
|
)
|
|
|
(23,672
|
)
|
|
|
(1,544
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(1,181
|
)
|
|
|
(13,910
|
)
|
|
|
(1,902
|
)
|
|
|
|
|
Proceeds from the sale of short-term investments
|
|
|
|
|
|
|
|
|
|
|
2,293
|
|
|
|
2,293
|
|
|
|
11,964
|
|
Proceeds from maturities of short-term investments
|
|
|
|
|
|
|
|
|
|
|
761
|
|
|
|
761
|
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,224
|
)
|
|
|
(2,396
|
)
|
|
|
(3,442
|
)
|
|
|
(2,010
|
)
|
|
|
(9,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,224
|
)
|
|
|
(3,577
|
)
|
|
|
(14,298
|
)
|
|
|
(855
|
)
|
|
|
1,973
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible preferred stock
|
|
|
7,218
|
|
|
|
28,078
|
|
|
|
43,765
|
|
|
|
4,107
|
|
|
|
|
|
Repurchases of convertible preferred stock
|
|
|
(50
|
)
|
|
|
|
|
|
|
(1,834
|
)
|
|
|
(285
|
)
|
|
|
|
|
Proceeds from a loan from a financial institution
|
|
|
|
|
|
|
5,989
|
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
11,000
|
|
Repayment of notes payable and capital lease obligations
|
|
|
|
|
|
|
(6,021
|
)
|
|
|
(4,179
|
)
|
|
|
(169
|
)
|
|
|
(6,298
|
)
|
Proceeds from exercises of stock options
|
|
|
|
|
|
|
141
|
|
|
|
133
|
|
|
|
54
|
|
|
|
550
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
Proceeds from exercise of common stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Change in restricted cash
|
|
|
|
|
|
|
(529
|
)
|
|
|
(166
|
)
|
|
|
(166
|
)
|
|
|
695
|
|
Proceeds from issuance of convertible notes
|
|
|
5,221
|
|
|
|
15,390
|
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
Repayment of convertible notes
|
|
|
(338
|
)
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,051
|
|
|
|
42,648
|
|
|
|
46,719
|
|
|
|
12,541
|
|
|
|
6,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
20
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,094
|
|
|
|
14,255
|
|
|
|
(7,133
|
)
|
|
|
(11,986
|
)
|
|
|
6,728
|
|
Cash and cash equivalents at beginning of period
|
|
|
3
|
|
|
|
2,097
|
|
|
|
16,352
|
|
|
|
16,352
|
|
|
|
9,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
2,097
|
|
|
$
|
16,352
|
|
|
$
|
9,219
|
|
|
$
|
4,366
|
|
|
$
|
15,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
18
|
|
|
$
|
107
|
|
|
$
|
122
|
|
|
$
|
89
|
|
|
$
|
362
|
|
Supplemental disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible notes and interest into convertible
preferred stock
|
|
$
|
5,196
|
|
|
$
|
15,528
|
|
|
$
|
5,038
|
|
|
$
|
|
|
|
$
|
|
|
Assets acquired under capital leases
|
|
|
|
|
|
|
327
|
|
|
|
334
|
|
|
|
177
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
FUSION-IO,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
|
|
1.
|
Description of
Business and Summary of Significant Accounting
Policies
|
Fusion-io, Inc. (the Company) provides a next
generation storage memory platform, which includes the
Companys ioMemory hardware, VSL virtualization software,
directCache automated data-tiering software and ioSphere
platform management software. The Company was originally
incorporated in the state of Nevada in December 2005 and in June
2010 was reincorporated in the state of Delaware as Fusion-io,
Inc. The Company sells its products through its global direct
sales force, original equipment manufacturers
(OEMs) and other channel partners.
Unaudited
Financial Information
The accompanying interim consolidated balance sheet as of
March 31, 2011, the consolidated statements of operations
and cash flows for the nine months ended March 31, 2010 and
2011, and the consolidated statement of convertible preferred
stock and stockholders deficit and comprehensive loss for
the nine months ended March 31, 2011 are unaudited. These
unaudited interim consolidated financial statements have been
prepared in accordance with U.S. generally accepted
accounting principles (GAAP) on the same basis as
the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments, consisting of
normal recurring adjustments, considered necessary to present
fairly the Companys financial position, as of
March 31, 2011 and its results of operations and cash flows
for the nine months ended March 31, 2010 and 2011. The
results of operations for the nine months ended March 31,
2011 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2011.
Unaudited Pro
Forma Stockholders Equity
Upon completion of the offering, all of the Companys
outstanding shares of convertible preferred stock will convert
into 52,489,072 shares of the Companys common stock.
Additionally, the warrant to purchase shares of the
Companys convertible preferred stock outstanding at the
consummation of the offering will automatically convert into a
warrant to purchase 125,800 shares of the Companys
common stock. Unaudited pro forma stockholders equity as
of March 31, 2011, as adjusted for the impact of these
conversions, assuming the offering was completed on
March 31, 2011, is disclosed on the accompanying
consolidated balance sheets.
Basis of
Presentation
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in the
consolidated financial statements.
Segment and
Geographic Information
Operating segments are defined in accounting standards as
components of an enterprise about which separate financial
information is available and is regularly evaluated by
management, namely the chief operating decision maker of an
organization, in order to make operating and resource allocation
decisions. The Company has concluded it operates in one business
segment, which is the development, marketing and sale of storage
memory platforms. All of the Companys revenue for all
periods presented in the accompanying consolidated statements of
operations has been from sales of the ioDrive product line and
related customer support services. The Companys
headquarters and most of its operations are located in the
United States; however, it conducts limited sales activities
through sales offices in Europe and Asia. Revenue recognized
from sales with a ship-to location
F-7
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
outside of the United States was 0%, 14%, 24%, 30% and 18% for
the fiscal years ended June 30, 2008, 2009 and 2010 and for
the nine months ended March 31, 2010 and 2011,
respectively. Revenue recognized to customers with a ship-to
address in China was 12% of revenue for the nine months ended
March 31, 2010. No other country outside of the United
States accounted for greater than 10% of revenue for all other
periods presented. Long-lived assets located outside of the
United States were not material for all periods for which a
consolidated balance sheet is presented.
Use of
Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. On an on-going basis, the
Company evaluates its estimates, including those related to
revenue recognition, sales returns, determination of fair value
of stock options, valuation of inventory, product warranty,
income taxes, useful lives of property and equipment and
provisions for doubtful accounts. Actual results could differ
from those estimates.
Revenue
Recognition
The Company derives its revenue from sales of storage memory
products (products) and related support services.
The Company recognizes revenue when persuasive evidence of an
arrangement with a customer exists (such as a purchase order or
a signed agreement) the product or service has been delivered,
the fee earned by the Company is fixed or determinable and
collection of the resulting receivable is reasonably assured. In
making these judgments, the Company evaluates compliance with
these criteria as follows:
|
|
|
|
|
Evidence of an arrangement A non-cancelable
agreement signed by a customer or channel partner or purchase
order generated by a customer or channel partner is considered
persuasive evidence of an arrangement.
|
|
|
|
Delivery has occurred Delivery has occurred
when product has been delivered to the customer and no
post-delivery obligations exist other than ongoing support
obligations under sold support services. In instances where
customer acceptance is required, delivery has occurred when
customer acceptance has been achieved.
|
|
|
|
Fees are fixed or determinable The Company
considers the fee to be fixed or determinable unless the fee is
subject to refund or adjustment or is not payable within normal
payment terms. If the fee is subject to a refund or adjustment,
the Company recognizes revenue net of estimated returns or, if a
reasonable estimate cannot be made, when the right to a refund
or adjustment lapses.
|
|
|
|
Collection is reasonably assured The Company
conducts a credit worthiness assessment on its customers, OEMs
and channel partners. Generally collateral is not required. The
Company also continues to evaluate collectability by reviewing
customer and channel partner credit worthiness including a
review of past transaction history. Payment terms are typically
net-30 days with terms up to net-60 days for certain
customers and channel partners. Collection is deemed reasonably
assured if, based upon the credit worthiness evaluation, the
Company expects that the customer will be able to pay amounts
under the arrangement as payments become due. If the Company
determines that collection is not reasonably assured, revenue is
deferred and recognized upon the receipt of cash.
|
F-8
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
The Company sells its products and support services directly to
customers, OEMs and resellers. The Companys agreements
with certain customers, including certain OEMs and resellers,
allow for product returns and price adjustments. In the period
revenue is recognized, allowances are provided for estimated
future product returns based on historical product return rates.
If reliable estimates of future returns cannot be made, revenue
is not recognized until the rights of return expire. From
inception through March 31, 2011, the Company has not had
any claims from its resellers for price adjustments. The Company
also provides allowances for rebates and discounts based on
programs in existence at the time revenue is recognized.
Revenue from stand-alone storage product sales is recognized
either upon shipment from the Companys shipping location
or upon receipt of the product at the customers location
based upon applicable terms. Revenue from sales of stand-alone
support services is recognized ratably over the support service
period.
Some of the Companys revenue arrangements are
multiple-element arrangements because they are comprised of
sales of both storage products and support services. The
Companys storage products also contain the embedded VSL
virtualization software. Historically, multiple-element
arrangements have not comprised a significant portion of the
Companys revenues. For multiple-element arrangements
originating on or prior to June 30, 2009, the Company
applied the scope exception included in Accounting Standards
Codification (ASC)
985-605,
Software Revenue Recognition because the Company
determined that the software embedded in its storage products
was incidental to its products as a whole. As a result of this
scope exception, the Company followed the accounting guidance in
ASC 605-25,
Revenue Recognition-Multiple Element Arrangements. The
total consideration in these arrangements was not allocated
between product and services revenue, because the Company did
not have objective and reliable evidence of fair value of the
support services. Accordingly, the total consideration in such
arrangements is deferred and recognized ratably over the support
service period ranging from one to three years. In these
multiple-element arrangements, the Company also defers the
related inventory costs for the delivered items and subsequently
expenses these costs to cost of revenue over the same period as
the related support services. As of June 30, 2009 and 2010
and March 31, 2011, these deferred costs were $237,000,
$20,000 and $10,000, respectively, and are included in prepaid
expenses and other current assets in the accompanying balance
sheets.
In October 2009, the Financial Accounting Standards Board
(FASB) amended the accounting standards for
multiple-element revenue arrangements. One of the new standards
amends previously issued guidance to exclude tangible products
containing software components and non-software components that
function together to deliver the tangible products
essential functionality from the scope of the software revenue
recognition rules. The other new standard related to multiple
element arrangements changed the requirements for establishing
separate units of accounting in a multiple-element arrangement
and requires the allocation of arrangement consideration to each
deliverable using the relative selling price of each element.
The Company early adopted these accounting standards effective
as of the beginning of fiscal year 2010.
For multiple element arrangements originating or materially
modified on or after July 1, 2009, the Company evaluates
whether each deliverable can be accounted for as separate units
of accounting. A deliverable constitutes a separate unit of
accounting when it has stand-alone value and for an arrangement
where a general right of return exists relative to a delivered
item, delivery or performance of the undelivered item is
considered probable and substantially in control of the Company.
Stand-alone value exists if the product or service is sold
separately by the Company or another vendor or
F-9
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
could be resold by the customer. Where the aforementioned
criteria for a separate unit of accounting are not met, the
deliverable is combined with the undelivered element(s) and
treated as a single unit of accounting for the purposes of
allocation of the arrangement consideration and revenue
recognition. The Company allocates the total arrangement
consideration to each separable element of an arrangement based
upon the relative selling price of each element.
The Companys multiple element arrangements typically
include two elements: ioDrive hardware, which includes embedded
VSL virtualization software, and support services. The Company
has determined that its ioDrive hardware and the embedded VSL
virtualization software are considered a single unit of
accounting because the hardware and software individually do not
have standalone value and are never sold separately. Support
services are considered a separate unit of accounting as they
are sold separately and have standalone value.
The selling price for a deliverable is based on its
vendor-specific objective evidence (VSOE) of the
selling price if available, third party evidence
(TPE) of the selling price if VSOE is not available,
or best estimated selling price (BESP) if neither
VSOE nor TPE is available. The Company then recognizes revenue
on each deliverable in accordance with its policies for product
and service revenue recognition.
VSOE is defined as the price charged when the same or similar
product is sold separately or, if applicable, the stated
substantive renewal rate in the agreement. If a product or
service is seldom sold separately, it is unlikely that the
Company can determine VSOE for the product or service. In
determining VSOE, the Company requires that a substantial
majority of the selling prices for a product or service fall
within a reasonably narrow pricing range.
TPE would consist of competitor prices for similar deliverables
when sold separately. The Companys products contain
significant differentiation such that the comparable pricing of
products with similar functionality cannot be obtained.
Furthermore, the Company is unable to reliably determine the
stand-alone selling prices for similar products of its
competitors. Therefore, the Company is typically not able to
obtain TPE of selling price.
The Company establishes BESP considering multiple factors
including, but not limited to, cost and margin objectives,
competitive pricing strategies, historical prices of products
sold on a stand-alone basis, and general market conditions.
The impact on the Companys consolidated statements of
operations of adopting these new accounting standards was as
follows (in thousands):
|
|
|
|
|
|
|
Year Ended
|
|
|
June 30,
|
|
|
2010
|
|
Increase in revenue
|
|
$
|
1,574
|
|
Increase in cost of revenue
|
|
|
409
|
|
Decrease to loss before income taxes
|
|
|
1,165
|
|
Decrease to net loss
|
|
|
1,165
|
|
The adoption of these accounting standards will continue to have
a material impact on the Companys consolidated financial
statements in future periods.
Shipping and handling costs are included in cost of sales.
F-10
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Cash and Cash
Equivalents and Short-term Investments
Cash consists of deposits with financial institutions. Cash
equivalents include primarily money market funds and highly
liquid debt securities with an original maturity of 90 days
or less. Short-term investments include debt securities with an
original maturity greater than 90 days. The Company
classifies its investments in debt securities as
available-for-sale
and realized gains and losses are included in income based on
the specific identification method. Unrealized gains and losses
on
available-for-sale
securities are recorded to other comprehensive income, a
component of stockholders deficit. Interest on securities
classified as
available-for-sale
is included as a component of interest income. The Company may
at times hold securities with stated maturities greater than one
year until maturity. The Company considers these investments to
be liquid resources available for current operations when and if
needed and therefore would classify them as current assets
unless specifically identified as an investment to be held to
maturity.
Restricted
Cash
Restricted cash at June 30, 2009 and 2010 related to
deposits held as cash collateral for letters of credit with a
financial institution.
Concentrations
of Credit Risk and Significant Customers and
Suppliers
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of cash, cash
equivalents, short-term investments and accounts receivable. The
Company deposits cash with high-credit-quality financial
institutions, which at times may exceed federally insured
amounts. The Company has policies that limit its investments as
to types of investments, maturity, liquidity, credit quality,
concentration and diversification of issuers. The Company
performs initial and ongoing credit evaluations of its
customers financial condition and will limit the amount of
credit as deemed necessary, but currently does not require
collateral.
The customers accounting for greater than 10% of revenue were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended June 30,
|
|
March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Customer A
|
|
|
*
|
|
|
|
*
|
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
47
|
%
|
Customer B
|
|
|
*
|
|
|
|
*
|
|
|
|
10
|
%
|
|
|
*
|
|
|
|
13
|
%
|
Customer C
|
|
|
*
|
|
|
|
*
|
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
*
|
|
Customer E
|
|
|
36
|
%
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Customer I
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
%
|
Customer K
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
13
|
%
|
|
|
*
|
|
|
|
|
* |
|
Indicates less than 10% of revenue for the period. |
F-11
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
The customers accounting for greater than 10% of accounts
receivable, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
March 31
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
(unaudited)
|
|
Customer A
|
|
|
*
|
|
|
|
*
|
|
|
|
31
|
%
|
Customer B
|
|
|
16
|
%
|
|
|
*
|
|
|
|
11
|
%
|
Customer C
|
|
|
*
|
|
|
|
19
|
%
|
|
|
16
|
%
|
Customer D
|
|
|
32
|
%
|
|
|
20
|
%
|
|
|
21
|
%
|
Customer G
|
|
|
20
|
%
|
|
|
12
|
%
|
|
|
*
|
|
Customer H
|
|
|
*
|
|
|
|
18
|
%
|
|
|
*
|
|
Customer J
|
|
|
*
|
|
|
|
*
|
|
|
|
15
|
%
|
|
|
|
* |
|
Indicates less than 10% of total accounts receivable, net. |
As a consequence of the concentration of the Companys
customers and typically, a small number of large purchases by
these customers, revenue and operating results may fluctuate
significantly from period to period.
The Company relies on a limited number of suppliers for its
contract manufacturing and certain raw material components. The
Company believes that other vendors would be able to provide
similar products and services; however, the qualification of
such vendors may require substantial
start-up
time. In order to mitigate any adverse impacts from a disruption
of supply, the Company attempts to maintain an adequate supply
of critical single-sourced raw materials.
Accounts
Receivable
Accounts receivable balances are recorded at the invoiced amount
and are non-interest-bearing. The Company maintains an allowance
for doubtful accounts to reserve for potential uncollectible
receivables. Allowances are made based upon a specific review of
all significant outstanding invoices. For those invoices not
specifically reserved, allowances are provided based upon a
percentage of aged outstanding invoices. In determining these
percentages, the Company analyzes its historical collection
experience and current economic trends. Provisions are recorded
in general and administrative expenses. The Company writes off
accounts receivable balances to the allowance for doubtful
accounts when it becomes likely that they will not be collected.
Accounts receivable balances are considered past due when not
paid in accordance with the contractual terms of the related
arrangement.
Inventories
Inventories are stated at the lower of cost or market. Cost is
computed using the average cost method, which approximates
actual cost, on a first-in, first-out basis. The Company
periodically assesses the recoverability of all inventories,
including raw materials,
work-in-process
and finished goods to determine whether adjustments are required
to record inventory at the lower of cost or market. Inventory
that the Company determines to be obsolete or in excess of
forecasted usage is reduced to its estimated realizable value
based on assumptions about future demand and market conditions.
If actual demand is lower than the forecasted demand, additional
inventory write-downs may be required.
F-12
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Property and
Equipment
Property and equipment are stated at historical cost less
accumulated depreciation. Repairs and maintenance costs are
expensed as incurred as repairs and maintenance do not extend
the useful life or improve the related assets. Depreciation and
amortization, including amortization of leasehold improvements
and assets under capital leases, is computed using the
straight-line method over the estimated useful lives of the
assets. The estimated useful life of each asset category is as
follows:
|
|
|
Computer equipment
|
|
3 years
|
Software
|
|
3 years
|
Machinery and equipment
|
|
3 years
|
Furniture and fixtures
|
|
5 years
|
Leasehold improvements
|
|
Useful life or remaining lease term,
whichever is shorter
|
Impairment of
Long-Lived Assets
The Company reviews its property and equipment for impairment
whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. When there are indicators
of potential impairment, the Company evaluates recoverability of
the asset carrying values by comparing the carrying amount of an
asset to the estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of the
asset exceeds its estimated undiscounted future net cash flows,
an impairment charge is recognized based on the amount by which
the carrying value of the asset exceeds the fair value of the
asset. The Company recorded an impairment charge of $46,000
during the nine months ended March 31, 2011 for certain
furniture and fixtures that were sold to a third party in
connection with the termination of a facility lease.
Product
Warranty
The Company provides its customers a limited product warranty of
three years for products shipped prior to January 1, 2010
and five years for products shipped on or after January 1,
2010. The Companys standard warranty requires the Company
to repair or replace defective products during such warranty
period at no cost to the customer. The Company estimates the
costs that may be incurred under its basic limited warranty and
records a liability in the amount of such costs at the time
product sales are recognized. Factors that affect the
Companys warranty liability include the number of
installed units, historical experience and managements
judgment regarding anticipated rates of warranty claims and cost
per claim. The Company assesses the adequacy of its recorded
warranty liability each period and makes adjustments to the
liability as necessary.
The following table presents the changes in the product warranty
liability (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Balance at beginning of period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24
|
|
|
$
|
153
|
|
Additions
|
|
|
|
|
|
|
24
|
|
|
|
225
|
|
|
|
993
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(96
|
)
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
|
|
|
$
|
24
|
|
|
$
|
153
|
|
|
$
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Foreign
Currency
The functional currency of the Companys international
subsidiaries is the local currency. For those subsidiaries,
expenses denominated in the functional currency are translated
into U.S. dollars using average exchange rates in effect
during the period and assets and liabilities are translated
using period-end exchange rates. The foreign currency
translation adjustments are included in accumulated other
comprehensive income (loss) as a separate component of
stockholders deficit. Foreign currency transaction gains
or losses are recorded in other income (expense), net. Foreign
currency transaction gains and losses for all periods presented
were not material.
Stock-based
Compensation
The Company records stock-based compensation expense related to
employee stock-based awards based on the estimated fair value of
the awards as determined on the date of grant. The Company
utilizes the Black-Scholes-Merton option pricing model to
estimate the fair value of employee stock options. The
Black-Scholes-Merton model requires the input of highly
subjective and complex assumptions, including the estimated fair
value of the Companys common stock on the date of grant,
the expected term of the stock option and the expected
volatility of the Companys common stock over the period
equal to the expected term of the grant. The Company estimates
forfeitures at the date of grant and revises the estimates, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates.
The Company accounts for stock options and warrants to purchase
shares of stock that are issued to nonemployees based on the
estimated fair value of such instruments using the
Black-Scholes-Merton option pricing model. The measurement of
stock-based compensation expense for these instruments is
variable and subject to periodic adjustments to the estimated
fair value until the awards vest or, in the case of the
convertible preferred stock warrant, each reporting period until
the warrant is exercised or converted to a warrant to purchase
shares of common stock. Any resulting change in the estimated
fair value is recognized in the Companys consolidated
statements of operations during the period in which the related
services are rendered.
Income
Taxes
Deferred tax assets and liabilities are accounted for using the
liability method and represent the future tax consequences
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates that are expected to be in effect when
these temporary differences are expected to reverse. A valuation
allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized.
Advertising
The Company expenses advertising costs as incurred. Advertising
expense was $2,000, $148,000, $170,000, $167,000 and $3,000 for
the fiscal years ended June 30, 2008, 2009 and 2010 and for
the nine months ended March 31, 2010 and 2011, respectively.
F-14
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Research and
Development
Research and development costs are expensed as incurred.
Research and development expenses consist primarily of personnel
costs, prototype expenses, consulting services and depreciation
associated with research and development equipment.
Software
Development Costs
The Company expenses software development costs as incurred
until technological feasibility is attained, including research
and development costs associated with stand-alone software
products and software embedded in hardware products.
Technological feasibility is attained when the Companys
software has completed the planning, design and testing phase of
development and the product has been determined viable for its
intended use, which typically occurs when beta testing
commences. The period of time between when beta testing
commences and when the software is available for general release
to customers has historically been short with immaterial amounts
of software development costs incurred during this period.
Accordingly, the Company has not capitalized any software
development costs to date.
Presentation
of Certain Taxes
The Company collects various taxes from customers and remits
these amounts to the applicable taxing authorities. The
Companys accounting policy is to exclude these taxes from
revenue and cost of revenue.
Net Income
(Loss) Per Share and Unaudited Pro Forma Net Loss Per
Share
Basic net loss per share is computed using the weighted-average
number of common shares outstanding during the period, less
weighted-average common shares subject to repurchase. Diluted
net income per share is computed using the weighted-average
number of common shares outstanding and potentially dilutive
common shares outstanding during the period that have a dilutive
effect on earnings per share. Potentially dilutive common shares
result from the assumed exercise of outstanding stock options,
assumed vesting of outstanding restricted stock subject to
vesting provisions and the assumed conversion of outstanding
convertible preferred stock using the if-converted method. In a
net loss position, diluted net loss per share is computed using
only the weighted-average number of common shares outstanding
during the period, less weighted-average common shares subject
to repurchase, as any additional common shares would be
anti-dilutive.
Pro forma basic and diluted net loss per common share have been
computed to give effect to the conversion of the Companys
convertible preferred stock into common stock (using the
if-converted method) as though the conversion had occurred on
the original dates of issuance.
F-15
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
The following table presents the reconciliation of the numerator
and denominator used in the calculation of basic and diluted net
loss per share and the shares of common stock used to compute
pro forma net loss per common share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(9,975
|
)
|
|
$
|
(25,573
|
)
|
|
$
|
(32,464
|
)
|
|
$
|
(19,844
|
)
|
|
$
|
(1,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
10,727
|
|
|
|
11,604
|
|
|
|
13,120
|
|
|
|
13,021
|
|
|
|
13,936
|
|
Less weighted-average common shares outstanding subject to
repurchase
|
|
|
(4,954
|
)
|
|
|
(3,775
|
)
|
|
|
(2,108
|
)
|
|
|
(2,314
|
)
|
|
|
(647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares, basic and diluted
|
|
|
5,773
|
|
|
|
7,829
|
|
|
|
11,012
|
|
|
|
10,707
|
|
|
|
13,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock used to compute pro forma net loss per
share (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
11,012
|
|
|
|
|
|
|
|
13,289
|
|
Assumed conversion of convertible preferred stock into shares of
common stock
|
|
|
|
|
|
|
|
|
|
|
43,261
|
|
|
|
|
|
|
|
52,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted-average number of common shares, basic and
diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
54,273
|
|
|
|
|
|
|
|
65,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
The following weighted-average common stock equivalents were
anti-dilutive and therefore were excluded from the calculation
of diluted net loss per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended June 30,
|
|
March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Convertible preferred stock
|
|
|
6,922
|
|
|
|
22,417
|
|
|
|
43,261
|
|
|
|
40,485
|
|
|
|
52,489
|
|
Stock options
|
|
|
2,573
|
|
|
|
1,938
|
|
|
|
1,782
|
|
|
|
1,578
|
|
|
|
12,402
|
|
Common stock subject to repurchase
|
|
|
|
|
|
|
761
|
|
|
|
1,214
|
|
|
|
1,127
|
|
|
|
591
|
|
Warrant to purchase convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Warrant to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,495
|
|
|
|
25,116
|
|
|
|
46,257
|
|
|
|
43,190
|
|
|
|
65,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.
|
Balance Sheet
Components
|
Cash and Cash
Equivalents and Short-term Investments
Cash, cash equivalents and short-term investments were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
11,533
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,533
|
|
Money market funds
|
|
|
4,506
|
|
|
|
|
|
|
|
|
|
|
|
4,506
|
|
U.S. government agency securities
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
16,352
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
1,181
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
1,181
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
675
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
675
|
|
Money market funds
|
|
|
6,045
|
|
|
|
|
|
|
|
|
|
|
|
6,045
|
|
U.S. government agency securities
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
2,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
9,219
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
$
|
11,970
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
11,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
11,970
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
11,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(unaudited)
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15,800
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,800
|
|
Money market funds
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
15,947
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, all
available-for-sale
securities had contractual maturities of less than one year.
Gross realized gains and gross realized losses resulting from
the sale of
available-for-sale
securities were not material for all periods presented in the
consolidated statement of operations.
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Raw materials
|
|
$
|
1,914
|
|
|
$
|
7,836
|
|
|
$
|
15,041
|
|
Work in progress
|
|
|
88
|
|
|
|
7,191
|
|
|
|
3,933
|
|
Finished goods
|
|
|
1,991
|
|
|
|
10,121
|
|
|
|
19,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,993
|
|
|
$
|
25,148
|
|
|
$
|
38,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Property and
Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Computer equipment
|
|
$
|
1,878
|
|
|
$
|
3,813
|
|
|
$
|
7,075
|
|
Software
|
|
|
434
|
|
|
|
608
|
|
|
|
969
|
|
Machinery and equipment
|
|
|
469
|
|
|
|
896
|
|
|
|
1,482
|
|
Furniture and fixtures
|
|
|
330
|
|
|
|
468
|
|
|
|
1,832
|
|
Leasehold improvements
|
|
|
863
|
|
|
|
1,910
|
|
|
|
6,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,974
|
|
|
|
7,695
|
|
|
|
17,632
|
|
Less accumulated depreciation and amortization
|
|
|
(746
|
)
|
|
|
(2,227
|
)
|
|
|
(5,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,228
|
|
|
$
|
5,468
|
|
|
$
|
12,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fiscal years ended June 30, 2009 and 2010, the
Company capitalized leasehold improvements primarily related to
its corporate offices of $584,000 and $1,047,000, respectively.
These assets were originally amortized over the remaining period
of the related facility lease that was to end in July 2015. In
December 2010, the Company entered into a termination agreement
related to this lease resulting in the lease terminating on
April 30, 2011. The net book value of the related leasehold
improvements of $1,335,000 as of December 31, 2010 was
amortized on a straight-line basis over the remaining lease term
ending April 30, 2011. During the nine months ended
March 31, 2011, the Company capitalized leasehold
improvements primarily related to its corporate offices of
$4,200,000.
Accrued and
Other Current Liabilities
Accrued and other current liabilities consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Accrued compensation
|
|
$
|
1,621
|
|
|
$
|
7,303
|
|
|
$
|
4,636
|
|
Convertible preferred stock warrant liability
|
|
|
88
|
|
|
|
174
|
|
|
|
748
|
|
Accrued professional costs
|
|
|
469
|
|
|
|
156
|
|
|
|
1,379
|
|
Customer deposits
|
|
|
430
|
|
|
|
|
|
|
|
81
|
|
Accrued other liabilities
|
|
|
558
|
|
|
|
1,263
|
|
|
|
3,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,166
|
|
|
$
|
8,896
|
|
|
$
|
10,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Fair Value
Measurements
|
Assets and
Convertible Preferred Stock Warrant Measured and Recorded at
Fair Value on a Recurring Basis
The Company measures and records certain financial assets and
its convertible preferred stock warrant at fair value on a
recurring basis. Fair value is based on the price that would be
received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date.
F-19
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
The Companys financial instruments that are measured at
fair value on a recurring basis consist of money market funds
and U.S. government agency securities and a convertible
preferred stock warrant. The following three levels of inputs
are used to measure the fair value of financial instruments:
|
|
|
Level 1:
|
|
Quoted prices in active markets for identical assets or
liabilities. The Company classifies its money market funds as
Level 1 instruments as they are traded in active markets with
sufficient volume and frequency of transactions.
|
Level 2:
|
|
Observable prices that are based on inputs not quoted on active
markets, but corroborated by market data. The Company classifies
its U.S. government agency securities as Level 2 instruments due
to the use of readily available market prices or alternative
pricing sources utilizing market observable inputs.
|
Level 3:
|
|
Unobservable inputs are used when little or no market data is
available. The Company utilized a Black-Scholes-Merton option
pricing model in order to determine the fair value of the
convertible preferred stock warrant, with such value determined
on an as-converted basis. Certain inputs used in the model are
unobservable. The fair values could change significantly based
on future market conditions.
|
F-20
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
The fair value of these financial assets and the convertible
preferred stock warrant was determined using the following
inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2009 Using
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
4,506
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,506
|
|
U.S. government agency securities
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
313
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
|
|
|
|
|
1,181
|
|
|
|
|
|
|
|
1,181
|
|
Accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock warrant
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2010 Using
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,045
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,045
|
|
U.S. government agency securities
|
|
|
|
|
|
|
2,499
|
|
|
|
|
|
|
|
2,499
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities
|
|
|
|
|
|
|
11,974
|
|
|
|
|
|
|
|
11,974
|
|
Accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock warrant
|
|
|
|
|
|
|
|
|
|
|
174
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2011 Using
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(unaudited)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
147
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
147
|
|
Accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock warrant
|
|
|
|
|
|
|
|
|
|
|
748
|
|
|
|
748
|
|
The following table summarizes the change in value of the
convertible preferred stock warrant (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Nine months ended
|
|
|
|
June 30
|
|
|
March 31
|
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Balance at beginning of period
|
|
$
|
|
|
|
$
|
88
|
|
|
$
|
88
|
|
|
$
|
174
|
|
Change in fair value included in interest expense
|
|
|
88
|
|
|
|
86
|
|
|
|
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
88
|
|
|
$
|
174
|
|
|
$
|
88
|
|
|
$
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Assets
Measured and Recorded at Fair Value on a Non-recurring
Basis
Non-financial long-lived assets such as property and equipment
are recorded at their historical cost; however, if there is an
impairment, the assets are measured and recorded at fair value.
Certain furniture and fixtures were measured at fair value
during the nine months ended March 31, 2011 due to
circumstances that indicated that the carrying value of these
assets was not recoverable, resulting in an impairment charge of
$46,000. This impairment charge is included in operating
expenses in the consolidated statements of operations. The fair
value of the furniture and fixtures on the measurement date was
$170,000 and was measured using level 2 inputs. The fair
value was based on a quoted price in a market that is not active.
Fair Value of
Other Financial Instruments
The carrying amounts of the Companys accounts receivable,
accounts payable, accrued liabilities, notes payable and other
liabilities approximate their fair values due to their short
maturities. The carrying value of notes payable approximates
fair value based on interest rates currently available to the
Company for debt with similar terms at March 31, 2011.
Loan and
Security Agreement
In September 2008, the Company entered into a loan and security
agreement with a financial institution. Initially, the agreement
provided for borrowings of up to $7,000,000 under a revolving
line of credit, and up to an additional $3,000,000 under a
bridge loan facility. In January 2009, the Company and the
financial institution modified the loan and security agreement
to allow financing of up to 80% of certain outstanding
receivables, not to exceed $6,250,000. The borrowings carried
interest at a rate ranging from prime to prime plus 2.0%. During
the year ended June 30, 2009, the Company borrowed, and
later repaid, an aggregate of $5,989,000 under these credit
facilities.
In January 2010, the Company amended the terms of the loan and
security agreement primarily to increase the facility amount,
modify certain financial covenants and extend the maturity date.
The revised agreement allowed financing of up to 80% of certain
outstanding receivables, not to exceed $7,500,000. Borrowings
were available through April 2010 and any borrowings were due no
later than April 2010. During the year ended June 30, 2010,
the Company borrowed and repaid a total of $4,000,000. As of
June 30, 2010 no borrowings were outstanding under this
agreement.
In September 2010, the Company amended and restated its loan and
security agreement (the Revolving Line of Credit)
with a financial institution. The Revolving Line of Credit
allows the Company to borrow up to a limit of $25,000,000 with a
sublimit of $6,000,000 for letters of credit, certain cash
management services and foreign exchange forward contracts. The
balance of borrowings outstanding on the Revolving Line of
Credit was $5,000,000 at March 31, 2011. The total balance
of letters of credit outstanding at March 31, 2011 was
$3,349,000. Borrowings under the Revolving Line of Credit accrue
interest at a floating per annum rate equal to one-half of one
percentage point (0.50%) above the prime rate as published in
the Wall Street Journal. An unused commitment fee equal to
0.375% of the difference between the $25,000,000 limit and the
average daily balance of borrowings outstanding each quarter is
due on the last day of such quarter. The Revolving Line of
Credit includes a prepayment penalty of $250,000 if outstanding
advances are prepaid and the line is cancelled prior to
September 2011. The Revolving Line of Credit is secured by
substantially all assets of the Company. At March 31, 2011,
the $5,000,000 note payable accrued interest at a rate of 3.75%
per annum with
F-22
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
interest due and payable on a monthly basis. The Company can
make advances against the Revolving Line of Credit until its
maturity date in September 2012, at which time all unpaid
principal and interest shall be due and payable. Under the terms
of the Revolving Line of Credit, the Company is required to
maintain the following minimum financial covenants on a
consolidated basis:
|
|
|
|
|
A ratio of current assets to current liabilities plus, without
duplication, any obligations of the Company to the financial
institution, of at least 1.25 to 1.00.
|
|
|
|
A tangible net worth of at least $25,000,000, plus 25% of the
net proceeds received by the Company from the sale or issuance
of the Companys equity or subordinated debt, such increase
to be measured as of the last day of the quarter in which the
Company received such proceeds.
|
As of March 31, 2011, the Company was in compliance with
these covenants.
The domestic and foreign components of loss before income taxes
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Domestic
|
|
$
|
(9,975
|
)
|
|
$
|
(25,572
|
)
|
|
$
|
(31,742
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(9,975
|
)
|
|
$
|
(25,572
|
)
|
|
$
|
(31,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense consisted of the following components (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
1
|
|
|
|
3
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
|
|
|
|
1
|
|
|
|
12
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Income tax expense differed from the amounts computed by
applying the statutory federal income tax rate of 34% to loss
before income taxes as a result of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Federal tax benefit at statutory rate
|
|
$
|
(3,391
|
)
|
|
$
|
(8,694
|
)
|
|
$
|
(10,779
|
)
|
State tax benefit, net of federal tax effect
|
|
|
(328
|
)
|
|
|
(1,518
|
)
|
|
|
(646
|
)
|
Current year tax credits
|
|
|
(149
|
)
|
|
|
(272
|
)
|
|
|
(50
|
)
|
Change in valuation allowance
|
|
|
3,821
|
|
|
|
10,158
|
|
|
|
10,922
|
|
Other, net
|
|
|
47
|
|
|
|
327
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of the Companys deferred income tax
assets and liabilities were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
13,955
|
|
|
$
|
21,903
|
|
Tax credit carryforwards
|
|
|
552
|
|
|
|
592
|
|
Accruals and allowances
|
|
|
276
|
|
|
|
2,818
|
|
Stock-based compensation
|
|
|
43
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
14,826
|
|
|
|
25,548
|
|
Valuation allowance
|
|
|
(14,583
|
)
|
|
|
(25,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
30
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(243
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, the Company had federal and state net
operating loss carryforwards (NOLs) of $58,019,000
and $54,289,000, respectively. The federal and state NOLs begin
to expire in 2027 and 2016, respectively, if not utilized. The
Company also had federal and state research and development tax
credit carryforwards of $482,000 and $166,000, respectively,
which begin to expire in 2027 and 2020, respectively, if not
utilized.
The Company maintained a full valuation allowance at
June 30, 2008, 2009 and 2010 due to the uncertainty of
realizing future tax benefits from its net operating loss
carryforwards and other deferred tax assets due to historical
losses. The valuation allowance increased by $3,821,000,
$10,158,000 and $10,922,000 during the fiscal years ended
June 30, 2008, 2009 and 2010, respectively.
Utilization of the net operating loss carryforwards and credits
may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue
Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating
losses and credits before utilization. If an ownership change
has occurred in the past or occurs in the future, the
utilization of net operation loss and credit carryforwards could
be significantly reduced.
F-24
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Effective July 1, 2009, the Company adopted the provisions
of FASB
ASC 740-10,
Accounting for Uncertainty in Income Taxes, which
provides a financial statement recognition threshold and
measurement attribute for a tax position taken or expected to be
taken in a tax return. Under FASB ASC
740-10, the
Company may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax
position will be sustained on examination by taxing authorities,
based solely on the technical merits of the position. The tax
benefits recognized in the financial statements from such a
position should be measured based on the largest benefit that
has greater than 50% likelihood to be sustained upon ultimate
settlement. As a result of the implementation of ASC
740-10, the
Company reclassified $184,000 of its tax reserves to
ASC 740-10
reserves. As of June 30, 2010, the Companys
unrecognized tax benefits were $349,000. Since the Company has a
valuation allowance against its deferred tax assets, the
adoption of
ASC 740-10
did not result in a change to the financial statements.
The Company recognizes accrued interest and penalties related to
uncertain tax positions as part of income tax expense. As of
July 1, 2009 and June 30, 2010, the Company had no
accrued interest and penalties.
During the fiscal year ended June 30, 2010, the aggregate
changes in the total gross amount of unrecognized tax benefits
were as follows (in thousands):
|
|
|
|
|
Balance as of July 1, 2009
|
|
$
|
184
|
|
Decrease of unrecognized tax benefits taken in prior years
|
|
|
(47
|
)
|
Increase in unrecognized tax benefits related to current year
|
|
|
212
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
349
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate is zero.
The Company does not anticipate any significant change within
fiscal 2011 of its uncertain tax positions, and the Company
does not anticipate any events which could cause a change to
these uncertainties. The Company files tax returns in the
U.S. on a Federal basis and in many U.S. state and
foreign jurisdictions. The Company is open for examinations in
its major tax jurisdictions for the 2006 and forward tax years.
There are no ongoing examinations by taxing authorities at this
time.
In addition to the net operating loss carryforwards listed
above, as of June 30, 2010, the Company has approximately
$1,307,000 of net operating loss carryforwards associated with
stock option tax deductions greater than deductions claimed for
book purposes. These benefits will be recorded directly to
equity in the period they reduce current taxes payable.
The Company paid income taxes for state and foreign income taxes
of $0, $1,000, and $12,000 during the fiscal years ended
June 30, 2008, 2009 and 2010, respectively. For the nine
months ended March 31, 2011, income tax expense related to
certain state and foreign jurisdictions for which taxable income
exists and for which net operating loss carry forwards are not
available to be utilized.
During the fiscal years ended June 30, 2008, 2009 and 2010,
the Company issued unsecured convertible notes to investors for
cash. The notes accrued interest at 10% per annum and were
automatically convertible into preferred stock in a qualifying
financing at a conversion price equal to the price per share
paid by the investors in such financing.
F-25
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
The following table presents the activity related to convertible
notes (in thousands):
|
|
|
|
|
Balance at July 1, 2007
|
|
$
|
233
|
|
Issuance of notes
|
|
|
5,221
|
|
Interest accrued
|
|
|
80
|
|
Principal repaid
|
|
|
(338
|
)
|
Conversion to Series Angel convertible preferred stock
|
|
|
(616
|
)
|
Conversion to Series A convertible preferred stock
|
|
|
(4,580
|
)
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
|
|
Issuance of notes
|
|
|
15,390
|
|
Interest accrued
|
|
|
555
|
|
Interest paid
|
|
|
(17
|
)
|
Principal repaid
|
|
|
(400
|
)
|
Conversion to Series B convertible preferred stock
|
|
|
(15,528
|
)
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
|
|
Issuance of notes
|
|
|
5,000
|
|
Interest accrued
|
|
|
38
|
|
Conversion to Series C convertible preferred stock
|
|
|
(5,038
|
)
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
|
|
|
|
|
|
|
|
|
7.
|
Convertible
Preferred Stock and Stockholders Deficit
|
Convertible
Preferred Stock
Convertible preferred stock consisted of the following (in
thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009
|
|
|
June 30, 2010
|
|
|
March 31, 2011
|
|
|
|
|
|
|
Shares
|
|
|
Aggregate
|
|
|
|
|
|
Shares
|
|
|
Aggregate
|
|
|
|
|
|
Shares
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Issued and
|
|
|
Liquidation
|
|
|
Shares
|
|
|
Issued and
|
|
|
Liquidation
|
|
|
Shares
|
|
|
Issued and
|
|
|
Liquidation
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Preference
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Preference
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Preference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Series A
|
|
|
17,571,250
|
|
|
|
17,445,450
|
|
|
$
|
19,068
|
|
|
|
17,571,250
|
|
|
|
17,445,450
|
|
|
$
|
19,068
|
|
|
|
17,571,250
|
|
|
|
17,445,450
|
|
|
$
|
19,068
|
|
Series B
|
|
|
23,750,000
|
|
|
|
21,934,902
|
|
|
|
43,870
|
|
|
|
23,867,334
|
|
|
|
23,466,941
|
|
|
|
46,934
|
|
|
|
23,867,334
|
|
|
|
23,466,941
|
|
|
|
46,934
|
|
Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,630,913
|
|
|
|
11,576,681
|
|
|
|
44,790
|
|
|
|
11,630,913
|
|
|
|
11,576,681
|
|
|
|
44,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,321,250
|
|
|
|
39,380,352
|
|
|
$
|
62,938
|
|
|
|
53,069,497
|
|
|
|
52,489,072
|
|
|
$
|
110,792
|
|
|
|
53,069,497
|
|
|
|
52,489,072
|
|
|
$
|
110,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fiscal year ended June 30, 2008, the Company
issued a total of 3,305 shares of Series Angel
convertible preferred stock, including 3,080 shares issued
upon conversion of convertible notes and 225 shares issued
for cash proceeds of $45,000. In March 2008, all outstanding
shares of Series Angel convertible preferred stock were
recapitalized into shares of newly designated Series A
convertible preferred stock at the conversion rate of 900 to 1.
During the fiscal year ended June 30, 2008, the Company
also issued a total of 10,978,950 shares of Series A
convertible preferred stock, including 4,190,620 shares
issued upon conversion of convertible notes and 6,788,330 issued
for $1.093 per share resulting in net cash proceeds of
$7,173,000.
During the fiscal year ended June 30, 2009, the Company
designated 23,750,000 shares of its convertible preferred
stock as Series B and the Company issued a total of
21,934,902 shares of Series B convertible preferred
stock, including 7,763,669 shares issued upon conversion of
convertible notes and 14,171,233 shares issued for $2.00
per share resulting in net cash proceeds of $28,078,000. During
the
F-26
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
fiscal year ended June 30, 2010, an additional
2,075,000 shares of Series B convertible preferred
stock were issued for $2.00 per share resulting in net cash
proceeds of $4,107,000.
During the fiscal year ended June 30, 2010, the Company
designated 11,630,913 shares of its convertible preferred
stock as Series C, repurchased 542,961 shares of
Series B convertible preferred stock for $1,834,000 and
issued a total of 11,576,681 shares of Series C
convertible preferred stock, including 1,302,237 shares
issued upon conversion of convertible notes and
10,274,444 shares issued for $3.869 per share resulting in
net cash proceeds of $39,658,000.
Amounts paid in excess of the carrying amount related to the
repurchase of the Series B convertible preferred stock are
reflected as a deemed dividend in computing net loss
attributable to common stockholders for the fiscal year ended
June 30, 2010.
The significant rights, privileges, and preferences of the
Series A, Series B and Series C convertible
preferred stock are as follows:
Conversion
Each share of convertible preferred stock is convertible, at any
time at the option of the holder into shares of the
Companys common stock. The price at which the convertible
preferred stock will be converted is the original issuance price
for the respective series of preferred stock, adjusted for
certain dilutive corporate transactions. As of June 30,
2010 and March 31, 2011, each share of outstanding
convertible preferred stock was convertible into common stock on
a
one-for-one
basis.
Conversion is automatic upon the earlier of a (1) closing
of the sale of the Companys common stock in a
firm-commitment, underwritten initial public offering which
results in aggregate proceeds to the Company (before payment of
underwriters discounts and expenses relating to the
issuance) of at least $40,000,000 or (2) the date specified
by written consent or agreement of holders of at least
two-thirds of the convertible preferred stock then outstanding
(voting together as a single class on an as-converted basis). In
the event the initial public offering price per share of common
stock is less than $5.80, then the Series C conversion
price shall be the initial public offering price divided by 1.50.
In addition, if the Company initiates a qualifying financing, as
determined by the board of directors, preferred stock held by
certain stockholders may be required to be converted into common
stock at the conversion rate of one share of common stock for
each ten shares of preferred stock held, if such stockholders do
not make an investment in the Company at least equal to their
pro rata portion of the financing.
Dividends
The holders of the convertible preferred stock are entitled, on
a pari passu basis, when, as, and if declared by the board of
directors, to noncumulative annual dividends of $0.08744 per
share of Series A, $0.16 per share of Series B and
$0.30952 per share of Series C. No dividends have been
declared or paid as of June 30, 2010 and March 31,
2011. Any additional dividends declared would be distributed on
a pari-passu basis among all holders of common stock and
convertible preferred stock on an as-converted basis.
Liquidation
Preferences
In the event of a liquidation event, which is defined as any
sale, merger, reorganization, liquidation, dissolution or
winding up of the Company, holders of Series A,
Series B and Series C
F-27
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
convertible preferred stock shall be entitled to receive, on a
pari passu basis, liquidation preferences of $1.093, $2.00 and
$3.869 per share, respectively, together with any declared but
unpaid dividends, prior to any payment or distribution to
holders of common stock.
After liquidation preferences are satisfied for holders of
convertible preferred stock, the entire remaining assets of the
Company shall be distributed on a pro rata basis to the holders
of common stock and convertible preferred stock on an
as-converted basis. Total distributions to Series A and
Series B convertible preferred stockholders will be limited
to 1.5 times their liquidation preference amounts. Total
distributions to Series C convertible preferred
stockholders will be limited to 2.0 times their liquidation
preference amounts. Thereafter, the holders of common stock
shall receive all of the remaining assets of the Company on a
pro rata basis.
A change in control or a sale, transfer, or lease of all or
substantially all of the assets of the Company is considered to
be a liquidation event. Because a change in control could occur
and not be solely within the control of the Company, all
convertible preferred stock has been classified outside of
permanent equity in the accompanying consolidated balance sheets.
Redemption
Holders of convertible preferred stock have no rights related to
the redemption of their stock.
Voting
Rights
Holders of convertible preferred stock are entitled to the
number of votes they would have upon conversion of their
convertible preferred stock into common stock on the applicable
record date. The Companys board of directors shall consist
of seven members determined as follows:
|
|
|
|
|
the holders of Series A convertible preferred stock voting
as a separate class on an as-converted basis are entitled to
elect two members to the Companys board of directors;
|
|
|
|
the holders of Series B convertible preferred stock voting
as a separate class on an as-converted basis are entitled to
elect one member to the board of directors;
|
|
|
|
the holders of common stock, voting as a separate class, are
entitled to elect three members to the board of directors;
|
|
|
|
and the holders of convertible preferred stock, voting as a
separate class on an as-converted basis, and the holders of
common stock, voting as a separate class, shall be entitled to
elect one member to the board of directors.
|
Equity
Incentive Plans
The Company adopted the 2006 Stock Option Plan (the 2006
Plan) in July 2006 and subsequently granted a total of
3,028,135 options to purchase common stock under the 2006 Plan.
Stock options granted under the 2006 Plan generally vest over a
period of 30 months and have a contractual life of
10 years from the date of grant. In March 2008, the Company
amended the terms of the 2006 Plan and terminated the ability to
grant additional awards under this plan.
In March 2008, the Company adopted the 2008 Equity Incentive
Plan (the 2008 Plan) and in July 2010 the Company
adopted the 2010 Executive Stock Incentive Plan (the 2010
Plan). In January 2011, the Companys board and
stockholders authorized an additional 3,000,000 shares of
common stock for future issuance under the 2008 Plan and 2010
Plan. The maximum aggregate
F-28
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
number of shares of common stock that may be issued under the
2008 Plan together with the 2010 Plan (the Stock
Plans), as of June 30, 2010 and March 31, 2011
is 15,984,159 and 18,984,159, respectively. The Stock Plans
provide for the grant of incentive stock options to employees
and for the grant of nonstatutory stock options and awards of
restricted or unrestricted shares of common stock to employees,
consultants, and advisors. Generally stock options granted under
the Stock Plans vest over a period of 48 months and have a
contractual life of 10 years from the date of grant. Grants
of incentive stock options generally must be at an exercise
price not less than the estimated fair value of the underlying
common stock on the date of grant. The estimated fair value of
the underlying common stock shall be determined by the board of
directors until such time as the Companys common stock is
listed on any established stock exchange. The fair value of
common stock has been determined by the board of directors at
each grant date based on a variety of factors, including
periodic valuations of the Companys common stock,
arms-length sales of the Companys common stock, the
Companys financial position, historical financial
performance, projected financial performance, valuations of
publicly traded peer companies and the illiquid nature of the
common stock.
Stock option activity for the fiscal years ended June 30,
2008, 2009 and 2010 and the nine months ended March 31,
2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Weighted-
|
|
|
|
|
Shares
|
|
|
|
Average
|
|
|
|
|
Subject to
|
|
Weighted-Average
|
|
Contractual
|
|
Aggregate
|
|
|
Outstanding
|
|
Exercise Price
|
|
Term
|
|
Intrinsic
|
|
|
Options
|
|
Per Share
|
|
(in Years)
|
|
Value(1)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Outstanding as of July 1, 2007
|
|
|
2,720,250
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,515,385
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(220,250
|
)
|
|
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2008
|
|
|
8,015,385
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
10,392,157
|
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,138,019
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(3,091,856
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2009
|
|
|
13,177,667
|
|
|
|
0.55
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,171,034
|
|
|
|
1.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(620,462
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,315,399
|
)
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2010
|
|
|
18,412,840
|
|
|
|
0.77
|
|
|
|
9.0
|
|
|
$
|
21,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of June 30, 2010
|
|
|
14,703,024
|
|
|
$
|
0.74
|
|
|
|
8.9
|
|
|
$
|
17,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of June 30, 2010
|
|
|
4,594,271
|
|
|
$
|
0.53
|
|
|
|
8.3
|
|
|
$
|
6,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2010
|
|
|
18,412,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted (unaudited)
|
|
|
9,325,981
|
|
|
$
|
3.88
|
|
|
|
|
|
|
|
|
|
Exercised (unaudited)
|
|
|
(881,424
|
)
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
Canceled (unaudited)
|
|
|
(716,491
|
)
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2011 (unaudited)
|
|
|
26,140,906
|
|
|
|
1.87
|
|
|
|
8.7
|
|
|
$
|
127,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
|
|
|
(1) |
|
The aggregate intrinsic value is equal to the difference between
the exercise price of the underlying stock option awards and the
estimated fair value of the Companys common stock as of
June 30, 2010 and March 31, 2011 as applicable. |
Additional per share information related to stock options
granted to employees was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Nine Months Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
(unaudited)
|
Weighted-average grant date fair value granted
|
|
$
|
0.12
|
|
|
$
|
0.32
|
|
|
$
|
0.55
|
|
|
$
|
0.32
|
|
|
$
|
2.49
|
|
Weighted-average grant date fair value forfeited
|
|
|
0.18
|
|
|
|
0.22
|
|
|
|
0.30
|
|
|
|
0.61
|
|
|
|
1.23
|
|
Valuation
Assumptions
The Company estimates the fair value of stock options granted to
employees using the Black-Scholes-Merton pricing model and a
single option award approach, which requires the input of
several highly subjective and complex assumptions. The risk-free
interest rate for the expected term of the option is based on
the yield available on United States Treasury Zero Coupon issues
with an equivalent expected term. The expected option term used
in the Black-Scholes-Merton pricing model is calculated using
the simplified method. The simplified method defines the
expected term as the average of the options contractual
term and the options weighted-average vesting period. The
Company utilizes this method as it has limited historical stock
option data that is sufficient to derive a reasonable estimate
of the expected stock option term. The computation of estimated
expected volatility is based on the volatility of comparable
companies from a representative peer group selected based on
industry data.
The following table presents the assumptions used in the
Black-Scholes-Merton pricing model related to employee stock
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Year Ended June 30,
|
|
March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Expected volatility
|
|
49-50%
|
|
49%
|
|
49%
|
|
49%
|
|
48-49%
|
Expected term (in years)
|
|
6.1
|
|
6.1
|
|
6.1
|
|
6.1
|
|
3.2-7.0
|
Risk-free interest rate
|
|
2.6-3.6%
|
|
2.8-3.4%
|
|
2.4-2.9%
|
|
2.6-2.9%
|
|
0.6-2.7%
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
F-30
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Total stock-based compensation expense was classified as follows
in the accompanying consolidated statement of operations (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended June 30,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
9
|
|
|
|
|
|
|
$
|
7
|
|
|
$
|
16
|
|
Sales and marketing
|
|
|
101
|
|
|
|
461
|
|
|
|
738
|
|
|
|
|
|
|
|
544
|
|
|
|
1,156
|
|
Research and development
|
|
|
211
|
|
|
|
382
|
|
|
|
492
|
|
|
|
|
|
|
|
422
|
|
|
|
762
|
|
General and administrative
|
|
|
29
|
|
|
|
155
|
|
|
|
628
|
|
|
|
|
|
|
|
269
|
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
341
|
|
|
$
|
999
|
|
|
$
|
1,867
|
|
|
|
|
|
|
$
|
1,242
|
|
|
$
|
3,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 and March 31, 2011, there was
approximately $5,641,000 and $20,714,000 of total unrecognized
compensation expense related to unvested stock options, which is
expected to be recognized over a weighted-average service period
of 3.2 years and 3.7 years, respectively.
Shares of
Common Stock Subject to Repurchase
In March 2008, the Company agreed with two of its executives to
add vesting provisions to an aggregate of 5,000,000 shares
of common stock controlled by these executives. The Company has
the right to repurchase any unvested shares at a price of $1.09
per share in the event the executive was to no longer provide
services to the Company. The repurchase right expires ratably as
the shares vest monthly over a 36-month period. The total fair
value of the 5,000,000 shares of $1,790,000 is being
recognized as stock-based compensation expense on a
straight-line basis over the vesting period.
The following table summarizes the activity related to these
shares subject to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Number of Shares
|
|
Fair Value
|
|
Unvested shares of common stock at July 1, 2007
|
|
|
|
|
|
$
|
|
|
Common shares subject to vesting provisions
|
|
|
5,000,000
|
|
|
|
0.36
|
|
Vested
|
|
|
(416,667
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Unvested as of June 30, 2008
|
|
|
4,583,333
|
|
|
|
0.36
|
|
Vested
|
|
|
(1,666,666
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Unvested as of June 30, 2009
|
|
|
2,916,667
|
|
|
|
0.36
|
|
Vested
|
|
|
(1,666,667
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Unvested as of June 30, 2010
|
|
|
1,250,000
|
|
|
|
0.36
|
|
Vested (unaudited)
|
|
|
(1,250,000
|
)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Unvested as of March 31, 2011 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, there was approximately $399,000 of
total unrecognized compensation expense related to these
unvested shares, which is expected to be recognized over a
weighted-
F-31
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
average service period of 0.7 years. As of March 31, 2011,
the 5,000,000 shares were fully vested and the unrecognized
compensation expense was $0.
Non-employee
Stock Options
The Company from time to time grants options to purchase common
stock to non-employees for advisory and consulting services. The
Company estimates the fair value of these stock options using
the Black-Scholes-Merton option pricing formula at each balance
sheet date and records expense ratably over the vesting period
of each stock option award. The Company recorded stock-based
compensation expense related to these non-employee stock options
of $4,000, $18,000, $54,000, $25,000 and $411,00 for the fiscal
years ended June 30, 2008, 2009 and 2010 and for the nine
months ended March 31, 2010 and 2011, respectively.
The following table presents the assumptions used in the
Black-Scholes-Merton pricing model related to non-employee stock
options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Nine Months Ended March 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Expected volatility
|
|
50%
|
|
49-50%
|
|
49%
|
|
49%
|
|
48-58%
|
Expected term (in years)
|
|
10.0
|
|
8.8-9.9
|
|
7.8-10.0
|
|
8.1-10.0
|
|
7.1-10.0
|
Risk-free interest rate
|
|
3.42%
|
|
2.7-3.8%
|
|
2.9-3.6%
|
|
3.2-3.6%
|
|
2.1-3.4%
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
Warrants
During the year ended June 30, 2010, the Company granted to
a business a fully vested warrant to purchase 12,500 shares
of common stock for $1.96 per share in exchange for services
rendered. The estimated fair value of the warrant of $11,000 was
expensed in the year ended June 30, 2010 and was measured
at the issuance date using the Black-Scholes-Merton
option-pricing model with the following assumptions:
|
|
|
|
|
Expected volatility
|
|
|
49
|
%
|
Expected life (in years, equal to the contractual term)
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
2.4
|
%
|
Dividend yield
|
|
|
|
|
In March 2011, the Company issued 12,500 shares of common
stock pursuant to the exercise of this warrant.
In connection with the execution of the September 2008 loan
and security agreement, the Company issued the financial
institution a fully vested warrant to purchase 125,800 shares of
Series A convertible preferred stock at $1.093 per
share. The warrant may be exercised for cash or net settled at
any time through September 2018. The number of shares to be
issued upon settlement of the warrant is 125,800.
The FASB has issued accounting guidance on the classification of
freestanding warrants and other similar instruments on shares
that are redeemable (either puttable or mandatorily redeemable).
The guidance requires liability classification for certain
warrants issued that are exercisable into
F-32
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
convertible preferred stock. Liability classification requires
the warrants to be remeasured to their fair value at each
reporting period. As of June 30, 2009 and 2010 and
March 31, 2011, the fair value of the warrant was $88,000,
$174,000 and $748,000, respectively, and was recorded in accrued
and other liabilities in the accompanying balance sheet. Changes
in the fair value of the warrant liability are recorded in
interest expense. The Company utilized a
Black-Scholes-Merton
option pricing model in order to determine the fair value of the
preferred stock warrant, including the consideration of a
risk-free
interest rate, expected term and expected volatility.
The following table presents the assumptions used in the
Black-Scholes-Merton
pricing model as of each date the warrant was revalued:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of June 30,
|
|
March 31,
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
(unaudited)
|
|
Expected volatility
|
|
49%
|
|
49%
|
|
48%
|
Expected term (in years)
|
|
10
|
|
8.3
|
|
7.5
|
Risk-free
interest rate
|
|
3.7%
|
|
2.9%
|
|
2.9%
|
Expected dividends
|
|
|
|
|
|
|
The Company has reserved the following shares of common and
convertible preferred stock for issuance upon the exercise of
warrants that were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
Subject to Warrants
|
|
|
|
|
|
|
June 30,
|
|
March 31,
|
|
|
|
Exercise
|
|
Date First
|
2010
|
|
2011
|
|
Shares Subject to Warrants
|
|
Price
|
|
Exercisable
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
Common Stock
|
|
$
|
1.960
|
|
|
May 28, 2010
|
|
125,800
|
|
|
|
125,800
|
|
|
Series A Convertible Preferred Stock
|
|
|
1.093
|
|
|
September 10, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,300
|
|
|
|
125,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
and Shares of Common Stock Reserved for Future
Issuance
Shares of common stock reserved for future issuance were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
(unaudited)
|
|
|
Stock options outstanding
|
|
|
18,412,840
|
|
|
|
26,140,906
|
|
Stock options available for future grants
|
|
|
7,073,491
|
|
|
|
1,364,001
|
|
Warrant to purchase common stock
|
|
|
12,500
|
|
|
|
|
|
Warrant to purchase convertible preferred stock
|
|
|
125,800
|
|
|
|
125,800
|
|
Convertible preferred stock
|
|
|
52,489,072
|
|
|
|
52,489,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,113,703
|
|
|
|
80,119,779
|
|
|
|
|
|
|
|
|
|
|
F-33
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
In February 2011, the Company issued an aggregate of 60,000
shares of common stock for cash to two members of its board of
directors. The purchase price of these shares was $5.12 per
share.
|
|
8.
|
Commitments and
Contingencies
|
Letters of
Credit
As of June 30, 2010 and March 31, 2011, the Company
had a total of $645,000 and $3,349,000, respectively, in letters
of credit outstanding with a financial institution. These
outstanding letters of credit have been issued for purposes of
securing the Companys obligations under equipment and
facility leases.
Leases
The Company leases certain assets under capital leases with
initial lease terms ranging between 12 to 48 months,
imputed interest rates between 7.8% and 9.4% and maturities at
various dates through fiscal year 2013. These leases are
recorded as capital leases due to each lease containing a
bargain purchase option. Obligations under capital leases are
included in accrued and other current liabilities and other
liabilities in the accompanying consolidated balance sheets.
Property and equipment capitalized under capital lease
obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Computer equipment
|
|
$
|
|
|
|
$
|
177
|
|
|
$
|
177
|
|
Machinery and equipment
|
|
|
144
|
|
|
|
301
|
|
|
|
301
|
|
Furniture and fixtures
|
|
|
183
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327
|
|
|
|
661
|
|
|
|
478
|
|
Less accumulated depreciation and amortization
|
|
|
(24
|
)
|
|
|
(201
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
303
|
|
|
$
|
460
|
|
|
$
|
242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Future minimum lease payments under non-cancelable operating
leases and payments under capital leases were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
March 31, 2011
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases
|
|
|
Leases(2)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Year Ending June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011(1)
|
|
$
|
295
|
|
|
$
|
1,334
|
|
|
$
|
47
|
|
|
$
|
468
|
|
2012
|
|
|
162
|
|
|
|
3,914
|
|
|
|
107
|
|
|
|
3,571
|
|
2013
|
|
|
28
|
|
|
|
3,910
|
|
|
|
6
|
|
|
|
3,490
|
|
2014
|
|
|
|
|
|
|
3,130
|
|
|
|
|
|
|
|
2,650
|
|
2015
|
|
|
|
|
|
|
4,066
|
|
|
|
|
|
|
|
3,472
|
|
Thereafter
|
|
|
|
|
|
|
23,287
|
|
|
|
|
|
|
|
23,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
485
|
|
|
$
|
39,641
|
|
|
|
160
|
|
|
$
|
37,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: imputed interest
|
|
|
(41
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
444
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
Less: current portion
|
|
|
(273
|
)
|
|
|
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations noncurrent
|
|
$
|
171
|
|
|
|
|
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The June 30, 2010 columns include future minimum lease
payments to be paid during the year ending June 30, 2011.
The March 31, 2011 columns include future minimum lease
payments to be paid during the three months ending June 30,
2011. |
|
(2) |
|
In December 2010, the Company entered into agreements to
terminate leases for certain facilities. As a result, the
operating lease obligations disclosed as of March 31, 2011
exclude approximately $2,900,000 of lease payments that were
included in the June 30, 2010 balance. |
Operating lease payments primarily relate to the Companys
leases of office space with various expiration dates through
2021. The terms of these leases often include periods of free
rent, or rent holidays, and increasing rental rates over time.
The Company recognizes rent expense on a straight-line basis
over the lease period and has accrued for rent expense recorded
but not paid. In May 2010, the Company entered into new leases
to expand its primary office facilities in Salt Lake City, Utah.
The term of these leases include an initial lease term that ends
in September 2021, plus the option for the Company to extend the
lease for an additional five years. These leases include rent
holidays during the first year beginning with the lease
effective date and also require the Company to provide the
lessor letters of credit in aggregate of $3,000,000. These
letters of credit were required upon signing the lease but as of
June 30, 2010, the Company did not have the letters of
credit in place. The letters of credit were secured in October
2010. This delay did not constitute an event of default under
the lease agreements.
The Company also leases certain equipment under operating leases
that expire at various dates through 2016. These equipment
leases typically include provisions that allow the Company at
the end of the initial lease term to renew the lease, purchase
the underlying equipment at the then fair market value or return
the equipment to the lessor.
F-35
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
Rent expense was $289,000, $1,306,000, $1,614,000, $1,167,000
and $2,901,000 for the fiscal years ended June 30, 2008,
2009 and 2010 and for the nine months ended March 31, 2010
and 2011, respectively.
Purchase
Commitments
The Company had non-cancelable purchase orders for raw materials
inventory of approximately $8,737,000 and $2,660,000 as of
June 30, 2010 and March 31, 2011, respectively.
Indemnifications
The Company indemnifies its officers and directors for certain
events or occurrences, while the officer or director is or was
serving at the Companys request in such capacity. The
maximum amount of potential future indemnification is unlimited;
however, the Company has a director and officer insurance policy
that provides corporate reimbursement coverage that limits its
exposure and enables it to recover a portion of any future
amounts paid. The Company is unable to reasonably estimate the
maximum amount that could be payable under these arrangements
since these obligations are not capped but are conditional to
the unique facts and circumstances involved. Accordingly, the
Company has no liabilities recorded for these agreements as of
June 30, 2009 and 2010 and as of March 31, 2011.
Many of the Companys agreements with channel partners and
customers generally include certain provisions for indemnifying
the channel partners and customers against liabilities if the
Companys products infringe a third partys
intellectual property rights. To date, the Company has not
incurred any material costs as a result of such indemnification
provisions and has not accrued any liabilities related to such
obligations in the consolidated financial statements.
Employee
Agreements
The Company has signed various employment agreements with key
executives pursuant to which if their employment is terminated
by the Company without cause or by the employees for good
reason, or following a change of control of the Company, the
employees are entitled to receive certain benefits, including
severance payments, accelerated vesting of stock and stock
options, and certain insurance benefits.
Legal
Matters
The Company is not currently a party to any material litigation
or other material legal proceedings. The Company may, from time
to time, be involved in various legal proceedings arising from
the normal course of business activities, and an unfavorable
resolution of any of these matters could materially affect the
Companys future results of operations, cash flows or
financial position.
|
|
9.
|
Employee Benefit
Plans
|
The Company sponsors a 401(k) defined contribution plan covering
all employees. Matching contributions and profit sharing
contributions to the plan are at the discretion of the Company.
The Company paid matching contributions of $29,000 in the year
ended June 30, 2009 and did not pay any matching
contributions in any other periods presented in the accompanying
consolidated statements of operations.
F-36
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
|
|
10.
|
Related Party
Transactions
|
The Company issued and sold an aggregate of
52,489,072 shares of Series A, B, and C convertible
preferred stock for aggregate consideration of $103,765,000, net
of issuance costs. Purchasers of the Companys
Series A, B and C convertible preferred stock include New
Enterprise Associates 12, Limited Partnership (NEA
12) and Lightspeed Venture Partners VIII, L.P.
(Lightspeed VIII). Both of these investors own more
than 5% of the Companys outstanding capital stock as of
June 30, 2010 and March 31, 2011. Forest Baskett and
Scott Sandell, both of whom are members of the Companys
board of directors, are general partners of NEA 12. Christopher
J. Schaepe is a member of the Companys board of directors
and is a representative of Lightspeed VIII.
The following table summarizes the purchases of the
Companys convertible preferred stock by NEA 12 and
Lightspeed VIII:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
Class of Convertible
|
|
Convertible
|
|
|
|
Total Purchase
|
Name of Stockholder
|
|
Preferred Stock
|
|
Preferred Stock
|
|
Price Per Share
|
|
Price
|
|
NEA 12
|
|
|
Series A
|
|
|
|
8,647,755
|
|
|
$
|
1.093
|
|
|
$
|
9,451,996
|
|
NEA 12
|
|
|
Series B
|
|
|
|
9,127,294
|
|
|
|
|
*
|
|
|
18,292,776
|
|
Lightspeed VIII
|
|
|
Series B
|
|
|
|
7,500,000
|
|
|
|
2.000
|
|
|
|
15,000,000
|
|
NEA 12
|
|
|
Series C
|
|
|
|
2,843,112
|
|
|
|
3.869
|
|
|
|
11,000,000
|
|
Lightspeed VIII
|
|
|
Series C
|
|
|
|
1,292,324
|
|
|
|
3.869
|
|
|
|
5,000,002
|
|
|
|
|
* |
|
- NEA 12 purchased 9,000,000 shares of Series A
convertible preferred stock directly from the Company at a price
per share of $2.00 and a purchase price of $18,000,000. |
In November 2007, the Company received proceeds of $400,000 from
an investor, in exchange for a convertible note payable. In
March of 2008, the note was converted into 378,500 shares
of Series A convertible preferred stock. In July 2008, this
investor purchased an additional 450,000 shares of the
Companys Series A convertible preferred stock from
another shareholder. In September 2008, the Company received
proceeds of $2,000,000 from this investor for a convertible note
payable and in April 2009, the note was converted into
1,055,616 shares of Series B convertible preferred
stock. In April 2010, an affiliate of this investor purchased
258,465 shares of the Companys Series C
convertible preferred stock. An affiliate of these investors is
a customer of the Company. The Company recognized revenue from
this affiliate of $0, $181,000, $3,421,000, $3,183,000 and
$275,000 for the fiscal years ended June 30, 2008, 2009 and
2010 and for the nine months ended March 31, 2010 and 2011,
respectively. The accounts receivable balance from this
affiliate was $25,000, $100,000 and $0 as of June 30, 2009
and 2010 and March 31, 2011, respectively.
In May 2008, the Company issued 1,829,825 shares of
Series A convertible preferred stock to an investor for a
total purchase price of $2,000,000. The parent company of this
investor is a customer of the Company. The Company recognized
revenue from this customer of $19,000, $22,000, $191,000,
$191,000 and $2,888,000 for the fiscal years ended June 30,
2008, 2009 and 2010 and for the nine months ended March 31,
2010 and 2011, respectively. The accounts receivable balance
from this customer was $0, $0 and $434,000 as of June 30,
2009 and 2010 and March 31, 2011, respectively.
F-37
FUSION-IO,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
INFORMATION PERTAINING TO THE NINE MONTHS ENDED
MARCH 31, 2010 AND 2011 IS UNAUDITED
In October 2009, the Company issued 2,000,000 shares of
Series B convertible preferred stock to an investor for a
total purchase price of $4,000,000. One of the Companys
vendors of NAND flash, is an affiliate of this investor. The
Company had total purchases from this vendor of $1,003,000,
$1,477,000, $4,938,000, $3,301,000 and $3,205,000 for the fiscal
years ended June 30, 2008, 2009 and 2010 and for the nine
months ended March 31, 2010 and 2011, respectively. The
accounts payable balance with this vendor was $0, $483,000 and
$4,000 as of June 30, 2009 and 2010 and March 31,
2011, respectively.
The Company has evaluated subsequent events through June 7,
2011, the date the financial statements were available to be
issued.
In April 2011, the Company repaid the remaining outstanding
balance on its revolving line of credit of $5.0 million.
In April 2011, the Company granted options to purchase
495,844 shares of common stock at an exercise price of
$6.76 per share. In May 2011, the Company granted options to
purchase 152,500 shares of common stock at an exercise
price of $14.00 per share. In May 2011, the Company received an
estimate of the preliminary range of the estimated offering
price for the Companys proposed initial public offering of
common stock. As a result of the proximity of this estimate to
the grant date of stock options in April 2011, the Company
subsequently reassessed the fair value at the date of grant to
be $10.88. The unrecognized stock-based compensation expense
related to the April 2011 and May 2011 grants was $3,651,000
(unaudited) and $1,208,000 (unaudited), respectively.
On May 2, 2011, the Company repurchased a total
165,000 shares of common stock from two of its
stockholders, in separate transactions, for a total purchase
price of $1,222,500. The terms and conditions of the individual
stock repurchases, including the purchase price, were
established independently between the two stockholders and a
third party buyer unaffiliated with the Company. The Company
exercised its pre-existing right of first refusal to which the
shares were subject and repurchased the shares on the same terms
and conditions to which the stockholders and third party buyer
had agreed. The terms of the repurchase transaction for 150,000
of such shares requires the Company to pay additional
consideration to one of the stockholders if a liquidity event
occurs at any time prior to May 2, 2012 in which the price
per share of the Companys common stock is greater than
$15.00. For this purpose, a liquidity event is defined as either
a change of control or sale of substantially all of the assets
of the Company or the initial public offering of common stock of
the Company, or IPO. The amount of the additional per share
consideration payable would be equal to half the difference
between the applicable liquidity event price per share and
$15.00. In the event of an IPO liquidity event, the liquidity
event price per share is the closing per share sale price as of
the first trading day following the expiration of the lock-up
period described in the underwriting section of the
Companys Form S-1 registration statement. Such
consideration shall be payable three business days following the
final determination of the amount of such payment.
F-38
PART II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
OTHER EXPENSES
OF ISSUANCE AND DISTRIBUTION.
|
The following table sets forth all expenses to be paid by the
Registrant, other than underwriting discounts and commissions,
in connection with this offering. All amounts shown are
estimates except for the SEC registration fee and the FINRA
filing fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
29,560
|
|
FINRA filing fee
|
|
|
25,961
|
|
NYSE listing fee
|
|
|
250,000
|
|
Printing and engraving
|
|
|
250,000
|
|
Legal fees and expenses
|
|
|
1,500,000
|
|
Accounting fees and expenses
|
|
|
1,015,000
|
|
Blue sky fees and expenses (including legal fees)
|
|
|
20,000
|
|
Transfer agent and registrar fees
|
|
|
10,000
|
|
Miscellaneous
|
|
|
399,479
|
|
|
|
|
|
|
Total
|
|
$
|
3,500,000
|
|
|
|
|
|
|
|
|
ITEM 14.
|
INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
|
Section 145 of the Delaware General Corporation Law
authorizes a corporations board of directors to grant, and
authorizes a court to award, indemnity to officers, directors
and other corporate agents.
As permitted by Section 102(b)(7) of the Delaware General
Corporation Law, the Registrants certificate of
incorporation includes provisions that eliminate the personal
liability of its directors and officers for monetary damages for
breach of their fiduciary duty as directors and officers.
In addition, as permitted by Section 145 of the Delaware
General Corporation Law, the certificate of incorporation and
bylaws of the Registrant provide that:
|
|
|
|
|
The Registrant shall indemnify its directors and officers for
serving the Registrant in those capacities or for serving other
business enterprises at the Registrants request, to the
fullest extent permitted by Delaware law. Delaware law provides
that a corporation may indemnify such person if such person
acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no
reasonable cause to believe such persons conduct was
unlawful.
|
|
|
|
The Registrant may, in its discretion, indemnify employees and
agents in those circumstances where indemnification is permitted
by applicable law.
|
|
|
|
The Registrant is required to advance expenses, as incurred, to
its directors and officers in connection with defending a
proceeding, except that such director or officer shall undertake
to repay such advances if it is ultimately determined that such
person is not entitled to indemnification.
|
|
|
|
The Registrant will not be obligated pursuant to the bylaws to
indemnify a person with respect to proceedings initiated by that
person, except with respect to proceedings authorized by the
Registrants board of directors or brought to enforce a
right to indemnification.
|
|
|
|
The rights conferred in the certificate of incorporation and
bylaws are not exclusive, and the Registrant is authorized to
enter into indemnification agreements with its directors,
officers, employees and agents and to obtain insurance to
indemnify such persons.
|
II-1
|
|
|
|
|
The Registrant may not retroactively amend the bylaw provisions
to reduce its indemnification obligations to directors,
officers, employees and agents.
|
The Registrants policy is to enter into separate
indemnification agreements with each of its directors and
officers that provide the maximum indemnity allowed to directors
and executive officers by Section 145 of the Delaware
General Corporation Law and also to provide for certain
additional procedural protections. The Registrant has also
entered into indemnification agreements with certain
stockholders affiliated with its directors. The Registrant also
maintains directors and officers insurance to insure such
persons against certain liabilities.
These indemnification provisions and the indemnification
agreements entered into between the Registrant and its officers,
directors and stockholders affiliated with some directors may be
sufficiently broad to permit indemnification of the
Registrants officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the
Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this
registration statement provides for indemnification by the
underwriters of the Registrant and its officers and directors
for certain liabilities arising under the Securities Act and
otherwise.
|
|
ITEM 15.
|
RECENT SALES
OF UNREGISTERED SECURITIES.
|
Since May 1, 2008, the Registrant issued the following
unregistered securities:
Sales of
Convertible Preferred Stock
Between March 2008 and May 2008, the Registrant issued an
aggregate of 17,445,450 shares of its Series A
convertible preferred stock, of which 6,466,500 shares were
issued upon conversion of existing preferred stock and
10,978,950 shares were sold to a total of 6 accredited
investors at a purchase price per share of $1.093, each adjusted
for a five for one forward stock split in July 2008, for an
aggregate purchase price of $11,999,992.36.
Between April 2009 and October 2009, the Registrant sold an
aggregate of 24,009,902 shares of its Series B
convertible preferred stock to a total of 17 accredited
investors at a purchase price per share of $2.00, for an
aggregate purchase price of $48,019,804.
Between April 2010 and May 2010, the Registrant sold an
aggregate of 11,576,681 shares of its Series C
convertible preferred stock to a total of 21 accredited
investors at a purchase price per share of $3.869, for an
aggregate purchase price of $44,790,179.
Warrants
In September 2008, the Registrant issued a warrant to purchase
125,800 shares of the Registrants Series A
convertible preferred stock to an accredited investor at an
exercise price of $1.093 per share.
In May 2010, the Registrant issued a warrant to purchase
12,500 shares of the Registrants common stock to an
accredited investor at an exercise price of $1.96 per share. In
March 2011, this warrant was exercised in full for an aggregate
exercise price of $24,500.
Convertible
Notes
Between November 2007 and May 2008, the Registrant issued
convertible promissory notes in an aggregate principal amount of
$4,580,349. These promissory notes accrued interest at the rate
of 10% per annum, compounded annually. In March 2008, the
outstanding principal and interest due under these notes
converted into 4,190,620 shares of the Registrants
Series A convertible preferred stock at $1.093 per share
(in each case as adjusted for a
5-for-1
forward stock split in July 2008).
Between August 2008 and March 2009, the Registrant issued
convertible promissory notes in an aggregate principal amount of
$15,390,000. The promissory notes accrued interest at the rate
of 10%
II-2
per annum, compounded annually. In April 2009, the outstanding
principal and interest due under these notes converted into
7,763,669 shares of the Registrants Series B
convertible preferred stock at $2.00 per share.
In March 2010, the Registrant issued convertible promissory
notes in an aggregate principal amount of $5,000,000. These
promissory notes accrued interest at the rate of 10% per annum,
compounded annually. In April 2010, the outstanding principal
and interest due under these notes converted into
1,302,237 shares of the Registrants Series C
convertible preferred stock at $3.869 per share.
Option and
Common Stock Issuances
From May 1, 2008 through May 16, 2011, the Registrant
granted to its employees, consultants and other service
providers options to purchase an aggregate of
14,361,934 shares of common stock under its 2008 Stock
Incentive Plan at exercise prices ranging from $0.358 to $14.00
per share.
From May 1, 2008 through May 16, 2011, the Registrant
granted to certain of its executive officers, directors and
other accredited investors options to purchase an aggregate of
14,653,082 shares of common stock under its 2008 Stock
Incentive Plan, 2010 Executive Stock Incentive Plan and non-plan
option agreements at exercise prices ranging from $0.358 to
$5.12 per share.
From May 1, 2008 through May 16, 2011, the Registrant
issued and sold to its employees, consultants and other service
providers an aggregate of 3,418,211 shares of its common
stock upon the exercise of options under its 2006 Stock Option
Plan and its 2008 Stock Incentive Plan at exercise prices
ranging from $0.002 to $0.65 per share, for an aggregate
exercise price of $730,826.
From May 1, 2008 through May 16, 2011, the Registrant
issued and sold to certain of its executive officers, directors
and other accredited investors aggregate of 591,481 shares
of common stock upon the exercise of options under its 2008
Stock Incentive Plan and under non-plan option agreements at
exercise prices ranging from $0.358 to $0.65 per share, for an
aggregate exercise price of $287,221.
In February 2011, the Registrant issued and sold to each of Dana
L. Evan and H. Raymond Bingham, members of its board of
directors, 30,000 shares of its common stock at a price per
share of $5.12, in each case for an aggregate purchase price of
$153,600.
None of the foregoing transactions involved any underwriters,
underwriting discounts or commissions, or any public offering.
The Registrant believes the offers, sales and issuances of the
securities to accredited investors were exempt from registration
under the Securities Act by virtue of Rule 506 of
Regulation D promulgated thereunder
and/or
Section 4(2) of the Securities Act because the issuance of
securities to the recipients did not involve a public offering.
The Registrant believes the offers, sales and issuances of the
securities to certain of its executive officers, directors and
other accredited investors were exempt from registration under
the Securities Act by virtue of Section 4(2) of the
Securities Act because the issuance of securities to the
recipients did not involve a public offering or in reliance on
Rule 701 because the transactions were pursuant to
compensatory benefit plans or contracts relating to compensation
as provided under such rule. The Registrant believes the offers,
sales and issuances of the securities to its employees,
consultants and other service providers were exempt from
registration in reliance on Rule 701 because the
transactions were pursuant to compensatory benefit plans or
contracts relating to compensation as provided under such rule.
The recipients of securities under compensatory benefit plans
and contracts relating to compensation were its employees,
directors or bona fide consultants and received the securities
as compensation for services. Appropriate legends have been
affixed to the securities issued in these transactions. Each of
the recipients of securities in these transactions had adequate
access, through employment, business or other relationships, to
information about the Registrant. When the Registrant has relied
on Rule 506 of Regulation D promulgated under the
Securities Act, the investors in unregistered securities have
II-3
been accredited investors. When we have relied on
Section 4(2) of the Securities Act, we have received
affirmative representations from the purchasers of unregistered
securities regarding these purchasers financial
sophistication.
|
|
ITEM 16.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
|
(a) Exhibits. The following exhibits are
filed herewith or incorporated herein by reference:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1#
|
|
Form of Underwriting Agreement.
|
|
3
|
.1#
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon the completion of this offering.
|
|
3
|
.2#
|
|
Form of Amended and Restated Bylaws of the Registrant, to be in
effect upon the completion of this offering.
|
|
4
|
.1#
|
|
Specimen common stock certificate of the Registrant.
|
|
4
|
.2#
|
|
Second Amended and Restated Investors Rights Agreement,
dated as of April 7, 2010 between Registrant and certain holders
of the Registrants capital stock named therein.
|
|
4
|
.3#
|
|
Warrant to Purchase Stock issued by the Registrant to Silicon
Valley Bank, dated September 10, 2008.
|
|
5
|
.1#
|
|
Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
|
|
10
|
.1A#
|
|
Form of Indemnification Agreement by and between the Registrant
and certain of its directors and officers.
|
|
10
|
.1B#
|
|
Form of Indemnification Agreement by and between the Registrant
and certain of its directors affiliated with investment funds
and such investment funds.
|
|
10
|
.2#
|
|
2006 Stock Option Plan and Form of Stock Option Agreement under
2006 Stock Option Plan.
|
|
10
|
.3#
|
|
2008 Stock Incentive Plan and Form of Stock Option Agreement
under 2008 Stock Incentive Plan.
|
|
10
|
.4#
|
|
2010 Executive Stock Incentive Plan and Form of Stock Option
Agreement under 2010 Executive Stock Incentive Plan.
|
|
10
|
.5#
|
|
2011 Equity Incentive Plan and Related Forms.
|
|
10
|
.6#
|
|
2011 Employee Stock Purchase Plan and Related Forms.
|
|
10
|
.7#
|
|
Form of Non-Plan Stock Option Agreement between the Registrant
and certain of its officers.
|
|
10
|
.8#
|
|
Second Amended and Restated Employment Agreement between the
Registrant, David Flynn and Sandusky Investments, Ltd., dated as
of April 7, 2010.
|
|
10
|
.9#
|
|
Amended and Restated Employment Agreement between the
Registrant, Rick White and West Coast VC, LLC, dated as of
December 31, 2008.
|
|
10
|
.9A#
|
|
Amendment Number One to Amended and Restated Employment
Agreement between the Registrant, Rick White and West Coast VC,
LLC, dated as of March 7, 2011.
|
|
10
|
.10#
|
|
Form of Involuntary Termination Severance Agreement between the
Registrant and certain of its officers.
|
|
10
|
.10A#
|
|
Involuntary Termination Severance Agreement between the
Registrant and Dennis P. Wolf, dated as of August 11,
2010.
|
|
10
|
.11#
|
|
Transition Agreement and Release between the Registrant and
David R. Bradford, dated as of September 21, 2010.
|
|
10
|
.12#
|
|
Lease Agreement between the Registrant and NOP Cottonwood 2825,
LLC, dated May 28, 2010 (Building 10).
|
|
10
|
.13#
|
|
Lease Agreement between the Registrant and NOP Cottonwood 2855,
LLC, dated May 28, 2010 (Building 11).
|
|
10
|
.14#
|
|
Office Lease Agreement between the Registrant and Bixby
Technology Center, LLC, dated May 29, 2009.
|
II-4
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.15#
|
|
Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank, dated September 13,
2010.
|
|
10
|
.16#
|
|
Offer Letter between the Registrant and Dennis Wolf, dated
November 4, 2009.
|
|
10
|
.17#
|
|
Offer Letter between the Registrant and Jim Dawson, dated April
1, 2008.
|
|
10
|
.18#
|
|
Offer Letter between the Registrant and Lance Smith, dated April
29, 2008 as supplemented by an Offer Letter dated December 26,
2008.
|
|
10
|
.19#
|
|
Executive Incentive Compensation Plan, adopted by the Registrant
on May 16, 2011.
|
|
21
|
.1#
|
|
List of subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
|
|
23
|
.2#
|
|
Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
|
|
24
|
.1#
|
|
Power of Attorney (see page II-6 to the original filing of
this registration statement on Form S-1).
|
(b) Financial Statement Schedules.
All financial statement schedules are omitted because the
information called for is not required or is shown either in the
consolidated financial statements or in the notes thereto.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to registration
statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in Salt Lake City, Utah, on the 7th day of June 2011.
FUSION-IO, INC.
David A. Flynn
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to registration statement on
Form S-1
has been signed by the following persons in the capacities and
on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ David
A. Flynn
David
A. Flynn
|
|
Chief Executive Officer, President and Director (Principal
Executive Officer)
|
|
June 7, 2011
|
|
|
|
|
|
|
|
/s/ Dennis
P. Wolf
Dennis
P. Wolf
|
|
Chief Financial Officer and Executive Vice President (Principal
Accounting and Financial Officer)
|
|
June 7, 2011
|
*
Forest
Baskett, Ph.D.
|
|
Director
|
|
June 7, 2011
|
*
H.
Raymond Bingham
|
|
Director
|
|
June 7, 2011
|
*
Dana
L. Evan
|
|
Director
|
|
June 7, 2011
|
*
Scott
D. Sandell
|
|
Director
|
|
June 7, 2011
|
*
Christopher
J. Schaepe
|
|
Director
|
|
June 7, 2011
|
*
Rick
C. White
|
|
Director
|
|
June 7, 2011
|
|
|
|
|
|
|
|
* By:
|
|
/s/ Dennis
P. Wolf
Dennis
P. Wolf
Attorney-in-fact
|
|
|
|
|
II-6
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1#
|
|
Form of Underwriting Agreement.
|
|
3
|
.1#
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be in effect upon the completion of this offering.
|
|
3
|
.2#
|
|
Form of Amended and Restated Bylaws of the Registrant, to be in
effect upon the completion of this offering.
|
|
4
|
.1#
|
|
Specimen common stock certificate of the Registrant.
|
|
4
|
.2#
|
|
Second Amended and Restated Investors Rights Agreement,
dated as of April 7, 2010 between Registrant and certain
holders of the Registrants capital stock named therein.
|
|
4
|
.3#
|
|
Warrant to Purchase Stock issued by the Registrant to Silicon
Valley Bank, dated September 10, 2008.
|
|
5
|
.1#
|
|
Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation.
|
|
10
|
.1A#
|
|
Form of Indemnification Agreement by and between the Registrant
and certain of its directors and officers.
|
|
10
|
.1B#
|
|
Form of Indemnification Agreement by and between the Registrant
and certain of its directors affiliated with investment funds
and such investment funds.
|
|
10
|
.2#
|
|
2006 Stock Option Plan and Form of Stock Option Agreement under
2006 Stock Option Plan.
|
|
10
|
.3#
|
|
2008 Stock Incentive Plan and Form of Stock Option Agreement
under 2008 Stock Incentive Plan.
|
|
10
|
.4#
|
|
2010 Executive Stock Incentive Plan and Related Forms.
|
|
10
|
.5#
|
|
2011 Equity Incentive Plan and Related Forms.
|
|
10
|
.6#
|
|
2011 Employee Stock Purchase Plan and Form of Purchase Agreement
under 2011 Employee Stock Purchase Plan.
|
|
10
|
.7#
|
|
Form of Non-Plan Stock Option Agreement between the Registrant
and certain of its officers.
|
|
10
|
.8#
|
|
Second Amended and Restated Employment Agreement between the
Registrant, David Flynn and Sandusky Investments, Ltd., dated as
of April 7, 2010.
|
|
10
|
.9#
|
|
Amended and Restated Employment Agreement between the
Registrant, Rick White and West Coast VC, LLC, dated as of
December 31, 2008.
|
|
10
|
.9A#
|
|
Amendment Number One to Amended and Restated Employment
Agreement between the Registrant, Rick White and West Coast VC,
LLC, dated as of March 7, 2011.
|
|
10
|
.10#
|
|
Form of Involuntary Termination Severance Agreement between the
Registrant and certain of its officers.
|
|
10
|
.10A#
|
|
Involuntary Termination Severance Agreement between the
Registrant and Dennis P. Wolf, dated as of August 11,
2010.
|
|
10
|
.11#
|
|
Transition Agreement and Release between the Registrant and
David R. Bradford, dated as of September 21, 2010.
|
|
10
|
.12#
|
|
Lease Agreement between the Registrant and NOP Cottonwood 2825,
LLC, dated May 28, 2010 (Building 10).
|
|
10
|
.13#
|
|
Lease Agreement between the Registrant and NOP Cottonwood 2855,
LLC, dated May 28, 2010 (Building 11).
|
|
10
|
.14#
|
|
Office Lease Agreement between the Registrant and Bixby
Technology Center, LLC, dated May 29, 2009.
|
|
10
|
.15#
|
|
Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank, dated September 13,
2010.
|
|
10
|
.16#
|
|
Offer Letter between the Registrant and Dennis Wolf, dated
November 4, 2009.
|
|
10
|
.17#
|
|
Offer Letter between the Registrant and Jim Dawson, dated April
1, 2008.
|
|
10
|
.18#
|
|
Offer Letter between the Registrant and Lance Smith, dated April
29, 2008 as supplemented by an Offer Letter dated December 26,
2008.
|
|
10
|
.19#
|
|
Executive Incentive Compensation Plan, adopted by the Registrant
on May 16, 2011.
|
|
21
|
.1#
|
|
List of subsidiaries of the Registrant.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP, Independent Registered
Public Accounting Firm.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
23
|
.2#
|
|
Consent of Wilson Sonsini Goodrich & Rosati,
Professional Corporation (included in Exhibit 5.1).
|
|
24
|
.1#
|
|
Power of Attorney (see
page II-6
to the original filing of this registration statement on
Form S-1)
|