S-1/A 1 d563804ds1a.htm AMENDMENT NO. 2 TO FORM S-1 Amendment No. 2 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on December 2, 2013

Registration No. 333-191789

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

Amendment No. 2

to

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

NIMBLE STORAGE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3572   26-1418899

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

211 River Oaks Parkway

San Jose, California 95134

(408) 432-9600

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

 

 

Suresh Vasudevan

Chief Executive Officer

Nimble Storage, Inc.

211 River Oaks Parkway

San Jose, California 95134

(408) 432-9600

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

Copies to:

 

Gordon K. Davidson, Esq.

Jeffrey R. Vetter, Esq.

Mark A. Leahy, Esq.

Fenwick & West LLP

801 California Street

Mountain View, CA 94041

(650) 988-8500

 

Aparna Bawa, Esq.

General Counsel

Nimble Storage, Inc.

211 River Oaks Parkway

San Jose, California 95134

(408) 432-9600

 

Jeffrey D. Saper, Esq.

Allison B. Spinner, Esq.

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300

 

 

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

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

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities
to be registered
  Amount to be
Registered(1)
  Proposed
Maximum Offering
Price Per Share
  Proposed
maximum
aggregate offering
price (2)
  Amount of
registration fee(3)

Common stock, $0.001 par value per share

  9,200,000   $18.00   $165,600,000   $21,330.00

 

 

 

(1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended. Includes an additional 1,200,000 shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) of the Securities Act of 1933, as amended. Includes the offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(3) The Registrant previously paid $19,320 of this amount in connection with a prior submission of this Registration Statement.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. 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 we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject To Completion. Dated December 2, 2013.

8,000,000 Shares

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of Nimble Storage, Inc.

Nimble Storage is offering all of the shares to be sold in the offering.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $16.00 and $18.00. Nimble Storage has applied to list the common stock on the New York Stock Exchange under the symbol “NMBL”.

 

 

We are an “emerging growth company” as defined under federal securities laws. See “Risk Factors” on page 13 to read about factors you should consider before buying shares of the common stock.

 

 

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.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to Nimble Storage

   $         $     

To the extent that the underwriters sell more than 8,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,200,000 shares from Nimble Storage at the initial public offering price less the underwriting discounts and commissions.

The underwriters expect to deliver the shares against payment in New York, New York on             , 2013.

 

Goldman, Sachs & Co.   Morgan Stanley

 

Pacific Crest
Securities
  William Blair   Stifel   Oppenheimer & Co.   Needham &
Company

 

 

Prospectus dated             , 2013


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     36   

Market and Industry Data

     37   

Use of Proceeds

     38   

Dividend Policy

     38   

Capitalization

     39   

Dilution

     41   

Selected Consolidated Financial Data

     43   

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

     45   

Business

     84   

Management

     102   

Executive Compensation

     110   

Certain Relationships and Related Party Transactions

     122   

Principal Stockholders

     126   

Description of Capital Stock

     129   

Shares Eligible for Future Sale

     135   

Material U.S. Federal Income Tax Considerations to Non-U.S. Holders

     138   

Underwriting

     143   

Legal Matters

     147   

Experts

     147   

Additional Information

     147   

Index to Consolidated Financial Statements

     F-1   

 

 

We have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                 , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

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PROSPECTUS SUMMARY

This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our common stock. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

Nimble Storage, Inc.

Overview

Our mission is to provide our customers with the industry’s most efficient data storage platform. We have designed and sell a flash-optimized hybrid storage platform that we believe is disrupting the market by enabling significant improvements in application performance and storage capacity with superior data protection, while simplifying business operations and lowering costs. At the core of our innovative platform is our Cache-Accelerated Sequential Layout file system software, which we call our CASL technology, and our cloud-based storage management and support service, InfoSight.

Enterprises and cloud-based service providers today are overwhelmed by numerous storage challenges including increasing costs, capacity and performance tradeoffs, management complexity and data protection issues. These challenges have been exacerbated by key trends in the data center: the rapid proliferation of applications with varying performance requirements, increased use of virtualization and the exponential growth in data. Over the last several years, major technological advancements have been made in flash storage media and data analytics, but traditional storage system providers have been unable to fully capture these improvements into system performance and efficiency at reasonable cost. We believe that a fundamental change to the software architecture underlying storage systems is required to fully take advantage of these advancements.

Our team is comprised of storage and software experts who recognized the opportunity to develop a platform that would transform the industry. We have built our platform from the ground up, starting with a fundamentally new file system software that takes advantage of the high performance characteristics of flash memory and the capacity and low cost of disk. Our platform’s key benefits include high performance and high capacity efficiency, superior data protection and simplified storage lifecycle management. In addition, CASL’s scale-to-fit flexibility enables non-disruptive and independent scaling of performance and capacity. We enable a new approach to storage infrastructure management by leveraging advances in data analytics. InfoSight takes advantage of deep-data analytics and other capabilities embedded across our platform to proactively monitor the health, capacity and performance of customer systems, and provide real-time operational insights to us and our end-customers.

We serve a broad array of enterprises and cloud-based service providers, and our software and storage systems effectively handle mainstream applications, including virtual desktops, databases, email, collaboration and analytics. Since shipping our first product in August 2010, our end-customer base has grown rapidly. We had over 40, 270 and 1,090 end-customers as of January 31, 2011, 2012 and 2013 and, as of October 31, 2013, we had over 2,100 end-customers. Our end-customers span a range of industries such as cloud-based service providers, education, financial services, healthcare, manufacturing, state and local government and technology.

 

 

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We sell our products through our network of value added resellers and distributors, and also engage our end-customers through our global sales force. As of October 31, 2011, 2012 and 2013, we had over 80, 320 and 780 value added resellers that offered our solutions worldwide. Additionally, we leverage our “land and expand” business model to sell additional products to our existing end-customers. For example, in the three months ended October 31, 2011, 2012 and 2013, approximately 17%, 31% and 39% of the dollar amount of orders received was from existing end-customers. As of October 31, 2013, the top 50 of our end-customers that have been with us for at least one year, on average, made additional purchases that were approximately 150% more than the initial dollar purchase amount in the year following the initial sale. Of these 50 customers, 19 have been with us for at least two years, and these longer term customers, on average, made additional purchases that were approximately three times the initial purchase amount in the two years following the initial sale.

We have experienced significant growth in recent periods with total revenue of $1.7 million, $14.0 million, $53.8 million and $84.0 million in the years ended January 31, 2011, 2012 and 2013 and the nine months ended October 31, 2013. Our net loss was $6.8 million, $16.8 million, $27.9 million and $30.0 million in the years ended January 31, 2011, 2012 and 2013 and the nine months ended October 31, 2013. As our sales and customer base have grown, we have also experienced growth in our deferred revenue from $2.0 million as of January 31, 2012 to $10.9 million as of January 31, 2013 and to $26.4 million as of October 31, 2013. Our gross margin has improved from approximately 55% for the year ended January 31, 2012 to 62% for the year ended January 31, 2013 and to 64% for the nine months ended October 31, 2013. As a percentage of total revenue, our operating expenses have declined from 175% for the year ended January 31, 2012 to 114% for the year ended January 31, 2013 and to 99% for the nine months ended October 31, 2013.

Industry Background

Data has become a key strategic resource for modern businesses and consequently, data storage has become a mission-critical element of IT infrastructure. IDC estimates that enterprises will spend approximately $42.5 billion worldwide on data storage systems in 2017, while Gartner estimates an additional $21.3 billion in worldwide spend on storage software in 2017. To maximize the benefits from investments in data storage infrastructure and applications, enterprises and cloud-based service providers generally require data storage systems that provide cost-effective storage capacity, high performance, comprehensive data protection, optimized footprint and cost of operations, and simplified management. These requirements have become increasingly difficult to address through traditional storage systems, particularly with the recent changes within enterprise and cloud-based service provider data centers. Specifically, the rapid adoption of virtualization technologies, proliferation of a diverse set of applications and enormous increase in the amount of data gathered and analyzed by organizations are resulting in substantially greater challenges for storage infrastructure than ever before.

Current storage products remain inadequate for meeting the broad demands of modern enterprises and cloud-based service providers due to the following limitations:

Existing Storage System Architectures Use File Systems that Are Not Optimized for Today’s Storage Demands and Available Technology.    File system software is the foundation of the enterprise storage system. File systems define the manner in which data is laid out on the underlying storage media, which in turn governs the performance, capacity, scalability and management functionality of the storage system. Traditional storage architectures relied on hard disk drives as the only underlying storage medium, and their file systems were designed using a basic approach of mapping application data to locations on hard disk drives. However, over the last decade, hard disk drive performance has not kept up with server compute performance improvements, resulting in ever-slower storage system read and write performance. This problem has become even more acute

 

 

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with the rapid adoption of virtualization. To meet application performance requirements, traditional storage systems have had to resort to significant over-provisioning of hard disk drives, which results in only modest performance improvements, inefficiently using storage capacity and increasing total cost.

Existing “Hybrid” Architectures Do Not Efficiently Utilize Flash Technology.    To improve input/output, or I/O, performance, some storage vendors have simply “bolted on” flash to existing hard disk drive-based systems, an approach that does not optimize for the unique characteristics of flash. These “hybrid” systems generally require over-provisioning of flash, are complex to manage and typically require more expensive high-endurance flash, all of which significantly increase total cost.

Scaling Limitations.    Traditional storage systems are limited in their ability to cost-effectively scale capacity, performance or both as storage user needs evolve. “Scale-up” architectures typically do not allow the aggregation or sharing of resources or the management of multiple systems in a unified manner. An alternative “scale-out” model, which can aggregate individual systems into one clustered, multi-node system, generally forces IT departments to scale both capacity and performance even if only one is required.

Inadequate Data Protection.    Traditional approaches to data backup are time-intensive and as a result, most enterprises typically take only one backup per day, risking substantial data loss in the event of a storage system failure. In addition, today’s remote replication solutions consume a significant amount of expensive network bandwidth, forcing enterprises to replicate only a small portion of their data for disaster recovery and rely on off-site tape copies to protect the rest.

Operational Complexity.    Existing storage systems are complex and time consuming to manage, resulting in high operating costs. With legacy storage systems, IT departments can be challenged to identify and address root causes of problems and have difficulty predicting future performance and capacity demands and preventing future service disruptions.

Opportunity for a Next Generation Storage Platform

Enterprises and cloud-based service providers today are overwhelmed by the growing inefficiency, cost and complexity of storage. However, recent technology advances such as the emergence of high performance flash storage media, cloud-based monitoring capabilities and predictive data analytics software have created a unique opportunity to fundamentally disrupt the storage market and significantly improve storage system capabilities. Our innovative platform, built on software designed from the ground up, leverages the strengths of both flash and disk to provide transformative benefits in application performance and data protection while simplifying business operations.

We believe we have a significant market opportunity. According to IDC, the worldwide market for storage systems with a cost greater than $15,000 is $23.5 billion in 2013 and growing to approximately $28.0 billion in 2017. Gartner estimates the worldwide market for software in Core Storage Management, Data Replication and Device Resource Management to be an additional $6.3 billion in 2013 and up to $7.9 billion in 2017. We believe the combination represents our addressable markets.

Our Solution

Our team of storage and software technology experts built our flash-optimized hybrid storage platform to leverage the strengths of both flash and disk and to simplify business operations. We believe our key technological differentiator is the software that underlies our disruptive CASL file system and our cloud-based InfoSight service. CASL enables our platform to deliver high performance

 

 

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and capacity efficiency with integrated data protection. InfoSight transforms storage lifecycle management, enabling us and our end-customers to manage and support their storage infrastructure from the cloud.

The key benefits of our platform include:

Enhanced Performance and High Capacity Efficiency.    CASL optimizes storage system performance and capacity by collecting random write I/Os and writing them as large coalesced sequential I/Os to low-cost hard disk drives. This allows us to effectively accelerate the write performance of a low-cost disk. For read performance, CASL caches copies of active data into flash-based solid state drives, so I/Os can be delivered in real time. The use of flash as a read cache is much more efficient since it eliminates the need for redundant provisioning of extra flash to protect against loss of data. Further, CASL enables all data stored on flash and on hard disk drives to be compressed in real time, further lowering costs. In total, CASL enables us to deliver significantly better performance with far less hardware and at lower cost than traditional solutions.

Flexible “Scale-to-Fit” Capability.    Our systems have a modular architecture that allows our end-customers to “scale-to-fit” system performance, capacity or both by adding compute, flash or hard disk drives as needed in small, discrete increments. This allows our systems to scale cost effectively. For demanding environments, our systems enable scaling of both performance and capacity beyond a single system by combining multiple systems into scale-out storage clusters.

Superior Data Protection.    Our platform enables our end-customers to take thousands of point-in-time snapshots without impacting system performance or consuming a large amount of space. Consequently, when they encounter accidental deletions, database corruptions or other logical failures, the amount of data at risk is significantly less than with traditional data protection approaches. In addition, there is no need to copy data between primary and backup storage, resulting in materially faster recovery times and significantly higher application availability. To mitigate physical failures, our platform replicates data between systems by transferring only compressed block-level changes, making disaster recovery easy and affordable.

Innovative Cloud-Enabled, Multi-Tenant Storage Lifecycle Management.    Built on powerful deep-data analytics, InfoSight monitors systems deployed across our end-customer base from the cloud to deliver a complete and insightful perspective of the overall health of our storage systems at individual end-customers and across our end-customer community. We believe InfoSight also provides an unmatched level of proactive support with alerts, comprehensive dashboard views, capacity forecasting and performance planning, enabling our end-customers to significantly reduce the time they have to invest in managing their storage infrastructure.

Our Strategy

Our growth strategies include the following:

Extend Our Technology Leadership.    We intend to extend our technology leadership by continuing to innovate and investing in research and development to expand the breadth of our platform into additional markets and deliver more cloud-based management services.

Drive Greater Penetration into Our Installed Base of End-Customers.    Our large installed base of end-customers provides us a strong foundation in which to drive incremental sales through our “land and expand” model. We plan to continue to assist our end-customers to migrate additional workloads and applications to our storage platform. We also plan to continue to use InfoSight’s

 

 

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predictive capabilities to help our end-customers identify potential expansion needs in their storage environments, thereby driving greater sales of our systems.

Expand and Deepen Our Channel Presence to Accelerate New End-Customer Acquisition.    We have carefully and systematically cultivated a strong channel partner network that has been a key contributor to our rapid customer growth. We intend to grow and deepen our value added reseller network and expand our channel model across a broad range of industries and geographies to increase our rate of new end-customer acquisition.

Continue to Build Our Sales Organization to Fuel Our Growth and Acquire New End-Customers.    We will continue to expand our sales organization with additional teams focused on field sales, enterprise, government, and our channel partners. We also believe we have significant opportunities for international expansion and are continuing to invest in key markets.

Expand Our Integration with Alliance Partners.    We have invested heavily in our SmartStack reference architecture initiative and have been focused on improving integration with industry-leading applications, hypervisors and servers from Cisco Systems, Inc., Citrix Systems, Inc., CommVault Systems, Inc., Microsoft Corporation and VMware, Inc. to make it easier to deploy our storage systems. We intend to continue to develop SmartStack solutions with our existing technology partners, as well as invest in new alliance relationships.

Risks Affecting Us

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

  Ÿ  

We have a history of losses and we may not be able to achieve or maintain profitability;

 

  Ÿ  

Our limited operating history makes it difficult to evaluate our current business and future prospects;

 

  Ÿ  

If the market for storage products does not grow as we anticipate, our revenue may not grow;

 

  Ÿ  

Our revenue growth rate in recent periods may not be indicative of our future performance;

 

  Ÿ  

Our quarterly operating results may fluctuate significantly;

 

  Ÿ  

We have limited visibility into future sales;

 

  Ÿ  

Adverse economic conditions or reduced IT spending may adversely impact our business;

 

  Ÿ  

We are dependent on a small number of product lines;

 

  Ÿ  

If our products have defects, failures occur or end-customer data is lost or corrupted, our reputation and business could be harmed;

 

  Ÿ  

We receive a substantial portion of our total revenue from a limited number of channel partners;

 

  Ÿ  

We face intense competition in our market, especially from larger, well-established companies;

 

  Ÿ  

We rely on a limited number of suppliers;

 

  Ÿ  

We depend on third-party manufacturers to build our products; and

 

  Ÿ  

Our directors, officers and principal stockholders will beneficially own approximately 62.4% of our outstanding stock after this offering and therefore will have the ability, acting together, to determine the outcome of all matters requiring stockholder approval.

See “Risk Factors” beginning on page 13.

 

 

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Corporate Information

We were incorporated in November 2007 as Nimble Storage, Inc., a Delaware corporation. Our principal executive offices are located at 211 River Oaks Parkway, San Jose, California 95134, and our telephone number is (408) 432-9600. Our website address is www.nimblestorage.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus. Unless the context indicates otherwise, as used in this prospectus, the terms “Nimble Storage,” “we,” “us” and “our” refer to Nimble Storage, Inc., a Delaware corporation, and its subsidiaries taken as a whole. We have registered the trademark Nimble Storage in the United States, the European Union and Japan and we have a pending trademark application for the trademark Nimble Storage in other jurisdictions. We have registered the trademark CASL in the United States and the European Union. We also have pending trademark applications for the trademark InfoSight in the United States and the European Union and for NimbleConnect in the United States. The “Nimble Storage” logo, SmartStack and certain product names contained in this prospectus are our common law trademarks. This prospectus contains additional trade names, trademarks and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

JOBS Act

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an emerging growth company until the earlier of the last day of the fiscal year following the fifth anniversary of the completion of this offering, the last day of the fiscal year in which we have total annual gross revenue of at least $1.0 billion, the date on which we are deemed to be a large accelerated filer (this means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year), or the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the prior three-year period.

In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

 

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THE OFFERING

 

Shares of common stock offered by us

8,000,000 shares

 

Over-allotment option to be offered by us

1,200,000 shares

 

Shares of common stock to be outstanding immediately after this offering

70,280,400 shares (71,480,400 shares if the over-allotment option is exercised in full)

 

Use of proceeds

We intend to use the net proceeds that we receive in this offering for working capital and other general corporate purposes. We may use a portion of the proceeds to acquire other complementary businesses or technologies. See “Use of Proceeds.”

 

Risk factors

You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

Proposed New York Stock Exchange symbol

“NMBL”

The number of shares of our common stock to be outstanding after this offering is based on 62,280,400 shares of our common stock outstanding as of October 31, 2013, and excludes:

 

  Ÿ  

16,612,114 shares of common stock issuable upon the exercise of options outstanding as of October 31, 2013, with a weighted-average exercise price of $2.93 per share;

 

  Ÿ  

190,000 shares of common stock issuable upon vesting of restricted stock units outstanding as of October 31, 2013;

 

  Ÿ  

64,000 shares of common stock issuable upon the exercise of options granted after October 31, 2013, with an exercise price of $17.00 per share;

 

  Ÿ  

291,410 shares of common stock issuable upon vesting of restricted stock units granted after October 31, 2013; and

 

  Ÿ  

12,161,286 shares of common stock reserved for future issuance under our stock-based compensation plans as of October 31, 2013, consisting of (a) 1,398,280 shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan (including the options to purchase shares of our common stock and shares of common stock issuable upon vesting of restricted stock units granted after October 31, 2013), (b) 8,806,096 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective on the date immediately prior to the date of this prospectus, and (c) 1,956,910 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective on the date of this prospectus. Upon completion of this offering, any remaining shares available for issuance under our 2008 Equity Incentive Plan will be added to the shares reserved under our 2013 Equity Incentive Plan and we will cease granting

 

 

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awards under our 2008 Equity Incentive Plan. Our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

Except as otherwise indicated, all share numbers referred to are calculated following our 3-for-2 forward stock split, which became effective October 22, 2012, and all information in this prospectus assumes:

 

  Ÿ  

the automatic conversion of all outstanding shares of our redeemable convertible preferred stock as of October 31, 2013 into an aggregate of 38,867,647 shares of common stock immediately prior to the completion of this offering;

 

  Ÿ  

the effectiveness of our restated certificate of incorporation in connection with the completion of this offering;

 

  Ÿ  

no exercise of outstanding stock options or settlement of outstanding restricted stock units; and

 

  Ÿ  

no exercise of the underwriters’ over-allotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated statements of operations data presented below for the years ended January 31, 2011, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statements of operations data for the nine months ended October 31, 2012 and 2013 and our consolidated balance sheet data as of October 31, 2013 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal recurring nature that are necessary for the fair presentation of the financial statements. The following summary consolidated financial data should be read with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in any future period and the results for the nine months ended October 31, 2013 are not necessarily indicative of results to be expected for the full year. The summary consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended January 31,     Nine Months Ended
October 31,
 
     2011     2012     2013           2012                 2013        
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenue:

          

Product

   $ 1,632      $ 13,113      $     49,765      $ 31,138      $ 75,650   

Support and service

     49        900        4,075        2,523        8,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,681        14,013        53,840        33,661        84,013   

Cost of revenue:

          

Product(1)

     604        5,233        17,266        10,856        24,695   

Support and service(1)

     230        1,045        3,184        1,828        5,535   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     834        6,278        20,450        12,684        30,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     847        7,735        33,390        20,977        53,783   

Operating expenses:

          

Research and development(1)

     4,415        7,903        16,135        11,015        23,737   

Sales and marketing(1)

     2,934        12,863        39,851        24,362        51,330   

General and administrative(1)

     325        3,756        5,168        3,238        8,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,674        24,522        61,154        38,615        83,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,827     (16,787     (27,764     (17,638     (29,756

Interest income, net

     5        6        32        21        27   

Other income (expense), net

            (4     (26     (3     11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (6,822     (16,785     (27,758     (17,620     (29,718

Provision for income taxes

            5        99        26        252   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (6,822     (16,790     (27,857     (17,646     (29,970

Accretion of redeemable convertible preferred stock

     (16     (23     (34     (24     (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (6,838   $ (16,813   $ (27,891   $ (17,670   $ (30,001
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.47   $ (1.04   $ (1.53  

 

$

 

(0.99

 

 

 

$

 

(1.46

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

     14,457        16,226        18,236     

 

 

 

 

 

17,899

 

 

  

 

 

 

 

 

 

20,537

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

       $ (0.51     $ (0.50
      

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

         54,887          59,405   
      

 

 

     

 

 

 

(footnotes on next page)

 

 

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

 

     Year Ended January 31,      Nine Months Ended 
October  31,
 
       2011          2012          2013            2012              2013      
     (in thousands)  

Cost of product revenue

   $       $ 10       $ 48       $ 19       $ 130   

Cost of support and service revenue

     5         31         114         77         258   

Research and development

     46         268         874         579         1,695   

Sales and marketing

     37         244         1,029         672         1,971   

General and administrative

     16         267         539         375         993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $     104       $     820       $  2,604       $ 1,722       $ 5,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
(2) Pro forma net loss per share attributable to common stockholders for the year ended January 31, 2013 and the nine months ended October 31, 2013 have been calculated assuming the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock, as though the conversion had occurred as of the beginning of the period presented or the original date of issue, if later.

Our consolidated balance sheet as of October 31, 2013 is presented on:

 

  Ÿ  

an actual basis;

 

  Ÿ  

a pro forma basis, giving effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 38,867,647 shares of common stock and the effectiveness of our restated certificate of incorporation as of immediately prior to the completion of this offering, as if such conversion had occurred and our restated certificate of incorporation had become effective on October 31, 2013; and

 

  Ÿ  

a pro forma as adjusted basis, giving effect to the pro forma adjustments and the sale of shares of common stock by us in this offering, based on an assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information set forth in the table below is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

 

     As of October 31, 2013  
     Actual     Pro Forma      Pro Forma
As
Adjusted(1)
 
     (in thousands)  

Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 34,719      $ 34,719       $ 157,799   

Working capital

     24,294        24,294         147,374   

Total assets

     81,318        81,318         204,398   

Deferred revenue, current and non-current

     26,381        26,381         26,381   

Redeemable convertible preferred stock

     98,590                  

Total stockholders’ (deficit) equity

     (74,479     24,111         147,191   

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, would increase (decrease) our cash and cash equivalents, working capital, total assets and total stockholders’ (deficit) equity by $7.4 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

 

 

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                       Nine Months Ended  
     Year Ended or as of January 31,     or as of October 31,  
     2011     2012     2013     2012     2013  
     (dollars in thousands)  

Key Business Metrics:

  

Total revenue

   $ 1,681      $ 14,013      $ 53,840      $ 33,661      $ 84,013   

Year-over-year percentage increase

     nm        734     284     315     150

Gross margin

     50.4     55.2     62.0     62.3     64.0

Total deferred revenue(1)

     227        2,028        10,896      $ 7,489      $ 26,381   

Net cash used in operating activities

     (7,584     (14,841     (18,754   $ (14,856   $ (8,927

Non-GAAP Net Loss

     (6,718     (15,970     (25,253   $ (15,924   $ (24,923

Adjusted EBITDA (non-GAAP)

     (6,681     (15,802     (24,068   $ (15,247   $ (22,250

 

(1) Our deferred revenue consists of amounts that have been either invoiced or prepaid but have not yet been recognized as revenue as of the period end. The majority of our deferred revenue consists of the unrecognized portion of revenue from sales of our support and service contracts. We monitor our deferred revenue balance because it represents a portion of revenue to be recognized in future periods.

Non-GAAP Financial Measures

To provide investors with additional information regarding our financial results, we have disclosed in this prospectus the following two financial measures that are not calculated in accordance with generally accepted accounting principles in the United States, or GAAP: Non-GAAP Net Loss and Adjusted EBITDA.

We define Non-GAAP Net Loss as our net loss adjusted to exclude the effects of stock-based compensation. We define Adjusted EBITDA as our net loss, adjusted to exclude stock-based compensation, interest income, provision for income taxes, and depreciation and amortization. We have provided a reconciliation below of Non-GAAP Net Loss and Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included Non-GAAP Net Loss and Adjusted EBITDA in this prospectus because they are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans. In particular, the exclusion of certain expenses in calculating Non-GAAP Net Loss and Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Non-GAAP Net Loss and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of Non-GAAP Net Loss and Adjusted EBITDA have limitations as analytical tools, and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

  Ÿ  

Non-GAAP Net Loss and Adjusted EBITDA do not consider the potentially dilutive impact of equity-based compensation, which is an ongoing expense for us;

 

  Ÿ  

Adjusted EBITDA does not reflect cash capital expenditure requirements;

 

  Ÿ  

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

 

  Ÿ  

Other companies, including companies in our industry, may calculate Non-GAAP Net Loss and Adjusted EBITDA differently, which reduces their usefulness as comparative measures.

 

 

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Because of these limitations, you should consider Non-GAAP Net Loss and Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. We compensate for these limitations by also reviewing our GAAP financial statements.

A reconciliation of Non-GAAP Net Loss and Adjusted EBITDA to net loss is provided below:

 

     Year Ended January 31,     Nine Months
Ended October 31,
 
     2011     2012     2013     2012     2013  
     (in thousands)  

Net loss

   $ (6,822   $ (16,790   $ (27,857   $ (17,646   $ (29,970

Stock-based compensation

     104        820        2,604        1,722        5,047   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Net Loss

     (6,718     (15,970     (25,253     (15,924     (24,923

Interest income, net

     (5     (6     (32     (21     (27

Provision for income taxes

            5        99        26        252   

Depreciation and amortization

     42        169        1,118        672        2,448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (6,681   $ (15,802   $ (24,068   $ (15,247   $ (22,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, operating results and prospects could be materially harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to Our Business and Our Industry

We have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to achieve or maintain profitability. If we cannot become profitable or maintain our profitability in the future, our business and operating results may suffer.

We have incurred net losses in all fiscal years since our inception, including net losses of $6.8 million, $16.8 million and $27.9 million in the years ended January 31, 2011, 2012 and 2013. As of October 31, 2013, we had an accumulated deficit of $87.9 million. We anticipate that our operating expenses will increase in the foreseeable future as we continue to develop our technology, enhance our product and service offerings, expand our sales channels, expand our operations and hire additional employees. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently, or at all, to offset these higher expenses. In future periods, our profitability could be adversely affected for a number of possible reasons, including slowing demand for our products or services, increasing competition, a decrease in the growth of our overall market or general economic conditions. If we are unable to meet these risks and challenges as we encounter them, our business and operating results may suffer.

Our limited operating history makes it difficult to evaluate our current business and future prospects.

We were incorporated in November 2007 and shipped our first products in August 2010. The majority of our revenue growth has occurred in the years ended January 31, 2012 and 2013 and the nine months ended October 31, 2013. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and difficulties frequently experienced by rapidly growing companies in constantly evolving industries, including the risks described in this prospectus. If we do not address these risks successfully, our business and operating results will be adversely affected, and our stock price could decline. Further, we have limited historical financial data. As such, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable market.

If the market for storage products does not grow as we anticipate, our revenue may not grow and our operating results would be harmed.

We are vulnerable to fluctuations in overall demand for storage products. Our business plan assumes that the demand for storage products will increase as organizations collect, process and store an increasing amount of data. However, if storage markets experience downturns or grow more slowly than anticipated, or if demand for our products does not grow as quickly as we anticipate, whether as a result of competition, product obsolescence, budgetary constraints of our end-customers, technological changes, unfavorable economic conditions, uncertain geopolitical environments or other factors, we

 

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may not be able to increase our revenue sufficiently to ever achieve profitability and our stock price would decline.

Our revenue growth rate in recent periods may not be indicative of our future performance.

You should not consider our revenue growth rate in recent periods as indicative of our future performance. While we have recently experienced significant revenue growth rates in the years ended January 31, 2012 and 2013, we do not expect to achieve similar revenue growth rates in future periods. You should not rely on our revenue growth rates for any prior periods as any indication of our future revenue or revenue growth rates.

Our quarterly operating results may fluctuate significantly, which could cause the trading price of our common stock to decline.

Our operating results have historically fluctuated and may continue to fluctuate from quarter to quarter, and we expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:

 

  Ÿ  

the budgeting cycles and purchasing practices of end-customers;

 

  Ÿ  

our ability to attract and retain new channel partners and end-customers;

 

  Ÿ  

our ability to sell additional products to existing channel partners and end-customers;

 

  Ÿ  

changes in end-customer requirements or market needs and our inability to make corresponding changes to our business;

 

  Ÿ  

any potential disruption in our sales channels or termination of our relationship with important channel partners;

 

  Ÿ  

potential seasonality in the markets we serve;

 

  Ÿ  

the timing and success of new product and service introductions by us or our competitors or any other change in the competitive landscape, including consolidation among our competitors or end-customers;

 

  Ÿ  

deferral of orders in anticipation of new products or product enhancements announced by us or our competitors;

 

  Ÿ  

our inability to provide adequate support to our end-customers;

 

  Ÿ  

our ability to control the costs of manufacturing our products, including the cost of components;

 

  Ÿ  

our inability to fulfill our customers’ orders due to supply chain delays or events that impact our manufacturers or their suppliers;

 

  Ÿ  

our inability to adjust certain fixed costs and expenses, particularly in research and development, for changes in demand;

 

  Ÿ  

price competition;

 

  Ÿ  

the timing of certain payments and related expenses, such as sales commissions;

 

  Ÿ  

increases or decreases in our revenue and expenses caused by fluctuations in foreign currency exchange rates, as an increasing portion of our revenue is collected and expenses are incurred and paid in currencies other than the U.S. dollar;

 

  Ÿ  

general economic conditions, both domestically and in our foreign markets;

 

  Ÿ  

the cost of and potential outcomes of existing and future claims or litigation, which could have a material adverse effect on our business; and

 

  Ÿ  

future accounting pronouncements and changes in our accounting policies.

 

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Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our operating results. In particular, because we have historically received a substantial portion of sales orders during the last few weeks of each fiscal quarter, we are particularly vulnerable to any delay in order fulfillment, failure to close anticipated orders or any other problems encountered during the last few weeks of each fiscal quarter. This variability and unpredictability could result in our failure to meet our revenue or other operating result expectations or those of investors for a particular period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our common stock could fall substantially, and we could face costly lawsuits, including securities class action suits.

We have limited visibility into future sales, which makes it difficult to forecast our future operating results.

Because of our limited visibility into end-customer demand, our ability to accurately forecast our future revenue is limited. We sell our products primarily through our network of channel partners that accounted for 82% and 89% of our total revenue in the years ended January 31, 2012 and 2013. We place orders with our third-party manufacturers based on our forecasts of our end-customers’ requirements and forecasts provided by our channel partners. These forecasts are based on multiple assumptions, each of which might cause our estimates to be inaccurate, affecting our ability to provide products to our end-customers. When demand for our products increases significantly, we may not be able to meet it on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs to accelerate the manufacture and delivery of additional products. If we or our channel partners underestimate end-customer demand, we may forego revenue opportunities, lose market share and damage our end-customer relationships. Conversely, if we overestimate demand for our products and consequently purchase significant amounts of components or hold inventory, we could incur additional costs and potentially incur related charges, which could adversely affect our operating results.

Adverse economic conditions or reduced IT spending may adversely impact our business.

Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. In general, worldwide economic conditions remain unstable, and these conditions make it difficult for our current and prospective customers and us to forecast and plan future business activities accurately, and they could cause our customers or prospective customers to reevaluate their decision to purchase our products. Weak global economic conditions, or a reduction in IT spending even if economic conditions improve, could adversely impact our business and operating results in a number of ways, including longer sales cycles, lower prices for our products, reduced bookings and lower or no growth.

We are dependent on a small number of product lines, and the lack of continued market acceptance of these product lines, particularly our CS Series of storage products, would result in lower revenue.

Our CS Series of storage products, or CS products, account for a majority of our total revenue and we anticipate that these products will continue to do so for the foreseeable future. As a result, our revenue could be reduced as a result of:

 

  Ÿ  

any decline in demand for these products;

 

  Ÿ  

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

 

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Table of Contents
  Ÿ  

technological innovations or new communications standards that our CS products do not address;

 

  Ÿ  

our failure or inability to predict changes in our industry or end-customers’ demands or to design products or enhancements that meet end-customers’ increasing demands; and

 

  Ÿ  

our inability to release enhanced versions of our CS products on a timely basis.

Our products handle mission-critical data for our end-customers and are highly technical in nature. If our products have defects, failures occur or end-customer data is lost or corrupted, our reputation and business could be harmed.

Our products are highly technical and complex and are involved in storing and replicating mission-critical data for our end-customers. Our products may contain undetected defects and failures when they are first introduced or as new versions are released. We have in the past and may in the future discover software errors in new versions of our existing products, new products or product enhancements after their release or introduction, which could result in lost revenue. Despite testing by us and by current and potential end-customers, errors might not be found in new releases or products until after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Our products may have security vulnerabilities and be subject to intentional attacks by viruses that seek to take advantage of these bugs, errors or other weaknesses. If defects or failures occur in our products, a number of negative effects in our business could result, including:

 

  Ÿ  

lost revenue or lost end-customers;

 

  Ÿ  

increased costs, including warranty expense and costs associated with end-customer support;

 

  Ÿ  

delays, cancellations, reductions or rescheduling of orders or shipments;

 

  Ÿ  

product returns or discounts;

 

  Ÿ  

diversion of management resources;

 

  Ÿ  

legal claims for breach of contract, product liability, tort or breach of warranty; and

 

  Ÿ  

damage to our reputation and brand.

Because our end-customers use our products to manage and protect their data, we could face claims resulting from any loss or corruption of our end-customers’ data due to a product defect. While our sales contracts contain provisions relating to warranty disclaimers and liability limitations, these provisions might not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and could result in public perception that our products are not effective, even if the occurrence is unrelated to the use of our products. In addition, our business liability insurance coverage might not be adequate to cover such claims. If any data is lost or corrupted in connection with the use or support of our products, our reputation could be harmed and market acceptance of our products could suffer.

We rely on third-party channel partners to sell substantially all of our products, and if our partners fail to perform, our ability to sell and distribute our products and services will be limited, and our operating results will be harmed.

We depend on value added resellers, or VARs, and distributors to sell our products. Our contracts with channel partners typically have a term of one year and are terminable without cause upon written notice to the other party. Our channel partner agreements do not prohibit them from offering competitive products or services and do not contain any purchase commitments. Many of our

 

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channel partners also sell our competitors’ products. If our channel partners give higher priority to our competitors’ storage products, we may be unable to grow our revenue and our net loss could increase. Further, in order to develop and expand our channels, we must continue to scale and improve our processes and procedures that support our channel partners, including investments in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. If we fail to maintain existing channel partners or develop relationships with new channel partners, our revenue opportunities will be reduced.

We receive a substantial portion of our total revenue from a limited number of channel partners, and the loss of, or a significant reduction in, orders from one or more of our major channel partners would harm our business.

We receive a substantial portion of our total revenue from a limited number of channel partners. For the years ended January 31, 2011, 2012 and 2013 our top ten channel partners accounted for 68%, 43% and 37% of our total revenue. In particular, Advanced Media Services, which buys our products for resale by CDW Corporation, accounted for more than 10% of our revenue in the year ended January 31, 2013 and the nine months ended October 31, 2013. We anticipate that we will continue to depend upon a limited number of channel partners for a substantial portion of our total revenue for the foreseeable future and, in some cases, the portion of our revenue attributable to individual channel partners may increase in the future. The loss of one or more key channel partners or a reduction in sales through any major channel partner would reduce our revenue.

We face intense competition in our market, especially from larger, well-established companies, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

A number of very large corporations have historically dominated the storage market. We consider our primary competitors to be companies that provide enterprise storage products, including Dell, Inc., EMC Corporation, Hewlett-Packard Company and NetApp, Inc. We also compete to a lesser extent with a number of other smaller companies and certain well-established companies. Some of our competitors have made acquisitions of businesses that allow them to offer more directly competitive and comprehensive solutions than they had previously offered. We expect to encounter new competitors domestically and internationally as other companies enter our market or if we enter new markets.

Many of our existing competitors have, and some of our potential competitors could have, substantial competitive advantages such as:

 

  Ÿ  

potential for broader market acceptance of their storage architectures and solutions;

 

  Ÿ  

greater name recognition and longer operating histories;

 

  Ÿ  

larger sales and marketing and customer support budgets and resources;

 

  Ÿ  

broader distribution and established relationships with distribution partners and end-customers;

 

  Ÿ  

the ability to bundle storage products with other technology products and services to better fit certain customers’ needs;

 

  Ÿ  

lower labor and development costs;

 

  Ÿ  

larger and more mature intellectual property portfolios;

 

  Ÿ  

substantially greater financial, technical and other resources; and

 

  Ÿ  

greater resources to make acquisitions.

 

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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 or failure to successfully manage our relationships with our key suppliers could delay shipments of our products and damage our channel partner or end-customer relationships.

We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key components of our products. We generally purchase components on a purchase order basis and do not have long-term supply contracts with our suppliers. Our reliance on key suppliers reduces our control over the manufacturing process and exposes us to risks, including reduced control over product quality, production costs, timely delivery and capacity. It also exposes us to the potential inability to obtain an adequate supply of required components because we do not have long-term supply commitments. In particular, replacing the single-source suppliers of our solid state drives and chassis would require a product re-design that could take months to implement.

We generally maintain minimal inventory for repairs, evaluation and demonstration units and acquire components only as needed. We do not enter into long-term supply contracts for these components. As a result, our ability to respond to channel partner or end-customer orders efficiently may be constrained by the then-current availability, terms and pricing of these components. Our industry has experienced component shortages and delivery delays in the past, and we may experience shortages or delays of critical components in the future as a result of strong demand in the industry or other factors. If we or our suppliers inaccurately forecast demand for our products or we ineffectively manage our enterprise resource planning processes, our suppliers may have inadequate inventory, which could increase the prices we must pay for substitute components or result in our inability to meet demand for our products, as well as damage our channel partner or end-customer relationships.

Component quality is particularly important with respect to disk drives. We have in the past and may in the future experience disk drive failures, which could cause our reputation to suffer, our competitive position to be impaired and our end-customers to select other vendors. To meet our product performance requirements, we must obtain disk drives of extremely high quality and capacity. In addition, there are periodic supply-and-demand issues for disk drives and flash memory that could result in component shortages, selective supply allocations and increased prices of such components. We may not be able to obtain our full requirements of components, including disk drives, that we need for our storage products or the prices of such components may increase.

If we fail to effectively manage our relationships with our key suppliers, or if our key suppliers increase prices of components, experience delays, disruptions, capacity constraints, or quality control problems in their manufacturing operations, our ability to ship products to our channel partners or end-customers could be impaired and our competitive position and reputation could be adversely affected. Qualifying a new key supplier is expensive and time-consuming. If we are required to change key suppliers or assume internal manufacturing operations, we may lose revenue and damage our channel partner or end-customer relationships.

Because we depend on third-party manufacturers to build our products, we are susceptible to manufacturing delays and pricing fluctuations that could prevent us from shipping orders on time, if at all, or on a cost-effective basis, which would cause our business to suffer.

We outsource the manufacturing of our products to third-party manufacturers, including Flextronics and Synnex, our contract manufacturers. Our reliance on these third-party manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs and product supply and timing. Any manufacturing disruption by these third-party manufacturers could severely impair our ability to fulfill orders. Generally, our orders

 

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represent a relatively small percentage of the overall orders received by Flextronics and Synnex from their customers; therefore, fulfilling our orders may not be a priority in the event those manufacturers are constrained in their ability to fulfill all of their customer obligations. If we are unable to manage our relationships with these third-party manufacturers effectively, or if these third-party manufacturers suffer delays or disruptions for any reason, experience increased manufacturing lead-times, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our end-customers would be impaired, and our business and operating results would be harmed.

We rely on a limited number of manufacturers and any disruption or termination of our manufacturing arrangements could delay shipments of our products and harm our business.

Our current agreements with Flextronics and Synnex do not contain any minimum commitments to manufacture our products, and are terminable at will or upon short notice by the manufacturer. Furthermore, any orders are fulfilled only after a purchase order has been delivered and accepted. As a result, Flextronics and Synnex may stop taking new orders or fulfilling our orders on short notice or limiting our allocations of products. If this were to occur, we would need to find alternative vendors and we could experience delays in shipping orders, which could harm our business.

Our business and operations have experienced rapid growth in recent periods. If we do not effectively manage any future growth or are unable to improve our systems and processes, our operating results could be harmed.

We have experienced rapid growth over the last few years. Our employee headcount and number of end-customers have increased significantly, and we expect to continue to grow our headcount significantly over the next 12 months. For example, from January 31, 2011 to October 31, 2013, our headcount increased from 47 to 528 employees. Since we initially launched our products in August 2010, our number of end-customers grew to over 2,100 as of October 31, 2013. The growth and expansion of our business and product and service offerings places a continuous significant strain on our management, operational and financial resources.

To manage any future growth effectively, we must continue to improve and expand our information technology, or IT, and financial infrastructure, our operating and administrative systems and controls, our enterprise resource planning systems and processes and our ability to manage headcount, capital and processes in an efficient manner. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenue and expenses, or to prevent losses. Our productivity and the quality of our products and services may also be adversely affected if we do not integrate and train our new employees quickly and effectively. Failure to manage any future growth effectively could result in increased costs, negatively impact our end-customers’ satisfaction and harm our operating results.

Our ability to sell our products is dependent on the quality of our technical support services, and our failure to offer high quality technical support services could have a material adverse effect on our sales, operating results and end-customers’ satisfaction with our products and services.

Once our products are deployed within our end-customers’ networks, our end-customers depend on our technical support services to resolve any issues relating to our products. We may be unable to respond quickly enough to accommodate short-term increases in end-customer demand for support

 

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services. We also may be unable to modify the format of our support services to compete with changes in support services provided by competitors. Increased end-customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results. Any failure by us to effectively help our end-customers quickly resolve post-deployment issues or provide high-quality technical support, or a market perception that we do not maintain high-quality support, could harm our reputation and adversely affect our ability to sell our solutions to existing and prospective customers.

If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market acceptance, our business will suffer.

The storage market is characterized by rapidly evolving technology, customer needs and industry standards. We might not be able to anticipate future market needs or changes in existing technologies, and we might not be able to develop new products or product enhancements to meet such needs, either in a timely manner or at all. For example, if changes in technology result in a significant reduction in the price for flash memory, enterprises may not need to utilize flash-optimized storage in order to cost effectively protect their data. Also, one or more new technologies could be introduced that compete favorably with our storage products or that cause our storage products to no longer be of significant benefit to our end-customers.

The process of developing new technology is complex and uncertain, and we may not be able to develop our products in a manner that enables us to successfully address the changing needs of our end-customers. We must commit significant resources to developing new products and product enhancements before knowing whether our investments will result in products the market will accept. Additionally, we may not achieve the cost savings or the anticipated performance improvements we expect, and we may take longer to generate revenue, or generate less revenue, than we anticipate. If we are not able to successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products, our business and operating results will be harmed.

Our future growth plan depends in part on expanding outside of the United States, and we are therefore subject to a number of risks associated with international sales and operations.

As part of our growth plan, we intend to expand our operations globally. We have a limited history of marketing, selling and supporting our products and services internationally. International sales and operations are subject to a number of risks, including the following:

 

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greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;

 

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increased expenses incurred in establishing and maintaining office space and equipment for our international operations;

 

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fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;

 

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management communication and integration problems resulting from cultural and geographic dispersion;

 

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difficulties in attracting and retaining personnel with experience in international operations;

 

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risks associated with trade restrictions and foreign legal requirements, including the importation, certification and localization of our products required in foreign countries;

 

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greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;

 

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the uncertainty of protection for intellectual property rights in some countries;

 

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greater risk of a failure of foreign employees to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act and any trade regulations ensuring fair trade practices; and

 

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general economic and political conditions in these foreign markets.

These factors and other factors could harm our ability to gain future international revenue and, consequently, materially impact our business and operating results. The expansion of our existing international operations and entry into additional international markets will require significant management attention and financial resources. Our failure to successfully manage our international operations and the associated risks effectively could limit the future growth of our business.

If we are not successful in executing our strategy to increase sales of our products to larger enterprise end-customers, our operating results may suffer.

Our growth strategy is dependent, in part, upon increasing sales of our products to larger enterprises. Sales to these types of end-customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities. These risks include:

 

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competition from larger competitors that traditionally target larger enterprises that may have pre-existing relationships or purchase commitments from those end-customers;

 

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increased purchasing power and leverage held by large end-customers in negotiating contractual arrangements;

 

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more stringent support requirements; and

 

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longer sales cycles and the associated risk that substantial time and resources may be spent on potential end-customers that elect not to purchase our products.

Large enterprises often undertake a significant evaluation process that results in a lengthy sales cycle. Although we have a channel sales model, our sales representatives may invest substantial time and resources in engaging with sales to larger end-customers. We may spend this time and resources without being successful in generating any sales. In addition, product purchases by large enterprises are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Finally, large enterprises typically have longer implementation cycles, require greater product functionality and scalability and a broader range of services, demand that vendors take on a larger share of risks, sometimes require acceptance provisions that can potentially lead to a delay in revenue recognition, and expect greater payment flexibility from vendors. All of these factors can add risk to business conducted with these end-customers. If we fail to realize an expected sale from a large end-customer in a particular quarter or at all, our business, operating results and financial condition could be adversely affected.

We are in the process of evolving our distribution model, which may harm our future operating results.

We are in the process of evolving our distribution model from contracting directly with hundreds of individual VARs to contracting with fewer larger global distributors. Although we believe that this transition will make our sales channels more efficient and broader reaching, there is no guarantee that this new distribution model will increase our sales in the short term or allow us to sustain our gross margins. Any potential delays or confusion during the transition process with our new partners may negatively affect our relationship with our existing end-customers and channel partners. Upon completion of the transition to the new sales model, we will be more reliant on fewer channel partners,

 

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which may make us more vulnerable to underperformance by or deteriorations in our relationships with those partners. Our failure to successfully implement this new distribution model could adversely affect our operating results.

Our sales cycle is unpredictable, which makes it difficult to predict our results even in the near term.

A substantial portion of our quarterly sales typically occurs during the last month of the quarter, which we believe largely reflects sales cycles of storage products and other products in the technology industry generally. We have little visibility at the start of any quarter as to which existing end-customers, if any, will make additional purchases and when any additional purchases may occur, if at all.

Currently, our average sales cycle is approximately three months. However, potential end-customers may undertake a longer evaluation process that has, in the past, resulted in a longer sales cycle. In addition, our sales cycle may be extended if potential end-customers decide to re-evaluate other aspects of their storage infrastructure at the same time they are considering a purchase of our products. As a result, our quarterly operating results are difficult to predict even in the near term.

Our growth depends in part on the success of our strategic relationships with third parties.

Our future growth will depend on our ability to enter into successful strategic relationships with third parties. For example, our SmartStack initiative involves working with third parties, including Cisco, Microsoft and VMware, to create a broader integrated technology solution to address our end-customers’ needs. In addition, we work with global distributors to streamline and grow our sales channel. These relationships may not result in additional customers or enable us to generate significant revenue. These relationships are typically non-exclusive and do not prohibit the other party from working with our competitors or from offering competing services. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results could suffer.

Interruptions to and failures of our IT infrastructure could disrupt our operations and services.

We depend on our IT infrastructure, which includes our data centers and networks, to operate our business and to provide services to our end-customers through our InfoSight platform. This infrastructure, including our back-up systems, resides in two locations. We do not currently have a disaster recovery policy. Any interruptions to or failures of our IT infrastructure, whether due to natural disasters, system failures, computer viruses, physical or electronic break-ins or other causes, would affect our ability to operate our business and provide services through our InfoSight platform. As a result, we could face liability with respect to the performance of the InfoSight platform, our reputation could be harmed and our ability to sell our solutions to existing and prospective customers could be harmed.

The inability of our products to interoperate with leading business software applications, hypervisors and data management tools would cause our business to suffer.

Our products are also designed to interoperate with virtualization solutions in the market. Virtual environment solutions require a fast and flexible network storage foundation. If our products are not compatible with leading business software applications, hypervisors and data management tools, demand for our products will decline. We must devote significant resources to enhancing our products to continue to interoperate with these software applications, hypervisors and data management tools. Any current or future providers of software applications, hypervisors or data management tools could make future changes that would diminish the ability of our products to interoperate with them, and we might need to spend significant additional time and effort to ensure the continued compatibility of our products, which might not be possible at all. Any of these developments could harm our business.

 

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If our products do not interoperate with our end-customers’ infrastructure, sales of our products could be negatively affected, which would harm our business.

Our products must interoperate with our end-customers’ existing infrastructure, which often have different specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify the sources of these problems. If we find errors in the existing software or defects in the hardware used in our end-customers’ infrastructure or problematic network configurations or settings, we may have to modify our software or hardware so that our products will interoperate with our end-customers’ infrastructure. In such cases, our products may be unable to provide significant performance improvements for applications deployed in our end-customers’ infrastructure. In addition, government and other end-customers may require our products to comply with certain security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, we may be disqualified from, or disadvantaged in, selling our products to such end-customers, which could harm our business and operating results.

If our industry experiences extraordinary declines in average sales prices, our revenue and gross profit may also decline.

The data storage products industry is highly competitive and has historically been characterized by declines in average sales prices. It is possible that the market for our storage products could experience similar trends in equal or greater degree than the rest of the industry. Our average sales prices could decline due to pricing pressure caused by several factors, including competition, the introduction of competing technologies, overcapacity in the worldwide supply of flash memory or disk drive 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 the volume of sales or the sales of new products with higher margins, our gross margins and operating results could be adversely affected.

Governmental regulations affecting the export of certain of our solutions could negatively affect our business.

Our products, technology and software are subject to U.S. export controls and economic sanctions, and we incorporate encryption technology into certain of our products. These encryption products and the underlying technology may be exported outside the United States only with the required export authorizations, including by license, a license exception or other appropriate government authorizations, including the filing of an encryption registration. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries, governments and persons and for certain end-uses. Governmental regulation of encryption technology and regulation of imports or exports, or our failure, or inability due to governmental action or inaction, to obtain required import or export approval for our products could harm our international sales and adversely affect our revenue. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities even if the export license ultimately may be granted. Even though we take precautions to ensure that our channel partners comply with all relevant regulations, any failure by our channel partners to comply with such regulations could have negative consequences, including reputational harm, government investigations and penalties.

In 2013, we determined that we may have shipped a particular hardware appliance product to a limited number of international customers that, prior to shipment, may have required us to first obtain

 

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an encryption registration number prior to shipment and to submit annual reports to the U.S. Commerce Department’s Bureau of Industry and Security, or BIS. In May 2013, we submitted a voluntary self-disclosure to the Office of Export Enforcement, or OEE, to report our failure to make the required submissions and the resulting unauthorized exports as a potential violation. We also filed a request to service items previously exported without the required authorization. Failure to comply with export regulations and these recent voluntary submissions could result in penalties, costs, and restrictions on export privileges, which could also harm our operating results, as well as our inability to service certain products already in the hands of our end-customers, which could have negative consequences, including reputational harm. BIS has granted the service authorization and the voluntary disclosure is under review.

A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.

We may in the future increase sales to government entities. Selling to government entities can be highly competitive, expensive and time consuming, often requiring significant upfront time and expense without any assurance that these efforts will result in a sale. Government certification requirements for products like ours may change and in doing so restrict our ability to sell into certain government sectors until we have attained the revised certification. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays adversely affecting public sector demand for our products and services. Government entities may have statutory, contractual or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any such termination may adversely impact our future operating results. Government entities may require contract terms that differ from standard arrangements and may impose compliance requirements that are complicated, require preferential pricing or “most favored nation” terms and conditions, or are otherwise time consuming and expensive to satisfy. Government entities routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit could result in the government entity refusing to continue buying our products and services, a reduction of revenue, fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely impact our operating results.

We may be subject to claims that our employees have wrongfully disclosed or we have wrongfully used proprietary information of our employees’ former employers. These claims may be costly to defend and if we do not successfully do so, our business could be harmed.

Many of our employees were previously employed at current or potential competitors. We may be subject to claims that these employees have divulged or we have used proprietary information of these employees’ former employers. For example, on October 29, 2013, NetApp, Inc. filed a lawsuit against us alleging that we and certain of our employees violated NetApp’s proprietary rights, as more fully described in the section titled “Business—Legal Proceedings.” Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to develop new products and features for existing products, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Our proprietary rights may be difficult to enforce or protect, which could enable others to copy or use aspects of our products without compensating us.

We rely and expect to continue to rely on a combination of confidentiality agreements, as well as trademark, copyright, patent and trade secret protection laws, to protect our proprietary rights with our employees, consultants and third parties with whom we have relationships. We have filed various applications for certain aspects of our intellectual property. Valid patents may not issue from our

 

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pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to protect our technology or products. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. We generally enter into confidentiality or license agreements with our employees, consultants, vendors and customers, and generally limit access to and distribution of our proprietary information. However, we cannot assure you that the agreements we have entered into will not be breached. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.

From time to time, we may need to take legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business and operating results. Attempts to enforce our rights against third parties could also provoke these third parties to assert their own intellectual property or other rights against us, or result in a holding that invalidates or narrows the scope of our rights, in whole or in part. Any of these events would have a material adverse effect on our business and operating results.

Claims by others that we infringe their proprietary technology or other rights could harm our business.

Companies in the storage industry own large numbers of patents, copyrights, trademarks, domain names and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. Third parties have asserted and may in the future assert claims of infringement of intellectual property rights against us or our end-customers and channel partners. For example, in October 2013, we received a letter on behalf of Crossroads Systems, suggesting that we should license its “’972 Patent Family” to avoid infringement of those patents. Our standard license and other agreements obligate us to indemnify our end-customers and channel partners against claims that our products infringe the intellectual property rights of third parties, and in some cases this indemnification obligation is uncapped as to the amount of the liability. As the number of products and competitors in our market increases and overlaps occur, and our profile within this market grows, infringement claims may increase. While we intend to increase the size of our patent portfolio, our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim and could distract our management from our business. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that requires us to pay substantial damages, royalties or other fees. Any of these events could harm our business and operating results.

Although third parties may offer a license to their technology or other intellectual property, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could materially and adversely affect our business and operating results. If a third party does not offer us a license to its technology or other intellectual property on reasonable terms, or at all, we could be enjoined from continued use of such intellectual property. As a result, we

 

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may be required to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected products or services), effort and expense, and may ultimately not be successful.

If we are unable to hire, retain, train and motivate qualified personnel and senior management, our business could be harmed.

Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. In particular, we are highly dependent on the contributions of our executive team as well as members of our research and development organization. The loss of any key personnel could make it more difficult to manage our operations and research and development activities, reduce our employee retention and revenue and impair our ability to compete. Although we have entered into employment offer letters with our key personnel, these agreements have no specific duration and constitute at-will employment.

Competition for highly skilled personnel is often intense, especially in the San Francisco Bay Area where we have a substantial presence and need for highly skilled personnel. We may not be successful in attracting, integrating or retaining qualified personnel to fulfill our current or future needs. We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value of our stock declines, it may adversely affect our ability to retain highly skilled employees. In addition, since we expense all stock-based compensation, we may periodically change our equity compensation practices, which may include reducing the number of employees eligible for options or reducing the size of equity awards granted per employee. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be harmed.

Failure to adequately expand our sales force will impede our growth.

We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. We plan to continue to expand our sales force, both domestically and internationally. Identifying, recruiting and training qualified personnel require significant time, expense and attention. It can take time before our sales representatives are fully-trained and productive. Our business may be adversely affected if our efforts to expand and train our sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain talented sales personnel or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.

If we or our channel partners fail to timely and correctly install our storage products, or if our channel partners face disruptions in their business, our reputation will suffer, our competitive position could be impaired and we could lose end-customers.

In addition to our small team of installation personnel, we rely upon some of our channel partners to install our storage products at our end-customer locations. Although we train and certify our channel partners on the installation of our products, end-customers have in the past encountered installation difficulties with our channel partners. In addition, if one or more of our channel partners suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its operations, our revenue could be reduced and our ability to compete could be impaired. As a significant portion of our sales occur in the last month of a quarter, our end-customers may also experience installation delays following a purchase if we or our channel partners have too many installations in a short period of time. If we or our channel partners fail to timely and correctly install our

 

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products, end-customers may not purchase additional products and services from us, our reputation could suffer and our revenue could be reduced. In addition, if our channel partners are unable to correctly install our products, we might incur additional expenses to correctly install our products.

We are exposed to the credit risk of some of our channel partners and direct customers, which could result in material losses and negatively impact our operating results.

Some of our channel partners and direct customers have experienced financial difficulties in the past. A channel partner or direct customer experiencing such difficulties will generally not purchase or sell as many of our products as it would under normal circumstances and may cancel orders. Our typical payment terms are 30 days. Because of local customs or conditions, payment terms may be longer in some circumstances and markets. In addition, a channel partner or direct customer experiencing financial difficulties generally increases our exposure to uncollectible receivables. If any of our channel partners or direct customers that represent a significant portion of our total revenue becomes insolvent or suffers a deterioration in its financial or business condition and is unable to pay for our products, our results of operations could be harmed.

Changes in laws, regulations and standards related to data privacy and the Internet could harm our business.

Federal, state or foreign government bodies or agencies have in the past adopted, and could in the future adopt, laws and regulations affecting data privacy and the use of the Internet as a commercial medium. Changing laws, regulations and standards applying to the solicitation, collection, processing or use of personal or consumer information could affect our end-customers’ ability to use and share data, potentially restricting our ability to store, process and share data with our end-customers through our InfoSight platform, and in turn limit our ability to provide real-time and predictive customer support. If we are not able to adjust to changing laws, regulations and standards related to the Internet, our business could be harmed.

Some of our products use “open source” software, which may restrict how we use or distribute our products or require that we release the source code of certain software subject to open source licenses.

Some of our products may incorporate software licensed under so-called “free,” “open source” or other similar licenses where the licensed software is made available to the general public under the terms of a specific non-negotiable license. Some open source licenses require that software subject to the license be made available to the public and that any modifications or derivative works based on open source software be licensed in source code form under the same open source licenses. Few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We rely on multiple software programmers to design our proprietary technologies, we are not able to exercise complete control over the development methods and efforts of our programmers, and we cannot be certain that our programmers have not incorporated open source software into our products without our knowledge or that they will not do so in the future. Some of our products incorporate third-party software under commercial licenses. We cannot be certain whether such third-party software incorporates open-source software without our knowledge. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our products, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our products and materially and adversely affect our ability to sustain and grow our business. Many open source licenses include additional obligations and restrictions, such as providing attribution to the authors of the open source software or providing a copy of the applicable open source license to

 

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recipients of the open source software. If we distribute products outside the terms of applicable open source licenses, we could be exposed to claims of breach of contract or intellectual property infringement.

Our failure to raise additional capital or generate the significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and could harm our business.

We expect that our existing cash and cash equivalents, together with the net proceeds that we receive in this offering, will be sufficient to meet our anticipated cash needs for the foreseeable future. After that, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of their ownership interests and the per share value of our common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of common stock, and we may be required to accept terms that restrict our ability to incur additional indebtedness. We may also be required to take other actions that would otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm our business and operating results. If we need additional capital and cannot raise it on acceptable terms, we might not be able to, among other things:

 

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develop or enhance our products;

 

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continue to expand our sales and marketing and research and development organizations;

 

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acquire complementary technologies, products or businesses;

 

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expand operations in the United States or internationally;

 

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hire, train and retain employees; or

 

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respond to competitive pressures or unanticipated working capital requirements.

Our failure to do any of these things could harm our business and operating results.

If we fail to maintain an effective system of internal controls, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the applicable listing exchange. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any

 

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failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.

In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended and anticipate that we will continue to expend significant resources, including accounting-related costs, and provide significant management oversight. Any failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.

We are not currently required to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report.

Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we will need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

If we fail to comply with environmental requirements, our business, operating results and reputation could be adversely affected.

We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the European Union, or EU, Restrictions of Hazardous Substances Directive, or RoHS, and the EU Waste Electrical and Electronic Equipment Directive, or WEEE, as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the United States, and we are, or may in the future be, subject to these laws and regulations.

 

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The EU RoHS and the similar laws of other jurisdictions ban the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. Currently, the manufacturer of our hardware appliances and our major component part suppliers comply with the EU RoHS requirements. However, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The WEEE Directive requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive may cause us to incur costs or have additional regulatory requirements to meet in the future in order to comply with this directive, or with any similar laws adopted in other jurisdictions.

Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions, any of which could harm our business and operating results. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our expenditures for environmental compliance have not had a material impact on our results of operations or cash flows, and although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business and operating results.

We are exposed to fluctuations in currency exchange rates, which could negatively affect our operating results.

Our sales contracts are primarily denominated in U.S. dollars, and therefore, substantially all of our revenue is not subject to foreign currency risk. However, a strengthening of the U.S. dollar could increase the real cost of our products to our end-customers outside of the United States, which could adversely affect our operating results. In addition, an increasing portion of our operating expenses is incurred outside the United States, is denominated in foreign currencies and is subject to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be adversely affected.

Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by man-made problems such as terrorism.

A significant natural disaster, such as an earthquake, fire, flood, or significant power outage could have a material adverse impact on our business, operating results. Both our corporate headquarters and the location where our products are manufactured are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis. In the event we or our service providers are hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter. In addition, acts of terrorism and other geo-political unrest could cause disruptions in our business or the businesses of our supply chain, manufacturers, logistics providers, partners or end-customers, or the economy as a whole. Any disruption in the business of our supply chain, manufacturers, logistics providers, partners or end-customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be further increased if we do not implement a disaster recovery plan or our suppliers’ disaster recovery plans

 

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prove to be inadequate. To the extent that any of the above should result in delays or cancellations of customer orders, or delays in the manufacture, deployment or shipment of our products, our business and operating results would be adversely affected.

New regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our products.

As a public company, we will be subject to new requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that will require us to diligence, disclose and report whether or not our products contain conflict minerals. The implementation of these new requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used or necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to alter our products, processes or sources of supply to avoid such materials.

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

As of January 31, 2013, we had federal and state net operating loss carryforwards of $49.1 million and $46.4 million due to prior period losses, which if not utilized, will begin to expire in 2028. If these net operating losses, or NOLs, expire unused and are unavailable to offset future income tax liabilities, our profitability may be adversely affected. In addition, under Section 382 of the U.S. Internal Revenue Code of 1986, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes and, if we undergo an ownership change in connection with this offering or otherwise in the future, our ability to utilize our NOLs could be further limited by Section 382 of the Code. 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 Code. In September 2013, we completed an analysis to evaluate whether there are any limitations of our NOLs and concluded no limitations currently exist. While we do not believe that we have experienced, or will experience in connection with this offering, an ownership change that would result in limitations, regulatory changes, such as suspension of the use of NOLs, could result in the expiration of our NOLs or otherwise cause them to be unavailable to offset future income tax liabilities. Our net operating losses could also be impaired under state law. As a result, we might not be able to utilize a material portion of our NOLs.

We may acquire other businesses which could require significant management attention, disrupt our business, dilute stockholder value and adversely affect our operating results.

As part of our business strategy, we may make investments in complementary companies, products or technologies. However, we have not made any acquisitions to date, and as a result, our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner is unproven. We may not be able to find suitable acquisition candidates, or we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our end-customers, investors or securities analysts. In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with

 

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such acquisitions, into our company, our operating results could be adversely affected. We may also incur unforeseen liabilities which could materially and adversely affect our operating results. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that impede our ability to manage our operations.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not 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, 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 shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Risks Related to this Offering, the Securities Markets

and Ownership of Our Common Stock

There has been no prior public market for our common stock, the stock price of our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to our initial public offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us and may vary from the market price of our common stock following our initial public offering. If you purchase shares of our common stock in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. An active or liquid market in our common stock may not develop upon the closing of our initial public offering or, if it does develop, it may not be sustainable. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

  Ÿ  

overall performance of the equity markets;

 

  Ÿ  

our operating performance and the performance of other similar companies;

 

  Ÿ  

changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;

 

  Ÿ  

announcements of technological innovations, new applications or enhancements to services, acquisitions, strategic alliances or significant agreements by us or by our competitors;

 

  Ÿ  

announcements of customer additions and customer cancellations or delays in customer purchases;

 

  Ÿ  

recruitment or departure of key personnel;

 

  Ÿ  

the economy as a whole, market conditions in our industry, and the industries of our customers;

 

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  Ÿ  

the expiration of market standoff or contractual lock-up agreements;

 

  Ÿ  

the size of our market float; and

 

  Ÿ  

any other factors discussed in this prospectus.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and adversely affect our business.

Substantial blocks of our total outstanding shares may be sold into the market when “lock-up” or “market standoff” periods end. If there are substantial sales of shares of our common stock, the price of our common stock could decline.

The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders, or if there is a large number of shares of our common stock available for sale. All of the shares of common stock sold in this offering will be available for sale in the public market. Substantially all of our outstanding shares of common stock are currently restricted from resale as a result of market standoff and “lock-up” agreements, as more fully described in “Shares Eligible for Future Sale.” These shares will become available to be sold 181 days after the date of this prospectus. Shares held by directors, executive officers and other affiliates will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements.

After our initial public offering, certain of our stockholders will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders. All of these shares are subject to market standoff or lock-up agreements restricting their sale until 181 days after the date of this prospectus. We also intend to register shares of common stock that we have issued and may issue under our employee equity incentive plans. Once we register these shares, they will be able to be sold freely in the public market upon issuance, subject to existing market standoff or lock-up agreements.

Goldman, Sachs & Co. and Morgan Stanley & Co. LLC may, in their discretion, permit our stockholders to sell shares prior to the expiration of the restrictive provisions contained in those lock-up agreements.

The market price of the shares of our common stock could decline as a result of the sale of a substantial number of our shares of common stock in the public market or the perception in the market that the holders of a large number of shares intend to sell their shares.

Because the initial public offering price of our common stock will be substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price is substantially higher that the pro forma net tangible book value per share of our common stock immediately following this offering based on the total value of our tangible assets less our total liabilities. Therefore if you purchase shares of our common stock in this offering, based on the midpoint of the price range set forth on the cover of this prospectus, you will

 

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experience immediate dilution of $14.94 per share, the difference between the price per share you pay for our common stock and its pro forma net tangible book value per share as of October 31, 2013, after giving effect to the issuance of 8,000,000 shares of our common stock in this offering.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research 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 securities or industry analysts publish about us or our business. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price could decline.

We have broad discretion in the use of the net proceeds from our initial public offering and may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from our initial public offering. We will have broad discretion in the application of the net proceeds, including working capital, possible acquisitions and other general corporate purposes, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our business and operating results. Pending their use, we may invest the net proceeds from our initial public offering in a manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.

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

After this offering, our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, will beneficially own, in the aggregate, 62.4% of our outstanding common stock, based on the midpoint of the price range set forth on the cover of this prospectus. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership could harm the market price of our common stock by:

 

  Ÿ  

delaying, deferring or preventing a change in control of us;

 

  Ÿ  

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

 

  Ÿ  

discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.

See “Principal Stockholders” below for more information regarding the ownership of our outstanding stock by our executive officers and directors, together with their affiliates.

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

We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

 

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Delaware law and provisions in our restated certificate of incorporation and restated bylaws that will be in effect at the closing of our initial public offering could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.

Following the closing of our initial public offering, our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and restated bylaws that will be in effect at the closing of our initial public offering will contain provisions that may make the acquisition of our company more difficult, including the following:

 

  Ÿ  

our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;

 

  Ÿ  

only our board of directors will have the right to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

  Ÿ  

only our chairman of the board, our chief executive officer, our president or a majority of our board of directors will be authorized to call a special meeting of stockholders;

 

  Ÿ  

certain litigation against us can only be brought in Delaware;

 

  Ÿ  

our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without the approval of the holders of common stock; and

 

  Ÿ  

advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

For information regarding these and other provisions, see “Description of Capital Stock.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.

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

 

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MARKET AND INDUSTRY DATA

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

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

Certain information in the text of the prospectus is contained in independent industry publications. The source of, and selected additional information contained in, these independent industry publications are provided below:

 

  (1) Gartner, Forecast: Storage Software Markets, Worldwide, 2010-2017, 2Q13 Update June 18, 2013.

 

  (2) IDC Digital Universe Study, sponsored by EMC Corporation, December 2012.

 

  (3) IDC, Worldwide Enterprise Storage Systems 2013-2017 Forecast: Customer Landscape is Changing, Defining Demand for New Solutions May 2013.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our sale of 8,000,000 shares of common stock in this offering at an assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $123.1 million, or $142.1 million if the underwriters’ over-allotment option is exercised in full. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $7.4 million, assuming the number of shares offered by us, remains the same, and after deducting estimated underwriting discounts and commissions.

As of the date of this prospectus, we have no specific plans for the use of the net proceeds we receive from this offering. We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, product development, general and administrative matters and capital expenditures. We may use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds from this offering in short term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

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

 

  Ÿ  

an actual basis;

 

  Ÿ  

a pro forma basis, giving effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 38,867,647 shares of common stock and the effectiveness of our restated certificate of incorporation as of immediately prior to the completion of this offering, as if such conversion had occurred and our restated certificate of incorporation had become effective on October 31, 2013; and

 

  Ÿ  

a pro forma as adjusted basis, giving effect to the pro forma adjustments and the sale of shares of common stock by us in this offering, based on an assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

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

 

     As of October 31, 2013  
     Actual     Pro Forma     Pro Forma
As
Adjusted(1)
 
     (in thousands, except share and per
share data)
 

Cash and cash equivalents

   $ 34,719      $ 34,719      $ 157,799   
  

 

 

   

 

 

   

 

 

 

Redeemable convertible preferred stock, net of issuance costs $0.001 par value; 39,320,106 shares authorized, 38,867,647 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma or pro forma as adjusted

     98,590                 

Stockholders’ (deficit) equity:

      

Preferred stock, $0.001 par value; no shares authorized, no shares issued or outstanding, actual; 5,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

                     

Common stock, $0.001 par value: 87,227,000 shares authorized, 23,412,753 shares issued and outstanding, actual; 750,000,000 authorized, 62,280,400 shares issued and outstanding, pro forma; 750,000,000 shares authorized and 70,280,400 shares issued and outstanding, pro forma as adjusted

     19        62        70   

Additional paid-in capital

     13,373        111,920        234,992   

Accumulated other comprehensive loss

     68        68        68   

Accumulated deficit

  

 

 

 

 

 

(87,939

 

 

 

 

 

 

 

 

(87,939

 

 

 

 

 

 

 

 

(87,939

 

 

  

 

 

   

 

 

   

 

 

 

Stockholders’ (deficit) equity

  

 

 

 

 

 

(74,479

 

 

 

 

 

 

 

 

24,111

 

 

  

 

 

 

 

 

 

147,191

 

 

  

  

 

 

   

 

 

   

 

 

 

Total capitalization

  

 

$

 

24,111

 

  

 

 

$

 

24,111

 

  

 

 

$

 

147,191

 

  

  

 

 

   

 

 

   

 

 

 

 

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(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity, and total capitalization by approximately $7.4 million, assuming that the number of shares offered by us remains the same, and after deducting the estimated underwriting discounts and commissions.

The number of shares of our common stock to be outstanding after this offering is based on 62,280,400 shares of our common stock outstanding as of October 31, 2013, and excludes:

 

  Ÿ  

16,612,114 shares of common stock issuable upon the exercise of options outstanding as of October 31, 2013, with a weighted-average exercise price of $2.93 per share;

 

  Ÿ  

190,000 shares of common stock issuable upon vesting of restricted stock units outstanding as of October 31, 2013;

 

  Ÿ  

64,000 shares of common stock issuable upon the exercise of options granted after October 31, 2013, with an exercise price of $17.00 per share;

 

  Ÿ  

291,410 shares of common stock issuable upon vesting of restricted stock units granted after October 31, 2013; and

 

  Ÿ  

12,161,286 shares of common stock reserved for future issuance under our stock-based compensation plans as of October 31, 2013, consisting of (a) 1,398,280 shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan (including the options to purchase shares of our common stock and shares issuable upon vesting of restricted stock units granted after October 31, 2013), (b) 8,806,096 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective on the date immediately prior to the date of this prospectus, and (c) 1,956,910 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective on the date of this prospectus. Upon completion of this offering, any remaining shares available for issuance under our 2008 Equity Incentive Plan will be added to the shares reserved under our 2013 Equity Incentive Plan and we will cease granting awards under our 2008 Equity Incentive Plan. Our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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DILUTION

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

As of October 31, 2013, our pro forma net tangible book value was approximately $21.6 million, or $0.35 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of October 31, 2013, assuming the conversion of all outstanding shares of our redeemable convertible preferred stock.

After giving effect to our sale in this offering of 8,000,000 shares of our common stock, at an assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of October 31, 2013 would have been approximately $144.6 million, or $2.06 per share of our common stock. This represents an immediate increase in pro forma net tangible book value of $1.71 per share to our existing stockholders and an immediate dilution of $14.94 per share to investors purchasing shares in this offering, as follows:

 

Assumed initial public offering price per share

      $ 17.00   

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

   $ 0.35      

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

     1.71      
  

 

 

    

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

        2.06   
     

 

 

 

Dilution per share to investors in this offering

      $ 14.94   
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, would increase (decrease) our pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $0.11 per share and would increase (decrease) the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by approximately $0.89 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions.

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be $2.29 per share, and the dilution in net tangible book value per share to investors in this offering would be $14.71 per share.

The following table summarizes, on a pro forma as adjusted basis as of October 31, 2013 after giving effect to (i) the automatic conversion of all of our convertible preferred stock into common stock and the effectiveness of our restated certificate of incorporation and (ii) this offering on an assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, the difference between existing stockholders and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and

 

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the average price per share paid, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent    
     (in thousands, except percentage and per share data)  

Existing stockholders

     62,280,400         88.6   $ 108,892,191         44   $ 1.75   

New public investors

     8,000,000         11.4        136,000,000         56        17.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     70,280,400         100   $ 244,892,191         100  
  

 

 

    

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the price range reflected on the cover page of this prospectus, would increase (decrease) total consideration paid by new investors and total consideration paid by all stockholders by approximately $8,000,000 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions.

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

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ over-allotment option. If the underwriters exercise their over-allotment option in full, our existing stockholders would own 87.1% and our new investors would own 12.9% of the total number of shares of our common stock outstanding upon the completion of this offering.

The number of shares of our common stock to be outstanding after this offering is based on 62,280,400 shares of our common stock outstanding as of October 31, 2013, and excludes:

 

  Ÿ  

16,612,114 shares of common stock issuable upon the exercise of options outstanding as of October 31, 2013, with a weighted-average exercise price of $2.93 per share;

 

  Ÿ  

190,000 shares of common stock issuable upon vesting of restricted stock units outstanding as of October 31, 2013;

 

  Ÿ  

64,000 shares of common stock issuable upon the exercise of options granted after October 31, 2013, with an exercise price of $17.00 per share;

 

  Ÿ  

291,410 shares of common stock issuable upon vesting of restricted stock units granted after October 31, 2013; and

 

  Ÿ  

12,161,286 shares of common stock reserved for future issuance under our stock-based compensation plans as of October 31, 2013, consisting of (a) 1,398,280 shares of common stock reserved for future issuance under our 2008 Equity Incentive Plan (including the options to purchase shares of our common stock and shares issuable upon vesting of restricted stock units granted after October 31, 2013), (b) 8,806,096 shares of common stock reserved for future issuance under our 2013 Equity Incentive Plan, which will become effective on the date immediately prior to the date of this prospectus, and (c) 1,956,910 shares of common stock reserved for future issuance under our 2013 Employee Stock Purchase Plan, which will become effective on the date of this prospectus. Upon completion of this offering, any remaining shares available for issuance under our 2008 Equity Incentive Plan will be added to the shares reserved under our 2013 Equity Incentive Plan and we will cease granting awards under our 2008 Equity Incentive Plan. Our 2013 Equity Incentive Plan and 2013 Employee Stock Purchase Plan also provide for automatic annual increases in the number of shares reserved under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended January 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of January 31, 2012 and 2013 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the nine months ended October 31, 2012 and 2013 and the consolidated balance sheet data as of October 31, 2013 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which consist only of normal recurring adjustments, necessary for the fair statement of those unaudited consolidated financial statements. The selected consolidated financial data below should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in any future period and the results for the nine months ended October 31, 2013 are not necessarily indicative of results to be expected for the full year. The selected consolidated financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended January 31,     Nine Months Ended 
October 31,
 
         2011             2012             2013             2012             2013      
     (in thousands, except per share data)  

Consolidated Statements of Operations Data:

          

Revenue:

          

Product

   $ 1,632      $ 13,113      $ 49,765      $ 31,138      $ 75,650   

Support and service

     49        900        4,075        2,523        8,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,681        14,013        53,840        33,661        84,013   
          

Cost of revenue:

          

Product(1)

     604        5,233        17,266        10,856        24,695   

Support and service(1)

     230        1,045        3,184     

 

 

 

 

 

1,828

 

 

  

 

 

 

 

 

 

5,535

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     834        6,278        20,450     

 

 

 

 

 

 

 

12,684

 

 

 

  

 

 

 

 

 

 

 

 

30,230

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     847        7,735        33,390     

 

 

 

20,977

 

  

 

 

 

 

53,783

 

  

          

Operating expenses:

          

Research and development(1)

     4,415        7,903        16,135     

 

 

 

11,015

 

  

 

 

 

 

23,737

 

  

Sales and marketing(1)

     2,934        12,863        39,851     

 

 

 

 

 

24,362

 

 

  

 

 

 

 

 

 

51,330

 

 

  

General and administrative(1)

     325        3,756        5,168     

 

 

 

 

 

 

 

 

 

3,238

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

8,472

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     7,674        24,522        61,154     

 

 

 

 

 

 

 

 

 

 

 

 

 

38,615

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83,539

 

 

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (6,827     (16,787     (27,764  

 

 

 

 

 

(17,638

 

 

 

 

 

 

 

 

(29,756

 

 

Interest income, net

     5        6        32     

 

 

 

 

 

 

 

21

 

 

 

  

 

 

 

 

 

 

 

 

27

 

 

 

  

Other income (expense), net

            (4     (26  

 

 

 

 

 

 

 

 

 

(3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (6,822     (16,785     (27,758  

 

 

 

 

 

 

 

 

 

(17,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,718

 

 

 

 

Provision for income taxes

            5        99     

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

252

 

 

 

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (6,822     (16,790     (27,857  

 

 

 

 

 

 

 

 

 

(17,646

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(29,970

 

 

 

 

Accretion of redeemable convertible preferred stock

     (16     (23     (34  

 

 

 

 

 

 

 

(24

 

 

 

 

 

 

 

 

 

 

 

(31

 

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (6,838   $ (16,813   $ (27,891  

 

$

 

(17,670

 

 

 

$

 

(30,001

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders, basic and diluted

   $ (0.47   $ (1.04   $ (1.53  

 

 

 

$

 

 

 

(0.99

 

 

 

 

 

 

 

$

 

 

 

(1.46

 

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted

     14,457        16,226        18,236     

 

 

 

 

 

17,899

 

 

  

 

 

 

 

 

 

20,537

 

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

       $ (0.51     $ (0.50
      

 

 

     

 

 

 

Weighted-average shares used to compute pro forma net loss per share attributable to common stockholders, basic and diluted (unaudited)(2)

         54,887          59,405   
      

 

 

     

 

 

 

(footnotes on next page)

 

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

 

    Year Ended January 31,     Nine Months Ended 
October  31,
 
        2011             2012             2013             2012             2013      
    (in thousands)  

Cost of product revenue

  $      $ 10      $ 48      $ 19      $ 130   

Cost of support and service revenue

    5        31        114        77        258   

Research and development

    46        268        874        579        1,695   

Sales and marketing

    37        244        1,029        672        1,971   

General and administrative

    16        267        539        375        993   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 104      $ 820      $ 2,604      $ 1,722      $ 5,047   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) Pro forma net loss per share attributable to common stockholders for the year ended January 31, 2013 and the nine months ended October 31, 2013 have been calculated assuming the conversion of all outstanding shares of our redeemable convertible preferred stock into shares of our common stock, as though the conversion had occurred as of the beginning of the period presented or the original date of issue, if later.

 

     As of January 31,     As of October
31,  2013
 
     2012     2013    
     (in thousands)  

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 28,796      $ 49,205      $ 34,719   

Working capital

     29,787        48,835        24,294   

Total assets

     37,420        72,563        81,318   

Deferred revenue, current and non-current

     2,028        10,896        26,381   

Redeemable convertible preferred stock

     57,921        98,559        98,590   

Total stockholders’ (deficit) equity

     (29,741     (53,662     (74,479

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and in other parts of this prospectus.

Overview

Our mission is to provide our customers with the industry’s most efficient data storage platform. We have designed and sell a flash-optimized hybrid storage platform that we believe is disrupting the market by enabling significant improvements in application performance and storage capacity with superior data protection, while simplifying business operations and lowering costs. At the core of our innovative platform is our Cache-Accelerated Sequential Layout file system software, which we call our CASL technology, and our cloud-based storage management and support service, InfoSight.

We were incorporated in November 2007, and we initially focused on the development of our CASL file system software and our storage platform. We shipped our first product line, our CS200 series, in August 2010. In August 2012, we introduced our CS400 series of products and a number of scale-to-fit products, including expansion shelves and controller upgrades. In April 2013, we launched InfoSight. We typically recognize revenue upon the shipment of these products. We also offer support and maintenance services including InfoSight, for periods ranging from one to five years, and recognize revenue over the term of the related support and maintenance agreement.

Since shipping our first product in August 2010, our end-customer base has grown rapidly. We had over 40, 270 and 1,090 end-customers as of January 31, 2011, 2012 and 2013 and, as of October 31, 2013, we had over 2,100 end-customers. Our end-customers span a range of industries such as cloud-based service providers, education, financial services, healthcare, manufacturing, state and local government and technology. We do not have any end-customers that represented more than 10% of our total revenue for either the year ended January 31, 2013 or the nine months ended October 31, 2013. To continue to grow our business, it is important that we both obtain new customers and sell additional products to our existing customers. For example, in the three months ended October 31, 2011, 2012 and 2013, approximately 17%, 31% and 39% of the dollar amount of orders received was from existing end-customers. As of October 31, 2013, the top 50 of our end-customers that have been with us for at least one year, on average, made additional purchases that were approximately 150% more than the initial dollar purchase amount in the year following the initial sale. Of these 50 customers, 19 have been with us for at least two years, and these longer term customers, on average, made additional purchases that were approximately three times the initial purchase amount in the two years following the initial sale.

We sell our products through our network of VARs and distributors, and also engage our end-customers through our global sales force. As of October 31, 2011, 2012 and 2013, we had over 80, 320 and 780 VARs that offered our solutions worldwide. Our channel partners act as an extension of our sales force to market our solutions directly to end-customers and do not hold inventory. We have sales offices located in Australia, England, Germany and Singapore. In addition, we have sales employees located in a number of other geographies worldwide, including Canada, Sweden, France and the Netherlands. Our international revenue was 14% of our total revenue for the nine months ending October 31, 2013, as we increased our sales and marketing efforts on a global basis.

 

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We outsource the manufacturing of our hardware products to our contract manufacturers, who assemble and test our products. Our contract manufacturers generally procure the components used in our products directly from third-party suppliers. Inventory and shipment are handled by our third-party logistics partners. Distributors handle fulfillment and shipment for our international end-customers, but do not hold inventory.

We have experienced significant growth in recent periods with total revenue of $1.7 million, $14.0 million, $53.8 million and $84.0 million in the years ended January 31, 2011, 2012 and 2013 and the nine months ended October 31, 2013. Our net loss was $6.8 million, $16.8 million, $27.9 million and $30.0 million in the years ended January 31, 2011, 2012 and 2013 and the nine months ended October 31, 2013. As our sales and customer base have grown, we have also experienced growth in our deferred revenue from $2.0 million as of January 31, 2012 to $10.9 million as of January 31, 2013 and to $26.4 million as of October 31, 2013. Our gross margin has improved from approximately 55% for the year ended January 31, 2012 to 62% for the year January 31, 2013 and to 64% for the nine months ended October 31, 2013. As a percentage of total revenue, our operating expenses have declined from 175% for the year ended January 31, 2012 to 114% for the year ended January 31, 2013 and to 99% for the nine months ended October 31, 2013.

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

Since our founding, we have invested heavily in growing our business, particularly in research and development and sales and marketing. From January 31, 2011 to October 31, 2013, our headcount has increased from 47 to 528 employees. We intend to continue to invest in development of our solutions and sales and marketing programs to drive long-term growth. To support future sales, we plan to continue to invest significant resources in sales and marketing.

The successful growth of our business will depend on our ability to continue to expand our customer base by gaining new customers and in turn grow revenues from our existing customer base. As a result, we intend to hire additional sales and marketing personnel. We are also expanding our VAR network and will be starting to contract directly with large distributors. While these areas represent significant opportunities for us, they also pose risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. For example, our investments in these areas might not result in a significant increase in productive sales personnel or channel partners. If this were to occur, we might not be able to expand our base of new customers or succeed in selling additional products to existing customers, which would affect our ability to continue to grow our revenues.

Our future performance will also depend on our ability to continue to innovate, improve functionality in our products and adapt to new technologies or changes to existing technologies. Accordingly, we also intend to continue to invest in our research and development activities. It is difficult for us to predict the timing and impact that these investments will have on future revenue. Additionally, we face significant competition in the storage market, which makes it more important that the investments we make in our business are successful. Weak global economic conditions, particularly market and financial uncertainty in the United States and Europe, or a reduction in spending even if economic conditions improve, could adversely impact our business, financial condition and operating results. If we are unable to address these challenges, our business could be adversely affected.

 

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Key Business Metrics

We monitor the key business metrics set forth below in managing our business. We discuss revenue and gross margin below under “—Components of Operating Results.” Deferred revenue, cash flow used in operating activities, Non-GAAP Net Loss and Adjusted EBITDA are discussed immediately below the following table.

 

     Year Ended or as of January 31,     Nine Months Ended or
as of October 31,
 
     2011     2012     2013     2012     2013  
     (dollars in thousands)  

Total revenue

   $ 1,681      $ 14,013      $ 53,840      $ 33,661      $ 84,013   

Year-over-year percentage increase

     nm        734     284     315     150

Gross margin

     50.4     55.2     62.0     62.3     64.0

Deferred revenue, current and non-current

     227        2,028        10,896      $ 7,489      $ 26,381   

Net cash used in operating activities

     (7,584     (14,841     (18,754   $ (14,856   $ (8,927

Non-GAAP Net Loss

     (6,718     (15,970     (25,253   $ (15,924   $ (24,923

Adjusted EBITDA (non-GAAP)

     (6,681     (15,802     (24,068   $ (15,247   $ (22,250

Deferred Revenue

Our deferred revenue consists of amounts that have been either invoiced or prepaid but have not yet been recognized as revenue as of the period end. The majority of our deferred revenue consists of the unrecognized portion of revenue from sales of our support and service contracts. We monitor our deferred revenue balance because it represents a portion of revenue to be recognized in future periods.

Net Cash Used in Operating Activities

We monitor net cash used in operating activities as a measure of our overall business performance. Our net cash used in operating activities is driven in large part by our net losses. Monitoring net cash used in operating activities enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation, amortization, and stock-based compensation costs, thereby allowing us to better understand and manage the cash needs of our business.

Non-GAAP Net Loss

To provide investors with additional information regarding our financial results, we have disclosed in this prospectus Non-GAAP Net Loss. We define Non-GAAP Net Loss as our net loss adjusted to exclude stock-based compensation. We have provided a reconciliation below of Non-GAAP Net Loss to net loss, the most directly comparable GAAP financial measure.

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in this prospectus Adjusted EBITDA, a non-GAAP financial measure. We define Adjusted EBITDA as our net loss, adjusted to exclude stock-based compensation, interest income, provision for income taxes and depreciation and amortization. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

 

 

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We have included non-GAAP Net Loss and Adjusted EBITDA in this prospectus because they are key measures used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational and compensation plans. In particular, the exclusion of certain expenses in calculating non-GAAP Net Loss and Adjusted EBITDA can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that non-GAAP Net Loss and Adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Our use of Non-GAAP Net Loss and Adjusted EBITDA have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

  Ÿ  

Non-GAAP Net Loss and Adjusted EBITDA do not consider the potentially dilutive impact of equity-based compensation, which is an ongoing expense for us;

 

  Ÿ  

Adjusted EBITDA does not reflect cash capital expenditure requirements for replacements or for new capital expenditures;

 

  Ÿ  

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

 

  Ÿ  

Other companies, including companies in our industry, may calculate Non-GAAP Net Loss and Adjusted EBITDA differently, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider Non-GAAP Net Loss and Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. We compensate for these limitations by also reviewing our GAAP financial statements.

A reconciliation of Non-GAAP Net Loss and Adjusted EBITDA to net loss is provided below:

 

     Year Ended January 31,     Nine Months Ended
October 31,
 
     2011     2012     2013     2012     2013  
    

(in thousands)

 

Net loss

   $ (6,822   $ (16,790   $ (27,857   $ (17,646   $ (29,970

Stock-based compensation expense

     104        820        2,604        1,722        5,047   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Net Loss

     (6,718     (15,970     (25,253     (15,924     (24,923

Interest income, net

     (5     (6     (32     (21     (27

Provision for income taxes

            5        99        26        252   

Depreciation and amortization

     42        169        1,118        672        2,448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (6,681   $ (15,802   $ (24,068   $ (15,247   $ (22,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Components of Operating Results

Revenue

Our total revenue is comprised of the following:

Product Revenue.     We generate the substantial majority of our product revenue from the sales of our storage products. It is our practice to identify a direct customer or an end-customer from our VARs and distributors prior to shipment. Products are typically shipped directly to the direct customer or the end-customers of our VARs and distributors. Assuming all other revenue recognition criteria

 

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have been met, we generally recognize revenue on sales upon shipment, as title and risk of loss are transferred at that time. For certain VARs and distributors, title and risk of loss is transferred upon delivery to the end-customers and revenue is recognized after delivery has been completed. Our arrangements with VARs and distributors do not contain rights of return, subsequent price discounts, price protection or other allowances for shipments completed.

Support and Service Revenue.     We generate our support and service revenue primarily from support and service contracts, which include our automated support and management platform. The majority of our product sales are bundled with support and service contracts with terms ranging from one to five years. We recognize revenue from support and service contracts over the contractual service period. As a percentage of total revenue, we expect our support and service revenue to increase as we add new customers and renew existing support and service contracts.

See “—Critical Accounting Policies and Estimates, Revenue Recognition” for further information on our revenue recognition policy.

Cost of Revenue

Our total cost of revenue is comprised of the following:

Cost of Product Revenue.     Cost of product revenue primarily includes costs paid to our third-party contract manufacturers, which includes the costs of our components, and personnel costs associated with our manufacturing operations. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. Our cost of product revenue also includes warranty costs, freight and allocated overhead costs. Overhead costs consist of certain facilities, depreciation, benefits and IT costs. We expect our cost of product revenue to increase as our product revenue increases.

Cost of Support and Service Revenue.     Cost of support and service revenue includes personnel costs associated with our global customer support organization, cost from service inventory reserves and allocated overhead costs. Personnel costs consist of salaries, benefits, bonuses and stock-based compensation. Overhead costs consist of certain facilities, depreciation, benefits and IT costs. We expect our cost of support and service revenue to increase as our installed end-customer base grows.

Gross Margin

Gross margin, or gross profit as a percentage of total revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our storage products and related support and service contracts, manufacturing and overhead costs, component costs, the mix of products sold, and our ability to leverage our existing infrastructure as we continue to grow. We expect our gross margins to fluctuate over time depending on the factors described above.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expense. Personnel costs are the most significant component of operating expenses.

Research and Development.    Research and development expense consists primarily of personnel costs and allocated overhead and also includes consulting and other costs to support our development activities. To date, we have expensed all research and development costs as incurred. We expect research and development expense to continue to increase in absolute dollars as we

 

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continue to invest in our research and product development efforts to enhance our product capabilities and access new customer markets, although such expense may fluctuate as a percentage of total revenue.

Sales and Marketing.    Sales and marketing expense consists primarily of personnel costs, sales commission costs and allocated overhead. We expense sales commission costs as incurred. Sales and marketing expense also includes costs for recruiting and training channel partners, market development programs, promotional and other marketing activities, travel, office equipment, depreciation of proof-of-concept evaluation units and outside consulting costs. We expect sales and marketing expense to continue to increase in absolute dollars as we expand our sales and marketing headcount in all markets and expand our international operations, although such expense may fluctuate as a percentage of total revenue.

General and Administrative.    General and administrative expense consists of personnel costs, professional services and allocated overhead. General and administrative personnel include our executive, finance, human resources, administrative, IT, facilities and legal organizations. Professional services consist primarily of legal, auditing, accounting and other consulting costs. We expect general and administrative expense to continue to increase in absolute dollars as we have recently incurred, and expect to continue to incur, additional general and administrative expenses as we grow our operations and prepare to operate as a public company, including higher legal, corporate insurance and accounting expenses.

Interest Income and Other Expense, Net

Interest income consists of interest earned on our cash and cash equivalent balances. We have historically invested our cash in money-market funds. We expect interest income, which has not been historically significant to our operations, to vary each reporting period depending on our average investment balances during the period, types and mix of investments and market interest rates.

Other expense, net consists primarily of gains and losses from foreign currency transactions.

Provision for Income Taxes

Provision for income taxes consists primarily of state income taxes in the United States and income taxes in certain foreign jurisdictions in which we conduct business. We provide a full valuation allowance for deferred tax assets, which includes net operating loss, or NOL, carryforwards and tax credits related primarily to research and development. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that the assets will not be realized based on our history of losses. At January 31, 2013, we had federal and state NOL carryforwards of $49.1 million and $46.4 million that expire in 2028. Under Section 382 of the U.S. Internal Revenue Code of 1986, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. In September 2013, we completed an analysis to evaluate whether there are any limitations of our NOLs and concluded no limitations currently exist. While we do not believe that we have experienced, or will experience in connection with this offering, an ownership change that would result in limitations, regulatory changes, such as suspension on the use of NOLs, could result in the expiration of our NOLs or otherwise cause them to be unavailable to offset future income tax liabilities.

 

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Results of Operations

The following tables summarize our consolidated results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of results is not necessarily indicative of results for future periods.

 

    Year Ended January 31,     Nine Months Ended
October 31,
 
    2011     2012     2013     2012     2013  
                      (unaudited)  
    (in thousands)  

Consolidated Statements of Operations Data:

         

Revenue:

         

Product

  $ 1,632      $ 13,113      $ 49,765      $ 31,138      $ 75,650   

Support and service

    49        900        4,075        2,523        8,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,681        14,013        53,840        33,661        84,013   

Cost of revenue:

         

Product(1)

    604        5,233        17,266        10,856        24,695   

Support and service(1)

    230        1,045        3,184        1,828        5,535   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    834        6,278        20,450        12,684        30,230   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    847        7,735        33,390        20,977        53,783   

Operating expenses:

         

Research and development(1)

    4,415        7,903        16,135        11,015        23,737   

Sales and marketing(1)

    2,934        12,863        39,851        24,362        51,330   

General and administrative(1)

    325        3,756        5,168        3,238        8,472   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,674        24,522        61,154        38,615        83,539   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (6,827     (16,787     (27,764     (17,638     (29,756

Interest income, net

    5        6        32        21        27   

Other income (expense), net

           (4     (26     (3     11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

    (6,822     (16,785     (27,758     (17,620     (29,718

Provision for income taxes

           5        99        26        252   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (6,822   $ (16,790   $ (27,857   $ (17,646   $ (29,970
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Year Ended
January 31,
     Nine Months Ended
October 31,
 
     2011      2012      2013          2012              2013      
            (unaudited)  
     (in thousands)  

Cost of product revenue

   $       $ 10       $ 48       $ 19       $ 130   

Cost of support and service revenue

     5         31         114         77         258   

Research and development

     46         268         874         579         1,695   

Sales and marketing

     37         244         1,029         672         1,971   

General and administrative

     16         267         539         375         993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 104       $ 820       $ 2,604       $ 1,722       $ 5,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     Year Ended January 31,     Nine Months
Ended October 31,
 
       2011     2012     2013       2012     2013  
                       (unaudited)  

Revenue:

          

Product

     97     94     92     93     90

Support and service

     3        6        8        7        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100        100        100   

Cost of revenue:

          

Product

     36        37        32        32        29   

Support and service

     14        8        6        6        7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     50        45        38        38        36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     50        55        62        62        64   

Operating expenses:

          

Research and development

     262        56        30        33        28   

Sales and marketing

     175        92        74        72        61   

General and administrative

     19        27        10        9        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     456        175        114        114        99   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (406     (120     (52     (52     (35

Interest income, net

                                   

Other income (expense), net

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (406     (120     (52     (52     (35

Provision for income taxes

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (406 )%      (120 )%      (52 )%      (52 )%      (35 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Nine Months Ended October 31, 2012 and 2013

Revenue

 

     Nine Months Ended
October 31,
        
     2012      2013      Change  
     Amount      Amount      Amount      %  
     (dollars in thousands)  

Revenue:

           

Product

   $ 31,138       $ 75,650       $ 44,512         143

Support and service

     2,523         8,363         5,840         231   
  

 

 

    

 

 

    

 

 

    

Total revenue

   $ 33,661       $ 84,013       $ 50,352         150
  

 

 

    

 

 

    

 

 

    

Total revenue increased by $50.4 million, or 150%, during the nine months ended October 31, 2013 compared to the nine months ended October 31, 2012. The revenue growth reflects increased demand for our storage products and related support and service. The increase in product revenue was driven by higher sales of our storage products to 1,026 new end-customers and increased sales to existing customers. During the nine months ended October 31, 2013, the total number of product orders received was 1,602, which represented a 133% increase compared to the nine months ended October 31, 2012. The increase in support and service revenue was driven by higher product sales and the resulting expansion of our installed base.

 

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Cost of Revenue and Gross Margin

 

     Nine Months Ended
October 31,
       
     2012     2013     Change  
     Amount     Amount     Amount      %  
     (dollars in thousands)  

Cost of revenue:

         

Product

   $ 10,856      $ 24,695      $ 13,839         127

Support and service

     1,828        5,535        3,707         203   
  

 

 

   

 

 

   

 

 

    

Total cost of revenue

   $ 12,684      $ 30,230      $ 17,546         138
  

 

 

   

 

 

   

 

 

    

Gross margin

     62.3     64.0     

Cost of revenue increased by $17.5 million, or 138%, during the nine months ended October 31, 2013 compared to the nine months ended October 31, 2012. The increase in cost of product revenue was driven primarily by higher product sales. The increase in cost of product revenue was also impacted by higher costs of $1.7 million in our manufacturing operations, primarily driven by personnel costs associated with increased headcount, and a $0.2 million increase in warranty expense. The increase in cost of support and service revenue was primarily attributable to higher costs of $2.9 million in our global customer support organization primarily driven by personnel costs associated with increased headcount and increased investments in our service depots, which are physical warehouse locations that hold service inventory in support of our customer service agreements.

Gross margin increased from 62.3% during the nine months ended October 31, 2012 to 64.0% during the nine months ended October 31, 2013 as a result of changes in revenue mix as support and service revenue increased as a percentage of our total revenue. Product gross margin increased by 2.2%, primarily driven by higher sales volume, our mix of products sold, lower average standard component costs from higher volume discounts and benefit from economies of scale as we improved the utilization of our existing infrastructure. Support and service gross margin increased by 6.3% due to increased recognition of deferred support and service revenue resulting from the increase in our installed base.

Operating Expenses

 

     Nine Months Ended October 31,               
     2012     2013     Change  
     Amount      % of
Total
Revenue
    Amount      % of
Total
Revenue
    Amount      %  
     (dollars in thousands)  

Operating expenses:

               

Research and development

   $ 11,015         33   $ 23,737         28   $ 12,722         115

Sales and marketing

     24,362         72        51,330         61        26,968         111   

General and administrative

     3,238         10        8,472         10        5,234         162   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

   $ 38,615         115   $ 83,539         99   $ 44,924         116
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Includes stock-based compensation expense of:

               

Research and development

   $ 579         $ 1,695         $ 1,116         193

Sales and marketing

     672           1,971           1,299         193   

General and administrative

     375           993           618         165   
  

 

 

      

 

 

      

 

 

    

Total

   $ 1,626         $ 4,659         $ 3,033         187
  

 

 

      

 

 

      

 

 

    

 

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Research and Development

Research and development expense increased by $12.7 million, or 115%, during the nine months ended October 31, 2013 compared to the nine months ended October 31, 2012. The increase was primarily due to a $10.2 million increase in personnel costs, including stock-based compensation, resulting from headcount growth to support further development of our storage products.

Sales and Marketing

Sales and marketing expense increased by $27.0 million, or 111%, during the nine months ended October 31, 2013 compared to the nine months ended October 31, 2012. The increase was primarily due to a $15.0 million increase in personnel costs, including stock-based compensation, resulting from headcount growth, a $4.0 million increase in commission expense related to higher sales, a $2.5 million increase in travel and entertainment expenses and a $1.1 million increase in advertising and tradeshow expenses.

General and Administrative

General and administrative expense increased by $5.2 million, or 162%, during the nine months ended October 31, 2013 compared to the nine months ended October 31, 2012. The increase was primarily due to a $3.5 million increase in personnel costs, including stock-based compensation, resulting from headcount growth and a $1.6 million increase in spending on consulting resources and professional services.

Interest Income and Other Income (Expense), Net

 

     Nine Months Ended
October 31,
     Change  
       2012          2013        Amount      %  
     (dollars in thousands)  

Interest income, net

   $ 21       $ 27       $ 6         29

Other income (expense), net

     (3      11         14         467

The increase in interest income was primarily due to higher cash and cash equivalent balances during the nine months ended October 31, 2013.

Provision for Income Taxes

 

       Nine Months Ended
October 31,
 
           2012              2013      
       (in thousands)  

Provision for income taxes

     $       26       $     252   

The increase in the provision for income taxes during the nine months ended October 31, 2013 compared to the nine months ended October 31, 2012 was primarily due to an increase in foreign taxes related to intercompany cost plus agreements with our international sales offices.

 

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Comparison of the Years Ended January 31, 2012 and 2013

Revenue

 

     Year Ended January 31,           
     2012        2013        Change  
     Amount        Amount        Amount        %  
     (dollars in thousands)  

Revenue:

                 

Product

   $ 13,113         $ 49,765         $ 36,652           280

Support and service

     900           4,075           3,175           353   
  

 

 

      

 

 

      

 

 

      

Total revenue

   $ 14,013         $ 53,840         $ 39,827           284
  

 

 

      

 

 

      

 

 

      

Total revenue increased by $39.8 million, or 284%, during the year ended January 31, 2013 compared to the year ended January 31, 2012. The revenue growth reflects increased demand for our storage products and related support and service. The increase in product revenue was driven by higher sales of our storage products to 819 new end-customers and increased sales to existing customers. During the year ended January 31, 2013, the total number of product orders received was 1,149, which represented a 280% increase compared to the year ended January 31, 2012. The increase in support and service revenue was driven by higher product sales and the renewal of existing support and service contracts from our installed base.

Cost of Revenue and Gross Margin

 

     Year Ended January 31,                 
     2012     2013     Change  
      Amount       Amount      Amount        %  
     (dollars in thousands)  

Cost of revenue:

           

Product

   $ 5,233      $ 17,266      $ 12,033           230

Support and service

     1,045        3,184        2,139           205   
  

 

 

   

 

 

   

 

 

      

Total cost of revenue

   $ 6,278      $ 20,450      $ 14,172           226
  

 

 

   

 

 

   

 

 

      

Gross margin

     55.2     62.0       

Total cost of revenue increased by $14.2 million, or 226%, during the year ended January 31, 2013 compared to the year ended January 31, 2012. The increase in cost of product revenue was driven primarily by the higher product sales. The increase in cost of product revenue was also impacted by higher costs of $1.0 million in our manufacturing operations, primarily driven by personnel costs associated with increased headcount, a $0.7 million increase in warranty expense and a $0.7 million increase in freight costs. The increase in cost of support and service revenue was primarily attributable to higher costs of $2.0 million in our global customer support organization primarily driven by personnel costs associated with increased headcount and increased investments in our service depots.

Gross margin increased from 55.2% during the year ended January 31, 2012 to 62.0% during the year ended January 31, 2013. Product gross margin increased by 5.2 percentage points, primarily driven by higher sales volume, our mix of products sold, lower average standard component costs from higher volume discounts and benefit from economies of scale as we improved the utilization of our existing infrastructure. Support and service gross margin increased by 38.0 percentage points due to increased recognition of deferred support and service revenue.

 

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Operating Expenses

 

     Year Ended January 31,               
     2012     2013     Change  
     Amount      % of
Total
Revenue
    Amount      % of
Total
Revenue
    Amount      %  
     (dollars in thousands)  

Operating expenses:

               

Research and development

   $ 7,903         56   $ 16,135         30   $ 8,232         104

Sales and marketing

     12,863         92        39,851         74        26,988         210   

General and administrative

     3,756         27        5,168         10        1,412         38   
  

 

 

      

 

 

      

 

 

    

Total operating expenses

   $ 24,522         175   $ 61,154         114   $ 36,632         149
  

 

 

      

 

 

      

 

 

    

Includes stock-based compensation expense of:

               

Research and development

   $ 268         $ 874         $ 606         226

Sales and marketing

     244           1,029           785         322   

General and administrative

     267           539           272         102   
  

 

 

      

 

 

      

 

 

    

Total

   $ 779         $ 2,442         $ 1,663         213
  

 

 

      

 

 

      

 

 

    

Research and Development

Research and development expense increased by $8.2 million, or 104%, during the year ended January 31, 2013 compared to the year ended January 31, 2012. The increase was primarily due to a $6.3 million increase in personnel costs, including stock-based compensation, resulting from headcount growth to support further development of our storage products.

Sales and Marketing

Sales and marketing expense increased by $27.0 million, or 210%, during the year ended January 31, 2013 compared to the year ended January 31, 2012. The increase was primarily due to a $11.4 million increase in personnel costs, including stock-based compensation, resulting from headcount growth, a $10.0 million increase in commission expense related to higher sales, a $2.0 million increase in travel and entertainment expenses and a $1.1 million increase in advertising and tradeshow expenses.

General and Administrative

General and administrative expense increased by $1.4 million, or 38%, during the year ended January 31, 2013 compared to the year ended January 31, 2012. The increase was primarily due to a $2.2 million increase in personnel costs, including stock-based compensation, resulting from headcount growth, offset by $0.9 million in certain legal costs in the year ended January 31, 2012.

Interest Income and Other Income (Expense), Net

 

     Year Ended January 31,      Change  
         2012              2013          Amount      %  
     (dollars in thousands)  

Interest income, net

   $ 6       $ 32       $ 26         433

Other income (expense), net

     (4      (26      (22      550   

 

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The increase in interest income resulted from higher average cash and cash equivalents balances during the year ended January 31, 2013 compared to the year ended January 31, 2012. The increase in other income (expense), net was due to fluctuations in the British pound sterling.

Provision for Income Taxes

 

     Year Ended January 31,  
     2012        2013  
     (in thousands)  

Provision for income taxes

   $   5         $   99   

The increase in provision for income taxes during the year ended January 31, 2013 compared to the year ended January 31, 2012 was primarily due to an increase in foreign taxes related to intercompany cost plus agreements with our international sales offices.

Comparison of the Years Ended January 31, 2011 and 2012

Revenue

 

     Year Ended January 31,        Change  
     2011        2012        Amount        %  
                 
     (dollars in thousands)  

Revenue:

                 

Product

   $   1,632         $ 13,113         $ 11,481           703

Support and service

     49           900           851           nm   
  

 

 

      

 

 

      

 

 

      

Total revenue

   $ 1,681         $ 14,013         $ 12,332           734
  

 

 

      

 

 

      

 

 

      

Total revenue increased by $12.3 million during the year ended January 31, 2012 compared to the year ended January 31, 2011. The increase in both product and support and service revenue was primarily driven by having a full year of product sales and related support and service contracts during the year ended January 31, 2012, as we launched our first storage product in the second half of the year ended January 31, 2011.

Cost of Revenue and Gross Margin

 

     Year Ended January 31,     Change  
     2011        2012     Amount        %  
              
     (dollars in thousands)  

Cost of revenue:

              

Product

   $ 604         $ 5,233      $ 4,629           766

Support and service

     230           1,045        815           354   
  

 

 

      

 

 

   

 

 

      

Total cost of revenue

   $ 834         $ 6,278      $ 5,444           653
  

 

 

      

 

 

   

 

 

      

Total gross margin

     50.4        55.2       

Total cost of revenue increased by $5.4 million during the year ended January 31, 2012 compared to the year ended January 31, 2011. The increase in both cost of product and support and service revenue was driven by full production during the year ended January 31, 2012 as compared to partial production during the year ended January 31, 2011, as we launched our first storage product in the second half of the year ended January 31, 2011. The total number of product orders received during the year ended January 31, 2012 was 302.

 

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Gross margin increased from 50.4% during the year ended January 31, 2011 to 55.2% during the year ended January 31, 2012 due to benefits from economies of scale as we improved the utilization of our existing infrastructure and an increase in support and service gross margin.

Operating Expenses

 

     Year Ended January 31,               
     2011     2012     Change  
     Amount     

% of
Total
Revenue

    Amount     

% of
Total
Revenue

    Amount      %  
     (dollars in thousands)  

Operating expenses:

               

Research and development

   $ 4,415           262   $ 7,903             56   $ 3,488         79

Sales and marketing

     2,934         175        12,863         92        9,929         338   

General and administrative

     325         19        3,756         27        3,431         nm   
  

 

 

      

 

 

      

 

 

    

Total operating expenses

   $ 7,674         456   $ 24,522         175   $ 16,848         220
  

 

 

      

 

 

      

 

 

    

Includes stock-based compensation expense of:

               

Research and development

   $ 46         $ 268         $ 222         483

Sales and marketing

     37           244           207         559   

General and administrative

     16           267           251         nm   
  

 

 

      

 

 

      

 

 

    

Total

   $ 99         $ 779         $ 680         687
  

 

 

      

 

 

      

 

 

    

Research and Development

Research and development expense increased by $3.5 million, or 79%, during the year ended January 31, 2012 compared to the year ended January 31, 2011. The increase was primarily due to a $3.2 million increase in personnel costs, including stock-based compensation, resulting from headcount growth.

Sales and Marketing

Sales and marketing expense increased by $9.9 million, or 338%, during the year ended January 31, 2012 compared to the year ended January 31, 2011, primarily due to a $5.3 million increase in personnel costs, including stock-based compensation, resulting from headcount growth, a $2.4 million increase in commission expenses related to higher sales and a $0.6 million increase related to marketing and advertising our new products.

General and Administrative

General and administrative expense increased $3.4 million during the year ended January 31, 2012 compared to the year ended January 31, 2011, primarily due to a $1.4 million increase in personnel costs, including stock-based compensation, resulting from headcount growth and a $1.5 million increase in legal and accounting fees which included $0.9 million in certain legal expenses.

 

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Interest Income and Other Income (Expense), Net

 

     Year Ended January 31,     Change  
         2011              2012         Amount     %  
     (dollars in thousands)  

Interest income, net

   $      5       $      6      $ 1        20

Other income (expense), net

             (4     (4     nm   

The increase in interest income resulted from higher average cash and cash equivalents balances during the year ended January 31, 2012 compared to the year ended January 31, 2011. The change in other income (expense), net was due to fluctuations in the British pound sterling.

Provision for Income Taxes

 

     Year Ended January 31,  
         2011              2012      
     (in thousands)  

Provision for income taxes

   $    —       $      5   

The increase in provision for income taxes during the year ended January 31, 2012 compared to the year ended January 31, 2011 was primarily due to an increase in foreign taxes related to intercompany cost plus agreements with our international sales offices.

 

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Quarterly Results of Operations

The following unaudited quarterly consolidated statements of operations data for each of the seven quarters in the period ended October 31, 2013 have been prepared on a basis consistent with our audited annual consolidated financial statements and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for any quarter are not necessarily indicative of results to be expected for a full year or any other period. The following quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     Three Months Ended  
     April 30,
2012
    July 31,
2012
    Oct. 31,
2012
    Jan. 31,
2013
    April 30,
2013
    July 31,
2013
    October 31,
2013
 
     (in thousands)  

Consolidated Statements of Operations Data:

              

Revenue:

              

Product

     $7,533      $ 10,198      $ 13,407      $ 18,627      $ 20,046      $ 25,720      $ 29,884   

Support and service

     623        755        1,145        1,552        2,078        2,758        3,527   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     8,156        10,953        14,552        20,179        22,124        28,478        33,411   
              

Cost of revenue:

              

Product

     2,567        3,506        4,783        6,409        6,895        8,480        9,320   

Support and service

     411        584        833        1,357        1,648        1,818        2,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     2,978        4,090        5,616        7,766        8,543        10,298        11,389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     5,178        6,863        8,936        12,413        13,581        18,180        22,022   
              

Operating expenses:

              

Research and development

     3,150        3,565        4,300        5,120        6,318        8,058        9,361   

Sales and marketing

     6,040        7,828        10,494        15,489        14,160        17,268        19,902   

General and administrative

     1,047        951        1,240        1,930        2,301        3,041        3,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     10,237        12,344        16,034        22,539        22,779        28,367        32,393   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (5,059     (5,481     (7,098     (10,126     (9,198     (10,187     (10,371

Interest income, net

     5        7        9        11        6        16        5   

Other income (expense), net

     3        (30     24        (23     (133     (162     306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (5,051     (5,504     (7,065     (10,138     (9,325     (10,333     (10,060

Provision for income taxes

     10        2        14        73        46        130        76   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (5,061   $ (5,506   $ (7,079   $ (10,211   $ (9,371   $ (10,463   $ (10,136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Revenue Trends

Our quarterly revenue increased sequentially for all periods presented reflecting increased demand for our products and related support and service. The sequential growth in product revenue was driven primarily by higher sales of our storage products to new and existing customers. The sequential growth in support and service revenue was primarily driven by higher product sales and the resulting expansion of our installed end-customer base. We expect to experience seasonal fluctuations in our revenue, as industry sales are historically highest in the fourth quarter and lowest in the first quarter of our fiscal year.

 

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Quarterly Cost of Revenue and Gross Margin Trends

The sequential increase in cost of revenue in absolute dollars over the quarterly periods was aligned with our revenue growth. During the first three quarters of the year ended January 31, 2013, we experienced a slight sequential decrease in our gross margin from 63.5% during the first quarter of the year ended January 31, 2013 to 61.4% during the third quarter of the year ended January 31, 2013 as the proportion of our support and service revenue to total revenue grew slightly. This was primarily due to increased investments in our service depots and our support and service contracts carrying a lower gross margin than our storage products. Our gross margin then stabilized during the fourth quarter of the year ended January 31, 2013 and the first quarter of the year ending January 31, 2014 as lower average standard cost components from higher volume discounts and the benefit from economies of scale resulting from the improved utilization of our existing infrastructure have offset the continued growth in support and service revenue. During the second and third quarters of the year ending January 31, 2014, our gross margin expanded to 63.8% and 65.9% as a result of higher support and service gross margins, favorable product mix, higher product average selling prices and increased leverage of our operations costs.

Quarterly Operating Expense Trends

Total operating expenses increased sequentially for all periods presented, primarily due to the addition of personnel in connection with the expansion of our business and the build out of facilities and corporate infrastructure. Research and development expenses increased due to continued development of new storage products and support infrastructure. Generally, sequential growth in sales and marketing expenses has been due to increased commission expenses related to higher sales of our storage products and increased marketing expenses. General and administrative costs increased due to higher facilities costs, consulting and accounting fees, and, in recent quarters, an increase in professional service fees related to preparing to be a public company.

Liquidity and Capital Resources

 

     As of January 31,      As of October  31,
2013
 
     2011      2012      2013     
     (in thousands)         

Cash and cash equivalents

   $ 18,985       $ 28,796       $ 49,205       $  34,719   

 

     Year Ended January 31,     Nine Months Ended
October 31,
 
   2011     2012     2013     2012     2013  
     (dollars in thousands)  

Cash used in operating activities

   $ (7,584   $ (14,841   $ (18,754   $ (14,856   $ (8,927

Cash used in investing activities

     (375     (1,283     (3,554     (2,130     (12,025

Cash provided by financing activities

     16,427        25,935        42,700        41,981        6,415   

Foreign exchange impact on cash and cash equivalents

                   17     

 

 

 

(3

 

 

 

 

 

51

 

  

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 8,468      $ 9,811      $ 20,409     

 

 

$