S-1/A 1 f58285a4sv1za.htm S-1/A sv1za
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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)
 
 
 
 
         
Delaware   3572   20-4232255
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
 
 
 
2855 E. Cottonwood Parkway, Suite 100
Salt Lake City, Utah 84121
801.424.5500
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
 
 
 
 
David A. Flynn
Chief Executive Officer and President
Fusion-io, Inc.
2855 E. Cottonwood Parkway, Suite 100
Salt Lake City, Utah 84121
801.424.5500
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
         
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
  Shawn J. Lindquist
Chief Legal Officer
Fusion-io, Inc.
2855 E. Cottonwood Parkway, Suite 100
Salt Lake City, Utah 84121
801.424.5500
  Gordon K. Davidson
Jeffrey R. Vetter
James D. Evans
Fenwick & West LLP
801 California Street
Mountain View, California 94041
650.988.8500
 
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):
 
     
Large accelerated filer o
  Accelerated filer o
Non-accelerated filer þ (Do not check if a smaller reporting company)
  Smaller reporting company o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed
    Proposed
     
            Maximum
    Maximum
     
Title of Each Class of
    Amount to be
    Offering Price
    Aggregate
    Amount of
Securities to be Registered     Registered (1)     Per Share     Offering Price(2)     Registration Fee(3)
Common Stock, $0.0002 par value per share
    14,145,000     $18.00     $254,610,000     $29,560.23
                         
 
(1)  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.
 
(2)  Estimated solely for the purpose of calculating the registration fee.
 
(3)  The Registrant previously paid $24,633.52 of the registration fee with the prior filings of this Registration Statement.
 
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.
 


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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.
 
Subject To Completion. Dated June 7, 2011.
12,300,000 Shares
 
(FUSION-IO LOGO)
 
Common Stock
 
 
 
 
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.
 
 
 
 
 
                 
    Per Share     Total  
 
Initial public offering price
  $       $             
Underwriting discounts and commissions
  $       $    
Proceeds, before expenses, to Fusion-io
  $       $    
Proceeds, before expenses, to the selling stockholders
  $       $  
 
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.
 
             
Goldman, Sachs & Co.
  Morgan Stanley   J.P. Morgan   Credit Suisse
 
 
 
 
Prospectus dated          , 2011


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(FULL PAGE GRAPHIC)
SAN LEVEL PERFORMANCE FORM A SINGLE DATA DECENTRALIZATION

 


 

 
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    F-1  
 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 dealer’s 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.


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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”, “Management’s 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 today’s 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


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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:
 
  •  Manage Growth in Quantity of Data — By transforming commodity non-volatile memory into a high capacity storage memory tier in the server and leveraging our automated data-tiering software, we enable enterprises to more efficiently manage the exponential growth in data;
 
  •  Manage Increasing Frequency of Access to Data — By providing memory-like performance and allowing multiple processor cores to access active data simultaneously, our platform allows enterprises to handle hundreds of thousands of data requests per second; and
 
  •  Improve Response Times, Relevancy, and Value from Data — By allowing enterprises to rapidly access more data, perform deeper analytics and produce more relevant responses, our platform helps enterprises extract greater value from their information assets.
 
Our data decentralization solution also enables enterprises to:
 
  •  Reduce Total Cost of Ownership and Environmental Impact — Our platform enables customers to reduce their datacenter infrastructure footprint, administrative expenses and energy consumption related to power and cooling;
 
  •  Unlock the Potential of Virtualization — Our platform enables more virtual servers and desktops to be deployed per physical server without experiencing the performance issues caused by data supply constraints; and
 
  •  Enhance the Performance of Clouds and SaaS — Our platform allows cloud service providers and software-as-a-service vendors to significantly enhance the performance of the services they offer and improve their underlying cost structures.
 
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:
 
  •  leverage our first-to-market and leading position in data decentralization;
 
  •  continue our focus on platform solutions;
 
  •  extend our platform differentiation through software innovation;
 
  •  develop and maintain direct customer engagement;
 
  •  leverage and expand our server OEM customer relationships; and
 
  •  pursue international growth opportunities.
 
 
 (1) See note (1) set forth in the section entitled “Market, Industry and Other Data”.


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


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THE OFFERING
 
Common stock offered by us 10,755,607 shares
 
Common stock offered by the selling stockholders
1,544,393 shares
 
Common stock to be outstanding after this offering
77,809,084 shares
 
Option to purchase additional shares
1,845,000 shares
 
Use of proceeds 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”.
 
Directed share program 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”.
 
NYSE symbol “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:
 
  •  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; 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 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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Except as otherwise indicated, all information in this prospectus assumes:
 
  •  the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 52,489,072 shares of common stock, effective immediately prior to the completion of this offering;
 
  •  the filing of our amended and restated certificate of incorporation in Delaware upon the completion of this offering;
 
  •  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
 
  •  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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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements, and the notes to consolidated financial statements, which are included in this prospectus.
                                         
          Nine Months
 
    Year Ended June 30,     Ended March 31,  
    2008     2009     2010     2010     2011  
    (In thousands, except per share data)  
Consolidated Statements of Operations Data:
                                       
Revenue
  $ 648     $ 10,150     $ 36,216     $ 25,290     $ 125,515  
Cost of revenue(1)
    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(1)
    2,856       13,476       23,386       14,637       35,176  
Research and development(1)
    5,603       11,707       15,977       11,669       18,272  
General and administrative(1)
    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), net
    (75 )     (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  
                                         


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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.


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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;


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  •  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.


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Some of our large customers require more favorable terms and conditions from their vendors and may request price concessions. As we seek to sell more products to these customers, we may be required to agree to terms and conditions that may have an adverse effect on our business or ability to recognize revenue.
 
Some of our large customers have significant purchasing power and, accordingly, have requested and received more favorable terms and conditions, including lower prices, than we typically provide. As we seek to sell more products to this class of customer, we may be required to agree to these terms and conditions, which may include terms that affect the timing of our revenue recognition or may reduce our gross margins and have an adverse effect on our business and operating results.
 
The future growth of our sales to OEMs is dependent on OEM customers incorporating our products into their server and data storage systems and the OEM’s sales efforts. Any failure to grow our OEM sales and maintain relationships with OEMs could adversely affect our business, operating results and financial condition.
 
Sales of our products to OEMs represent a significant portion of our revenue and we anticipate that our OEM sales will constitute a substantial portion of our future sales. In some cases, our products must be designed into the OEM’s products. If that fails to occur for a given product line of an OEM, we would likely be unable to sell our products to that OEM for such product line during the life cycle of that product. Even if an OEM integrates one or more of our products into its server, data storage systems or appliance solutions, we cannot be assured that its product will be commercially successful, and as a result, our sales volumes may be less than anticipated. Our OEM customers are typically not obligated to purchase our products and can choose at any time to stop using our products, if their own systems are not commercially successful or if they decide to pursue other strategies or for any other reason, including the incorporation or development of competing products by these OEMs. Moreover, our OEM customers may not devote sufficient attention and resources to selling our products. We may not be able to develop or maintain relationships with OEMs for a number of reasons, including because of the OEM’s relationships with our competitors or prospective competitors or other incentives that may not motivate their internal sales forces to promote our products. Even if we are successful in selling through OEMs, we expect that sales through OEMs will be a lower gross margin business than our direct sales business. If we are unable to grow our OEM sales, if our OEM customers’ systems incorporating our products are not commercially successful, if our products are not designed into a given OEM product cycle or if our OEM customers significantly reduce, cancel or delay their orders with us, our revenue would suffer and our business, operating results and financial condition could be materially adversely affected.
 
Ineffective management of our inventory levels could adversely affect our operating results.
 
If we are unable to properly forecast, monitor, control and manage our inventory and maintain appropriate inventory levels and mix of products to support our customers’ needs, we may incur increased and unexpected costs associated with our inventory. Sales of our products are generally made through individual purchase orders and some of our customers place large orders with short lead times, which makes it difficult to predict demand for our products and the level of inventory that we need to maintain to satisfy customer demand. If we build our inventory in anticipation of future demand that does not materialize, or if a customer cancels or postpones outstanding orders, we could experience an unanticipated increase in levels of our finished products. For 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.


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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.


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We also sell to OEMs that incorporate our solutions into their products, which can require an extended evaluation and testing process before our product is approved for inclusion in one of their product lines. We also may be required to customize our product to interoperate with an OEM’s product, which could further lengthen the sales cycle for OEM customers. The length of our sales cycle for an OEM makes us susceptible to the risk of delays or termination of orders if end-users decide to delay or withdraw funding for datacenter projects, which could occur for various reasons, including global economic cycles and capital market fluctuations.
 
As a result of these lengthy and uncertain sales cycles of our products, it is difficult for us to predict when customers may purchase and accept products from us and as a result, our operating results may vary significantly and may be adversely affected.
 
We compete with large storage and software providers and expect competition to intensify in the future from established competitors and new market entrants.
 
The market for data storage products is highly competitive, and we expect competition to intensify in the future. Our products compete with various traditional datacenter architectures, including high performance server and storage approaches. These may include the traditional data storage providers, including storage array vendors such as EMC Corporation, Hitachi Data Systems and NetApp, Inc., which typically sell centralized storage products as well as high performance storage approaches utilizing solid state drives, or SSDs, as well as vertically integrated appliance vendors such as Oracle. In addition, we may also compete with enterprise solid state disk vendors such as Huawei Technologies, Co., Intel Corp., LSI Corporation, 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:
 
  •  the failure of our storage memory products to achieve broad market acceptance;
 
  •  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;
 
  •  the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, these products; and
 
  •  our inability to release enhanced versions of our products, including any related software, on a timely basis.
 
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


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liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, would be costly and might divert management’s attention and adversely affect the market’s perception of us and our products. In addition, our business liability insurance coverage could prove inadequate with respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us and our business could be adversely impacted.
 
Our products must interoperate with operating systems, software applications and hardware that is developed by others and if we are unable to devote the necessary resources to ensure that our products interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience a weakening demand for our products.
 
Our products must interoperate with our customers’ existing infrastructure, specifically their networks, servers, software and operating systems, which may be manufactured by a wide variety of vendors and OEMs. When new or updated versions of these software operating systems or applications are introduced, we must sometimes develop updated versions of our software so that our products will interoperate properly. We may not accomplish these development efforts quickly, cost-effectively or at all. These development efforts require capital investment and the devotion of engineering resources. If we fail to maintain compatibility with these applications, our customers may not be able to adequately utilize the data stored on our products, and we may, among other consequences, fail to increase, or we may lose, market share and experience a weakening in demand for our products, which would adversely affect our business, operating results and financial condition.
 
Our products must conform to industry standards in order to be accepted by customers in our markets.
 
Generally, our products comprise only a part of a datacenter. The servers, network, software and other components and systems of a datacenter must comply with established industry standards in order to interoperate and function efficiently together. We depend on companies that provide other components of the servers and systems in a datacenter to support prevailing industry standards. Often, these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers. If larger companies do not support the same industry standards that we do, or if competing standards emerge, market acceptance of our products could be adversely affected, which would harm our business, operating results and financial condition.
 
We rely on our key technical, sales and management personnel to grow our business, and the loss of one or more key employees or the inability to attract and retain qualified personnel could harm our business.
 
Our success and future growth depends to a significant degree on the skills and continued services of our key technical, sales and management personnel. In particular, we are highly dependent on the services of our Chief Executive Officer, David Flynn. All of our employees work for us on an at-will basis, and we could experience difficulty in retaining members of our senior management team. We do not have “key person” life insurance policies that cover any of our officers or other key employees, other than our Chief Executive Officer. The loss of the services of any of our key employees could disrupt our operations, delay the development and introduction of our products, and negatively impact our business, prospects and operating results.
 
We plan to hire additional personnel in all areas of our business, particularly for sales and research and development. Competition for these types of personnel is intense. We cannot assure you that we will be able to successfully attract or retain qualified personnel. Our inability to retain and attract the necessary personnel could adversely affect our business, operating results and financial condition.


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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:
 
  •  the inability to obtain an adequate supply of key components, including non-volatile memory and reprogrammable controllers;
 
  •  price volatility for the components of our products;
 
  •  failure of a supplier to meet our quality, yield or production requirements;
 
  •  failure of a key supplier to remain in business or adjust to market conditions; and
 
  •  consolidation among suppliers, resulting in some suppliers exiting the industry or discontinuing the manufacture of components.
 
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 Japan’s 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


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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 supplier’s discontinuation of a particular type of component, such as a specific size of NAND Flash memory, may require us to make significant “last time” purchases of component inventory that is being discontinued by the vendor to ensure supply continuity until the transition to products based on next generation components or until we are able to secure an alternative supply. To the extent 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 entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
 
For fiscal 2008 and 2009, our independent registered public accounting firm noted a material weakness related to our financial statement close process that resulted in the recording of a substantial number of audit adjustments over the two fiscal years ended June 30, 2009. This was primarily the result of the early stage of our business and the lack of a sufficient number of accounting personnel, including personnel with technical accounting and financial reporting experience.
 
For fiscal 2010, our independent registered public accounting firm noted a material weakness related to our financial statement close process that resulted in audit adjustments. This was a result of the lack of a sufficient number of accounting personnel and a lack of formal accounting policies and procedures related to identification of unique contract terms that affected revenue recognition, proper identification and accounting for inventory in transit and evaluation units and the recording of certain expenses in the proper period. We also restated our consolidated financial statements for fiscal 2010 to reflect a deemed dividend associated with a repurchase of a portion of our convertible preferred stock.
 
Since July 1, 2010, we have taken and continue to take additional steps to upgrade our finance and accounting function, including the hiring of additional 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 Entorian’s 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 party’s intellectual property rights, if any, could harm our relationships with our customers, may deter future customers from purchasing our products and could expose us to costly litigation and settlement expenses. Even if we are not a party to any litigation between a customer and a third party relating to infringement by our products, an adverse outcome in any such litigation could make it more difficult for us to defend our products against intellectual property infringement claims in any subsequent litigation in which we are a named party. Any of these results could harm our brand and operating results.
 
Any intellectual property rights claim against us or our customers, suppliers and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle, 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


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conditions or restrictions on our ability to market our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products for certain uses, to license portions of our source code at no charge, to re-engineer our technology or to discontinue offering some of our software in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.
 
We might require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.
 
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products or enhance our existing products, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing in the future could involve additional restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects could be adversely affected.
 
We may expand through acquisitions of, or investments in, other companies, each of which may divert our management’s attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.
 
Our business strategy may, from time to time, include acquiring complementary products, technologies or businesses. We also may enter into relationships with other businesses in order to expand our product offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulation, which are beyond our control. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close.
 
An acquisition or investment may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel of the acquired business choose not to work for us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for development of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or that we would not be exposed to unknown liabilities. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures, and become subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could adversely affect our business, operating results and financial condition.


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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.


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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 management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results and financial condition.
 
Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock
 
We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.
 
Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock will be determined by negotiations with the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business.
 
The price of our common stock may be volatile and the value of your investment could decline.
 
Technology stocks have historically experienced high levels of volatility. The trading price of our common stock following this offering may fluctuate substantially. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
 
  •  price and volume fluctuations in the overall stock market from time to time;
 
  •  significant volatility in the market price and trading volume of technology companies in general, and of companies in our industry;
 
  •  actual or anticipated changes in our results of operations or fluctuations in our operating results;
 
  •  whether our operating results meet the expectations of securities analysts or investors;
 
  •  actual or anticipated changes in the expectations of investors or securities analysts;


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  •  actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;
 
  •  litigation involving us, our industry or both;
 
  •  regulatory developments in the United States, foreign countries or both;
 
  •  general economic conditions and trends;
 
  •  major catastrophic events;
 
  •  sales of large blocks of our stock; or
 
  •  departures of key personnel.
 
In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, operating results and financial condition.
 
Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.
 
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the contractual lock-up and other legal restrictions on resale lapse, the trading price of our common stock could decline. After this offering, approximately 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


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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


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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:
 
  •  establish a classified board of directors so that not all members of our board of directors are elected at one time;
 
  •  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;
 
  •  prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
 
  •  prohibit stockholders from calling a special meeting of our stockholders;
 
  •  provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and
 
  •  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.
 
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.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus, including the sections entitled “Prospectus Summary”, “Risk Factors”, “Use of Proceeds”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and “Compensation Discussion and Analysis” contains forward-looking statements. The words “believe”, “may”, “will”, “potentially”, “estimate”, “continue”, “anticipate”, “intend”, “could”, “would”, “project”, “plan” and “expect”, and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.
 
These forward-looking statements include, but are not limited to, statements concerning the following: our ability to achieve or maintain profitability; our business plan and growth management; our operating expenses; our business expansion, including expansion of our sales and research and development capabilities; certain critical accounting policies and estimates; our ability to remediate previously identified material weaknesses; our competitors’ and our ability to compete effectively in the market; the ability of our platform to address industry problems; the data supply problem; our ability to innovate new products and bring them to market in a timely manner; our ability to expand internationally; the impact of quarterly fluctuations of revenue and operating results; the compliance costs of being a public company; our expectations concerning relationships with third parties, including channel partners, key customers and OEMs; levels and sources of revenue; our estimates regarding market size, market position, and market opportunity; levels of capital expenditures; future capital requirements and availability to fund operations and growth; the adequacy of our facilities; future headcount needs; future acquisitions of or investments in complementary companies, products, services or technologies; the adequacy of our intellectual property; 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 OEM’s 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.


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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:
 
(1)  See table below:
 
             
High Performance
       
Hardware Market
 
2011 Market Size
 
Source Data
    (billions)    
 
Storage
    $18.0     IDC, Worldwide Enterprise Storage Systems 2010–2014 Forecast Update, IDC #226223, December 2010.
Memory-Rich Servers
    $23.7     IDC, Server Workloads 2010, July 2010.
Networking
    $10.4     Fusion-io estimate of high performance networking as provided in note 9 below.
Total
    $52.1     Fusion-io estimate (based on the sum of the above data).
 
(2)  IDC, Worldwide Enterprise Server 2011 Top 10 Predictions An Outlook, IDC #226698, February 2011.
 
(3)  IMS Research, Internet Connected Devices About to Pass the 5 Billion Milestone, August 19, 2010.
 
(4)  TABB Group, Long Distance Latency: Straightest and Fastest Equals Profit, Kevin McPartland, June 21, 2010.
 
(5)  Gartner, Inc., Market Databook, December 2010 Update, K. Newbury et al, January 4, 2011.
 
(6)  U.S. Department of Energy, Data Center Emergency Trends, May 30, 2009.
 
(7)  IDC, Worldwide Server Energy Expense 2009–2013 Forecast, IDC #221346, December 2009.
 
(8)  IDC, Server Workloads 2010, July 2010.
 
(9)  IDC, Worldwide Hard Disk Drive 2010–2014 Forecast Update, IDC #226082, December 2010.


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(10)  IDC, Worldwide Enterprise Storage Systems 2010–2014 Forecast Update, IDC #226223, December 2010.
 
(11)  IDC, Worldwide Ethernet Switch 2010–2014 Forecast, IDC #221612, January 2010.
 
(12)  See table below:
 
             
FC Switch Market
 
2011
 
Source Data
 
Revenue (millions)
    $1,810     IDC, Worldwide Storage Networking Infrastructure 2010–2014 Forecast: Converged IT Infrastructure Changes the Game and Ushers in 10GbE Solutions, IDC #225899, December 2010.
Ports (millions)
    7.3     IDC, Worldwide Storage Networking Infrastructure 2010–2014 Forecast: Converged IT Infrastructure Changes the Game and Ushers in 10GbE Solutions, IDC #225899, December 2010.
Cost/Port
    $248     Fusion-io estimate (based on the quotient of the above data)
 
(13)  See table below:
 
             
Market
 
2011 Market Size
 
Source Data
    (millions)    
 
Datacenter Layer 4-7 switch
    $1,275     IDC, Worldwide Datacenter Network 2010–2015 Forecast and Analysis, IDC #226224, December 2010.
WAN Application Delivery
    $428     IDC, Worldwide Datacenter Network 2010–2015 Forecast and Analysis, IDC #226224, December 2010.
Fibre Channel Switch
    $1,765     IDC, Worldwide Datacenter Network 2010–2015 Forecast and Analysis, IDC #226224, December 2010.
Infiniband Switch
    $147     IDC, Worldwide Datacenter Network 2010–2015 Forecast and Analysis, IDC #226224, December 2010.
10GbE Switch
    $5,389     IDC, Worldwide Ethernet Switch 2010–2014 Forecast, IDC#221612, January 2010.
HBA and CNA Market
    $1,360     IDC, Worldwide Storage Networking Infrastructure 2010–2014 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.


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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.


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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.


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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the related notes that are included elsewhere in this prospectus.
 
                         
    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  
                         


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(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.


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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


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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.


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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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the notes to consolidated financial statements, which are included in this prospectus.
 
                                                         
    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  


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(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 )


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MANAGEMENT’S 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 OEM’s products. If that fails to occur for a given product line of an OEM, we would likely be unable to sell our products to that OEM during the life cycle of that product, which would adversely affect our revenue. We expect that as we expand our global presence and business overseas that we will increasingly depend on our OEM relationships in such markets.


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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,


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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


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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%  


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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 %


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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


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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%  


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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.


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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  
                                                                 
 


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    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

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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


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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.


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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):
 
                                         
          Payments Due by Period  
          Less Than
    1 to 3
    3 to 5
    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              
Purchase obligations(2)
    8,737       8,737                    
                                         
Total
  $ 48,863     $ 10,366     $ 8,014     $ 7,196     $ 23,287  
                                         


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(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 party’s 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


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material misstatement of the entity’s 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.


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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:
 
  •  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.
 
  •  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.
 
  •  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.
 
  •  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 product’s 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  


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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.
 
  •  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


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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 award’s 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 option’s 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.


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  •  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:
 
                                 
            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 management’s future


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expectations combined with management’s 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:
 
  •  our stage of development;
 
  •  our future financial projections and changes to those projections due to large customer orders and timing of shipments for those orders;
 
  •  the risks associated with achieving our financial projections based on limited history of selling our products and recognizing revenue;
 
  •  the introduction of new products;
 
  •  our operating performance and financial position including the value of our assets;
 
  •  the market performance of comparable publicly traded companies;
 
  •  rights, preferences and privileges of our convertible preferred stock relative to the common stock;
 
  •  the prices of our convertible preferred stock sold to outside investors in arms-length transactions; and
 
  •  individual sales of common stock.
 
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 company’s 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.


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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:
 
                 
   
Sale/Merger
 
IPO
 
May 21, 2010
    62.5 %     37.5 %
October 8, 2010
    50.0 %     50.0 %
December 31, 2010
    30.0 %     70.0 %
April 5, 2011
    10.0 %     90.0 %
 
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.


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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


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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


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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 management’s 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.


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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.


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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:
 
  •  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)
 
  •  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)
 
 
 (2)-(3) See notes (2) and (3) in the section entitled “Market, Industry and Other Data”.


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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)
 
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:
 
  •  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)
 
  •  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.
 
  •  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)
 
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 today’s 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”.


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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:
 
  •  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)
 
  •  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)
 
  •  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)
 
  •  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.
 
  •  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
 
 
 (9)-(14) See notes (9) through (14), respectively, in the section entitled “Market, Industry and Other Data”.


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  engineering and consulting resources, requires significant investments of time, and can compromise application reliability and time-to-market.
 
  •  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.
 
  •  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.
 
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:
 
  •  hardware with sufficient capacity and rate of access, in a form factor that can be integrated within industry-standard servers;
 
  •  software that virtualizes storage resources and governs the flow and management of data between storage and the server;
 
  •  software that enables this platform to be utilized within both new and existing datacenter architectures; and
 
  •  software that centrally configures, manages and monitors this new distributed infrastructure.
 
This platform must also meet enterprise reliability, availability and serviceability requirements.
 
 
(15)  See note (1) in the section entitled “Market, Industry and Other Data”.


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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.
 
(GRAPHIC)


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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:
 
  •  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.
 
  •  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 server’s high-speed system bus allowing data to be accessed with memory-like performance. Further, our VSL software integrates within a server’s operating system and allows multiple processor cores to simultaneously access the active data in our ioMemory.
 
  •  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.
 
Further, our data decentralization platform enables enterprises to transform legacy architectures into next generation datacenters that can:
 
  •  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.
 
  •  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.
 
  •  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.
 
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:
 
  •  increased query processing throughput by 9 times;
 
  •  improved database replication by 30 times, ensuring that responses included the most up-to-date data; and
 
  •  reduced server footprint, power costs and datacenter overhead by 75%.
 
IT Security Service Provider
 
A leading and fast-growing security service provider’s 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:
 
  •  improved application performance between 5 and 10 times;
 
  •  reduced server footprint by more than 50%; and
 
  •  lowered datacenter energy consumption by more than 40%.
 
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 company’s 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:
 
  •  increased database response time by more than 10 times;
 
  •  improved its customers’ access speeds by approximately 66%;
 
  •  achieved high reliability through just two servers; and
 
  •  realized immediate 100% return on investment through the cost savings by eliminating costly disk-based storage.
 
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 laboratory’s


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energy efficiency initiatives. The laboratory adopted our solution in the first half of 2009. By using our solution, the laboratory reported that it:
 
  •  significantly increased performance to 52 million data operations per second and 380 gigabytes per second aggregated bandwidth;
 
  •  utilized only 2 racks rather than the 54 racks needed by comparable hard disk-based solutions; and
 
  •  achieved the performance of over $300 million worth of alternative all Flash-based systems.
 
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:
 
  •  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.
 
  •  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.
 
  •  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.
 
  •  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.
 
  •  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.
 
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 server’s 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 server’s peripheral bus through the industry-standard PCIe interface, our products can be installed into a server’s 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.


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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 server’s 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:
 
                 
        NAND
       
Product
  ioMemory
  Type and
  VSL
   
Family   Modules   Capacity   Software   Performance
 
ioDrive
(ioDrive pic)
  1   SLC-160GB
SLC-320GB
MLC-320GB
MLC-640GB
  Yes   26uS latency, up to 790MB/sec and up to 145,000 IOPS
                 
                 
                 
ioDrive Duo
(ioDrive Duo pic)
  2   SLC-320GB
SLC-640GB
MLC-640GB
MLC-1.28TB
  Yes   26uS latency, up to 1.5GB/sec and up to 285,000 IOPS
                 
                 
                 
ioDrive Octal
(ioDrive Octal pic)
  8   MLC-5.12TB   Yes   30uS latency, up to 6GB/sec and up to 1,190,000 IOPS


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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 ioMemory’s 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
     
     
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.
  GRAPHIC HP’s StorageWorks IO
Accelerator
 
 
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.


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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 customer’s 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:
 
  •  hardware incorporating sufficient capacity and rate of access, in a form factor that can be integrated within industry-standard servers;
 
  •  software that virtualizes storage resources and governs the flow and management of data between storage and the server;
 
  •  software that enables this platform to be utilized within both new and existing datacenter architectures; and
 
  •  software that centrally configures, manages and monitors this new distributed infrastructure.
 
Other principal factors affecting our market include:
 
  •  application performance, including consistent low latency and high bandwidth;
 
  •  providing enterprise grade data endurance, reliability, retention and availability not inherent in NAND Flash memory;


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  •  ease of management;
 
  •  space efficiency;
 
  •  energy efficiency; and
 
  •  total cost of ownership.
 
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:
 
             
Name
 
Age
 
Position(s)
 
Executive Officers:
           
David A. Flynn
    42     Chief Executive Officer, President and Chairman
Dennis P. Wolf
    58     Chief Financial Officer and Executive Vice President
Neil A. Carson
    34     Chief Technology Officer and Executive Vice President
James L. Dawson
    49     Executive Vice President, Worldwide Sales
Shawn J. Lindquist
    41     Chief Legal Officer, Executive Vice President and Secretary
Lance L. Smith
    47     Chief Operating Officer and Executive Vice President
Rick C. White
    41     Chief Marketing Officer, Executive Vice President and Director
           
Key Employee:
           
Stephen G. Wozniak
    60     Chief Scientist
           
Other Directors:
           
Forest Baskett, Ph.D.(3)
    68     Director
H. Raymond Bingham(1)(2)
    65     Director
Dana L. Evan(1)(2)
    51     Director
Scott D. Sandell(2)(3)
    46     Lead Independent Director
Christopher J. Schaepe(1)(3)
    47     Director
 
(1) Member of our audit committee.
 
(2) Member of our compensation committee.
 
(3) 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 Children’s 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:
 
  •  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);
 
  •  holders of shares of our Series B convertible preferred stock, voting as a separate class, are entitled to elect one member (currently Mr. Schaepe);
 
  •  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).
 
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:
 
  •  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;
 
  •  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
 
  •  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.
 
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 director’s 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 company’s 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 company’s 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 company’s 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:
 
  •  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;
 
  •  evaluating the performance and independence of our independent registered public accounting firm;
 
  •  monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;
 
  •  reviewing the adequacy and effectiveness of our internal control policies and procedures and our disclosure controls and procedures;
 
  •  overseeing procedures for the treatment of complaints on accounting, internal accounting controls or audit matters;
 
  •  overseeing our internal auditors;
 
  •  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
 
  •  preparing the audit committee report that the SEC will require in our annual proxy statement.
 
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:
 
  •  reviewing and approving our Chief Executive Officer’s and other executive officers’ annual base salaries, equity compensation, annual incentive bonuses and severance, change in control and other compensation arrangements;
 
  •  overseeing our overall compensation philosophy, compensation plans and benefits programs; and
 
  •  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:
 
  •  assisting our board of directors in identifying prospective director nominees and recommending nominees for each annual meeting of stockholders to the board of directors;
 
  •  developing and recommending governance principles applicable to our board of directors;
 
  •  overseeing the evaluation of our board of directors and management;
 
  •  reviewing and monitoring compliance with our code of business conduct and ethics; and
 
  •  recommending potential members for each board committee to our board of directors.
 
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 director’s 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:
 
         
    Annual Cash Retainer  
 
Annual retainer
  $ 38,500  
Additional retainer for audit committee chair
  $ 20,500  
Additional retainer for audit committee member
  $ 10,000  
Additional retainer for compensation committee chair
  $ 15,500  
Additional retainer for compensation committee member
  $ 8,500  
Additional retainer for nominating and governance committee chair
  $ 9,250  
Additional retainer for nominating and governance committee member
  $ 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 director’s 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 director’s 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 Officer’s recommendations for all named executive officers, including the Chief Executive Officer. Additionally, the board of directors discussed the Chief Executive Officer’s 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 Compensia’s 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:
 
  •  base salary;
 
  •  incentive cash compensation;
 
  •  stock options; and
 
  •  change of control and severance arrangements.
 
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.
 
         
Name
 
FY 2010 Base Salary ($)
 
David A. Flynn
Chief Executive Officer and President
    240,000 (1)
Dennis P. Wolf
Chief Financial Officer and Executive Vice President
    220,000  
James L. Dawson
Executive Vice President of Worldwide Sales
    225,000  
Rick C. White
Chief Marketing Officer and Executive Vice President
    220,000  
Lance L. Smith
Chief Operating Officer and Executive Vice President
    220,000  
David R. Bradford
Former Chief Executive Officer
    240,000  
 
(1) Mr. Flynn’s 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. Bradford’s 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 officer’s 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.