S-1 1 d366503ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 26, 2013.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

VIOLIN MEMORY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3572   20-3940944
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

 

 

685 Clyde Ave.

Mountain View, California 94043

(650) 396-1500

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

 

 

Donald G. Basile

Chief Executive Officer

685 Clyde Ave.

Mountain View, California 94043

(650) 396-1500

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

 

 

Copies to:

 

Jorge del Calvo, Esq.
James J. Masetti, Esq.
Heidi E. Mayon, Esq.
Pillsbury Winthrop Shaw Pittman LLP
2550 Hanover Street
Palo Alto, California 94304
  Alan F. Denenberg, Esq.
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, California 94025

 

 

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

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

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

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of
securities to be registered
  Proposed
maximum
aggregate
offering price(1)(2)
  Amount of
registration fee

Common Stock, 0.0001 par value per share

 

$172,500,000

  $23,529

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes shares that the underwriters have the option to purchase, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment 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. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED AUGUST 26, 2013

Preliminary Prospectus

             Shares

LOGO

 

 

Common Stock

 

 

This is the initial public offering of              shares of common stock of Violin Memory, Inc. Prior to this offering, there has been no public market for our common stock. We are offering              shares of common stock. The initial public offering price of our common stock is expected to be between $         and $         per share.

We have applied to list our common stock on the New York Stock Exchange under the symbol “VMEM.”

 

 

We are an emerging growth company, as defined in section 2(a) of the Securities Act, and may elect to comply with reduced U.S. public company reporting requirements. Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 10 of this prospectus.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds to Violin Memory, before expenses

   $         $     

 

(1) See “Underwriting” for a description of the compensation payable to the underwriters.

The underwriters have an option to purchase a maximum of                  additional shares of common stock from us at the public offering price, less underwriting discounts and commissions. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

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

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2013.

 

 

 

J.P. Morgan   Deutsche Bank Securities   BofA Merrill Lynch

 

 

Barclays

 

 

 

Baird   Pacific Crest Securities

                    , 2013


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LOGO

Violin MEMORY


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LOGO

Pioneering a new class of persistent memory-based storage solutions

Low latency and fast response times

Sustained and scalable high performance

Low cost per transaction and overall total cost of ownership

Designed for real-time application workloads

Violin Flash Memory Array

Violin PCIe Flash Memory Card

High performance density

Financial service media & Entertainment Internet Government Telecom Consumer Healthcare

Industrial Education Transportation


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

The Offering

     6   

Summary Consolidated Financial Data

     8   

Risk Factors

     10   

Information Regarding Forward-Looking Statements

     37   

Industry Data

     37   

Other Information

     37   

Use Of Proceeds

     38   

Dividend Policy

     38   

Capitalization

     39   

Dilution

     41   

Selected Consolidated Financial Data

     44   

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

     46   

Business

     76   

Management

     96   

Certain Relationships And Related-Party Transactions

     113   

Principal Stockholders

     118   

Description Of Capital Stock

     120   

Material United States Federal Income Tax Considerations To Non-U.S. Holders

     124   

Shares Eligible For Future Sale

     128   

Underwriting

     130   

Legal Matters

     137   

Experts

     137   

Where You Can Find Additional Information

     137   

Index To Consolidated Financial Statements

     F-1   

 

 

Through and including                  (the 25th day after the date of this prospectus) all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Neither we nor the underwriters have authorized anyone to provide you with information different from or in addition to that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by us on our behalf. Neither we nor the underwriters take any responsibility for, and can provide no assurances as to the reliability of, any information other than the information contained in the foregoing document. We are offering to sell shares of common stock and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.


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PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information concerning our company, the common stock being sold in this offering, and our consolidated financial statements appearing in this prospectus. Because this is only a summary, you should read the rest of this prospectus before you invest in our common stock. Read this entire prospectus carefully, especially the risks described under the section entitled “Risk Factors.”

Our Company

We have pioneered a new class of persistent memory-based storage solutions designed to bring storage performance in line with high-speed applications, servers and networks. Our Flash Memory Arrays are specifically designed at each level of the system architecture starting with memory and optimized through the array to leverage the inherent capabilities of flash memory and meet the sustained high-performance requirements of business-critical applications, virtualized environments and Big Data solutions in enterprise data centers. Our Velocity Peripheral Component Interconnect Express, or PCIe, Flash Memory Cards leverage our persistent memory-based architecture in servers and are optimized for applications that require continuous access to large quantities of low latency persistent memory located directly in servers. We have demonstrated that our persistent memory-based storage solutions provide low latency and sustainable performance with enterprise-class reliability, availability and serviceability through product testing and customer feedback. Our solutions enable customers to realize significant capital expenditure and operational cost savings by simplifying their data center environments.

A number of important IT trends are transforming the architecture, design and performance requirements of data centers and highlighting the widening performance gap between storage and other data center technologies. Traditional disk-based storage solutions provided by incumbent primary storage vendors have been unable to adequately scale performance to address this widening gap due to the inherent limitations of hard disk drives, contributing to a performance bottleneck in the data center. We believe there is a pressing need for a new approach to storage, across both array- and server-based architectures, designed to address the input/output, or I/O, intensive requirements of today’s real-time applications and enable organizations to optimize the utilization and performance of their enterprise data centers and hyperscale cloud environments.

Our Flash Memory Arrays integrate enterprise-class hardware and software technologies to cost effectively address the limitations of other storage solutions. Our storage systems are based on a four-layer hardware architecture which is tightly integrated with our Violin Memory Operating System, or vMOS, software stack to optimize the management of flash memory at each level of our system architecture. In March 2013, we expanded our innovation in persistent memory technologies and proprietary techniques in flash management from our memory arrays to our Velocity PCIe Flash Memory Cards. Our Velocity PCIe Flash Memory Cards leverage our expertise in persistent memory-based storage and controller design, as well as our vMOS software stack, to offer a differentiated architecture in a widely deployable PCIe form factor. Additionally, we believe our relationship with Toshiba, a leading provider of flash memory and one of our principal stockholders, allows us to design our systems to unlock the inherent performance capabilities of flash technology and enables us to develop around new generations of flash memory rapidly.

As of July 31, 2013, we believe our persistent memory-based storage solutions have been implemented by more than 250 enterprises in diverse end markets, including financial services, Internet, government, media and entertainment and telecommunications. We primarily sell our products and services through our direct sales force and global network of over 100 resellers to provide a high level of end-customer engagement. We maintain relationships with systems vendors and key technology partners, such as Dell, Fujitsu, IBM, Microsoft, SAP, Symantec, Toshiba and VMware. We have grown our business substantially for the past three years with total revenue of $11.4 million, $53.9 million and $73.8 million in fiscal 2011, 2012 and 2013, respectively and $51.3 million for the six months ended July 31, 2013. We only recently introduced our Velocity PCIe Memory

 

 

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Card solutions in March 2013 and have not derived significant revenue from the sale of these solutions to date. We had a net loss of $16.7 million, $44.8 million and $109.1 million in fiscal 2011, 2012 and 2013, respectively and $59.2 million for the six months ended July 31, 2013.

Industry Background

A number of important IT trends are highlighting the widening performance gap between storage and other data center technologies. These trends include the acceleration of server and network technologies; widespread adoption of virtualization technologies; proliferation of public and private cloud-based environments; explosive data growth and demand for high-frequency, real-time access; the increasing strategic importance of in-memory computing; and a focus on reducing data center complexity and lowering total cost of ownership. Organizations seek to address this performance gap and optimize the utilization of both their enterprise data center and hyperscale cloud environments. Traditional disk-based storage solutions provided by incumbent primary storage vendors, such as Dell, EMC, Hewlett-Packard (3PAR), Hitachi, NetApp and Oracle, have been unable to adequately scale performance to address this widening gap due to the inherent limitations of hard disk drives, contributing to a performance bottleneck in the data center. There has been an increasing shift towards the use of persistent memory-based solutions, across array- and server-based configurations. We believe other flash-based solutions provided by vendors, including EMC, Fusion-io, Intel, Micron, Samsung, SanDisk and sTec, while offering greater performance than disk-based storage solutions, have nevertheless been unable to adequately address this bottleneck due to the limitations of their software and controller technologies that have not been specifically designed to address the technical challenges of flash memory.

IDC estimates worldwide spending on enterprise storage systems will grow from $35.0 billion in 2012 to $42.5 billion in 2017. A majority of this market is comprised of disk-based capacity-optimized and performance-optimized systems, which together is expected to grow at a compound annual growth rate, or CAGR, of 2.2% from $32.8 billion in 2012 to $36.5 billion in 2017. As enterprises seek alternatives to traditional disk-based storage solutions and the price of flash continues to decline, there has been a shift toward I/O intensive storage, which is expected to grow at a CAGR of 23.1% from $2.2 billion in 2012 to $6.1 billion in 2017.1 We believe there is an opportunity for a disruptive solution to capture the I/O intensive storage market as well as a meaningful portion of the market for disk-based capacity-optimized and performance-optimized systems.

In an effort to overcome the limited performance capabilities of disk-based storage solutions, vendors have begun incorporating persistent memory-based solutions as an alternative. Adoption of solid state storage has accelerated as flash memory prices have decreased. According to Gartner, the worldwide average selling price of NAND flash memory per gigabyte has declined from $19.13 in 2006 to $0.73 in 2012.2 Persistent memory-based solutions are generally deployed in two configurations, array-based and server-based. Array-based solutions are found in two configurations, arrays built using off-the-shelf controllers and solid state drives, or SSDs (or a hybrid of both HDDs and SSDs) or specifically designed all-flash memory arrays. Array-based and server-based solutions using off-the-shelf components, which we refer to as other flash-based storage solutions, deliver improved performance relative to disk-based storage solutions. However, their ability to optimize flash memory technology is severely limited principally due to their utilization of off-the-shelf flash memory chips, commodity controllers, commercially available data protection algorithms and management software originally designed for

 

1  IDC, “Worldwide Enterprise Storage Systems 2013–2017 Forecast: Customer Landscape Is Changing, Defining Demand for New Solutions,” May 2013
2  Gartner, “Forecast: Memory, Worldwide, 2010-2017, 2Q13 Update,” June 27, 2013. Gartner, “Forecast: Memory, Worldwide, 2006-2016, 3Q12 Update,” September 11, 2012. The Gartner Report(s) described herein (the “Gartner Report(s)”) represent(s) data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this filing) and the opinions expressed in the Gartner Report(s) are subject to change without notice.

 

 

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HDDs. We believe that the implementation of purpose-built intelligent software and controller technologies that are tightly integrated with persistent memory-based solutions are necessary to address the technical challenges of flash memory and to deliver sustained high performance and endurance. Without the implementation of technologies specifically designed for flash memory, the performance sustainability and endurance of other flash-based storage solutions remain significantly limited.

Key Limitations of Disk-based and Other Flash-based Storage Solutions

 

   

Slow response times of disk-based storage solutions. Disk-based storage solutions are unable to deliver the low latency required by today’s high-performance applications. While over-provisioning with more HDDs modestly increases I/O throughput, this approach cannot reduce I/O response time due to the physics of rotating media and the architecture of disk-based storage solutions.

 

   

Limited ability to provide scalable and sustained performance under peak workloads. While other flash-based storage solutions can provide improved performance over disk-based storage solutions, they suffer from the Write Cliff issue, a phenomenon that refers to a significant spike in latency and slower I/O response times experienced by flash memory during erase cycles. This prevents other flash-based storage solutions from delivering predictable and sustainable performance during periods of peak workload. Additionally, the performance scalability of other flash-based storage solutions is restricted by the limitations of storage controller technologies and software algorithms that were not specifically designed for flash technology.

 

   

High cost per transaction and overall total cost of ownership. Disk-based and other flash-based storage solutions are not typically optimized to reduce the cost of storage associated with the execution of individual transactions of high-speed applications, which we refer to as cost per transaction. In addition, the current approach of over-provisioning storage resources to address the performance gap increases facilities costs, management overhead and energy consumption.

 

   

Not optimized for real-time application workloads. Disk-based storage solutions were not originally designed to serve the dynamic requirements of real-time application workloads. For example, disk-based storage solutions are designed for sequential workloads, not the random I/O patterns inherent in virtualized and cloud-based environments. Similarly, disk-based storage solutions are not designed to deliver the high performance and high scalability requirements of Big Data analytics applications. While other flash-based storage solutions deliver improved performance over disk-based storage solutions, they are generally limited in their ability to address the sustained and scalable performance required by I/O intensive virtualized and cloud-based environments, Big Data analytics and other real-time application workloads.

As a result of these limitations, we believe there is a pressing need for a fundamentally new approach to provide sustained high-performance storage that offers low latency, high bandwidth and extensive capacity as well as enterprise-class reliability, availability and serviceability. In addition, these solutions must enable enterprises to realize capital expenditure and operational cost savings by simplifying their data center environments.

Our Solution

We have pioneered a new class of persistent memory-based storage solutions, in both array and server configurations designed to bring storage performance in-line with high-speed applications, servers and networks. Our Flash Memory Arrays are specifically designed at each level of the system architecture starting with memory and optimized through the array to leverage the inherent capabilities of flash memory and meet the sustained high-performance requirements of business-critical applications, virtualized environments and Big Data solutions in enterprise data centers. In addition, we have brought our innovation in persistent memory technologies and proprietary techniques in flash management from our memory arrays to our Velocity PCIe Flash Memory Cards.

 

 

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Our Velocity PCIe Flash Memory Cards leverage our expertise in persistent memory-based storage and controller design, as well as our vMOS software stack, to offer a differentiated architecture that delivers sustained high performance, spike-free low latency and enterprise-class availability and reliability in a widely deployable PCIe form factor.

Our persistent memory-based storage solutions address fundamental challenges in the data center and deliver critical benefits to enterprises, including:

 

   

Low latency and fast response times. Our persistent memory-based storage solutions significantly reduce latency and enable fast response times as a result of our parallel system and proprietary hardware-accelerated management algorithms.

 

   

Sustained and scalable high performance. Our persistent memory-based storage solutions provide enterprises with the sustained high performance required to run business-critical applications in today’s random I/O workload environments, overcoming the Write Cliff issues experienced by other flash-based storage solutions. Further, we believe our vMOS software-stack enables our Flash Memory Arrays and Velocity PCIe Flash Memory Cards to scale performance more effectively than disk-based and other flash-based storage solutions on a sustained performance basis.

 

   

Low cost per transaction and overall total cost of ownership. Our persistent memory-based storage solutions can generate significant savings on a cost per transaction basis and provide greater return on investment to enterprises. Additionally, the enhanced performance provided by our systems offers significant opportunities for infrastructure consolidation, which reduces both capital and operating expenses necessary to manage data center assets.

 

   

Optimized for real-time application workloads. Our Flash Memory Arrays are specifically designed to deliver the sustainable and scalable performance required by a broad range of real-time application workloads. Additionally, unlike many other flash-based storage solutions, our solutions are highly interoperable with existing virtualization infrastructures, allowing IT managers to leverage existing data center networking and operating systems in both virtual and cloud-based environments without making changes to management software.

Our Strategy

Our objective is to be the leading supplier of persistent memory-based storage solutions for business-critical applications, virtualized environments, Big Data solutions and data center and hyperscale cloud environments. Key elements of our strategy include:

 

   

Continue to pursue technology and product innovation to bring storage capabilities in line with advancements in server and network technologies. We intend to continue to innovate and invest in new products, across both server- and array-based configurations, designed to leverage the capabilities of future generations of memory technology to cost-effectively provide greater levels of sustained performance. We also plan to continue to integrate software into our hardware to build an end-to-end storage platform that further enhances storage optimization, data management and analytics capabilities and other embedded applications.

 

   

Maintain high levels of customer engagement to drive sales. We intend to drive further penetration and deployment of our persistent memory-based storage solutions within our existing base of over 250 end-customers globally. Many of our Flash Memory Array customers initially deploy our solutions on a limited scale, tiered with disk-based storage solutions, which provides us with significant opportunities to sell more of our products as their storage performance and capacity requirements increase. We also intend to increase our engagement with hyperscale cloud customers to drive the adoption of our Velocity PCIe Flash Memory Card solutions.

 

 

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Continue to grow our relationships with systems vendors and technology partners to accelerate the adoption of our solutions. We have established relationships with a number of industry-leading systems vendors, whose distribution capabilities we intend to leverage to expand our global reach to customers in diverse end-markets. In addition to our relationship with Toshiba, we also intend to expand our other technology relationships while establishing new relationships with leading software, memory and storage hardware vendors globally to increase the adoption of our solutions.

 

   

Invest in our global distribution channel to expand our international presence. We intend to leverage and expand our relationships with resellers to more effectively penetrate existing and new markets. Additionally, we intend to continue to grow our operations in Europe and Asia, and invest in our direct sales teams and network of resellers in international markets to further expand our geographic reach.

 

   

Opportunistically pursue strategic acquisitions and investments. We expect to opportunistically make strategic investments in, or pursue acquisitions of, companies with innovative technologies that will broaden the features or capabilities of our solutions, extend our product portfolio, increase our geographic presence or expand our market share.

Risks to Our Business

Our business is subject to numerous risks and uncertainties, including those identified in “Risk Factors” immediately following this prospectus summary that primarily represent challenges we face in connection with the successful implementation of our strategy and the growth of our business. We expect large and concentrated purchases by a limited number of customers to continue to represent a substantial majority of our revenue, which means our operating results may fluctuate significantly from quarter to quarter. Toshiba, one of our principal stockholders, is our sole supplier for flash memory. We have agreed to purchase a minimum percentage of our flash memory from Toshiba. Any disruption in our relationship with Toshiba could have a material adverse effect on our business. We have a limited operating history and our revenue growth rate in recent periods is not likely to recur, which make it difficult to predict our future operating results. In addition, the report of our independent registered public accounting firm for the year ended January 13, 2013 contains a statement with respect to substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations and negative cash flows. Additional factors that may have a negative impact on our business include material weaknesses in our internal control over financial reporting, the availability of, and our ability to control the costs of, the components we use in our hardware products, reductions in customers’ budgets for information technology purchases and changes in the competitive dynamics of our markets, including actions by large storage vendors who have a longer operating history than us, better brand recognition and more resources available.

Corporate Information

We were incorporated in 2005 and recapitalized in 2009 with the arrival of our current chief executive officer, Donald G. Basile. Our principal executive offices are located at 685 Clyde Avenue, Mountain View, California 94043 and our telephone number is: (650) 396-1500. As of July 31, 2013, we had 445 employees, including 186 research and development employees. Our website address is www.violin-memory.com. We do not incorporate the information on, or accessible through, our website into this prospectus, and you should not consider any information on, or accessible through, our website as part of this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

             shares

Common stock to be outstanding after this offering

             shares

 

Underwriters option to purchase additional shares of common stock

The underwriters have an option to purchase a maximum of      additional shares of common stock. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We estimate that the net proceeds from this offering will be $         million, assuming an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated expenses payable. We intend to use a portion of the net proceeds from this offering for working capital and general corporate purposes, including further expansion of our sales and marketing efforts, continued investments in research and development and for capital expenditures. We also intend to use the net proceeds to repay all of our outstanding debt. In addition, we may use a portion of the net proceeds of this offering for acquisitions of complementary businesses, technologies or other assets. However, we do not have agreements or understandings for any acquisitions or investments at this time. See “Use of Proceeds” beginning on page 38.

 

Risk factors

See “Risk Factors” beginning on page 10 and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

 

Proposed NYSE symbol

VMEM

The number of shares of common stock that will be outstanding after this offering is based on 127,057,199 shares outstanding as of July 31, 2013, and excludes:

 

   

11,161,477 shares of common stock issuable upon the exercise of options outstanding as of July 31, 2013, at a weighted-average exercise price of $0.47 per share;

 

   

20,473,480 shares of common stock subject to restricted stock units, or RSUs, outstanding as of July 31, 2013, including 5,354,317 RSUs for which the service condition was satisfied as of July 31, 2013 and which will vest on the earlier of 181 days following the completion of this offering or March 15 in the year following the completion of this offering;

 

   

             shares of common stock, subject to increase on an annual basis, reserved for issuance under our 2012 Stock Incentive Plan, which reserve includes the 6,739,757 shares of common stock available for issuance under our 2005 Stock Plan. On the date of this prospectus, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Stock Incentive Plan and we will cease granting awards under the 2005 Stock Plan;

 

   

             shares of common stock issuable upon automatic conversion of convertible notes and accrued interest thereon assuming the conversion as of August 31, 2013 and an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus;

 

 

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133,833 shares of common stock issuable upon conversion of 131,875 shares of Series D convertible preferred stock issuable upon exercise of outstanding warrants, which will convert into warrants to purchase common stock at the initial public offering; and

 

   

             shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 2012 Employee Stock Purchase Plan, which will become effective in connection with this offering.

Unless otherwise indicated, all information in this prospectus assumes:

 

   

that our amended and restated certificate of incorporation, which we will file in connection with the completion of this offering, is in effect;

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 95,429,590 shares of common stock, effective immediately prior to the completion of this offering;

 

   

the conversion of all outstanding convertible promissory notes into shares of common stock, effective immediately prior to the completion of this offering;

 

   

no shares have become issuable pursuant to our warrant agreement with Toshiba which will terminate immediately prior to the completion of this offering; and

 

   

no exercise by the underwriters of their option to purchase up to                  additional shares of common stock from us.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

We derived the summary consolidated statements of operations data for fiscal years ended January 31, 2011, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the six months ended July 31, 2012 and 2013 and our summary consolidated balance sheet data as of July 31, 2013 from our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. Our unaudited consolidated financial statements were prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, which consisted of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended January 31,     Six Months Ended
July  31,
 
     2011     2012     2013     2012     2013  
                       (unaudited)  
    

(In thousands, except per share data)

 

Consolidated Statements of Operations Data:

          

Revenue:

          

Product revenue

   $ 11,031      $ 52,541      $ 69,584      $ 29,055      $ 46,073   

Services revenue

     366        1,347        4,214        1,247        5,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     11,397        53,888        73,798        30,302        51,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

          

Cost of product revenue(1)

     7,953        38,110        38,180        15,760        26,738   

Cost of services revenue(1)

     125        1,156        4,474        1,524        3,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     8,078        39,266        42,654        17,284        30,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,319        14,622        31,144        13,018        21,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(1)

     9,701        26,641        57,840        25,015        34,734   

Sales and marketing(1)

     5,323        21,493        61,094        24,886        36,876   

General and administrative(1)

     4,895        6,222        21,105        11,350        8,150   

Litigation settlement

     —          2,100        —          —       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,919        56,456        140,039        61,251        79,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,600     (41,834     (108,895     (48,233     (58,517

Other income (expense), net

     110        89        (79     (16     (286

Interest expense

     (251     (3,033     (31     (31     (342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (16,741     (44,778     (109,005     (48,280     (59,145

Income taxes

     1        7        97        15        27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (16,742   $ (44,785   $ (109,102   $ (48,295   $ (59,172
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic and diluted

   $ (1.55   $ (2.38   $ (4.00   $ (1.90   $ (1.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted

     10,808        18,792        27,248        25,437        30,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock, basic and diluted

       $ (0.92     $     
      

 

 

     

 

 

 

Pro forma weighted-average number of shares of common stock, basic and diluted

         118,964       
      

 

 

     

 

 

 

 

 

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

 

     Year Ended
January 31,
     Six Months Ended
July  31,
 
     2011      2012      2013      2012      2013  
                          (unaudited)  
     (In thousands)  

Cost of product revenue

   $ 1       $ 15       $ 150       $ 18       $ 39   

Cost of services revenue

     —           4         474         101         651   

Research and development

          23         236         3,228         1,308         2,620   

Sales and marketing

     59         299         4,061         1,539         3,280   

General and administrative

     21         492         10,010         5,632         3,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 104       $ 1,046       $ 17,923       $ 8,598       $ 9,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of July 31, 2013
     Actual     Pro Forma(1)     Pro Forma as
Adjusted
(2)(3)
          

(In thousands and unaudited)

     

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 33,463      $ 33,463     

Working capital

     16,963        16,963     

Total assets

     112,886        112,886     

Line of credit and debt, including current portion

     20,165        20,165     

Convertible notes and related accrued interest

     2,477        —       

Total liabilities

     95,539        95,539     

Additional paid-in-capital

     279,324        281,801     

Accumulated deficit

     (261,985     (261,985  

Total stockholders’ equity

     112,886        112,886     

 

(1) The pro forma column reflects the conversion of all outstanding shares of our convertible preferred stock and convertible notes, including accrued interest thereon as of July 31, 2013, into common stock immediately prior to the completion of this offering.
(2) The pro forma as adjusted column reflects the items described in (1) above and the receipt and application of the net proceeds from the sale of         shares of common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated expenses payable.
(3) A $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $        million, assuming that the number of shares offered, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated expenses payable. Each increase (decrease) of 1.0 million shares in the number of shares of common stock offered would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $        million, assuming an initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated expenses payable. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering.

 

 

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RISK FACTORS

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

Risks Related to Our Business and Industry

We expect large and concentrated purchases by a limited number of customers to continue to represent a substantial majority of our revenue, and any loss of, or delay or reduction in purchases by, a small number of customers 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 has changed from period to period. These concentrated purchases are made on a purchase order basis rather than pursuant to long-term contracts. In fiscal 2012, Hewlett-Packard Company, or Hewlett-Packard, represented 65% of our total revenue, while in fiscal 2013 and the six months ended July 31, 2013 Hewlett-Packard represented less than 10% of our total revenue. Revenue from our five largest customers for fiscal 2013 was 37% of our total revenue, of which revenue from one customer, CompSec, represented 12% of our total revenue. It is our understanding that CompSec purchased our products for resale to the United States Federal Government. Revenue from our five largest customers for the six months ended July 31, 2013 was 32% of our total revenue, of which revenue from one customer, Avnet, represented 12% of our total revenue. It is our understanding that Avnet purchased our products for resale to a large global retailer.

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 offset the discontinuation or reduction of concentrated purchases by our larger customers with purchases by other new or existing customers. For example, our total revenue declined $11.7 million, or 53%, from $21.9 million for the three months ended January 31, 2012 to $10.2 million for the three months ended April 30, 2012. Nearly the entire decline in total revenue during this period was attributable to a decline in orders in fiscal 2013 from Hewlett-Packard, a systems vendor customer. 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.

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 incorporated in March 2005 and recapitalized in 2009 with the arrival of our current chief executive officer, Donald G. Basile. We introduced our Flash Memory Arrays in May 2010 and our PCIe Flash Memory Cards in March 2013. The majority of our revenue growth has occurred since the first quarter of our fiscal 2012. In addition, our current management team has only been working together for a relatively short period of time. Our limited operating history makes it difficult for you to evaluate our business and our future prospects, as well as for us to plan for and model future growth. For example, we have limited experience from which to formulate an accurate expectation of our product lifecycles, which could make it more difficult for us to plan our product development timelines to meet customer and market demands. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including the risks described in this prospectus. If we do not address these risks successfully, our business and operating results would be adversely affected.

 

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Without obtaining adequate capital funding or improving our financial performance, we may not be able to continue as a going concern.

The report of our independent registered public accounting firm for the year ended January 31, 2013 included herein contains an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a going concern as a result of recurring losses from operations and negative cash flows. This report is dated July 25, 2013 and does not take into account any proceeds we will receive in this proposed offering or our ability to draw down up to an additional $37.2 million under our debt facility. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which contemplate that we will continue to operate as a going concern. Our financial statements do not contain any adjustments that might result if we are unable to continue as a going concern. Our ability to continue as a going concern will be determined by our ability to complete this offering enabling us to fund our expansion plans and realize our business objectives. In addition, we have incurred a net loss and negative operating cash flows in each quarter since our inception and expect to incur losses in future periods as we continue to increase our expenses in order to position us to grow our business. If we are unable to obtain adequate funding from this proposed offering or in the future, or if we are unable to grow our revenue substantially to achieve and sustain profitability, we may not be able to continue as a going concern.

If our lender declares an event of default under our debt facility or credit facility arrangements, we may not have sufficient liquidity to repay amounts outstanding under the arrangements should they become due and payable.

In May 2013, we entered into a $50 million debt arrangement with TriplePoint Capital LLC, or TriplePoint. This debt facility has a first secured interest in substantially all of our assets and intellectual property, other than $7.5 million of accounts receivable. As of July 31, 2013, we have drawn down $12.8 million from this debt facility. This debt facility contains a clause that allows TriplePoint to declare an event of default if, in the determination of TriplePoint, we have experienced a material adverse change to our business. In the event TriplePoint declares an event of default, all amounts outstanding under the facility would become immediately due and payable and further advances under the facility would not be available to us. Under these circumstances, we may not be able to renegotiate the terms of our debt facility with TriplePoint or we may be required to agree to unfavorable terms. If TriplePoint declares an event of default and we are unable to repay the amounts outstanding under the debt facility or to renegotiate the terms of this debt facility, TriplePoint could exercise its security interest in our assets, including our intellectual property. In July 2013, we also established a line of credit in the amount of $7.5 million with Comerica Bank, which is secured by our accounts receivable and our intellectual property. If we were to default on our debt facility with TriplePoint, it could also trigger an event of default under our line of credit with Comerica Bank. As a result, any event of default on our debt facility with TriplePoint could have an adverse effect on our business and operations.

We have incurred significant net losses and may not achieve or maintain profitability.

We have incurred a net loss in each quarter since our inception. As of July 31, 2013, we had an accumulated deficit of $262.0 million. We expect to incur losses in future periods as we continue to increase our expenses in order to position us to grow our business. If our revenue does not increase substantially, we will not be profitable. Even if we achieve profitability in a particular period, we may not be able to sustain it.

Our revenue growth rate in recent periods is not likely to recur and is not indicative of our future performance.

You should not consider our revenue growth in recent periods as indicative of our future performance. We do not expect to achieve similar revenue growth rates in future periods. In fact, in future periods, our total revenue could decline. For example, even though our total revenue increased 373% in fiscal 2012 compared to fiscal 2011, our total revenue declined 53% for the three months ended April 30, 2012 compared to the three months ended January 31, 2012. You should not rely on our revenue for any prior quarterly or annual periods as an indication of our future revenue or revenue growth. If our revenue declines from our prior performance, it may be difficult to achieve and maintain profitability.

 

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Our overall business has 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 April 2011, and we anticipate that this growth will continue. For example, from January 31, 2012 to July 31, 2013, our headcount increased 77% from 252 to 445 employees. We also introduced a new line of products in March 2013, our Velocity PCIe Flash Memory Cards. 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 the development of memory arrays;

 

   

establish a leadership position in the memory card market;

 

   

maintain and grow our direct sales force as well as grow our relationships with key customers, systems vendors and technology partners;

 

   

forecast and control expenses;

 

   

recruit, hire, train and manage additional research and development, and sales and marketing personnel;

 

   

expand our customer support capabilities on a global basis;

 

   

enhance and expand our distribution and supply chain infrastructure;

 

   

manage inventory levels, including trial deployments of systems;

 

   

enhance and expand our international operations; and

 

   

implement and improve our administrative, financial and operational systems, 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 will incur costs to support this anticipated growth prior to realizing any 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-customers’ requirements, maintain product quality, execute on our business plan or respond to competitive pressures, any of which would adversely affect our business and operating results.

Toshiba is our sole supplier for flash memory. Any disruption in our relationship with Toshiba could have a material adverse effect on our business.

The most significant component that we use in our products is flash memory. Although we have an agreement with Toshiba, the sole supplier of our flash memory components, we may experience a shortage of flash memory if Toshiba is not able to meet our demand. Toshiba may not be able to meet our demand for a variety of reasons, including our inability to forecast our future needs accurately to Toshiba or a shortfall in production by Toshiba for reasons unrelated to us. In addition, our agreement with Toshiba does not provide us with fixed pricing for flash memory, which subjects us to fluctuations in pricing. Our agreement with Toshiba also requires us to purchase 70% of our requirements for flash memory from Toshiba, subject to specified conditions, and to design our products to be substantially compatible with Toshiba flash memory. If Toshiba were to increase the price of its flash memory, we may not be able to correspondingly increase the price of our products and our revenue and gross margins would be harmed. We do not currently have any agreement in place with other flash memory providers in the event that Toshiba cannot meet our demand or we are unable to renew our contract with Toshiba when it expires. If we cannot obtain sufficient supply of flash memory at an acceptable price to us, our ability to respond to our customer demand and grow our business could be significantly harmed.

 

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Our agreements with Toshiba, our sole supplier of flash memory, including a proposed agreement we are currently negotiating to license certain of our intellectual property, may not be the result of arm’s-length negotiations because Toshiba is also one of our principal stockholders.

We have entered into agreements with Toshiba, one of our principal stockholders, relating to our purchase of flash memory from Toshiba, and we may enter into additional agreements with Toshiba and its affiliates. Although we believe that the terms in our agreements, as a whole, are no less favorable to us than could be obtained through arm’s-length dealing, these agreements include specific terms and conditions that may be different from terms contained in comparable agreements with unaffiliated third parties. In addition, because Toshiba is also one of our principal stockholders and because we have a significant relationship with Toshiba, it may be difficult or impossible for us to enforce claims that we may have against it. We are currently negotiating a new agreement with Toshiba to license our intellectual property related to our Velocity PCIe Flash Memory Cards and jointly develop next generation PCIe cards. Although we have a significant relationship with Toshiba, we may not be able to successfully negotiate and execute this proposed agreement or we may not do so on terms that are beneficial to us or on terms that we currently anticipate. For a more complete discussion of our arrangements with Toshiba, see the discussion under the heading “Certain Relationships and Related-Party Transactions.”

We compete with large data storage providers and expect competition to intensify in the future from established companies 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 high-performance server- and array-based storage approaches employed by next-generation datacenters. Competitors include incumbent primary storage vendors, such as Dell, Inc., or Dell, EMC Corporation, or EMC, Hewlett-Packard (3PAR), Hitachi Data Systems Corporation, or Hitachi, International Business Machines Corporation, or IBM, and NetApp, Inc., or NetApp, 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 Corporation. We also compete with server-centric flash-based solution providers in limited application use cases, such as Fusion-io. In addition, a number of privately-held companies are 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 systems vendor 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. In addition, consolidations among systems vendors, which can occur unexpectedly, can significantly impact our sales efforts to systems vendors. As a result, we cannot assure you that our products will 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 competitive challenges could seriously harm our business and operating results.

 

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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 expectations, 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, including orders from large customers;

 

   

a postponement or cancellation of significant orders;

 

   

cost and timing of trial deployments;

 

   

product mix;

 

   

the degree to which our Velocity PCIe Flash Memory Cards gain market acceptance;

 

   

mix of sales between end-customers and channel partners;

 

   

availability of, and our ability to control the costs of, the components we use in our hardware products, specifically flash memory;

 

   

reductions in customers’ budgets for information technology purchases;

 

   

delays in end-customers’ purchasing cycles or deferments of end-customers’ product purchases in anticipation of new products or product enhancements from us or our competitors;

 

   

any change in the competitive dynamics of our markets, including actions by large storage providers who may discount product prices or bundle storage products to provide lower overall systems costs;

 

   

fluctuations in demand and prices for our products;

 

   

changes in standards in the data storage industry;

 

   

our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet end-customer requirements;

 

   

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 cause the price of our common stock to decline.

In connection with the audit of our consolidated financial statements for fiscal 2012, four material weaknesses were identified in our systems, processes and internal control over financial reporting. While we remediated these material weaknesses in fiscal 2013 and no new material weakness has been identified to date, we cannot provide assurance that additional material weaknesses or significant deficiencies will not occur in the future. If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

When we become a public company, we will be subject to reporting obligations under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, that will require us to include a management report on our internal control over financial reporting in our annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. Our management may conclude that our internal

 

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control over our financial reporting is not effective. Moreover, when we are no longer an emerging growth company under the federal securities laws, our independent registered public accounting firm will be required to issue an attestation report on the effectiveness of our internal control over financial reporting. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are significant deficiencies or material weaknesses with respect to our controls or the level at which our controls are documented, designed, operated or reviewed. Material weaknesses may be identified during the audit process or at other times.

In connection with the audit of our consolidated financial statements for fiscal 2012, four material weaknesses were identified in our internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses that were identified related to our lack of resources within our finance function required to analyze and account for complex, non-routine transactions in a timely manner; our lack of systems or controls in place for tracking fixed assets, specifically the review and approval of internally transferred assets; our use of a financial reporting system in fiscal 2012 that was not adequate for a company of our size and complexity; and our lack of a material resource planning system or sufficiently robust forecasting process that prevented us from being able to appropriately document our basis for our excess and obsolete inventory reserves at year end. While we remediated these material weaknesses in fiscal 2013, there is no assurance that we will not have material weaknesses or significant deficiencies in the future.

Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future. If we fail to timely achieve and maintain the adequacy of our internal control over financial reporting, we may not be able to produce reliable financial reports and will be less able to detect and prevent fraud. In addition, our failure to achieve and maintain effective internal control over financial reporting could prevent us from filing our periodic reports on a timely basis which could result in the loss of investor confidence in the reliability of our financial statements, harm our business and negatively impact the trading price of our common stock.

Our sales cycles can be long and unpredictable, particularly with respect to large orders and establishing systems vendor relationships that 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 include convincing end-customers of our products’ reliability and interoperability with their existing network infrastructure. Because our products are based on emerging flash technology, we often must invest time in educating our potential end customers of the benefits of flash technology over legacy technologies, such as HDDs. Customers often undertake a trial deployment to evaluate and test our products which 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 the number of our sales personnel, which could further extend the sales cycle as these new personnel typically require a significant amount of training and experience until they are productive. These factors, among others, result in long and unpredictable sales cycles, particularly with respect to large orders and the establishment of system vendor relationships. Further, we may invest significant management attention and expense in building relationships that do not ultimately result in successful sales.

We also sell to systems vendors 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 a systems vendor’s solution, which could further lengthen the sales cycle for sales to systems vendors.

 

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The length of our sales cycle makes us susceptible to the risk of delays or termination of orders if end-customers decide to delay or withdraw funding for datacenter projects, which could occur for various reasons, including global economic cycles and capital market fluctuations. In addition, as a result of the lengthy and uncertain sales cycles of our products, it is difficult for us to predict when customers may purchase products from us and as a result, our operating results may vary significantly and 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 Flash Memory Array and Velocity PCIe Flash Memory Card products and related software are highly technical and complex and are often used to store information critical to our end-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 end-customers. Some errors in our products may only be discovered after they have been installed and used by end-customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release, or any perception of the same in the marketplace, could result in a loss of revenue or delay in revenue recognition, injury to our reputation, a loss of end-customers or increased service and warranty costs, any of which could adversely affect our business. In addition, we could face claims for product liability, tort or breach of warranty. Many of our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, would be costly and might divert management’s attention and adversely affect the market’s perception of us and our products. In addition, our business liability insurance coverage could prove inadequate or could be subject to coverage exclusions or deductibles 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.

Ineffective management of product transitions or our inventory levels, including inventory used in trial deployments, 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. Sales of our products are generally made through individual purchase orders and some of our customers place large orders with short lead times, which make it difficult to predict demand for our products and the level of inventory that we need to maintain in order 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 the inventory level of our finished products which would cause us to incur manufacturing costs in a period that are not offset by sales of finished products. In addition, our inability to manage inventory levels in connection with future product transitions may harm our operating results. For example, in the fourth quarter of fiscal 2012, we recorded $4.6 million in a provision for excess and obsolete inventory related to our 3000 Series Flash Memory Arrays as customers moved to our 6000 Series Flash Memory Arrays more rapidly than we had expected.

We typically provide trial deployments to potential customers and maintain the classification of these products in the field as inventory. We may not be able to convert these trial deployments into sales, which could lead to higher levels of inventory, lost or damaged units, risk of obsolescence and excessive wear making them unsaleable or saleable only at low margin or at a loss. Although our sales contracts typically provide that we are not obligated to accept product returns for purchased products, in limited circumstances, we may determine that it is in our best interest to accept returns or exchange products in order to maintain good relationships with customers. Product returns or exchanges 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, particularly in periods of product transition.

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 often experienced order changes including delivery delays and fluctuations in order levels from period-to-period, and we expect to continue to experience 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 related to inventory could adversely affect our business, operating results and financial condition.

Our gross profit may vary and such variation may make it more difficult to forecast our earnings.

Our gross profit has been and may continue to be affected by a variety of factors, including:

 

   

demand for our products and related services;

 

   

discount levels and price competition;

 

   

average order size and customer mix;

 

   

product mix;

 

   

the cost and availability of components;

 

   

level of costs for providing customer support;

 

   

the mix of services as a percentage of revenue;

 

   

new product introductions and enhancements; and

 

   

geographic sales mix.

Any of these factors could adversely affect our gross profit and operating results in future periods.

Many of our established competitors have long-standing relationships with key decision makers at many of our current and prospective customers. As a result, we may not be able to compete effectively and maintain or increase our market share.

Many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and prospective customers. We expect that our competitors will seek to leverage these existing relationships to discourage customers from purchasing our products. In particular, when competing against us, we expect our competitors to emphasize the importance of data storage retention, the high cost of data storage failure and the perceived risks of relying on products from a company with a shorter operating history and less predictable operating results. Additionally, most of our prospective customers have existing storage systems manufactured by our competitors. This gives an incumbent competitor an advantage in retaining the customer because the incumbent competitor already understands the customer’s network infrastructure, user demands and information technology needs. These factors may cause our current or prospective customers to be unwilling to purchase our products and instead to purchase the products of our better-known and more established competitors. In the event that we are unable to successfully sell our products to new customers, persuade customers of our competitors to purchase our products instead, or prevent our competitors from persuading our customers to purchase our competitors’ products, we may not be able to maintain or increase our market share and our operating results would be adversely affected.

The use of flash memory in storage products is rapidly evolving, which makes it difficult to forecast customer adoption rates and demand for our products.

The market for flash memory in storage products is rapidly evolving. Accordingly, our future financial performance will depend in large part on growth in this market and on our ability to adapt to trends in this market as they develop and evolve. Sales of our products are dependent in large part upon demand in markets that require high-performance data storage solutions, such as business-critical applications, virtualization and Big Data. It is difficult to predict with any precision customer adoption rates, end-customer demand for our products

 

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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 predict our future performance. Our products may never gain broad 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 shorter product lifecycles, more limited methods for data recovery and lower performance for certain uses, including sequential I/O transactions and increased utilization of host system resources than traditional storage, and in some circumstances may require end-customers to modify or replace network systems originally installed for traditional storage media. A reduction in demand for flash-based data storage caused by lack of end-customer acceptance, technological challenges, competing technologies and products or otherwise would result in a lower revenue growth rate or decreased revenue, either of which would negatively impact our business and operating results.

We have derived 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 Flash Memory Array product line has accounted for substantially all of our revenue and will continue to comprise a significant portion of our revenue for the foreseeable future. As a result, our revenue could be reduced by:

 

   

the failure of our Flash Memory Array products to achieve broad market acceptance;

 

   

any decline or fluctuation in demand for our Flash Memory Array products, whether as a result of product obsolescence, technological change, customer budgetary constraints or other factors;

 

   

any constraint on our ability to meet demand for our Flash Memory Array products, whether as a result of component supply constraint or the inability or unwillingness of our contract manufacturer to timely deliver products;

 

   

pricing pressures;

 

   

the introduction of products and technologies by competitors that serve as a replacement or substitute for, or represent an improvement over, these products;

 

   

an order resulting from a judgment of patent infringement or otherwise, that restricts our ability to market and sell our Flash Memory Array products; and

 

   

our inability to release enhanced versions of our products, including any related software, on a timely basis.

In March 2013, we introduced our Velocity PCIe Flash Memory Card products. If we are unable to grow our revenue from our Velocity PCIe Flash Memory Cards, we will continue to be dependent on the success of our Flash Memory Arrays.

If our Velocity PCIe Flash Memory Cards do not gain market adoption or sales of our Velocity PCIe Flash Memory Cards grow more slowly than anticipated, we may not be able to increase our revenue sufficiently to achieve and maintain profitability.

We have devoted a significant amount of resources to developing and marketing our Velocity PCIe Flash Memory Cards and believe our future growth will substantially depend on the market acceptance and adoption of this new product. Because we are strategically targeting the PCIe memory card market and expending a considerable amount of resources in doing so, if our Velocity PCIe Flash Memory Cards do not gain market acceptance, our results of operations, business and prospects would be materially and adversely affected.

If we fail to develop and introduce new or enhanced products on a timely basis, our ability to attract and retain customers could be impaired and our competitive position would 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

 

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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 need to continue to create valuable software solutions to be integrated with our 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 increase our overall gross margins. If we are unable to successfully develop or acquire, and then market and sell future generations of our products, our ability to increase our revenue and gross margin will be adversely affected.

Our products must interoperate with network interfaces, such as operating systems, software applications and hardware developed by others, and if we are unable 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 reduced demand for our products.

Our storage products comprise only a part of a datacenter’s infrastructure. Accordingly, our products must interoperate with our end-customers’ existing infrastructure, specifically their networks, servers, software and operating systems, which are typically manufactured by a wide variety of systems vendors. 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 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 end-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 reduced demand for our products, which would adversely affect 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, Donald G. Basile. 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. 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 in 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 attract and retain the necessary personnel could adversely affect our business, operating results and financial condition.

We intend to continue focusing on revenue growth and increasing market penetration and international presence at the expense of profitability by re-investing in our operations.

We intend to increase our investments in our marketing services and sales organization and to continue investing significantly in research and development at the expense of near-term profitability. We believe our decision to continue investing heavily in these operations will be critical to our revenue growth and our increased market penetration and international presence. Accordingly, we anticipate that our operating costs and expenses will

 

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increase substantially for the foreseeable future. However, we cannot assure you that this strategy will result in revenue growth. Even if we achieve significant revenue growth, we may continue to experience net losses and operating losses similar to those we have incurred historically. Additionally, at least as long as we pursue this strategy, we may not achieve profitability or, if achieved, we may not be able to sustain profitability.

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, which subjects us to the risk of loss resulting in nonpayment or nonperformance by our customers. Although we have programs in place that are designed to monitor and mitigate our customers’ credit 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.

Our 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, if at all, 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.

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 alternatives 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 on our part to demonstrate the benefits of our products would result in lost sales. In addition, 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.

The rate at which we grow our business is impacted by systems vendor customers incorporating our products into their server and data storage systems and these systems vendors’ sales efforts. Any failure to grow our systems vendor sales and maintain relationships with systems vendors could adversely affect our business, operating results and financial condition.

Historically, sales of products to systems vendors have represented a significant portion of our revenue. In fiscal 2012, sales of our products to Hewlett-Packard, a systems vendor customer, represented 65% of our revenue. Systems vendor sales may constitute a substantial portion of our future sales. In some cases, our products must be designed into the systems vendor’s products. If that fails to occur for a given product line of a systems vendor, we would likely be unable to sell our products to that systems vendor for that product line during the life cycle of that product. Even if a systems vendor integrates one or more of our products into its solutions, we cannot assure that its product will be commercially successful, and as a result, our sales volumes may be less than anticipated. Our systems vendor customers are typically not obligated to purchase our products and can choose at any time to stop

 

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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 systems vendors. For example, to date, Hewlett-Packard has not sought to qualify our 6000 Series Flash Memory Arrays, which is a necessary step for Hewlett-Parkard to be able to resell this product. And with the rapid adoption of our 6000 Series Flash Memory Arrays by the marketplace, we do not expect sales to Hewlett-Packard to account for more than 10% of our revenue in fiscal 2014. Moreover, our systems vendor customers may not devote sufficient attention and resources to selling our products. We may not be able to develop or maintain relationships with systems vendor customers for a number of reasons, including because of the systems vendor’s relationships with our competitors or prospective competitors. In addition, there may be competing incentives that may not motivate their internal sales forces to promote our products. If we are unable to grow our sales to systems vendors, if our system vendor customers’ systems incorporating our products are not commercially successful, if our products are not designed into a given systems vendor product cycle or if our systems vendor 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.

Our ability to sell our products is highly dependent on the quality of our customer support and services, and any failure to offer high-quality support and services would harm our business, operating results and financial condition.

Once our products are deployed, our customers depend on our support organization to resolve any issues relating to our products. Our products provide business-critical services to our customers and a high level of customer support is necessary to maintain our customer relationships. We rely on authorized service providers in certain locations in the United States to install our products and deliver initial levels of on-site customer support and services. While we attempt to carefully identify, train, and certify our authorized service providers, we may not be successful in ensuring the proper delivery and installation of our products or the quality or responsiveness of the support and services being provided.

As we grow our business, our ability to provide effective customer support and services will be largely dependent on our ability to attract, train and retain qualified direct customer service personnel and our ability to maintain and grow our network of authorized service providers. Additionally, as we continue to expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English, as well as identifying, training, and certifying international authorized service providers to support products we may deploy in geographical areas in which we may not currently have authorized service providers.

Any failure to maintain high-quality customer support and services, or a market perception that we do not maintain high-quality customer support and services, 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.

Some of our large end-customers demand more favorable terms and conditions from us and may request price concessions. As we seek to sell more products to large end-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 end-customers have significant purchasing power and, accordingly, have requested and received from us more favorable terms and conditions, including lower prices and extended payment terms, than we typically provide. As we seek to sell more products to this class of customer, we may be required to agree to more favorable customer 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.

 

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We rely on systems vendors and resellers to sell our products in markets where we do not have a direct sales force, and on authorized service providers to service and support our products in markets where we do not have direct customer service personnel. Any disruptions to, or failure to develop and manage, our relationships with systems vendors, resellers and authorized service providers could have an adverse effect on our customer relationships and on our ability to increase revenue.

Our future success is highly dependent upon our ability to establish and maintain successful relationships with a variety of systems vendors, resellers and authorized service providers in markets where we do not have a direct sales force or direct customer service personnel. We currently have sales personnel in the United States as well as Australia, Austria, Belgium, Canada, Denmark, France, Germany, Hong Kong, Japan, The Netherlands, Singapore, Switzerland and the United Kingdom. In other markets, we rely and expect to continue to rely on establishing relationships with systems vendors, resellers and authorized service providers. Our ability to maintain or grow our international revenue will depend, in part, on our ability to carefully select, manage and expand our network of systems vendor partners, resellers and authorized service providers. In addition to their sales activities, our systems vendor partners also provide installation, post-sale service and support on our behalf in their local markets. We also have agreements with authorized service providers that deliver and install our products, as well as provide post-sale customer service and support, on our behalf in their local markets. In markets where we rely on systems vendor partners, resellers and authorized service providers, we have less contact with our customers and less control over the sales process and their responsiveness. As a result, it may be more difficult for us to ensure the proper delivery and installation of our products or the quality or responsiveness of the support and services being offered. Any failure on our part to effectively identify and train our systems vendor partners, resellers and authorized service providers and to monitor their sales activity as well as the customer support and services being provided to our customers in their local markets could harm our business, operating results and financial condition.

Identifying, training, and retaining qualified systems vendors, resellers and authorized service providers requires significant time and resources. In order to maintain and expand our network of systems vendor partners, resellers and authorized service providers, we must continue to scale and improve the systems, processes, and procedures that support them, which will require continuing investment in our information technology infrastructure and dedication of significant training resources. As we grow our business and support organization, these systems, processes, and procedures may become increasingly complex, difficult and expensive to manage, particularly as the geographic scope of our customer base expands globally.

We typically enter into non-exclusive agreements with our systems vendor partners, resellers and authorized service providers. These agreements generally have a one-year, self-renewing term, have no minimum sales commitment, and do not prohibit our systems vendor partners, resellers and authorized service providers from offering products and services that compete with ours. Accordingly, our systems vendor partners, resellers and authorized service providers may choose to discontinue offering our products and services or may not devote sufficient attention and resources toward selling our products and services. Additionally, our competitors may provide incentives to our existing and potential systems vendor partners, resellers and authorized service providers to use, purchase or offer their products and services which may prevent or reduce sales of our products and services. The occurrence of any of these events could harm our business, operating results and financial condition.

If our third-party hardware repair service fails to timely and correctly resolve hardware failures experienced by our end-customers, our reputation will suffer, our competitive position will be impaired and our expenses could increase.

We and our authorized service providers rely upon third-party hardware maintenance providers, which specialize in providing vendor-neutral support of storage equipment, network devices and peripherals, to provide repair services to our end-customers. If our third-party repair service fails to timely and correctly resolve hardware failures, our reputation will suffer, our competitive position will be impaired and our expenses could increase. In February 2011, we entered into a five-year agreement with IBM Global Services for our on-site response and call

 

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center support. Either party may terminate the agreement for any reason by providing the other party 120-day notice of termination. In addition, either party may immediately terminate the agreement for a material default by the other party that is not cured within 30 days. If our relationship with our third-party repair service were to end, we would have to engage a new third party provider of hardware support, and the transition could result in delays in effecting repairs and damage our reputation and competitive position as well as increase our operating expenses.

We rely on a single contract manufacturer to manufacture our products, and our failure to accurately forecast demand for our products or successfully manage our relationship with our contract manufacturer could negatively impact our ability to sell our products.

We rely on a single contract manufacturer, Flextronics International Ltd., or Flextronics, to manufacture all of our products, manage our supply chain and, alone or together with us, negotiate component costs. We purchase our flash components directly from a single-source supplier and consign these components to Flextronics. Our reliance on our contract manufacturer reduces our control over the assembly process, quality assurance, production costs and product supply. If we fail to manage our relationship with our contract manufacturer or if our contract manufacturer experiences delays, disruptions, capacity constraints or quality control problems in its operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. If we or our contract manufacturer are unable to negotiate with suppliers for reduced component costs, our operating results could be harmed.

If we are required to change to a new contract manufacturer, qualify an additional contract manufacturer or assume internal manufacturing operations for any reason, including financial problems of our contract manufacturer, reduction of manufacturing output made available to us, or the termination of our contract, we may lose revenue, incur increased costs and damage our customer relationships. Our contract manufacturer may terminate our agreement with them with prior notice to us or for reasons such as we fail to perform a material obligation under our agreements with them. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming.

We are required to provide forecasts to our contract manufacturer regarding product demand and production levels. We provide our contract manufacturer with purchase orders for products they manufacture for us, and these orders may only be rescheduled or cancelled under certain limited conditions. If we inaccurately forecast demand for our products, we may have excess or inadequate inventory or incur cancellation charges or penalties, which could adversely impact our operating results.

We intend to introduce new products and product enhancements, which could require us to achieve volume production rapidly by coordinating with our contract manufacturer and component suppliers. For example, we introduced our PCIe Flash Memory Cards in March 2013 and must coordinate the manufacturing of this new product line with Flextronics. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions if we experience increased demand for our Flash Memory Arrays or our PCIe Flash Memory Cards. Our orders may represent a relatively small percentage of the overall orders received by our contract manufacturer from their customers. As a result, fulfilling our orders may not be considered a priority in the event our contract manufacturer is constrained in its ability to fulfill all of its customer obligations in a timely manner. If our contract manufacturer is unable to provide us with adequate

supplies of high-quality products, or if we or our contract manufacturer is unable to obtain adequate quantities of components, it could cause a delay in our order fulfillment, in which case our business, operating results and financial condition could be adversely affected.

 

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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 neither our contract manufacturer nor we have 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 in a timely manner, including flash memory and field programmable gate arrays;

 

   

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.

If our supply of certain components is disrupted or delayed, or if we need to replace one or more of our existing suppliers, there can be no assurance that additional supplies or components will be available when required or that supplies will be available on terms that are favorable to us, which could extend our lead times, increase the costs of our components and materially adversely affect our business, operating results and financial condition. If we are successful in growing our business, we may not be able to continue to procure components at acceptable prices, which would require us to enter into longer term contracts with component suppliers to obtain these components at competitive prices. In addition, errors or defects may arise in some of our components supplied by third parties that are beyond our detection or control, which could lead to additional customer returns or product warranty. If any of these were to occur, our costs would increase and our gross margins would decrease, harming our operating results.

Our products incorporate components that are subject to supply and pricing volatility, and, as a result, our ability to respond in a timely manner to customer demand and our cost structure are sensitive to such volatility in the supply and market prices for these components.

We do not enter into long-term supply contracts for the components we use in our products, but instead generally we, or our contract manufacturer on our behalf, purchase these components pursuant to individual purchase orders. In addition, 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. If we are required to make significant “last time” purchases of components that are being discontinued and do not purchase enough components, we may experience delayed shipments, order cancellations or otherwise be required to purchase more expensive components to meet customer demand, which could negatively impact our revenue, gross margins and operating results. If we purchase too many such components, we could be subject to inventory write-offs adversely affecting our operating results.

A portion of our expenses are directly related to the pricing of components utilized in the manufacture of our products, such as field programmable gate arrays, memory chips and central processing units, or CPUs. In some cases, our contract manufacturer purchases these components in a competitive-bid purchase order environment with suppliers or on the open market at spot prices. As a result, our cost structure is affected by price volatility in the marketplace for these components, especially for field programmable gate arrays, memory chips and CPUs. This volatility makes it difficult to predict expense levels and operating results, and may cause our expense levels and operating results to fluctuate significantly. Furthermore, these components can be subject to limits on supply or other supply volatility which may negatively impact our ability to obtain quantities necessary at reasonable prices to grow our business and respond to customer demand for our products.

 

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As we seek to increase our sales to government customers, we may face difficulties and risks unique to government contracts that may have a detrimental impact on our business, operating results and financial condition.

Historically, we have sold products to the United States government through third-party resellers. Developing new business in the public sector often requires the development of relationships with different agencies or entities, as well as with other government contractors. If we are unable to develop or sustain such relationships, we may be unable to procure new contracts within the timeframes we expect, and our business, operating results and financial condition may be adversely affected. Contracting with the United States government often requires businesses to participate in a highly competitive bidding process to obtain new contracts. We may be unable to bid competitively if our products or services are improperly priced, or if we do not offer our products and services at a competitive price. The bidding process is an expensive and time-consuming endeavor that may result in a financial loss for us if we fail to win a contract on which we submitted a bid. Further, some agencies within the United States government may also require some or all of our personnel to obtain a security clearance or may require us to add features or functionality to our products that could require a significant amount of time and prevent our employees from working on other critical projects. If our key personnel are unable to obtain or retain this clearance or if we cannot or do not provide required features or functionality, we may be unsuccessful in our bid for some government contracts.

Contracts with the United States government also frequently include provisions not found in private sector contracts and are often governed by laws and regulations that do not affect private sector contracts. These provisions may permit public sector customers to take actions not always available to customers in the private sector. These actions may include termination of contracts for convenience. The United States government can also suspend operations if Congress does not allocate sufficient funds to a particular agency or organization, and the United States government may allow our competitors to protest our successful bids. The occurrence of any of these events may negatively affect our business, operating results and financial condition.

In order to maintain contracts we may obtain with government entities, we must also comply with many rules and regulations that may affect our relationships with other customers. For example, the United States government could terminate its contracts with us if we come under foreign government control or influence, may require that we disclose our pricing data during the course of negotiations, and may require us to prevent access to classified data. If the United States government requires us to meet any of these demands, it could increase our costs or prevent us from taking advantage of certain opportunities that may present themselves in the future. The United States government routinely investigates and audits government contractors’. It may audit our performance and our pricing, and review our compliance with rules and regulations. If it finds that we have improperly allocated costs, it may require us to refund those costs or may refuse to pay us for outstanding balances related to the improper allocation. An unfavorable audit could reduce our revenue, and may result in civil or criminal liability if the audit uncovers improper or illegal activities. This could harm our business, operating results and financial condition.

Third-party claims that we are infringing the intellectual property rights of others, whether successful or not, could subject us to costly and time-consuming litigation, require us to acquire expensive licenses, prohibit us from selling products and harm our business.

The storage and networking industries are characterized by the existence of a large number of patents, copyrights, trademarks, 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 January 5, 2012, Narada Systems, LLC, or Narada, filed suit against us in the Tyler Division of the United States District Court for the Eastern District of Texas alleging infringement of U.S. Patent Nos. 6,504,786 and 7,236,488. In October 2012, we made a cash payment to Narada of $0.7 million and issued 200,000 shares of Series D Preferred Stock in exchange for a license and such litigation was subsequently dismissed. The costs associated with any actual, pending or threatened litigation could negatively impact our operating results regardless of outcome.

 

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We currently have a number of agreements in effect pursuant to which we have agreed to defend, indemnify and hold harmless our customers, suppliers and channel partners from damages and costs which may arise from the infringement by our products of third-party patents, trademarks or other proprietary rights. The scope of these indemnity obligations varies, but may, in some instances, include indemnification for damages and expenses, including attorneys’ fees. Our insurance may not cover intellectual property infringement claims. A claim that our products infringe a third party’s intellectual property rights 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, divert management resources and attention and 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. In addition, parties to intellectual property litigation often announce the results of hearings, motions or other interim developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

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 July 31, 2013, we had 21 issued patents and 55 provisional and nonprovisional patent applications in the United States and 28 corresponding issued or allowed patents and 66 corresponding patent applications in foreign jurisdictions (including 21 Patent Cooperation Treaty applications). We cannot assure you that any patents will issue with respect to our 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 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 reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive with ours or that design around our intellectual property. While we endeavor to sign confidentiality agreements with our employees and others who may have access to our trade secrets, we cannot guarantee that we have entered into these agreements with all such parties, nor that the agreements we have entered will not be breached.

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,

 

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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.

Adverse economic conditions and reduced information technology spending could have an adverse impact on our revenue, revenue growth rates, and operating results.

Our business depends on the overall demand for information technology, and in particular for storage infrastructure, and on the capital spending budgets and financial health of our current and prospective customers. The purchase of our products is often discretionary and may require our customers to make significant initial commitments of capital. A general economic downturn, such as the slowdown that began in 2008, could dramatically reduce business spending on technology infrastructure. In response to a global economic slowdown, deterioration in their own financial condition, or an inability to obtain financing for capital investments, our customers and customer prospects could reduce or defer their spending on storage infrastructure, which could result in lost opportunities, declines in bookings and revenue, order cancellations or indefinite shipping delays.

The global economic environment has been volatile as a result of many factors, including the economic uncertainty faced by several European countries. If this volatility continues and there is a growing weakness in general economic conditions, a reduction in storage infrastructure spending, or deterioration in the financial condition of our customers and customer prospects will adversely impact our business, revenue, operating results and financial condition, including as a result of potential inventory writedowns, longer sales cycles, potential increases in price competition, reduced unit sales, increased number of days of sales outstanding and customer payment defaults.

If we experience declines in average selling prices, our revenue and gross profit may decline.

The data storage products industry is highly competitive and has historically been characterized by declines in average selling prices. It is possible that the market for flash-based data storage solutions could experience similar trends. Our average selling prices could decline due to pricing pressure caused by several factors, including competition, the introduction of alternative 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 sales volume or cost reductions, our gross margins and operating results would be adversely affected.

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 financing 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 could involve restrictive covenants, which may restrict our flexibility in operating our business and 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 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.

 

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We expect to face numerous challenges as we attempt to grow our operations, channel partner relationships and end-customer base internationally.

We have recently begun to grow our business internationally. Our revenue from international sales was 8%, 35%, 24% and 29% of our total revenue during fiscal 2011, 2012, 2013 and the six months ended July 31, 2013, respectively. Although we expect a portion of our future revenue growth will be from channel partners and end-customers located outside of the United States, we may not be able to increase international market demand for our products.

We expect to face numerous challenges as we attempt to grow our operations, channel partner relationships and end-customer base internationally, in particular attracting and retaining systems vendor partners and resellers with international capabilities or systems vendor partners and resellers located in international markets. Our revenue and expenses could be adversely affected by a variety of factors associated with international operations, some of which are beyond our control, including:

 

   

difficulties of managing and staffing international offices, and the increased travel, infrastructure and legal compliance costs associated with international locations;

 

   

difficulty in collecting accounts receivable and longer collection periods;

 

   

difficulty in contract enforcement;

 

   

regulatory, political or economic conditions in a specific country or region;

 

   

compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;

 

   

export and import controls, trade protection measures, FCPA compliance and other regulatory requirements;

 

   

effects of changes in currency exchange rates;

 

   

potentially adverse tax consequences;

 

   

service provider and government spending patterns;

 

   

reduced protection of our intellectual property and other assets in some countries;

 

   

greater difficulty documenting and testing our internal controls;

 

   

differing employment practices and labor issues; and

 

   

acts of terrorism and international conflicts.

We are an emerging growth company and may elect to comply with reduced public company reporting requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

We are an emerging growth company, as defined in Section 2(a) of the Securities Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any July 31 before the end of that five-year period, we would cease to be an emerging growth company as of the following January 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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Under the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We are considering whether to elect to avail ourselves of this exemption from new or revised accounting standards.

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

As a public company and particularly after we cease to be an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act and the Dodd-Frank Act of 2010, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, or NYSE, impose a number of requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal, accounting and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our products.

We incorporate open source software into our products. Although we monitor our use of open source software closely, we cannot guarantee that we are aware of all the open source software included in our products. Moreover, the terms of many open source licenses have not been interpreted by courts in or outside of the United States, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our products. In this event, we could be required to seek licenses from third parties in order to continue offering our products, to make generally available, in source code form, proprietary code that links to certain open source modules, to re-engineer our products, or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition.

We also incorporate proprietary third-party technologies, including software programs, into our products. We rely on license agreements to gain access to these third-party technologies and may need to enter into additional license agreements in the future. However, licenses to relevant third-party technology may not be or remain available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially adversely affect our business, operating results and financial condition.

We may acquire or make investments in other companies, each of which may divert our management’s attention, and result 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 other complementary products, technologies or businesses. We also may enter into strategic 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 or governmental approvals. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close. Acquisitions or investments may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or

 

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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 also expose us to unknown liabilities. Moreover, we cannot assure you that we would realize the anticipated benefits of any acquisition or investment. 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 significant 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.

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, corporate headquarters and our current contract manufacturer are located in the San Francisco Bay area, 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.

Our results of operations could be affected by natural catastrophes in locations in which our customers, suppliers or contract manufacturers operate.

Several of our customers, suppliers and our contract manufacturer 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, suppliers and our contract manufacturer. 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, including our sole flash memory supplier, Toshiba, 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 a natural disaster could postpone or cancel orders of our products, which would negatively impact our business. In addition, natural disaster could delay or prevent our contract manufacturer in the manufacture of our products, and we may need to qualify a replacement manufacturer. Moreover, should any of our key suppliers fail to deliver components to us as a result of a natural disaster, we may be unable to purchase these components in the 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.

Our reported financial results may be adversely affected by changes in accounting principles applicable to us.

Generally accepted accounting principles in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a

 

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change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below market expectations, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, product warranty, allowances for doubtful accounts, carrying values of inventories, determination of the fair value of common stock, stock based compensation, liabilities for unrecognized tax benefits, deferred income tax valuation allowances and the useful lives of property and equipment.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. Our existing NOLs may be subject to substantial limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs could be further limited by Section 382 of the Internal Revenue Code. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. Our net operating losses may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could materially and adversely affect our operating results, financial condition and cash flows.

Our provision for income taxes is subject to volatility and could be adversely affected by the following:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expiration of, or lapses in, the research and development tax credits;

 

   

transfer pricing adjustments;

 

   

tax effects of nondeductible compensation;

 

   

tax costs related to intercompany realignments;

 

   

changes in accounting principles;

 

   

changes in tax laws and regulations, including possible changes to the taxation of earnings in the United States of our foreign subsidiaries, and the deductibility of expenses attributable to foreign income, or the foreign tax credit rules; or

 

   

earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates.

 

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Significant judgment is required to determine the recognition and measurement attribute prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. The outcomes from these examinations may have a material adverse effect on our operating results, financial condition and cash flows.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in foreign markets.

Because we incorporate encryption technology into our products, our products are subject to United States export controls and may be exported outside the United States only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to introduce products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies affected by such regulations, could result in decreased use of our products by, or an inability to export or sell our products to, existing or prospective customers with international operations and harm our business. In addition, any failure by us to comply with these rules and regulations could subject us to significant fines and penalties.

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.

We are subject to environmental, health and safety laws and regulations pursuant to which we may incur substantial costs or liabilities, which could harm our business, operating results or financial condition.

We are subject to various state, federal, local and international laws and regulations relating to the environment or human health and safety, including those governing the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. These laws and regulations have been enacted in several jurisdictions in which we sell our products, including the European Union, or EU, and certain of its member countries. For example, the EU has enacted the Restriction on Hazardous Substances, or RoHS, and Waste Electrical and Electronic Equipment, or WEEE, directives. RoHS prohibits the use of certain substances, including lead, in certain products, including hard drives, sold after July 1, 2006. The WEEE directive obligates parties that sell electrical and electronic equipment in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member countries regarding distribution of the equipment and provide a mechanism to take back and properly dispose of the equipment. There is still some uncertainty in certain EU countries as to which party involved in the manufacture, distribution and sale of

 

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electronic equipment will be ultimately responsible for registration, reporting and disposal. Similar legislation may be enacted in other locations where we sell our products. We will need to ensure that we comply with these laws and regulations as they are enacted, and that our component suppliers also comply with these laws and regulations. If we or our component suppliers fail to comply with the legislation, our customers may refuse or be unable to purchase our products, which could harm our business, operating results and financial condition.

Pursuant to such laws and regulations, we could incur substantial costs and be subject to disruptions to our operations and logistics or other liabilities. For example, if we were found to be in violation of these laws or regulations, we could be subject to governmental fines or other sanctions and liability to our customers. In addition, we have to make significant expenditures to comply with such laws and regulations. Any such costs or liabilities pursuant to environmental, health or safety laws or regulations could have a material adverse effect on our business, operating results or financial condition.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial condition and results of operations.

While our international revenue has typically been denominated in U.S. dollars, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in revenue or profitability from sales in that country. We currently do not enter into hedging arrangements to minimize the impact of foreign currency fluctuations. Our exposure to foreign currency fluctuation may change over time as our business practices evolve and could have a material adverse impact on our financial condition and results of operations. Gains and losses on the conversion to U.S. dollars of accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in operating results.

Risks Related to this Offering and Our Common Stock

Our stock price may be volatile. Further, you may not be able to resell shares of our common stock at or above the price you paid.

Prior to this offering, there has been no public market for shares of our common stock, and an active public market for these shares may not develop or be sustained after this offering. We and the representatives of the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:

 

   

actual or anticipated variation in our and our competitors’ results of operations;

 

   

announcements by us or our competitors of new products, new or terminated significant contracts, commercial relationships or capital commitments;

 

   

issuance of new securities analysts’ reports or changed recommendations for our stock;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

commencement of, or our involvement in, litigation;

 

   

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

   

any major change in our management; and

 

   

general economic conditions and slow or negative growth of our markets.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating

 

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performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

If securities or industry analysts issue an adverse opinion regarding our stock or do not publish research or reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts or the content and opinions included in their reports. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. Further, securities analysts may elect not to provide research coverage of our common stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of our common stock.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares outstanding as of July 31, 2013, upon completion of this offering, we will have outstanding a total of              shares of common stock. Of these shares, only the shares of common stock sold in this offering will be freely tradable, without restriction, in the public market immediately after the offering. Each of our directors and officers, and holders of an aggregate of     % of our outstanding shares has entered into lock-up agreements with the underwriters that restrict their ability to sell or transfer their shares. The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus, although they may be extended for up to an additional 34 days under certain circumstances. Our underwriters, however, may, in their sole discretion, waive the contractual lock-up prior to the expiration of the lock-up agreements. After the lock-up agreements expire, based on 127,057,199 shares outstanding as July 31, 2013, up to an additional              shares of common stock will be eligible for sale in the public market, of which              shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, and various vesting agreements. In addition, 31,634,957 shares of common stock are subject to outstanding options and RSUs as of July 31, 2013. These shares will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. We intend to file a registration statement on Form S-8 under the Securities Act covering all of the shares of common stock subject to options and RSUs outstanding and reserved for issuance under our stock plans. This registration statement will become effective immediately upon filing, and shares covered by this registration statement will be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates and any lock-up agreements described above. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

Insiders have substantial control over us and will be able to influence corporate matters.

As of July 31, 2013, directors and executive officers and their affiliates beneficially owned, in the aggregate, 17.9% of our outstanding capital stock. In addition, a large percentage of our outstanding capital stock is held by only two stockholders, Toshiba and Rationalwave, who together beneficially own an aggregate of 21.1% as of July 31, 2013. Rationalwave is an affiliate of one of our directors. As a result of this concentrated ownership, our directors, executive officers and these stockholders will be able to exercise significant influence over all matters requiring

 

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stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. This intention of these stockholders may be different from those of other investors.

Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control and may affect the trading price of our common stock.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:

 

   

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

 

   

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

 

   

specify that special meetings of our stockholders can be called only by our board of directors or the chief executive officer;

 

   

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

 

   

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

 

   

provide that our directors may be removed only for cause;

 

   

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

 

   

specify that no stockholder is permitted to cumulate votes at any election of directors; and

 

   

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

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a business combination with an interested stockholder subject to certain exceptions.

We will have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business.

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

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $         in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $         per share. See “Dilution” for more information. In addition, new investors who purchase shares in this offering will contribute approximately     % of the total amount of equity capital raised by us through the date of this offering, but will only own approximately     % of

 

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the outstanding share capital. The exercise of outstanding options will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

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

We have not paid cash dividends on any of our classes of capital stock to date and currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock would be the sole source of gain for the foreseeable future.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect” or the negative version of these words and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” 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. Forward-looking statements include, but are not limited to, statements about:

 

   

our financial performance, including our revenue, cost of revenue and operating expenses;

 

   

our ability to effectively manage our growth;

 

   

our ability to attract and retain customers;

 

   

anticipated trends and challenges in our business and the competition that we face;

 

   

our liquidity and working capital requirements; and

 

   

our expectations regarding the use of proceeds from this offering.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date on which it is made. We disclaim any duty to update any of these forward-looking statements after the date of this prospectus to confirm these statements to actual results or revised expectations.

INDUSTRY DATA

This prospectus also contains statistical data and estimates, including those relating to market size and growth rates of the markets in which we participate, that we obtained from industry publications and reports generated by International Data Corporation, or IDC, and Gartner, Inc. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Although we have assessed the information in the publications and found it to be reasonable and believe the publications are reliable, we have not independently verified their data.

OTHER INFORMATION

In this prospectus, “Company,” “we,” “us,” and “our” refer to Violin Memory, Inc. and its subsidiaries. The name “Violin Memory” is our trademark. This prospectus also contains trademarks and trade names that are the property of their respective owners.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock in this offering will be $         , based on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses. If the underwriters’ option to purchase additional shares is exercised in full, we estimate that we will receive additional net proceeds of $         . A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by $         million, after deducting underwriting discounts and commissions and estimated offering expenses payable, assuming that the number of shares, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1.0 million shares in the number of shares offered would increase (decrease) the net proceeds by $         million, assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable.

We currently intend to use the net proceeds from this offering for working capital and general corporate purposes, including further expansion of our sales and marketing efforts, continued investments in research and development and for capital expenditures. Specifically, we intend to hire additional personnel to support the growth in our business. In addition, we intend to use a portion of the net proceeds from this offering to repay all of our outstanding debt that will not convert into common stock upon the closing of this offering. As of July 31, 2013, we had an aggregate of $20.3 million outstanding on such debt arrangements. For an additional discussion of our debt arrangements, including the applicable interest rates, please see the discussion of our Liquidity and Capital Resources in the section below entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A portion of the net proceeds from this offering is required to fund our operations and expansion plans over the next 12 months. Based on our current operating assumptions, we believe we will use between $50 million and $60 million of our net proceeds from this offering to fund our operations for the next 12 months. The exact amount of net proceeds we use for our operations and expansion plans, however, will depend on the amount of cash generated from our operations and any strategic decisions we may make that could alter our expansion plans and the amount of cash necessary to fund these plans. In addition, we may use a portion of the net proceeds from this offering for acquisitions of complementary businesses, technologies or other assets. We have no agreements or understandings with respect to any acquisitions or investments at this time and we have not allocated specific amounts of net proceeds for any of these purposes.

We cannot specify with certainty the uses for the net proceeds to be from this offering. Accordingly, our management team will have broad discretion in using the net proceeds to be received by us from this offering.

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

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Our debt agreement restricts our ability to pay cash dividends on our common stock and we may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of July 31, 2013, as follows:

 

   

on an actual basis as of July 31, 2013;

 

   

on a pro forma basis to give effect to the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock immediately prior to the completion of this offering and the conversion of convertible notes, including accrued interest thereon, assuming the conversion as of August 31, 2013 and an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus; and

 

   

on a pro forma as adjusted basis to give effect to the conversion of all outstanding shares of our convertible preferred stock into shares of our common stock immediately prior to the completion of this offering, the conversion of convertible notes, including accrued interest thereon, assuming the conversion as of August 31, 2013 and an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, and the receipt of the net proceeds from the sale of              shares of common stock in this offering at an assumed initial public offering price of $          per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated expenses payable and the application of the net proceeds from this offering to pay off all of our outstanding debt as described in “Use of Proceeds”.

You should read this table in conjunction with “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of July 31, 2013  
     Actual     Pro
Forma
    Pro Forma as
Adjusted(1)
 
     (unaudited)  
     (In thousands, except share and per share data)  

Cash and cash equivalents

   $ 33,463      $ 33,463      $                    
  

 

 

   

 

 

   

 

 

 

Line of credit and debt, including current portion

   $ 20,165      $ 20,165      $ —     
  

 

 

   

 

 

   

 

 

 

Convertible notes and related accrued interest

   $ 2,477      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Preferred stock, par value $0.0001 per share: 111,000,000 shares authorized, 95,144,515 issued and outstanding, actual; 10,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

     10        —          —     

Common stock, par value $0.0001 per share: 250,000,000 shares authorized, 31,627,609 shares issued and outstanding, actual; 1,000,000,000 shares authorized,             shares issued and outstanding, pro forma and              shares issued and outstanding, pro forma as adjusted

     4        14     

Additional paid-in capital

     279,324        281,801     

Accumulated other comprehensive loss

     (6     (6 )    

Accumulated deficit

     (261,985     (261,985  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

   $ 17,347      $ 19,824      $     
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 17,347      $ 19,824      $     
  

 

 

   

 

 

   

 

 

 

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total stockholders’ equity and total capitalization by $         million, assuming that the number of shares, as set forth on the cover page of this prospectus, remains the same, and after deducting

 

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  underwriting discounts and commissions. Each increase (decrease) of 1.0 million shares in the number of shares would increase (decrease) cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $         million assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and terms of this offering determined at pricing.

If the underwriters’ option to purchase additional shares were exercised in full, pro forma as adjusted cash and cash equivalents, common stock and additional paid-in capital, stockholders’ equity and shares issued and outstanding as of July 31, 2013 would be $        , $        , $        and             , respectively.

The number of shares of common stock that will be outstanding after this offering is based on 127,057,199 shares outstanding as of July 31, 2013, and excludes:

 

   

11,161,477 shares of common stock issuable upon the exercise of options outstanding as of July 31, 2013, at a weighted-average exercise price of $0.47 per share;

 

   

20,473,480 shares of common stock subject to restricted stock units, or RSUs, outstanding as of July 31, 2013, including 5,354,317 RSUs for which the service condition was satisfied as of July 31, 2013 and which will vest on the earlier of 181 days following the completion of this offering or March 15 in the year following the completion of this offering;

 

   

             shares of common stock, subject to increase on an annual basis, reserved for issuance under our 2012 Stock Incentive Plan, which reserve includes the 6,739,757 shares of common stock available for issuance under our 2005 Stock Plan. On the date of this prospectus, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Stock Incentive Plan and we will cease granting awards under the 2005 Stock Plan;

 

   

             shares of common stock issuable upon automatic conversion of our convertible notes and accrued interest thereon assuming the conversion as of August 31, 2013 and an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus;

 

   

133,833 shares of common stock issuable upon conversion of 131,875 shares of Series D convertible preferred stock issuable upon exercise of outstanding warrants, which will convert into warrants to purchase common stock at the initial public offering; and

 

   

             shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 2012 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 ownership 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 as adjusted net tangible book value per share of our common stock immediately after this offering. Pro forma net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering.

As of July 31, 2013, our pro forma net tangible negative book value was approximately $        million, or $        per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the shares of common stock outstanding as of July 31, 2013, assuming the conversion of all outstanding shares of our convertible preferred stock.

After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $        per share, the midpoint of the price range set forth on the front cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of July 31, 2013 would have been $        million, or $        per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $        per share to existing stockholders and an immediate dilution of $        per share to new investors purchasing shares in this offering, as illustrated this dilution:

 

Assumed initial public offering price per share

      $                

Pro forma net tangible book value per share as of January 31, 2013

   $                   

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

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

     
     

 

 

 

Dilution per share to investors in this offering

      $                
     

 

 

 

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

If the underwriters’ option to purchase additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $        per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $        per share and the dilution to new investors purchasing shares in this offering would be $        per share.

The following table presents, on a pro forma as adjusted basis as of July 31, 2013, after giving effect: (i) to the conversion of all outstanding shares of convertible preferred stock and outstanding convertible notes, including interest thereon as of the date of this prospectus, into common stock assuming the conversion immediately prior

 

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to the completion of this offering; and (ii) to this offering on an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, the differences between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid, which includes net proceeds received from the issuance of common, convertible preferred stock, convertible notes, cash received from the exercise of stock options and the value of any stock issued for services and the average price paid per share (in thousands, except per share amounts and percentages):

 

     Shares Purchased      Total Consideration(1)         
     Number    Percent      Amount      Percent      Average price
per share
 

Existing stockholders

                        %       $                                              %       $                    

New investors

               $     
  

 

  

 

 

    

 

 

    

 

 

    

Totals

        100%       $           100%      
  

 

  

 

 

    

 

 

    

 

 

    

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $        million, assuming that the number of shares, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable. An increase (decrease) of 1.0 million shares in the number of shares would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholders by $        million assuming a price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable.

If the underwriters exercise their option to purchase additional shares from us in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding immediately after this offering.

The number of shares of common stock that will be outstanding after this offering is based on 127,057,199 shares outstanding as of July 31, 2013, and excludes:

 

   

11,161,477 shares of common stock issuable upon the exercise of options outstanding as of July 31, 2013, at a weighted-average exercise price of $0.47 per share;

 

   

20,473,480 shares of common stock subject to restricted stock units, or RSUs, outstanding as of July 31, 2013, including 5,354,317 RSUs for which the service condition was satisfied as of July 31, 2013 and which will vest on the earlier of 181 days following the completion of this offering or March 15 in the year following the completion of this offering;

 

   

             shares of common stock, subject to increase on an annual basis, reserved for issuance under our 2012 Stock Incentive Plan, which reserve includes the 6,739,757 shares of common stock available for issuance under our 2005 Stock Plan. On the date of this prospectus, any remaining shares available for issuance under our 2005 Stock Plan will be added to the shares reserved under our 2012 Stock Incentive Plan and we will cease granting awards under the 2005 Stock Plan;

 

   

             shares of common stock issuable upon automatic conversion of our convertible notes and accrued interest thereon assuming the conversion as of August 31, 2013 and an initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus;

 

   

133,833 shares of common stock issuable upon conversion of 131,875 shares of Series D convertible preferred stock issuable upon exercise of outstanding warrants, which will convert into warrants to purchase common stock at the initial public offering; and

 

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             shares of common stock, subject to increase on an annual basis, reserved for future issuance under our 2012 Employee Stock Purchase Plan, which will become effective in connection with this offering.

To the extent that any outstanding options are exercised, outstanding RSUs are settled or new options or RSUs are issued under our incentive plans, there will be further dilution to investors participating in this offering. If all outstanding options under our 2005 Stock Plan as of July 31, 2013 were exercised and all outstanding RSUs settled, then our existing stockholders, including the holders of options and RSUs, would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon the completion of this offering. In such event, the total consideration paid by our existing stockholders, including the holders of options and RSUs, would be approximately $        million, or     %, the total consideration paid by our new investors would be $        million, or     %, the average price per share paid by our existing stockholders would be $        and the average price per share paid by our new investors would be $        per share.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the selected consolidated statements of operations data for the fiscal years ended January 31, 2011, 2012 and 2013, and the consolidated balance sheet data as of January 31, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the summary consolidated statements of operations data for the six months ended July 31, 2012 and 2013 and our summary consolidated balance sheet data as of July 31, 2013 from our unaudited consolidated financial statements and related notes included elsewhere in this prospectus. Our unaudited consolidated financial statements were prepared on the same basis as our audited consolidated financial statements and include, in our opinion, all adjustments, which consisted of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those financial statements. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected consolidated historical financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, related notes and other financial information included elsewhere in this prospectus. The selected consolidated financial data is qualified in its entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended January 31,     Six Months Ended
July 31,
 
     2011     2012     2013     2012     2013  
                       (unaudited)  
    

(In thousands, except per share data)

 

Consolidated Statements of Operations Data:

          

Revenue:

          

Product revenue

   $ 11,031      $ 52,541      $ 69,584      $ 29,055      $ 46,073   

Services revenue

     366        1,347        4,214        1,247        5,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     11,397        53,888        73,798        30,302        51,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

          

Cost of product revenue(1)

     7,953        38,110        38,180        15,760        26,738   

Cost of services revenue(1)

     125        1,156        4,474        1,524        3,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     8,078        39,266        42,654        17,284        30,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,319        14,622        31,144        13,018        21,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(1)

     9,701        26,641        57,840        25,015        34,734   

Sales and marketing(1)

     5,323        21,493        61,094        24,886        36,876   

General and administrative(1)

     4,895        6,222        21,105        11,350        8,150   

Litigation settlement

     —          2,100        —          —       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,919        56,456        140,039        61,251        79,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,600     (41,834     (108,895     (48,233     (58,517

Other income (expense), net

     110        89        (79     (16     (286

Interest expense,

     (251     (3,033     (31     (31     (342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (16,741     (44,778     (109,005     (48,280     (59,145

Income taxes

     1        7        97        15        27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (16,742   $ (44,785   $ (109,102   $ (48,295   $ (59,172
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic and diluted

   $ (1.55   $ (2.38   $ (4.00   $ (1.90   $ (1.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted

     10,808        18,792        27,248        25,437        30,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share of common stock, basic and diluted

       $ (0.92     $     
      

 

 

     

 

 

 

Pro forma weighted-average number of shares of common stock, basic and diluted

         118,964       
      

 

 

     

 

 

 

 

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(1) Includes stock-based compensation as follows:

 

     Year Ended
January 31,
     Six Months Ended
July 31,
 
     2011      2012      2013      2012      2013  
                          (unaudited)  
     (In thousands)  

Cost of product revenue

   $ 1       $ 15       $ 150       $ 18       $ 39   

Cost of services revenue

     —           4         474         101         651   

Research and development

     23         236         3,228         1,308         2,620   

Sales and marketing

     59         299         4,061         1,539         3,280   

General and administrative

     21         492         10,010         5,632         3,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $      104       $   1,046       $ 17,923       $   8,598       $ 9,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     January 31,     July 31,
2013
 
     2012     2013    
                 (unaudited)  
     (In thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 22,604      $ 17,378      $ 33,463   

Working capital

     37,689        32,175        16,963   

Total assets

     73,285        88,150        112,886   

Line of credit and debt, including current portion

     —          —          20,165   

Convertible notes and related accrued interest

     688        —          2,477   

Total liabilities

     29,134        43,426        95,539   

Convertible preferred stock

     8        9        10   

Additional paid-in-capital

     137,938        247,531        279,324   

Accumulated deficit

     (93,711     (202,813     (261,985

Total stockholders’ equity

     44,151        44,724        17,347   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this prospectus.

Overview

We were incorporated in 2005 with the goal of bringing storage performance in line with advancements in server and network technologies. Since our inception, we have focused on persistent memory-based technology as the key to solving the performance limitations of traditional storage solutions in the data center environment. We have invested significantly in our research and development efforts to design hardware and software at each level of the system architecture starting with memory and optimized through the array level to capitalize on the benefits of flash technology. We were recapitalized in 2009 with the arrival of our current chief executive officer, Donald G. Basile. In 2009, we transitioned to build an enterprise-class all-flash storage solution serving diverse end markets and applications. In May 2010, we introduced our 3000 Series Flash Memory Array to accelerate business-critical applications.

In March 2010, we established a relationship with Toshiba, one of the two largest providers of flash memory. Through this relationship, we have developed a fundamental understanding of Toshiba’s flash specifications at the chip level, which allows us to optimize our hardware and software technologies to unlock the inherent performance capabilities of flash memory and better anticipate future innovations in memory technology.

In September 2011, we expanded our product offering with the introduction of our 6000 Series Flash Memory Arrays, which is based on our four-layer architecture that significantly improves performance density, or IOPS per rack unit. In March 2013, we expanded our innovation in persistent memory technologies and proprietary techniques in flash management from our memory arrays to our PCIe Flash Memory Cards. Our PCIe Flash Memory Cards leverage our expertise in persistent memory-based storage and controller design, as well as our vMOS software stack, to offer a differentiated architecture in a widely deployable PCIe form factor. We intend to devote substantial resources to continue to develop innovative solutions that optimize the performance capability of flash memory technology and enhance our vMOS software stack to incorporate additional data management functionality. It typically takes us between 18 to 24 months to develop a new product, and we would expect to phase out existing product lines when a new generation of a product line becomes available. Generally, we begin our product development cycle when the release by our supplier of next generation NAND flash memory is anticipated.

We market and sell our products directly to end-customers and through channel partners, including systems vendors, technology partners and resellers. As of July 31, 2013, we had 221 sales and marketing employees worldwide as well as over 100 channel partners in over 30 countries. As of July 31, 2013, we believe our Flash Memory Arrays had been deployed by over 250 end-customers. We intend to continue to hire additional sales personnel as we increase our direct sales capacity and geographic reach. We and our authorized service providers also sell support services to our end-customers.

An initial sale by us to an end-customer typically requires three to nine months of selling effort as we educate the prospective end-customer about the technical merits, potential cost savings and other benefits of our products as compared to our competitors’ products. Our sales process typically includes a trial deployment of our systems in the end-customer’s data center. We currently derive and expect to continue to derive a significant portion of our revenue from existing end-customers. The selling effort required for repeat orders from end-customers is usually less time-consuming than that required for initial orders. We maintain a close relationship with our end-customers through our client teams consisting of sales, service and support and technical personnel. It has generally taken

 

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between six and twelve months for us to establish a relationship with a systems vendor or technology partner, because our products are often integrated into a broader enterprise solution offered by them. Once we establish a relationship with a systems vendor or technology partner, we work with them to co-market our solutions. In fiscal 2012, our primary systems vendor partner was Hewlett-Packard for our 3000 Series Flash Memory Array. To date, Hewlett-Packard has not sought to qualify our 6000 Series Flash Memory Array. We recently established new relationships with additional systems vendors and technology partners that are focused primarily on our 6000 Series Flash Memory Arrays and, to date, we have not derived significant revenue from these new relationships.

A limited number of customers have accounted for a substantial majority of our revenue, and the composition of the group of our largest customers has changed from period to period. Some of our end-customers make periodic purchases of our system solutions in large quantities to complete or upgrade specific large-scale storage installations. Purchases are typically made on a purchase order basis rather than pursuant to long-term contracts. Revenue from our five largest customers was 72%, 83% and 37% of total revenue for fiscal 2011, 2012 and 2013, and 54% and 32% for the six months ended July 31, 2012 and 2013, respectively. As a consequence of these concentrated purchases by a shifting customer base, we believe that revenue may fluctuate in future periods, and period-to-period comparisons of revenue and operating results are not necessarily meaningful and should not be relied upon as an indication of future performance.

Our sales are principally denominated in U.S. dollars. Revenue from customers with a bill-to location in the United States accounted for 92%, 65%, 76% and 71% of total revenue for fiscal 2011, 2012, 2013 and for the six months ended July 31, 2013, respectively.

We outsource the manufacturing of our hardware products to a single contract manufacturer, Flextronics. We believe this arrangement makes our operations more efficient and flexible. We procure the flash memory components used in our products directly from Toshiba. Our manufacturer procures, on our behalf, the remaining components used in our products. To date, we have not experienced a material shortage of supply of any components. However, because we only have one manufacturer qualified to manufacture our products and some of our components, such as flash memory, are procured from a single-source supplier, we could face product shortages and component shortages, which could prevent us from fulfilling customer orders.

We have experienced significant losses as we have continued to invest in our product development, customer service and sales and marketing organizations. We have funded our activities primarily through equity financings. As of July 31, 2013, we had an accumulated deficit of $262.0 million. We intend to increase our investments in our marketing services and sales organization and to continue investing significantly in research and development at the expense of near-term profitability. As a result, we anticipate that we will incur net losses at least for the next several quarters. We expect our research and development, sales and marketing, and general and administrative expenses to decrease as a percentage of revenue over time as we anticipate that we will realize economies of scale by increasing our customer base without direct incremental development costs and by reducing our manufacturing costs as a result of more favorable pricing terms as we increase the volume of our manufacturing orders.

As of July 31, 2013, we had 445 employees, including 186 in research and development. We have substantially grown our business for the past three years with total revenue of $11.4 million, $53.9 million and $73.8 million in fiscal 2011, 2012 and 2013, respectively and $30.3 million and $51.3 million for the six months ended July 31, 2012 and 2013, respectively. We had a net loss of $16.7 million, $44.8 million and $109.1 million in fiscal 2011, 2012 and 2013, respectively and $59.2 million for the six months ended July 31, 2013. Although we have experienced significant growth in our revenue, you should not assume that our historical growth in revenue is indicative of our future growth.

Key Trends Affecting Our Results of Operations

Adoption of Flash-Based Solutions

There has been an increasing shift towards the use of persistent memory-based solutions by organizations, across array and server-based configurations. Traditional data center architectures have typically deployed disk-based

 

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storage approaches. We believe that flash memory technology has the significant potential to displace HDDs in primary storage solutions and bring storage solutions in line with other advanced data center technologies. Our success, however, depends on the adoption of flash-based solutions in both enterprise data center and hyperscale cloud environments. A lack of demand for flash-based storage solutions for any reason, including technological challenges associated with the use of flash memory or the adoption of competing technologies and products, would adversely affect our growth prospects. To the extent more enterprise IT organizations recognize the benefits of flash memory in data center storage solutions and as the adoption of flash memory technology as primary storage increases, our target customer base will expand.

Relationships with Systems Vendors and Technology Partners

One of the keys to growing our business is our ability to broaden our routes to market and our geographic reach. A key component of this strategy is our intention to establish relationships with systems vendors and technology partners. Systems vendors incorporate our products into a broader enterprise solution offered by them. These relationships also allow us to leverage the account control, marketing, brand and other resources of our systems vendor partners to reach more potential customers and broaden our target markets. Technology partners allow us to enhance our product offerings by leveraging leading technologies that are well-accepted in the marketplace. Our relationships with technology partners also extend our reach into different end markets and new target end-customers. Continued success in establishing relationships with systems vendors and technology partners would allow us to grow our business by expanding our target markets and distribution capabilities.

Size of our Field Organization, Including Sales, Field Application Engineers and Customer Support Personnel

We target large customer storage deployments in the data center. Often, our end-customer relationships start with a limited initial deployment of our products to demonstrate the performance benefits of our solution. Our objective is to leverage initial deployments into large-scale deployments as our customers’ experience with our products and their storage performance and capacity requirements increase. In an effort to do this, we maintain a very close relationship with our end-customers through the efforts of our field organization. Our ability to grow our business and to establish a growing number of these high-touch end-customer relationships is dependent upon our ability to expand the size of our field organization in an efficient and effective manner. As we grow our field organization, we must closely monitor productivity to ensure our investments in personnel are translating into product sales and positive operating results.

Cost of Flash Memory

A significant percentage of our cost of revenue is the cost of flash memory. We have a relationship with Toshiba, our sole supplier of our flash memory components. Although we have historically received competitive pricing from Toshiba, our agreement with Toshiba does not provide us with fixed pricing. We are required to purchase 70% of our requirements of flash memory from Toshiba, subject to specified conditions, and design our products to be substantially compatible with Toshiba. However, our supply of flash memory from Toshiba is not guaranteed. There are many variables that may change our cost to procure flash memory. If the component costs of flash memory were to increase, we may not be able to pass on the cost increase to our customers, which could harm our gross margin and operating results. If the component costs of flash memory were to decrease, we may be able to leverage these cost savings into offering a more competitive solution to our end-customers.

Components of Consolidated Statements of Operations

Revenue

We derive revenue primarily from the sale of our Flash Memory Array products and related support services. We sell our products on a purchase order basis directly to end-customers and through channel partners, including systems vendors and resellers. Our mix of sales between end-customers and channel partners impacts the average

 

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selling price of our products. We derive support services revenue from the sale of our premium support services. These support services are provided pursuant to support terms that generally are for either one- or three-year durations. Support services are typically billed in advance on an annual basis or at the inception of a multiple year support contract, and revenue is recognized ratably over the support period. Revenue from support services was less than 10% of total revenue for all the annual periods presented, but consistent with the six months ended July 31, 2013, we expect our support revenue to be greater than 10% of our total revenue in future periods as support contracts are renewed, the installed base of Flash Memory Arrays grows and we begin recognizing revenue under our development agreement with Toshiba.

Cost of Revenue

Cost of revenue consists primarily of component costs, amounts paid to our contract manufacturer to assemble our products, shipping and logistics costs and estimated warranty obligations. The largest portion of our cost of revenue consists of the cost of flash memory components. Neither our contract manufacturer nor we enter into supply contracts with fixed pricing for our product components, including our flash memory, which can cause our cost of revenue to fluctuate from quarter to quarter. We may not be able to pass flash or component cost increases to our customers immediately or at all resulting in lower gross margins. Cost of revenue is recorded when the related product revenue is recognized. Cost of revenue also includes personnel expenses related to customer support and carrying value adjustments recorded for excess and obsolete inventory. We intend to add customer support personnel to increase our customer support efforts as we increase the installed base of our Flash Memory Arrays globally.

Operating Expenses

Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. The largest component of our operating expenses is personnel costs, consisting of salaries, benefits and incentive compensation for our employees, including stock-based compensation. As a result, operating expenses have increased significantly over the past three fiscal years, but have decreased as a percentage of revenue. We expect operating expenses to increase in absolute dollars, although they may fluctuate as a percentage of revenue from period to period, as we continue to grow our employee base.

Research and Development

Research and development expenses consist primarily of personnel costs, prototype expenses, software tools, consulting services and allocated facilities costs. Consulting services generally consist of contracted engineering consulting for specific projects on an as-required basis. We recognize research and development expense as incurred. We expect to continue to devote substantial resources to the development of our products including the development of new software capabilities within our vMOS software stack. We believe that these investments are necessary to maintain and improve our competitive position. In particular, we anticipate that we will continue to hire additional engineering personnel with a focus on hiring additional software engineers and add infrastructure to support these personnel in future periods.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel costs, incentive compensation, marketing programs, travel-related expenses, consulting expenses associated with sales and marketing activities and allocated facilities costs. We plan to continue to invest heavily in sales effort principally by increasing headcount. Our sales personnel are typically not immediately productive, and therefore, the increase in sales and marketing expenses 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 cause our future period-to-period financial performance to fluctuate. We expect to generate a larger percentage of our sales from direct sales or through resellers with whom we will be directly involved in the sales process with the end-customer. This type of selling typically requires greater involvement of our direct sales force than sales to systems vendors and may increase our sales and marketing expense as a percentage of revenue.

 

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General and Administrative

General and administrative expenses consist primarily of personnel costs, legal expenses, consulting and professional services, insurance and allocated facilities costs for our executive, finance, human resources 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 related to compliance with rules and regulations implemented by the SEC and the NYSE, as well as additional insurance, investor relations and other costs associated with being a public company.

Other Income (Expense), Net

Other income (expense), net consists of interest income and foreign currency gains and losses.

Interest Expense

Interest expense consists of debt extinguishment loss and interest related to convertible notes issued in connection with equity financings.

Provision for Income Taxes

From inception through July 31, 2013, we incurred operating losses and, accordingly, have not recorded a provision for U.S. federal income taxes but have recorded provisions for foreign income and state franchise taxes.

Results of Operations

The following table summarizes our historical consolidated statements of operations data for the periods shown:

 

     Year Ended January 31,     Six Months Ended
July 31,
 
           2011                 2012                 2013               2012             2013      
                       (unaudited)  
     (In thousands, except per share data)  

Revenue:

          

Product revenue

   $ 11,031      $ 52,541      $ 69,584      $ 29,055      $ 46,073   

Services revenue

     366        1,347        4,214        1,247        5,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     11,397        53,888        73,798        30,302        51,303   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

          

Cost of product revenue(1)

     7,953        38,110        38,180        15,760        26,738   

Cost of services revenue(1)

     125        1,156        4,474        1,524        3,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     8,078        39,266        42,654        17,284        30,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,319        14,622        31,144        13,018        21,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(1)

     9,701        26,641        57,840        25,015        34,734   

Sales and marketing(1)

     5,323        21,493        61,094        24,886        36,876   

General and administrative(1)

     4,895        6,222        21,105        11,350        8,150   

Litigation settlement

     —          2,100        —          —       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,919        56,456        140,039        61,251        79,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (16,600     (41,834     (108,895     (48,233     (58,517

Other income (expense), net

     110        89        (79     (16     (286

Interest expense

     (251     (3,033     (31     (31     (342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (16,741     (44,778     (109,005     (48,280     (59,145

Income taxes

     1        7        97        15        27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (16,742   $ (44,785   $ (109,102   $ (48,295   $ (59,172
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic and diluted

   $ (1.55   $ (2.38   $ (4.00   $ (1.90   $ (1.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted

     10,808        18,792        27,248        25,437        30,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) Includes stock-based compensation as follows:

 

     Year Ended
January  31,
     Six Months Ended
July 31,
 
     2011      2012      2013      2012      2013  
            (unaudited)  
     (In thousands)  

Cost of product revenue

   $ 1       $ 15       $ 150       $ 18       $ 39   

Cost of services revenue

     —           4         474         101         651   

Research and development

     23         236         3,228         1,308         2,620   

Sales and marketing

     59         299         4,061         1,539         3,280   

General and administrative

     21         492         10,010         5,632         3,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $      104       $   1,046       $ 17,923       $ 8,598       $ 9,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes our historical consolidated statements of operations data as a percentage of revenue for the periods shown:

 

     Year Ended
January 31,
    Six Months Ended
July 31,
 
         2011             2012             2013             2012             2013      
                       (unaudited)  

Revenue:

          

Product revenue

     97     98     94     96     90

Services revenue

     3        2        6        4        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

          

Cost of product revenue

     72        73        55        54        58   

Cost of services revenue

     34        86        106        122        64   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     71        73        58        57        59   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     29        27        42        43        41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     85        49        78        83        67   

Sales and marketing

     47        40        83        82        72   

General and administrative

     43        11        29        37        15   

Litigation settlement

     —          4        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     175        104        190        202        154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (146     (77     (148     (159     (113

Other income (expense), net

     1        —          —          —          (1

Interest expense

     (2     (6     —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (147     (83     (148     (159     (115

Income taxes

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (147 )%      (83 )%      (148 )%      (159 )%      (115 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of the First Six Months of Fiscal 2013 and Fiscal 2014

Revenue

 

     Six Months Ended
July 31,
     Change in  
          2012              2013          $      %  
     (In thousands and unaudited)  

Product revenue

   $ 29,055       $ 46,073       $ 17,018         59

Services revenue

     1,247         5,230         3,983         319
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 30,302       $ 51,303       $ 21,001         69
  

 

 

    

 

 

    

 

 

    

Total revenue increased $21.0 million to $51.3 million for the six months ended July 31, 2013 as compared to

$30.3 million for the six months ended July 31, 2012. The increase was primarily due to an increase in product revenue by $17.0 million and services revenue by $4.0 million. The product revenue increase was primarily due to an increase of approximately 80% in the number of Flash Memory Arrays sold, partially offset by a decline in average selling price. During the second half of fiscal 2013, we introduced 6000 Series Flash Memory Arrays with smaller capacities. Consequently, a portion of the decline in average selling prices resulted from our selling smaller capacity arrays at lower average selling prices as well as unit price declines typical in our industry. Sales of our 6000 Series Flash Memory Arrays represented approximately 84% and 94% of our product revenue for the six months ended July 31, 2012 and 2013. The increase in service revenue of $4.0 million was primarily due to growth in our installed base.

Total revenue from our five largest customers for the six months ended July 31, 2012 and 2013 was 54% and 32% of total revenue, respectively. For the six months ended July 31, 2012, sales to Super Micro, a reseller, represented 15%, CompSec, a reseller, represented 13% and ePlus, a reseller, represented 10% of our total revenue. For the six months ended July 31, 2013, Avnet, a reseller, represented 12% of our total revenue. No other customer accounted for more than 10% of total revenue in the first six months of fiscal 2012 or 2013. It is our understanding that Avnet purchased our products for resale to a large global retailer, CompSec purchased our products for resale to the U.S. Federal government, ePlus purchased our products for resale to AOL and Super Micro purchased our products for resale to Trunkbow International Holdings, Ltd.

Cost of Revenue and Gross Margin

 

      Six Months Ended
July 31,
    Change in  
         2012             2013         $      %  
     (In thousands and unaudited)  

Cost of product revenue

   $ 15,760      $ 26,738      $ 10,978         70

Cost of services revenue

     1,524        3,322        1,798         118
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 17,284      $ 30,060      $ 12,776         74
  

 

 

   

 

 

   

 

 

    

Gross profit

   $ 13,018      $ 21,243      $ 8,225         63
  

 

 

   

 

 

   

 

 

    

Product gross margin

     46     42     

Services gross margin

     (22 %)      36     

Total gross margin

     43     41     

Cost of revenue increased $12.8 million from $17.3 million for the six months ended July 31, 2012 to $30.1 million for the six months ended July 31, 2013. The increase was due to increases in the cost of product revenue of $11.0 million and cost of services revenue of $1.8 million. The increase in cost of product revenue

 

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was primarily due to an approximately 80% increase in the number of Flash Memory Arrays sold. The increase in cost of services revenue was primarily due to increase in headcount to support our increased customer base.

Gross profit increased $8.2 million from $13.0 million for the six months ended July 31, 2012 to $21.2 million for the six months ended July 31, 2013. Gross margin decreased to 41% for the six months ended July 31, 2013 as compared to 43% for the year ago period primarily due to lower selling prices of our Flash Memory Arrays, partially offset by improvements in our service margin. We expect our gross margin to improve as our sales volume increases and as we introduce new Flash Memory Array products with higher densities and higher average selling prices and increase sales of our Velocity Flash Memory PCle cards.

Operating Expenses

 

      Six Months Ended
July 31,
     Change in  
         2012              2013          $      %  
     (In thousands and unaudited)  

Research and development

   $ 25,015       $ 34,734       $ 9,719         39

Research and development expenses increased $9.7 million from $25.0 million for the six months ended July 31, 2012 to $34.7 million for the six months ended July 31, 2013. The increase was primarily due to an increase in personnel-related costs of $5.1 million as we increased the number of research and development employees from 161 employees as of July 31, 2012 to 186 employees as of July 31, 2013, principally to enhance our software capabilities and expand our product portfolio. We also experienced increases in purchased software development costs of $3.0 million, stock-based compensation of $1.3 million and prototype expenses of $0.3 million.

 

      Six Months Ended
July 31,
     Change in  
         2012              2013          $      %  
     (In thousands and unaudited)  

Sales and marketing

   $ 24,886       $ 36,876       $ 11,990         48

Sales and marketing expenses increased $12.0 million from $24.9 million for the six months ended July 31, 2012 to $36.9 million for the six months ended July 31, 2013. The increase was primarily due to an increase in personnel-related costs of $10.1 million as we increased the number of sales and marketing employees from 179 employees as of July 31, 2012 to 221 employees as of July 31, 2013 to expand our direct sales force. The increase was also due to stock-based compensation of $1.7 million.

 

      Six Months Ended
July 31,
     Change in  
         2012              2013          $     %  
     (In thousands and unaudited)  

General and administrative

   $ 11,350       $ 8,150       ($ 3,200     (28 )% 

General and administrative expenses decreased $3.2 million from $11.4 million for the six months ended July 31, 2012 to $8.2 million for the six months ended July 31, 2013. The decrease was primarily due to decreases in stock-based compensation of $2.3 million and in legal expenses of $0.6 million.

 

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Comparison of the Fiscal Years 2011, 2012 and 2013

Revenue

 

      Year Ended January 31,      Fiscal 2011 vs 2012
Change in
    Fiscal 2012 vs 2013
Change in
 
      2011      2012      2013      $      %     $      %  
     (In thousands)  

Product Revenue

   $ 11,031       $ 52,541       $ 69,584       $ 41,510         376   $ 17,043         32

Services Revenue

     366         1,347         4,214         981         268     2,867         213
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total Revenue

   $ 11,397       $ 53,888       $ 73,798       $ 42,491         373   $ 19,910         37
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Fiscal 2012 Compared to Fiscal 2013. Total revenue increased $19.9 million from fiscal 2012 to fiscal 2013. The increase in total revenue was primarily due to an increase in product revenue of $17.0 million and services revenue of $2.9 million. The increase in product revenue was primarily due to an increase in average selling prices related to larger capacity Flash Memory Arrays sold and, to a lesser extent, an increase in the number of Flash Memory Arrays sold. In the first quarter of fiscal 2013, we began shipping in volume our newest generation 6000 Series Flash Memory Arrays. The 6000 Series Flash Memory Arrays are larger capacity units than our prior generations of products offering enhanced functionality and, therefore, have higher average selling prices. Sales of our 6000 Series Flash Memory Arrays represented approximately 78% of our total revenue for fiscal 2013. The increase in service revenue of $2.9 million was primarily due to maintenance and support services provided for our 6000 Series Flash Memory Arrays.

Fiscal 2011 Compared to Fiscal 2012. Total revenue increased $42.5 million from fiscal 2011 to fiscal 2012. The increase in total revenue was primarily due to an increase in product revenue of $41.5 million and services revenue of $1.0 million. The increase in product revenue was primarily due to an increase of approximately 560% in the number of Flash Memory Arrays sold. This increase in the volume of products shipped was primarily due to $34.9 million in sales to Hewlett-Packard, which began in volume in the second quarter of fiscal 2012, as well as to a lesser extent revenue derived from the expansion of our direct sales model in the United States and Europe. The increase in service revenue of $1.0 million was primarily due to an increase in support and maintenance contracts sold with our products.

Total revenue from our five largest customers was 72%, 83% and 37% of total revenue for fiscal 2011, 2012 and 2013, respectively. In fiscal 2011, ePlus represented 45% of our total revenue, and CompSec represented 16% of our total revenue. In fiscal 2012, Hewlett-Packard, a systems vendor, represented 65% of our total revenue. In fiscal 2013, CompSec represented 12% of our total revenue. No other customer accounted for greater than 10% of our total revenue in fiscal 2011, 2012 or 2013. It is our understanding that CompSec purchased our products for resale to the U.S. Federal government, and ePlus purchased our products for resale to AOL.

Cost of Revenue and Gross Margin

 

      Year Ended January 31,     Fiscal 2011 vs 2012
Change in
    Fiscal 2012 vs 2013
Change in
 
      2011     2012     2013     $      %     $      %  
     (In thousands)  

Cost of product revenue

   $ 7,953      $ 38,110      $ 38,180      $ 30,157         379   $ 70        

Cost of services revenue

     125        1,156        4,474        1,031         825     3,318         287
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total cost of revenue

   $ 8,078      $ 39,266      $ 42,654      $ 31,188         386   $ 3,388         9
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 3,319      $ 14,622      $ 31,144      $ 11,303         341   $ 16,522         113
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Product gross margin

     28     27     45          

Services gross margin

     66     14     (6 )%           

Total gross margin

     29     27     42          

 

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Table of Contents

Fiscal 2012 Compared to Fiscal 2013. Cost of revenue increased $3.4 million from $39.3 million for fiscal 2012 to $42.7 million for fiscal 2013. The increase was primarily due to higher manufacturing costs associated with

our 6000 Series Flash Memory Arrays as a result of the increased amount of flash memory used in the

6000 Series Flash Memory Arrays to support its increased performance and capacity compared to our 3000 Series Flash Memory Arrays and, to a lesser extent, an increase in the volume of product shipped. Gross profit increased $16.5 million from fiscal 2012 to fiscal 2013.

Gross margin increased to 42% in fiscal 2013 as compared to 27% in fiscal 2012. Our product gross margin was significantly higher as a result of higher average selling prices associated with our 6000 Series Flash Memory Arrays and greater economies of scale as we increased production. This increase was partially offset by a decrease in our services gross margin due to an increase in headcount to support our increased customer base. We also recorded a provision for excess and obsolete inventory of $5.8 million in fiscal 2012 compared to $1.1 million in fiscal 2013.

Fiscal 2011 Compared to Fiscal 2012. Cost of revenue increased $31.2 million and gross profit increased $11.3 million from fiscal 2011 to fiscal 2012, primarily due to an increase in the volume of products shipped. Gross margin decreased from 29% in fiscal 2011 to 27% in fiscal 2012 primarily due to a provision for excess and obsolete inventory of $5.8 million and an increase in warranty reserves of $0.6 million.

Operating Expenses

 

      Year Ended January 31,      Fiscal 2011 vs  2012
Change in
    Fiscal 2012 vs  2013
Change in
 
      2011      2012      2013      $      %     $      %  
     (In thousands)  

Research and development

   $ 9,701       $ 26,641       $ 57,840       $ 16,940         175   $ 31,199         117

Fiscal 2012 Compared to Fiscal 2013. Research and development expenses increased $31.2 million from fiscal 2012 to fiscal 2013 primarily due to an increase in personnel-related costs of $16.0 million as we increased the number of research and development employees from 131 employees as of January 31, 2012 to 194 employees as of January 31, 2013, principally to enhance our software capabilities and expand our product portfolio. We also incurred increased expenses associated with the development of new product prototypes of $6.4 million, depreciation expense related to lab equipment of $3.9 million, stock-based compensation of $3.0 million and consulting services of $1.7 million.

Fiscal 2011 Compared to Fiscal 2012. Research and development expenses increased $16.9 million from fiscal 2011 to fiscal 2012 primarily due to an increase in personnel-related costs of $11.4 million as we increased the number of research and development employees from 37 employees as of January 31, 2011 to 131 employees as of January 31, 2012 in order to support an increased number of engineering projects, continued development of our software offerings and an increase in our quality assurance efforts. We also experienced an increase in expenses related to new product prototypes of $2.3 million, depreciation of $1.8 million and allocated facilities expenses of $1.0 million.

 

      Year Ended January 31,      Fiscal 2011 vs 2012
Change in
    Fiscal 2012 vs 2013
Change in
 
      2011      2012      2013      $      %     $      %  
     (In thousands)  

Sales and marketing

   $ 5,323       $ 21,493       $ 61,094       $ 16,170         304   $ 39,601         184

Fiscal 2012 Compared to Fiscal 2013. Sales and marketing expenses increased $39.6 million from fiscal 2012 to fiscal 2013. The increase is primarily due to an increase in personnel-related expenses of $26.8 million as we increased the number of sales and marketing employees from 95 employees as of January 31, 2012 to 218 employees as of January 31, 2013 to build our direct sales force. The increase was also due to increases in

 

55


Table of Contents

expenses associated with systems provided to partners for test and development of $4.4 million, stock-based compensation of $3.8 million, travel-related expenses of $3.4 million and consulting expenses of $1.1 million.

Fiscal 2011 Compared to Fiscal 2012. Sales and marketing expenses increased $16.2 million from fiscal 2011 to fiscal 2012, primarily due to an increase in personnel-related costs of $6.7 million as we increased the number of sales and marketing employees from 28 employees as of January 31, 2011 to 95 employees as of January 31, 2012, as we grew our direct sales force and continued to expand our business into new international regions. We provided our systems vendors and technology partners incrementally more systems for their test and development of $2.5 million. Other increases include marketing program expenses of $2.3 million, depreciation of $2.2 million, travel-related expenses of $0.9 million, consulting fees of $0.7 million and allocated facilities expenses of $0.5 million.

 

      Year Ended January 31,      Fiscal 2011 vs 2012
Change in
    Fiscal 2012 vs 2013
Change in
 
      2011      2012      2013      $      %     $      %  
     (In thousands)  

General and administrative

   $ 4,895       $ 6,222       $ 21,105       $ 1,327         27   $ 14,883         239

Fiscal 2012 Compared to Fiscal 2013. General and administrative expenses increased $14.9 million from fiscal 2012 to fiscal 2013 primarily due to an increase in personnel-related expenses of $1.2 million as we increased the number of general and administrative employees from 17 employees as of January 31, 2012 to 23 employees as of January 31, 2013. We also experienced increases in stock-based compensation of $9.5 million, legal expenses of $1.5 million, audit fees of $1.2 million, consulting fees of $0.9 million and bad debt expenses of $0.4 million.

Fiscal 2011 Compared to Fiscal 2012. General and administrative expenses increased $1.3 million from fiscal 2011 to fiscal 2012 primarily due to an increase in personnel-related costs of $1.8 million and an increase in accounting and audit fees of $0.3 million, partially offset by a decrease in legal costs and consulting services of $0.8 million and $0.5 million, respectively. The increase in personnel-related costs was due to an increase in the number of general and administrative employees from four as of January 31, 2011 to 17 as of January 31, 2012 as we expanded our corporate infrastructure.

 

      Year Ended January 31,  
      2011      2012      2013  
     (In thousands)  

Litigation settlement

   $ —         $ 2,100       $ —     

Fiscal 2011 Compared to Fiscal 2012. As a result of our entry into a letter of intent in September 2012 with Narada Systems, LLC, or Narada, to settle the lawsuit Narada filed against us in the Eastern District of Texas in January 2012, we incurred an expense of $2.1 million in fiscal 2012.

Interest Expense

 

      Year Ended January 31,  
      2011      2012      2013  
     (In thousands)  

Interest expense

   $ 251       $ 3,033       $ 31   

Fiscal 2012 Compared to Fiscal 2013. Interest expense decreased $3.0 million from fiscal 2012 to fiscal 2013. The decrease was primarily due to the absence of a $2.9 million extinguishment loss related to the conversion of $14.0 million principal amount of convertible notes, which were converted into shares of our Series B convertible preferred stock in fiscal 2012.

Fiscal 2011 Compared to Fiscal 2012. Interest expense increased $2.8 million from fiscal 2011 to fiscal 2012 primarily due to a $2.9 million extinguishment loss related to the conversion of $14.0 million principal amount of convertible notes into shares of our Series B convertible preferred stock in fiscal 2012.

 

56


Table of Contents

Quarterly Results of Operations

The following table presents our unaudited selected 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 this table in conjunction with our consolidated financial statements and the related notes elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results of operations for any future periods.

 

                                                                                                                                           
    Three Months Ended  
    Apr. 30,
2011
    July 31,
2011
    Oct. 31,
2011
    Jan. 31,
2012
    Apr. 30,
2012
    Jul. 31,
2012
    Oct. 31,
2012
    Jan. 31,
2013
    Apr. 30,
2013
    Jul. 31,
2013
 
    (In thousands)        

Revenue:

                   

Product revenue

  $ 2,466      $ 6,811      $ 21,786      $ 21,478      $ 9,743      $ 19,312      $ 19,325      $ 21,204      $ 22,478      $ 23,595   

Services revenue

    222        301        386        438        473        774        1,271        1,696        2,320        2,910   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,688        7,112        22,172        21,916        10,216        20,086        20,596        22,900        24,798        26,505   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

                   

Cost of product
revenue(1)

    1,205        5,460        15,551        15,894        5,751        10,009        10,330        12,090        13,077        13,661   

Cost of services
revenue(1)

    53        174        192        737        668        856        1,354        1,596        1,649        1,673   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    1,258        5,634        15,743        16,631        6,419        10,865        11,684        13,686        14,726        15,334   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    1,430        1,478        6,429        5,285        3,797        9,221        8,912        9,214        10,072        11,171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Research and development(1)

    3,879        5,507        7,052        10,203        11,246        13,769        14,061        18,764        15,934        18,800   

Sales and marketing(1)

    3,278        3,019        6,285        8,911        11,613        13,273        15,568        20,640        18,252        18,624   

General and administrative(1)

    719        1,200        1,598        2,705        3,804        7,546        4,606        5,149        4,110        4,040   

Litigation settlement

    —          —          —          2,100        —          —          —            —       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,876        9,726        14,935        23,919        26,663        34,588        34,235        44,553        38,296        41,464   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (6,446     (8,248     (8,506     (18,634     (22,866     (25,367     (25,323     (35,339     (28,224     (30,293

Other income (expense), net

    25        35        29        —          22        (38     (43     (20     (280     (6

Interest expense

    (2,926     (54     —          (53     (31     —          —          —          —          (342
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (9,347     (8,267     (8,477     (18,687     (22,875     (25,405     (25,366     (35,359     (28,504     (30,641

Provision for income taxes

    —          —          —          7        —          15        33        49        20        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (9,347   $ (8,267   $ (8,477   $ (18,694   $ (22,875   $ (25,420   $ (25,399   $ (35,408   $ (28,524   $ (30,648
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share of common stock, basic and diluted

  $ (0.60   $ (0.47   $ (0.43   $ (0.85   $ (0.94   $ (0.96   $ (0.89   $ (1.21   $ (0.93   $ (0.99
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per share of common stock, basic and diluted

    15,515        17,593        19,802        21,978        24,290        26,517        28,393        29,337        30,716        31,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

 

(1) Amounts include stock-based compensation expense as follows:

 

                                                                                                                                           
    Three Months Ended  
    Apr. 30,
2011
    July 31,
2011
    Oct. 31,
2011
    Jan. 31,
2012
    Apr. 30,
2012
    Jul. 31,
2012
    Oct. 31,
2012
    Jan. 31,
2013
    Apr. 30,
2013
    Jul. 31,
2013
 
    (In thousands)        

Cost of product revenue

  $ 1      $ 1      $ 6      $ 7      $ 6      $ 11      $ 20      $ 10      $ 17      $ 22   

Cost of services revenue

    1        1        1        1        67        35        243        232        226        425   

Research and development

    13        29        87        107        626        682        919        1,001        1,360        1,260   

Sales and marketing

    9        26        112        152        845        694        1,356        1,166        1,517        1,763   

General and administrative

    26        53        156        257        692        4,940        1,575        2,803        1,701        1,653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 50      $ 110      $ 362      $ 524      $ 2,236      $ 6,362      $ 4,113      $ 5,212      $ 4,821      $ 5,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three Months Ended  
    Apr. 30,
2011
    July 31,
2011
    Oct. 31,
2011
    Jan. 31,
2012
    Apr. 30,
2012
    Jul. 31,
2012
    Oct. 31,
2012
    Jan. 31,
2013
    Apr. 30,
2013
    Jul. 31,
2013
 
    (In thousands)        

Revenue:

                   

Product revenue

    92     96     98     98     95     96     94     93     91     89

Services revenue

    8        4        2        2        5        4        6        7        9        11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    100        100        100        100        100        100        100        100        100        100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                   

Cost of revenue:

                   

Cost of product revenue

    49        80        71        74        59        52        53        57        58        58   

Cost of services revenue

    24        58        50        168        141        111        107        94        71        57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    47        79        71        76        63        54        57        60        59        58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    53        21        29        24        37        46        43        40        41        42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                   

Research and development

    144        77        32        46        110        69        68        82        64        71   

Sales and marketing

    122        42        28        41        114        66        76        90        74        71   

General and administrative

    27        17        7        12        37        38        22        23        17        15   

Litigation summary

    —          —          —          10        —