- Securities Registration Statement (S-1/A)
08 Aprile 2010 - 12:05PM
Edgar (US Regulatory)
Table of Contents
As filed with the Securities and Exchange Commission on April 8, 2010
Registration No. 333-150446
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Pre-Effective
Amendment No. 6
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEXSAN CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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3572
(Primary standard classification
industrial code number)
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13-4149478
(I.R.S. Employer
Identification No.)
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555 St. Charles Drive, Suite 202
Thousand Oaks, California 91360
(805) 418-2700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Philip Black
President and Chief Executive Officer
Nexsan Corporation
555 St. Charles Drive, Suite 202
Thousand Oaks, California 91360
(805) 418-2700
(Name, address, including zip code, and telephone number, including area code, of agent for service)
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Copies to:
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William R. Schreiber, Esq.
Jeffrey R. Vetter, Esq.
Fenwick & West LLP
Silicon Valley Center
801 California Street
Mountain View, California 94041
(650) 988-8500
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Denise M. Tormey, Esq.
Sonnenschein Nath & Rosenthal LLP
1221 Avenue of the Americas
New York, NY 10020
(212) 768-6700
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Craig W. Adas, Esq.
Alexander D. Lynch, Esq.
Weil, Gotshal & Manges LLP
201 Redwood Shores Parkway
Redwood Shores, California 94065
(650) 802-3000
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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.
o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box
and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities
to be Registered
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Amount to be
Registered(1)
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Proposed Maximum
Offering Price
Per Share
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Proposed Maximum
Aggregate
Offering Price(2)
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Amount of
Registration Fee(3)
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Common Stock, $0.001 par value
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5,750,000
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$12.00
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$69,000,000.00
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$4,919.70
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(1)
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Includes
750,000 shares issuable upon exercise of the underwriters' option to purchase additional shares from the Registrant.
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(2)
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Estimated
pursuant to Rule 457(a) solely for the purpose of calculating the amount of the registration fee.
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(3)
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Previously
paid.
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 that 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 Commission, acting pursuant to said Section 8(a), may determine.
Table of Contents
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. The prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
SUBJECT TO COMPLETION. DATED APRIL 8, 2010.
5,000,000 Shares
Common Stock
Nexsan Corporation is selling 4,884,000 shares of our common stock and the selling stockholder named in this prospectus is selling an additional 116,000 shares. We will not
receive any of the proceeds from the sale of the shares by the selling stockholder. We have granted the underwriters a 30-day option to purchase up to an additional 750,000 shares to cover
over-allotments, if any.
This is an initial public offering of our common stock. We currently expect the initial public offering price to be between $10.00 and $12.00 per share. Our common stock has been approved for listing
on the NASDAQ Global Market under the symbol "NXSN."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Proceeds, before expenses, to the selling stockholder
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$
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$
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Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of
this prospectus. Any representation to the contrary is a criminal offense.
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Thomas Weisel Partners LLC
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Lazard Capital Markets
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Needham & Company, LLC
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Morgan Keegan & Company, Inc.
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The
date of this prospectus
is , 2010.
Table of Contents
Table of Contents
TABLE OF CONTENTS
You
should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We
are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.
In
this prospectus "Nexsan," "we," "us" and "our" refer to Nexsan Corporation, and where appropriate, its subsidiaries.
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Table of Contents
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all of the
information you should consider before buying shares of our common stock. Before deciding to invest in shares of our common stock, you should read the entire prospectus carefully, including our
consolidated financial statements and the related notes and the information set forth under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," in each case included elsewhere in this prospectus.
Overview
We are a leading provider of disk-based storage systems designed for the storage of digital information. Our systems are
used to store information created in the new "digital-age" by the rapidly growing number of digital applications that are creating large amounts of information such as email, office documents, medical
images and digital voice or video
recordings. We have designed our products to bring enterprise-class storage features to the mid-tier market, which we define as mid-sized businesses and branch offices of
larger organizations, and which has historically been underserved by legacy storage vendors. Our systems help these organizations store and access growing amounts of digital information over long
periods of time by:
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meaningfully lowering the cost of storing digital information on disk;
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providing enterprise-class storage for mid-tier organizations;
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minimizing the use of data center floor space by providing storage with industry-leading densities;
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significantly reducing energy consumption in powering and cooling storage systems;
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ensuring reliability, accessibility, integrity and security of stored data;
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simplifying the management of storage; and
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enabling the rapid search and retrieval of files stored.
As
a pioneer of reliable disk-based storage systems optimized for capacity and cost, our ATA and subsequent SATA RAID technology solutions have significantly reshaped
the economics of storage. We have been able to offer enterprise-class storage systems at price points that have historically been as low as 1/10th of the cost of traditional storage
systems. Our storage
systems are designed and priced to be used by the mid-tier market and these efforts have brought the benefits of enterprise-class storage systems within reach of a larger number of organizations and a
wider range of applications. In addition, our storage systems are among the first to offer energy-saving "green" technology such as MAID, or Massive Array of Idle Disks. Our products
include: block storage systems, which communicate with computers over SANs, or Storage Area Networks, through Fibre Channel and iSCSI block-mode protocols; and file storage systems, which
send and receive files through standard file-mode interfaces such as NFS and CIFS.
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Block storage systems with Fibre Channel and iSCSI
connectivity.
Our block storage systems are based on SAS and SATA disk drives, our high-performance RAID controllers and our
capacity-optimized chassis and enclosures. Our systems can be used in a wide variety of applications and storage environments, including iSCSI and Fibre Channel, offer industry-leading
density, are highly scalable and are priced to offer significant savings over traditional enterprise-class disk-based storage systems as well as a competitive replacement for
tape-based storage systems.
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Intelligent and high-speed file storage systems with strong archiving
capabilities.
Our software-based file storage systems typically integrate with our block storage systems to offer our
customers scalable, clusterable, secure and searchable file storage and archival systems with encryption and de-duplication.
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Table of Contents
We
sell our products through resellers, original equipment manufacturer, or OEM, partners and system integrators and to date have shipped over 24,000 systems worldwide. While our
market focus is on the mid-tier market, our systems have also been installed in small businesses, as well as large global enterprises around the world.
Industry Background
The amount of digital information being created and stored on disk by digital-age applications by businesses, governments and other
organizations is growing rapidly. As
disk-based storage solutions offer many advantages over tape and optical solutions in storing digital information, many organizations are increasingly using disk-based storage
solutions and are reducing the use of tape or optical solutions.
Digital
information is being created by mid-tier organizations faster than ever before and this information needs to be stored longer and be readily available. Some of the
key factors influencing these trends include:
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Increasing number of applications that create digital
information.
Businesses and organizations of all sizes are utilizing applications that create significant amounts of digital
information, such as e-commerce, digital security, digital multimedia, digital medical records, digital design software and digital imaging. Many of these applications are outside of the
traditional data center and are becoming more widely-used, particularly by the mid-tier market.
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Larger sized and more frequently shared files.
The
creation and storage of increasingly larger files associated with high-resolution video, photos, medical images and music and data-intensive documents, as well as the frequent sharing and
re-saving of files, which results in the storage of duplicate data, is accelerating the growth of digital information.
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Evolving business practices to store information in digital
form.
Many organizations are now retaining key information in digital form for indefinite timeframes. For example, local governments are
now retaining records in digital form that had previously been kept in paper form.
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Increasing regulatory requirements.
Regulations resulting
from legislation such as the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and Accountability Act, or HIPAA, require some companies to retain digital information for specified
periods of time, and then often require guaranteed deletion of data when that time has elapsed. These regulations also require organizations to take reasonable measures to ensure the security and
integrity of their data over sustained periods of time.
Traditionally,
high-cost disk drives optimized for performance, such as Fibre Channel and SCSI disks, have been used to store transaction-oriented database
information, while less expensive, low-availability storage systems, such as tape and optical disk were used for long-term storage of digital information. However, as demands have been
increasing for storing digital-age applications that create large amounts of digital content, the requirements for more cost-effective long-term disk storage have emerged. Organizations of
all sizes are increasingly looking for cost-effective and energy-efficient storage solutions with high-availability that can scale to tackle the substantial growth
of digital information.
As
the demand for digital content continues to increase, the result has been a shift from the need for performance-optimized storage to capacity-optimized
storage. In addition, the need for ready access to information has led to the replacement of some tape and optical disk systems with disk drives.
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Table of Contents
Limitations of Traditional Storage Systems
Traditional disk and tape storage systems do not fully meet the needs of the mid-tier market for storing digital information.
Tape-based solutions lack the reliability and performance characteristics of disk-based systems, while traditional disk-based systems typically cost significantly
more, consume considerable floor space and are energy inefficient. Moreover, traditional systems also typically lack the ability to securely manage, store and protect digital information over the
course of its life and unnecessarily store duplicate information, increasing the consumption of storage capacity and leading to higher storage costs.
While
the mid-tier market faces similar storage-related challenges as larger organizations, many storage solutions have been priced or designed for larger enterprises with complex
storage needs, and which do not scale cost-effectively for smaller organizations.
We
believe there is an excellent opportunity to leverage our storage technology to capitalize on this market opportunity by providing solutions that help organizations efficiently,
intelligently and securely store and manage digital information for the long term.
Strategy
Our goal is to be the leading supplier of disk-based storage systems for the mid-tier market, with a focus on providing
storage for digital applications. Key elements of our strategy include:
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Continuing our history of technical innovation and utilizing technology to drive growth and reduce cost.
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Continuing to focus on the attractive mid-tier market.
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Continuing to integrate storage application software in our products.
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Continuing to sell our products through channel partners.
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Increasing our global sales coverage and marketing efforts.
Recent Developments
We have recently completed our third fiscal quarter. Although complete financial statements for this period and the nine months ended
March 31, 2010 have not been reviewed by our independent registered public accounting firm and are not yet available, we anticipate that our revenue for the three months ended March 31,
2010 will be between $16.8 million
and $17.3 million. We also anticipate that our gross profit will be between $6.5 million and $6.8 million.
Corporate Information
We were incorporated in Delaware in November 2000 and are currently headquartered in Thousand Oaks, California, with
126 employees throughout North America and Europe as of December 31, 2009. Our website address is
www.nexsan.com
. The information
contained on our website is not a part of this prospectus. We have three principal operating subsidiaries, Nexsan Technologies Incorporated, a Delaware corporation, Nexsan Technologies Limited, a
United Kingdom, U.K., corporation, and Nexsan Technologies Canada Inc., a Canadian corporation. Our principal executive offices are located at 555 St. Charles Drive,
Suite 202, Thousand Oaks, California 91360, and our telephone number is (805) 418-2700.
Nexsan
and logo, Nexsan Technologies and logo, Assureon, and SATABeast are our United States, U.S., registered trademarks. We have also filed a U.S. trademark application for
SASBeast, SASBoy, DeDupe SG and Nexsan iSeries. DATABeast, iSeries and SATABoy are other trademarks of ours. Other trade names, trademarks or service marks referred to in this prospectus are the
property of their respective owners.
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Table of Contents
THE OFFERING
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Common stock offered
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4,884,000 shares
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Common stock offered by selling stockholder
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116,000 shares
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Common stock to be outstanding after this offering
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16,623,967 shares
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Over-allotment option
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750,000 shares
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Use of proceeds
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We intend to use the proceeds of this offering for working capital and other general corporate purposes. We may
use a portion of the proceeds for potential acquisitions. See "Use of Proceeds."
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NASDAQ Global Market symbol
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NXSN
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The
common stock outstanding after this offering is based on 11,739,967 shares outstanding as of December 31, 2009 and excludes:
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1,993,015 shares issuable upon exercise of options outstanding as of December 31, 2009, at a weighted average
exercise price of $6.21 per share, including 403,570 shares subject to options that are subject to call options held by us, exercisable as of December 31, 2009 at $9.48 per share;
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732,358 shares issuable upon exercise of options granted between January 1, 2010 and March 31, 2010,
at a weighted average exercise price of $9.21 per share;
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292,316 shares issuable upon exercise of warrants outstanding as of December 31, 2009, at a weighted average
exercise price of $8.03 per share; and
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476,857 shares reserved for future issuance under our 2001 stock plan as of March 31, 2010 and to be transferred
into our 2010 equity incentive plan and 193,045 shares reserved for future issuance under our 2010 employee stock purchase plan, such plans to be effective upon completion of this offering.
Except
as otherwise noted, all information in this prospectus:
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reflects the filing of our restated certificate of incorporation prior to the completion of this offering;
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reflects the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 6,516,176
shares of common stock, effective upon the completion of this offering;
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reflects the exchange of all of the outstanding exchangeable shares of our wholly-owned Canadian subsidiary into an
aggregate of 464,283 shares of our common stock;
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assumes the issuance of 362,598 IPO Bonus Shares on an after-tax basis, based on an assumed initial public offering price
of $11.00 per share of our common stock, immediately prior to the completion of this offering.
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reflects, on a retroactive basis, a 10.5-for-1 reverse split of our common stock, Series A
and C convertible preferred stock and exchangeable shares effected in March 2010; and
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assumes no exercise of the underwriters' over-allotment option.
4
Table of Contents
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following tables summarize our consolidated financial data. The consolidated statements of operations data for the fiscal years
ended June 30, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for
the six months ended December 31, 2008 and 2009, and the consolidated balance sheet data as of December 31, 2009, have been derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include, in the opinion of
management, all adjustments, that management considers necessary for the fair presentation of the financial information set forth in those financial statements. You should read this data together with
our consolidated financial statements and related notes to those statements included elsewhere in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Our historical results are not necessarily indicative of the results to be expected in any future period.
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Year Ended June 30,
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Six Months Ended
December 31,
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2007
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2008
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2009
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2008
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2009
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(unaudited)
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Consolidated Statements of Operations Data:
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Revenue
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$
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49,774
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$
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62,676
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$
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60,895
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$
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32,498
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$
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34,311
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Cost of revenue(1)
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35,750
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40,754
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35,544
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18,840
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20,253
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Gross profit
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14,024
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21,922
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25,351
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13,658
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14,058
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Operating expenses:
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Research and development(1)
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3,938
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5,364
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5,316
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2,593
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3,302
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Sales and marketing(1)
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8,055
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10,444
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11,112
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5,495
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7,532
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General and administrative(1)
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3,114
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6,289
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4,678
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2,804
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2,620
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Postponed public offering costs
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3,447
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449
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Total operating expenses
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15,107
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25,544
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21,555
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10,892
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13,454
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Income (loss) from operations
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(1,083
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(3,622
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3,796
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2,766
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604
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Total other income (expense)
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(2,090
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(1,746
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(10
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499
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70
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Income (loss) before income taxes
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(3,173
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(5,368
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3,786
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3,265
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674
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Income tax benefit (expense)
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148
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35
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(279
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(425
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(177
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Net income (loss)
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$
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(3,025
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)
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$
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(5,333
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$
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3,507
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$
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2,840
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$
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497
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Net income (loss) per common share, basic(2)
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$
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(0.61
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$
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(1.09
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$
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0.23
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$
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0.34
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$
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0.00
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Net income (loss) per common share, diluted(2)
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$
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(0.61
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$
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(1.09
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$
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0.22
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$
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0.24
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$
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0.00
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Shares used in computing net income (loss) per common share, basic
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4,923
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4,910
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4,827
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4,813
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4,851
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Shares used in computing net income (loss) per common share, diluted
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4,923
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4,910
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5,154
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11,693
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4,851
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Pro forma net loss per common share, basic and diluted (unaudited)(2)
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$
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(0.32
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)
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$
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(0.57
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Shares used in computing pro forma net loss per common share, basic and diluted (unaudited)
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11,706
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11,730
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Other Financial Data:
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Net cash provided by (used in) operating activities
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$
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1,840
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$
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2,591
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$
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1,150
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$
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(79
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$
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2,176
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(1)
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Includes
stock-based compensation expense (credit) as follows:
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|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cost of revenue
|
|
$
|
2
|
|
$
|
16
|
|
$
|
18
|
|
$
|
1
|
|
$
|
12
|
|
|
Research and development
|
|
|
43
|
|
|
103
|
|
|
19
|
|
|
(25
|
)
|
|
130
|
|
|
Sales and marketing
|
|
|
826
|
|
|
1,099
|
|
|
(15
|
)
|
|
(264
|
)
|
|
817
|
|
|
General and administrative
|
|
|
115
|
|
|
2,255
|
|
|
315
|
|
|
(18
|
)
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense (credit)
|
|
$
|
986
|
|
$
|
3,473
|
|
$
|
337
|
|
$
|
(306
|
)
|
$
|
1,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(2)
-
See
note 1 to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per common
share and pro forma basic and diluted net income (loss) per common share which gives effect to (1) the 10.5-for-1 reverse split of our outstanding common stock, Series A and C
convertible preferred stock and exchangeable shares effected in March 2010 and (2) the issuance of the IPO Bonus Shares.
5
Table of Contents
The actual consolidated balance sheet data as of December 31, 2009 have been derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. The pro forma consolidated balance sheet data set forth below give effect to (1) the conversion of all outstanding shares of convertible preferred stock
into common stock upon the completion of this offering; and (2) the exchange of all outstanding exchangeable shares of our Canadian subsidiary into 464,283 shares of our common stock upon the
completion of this offering. The pro forma as adjusted balance sheet data set forth below give effect to our receipt of the estimated net proceeds from the sale of 4,884,000 shares of common stock
offered by us at an assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable by us and the issuance of the IPO Bonus Shares to certain executive officers valued at $7,201,000, based on an assumed
initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this prospectus, resulting in a Pre-IPO value of approximately $137.5 million. We
will pay the bonus in cash of $3,213,000, representing the amount of the recipients' tax liability, and issue approximately 362,598 shares valued at $3,988,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Actual
|
|
Pro Forma
|
|
Pro Forma
As Adjusted(1)
|
|
|
|
|
|
(unaudited, in thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,760
|
|
$
|
10,760
|
|
$
|
53,611
|
|
Working capital
|
|
|
18,367
|
|
|
18,367
|
|
|
61,218
|
|
Total assets
|
|
|
32,846
|
|
|
32,846
|
|
|
75,697
|
|
Notes payable
|
|
|
2,590
|
|
|
2,590
|
|
|
2,590
|
|
Convertible preferred stock
|
|
|
27,429
|
|
|
|
|
|
|
|
Exchangeable stock
|
|
|
3,033
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
|
(14,999
|
)
|
|
12,430
|
|
|
55,282
|
|
-
(1)
-
Each
$1.00 increase or decrease in the assumed initial public offering price of $11.00 per share would increase or decrease, respectively, the amount of
cash, working capital, total assets and total stockholders' equity on a pro forma as adjusted basis by approximately $4.1 million, assuming the number of shares offered by us, as set forth on
the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
6
Table of Contents
RISK FACTORS
An investment 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 contained in this prospectus, including our consolidated financial statements and the related notes, before deciding whether
to invest. Each of these risks could materially adversely affect our business, operating results and financial condition. As a result, the trading price of our common stock could decline and you might
lose all or part of your investment.
Risks Related to Our Business and Industry
Our recent profitability and growth rates may not be indicative of our future profitability or growth, and we may not be able to continue to maintain or increase our
profitability or growth.
While we have been profitable in recent periods, we had an accumulated deficit of $34.1 million as of December 31, 2009.
This accumulated deficit is attributable to net losses incurred from our inception through the end of fiscal 2008. We expect to make expenditures related to expanding our business, including
expenditures for additional sales and marketing, research and development, and general and administrative personnel. As a public company, we will also incur significant legal, accounting and other
expenses that we did not incur as a private company. As a result of these increased expenditures, we will need to generate and sustain substantially increased revenue to maintain or increase our
recent profitability. Our revenue growth trends in prior periods may not be indicative of future revenue and our recent results of operations may not be indicative of our results of operations for
fiscal 2010 or future periods. Accordingly, we may not be able to maintain profitability, and we may incur losses in the future.
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict. If our operating results fall below expectations, the price
of our common stock could decline.
Our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety
of factors, many of which are outside of our control. As a result, predicting our future operating results is extremely difficult.
Our
quarterly and annual expenses as a percentage of our revenue may be significantly different from our historical rates, and our operating results in future quarters may fall below
expectations. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of
our future performance.
Factors
that may affect or result in period-to-period variability in our operating results include:
-
-
fluctuations in demand for our products;
-
-
reductions in customers' budgets for information technology purchases and delays in their budgeting and purchasing cycles;
-
-
pricing and availability of components;
-
-
the length of time between our receipt of orders and the timing of recognition of revenue from those orders, particularly
for our Assureon product;
-
-
fluctuations in the size of our individual sale transactions;
-
-
potential seasonality in some markets;
-
-
lengthy sales cycles for our Assureon product;
7
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-
-
our ability to develop, introduce and ship, in a timely manner, new products and product enhancements;
-
-
our ability to control costs;
-
-
the timing of product releases or upgrades by us or by our competitors; and
-
-
pricing changes by our competitors.
Furthermore,
since we sell our products through indirect sales channels rather than a direct sales force, we often lack visibility into the demand for our products and the timing of
customer orders. Accordingly, it is difficult for us to accurately predict quarter-to-quarter demand.
In
addition, we expect to incur additional cash and non-cash sales and marketing and general and administrative expenses in the quarter in which our initial public offering
is completed, including payment of applicable withholding taxes, as a result of the issuance of IPO Bonus Shares immediately prior to the completion of this offering. Based on an assumed initial
public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this prospectus, we expect to incur expenses of approximately $7.2 million related to these
IPO Bonus Shares in the quarter in which they are issued. Please refer to the section of this prospectus entitled "Executive CompensationEmployment, Severance and Change of Control
Arrangements," for a further discussion of the IPO Bonus Shares.
Current uncertainty in global economic conditions makes it particularly difficult to predict demand for our products, and makes it more likely that our actual results could
differ materially from expectations.
Our operations and performance depend on worldwide economic conditions, which have been depressed in the United States, or U.S., and
other countries and may remain depressed for the foreseeable future. These conditions make it difficult for our customers and potential customers to accurately forecast and plan future business
activities and could cause our customers and potential customers to slow or reduce spending on capital equipment such as our products. These economic conditions could also cause our competitors to
drastically reduce prices or take unusual actions to gain a competitive edge, which could force us to provide similar discounts and thereby reduce our profitability. We cannot predict the timing,
strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in the U.S., or in our
industry. These and other economic factors could have a material adverse effect on demand for our products and services and on our financial condition including profitability and operating results.
We face intense competition from a number of established companies and expect competition to increase in the future, which could prevent us from increasing our revenue and
end user base.
The market for our products is highly competitive, and we expect competition to intensify in the future. This competition could make it
more difficult for us to sell our products and result in increased pricing pressure, reduced margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any
of which would likely seriously harm our business.
Currently,
we face competition from traditional providers of storage systems. In addition, we also face competition from other public and private companies, as well as recent market
entrants, that offer products with similar functionality as ours. Our products compete with Compellent, Dell, EMC, Hewlett-Packard, Hitachi Data Systems, Infortrend, IBM, NetApp, Promise Technology
and Sun Microsystems, among others. In addition, we compete against internally developed storage solutions, as well as combined third-party software and hardware solutions. Many of our current
competitors have, and some of our potential competitors could have, longer operating histories, greater name
8
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recognition,
larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Given their capital resources and broad product and service
offerings, many of these competitors may be able to offer reduced pricing for their products that are competitive with ours, which in turn could cause us to reduce our prices to remain competitive.
Potential customers may have long-standing relationships with our competitors, whether for storage or other network equipment, and potential customers may prefer to purchase from their
existing suppliers rather than a new supplier regardless of product performance or features. Many of our competitors benefit from established brand awareness and long-standing
relationships with key decision makers at many of our current and prospective customers. We expect that our competitors will seek to leverage these existing relationships to encourage customers to
purchase their products.
We
expect increased competition from other established and emerging companies, including companies such as storage software and networking infrastructure companies that provide
complementary technology and functionality. We also expect that some of our competitors may make acquisitions of businesses that would allow them to offer more directly competitive and comprehensive
solutions than they had previously offered. For example, EMC acquired Data Domain, Dell acquired EqualLogic, HP acquired LeftHand Networks and Oracle proposes to acquire Sun Microsystems. Our current
and potential competitors, including any of our suppliers, may also
establish cooperative relationships among themselves or with third parties. If so, new competitors or alliances that include our competitors may emerge that could acquire significant market share. In
addition, third parties currently selling our products also market products and services that compete with ours. Any of these competitive threats, alone or in combination with others, could seriously
harm our business.
As our product offerings become more complex, the timing of our revenue recognition may become less predictable.
As we expand the range of products and functionality we offer, the revenue recognition requirements that apply to our revenue streams
will become more complex than those that apply to our standalone products, for which we generally recognize revenue when the product is shipped. We expect this trend to continue as we expand our
offerings. For example, for revenue recognition purposes, our Assureon product is considered a software system sale, which is a multiple-element system that includes hardware, software and software
support. We determine the fair value of each element of the multiple-element arrangement based on vendor-specific objective evidence, or VSOE. Effective in the fourth quarter of fiscal 2008, we were
able to establish VSOE of fair value for post-contract customer support services on certain Assureon sale transactions based on a stated renewal rate for post-contract customer support
services, and in these instances, we allocate revenue to the delivered elements using the residual method. As we offer new products and features, we could be required to recognize revenue under the
more complex revenue recognition rules, which could make predicting our future revenue more difficult.
We rely heavily on value-added resellers and other channel partners to sell our products. Any disruptions to, or failure to develop and manage, our relationships with these
third parties could have an adverse effect on our existing end user relationships and on our ability to maintain or increase revenue.
We do not use a direct sales force. Instead, we rely on third-parties such as resellers, OEM partners and systems integrators to sell
our products. Accordingly, over the past year we have invested, and we intend to continue to invest in, increasing our sales personnel, who sell to, manage, market to, and support our channel
partners. Our future success highly depends upon maintaining and managing the existing relationships with our channel partners and establishing relationships with new channel partners. Recruiting and
retaining qualified channel partners and
9
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training
them in our technology and product offerings requires significant time and resources. To develop and expand our relationships with our channel partners, we must continue to scale and
improve our processes and procedures that support our channel partners, including investments in systems and training. This may become increasingly complex, difficult and expensive to manage,
particularly as the geographic scope of our end user base expands. Any failure on our part to train our channel partners and to manage their sales activities could harm our business.
Our
agreements with channel partners generally are short-term, have no minimum sales commitment and do not prohibit them from offering products and services that compete with ours.
Accordingly, our channel partners may choose to discontinue offering our products, promote competing products or may not devote sufficient attention and resources toward selling our products. From
time to time, our competitors might provide more favorable incentives to our existing and potential channel partners to promote or sell their products, which could have the effect of reducing sales of
our products.
Because we rely on channel partners to sell our products, we have less contact with end users, which makes it difficult for us to manage the sales process, quality of
service, respond to end user needs and forecast future sales.
Because we rely on third parties to sell our products, we have less contact with our end users and less control over the sales process,
quality of service and responsiveness to end user needs. As a result, it may be more difficult for us to ensure the proper delivery and installation of our products and to adequately predict the needs
of our end users for enhancements to existing products or for new products. Furthermore, a negative end user experience with our channel partners could cause customers to be dissatisfied with us or
our products, which could harm our business. In addition, we have less visibility into future sales than we might otherwise have using a direct sales force, which makes it more difficult for us to
forecast demand for our products.
Failure to adequately expand and ramp our sales personnel and further develop and expand our indirect sales channel will impede our growth.
We have invested in growing the number of our sales personnel and channel partners and we plan to continue to expand and ramp our sales
force who sell to, manage, market to, support our channel partners and engage additional channel partners, both domestically and internationally. Identifying and recruiting these people and entities
and training them in our systems require significant time, expense and attention. This expansion will require us to invest significant financial and other resources. Our business will be seriously
harmed if our efforts to expand and ramp our sales personnel and expand our indirect sales channels do not generate a corresponding significant increase in revenue.
We derive the substantial majority of our revenue from sales of our block storage systems, and a decline in demand for these products would harm our business.
Historically, we have derived more than 90% of our revenue from sales of our block storage systems. We expect to continue to depend on
sales of our block storage systems for the foreseeable future and, accordingly, will be vulnerable to fluctuations in demand for these products, whether as a result of competition, product
obsolescence, technological change, customer budgetary constraints or other factors. A decline in demand for our block storage systems would harm our business.
10
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Our gross margins may decrease with decreases in the average selling prices of our current products, changes in our product mix, or increasing costs which may adversely
impact our operating results.
To maintain our selling prices and increase our gross margins, we must develop and introduce on a timely basis new products and product
enhancements, as well as continually reduce our product costs. Our failure to do so would likely cause our revenue and gross margins to decline, which could harm our operating results and cause the
price of our stock to decline. Our industry has historically experienced a decrease in average selling prices for similar types of products. The average selling prices of our products could decrease
in response to competitive pricing pressures, evolving technologies and new product introductions by us or our competitors. In addition, increases in the cost of our components could increase our cost
of revenue. We also anticipate that our gross margins will fluctuate from period to period as a result of the mix of products we sell in any given period. If our sales of higher margin products do not
significantly expand as a percentage of revenue, our overall gross margins and operating results would be adversely impacted.
Our inability to increase sales of our Assureon product, which we sell primarily through OEM partners and systems integrators, could harm our business.
Our Assureon product was commercially released in February 2006 and constituted less than 10% of our total revenues in the six months
ended December 31, 2009. We cannot assure you that our Assureon product will become widely accepted or that we will be able to derive substantial revenue from the sale of this product. Our
principal competitors for our Assureon product include EMC and NetApp, which are substantially larger, have greater resources than we do and may utilize a direct sales force to sell their competing
products. For us to substantially increase sales of our Assureon product, we must develop additional relationships with OEM partners and systems integrators. As a result, we may need to hire
additional sales personnel and expend additional resources developing these relationships. Our failure to increase sales of our Assureon product for any reason could harm our business.
Our sales cycle for our Assureon product can be long and unpredictable. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter,
which may cause our operating results to fluctuate.
Sales of our Assureon product can involve substantial education of prospective customers about the use and benefits of the product.
Sales are also subject to prospective customers' budget constraints and approval processes, and a variety of unpredictable administrative, processing and other delays. Accordingly, it is difficult to
predict future sales activity for this product. Because of the larger size of Assureon product sales as compared to our other products, if Assureon sales expected from specific customers for a
particular quarter are not realized in that quarter or at all, our results of operations for that quarter may be materially and adversely affected.
We purchase our disk drives, power supplies and certain components for our products from a limited number of suppliers. If these or any of our other suppliers are not able
to meet our requirements, it could negatively impact our ability to fulfill customer orders and harm our business.
Our products incorporate sophisticated components, including disk drives, high-density memory components and chips, from a
variety of suppliers. In particular, we rely on Bell Microproducts Inc., a value-added distributor, to provide us with disk drives. Bell Microproducts generally obtains disk drives from Hitachi
Global Storage Technologies, Seagate Technology LLC and Western Digital Corporation. In addition, we obtain our power supplies from BluTek Power, Inc. and our microprocessors from
PMC-Sierra, Inc. and servers from Dell Inc. Qualifying components for our
11
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products
can take up to several months, as this process involves lengthy testing and substantial work to ensure they are compatible with our products. Accordingly, if we needed to find new suppliers
of components, it could take a significant amount of time to transition to the new supplier, which could delay our ability to ship products. Component quality is particularly significant with respect
to our disk drives, and we could in the future experience quality control issues and delivery delays with our suppliers, which could negatively impact our ability to ship products, which could harm
our business.
Additionally,
we periodically need to transition our product lines to incorporate new technologies developed by us or our suppliers. For example, from time to time our suppliers may
discontinue production of underlying components and products due to new technologies that have been incorporated into such components and products or due to the acquisition of a supplier by another
entity. Such a discontinuance can occur on short notice, and we and our suppliers may require a significant amount of time to qualify the new technologies to ensure that they are compatible with our
products. We also may incur significant expenses to purchase "end of life" components.
We
do not have long-term contracts with any of our current suppliers, and we purchase all components on a purchase-order basis. If any of our suppliers were to cancel or
materially change any commitment they may have with us, or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose
time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased revenue.
Any price increases, shortages or interruptions of supply of components for our products would adversely affect our revenue and gross profits.
We may be vulnerable to price increases for components. In addition, in the past we have occasionally experienced shortages or
interruptions in supply for certain components, which caused us to purchase these items at a higher cost than we had initially forecast. To help address these issues, we have in the past and we could
in the future, decide to purchase quantities of these items that are above our foreseeable requirements. As a result, we could be forced to increase our excess and obsolete inventory reserves to
account for excess quantities. If we experience any shortage of components or receive components of unacceptable quality or if we are not able to procure components from alternate sources at
acceptable prices and within a reasonable period of time, our revenue and gross profit could decrease significantly.
If we fail to develop and introduce new products in a timely manner, or if we fail to manage product transitions, we could experience decreased revenues.
Our future growth depends on our ability to develop and introduce new products successfully. Due to the complexity of our products,
there are significant technical risks that may affect our ability to introduce new products successfully. If we are unable to develop and introduce new products in a timely manner or in response to
changing market conditions or customer requirements, or if these products do not achieve market acceptance, our growth could be negatively impacted and our operating results could be materially and
adversely affected.
In
addition, components used in our products are periodically discontinued by our suppliers, which could result in our having to change our product designs. We are also periodically
required to redesign some of our products in order to remain competitive because of increased functionality or higher performance afforded by new components. If these redesigns are not timely, of if
they result in unexpected issues related to quality or performance, sales of our products could be adversely affected.
12
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Product introductions by us in future periods may also reduce demand for our existing products. As new or enhanced products are introduced, we must successfully
manage the transition from older products, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered to meet customer demand. Our failure
to do so could adversely affect our operating results.
We rely principally on two contract manufacturers and other third parties to assemble portions of our products, perform printed circuit board, or PCB, layout, agency testing
and assembling. If we fail to accurately forecast demand for our products or successfully manage our relationships with our contract manufacturers or other third-party service providers, our ability
to ship and sell our products could be negatively impacted.
We rely principally on two contract manufacturers to manufacture our block and file storage products, manage our supply chain and
negotiate costs for some components. Specifically, we rely on AWS Cemgraft in England and Cal Quality in California to manufacture our products. We also rely on third parties to perform PCB layout and
testing and assembly. Our reliance on third parties for these services reduces our control over the manufacturing process, production costs and product supply. In addition, none of our contract
manufacturers is contractually obligated to perform manufacturing services for us, and they may elect not to perform these services or
perform at levels that are insufficient to meet our manufacturing needs. If we fail to manage our relationships with our contract manufacturers or if any of our contract manufacturers experiences
delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products could be impaired and our competitive position, reputation, customer
relationships, product sales and revenue could be harmed. If we are required to change any of our contract manufacturers for any reason, we may lose revenue, incur increased costs and damage our
customer relationships.
Our
contract manufacturers also manufacture products for other companies. If our contract manufacturers experience demand for their services beyond their capacity, they may give priority
to other customers, particularly those who place larger orders than us, and this could impact our ability to timely ship our products.
We
intend to introduce new products and product enhancements, which could require us to achieve volume production rapidly. We may need to increase our component purchases, contract
manufacturing capacity and internal test and quality functions if we experience increased demand. If our contract manufacturers are unable to provide us with adequate supplies of
high-quality products, or if we or any of our contract manufacturers are unable to obtain adequate quantities of components, it could cause a delay in our order fulfillment and harm our
business.
If we fail to adequately manage our product inventory, we may incur excess product inventory costs and write downs or we may have insufficient quantities to meet customer
demand and our financial results could be adversely affected.
We must effectively manage our product inventory. We place orders to manufacture our products based on rolling forecasts. Since we
utilize an indirect, rather than direct, sales channel, our future sales are difficult to predict with certainty. We may seek to increase orders during periods of product shortages or delay orders in
anticipation of new products, and as a result may have insufficient quantities of products available to meet customer demand. On the other hand, if we manufacture more products than we need, we could
incur excess manufacturing and component costs and could be required to write down inventory for any obsolete or excess products. As we introduce new products, we risk creating obsolete or excess
inventory of our existing products. For example, in fiscal 2006, we incurred an inventory write down of approximately $1.0 million related to the excess inventory of our ATA products as we
introduced new products.
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If our products do not interoperate with our end users' existing network infrastructure, including hardware, software and other networking equipment, installations will be
delayed or cancelled and our financial results could be adversely affected.
Our products must interoperate with end users' existing networks, which often have different specifications, utilize multiple protocol
standards and products from multiple vendors, and contain multiple generations of products that have been added over time. We may be required to modify our software or hardware, so that our products
will interoperate with our end users' existing network infrastructure. This could cause longer installation times for our products, result in reduced new orders for our products, and could cause order
delays or cancellations, any of which would adversely affect our business.
Our products are complex and may contain undetected software or hardware errors, which could harm our reputation and future product sales.
Our products are complex and it is possible that despite our testing, defects, incompatibilities with products from other vendors or
other errors may not be discovered until after a product has been installed and used by customers. Errors, defects, incompatibilities or other problems with our products or other products within a
larger system could result in a number of negative effects on our business, including:
-
-
loss of customers;
-
-
loss of or delay in revenue;
-
-
loss of market share;
-
-
damage to our brand and reputation;
-
-
inability to attract new customers or achieve market acceptance;
-
-
diversion of development resources;
-
-
increased service and warranty costs;
-
-
legal actions by our customers; and
-
-
increased insurance costs.
If
any of these occurs, our operating results could be harmed.
If our channel partners do not properly install our products or integrate our products with other products, our reputation and business may be harmed.
Because we rely on channel partners to sell, install and integrate our products, we have limited control over how our products are
used. If any of our channel partners incorporate any of our products into a storage system that does not perform as an end user customer expects, our reputation and business could be harmed, even if
our product performs properly.
Our products handle important data for our customers and are highly technical in nature. If end user data is lost or corrupted, or our products contain software errors or
hardware defects, our reputation and business could be harmed.
Our products store important data for our end users. The process of storing that data is highly technical and complex. If any data is
lost or corrupted in connection with the use of our products, our reputation could be seriously harmed and market acceptance of our products could suffer. In addition, our products could contain
software errors, hardware defects or security vulnerabilities. Some software errors or defects in the hardware components of our products may be discovered
14
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only
after a product has been installed and used by our end users. Any such errors, defects or security vulnerabilities discovered in our products could result in lost revenue or customers, increased
service and warranty costs, harm to our reputation and diversion of attention of our management and technical personnel, any of which could significantly harm our business. In addition, we could face
claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention and adversely affect the market's perception of
us and our products.
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 could be adversely affected.
We compete in a market characterized by rapid technological change, frequent new product introductions, evolving industry standards and
changing customer needs. We cannot assure you that we will be able to anticipate future market needs or be able to develop new products or product enhancements to meet those needs in a timely manner,
or at all. The product development process can be lengthy, and we may experience unforeseen delays in developing new products, product enhancements or technologies. In addition, although we invest a
considerable amount of money into our research and development efforts, any new products or product enhancements that we develop may not achieve widespread market acceptance. As competition increases
in the storage industry and the IT industry in general, it may become even more difficult for us to stay abreast of technological changes or develop new technologies or introduce new products as
quickly as our competitors, many of which have substantially greater financial, technical and engineering resources than we do. Additionally, risks associated with the introduction of new products or
product enhancements include difficulty in predicting customer needs or preferences, transitioning existing products to incorporate new technologies, the capability of our suppliers to deliver
high-quality components required by such new products or product enhancements in a timely fashion, and unknown defects in such new products or product
enhancements. If we are unable to keep pace with rapid industry, technological or market changes, our business could be harmed.
Our international sales and operations introduce risks that can harm our business.
In fiscal 2009 and the six months ended December 31, 2009, we derived approximately 35% and 33%, respectively, of our revenue
from customers outside the U.S., and we expect to continue to expand our international operations. We have personnel in the U.S., Canada and the U.K. and sales personnel and channel partners
worldwide. We expect to continue to hire additional personnel and add channel partners worldwide, and as a result may need to expand our existing international facilities and establish additional
international subsidiaries and offices. Our international operations could subject us to a variety of risks, including:
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increased exposure to foreign currency exchange rate risk;
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the potential inability to attract, hire and retain qualified management and other personnel in our international offices;
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the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
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difficulties in enforcing contracts, collecting accounts receivable and managing longer payment cycles, especially in
emerging markets;
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tariffs and trade barriers and other regulatory or contractual provisions limiting our ability to sell or develop our
products in certain foreign markets;
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export controls, especially for encryption technology; and
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reduced protection for intellectual property rights in some countries.
As
we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our
international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales.
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some we may work with, may not be subject to these prohibitions. While we
maintain policies that require compliance with these rules, we cannot assure you that our employees, agents or other business partners will not engage in such conduct for which we might be held
responsible. If our employees, agents or other business partners are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse
effect on our business, financial condition and results of operations.
If we fail to manage future growth effectively, our business could be harmed.
In recent years, we have experienced growth in the size and scope of our business, and if that growth continues, it will continue to
place significant demands on our management, infrastructure and other resources. We have also expanded the geographic scope of our business, establishing operations in Canada as a result of our
acquisition of AESign Evertrust Inc. in March 2005 and establishing and managing our reseller networks in China and Japan.
We
expect to continue to expand in select international markets. Continued growth in the size and scope, including the geographic scope, of our business operations will require
substantial management attention with respect to:
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recruiting, hiring, integrating and retaining highly skilled and motivated individuals;
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managing increasingly dispersed geographic locations and facilities; and
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establishing an integrated information technology infrastructure; and establishing company-wide systems,
processes and procedures.
We
intend to rely on third parties to provide some of these services for us. For example, we have contracted with a third party to administer our human resources training, compensation
benefit management and compliance activities. If any of these third-party providers are unable to adequately provide the support for which we have retained them, we could be unable to find a suitable
replacement service provider or be subject to regulatory actions related to our compliance activities. Our business could be harmed if we are not successful in effectively managing any future growth.
If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be
harmed.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we establish and maintain adequate disclosure controls and procedures
and internal control over financial reporting. In connection with the audit of our financial statements for the fiscal year ended June 30, 2007, material weaknesses in our internal control over
financial reporting were noted. Subsequent to that audit, we increased the size of our finance organization by hiring additional technical personnel,
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implemented
new controls and improved processes and no material weaknesses were noted in the audit of our financial statements for the fiscal years ended June 30, 2008 and 2009. We cannot
provide assurance that we will not have material weaknesses in the future, which could cause us to be unable to timely report financial information, cause the market price of our stock to decline or
subject us to investigations or litigation by regulatory authorities or other persons or entities.
As a public company we will be required to assess our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act and file periodic reports
with the SEC. If we are unable to comply with these requirements in a timely manner, or if material weaknesses or significant deficiencies persist, the market price of our stock could decline and we
could be subject to sanctions or regulatory investigations, which could harm our business.
Commencing with our fiscal year ending June 30, 2011, we must perform an assessment of our internal control over financial
reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404
of the Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expenses and expend significant management efforts. Prior
to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a
timely manner, particularly if material weaknesses or significant deficiencies persist. In addition, SEC rules require that, as a public company following completion of this offering, we file periodic
reports containing our financial statements within a specified time following the completion of quarterly and annual periods. If we are unable to comply with the requirements of Section 404 of
the Sarbanes-Oxley Act or the SEC reporting requirements in a timely manner, or if we or our independent registered public accounting firm continue to note or identify deficiencies in our internal
control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange
upon which our
common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources and increase our operating expenses.
If our third-party providers of on-site product support fail to adequately support the end users of our products, our reputation and business could be harmed.
We rely primarily on Eastman Kodak Company, or Kodak, and on other service providers, in various geographic locations, to provide
on-site support for our products. Since Kodak and our other service providers work directly with the end users of our products for their on-site support needs, we have limited
contact with our end users that require on-site support. If our end users are not satisfied with the support that they receive from these service providers, our end users may become
dissatisfied with our products and purchase products from our competitors in the future.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
Our products include technology that subjects us to export control laws that limit where and to whom we sell our products. In addition,
various countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our products or could limit our end users' ability to deploy our products
in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our existing and new products in international markets, prevent end
users with international operations from deploying our products throughout their global systems, or in some cases, prevent the export or
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import
of our products to certain countries altogether. Any change in export or import laws, shift in the enforcement or scope of existing laws, or change in the countries, persons or technologies
targeted by such laws, could decrease our ability to export or sell our products outside of the United States.
A decrease in government spending on the storage market could adversely affect our revenue and financial results.
Sales to government entities have recently contributed to our revenue. Future revenue from government entities is unpredictable and
subject to shifts in government spending patterns. Government agencies are subject to budgetary processes and expenditure constraints that could lead to delays or decreased capital expenditures in
information technology spending. If the government or individual agencies within the government reduce or shift their capital spending patterns, our revenues and financial results may be adversely
affected.
If we are unable to protect our intellectual property rights, our competitive position could be harmed and we could be required to incur significant expenses to enforce our
rights.
We depend on our ability to protect our proprietary information and technology. We rely on trade secret, patent, copyright and
trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. Despite our efforts, the steps we have taken to protect our intellectual
property rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, particularly outside of the U.S. Further, with
respect to patent rights, we do not know whether our pending patent application will result in the issuance of a patent or whether the examination process will require us to narrow our claims, and
even if the patent is issued, it may be contested, circumvented or invalidated over the course of our business. Moreover, the rights granted under our issued patents or patents that may be issued in
the future may not provide us with proprietary protection or competitive advantages, and competitors may be able to develop similar or superior technologies to our own now or in the future. Protecting
against the unauthorized use of our proprietary rights can be expensive and difficult. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our
trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of management resources, either of which could
harm our business. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than us.
Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
Claims by others that we infringe their intellectual property rights could harm our business.
The storage industry is characterized by a large number of patents and frequent patent litigation. We may in the future be contacted by
third parties suggesting that we seek a license to certain of their intellectual property rights that they may believe we are infringing upon. We expect that infringement claims against us may
increase as the number of products and competitors in our market increases and overlaps occur. In addition, as a publicly traded company, we believe that we will face a higher risk of being the
subject of intellectual property infringement claims. 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 party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment against us
could also include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property,
which may not be available on commercially reasonable terms, or
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at
all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any of these events
could seriously harm our business. Third parties may also assert infringement claims against our customers, channel partners and authorized service providers. Because we generally indemnify our
customers, channel partners and authorized service providers if our products infringe upon the proprietary rights of third parties, any such claims could require us to initiate or defend protracted
and costly litigation on their behalf, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers, channel partners and
authorized service providers.
If we are unable to obtain the rights necessary to use or continue to use third-party intellectual property in our products, our business could be harmed.
Certain of our products include intellectual property owned by third parties. From time to time we may be required to renegotiate with
these third parties, or negotiate with other third parties, to include their technology in our existing products, in new versions of our existing products or in new products. We may not be able to
negotiate or renegotiate licenses on reasonable terms on a timely basis, or at all. If we are unable to obtain the rights necessary to use or continue to use third-party intellectual property in our
products, we may not be able to sell the affected products, we could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our
current or future products. Any of these issues, if they occur, could harm our business.
Our use of open source software could impose limitations on our ability to develop or ship our products.
We incorporate open source software into our products. The terms of many open source licenses have not been interpreted by U.S. courts,
and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to market our products. In such event, we could be
required to seek licenses from third parties to continue offering our products, make generally available, in source code form, proprietary code that links to certain open source modules,
re-engineer our products, discontinue the sale of our products if re-engineering could not be accomplished on a cost-effective and timely basis, or become subject
to other consequences, any of which could adversely affect our business.
We may seek to expand our business through acquisitions of, or investments in, other companies, each of which could divert management's attention, be viewed negatively, lead
to integration problems, disrupt our business, increase our expenses, reduce our cash, cause dilution to our stockholders or otherwise harm our business.
In the future, we may seek to acquire additional companies or assets that we believe may enhance our product offerings or market
position. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we complete acquisitions, these transactions may
be viewed negatively by our customers, financial markets or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel and operations from the acquired
businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day
responsibilities and increase our expenses. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to
intangible assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business.
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The issuance of new accounting standards or future interpretations of existing accounting standards could adversely affect our operating results.
We prepare our financial statements to conform to accounting principles generally accepted in the U.S. A change in those principles
could have a significant effect on our reported results and might affect our reporting of transactions completed before a change is announced. Generally accepted accounting principles in the U.S. are
issued by and are subject to interpretation by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, or
AICPA, the SEC, and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our
reported financial results, and could affect the reporting of transactions completed before the announcement of a change. The regulatory bodies listed above continue to issue interpretations and
guidance for applying the relevant accounting standards to a wide range of sales practices and business arrangements applicable to us. The issuance of new accounting standards or future
interpretations of existing accounting standards, or changes in our business practices could result in future changes in our revenue recognition or other accounting policies that could have a material
adverse effect on our results of operations.
We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The
Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and NASDAQ, impose additional requirements on public companies, including enhanced corporate governance practices. For example,
NASDAQ listing requirements require that listed companies satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim
reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of business conduct. Our management and other personnel will
need to devote a substantial amount of time to comply with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some
activities more time-consuming and costly. For example, we incurred approximately $3.9 million of costs in preparing for this offering through June 30, 2009 that we would not
have incurred if we remained private. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors and board
committees or as executive officers.
Our future success depends on our ability to attract and retain key personnel, and our failure to do so could harm our ability to grow our business.
Our success highly depends upon the performance of our senior management and key accounting and finance, technical and sales personnel.
Our management and employees can terminate their employment at any time, and the loss of the services of one or more of our executive officers or other key employees could harm our business. Our
success also is substantially dependent upon our ability to attract additional personnel for all areas of our organization, particularly in our finance, sales, and research and development
departments. Our dependence on attracting and retaining qualified personnel is particularly significant as we attempt to grow our organization. Competition for qualified personnel in our industry and
in the finance area is intense, and we may not be successful in attracting and retaining such personnel on a timely basis, on competitive terms, or at all. If we are unable to attract and retain the
necessary technical, sales and other personnel on a cost-effective basis, our business could be harmed.
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We are subject to laws and regulations governing the environment and may incur substantial environmental regulation costs, which could harm our operating results.
We are subject to various state, federal and international laws and regulations governing the environment, including those restricting
the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of certain products.
These laws and regulations have been enacted in several jurisdictions in which we sell our products, including various European Union, or EU, member countries. For example, the EU enacted the
Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, and the Waste Electrical and Electronic Equipment, or WEEE, directives. RoHS regulates the use
of certain substances, including lead, in certain products, including hard drives, sold after July 1, 2006. Similar legislation may be enacted in other locations where we sell our products. We
will need to ensure that we comply with these laws and regulations as they are enacted, and that our component suppliers also comply with these laws and regulations.
If
we or our component suppliers fail to comply with the legislation, our customers may refuse or be unable to purchase our products, or we could incur penalties or other costs, any of
which could harm our business. In addition, in connection with our compliance with these environmental laws
and regulations, we could incur substantial costs and be subject to disruptions to our operations and logistics. Furthermore, if we were found to be in violation of these laws, we could be subject to
governmental fines and liability to our customers. If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenses in connection
with a violation of these laws, our business could suffer.
If we need additional capital in the future, it may not be available on favorable terms, or at all, which could adversely impact our business.
We have historically relied on outside financing to fund our operations, capital expenditures and expansion. However, we may require
additional capital from equity or debt financing in the future to fund our operations, or respond to competitive pressures or strategic opportunities. We may not be able to secure additional financing
on favorable terms, or at all. The terms of additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity,
convertible debt securities or other securities convertible into or exercisable for equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company,
and any new securities we issue could have rights, preferences or privileges senior to those of existing or future holders of our common stock, including shares of common stock sold in this offering.
If we are unable to obtain necessary financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be
significantly limited.
Interruption or failure of our information technology and communications systems or other interruptions in our operations or those of our suppliers, manufacturers and
channel partners could impair our ability to operate our business, which could harm our operating results.
Our systems, facilities and operations and those of our suppliers, manufacturers, channel partners and other supply chain participants
are vulnerable to damage or interruption from earthquakes, pandemics, work stoppages, floods, fires, terrorist attacks, power losses, telecommunications failures, computer viruses, computer denial of
service attacks or other attempts to harm these systems. If any of these events were to occur, our ability to operate our business could be seriously impaired. In addition, we may not have adequate
insurance to cover our losses resulting from natural disasters or other significant business interruptions. Any significant losses that
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are
not recoverable under our insurance policies could seriously impair our business and financial condition.
Risks Related to the Offering
We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.
Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be
sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the
prices at which our common stock will trade. The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not bear any relationship
to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business. As a result of these and other factors, the price of our
common stock may decline, and you could lose some or all of your investment.
The price of our common stock may be volatile and the value of your investment could decline.
The stock market in general, and the market for technology stocks in particular, have been experiencing high levels of volatility. The
trading price of our common stock following this offering may fluctuate substantially. The price of our common stock that will prevail in the market after this offering may be higher or lower than the
price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your
investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:
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price and volume fluctuations in the overall stock market from time to time;
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significant volatility in the market price and trading volume of technology companies;
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actual or anticipated changes in our results of operations or fluctuations in our operating results;
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actual or anticipated changes in the expectations of investors or securities analysts;
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actual or anticipated developments in our competitors' businesses or the competitive landscape generally;
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litigation involving us, our industry or both;
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regulatory developments in the U.S., foreign countries or both;
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economic conditions and trends in our industry;
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major catastrophic events;
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sales of large blocks of our stock; or
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departures of key personnel.
In
the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. If our stock
price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management's attention and resources from our business.
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Future sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our
business is doing well.
If our existing stockholders sell a large number of shares of our common stock or the public market perceives that these sales may
occur, the market price of our common stock could decline. Based on shares outstanding on December 31, 2009, upon the completion of this offering, assuming no outstanding options or warrants
are exercised prior to the completion of this offering, we will have approximately 16,623,967 shares of common stock outstanding. All of the shares offered under this prospectus will be freely
tradable without restriction or further registration under the federal securities laws, unless purchased by our affiliates. The remaining shares of our common stock outstanding after this offering
will be restricted as a result of securities laws or lock-up agreements. These remaining shares will generally become available for sale in the public market as
follows:
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172,366 shares not subject to a lock-up or market standoff agreement with Thomas Weisel Partners, LLC or with us
will be eligible for immediate sale upon the completion of this offering;
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no restricted shares will be eligible for immediate sale upon the completion of this offering; and
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beginning 181 days after the date of this prospectus, subject to extension, 2,818,600 shares will be tradable under
Rule 144(b)(1), and 8,921,367 shares will be tradable subject to the limitations on shares held by affiliates under Rule 144(b)(2).
Furthermore,
following this offering, certain holders of our common stock, including common stock issued upon conversion of our preferred stock and issued upon exercise of warrants or
options for common stock will be entitled to rights with respect to the registration of a total of 12,120,891 shares under the Securities Act. For a description of these rights, see the section of
this prospectus entitled "Description of Capital StockRegistration Rights." If we register their shares of common stock following the expiration of the lock-up agreements,
these stockholders can immediately sell those shares in the public market.
Following
this offering, we intend to register on a registration statement on Form S-8 up to approximately 1,947,709 shares of common stock that may be issued upon
exercise of outstanding stock options granted under our 2001 stock plan, 565,474 shares of our common stock that may be issued upon exercise of outstanding stock options granted outside of our equity
incentive plans, 476,857 shares of common stock that are authorized for future issuance or grant under our 2010 equity incentive plan, 193,045 shares of common stock that are authorized for future
issuance or grant under our 2010 employee stock purchase plan, such plans to be effective upon the completion of this offering, and the 362,598 IPO Bonus Shares. To the extent we register these shares
they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above and, with respect to affiliates, Rule 144(b)(2).
In
addition, 212,190 shares subject to outstanding stock options are not eligible for registration on Form S-8. Of these shares, 95,238 will be tradable beginning
181 days after the date of this prospectus, subject to the limitations on shares sold by affiliates under Rule 144(b)(2), and the remaining 116,952 shares will be tradable six months
from the date of exercise of the options, subject to the limitations on shares sold by affiliates under Rule 144(b)(2).
If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock will rely in part on the availability of research and reports that third-party industry or
financial analysts publish about us. If analysts cover us and then
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one
or more of the analysts who cover us downgrade our stock, our stock price may decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which
in turn could cause the liquidity of our stock and our stock price to decline.
Concentration of ownership among our existing directors, executive officers, and principal stockholders may prevent new investors from influencing significant corporate
decisions.
Upon closing of this offering, assuming the underwriters' option to purchase additional shares is not exercised, based upon beneficial
ownership as of February 28, 2010, our current directors, executive officers, holders of more than 5% of our common stock, including Fonds de solidarité des travailleurs du
Québec (F.T.Q.), MFP Partners, L.P., the funds affiliated with RRE Ventures and VantagePoint Venture Partners, and their respective affiliates will, in the aggregate, beneficially own
approximately 57% of our outstanding common stock. As a result, these stockholders may be able to exercise a controlling influence over matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions, and will have significant influence over our management and policies. Some of these persons or entities may have interests that are
different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or
prevent a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company, which in turn could reduce the price of our common stock. In
addition, these stockholders, some of whom have representatives sitting on our board of directors, could use their voting influence to maintain our existing management and directors in office, delay
or prevent changes of control of our company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and
approvals of significant financing transactions.
We have broad discretion in the use of the net proceeds from this offering.
We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. We will have broad
discretion in the application of the net proceeds, including using the net proceeds for any of the purposes described in the section of this prospectus entitled "Use of Proceeds." Accordingly, you
will have to rely upon the judgment of our board and management with respect to the use of the proceeds, with only limited information concerning their specific intentions. We may spend a portion or
all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. Our failure to apply these funds effectively could harm our business.
Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
We do not intend to pay dividends for the foreseeable future.
We have never declared or paid any cash dividends on our common stock. We intend to retain any earnings to finance the operation and
expansion of our business, and we do not anticipate paying any cash dividends in the future. In addition, our loan agreement prohibits the payment of cash dividends without the lender's consent. As a
result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.
If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution in the pro forma
net tangible book value per share after giving effect to this offering of $7.68 per share as of December 31, 2009, based on an assumed initial public offering price of $11.00 per share, which
is the midpoint of the range set forth on the cover page of this
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prospectus,
because the price that you pay will be substantially greater than the pro forma net tangible book value per share of the common stock that you acquire. This dilution is due in large part
to the fact that our earlier investors paid substantially less than the initial public offering price
when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of warrants, upon exercise of options to purchase common stock under our equity incentive
plans, if we issue restricted stock to our employees under our equity incentive plans or if we otherwise issue additional shares of our common stock.
Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.
Upon the completion of this offering, provisions of our restated certificate of incorporation and bylaws and applicable provisions of
Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:
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prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our
stockholders;
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limit who may call a special meeting of stockholders;
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provide our board of directors with the ability to designate the terms of and issue a new series of preferred stock
without stockholder approval;
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require the approval of two-thirds of the shares entitled to vote at an election of directors to adopt, amend
or repeal our bylaws or repeal certain provisions of our certificate of incorporation;
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allow a majority of the authorized number of directors to adopt, amend or repeal our bylaws without stockholder approval;
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do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of
stockholders to elect directors; and
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set limitations on the removal of directors.
In
addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our
outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of
entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control
premium could reduce the price of our common stock.
See
the section of this prospectus entitled "Description of Capital StockAnti-takeover Provisions" for a more detailed description of these provisions.
25
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This prospectus, particularly in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," contains forward-looking statements that are subject to substantial risks and uncertainties. All statements other than statements of
historical facts contained in this prospectus, including, but not limited to, statements regarding our future financial position, statements regarding our business strategy, and plans and objectives
for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "believe," "may," "estimate," "continue," "anticipate," "intend,"
"should," "plan," "expect," "predict," or "potential," the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements
are subject to a number of risks, uncertainties and assumptions described in the section entitled "Risk Factors" and elsewhere in this prospectus. We qualify all of our forward-looking statements by
these cautionary statements.
Moreover,
we operate in a very competitive and rapidly changing environment. 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. Before investing in our common stock, investors should be aware that the occurrence of the events described in the section entitled "Risk Factors" and elsewhere in this
prospectus could have a material adverse effect on our business, results of operations and financial condition.
You
should not rely upon forward-looking statements as predictions of future events. We cannot guarantee that the future results, levels of activity, performance or events and
circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results
or to changes in our expectations.
You
should read this prospectus and the documents that we referenced 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 currently expect.
Industry
and market data used throughout this prospectus were obtained through surveys and studies conducted by third parties, and industry and general publications. The information
contained in the section of this prospectus entitled "BusinessIndustry Background" is based on studies, analyses and surveys prepared by the Enterprise Strategy Group and IDC which we
believe were based on reasonable assumptions. We have not independently verified any of the data from third-party sources nor have we ascertained any underlying economic assumptions relied upon
therein. Estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading "Risk Factors."
26
Table of Contents
USE OF PROCEEDS
We estimate that we will receive net proceeds of $46.1 million from our sale of the 4,884,000 shares of common stock offered by
us in this offering, based on an assumed
initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholder. If the underwriters' over-allotment option is exercised in
full, we estimate that our net proceeds will be approximately $7.7 million. Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share would increase or
decrease the net proceeds to us from this offering by approximately $4.1 million, 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 payable by us.
The
principal purposes of this offering are to create a public market for our common stock and facilitate our future access to the public equity markets. We currently anticipate that we
will use the net proceeds received by us from this offering for working capital and other general corporate purposes. In addition, we may use a portion of the proceeds of this offering for potential
acquisitions of complementary businesses, technologies or other assets. We have no current agreements or commitments with respect to any such acquisitions.
We
currently have no specific plans for the use of the net proceeds to us from this offering. The amounts and timing of our actual expenditures will depend on numerous factors, including
the amount of cash used in or generated by our operations, sales and marketing activities and competitive pressures. We may find it necessary or advisable to use our net proceeds for other purposes,
and we will have broad discretion in the application of our net proceeds.
Pending
the uses described above, we intend to invest the net proceeds to us from this offering in short-term, interest-bearing, investment-grade securities. We cannot
predict whether the net proceeds will yield a favorable return.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any
future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Our loan
agreement prohibits the payment of cash dividends without the lender's consent.
27
Table of Contents
CAPITALIZATION
(in thousands, except share and per share data)
The following table sets forth our cash and capitalization as of December 31, 2009:
-
-
on an actual basis;
-
-
on a pro forma basis to reflect upon the completion of this offering: (1) the conversion of all outstanding shares
of preferred stock into 6,516,176 shares of our common stock; and (2) the exchange of all outstanding exchangeable stock of our Canadian subsidiary into 464,283 shares of our common stock; and
-
-
on a pro forma as adjusted basis to reflect the sale of the shares of our common stock offered by us at an assumed initial
public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us and the issuance of the IPO Bonus Shares based on an assumed initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of
this prospectus, we will incur an expense in the amount of $7,201,000, resulting in an increase in pro forma as adjusted accumulated deficit. We will pay the bonus in cash of $3,213,000, representing
the amount of the recipients' tax liability, and issue 362,598 shares valued at $3,988,000.
You
should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related
notes, each included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Actual
|
|
Pro Forma
|
|
Pro Forma As
Adjusted(1)
|
|
|
|
|
|
(unaudited)
|
|
Cash and cash equivalents
|
|
$
|
10,760
|
|
$
|
10,760
|
|
$
|
53,611
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
2,590
|
|
$
|
2,590
|
|
$
|
2,590
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock, $0.001 par value: 11,059,019 shares authorized, 6,516,176 shares issued and outstanding, actual; no shares
authorized or issued and outstanding, pro forma and pro forma as adjusted
|
|
$
|
27,429
|
|
$
|
|
|
$
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Series B preferred stock, $0.001 par value: 1 share authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma
and pro forma as adjusted
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 20,369,550 shares authorized, 4,396,910 shares issued and outstanding, actual; 11,377,369 shares issued and outstanding, pro
forma; 100,000,000 shares authorized, and 16,623,967 shares issued and outstanding, pro forma as adjusted
|
|
|
4
|
|
|
11
|
|
|
17
|
|
Exchangeable stock in wholly-owned subsidiary, no par value, 464,283 shares authorized, issued and outstanding, actual; no shares authorized, issued and
outstanding, pro forma and pro forma as adjusted
|
|
|
3,033
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
18,921
|
|
|
49,376
|
|
|
99,423
|
|
Notes receivable from stockholders
|
|
|
(37
|
)
|
|
(37
|
)
|
|
(37
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,852
|
)
|
|
(2,852
|
)
|
|
(2,852
|
)
|
Accumulated deficit
|
|
|
(34,068
|
)
|
|
(34,068
|
)
|
|
(41,269
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
|
(14,999
|
)
|
|
12,430
|
|
|
55,282
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
12,430
|
|
$
|
12,430
|
|
$
|
55,282
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Each
$1.00 increase or decrease in the assumed initial public offering price of $11.00 per share would increase or decrease, respectively, the amount of
cash, additional paid-in capital and total stockholders' equity on a pro forma as adjusted basis, by approximately $4.1 million, assuming the number of shares offered by us, as set
forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.
28
Table of Contents
The information in the table above excludes:
-
-
1,993,015 shares issuable upon exercise of options outstanding as of December 31, 2009, at a weighted average
exercise price of $6.21 per share, including 403,570 option shares that are subject to call options held by us, exercisable as of December 31, 2009 at $9.48 per share;
-
-
732,358 shares issuable upon exercise of options granted between January 1, 2010 and March 31, 2010,
at a weighted average exercise price of $9.21 per share;
-
-
292,316 shares issuable upon exercise of warrants outstanding as of December 31, 2009, at a weighted average
exercise price of $8.03 per share; and
-
-
476,857 shares reserved for future issuance under our 2001 stock plan as of March 31, 2010 to be transferred into
our 2010 equity incentive plan and 193,045 shares reserved for issuance under our 2010 employee stock purchase plan, such plans to be effective upon completion of this offering.
29
Table of Contents
DILUTION
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public
offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately after completion of this offering.
As
of December 31, 2009, we had a pro forma net tangible book value of $12.4 million, or $1.09 per share of common stock outstanding. Net tangible book value per share is
equal to our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of outstanding shares of our common stock. The pro forma net tangible book value
of our common stock represents net tangible book value adjusted to give effect, upon completion of this offering, to: (1) the conversion of all outstanding shares of convertible preferred stock
into common stock, and (2) the exchange of all outstanding exchangeable stock of our Canadian subsidiary into 464,283 shares of our common stock. The pro forma as adjusted net tangible book
value of our common stock represents pro forma net tangible book value as further adjusted to give effect to our application of the net proceeds of this offering and the issuance of the IPO Bonus
Shares to certain executive officers valued at $7,201,000, based on an assumed initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this
prospectus, resulting in a Pre-IPO value of approximately $137.5 million. We will pay the bonus in cash of $3,213,000,
representing the amount of the recipients' tax liability, and issue approximately 362,598 shares valued at $3,988,000.
Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and pro forma as adjusted net tangible
book value per share of our common stock immediately after the completion of this offering. After giving effect to the sale of 4,884,000 shares of common stock offered by us under this prospectus at
an assumed initial public offering price of $11.00 per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by us and the issuance of the IPO Bonus Shares, our pro forma as adjusted net tangible book value as of December 31, 2009 would
have been approximately $55.2 million, or approximately $3.32 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $2.23 per share to our
existing stockholders and an immediate dilution of $7.68 per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution:
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
$
|
11.00
|
|
|
Pro forma net tangible book value per share as of December 31, 2009
|
|
$1.09
|
|
|
|
|
|
Increase in pro forma net tangible book value per share attributable to new investors in this offering
|
|
2.23
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after giving effect to this offering
|
|
|
|
|
3.32
|
|
|
|
|
|
|
|
Dilution per share to new investors in this offering
|
|
|
|
$
|
7.68
|
|
|
|
|
|
|
|
Each
$1.00 increase or decrease in the assumed initial public offering price of $11.00 per share would increase or decrease, respectively, our pro forma as adjusted net tangible book
value per share after giving effect to this offering by $0.24 per share and correspondingly decrease or increase the dilution per share to new investors in this offering by $0.24 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 the estimated underwriting discounts and commissions payable by us.
30
Table of Contents
The
following table shows, as of December 31, 2009, on the pro forma basis described above, the number of shares of common stock owned by, the total consideration paid by and the
average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of $11.00 per share, which is the
midpoint of the
range set forth on the cover page of this prospectus, and before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
Total Consideration(1)
|
|
|
|
|
|
Average
Price Per
Share
|
|
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Existing stockholders
|
|
|
11,623,967
|
|
|
70
|
%
|
$
|
48,469,611
|
|
|
47
|
%
|
$
|
4.17
|
|
New investors
|
|
|
5,000,000
|
|
|
30
|
|
|
55,000,000
|
|
|
53
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,623,967
|
|
|
100.0
|
%
|
$
|
103,469,611
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes
approximately $4.9 million of consideration from the issuance of shares of common stock and exchangeable stock in connection with our prior acquisitions. Also includes 362,598 IPO
Bonus Shares for which no cash consideration will be paid. Each $1.00 increase or decrease in the assumed initial public offering price of $11.00 per share would increase or decrease, respectively,
the total consideration paid by new investors and total consideration paid by all stockholders by $4.1 million, assuming 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 payable by us.
If
the underwriters exercise their over-allotment option in full, our pro forma as adjusted net tangible book value per share as of December 31, 2009 would be $3.62,
representing an immediate increase in pro forma net tangible book value per share attributable to new investors in this offering of $2.53 to our existing stockholders and an immediate dilution per
share to new investors in this offering of $7.38. If the underwriters' over-allotment option is exercised in full, our existing stockholders would own 67% and new investors would own 33%
of the total number of shares of our common stock outstanding after this offering.
The
information in the table above excludes:
-
-
1,993,015 shares issuable upon exercise of options outstanding as of December 31, 2009, at a weighted average
exercise price of $6.21 per share, including 403,570 shares subject to options that are subject to call options held by us, exercisable as of December 31, 2009 at $9.48 per share;
-
-
732,358 shares issuable upon exercise of options granted between January 1, 2010 and March 31, 2010,
at a weighted average exercise price of $9.21 per share;
-
-
292,316 shares issuable upon exercise of warrants outstanding as of December 31, 2009, at a weighted average
exercise price of $8.03 per share; and
-
-
476,857 shares reserved for future issuance under our 2001 stock plan as of March 31, 2010 to be transferred into
our 2010 equity incentive plan and 193,045 shares reserved for future issuance under our 2010 employee stock purchase plan, such plans to be effective upon the completion of this offering.
31
Table of Contents
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following tables summarize our selected consolidated financial data. The selected consolidated statements of operations data for
the fiscal years ended June 30, 2007, 2008 and 2009, and the selected consolidated balance sheet data as of June 30, 2008 and 2009 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of June 30, 2005, 2006 and 2007 and the selected consolidated statement of operations
for the years ended June 30, 2005 and 2006 have been derived from our audited consolidated financial statements, which are not included in this prospectus. The selected consolidated statements
of operations data for the six months ended December 31, 2008 and 2009, and the selected consolidated balance sheet data as of December 31, 2009 have been derived from our unaudited
consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited financial statements
and include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those financial statements. You
should read this data together with our consolidated financial statements and related notes to those statements included elsewhere in this prospectus and the information under "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Our historical results are not necessarily indicative of the results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
34,949
|
|
$
|
42,799
|
|
$
|
49,774
|
|
$
|
62,676
|
|
$
|
60,895
|
|
$
|
32,498
|
|
$
|
34,311
|
|
Cost of revenue(1)
|
|
|
28,942
|
|
|
34,631
|
|
|
35,750
|
|
|
40,754
|
|
|
35,544
|
|
|
18,840
|
|
|
20,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,007
|
|
|
8,168
|
|
|
14,024
|
|
|
21,922
|
|
|
25,351
|
|
|
13,658
|
|
|
14,058
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
3,248
|
|
|
3,854
|
|
|
3,938
|
|
|
5,364
|
|
|
5,316
|
|
|
2,593
|
|
|
3,302
|
|
|
Sales and marketing(1)
|
|
|
5,574
|
|
|
5,889
|
|
|
8,055
|
|
|
10,444
|
|
|
11,112
|
|
|
5,495
|
|
|
7,532
|
|
|
General and administrative(1)
|
|
|
4,259
|
|
|
3,546
|
|
|
3,114
|
|
|
6,289
|
|
|
4,678
|
|
|
2,804
|
|
|
2,620
|
|
|
Write-off of in-process research and development
|
|
|
3,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postponed public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
3,447
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,061
|
|
|
13,289
|
|
|
15,107
|
|
|
25,544
|
|
|
21,555
|
|
|
10,892
|
|
|
13,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(11,054
|
)
|
|
(5,121
|
)
|
|
(1,083
|
)
|
|
(3,622
|
)
|
|
3,796
|
|
|
2,766
|
|
|
604
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(167
|
)
|
|
(799
|
)
|
|
(1,453
|
)
|
|
(2,018
|
)
|
|
(700
|
)
|
|
(602
|
)
|
|
(253
|
)
|
|
Foreign currency transaction gain (loss)
|
|
|
(225
|
)
|
|
(227
|
)
|
|
(449
|
)
|
|
166
|
|
|
402
|
|
|
880
|
|
|
567
|
|
|
Other income, net
|
|
|
41
|
|
|
15
|
|
|
870
|
|
|
303
|
|
|
288
|
|
|
221
|
|
|
(244
|
)
|
|
Loss on extinguishment and modification of debt
|
|
|
|
|
|
|
|
|
(1,058
|
)
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(11,405
|
)
|
|
(6,132
|
)
|
|
(3,173
|
)
|
|
(5,368
|
)
|
|
3,786
|
|
|
3,265
|
|
|
674
|
|
Income tax benefit (expense)
|
|
|
455
|
|
|
542
|
|
|
148
|
|
|
35
|
|
|
(279
|
)
|
|
(425
|
)
|
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,950
|
)
|
$
|
(5,590
|
)
|
$
|
(3,025
|
)
|
$
|
(5,333
|
)
|
$
|
3,507
|
|
$
|
2,840
|
|
$
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic(2)
|
|
$
|
(2.47
|
)
|
$
|
(1.25
|
)
|
$
|
(0.61
|
)
|
$
|
(1.09
|
)
|
$
|
0.23
|
|
$
|
0.34
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted(2)
|
|
$
|
(2.47
|
)
|
$
|
(1.25
|
)
|
$
|
(0.61
|
)
|
$
|
(1.09
|
)
|
$
|
0.22
|
|
$
|
0.24
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Shares used in computing net income (loss) per common share, basic
|
|
|
4,435
|
|
|
4,482
|
|
|
4,923
|
|
|
4,910
|
|
|
4,827
|
|
|
4,813
|
|
|
4,851
|
|
|
|
Shares used in computing net income (loss) per common share, diluted(2)
|
|
|
4,435
|
|
|
4,482
|
|
|
4,923
|
|
|
4,910
|
|
|
5,154
|
|
|
11,693
|
|
|
4,851
|
|
|
|
Pro forma net loss per common share, basic and diluted (unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.32
|
)
|
|
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma net loss per common share, basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,706
|
|
|
|
|
|
11,730
|
|
-
(1)
-
Includes
stock-based compensation expense (credit) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Cost of revenue
|
|
$
|
7
|
|
$
|
(3
|
)
|
$
|
2
|
|
|
16
|
|
$
|
18
|
|
$
|
1
|
|
$
|
12
|
|
|
Research and development
|
|
|
74
|
|
|
(57
|
)
|
|
43
|
|
|
103
|
|
|
19
|
|
|
(25
|
)
|
|
130
|
|
|
Sales and marketing
|
|
|
523
|
|
|
(440
|
)
|
|
826
|
|
|
1,099
|
|
|
(15
|
)
|
|
(264
|
)
|
|
817
|
|
|
General and administrative
|
|
|
535
|
|
|
(157
|
)
|
|
115
|
|
|
2,255
|
|
|
315
|
|
|
(18
|
)
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense (credit)
|
|
$
|
1,139
|
|
$
|
(657
|
)
|
$
|
986
|
|
$
|
3,473
|
|
$
|
337
|
|
$
|
(306
|
)
|
$
|
1,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(2)
-
For
the periods presented, preferred stock was only considered dilutive for the six months ended December 31, 2008.
-
(3)
-
See
note 1 to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per common
share and pro forma basic and diluted net loss per common share, which gives effect to the 10.5-for-1 reverse split of our outstanding common stock, Series A and C preferred stock and
exchangeable shares effected in March 2010 and in the case of pro forma basic and diluted net loss per common share, the issuance of the IPO Bonus Shares to certain executive officers valued at
$7,201,000, based on an assumed initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this prospectus, resulting in a Pre-IPO value of
approximately $137.5 million. We will pay the bonus in cash of $3,213,000, representing the recipients tax withholdings, and issue approximately 362,598 shares valued at $3,988,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
As of
December 31,
2009
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,601
|
|
$
|
587
|
|
$
|
10,157
|
|
$
|
8,500
|
|
$
|
9,092
|
|
$
|
10,760
|
|
Working capital
|
|
|
3,048
|
|
|
4,268
|
|
|
12,820
|
|
|
9,761
|
|
|
12,840
|
|
|
18,367
|
|
Total assets
|
|
|
16,920
|
|
|
18,588
|
|
|
25,734
|
|
|
29,110
|
|
|
28,857
|
|
|
32,846
|
|
Notes payable, excluding long-term portion
|
|
|
2,569
|
|
|
2,186
|
|
|
2,534
|
|
|
2,554
|
|
|
3,000
|
|
|
10
|
|
Notes payable, long-term
|
|
|
|
|
|
5,643
|
|
|
2,916
|
|
|
10
|
|
|
10
|
|
|
2,580
|
|
Total redeemable convertible preferred stock
|
|
|
15,431
|
|
|
15,431
|
|
|
27,429
|
|
|
27,429
|
|
|
27,429
|
|
|
27,429
|
|
Total stockholders' deficit
|
|
|
(10,044
|
)
|
|
(15,501
|
)
|
|
(17,499
|
)
|
|
(18,629
|
)
|
|
(15,314
|
)
|
|
(14,999
|
)
|
33
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our consolidated financial statements and related notes included in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those
previously discussed above in the section entitled "Risk Factors." We report results on a fiscal year ending June 30.
We are a leading provider of disk-based storage systems designed for the storage of digital information. We have designed
our products to bring enterprise-class storage features to the mid-tier market, which we define as
mid-sized businesses and branch offices of larger organizations, which has historically been underserved by legacy storage vendors. Our systems help these organizations store and access
growing amounts of digital information over long periods of time. We began commercial shipments of storage systems based on ATA disk drives in 2000. We have transitioned a substantial majority of our
revenue from ATA-based storage systems to SATA and SAS-based RAID storage systems.
Our
current product portfolio consists of both block and file storage products. Our block storage products include our Boy product line, our Beast product line, our DATABeast and our
iSeries. Our legacy Boy product line, consists of our SATABoy, which was commercially released in June 2005 and our SASBoy, which was commercially released in October 2008. Our Beast product line,
consists of our SATABeast, which was commercially released in August 2005 and our SASBeast, which was commercially released in October 2008. Our DATABeast product line was commercially released in May
2008 and our iSeries was commercially released in December 2008. Our file storage systems typically integrate with our block storage systems to offer our customers scalable, clusterable, secure and
intelligent file storage with encryption and de-duplication, which are typically used for archive and back-up. Our file storage systems include the Assureon, which was
commercially released in February 2006, and the DeDupe SG, which was commercially released in October 2009. Our file storage products typically integrate with our block storage systems to offer our
customers scalable, clusterable, secure and intelligent file storage with encryption and de-duplication, which are typically used for archive and back-up.
We
sell our products primarily through channel partners, including resellers, OEM partners and systems integrators, to mid-tier organizations across all industries. We
believe our channel partner strategy allows us to reach a larger number of prospective customers more effectively than if we were to sell directly. Our internal sales and marketing personnel support
these channel partners in their selling efforts. Our channel partners generally perform installation and implementation services for the organizations that use our systems. We typically provide
ongoing customer support, although we typically rely on third parties to provide on-site support services.
In March 2005, we acquired AESign Evertrust Inc., or Evertrust, a Canadian developer of digital archiving software, for
approximately $5.0 million, comprised of cash consideration of approximately $1.3 million, acquisition costs of $316,000, 200,917 shares of our common stock and 342,103 shares of
exchangeable stock of our wholly owned Canadian subsidiary, which are exchangeable for an equivalent number of shares of our common stock. As part of the acquisition, we acquired intangible assets
consisting of an assembled workforce, covenants not to compete and in-process research and development, which is our current Assureon technology. At the time of the acquisition, Evertrust was in the
start-up phase of its operations and had not generated revenue. Accordingly, we
34
Table of Contents
accounted
for the purchase of Evertrust as an asset acquisition, and in fiscal 2005, we wrote off the in-process research and development of approximately $4.0 million.
In
addition, in November 2007, we issued to the sellers of Evertrust an additional 71,754 shares of our common stock and 122,180 shares of exchangeable stock as consideration of certain
employees' contributions to the combined operations subsequent to the acquisition. This additional consideration, valued at $1.3 million, was recorded as general and administrative expense in
our consolidated statement of operations for the six months ended December 31, 2007.
Revenue primarily consists of sales of our storage systems, net of allowances for returns. We also derive revenue from support
services, although historically, support revenue has accounted for less than 10% of our revenue. Channel partners buy our products directly from us, and then sell the products to their end customers
and to a much lesser extent other partners, either as a stand-alone product or as part of a larger system implementation. In fiscal 2007, 2008 and 2009 and the six months ended December 31,
2008 and 2009, no single customer accounted for greater than 10% of our revenue. Our top 10 customers accounted for 32%, 33%, 32% and 32% of our revenue in fiscal 2007, 2008, 2009 and the six months
ended December 31, 2009, respectively. Revenue from customers outside the U.S. was approximately 29%, 33%, 35% and 33% of our revenue in fiscal 2007, 2008 and 2009, and the six months ended
December 31, 2009, respectively.
Our
future revenue will depend significantly on the continued increases in sales of our block storage systems and our more recently-introduced file storage systems. We anticipate that
sales of our block storage systems will continue to constitute a substantial majority of our revenue for the near term. Our future growth also depends on our ability to develop and introduce new
products and enhancements to our existing products in response to market trends, changing customer requirements and market acceptance of those products.
Cost of revenue consists primarily of the costs of components we purchase from our contract manufacturers and suppliers, personnel
costs, depreciation, facilities and other overhead expenses, freight, warranty costs and provision for excess inventory.
In
general, gross margin on our Assureon product is greater than gross margin on our other products. However, our gross margin is primarily affected by our ability to reduce hardware
component costs faster than the decline in average product prices, which has been a trend in our industry. We will need to monitor and manage these factors successfully in order to increase gross
margins and our profitability.
Our operating expenses consist of research and development expenses, sales and marketing expenses, and general and administrative
expenses. Our operating expenses have increased in recent periods. This growth has primarily been driven by increased stock-based compensation expenses, increased headcount in research and development
and sales and marketing, and increased costs associated with preparing to be a public company. We expect to incur additional general and administrative expenses as a public company. In addition, we
expect to incur additional cash and non-cash sales and marketing and general and administrative expense in the quarter in which our initial public offering is completed as a result of the
issuance of the IPO Bonus Shares immediately prior to the completion of this offering, including payment of applicable withholding taxes. Based on an assumed initial public offering price of $11.00
per share, the midpoint of the range set forth on the cover page of this prospectus, we expect additional expenses related to the IPO Bonus
35
Table of Contents
Shares
to be approximately $7.2 million, in the quarter in which they are issued. See note 5 to our consolidated financial statements.
Research and development.
Research and development expenses primarily consist of personnel costs, including stock-based compensation,
and to a lesser
extent, development costs, such as outside engineering costs, prototype costs and test equipment, depreciation, and facilities and other overhead expenses. Research and development expenses are
recognized when incurred. We intend to continue to invest in research and development efforts because we believe they are essential to maintaining and improving our competitive position. Accordingly,
we expect research and development expenses will increase in absolute dollars.
Sales and marketing.
Sales and marketing expenses primarily consist of personnel costs, including stock-based compensation, sales
commissions,
travel, advertising, cooperative advertising, and marketing expenses, trade shows, and to a lesser extent, professional services fees, facilities and other overhead expenses. Sales and marketing has
historically been our largest operating expense category. We plan to continue investing in development of our sales channel by increasing the number of sales and channel support personnel. We also
plan to continue investing in our domestic and international marketing activities to help build brand awareness and create sales leads for our channel partners. We expect that sales and marketing
expenses will increase in absolute dollars and remain our largest operating expense category.
General and administrative.
General and administrative expenses primarily consist of personnel costs for our finance, executive and
human resources
functions, including stock-based compensation, professional fees for legal, accounting, tax, compliance and information systems, and to a lesser extent, travel, depreciation, facilities and other
overhead expenses, and allowance for bad debts. General and administrative expenses also included amortization of intangible assets, primarily those we acquired in our acquisition of Evertrust. As of
June 30, 2008, these intangible assets were fully amortized. We have incurred, and we expect to continue to incur, significant additional accounting, legal and compliance costs as well as
additional insurance, investor relations and other costs associated with being a public company and as we grow our company.
Postponed public offering costs.
As of June 30, 2008, we had incurred $3.4 million of costs directly attributable to the
planned public
offering. These costs were being deferred until the completion of the offering. In the quarter ended June 30, 2008, these costs have been charged to expense due to an indefinite postponement of
the offering process as a result of overall market conditions. On May 13, 2009, we filed Amendment No. 1 to Form S-1 to update the previously filed registration
statement. We incurred $449,000 of costs directly attributable to the amended filing. These costs were charged to expense as incurred due to the indefinite postponement of the offering process. As of
June 30, 2009 and December 31, 2009, we deferred $0 and $63,000, respectively, of costs related to the proposed public offering.
Other income (expense) primarily consists of interest expense, derivative gains and losses, foreign currency transaction gains and
losses, other income and net losses on the extinguishment or modification of debt.
Through fiscal 2008, income tax benefit results from foreign research and development tax credits related to our development activities
in the U.K. and Canada. We realized these tax credits in cash. For the year ended June 30, 2009 and the six months ended December 31, 2009, we recorded income tax expense primarily due
to the suspension of net operating loss carryforwards in the State of California and U.S. federal alternative minimum tax.
36
Table of Contents
As
of June 30, 2009, we had net operating loss carryforwards for U.S. federal, California, U.K. and Canada tax jurisdictions of $4.5 million, $3.6 million,
$1.1 million and $3.5 million, respectively, which are available to offset future taxable income, if any. Realization of deferred tax assets depends upon future earnings, if any, the
timing and amount of which are uncertain. Accordingly, we have offset all net deferred tax assets by a valuation allowance. If not utilized, our federal net operating loss carryforwards will begin to
expire in fiscal 2022, and California net operating loss carryforwards begin to expire in fiscal 2015. Foreign net operating loss carryforwards begin to expire in fiscal 2013. Deductions related to
our state net operating loss carryforwards have been suspended until fiscal 2011. Our state tax credit carryforwards will carry forward indefinitely if not utilized. While not currently subject to
annual limitation, the utilization of these carryforwards may become subject to annual limitation because of provisions in the Internal Revenue Code of 1986, as amended, or IRC, that are applicable if
we experience an "ownership change," which may occur, for example, as the result of this offering or other issuances of stock.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., or GAAP.
These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements,
the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. Although we believe that our
judgments and estimates are reasonable under the circumstances, actual results may differ from those estimates.
We
believe the following to be our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical
management judgments and estimates about matters that are uncertain:
-
-
Revenue recognition;
-
-
Stock-based compensation;
-
-
Valuation of common stock;
-
-
Warranty reserve;
-
-
Inventory valuation; and
-
-
Allowance for doubtful accounts.
If
actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could
be materially affected. See the section of this prospectus entitled "Risk Factors" for certain matters that may affect our future financial condition or results of operations.
Revenue Recognition
We derive revenue principally from sales of hardware systems and software systems. We sell our products primarily through indirect
channels including resellers, OEM partners and systems integrators. We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has shipped or
delivery has occurred (depending on when title passes), the sales price is fixed or determinable and free of contingencies and significant uncertainties, and collection is reasonably assured. Our fee
is considered fixed or determinable at the execution of an agreement, based on specific products and quantities to be delivered at specified prices. Our agreements generally do not include acceptance
provisions. To the extent that our agreements contain such terms, we recognize revenue once the acceptance provisions have been met. We establish a reserve for sales returns based on historical
experience. We assess the ability to collect from channel partners based on a number of factors, including creditworthiness and past transaction history. If the
37
Table of Contents
channel
partner is not deemed creditworthy, we defer all revenue from the arrangement until payment is received and all other revenue recognition criteria have been met. Shipping charges are generally
paid by our channel partners. However, shipping charges, when billed to channel partners, are recorded as revenue and the related shipping costs are included in cost of revenue.
We
monitor and analyze the accuracy of sales returns estimates by reviewing actual returns and adjusting the reserves for future expectations to determine the adequacy of our current and
future reserves. If actual future returns and allowances differ from past experience and expectations, additional allowances may be required.
We
have arrangements with our channel partners to reimburse them for cooperative marketing costs meeting specified criteria. In accordance with ASC 605-50,
Revenue Recognition, Customer Payments and
Incentives
(ASC 605-50), we record the reimbursements to the channel partners meeting specified
criteria in sales and marketing expense. We record as a reduction of revenue those marketing costs not meeting these criteria.
Hardware Systems Sales.
Hardware systems sales primarily consist of the sales of our block and file storage system, including our Boy
and Beast lines
of products, and in earlier periods, our ATA storage products. Software is incidental to the functionality of these products. Accordingly, we apply the provisions of Staff Accounting Bulletin, or SAB
No. 104,
Revenue Recognition
, and all related interpretations.
Hardware
system sales may also include sales of premium and extended warranties. For multiple element arrangements that include hardware systems and premium and extended warranties, we
recognize revenue in accordance with ASC 605-25,
Revenue Recognition, Multiple-Element Arrangements
(ASC 605-25). We have determined that
we have objective and reliable evidence of fair value, in accordance with ASC 605-25, to allocate revenue separately to hardware and hardware warranties. Accordingly, revenue for hardware
components is generally recognized upon shipment, which is when the risk of loss is transferred to the buyer. In accordance with ASC 605-20
Revenue Recognition,
Services
(ASC 605-20), we recognize revenue relating to our premium and extended hardware warranties ratably over the premium and extended warranty period, which is
generally one to three years.
Software Systems Sales.
Software systems sales consist of the sales of our Assureon product where software has been determined to be
essential to the
functionality of the product. Accordingly, we account for revenue from Assureon in accordance with the ASC 985-605
Software, Revenue Recognition
(ASC 985-605).
Our
software systems sales are comprised of multiple elements, which include hardware, software and software support. Software support includes telephone support, bug fixes, and
unspecified software upgrades and enhancements, on a when-and-if available basis, over the term of the support period. Software support is considered post-contract
customer support (PCS) under ASC 985-605. Prior to the fourth quarter of fiscal 2008, we did not have vendor-specific objective evidence (VSOE) of fair value for our PCS. Accordingly, in these
instances, we recognized all of the revenue elements from software systems sales ratably over the support period, which is typically one year. Effective in the fourth quarter of fiscal 2008, we
established VSOE of fair value for PCS on certain arrangements based on a stated renewal rate for PCS services which we determined are substantive, and in these instances we allocated revenue to the
delivered elements using the residual method.
38
Table of Contents
Stock-Based Compensation
Prior to July 1, 2006, we accounted for stock option grants in accordance with Accounting Standards in effect at that time which
required that compensation expense is recorded for the intrinsic value of options (the difference between the deemed fair value of our common stock and the option exercise price) at the grant date and
is amortized ratably over the option's vesting period.
Effective
July 1, 2006, we adopted the fair value recognition provisions under ASC 718,
CompensationStock
Compensation
(ASC 718), using the prospective transition method, which requires us to apply its provisions only to awards granted, modified, repurchased or cancelled
after the adoption date. Under this transition method, our stock-based compensation expense recognized beginning July 1, 2006 is based on (1) the grant-date fair value of
stock option awards granted or modified beginning July 1, 2006 and (2) the balance of deferred stock-based compensation related to stock option awards granted prior to July 1,
2006, which was calculated using the intrinsic-value method as previously permitted. We recognize stock-based compensation expense on a straight-line basis over the awards' expected
vesting terms. We estimated the grant date fair value of stock-based awards under the provisions of ASC 718 using the Black-Scholes option valuation model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
Expected life (years)
|
|
|
6.0
|
|
|
6.1
|
|
|
6.0
|
|
|
6.0
|
|
|
6.3
|
|
Risk-free interest rate
|
|
|
4.8
|
%
|
|
4.0
|
%
|
|
2.4
|
%
|
|
2.4
|
%
|
|
2.8
|
%
|
Expected volatility
|
|
|
55.1
|
%
|
|
50.8
|
%
|
|
47.9
|
%
|
|
47.7
|
%
|
|
51.0
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Common Stock
Given the absence of an active market for our common stock prior to this offering, our board of directors determined the fair value of
our common stock in connection with our grant of options and stock awards. In periods prior to June 30, 2007, our board of directors made such determinations based on valuation criteria and
analyses, the business, financial and venture capital experience of the individual directors, and input from management.
In
connection with the preparation of our financial statements in anticipation of a potential initial public offering, valuations were performed to estimate the fair value of our common
stock for financial reporting purposes through the use of contemporaneous valuations of our common stock commencing at June 30, 2007.
Determining
the fair value of our common stock requires making complex and subjective judgments. In estimating the fair value of our common stock on a quarterly basis commencing
June 30, 2007, we employed a two-step approach that first estimated the fair value of Nexsan as a whole, and then allocated the enterprise value to our common stock. This approach
is consistent with the methods outlined in the AICPA Practice Aid,
Valuation of Privately-Held-Company Equity Securities Issued as
Compensation
.
We
utilized an income approach and two market approaches to estimate our enterprise value. The income approach consisted of the discounted cash flow method which involved applying
appropriate discount rates to estimated future cash flows that are based on forecasts of revenue and costs. These cash flow estimates were consistent with the plans and estimates that management used
to manage the business. There is inherent uncertainty in making these estimates. The risks associated with achieving the forecasts were assessed in selecting the appropriate discount rates
39
Table of Contents
which
ranged from 16.0% to 23.0%. If different discount rates had been used, the valuations would have been different. The market approaches that we used were a comparable public company analysis and
a comparable acquisition analysis. The following factors were considered in selecting comparable public companies: whether the company operated in the computer storage device industry; whether its
common stock had adequate market capitalization and trading volume, and whether the company had quantifiable financial metrics such as historical and projected growth and level of profitability. For
each of the valuations, these companies generally consisted of QLogic, Corp., NetApp, Inc., Brocade Communications, Seagate Technology, Quantum Corp., EMC Corporation, Xyratex Ltd.,
Imation Corp., Adaptec and Dot Hill Systems, with 3PAR, Inc. being added after its initial public offering.
Comparable
acquisitions were selected based on acquisitions of companies for between $10 million and $5 billion in the storage industry that were publicly announced after
January 1, 2004 until the valuation date and for which purchase price multiples were available. The comparable transaction analysis was not used for valuations subsequent to
September 30, 2008 due to the lack of sufficient recent data.
Based
on these approaches, we arrived at a high and low range for the total equity value of Nexsan and concluded on the average as the estimated enterprise value.
We
then utilized the option pricing method to allocate the total equity value to the various securities that comprised our capital structure. Application of this method involved making
estimates of the anticipated timing of a potential liquidity event such as a sale of Nexsan or an initial public offering. The anticipated timing and likelihood of each scenario was based on the plans
of our board of directors and management as of the respective valuation date. Under each scenario, the enterprise value of Nexsan was allocated to preferred and common shares using the option pricing
method under which values are assigned to each class of our preferred stock and the common stock is viewed as an option on the remaining equity value.
The
options were then valued using the Black-Scholes option pricing model which required estimates of the volatility of our equity securities. Estimating volatility of the share price of
a privately held company is complex because there is no readily available market price for the shares. The volatility of the stock was based on available information on volatility of stocks of
publicly traded companies in the industry. The volatility of the comparable public companies varied between 40% and 55% over this period. Had we used different estimates of volatility, the allocations
between preferred and common shares would have been different.
The
option pricing method resulted in an estimated fair value per share of our common stock that was reduced for lack of marketability by a discount which ranged from 10.0% to 12.5% in
the valuations through March 31, 2009. The discounts for lack of marketability at each valuation date during this period were determined by considering restricted stock and studies of
pre-initial public offering company valuations. The lack of marketability discount increased to 15% for the June 30, 2009 valuation and to 17.5% for the September 30, 2009 valuation.
These increases were due primarily to the change in our estimate as to the time to liquidity as of those valuation dates. Given the continued economic downturn, we believed that the date of an initial
public offering was becoming more distant, and increased the estimated time to liquidity. As a result of the improved market conditions in late December 2009 and the anticipated initial public
offering in the first half of 2010, we reduced the time to liquidity to three months and reduced the marketability discount to 5%.
The
exercise price for the stock options granted in January 2010 differed from the per share prices reflected in the initial public offering price range on the cover page of this
prospectus primarily because of the uncertainty as to the consummation of this offering that existed in January 2010. Estimates as to the proposed offering price range were based on the assumption
that the
40
Table of Contents
offering
would occur later in the first quarter of calendar 2010 at the earliest, or two months after the grants. We also believed that market conditions remained volatile, particularly for recent
initial public offerings. The exercise price for options granted in February 2010 had a slightly higher exercise price, but still differed from the proposed initial public offering price range.
Because this offering was closer to being consummated, Nexsan will determine the grant date fair value per share of the February 2010 options assuming a fair market value of $11.00 per share, the
midpoint of the price range on the cover of this prospectus, in our option pricing model for the quarter ending March 31, 2010.
Our
enterprise value declined from June 30, 2008 to March 31, 2009. This decline was caused primarily by two factorsa general decline in the valuation
multiples within the computer storage device industry and a decline in our latest twelve months or LTM and projected operating results.
The
computer storage device industry was heavily affected by the adverse economic conditions in 2008 and 2009. As the slowdown in the economy accelerated, companies began to execute
restructuring initiatives and reduced or delayed headcount and capital expenditures. These factors, in conjunction with a general slowdown in the U.S. and global economy, led to declining stock prices
of the comparable companies which in turn compressed valuation multiples for the industry.
In
addition, from the quarter ended June 30, 2008 to the quarter ended June 30, 2009, our LTM revenue declined from approximately $62.6 million to
$60.9 million. Similarly, our projected results that were used in the income approach also declined. Our enterprise value for the valuation as of December 31, 2009, as a result of the
increased likelihood of an initial public offering and increases in the valuation multiples of the comparable companies.
For
the quarter ended December 31, 2007, stock-based compensation expense also included a $1.3 million non-recurring charge related to the issuance of stock to former
shareholders of Evertrust in consideration of certain employees' contributions to the combined operations subsequent to the acquisition.
41
Table of Contents
The
following table sets forth certain information regarding our stock option grants commencing July 1, 2006 through February 4, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Shares Subject to
Options Granted
|
|
Exercise Price
Per Share
|
|
Fair Market Value
Per Share
|
|
Intrinsic Value
Per Share
|
|
September 2006
|
|
|
11,632
|
|
$
|
6.45
|
|
$
|
4.20
|
|
$
|
|
|
January 2007
|
|
|
3,809
|
|
|
6.45
|
|
|
3.78
|
|
|
|
|
April 2007
|
|
|
49,511
|
|
|
6.45
|
|
|
3.78
|
|
|
|
|
June 2007
|
|
|
36,472
|
|
|
6.45
|
|
|
5.36
|
|
|
|
|
September 2007
|
|
|
81,225
|
|
|
6.45
|
|
|
6.51
|
|
|
0.06
|
|
October 2007
|
|
|
9,521
|
|
|
6.83
|
|
|
6.83
|
|
|
|
|
November 2007
|
|
|
1,904
|
|
|
6.93
|
|
|
6.93
|
|
|
|
|
December 2007
|
|
|
7,618
|
|
|
6.93
|
|
|
7.04
|
|
|
0.11
|
|
January 2008(1)
|
|
|
352,380
|
|
|
9.13
|
|
|
7.04
|
|
|
|
|
April 2008
|
|
|
39,514
|
|
|
7.56
|
|
|
7.56
|
|
|
|
|
September 2008
|
|
|
77,732
|
|
|
7.46
|
|
|
7.04
|
|
|
|
|
October 2008
|
|
|
204,244
|
|
|
6.93
|
|
|
6.83
|
|
|
|
|
December 2008
|
|
|
277,079
|
|
|
6.93
|
|
|
6.62
|
|
|
|
|
February 2009
|
|
|
48,266
|
|
|
6.51
|
|
|
6.51
|
|
|
|
|
April 2009
|
|
|
32,140
|
|
|
6.51
|
|
|
6.51
|
|
|
|
|
July 2009
|
|
|
69,516
|
|
|
6.93
|
|
|
6.93
|
|
|
|
|
October 2009
|
|
|
19,997
|
|
|
7.04
|
|
|
7.04
|
|
|
|
|
November 2009
|
|
|
90,909
|
|
|
7.35
|
|
|
7.35
|
|
|
|
|
January 2010
|
|
|
461,904
|
|
|
9.14
|
|
|
9.14
|
|
|
|
|
February 2010
|
|
|
270,454
|
|
|
9.35
|
|
|
11.00
|
|
|
1.65
|
|
-
(1)
-
The
exercise price per share compounds annually at a rate of 3.23%.
All
share amounts and values listed in the table above give effect to a 10.5-for-1 reverse stock split effected in March 2010.
As
of December 31, 2009, based on an assumed initial public offering price per share of $11.00, the aggregate intrinsic value of outstanding unvested and vested stock options was
$2.4 million and $4.0 million, respectively. In addition, as of December 31, 2009, we had approximately $1.9 million of total unrecognized compensation costs related to
unvested stock-based compensation arrangements.
Warranty Reserve
The Boy, the Beast, iSeries and DeDupe SG product families come with a three-year warranty. Assureon and DATABeast systems
are shipped with a one-year warranty. Warranty reserves are recorded when we recognize revenue and are reflected in cost of revenue. Our estimate of product warranty liability involves
many factors, including the number of units shipped, the warranties provided by contract manufacturers or suppliers, historical and anticipated rates of warranty claims, and cost per claim. We
periodically assess the adequacy of the recorded product warranty liability and adjust the amounts as necessary. We classify the portion of the product warranty liability that we expect to incur in
the next 12 months as a current liability. We classify the portion of the product warranty liability that we expect to incur more than 12 months in the future as a long-term
liability.
Inventory Valuation Reserve
Inventories include material and related manufacturing overhead and are stated at the lower of cost or market value, with cost being
determined under the average-cost method. Inventory valuation reserves are reflected in cost of revenue and are established to reduce the carrying
42
Table of Contents
amounts
of our inventories to their net realizable values. Inventory valuation reserves are based on estimated obsolescence or unmarketable inventory equal to the difference between the cost of
inventory and the estimated market value. Inherent in our estimates of market value in determining inventory valuation reserves are estimates related to economic trends, future demand for our products
and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory valuation reserves could be required and would be
reflected in cost of revenue in the period in which the reserves are taken. Once a reserve is established, it is maintained until the related inventory is sold or scrapped.
Allowance for Doubtful Accounts
We review our allowance for doubtful accounts on an ongoing basis by assessing individual accounts receivable. Risk assessment for
these accounts includes historical collections experience with the specific account and with our similarly-situated accounts coupled with other related credit factors that may evidence a risk of
default and loss to us. Accordingly, the amount of this allowance will fluctuate based upon changes in revenue levels, collection of specific balances in accounts receivable and estimated changes in
channel partner credit quality or likelihood of collection. If the financial condition of our channel partners were to deteriorate, resulting in their inability to make payments, additional allowances
may be required. The allowance for doubtful accounts represents management's best estimate, but changes in circumstances, including unforeseen declines in market conditions and collection rates, may
result in additional allowances in the future or reductions in allowances due to future recoveries.
Results of Operations
The following table sets forth selected consolidated statements of operations data as a percentage of revenue for each of the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Revenue
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost of revenue
|
|
|
72
|
|
|
65
|
|
|
58
|
|
|
58
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28
|
|
|
35
|
|
|
42
|
|
|
42
|
|
|
41
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
8
|
|
|
9
|
|
|
9
|
|
|
8
|
|
|
10
|
|
|
Sales and marketing
|
|
|
16
|
|
|
17
|
|
|
18
|
|
|
17
|
|
|
22
|
|
|
General and administrative
|
|
|
6
|
|
|
10
|
|
|
8
|
|
|
9
|
|
|
8
|
|
|
Postponed public offering costs
|
|
|
|
|
|
5
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
30
|
|
|
41
|
|
|
35
|
|
|
34
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(2
|
)
|
|
(6
|
)
|
|
6
|
|
|
9
|
|
|
2
|
|
Other income (expense), net
|
|
|
(4
|
)
|
|
(3
|
)
|
|
0
|
|
|
2
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(6
|
)
|
|
(9
|
)
|
|
6
|
|
|
10
|
|
|
2
|
|
Income tax benefit (expense)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(1
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(6
|
)%
|
|
(9
|
)%
|
|
6
|
%
|
|
9
|
%
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.
43
Table of Contents
Six Months Ended December 31, 2009 Compared to Six Months Ended December 31, 2008
Revenue.
Revenue increased $1.8 million, or 6%, to $34.3 million for the six months ended December 31, 2009, compared to
$32.5 million for the six months ended December 31, 2008. Of this increase, $1.0 million was due to sales to new customers and $800,000 was due to increased sales to existing
customers. The increase in revenues was primarily due to a $2.9 million increase in sales of our Beast and Assureon products as well as a $1.4 million increase in the sale of various
products,
none of which we believe was material. We also had a $2.5 million decrease in sales of our Boy product, our legacy storage system. We believe that because our Boy products are more mature than
our Beast and Assureon products, we expect that future growth will be primarily from the Beast and Assureon products.
Cost of revenue and gross profit.
Cost of revenue increased $1.4 million, or 8%, to $ 20.3 million for the six months
ended
December 31, 2009, compared to $18.8 million for the six months ended December 31, 2008. The increase was due to higher material costs primarily from the increased sales volumes.
Gross
profit increased $400,000, or 3% to $14.1 million for the six months ended December 31, 2009, compared to $13.7 million for the six months ended
December 31, 2008. Gross profit as a percentage of revenue declined to 41% for the six months ended December 31, 2009 compared to 42% for the six months ended December 31, 2008.
The decrease as a percentage of revenue was primarily due to lower selling prices as a result of the global economic climate.
Research and development.
Research and development expense increased $709,000, or 27% to $3.3 million for the six months ended
December 31, 2009 compared to $2.6 million for the six months ended December 31, 2008. These expenses represented 10% and 8% of revenue for the six months ended December 2009 and
2008, respectively. The increased expense was primarily the result of increases in stock-based compensation expense of $155,000, compensation costs of $148,000 from increased headcount, product
development costs of $145,000, professional fees of $116,000 primarily related to recruiting and legal services, and temporary labor costs of $71,000.
Sales and marketing.
Sales and marketing expense increased $2.0 million, or 37%, to $7.5 million for the six months ended
December 31, 2009, compared to $5.5 million for the six months ended December 31, 2008. These expenses represented 22% of revenue for the six months ended December 31, 2009
and 17% of revenue for the six months ended December 31, 2008. The higher expense was primarily due to an increase in stock-based compensation expense of $1.1 million, largely due to
higher expense on liability-based stock awards resulting from a higher enterprise valuation of the Company. The remaining increases consisted primarily of higher compensation costs
of $861,000 resulting from the hiring of our Chief Commercial Officer in November 2008 and other sales personnel, and higher temporary labor of $115,000.
General and administrative.
General and administrative expense decreased $184,000, or 7%, to $2.6 million for the six months ended
December 31, 2009, compared to $2.8 million for the six months ended December 31, 2008. These expenses represented 8% and 9% of revenue, respectively, in those periods. The
decrease was primarily due to lower bad debt expenses of $478,000 resulting from the recovery of previously uncollectible accounts and lower professional services fees of $344,000, primarily legal and
accounting, offset by increased stock-based compensation expense of $494,000, largely due to higher expense on liability-based stock awards resulting from our higher enterprise valuation, and
increased compensation expenses of $146,000.
Other income (expense).
Other income, net, decreased $429,000 to $70,000 for the six months ended December 31, 2009, compared to
$499,000 for
the six months ended December 31, 2008. For the six months ended December 31, 2009, net foreign currency transaction gains were
44
Table of Contents
$567,000,
related to fluctuations in the exchange rates between the pound sterling and the U.S. dollar and between the Canadian dollar and the U.S. dollar; interest expense of $253,000 primarily
related to the $3.6 million note payable entered into on September 2009, and other expense of $244,000, primarily due to the revaluation of liability-classified warrants. For the six months
ended December 31, 2008, foreign currency transaction gains were $880,000, primarily related to fluctuations in the exchange rates between the pound sterling and the U.S. dollar and between the
Canadian dollar and the U.S. dollar; other income was $221,000, primarily due to changes in the valuation of the derivative liability related to the convertible bridge debt repaid in March 2009, and
interest expense of $602,000 related to the convertible bridge debt.
Fiscal 2009 Compared to Fiscal 2008
Revenue.
Revenue decreased $1.8 million, or 3%, to $60.9 million for fiscal year 2009 compared to $62.7 million for
fiscal year
2008. Of the decrease, $5.9 million was due to lower sales to existing customers offset by $4.1 million in sales to new customers. The decrease was primarily due to a
$3.5 million decrease in our Beast and Boy products as a result of the global economic climate offset by an increase of $1.7 million in our Assureon product.
Cost of revenue and gross profit.
Cost of revenue decreased $5.2 million, or 13%, to $35.5 million for fiscal year 2009,
compared to
$40.8 million for fiscal year 2008. The decrease was primarily the result of lower material costs.
Gross
profit increased $3.4 million, or 16%, to $25.4 million for fiscal year 2009, compared to $21.9 million for fiscal year 2008. Gross profit as a percentage of
revenue improved to 42% for fiscal year 2009 compared to 35% for fiscal year 2008. The increase in gross profit as a percentage of revenue was primarily the result of lower material costs.
Research and development.
Research and development expense remained relatively constant at 9% of revenue for both fiscal years.
Research and
development expenses for fiscal year 2009 were relatively constant in absolute dollars at $5.3 million compared to $5.4 million in fiscal year 2008. Lower compensation costs for
engineering personnel of $387,000 due to lower headcount were offset by increased spending for product development of $313,000.
Sales and marketing.
Sales and marketing expense increased $668,000, or 6%, to $11.1 million for fiscal year 2009, compared to
$10.4 million for fiscal year 2008. These expenses represented 18% and 17% of revenue for fiscal years 2009 and 2008, respectively. This increase was primarily due to higher commissions paid to
third-party sales representatives of $812,000, higher compensation for sales and marketing personnel of $672,000, primarily due to an increase in personnel, including the hiring of our Chief
Commercial Officer in November 2008, and increased travel, entertainment and administrative expenses of $182,000, offset by a reduction in stock-based compensation expense of $1.1 million,
primarily due to the grant in fiscal year 2008 of fully-vested options in consideration of the cancellation of certain restricted shares.
General and administrative.
General and administrative expense decreased $1.6 million, or 26%, to $4.7 million for fiscal
year 2009,
compared to $6.3 million for fiscal year 2008. These expenses represented 8% and 10% of revenue in fiscal years 2009 and 2008, respectively. The decrease was due to a $1.9 million
decrease in stock-based compensation expense primarily due to $1.3 million of expense in connection with the non-recurring issuance of additional shares of stock in November 2007 to
the former shareholders of Evertrust in consideration of certain employees' contributions to the combined operations subsequent to the acquisition and $615,000 due to the grant of fully-vested options
in consideration of the cancellation of certain restricted shares which also occurred during fiscal year 2008. Partially offsetting the decrease in stock-based compensation expense were
increases in bad debt expense of $284,000 resulting from uncollectible accounts, and compensation of $273,000, primarily for pay increases and new personnel added during fiscal year 2008.
45
Table of Contents
Postponed public offering costs.
On April 25, 2008, we filed a registration statement with the SEC related to a proposed initial
public
offering. As of June 30, 2008, we had incurred $3.4 million of costs directly attributable to the planned initial public offering. These costs were being deferred until the completion of
the offering. In the quarter ended June 30, 2008, these costs were charged to expense due to an indefinite postponement of the offering process as a result of overall market conditions.
On
May 13, 2009, we filed Amendment No. 1 to Form S-1 to update the previously filed registration statement. The Company incurred $449,000 of costs
directly attributable to the amended filing. These costs were charged to expense as incurred due to the indefinite postponement of the offering process. As of June 30, 2009, no costs were
deferred related to the proposed public offering.
Other income (expense).
Other expense, net, was $10,000 for fiscal year 2009, a decrease of $1.7 million from fiscal year 2008.
The components
of other expense in fiscal 2009 were interest expense of $700,000, net foreign currency transaction gains of $402,000, and other income of $288,000. The interest expense primarily related to the
convertible bridge debt, including cash interest paid and the amortization of the related beneficial conversion feature. The convertible
bridge debt was repaid in March 2009. Net foreign currency transaction gains related to fluctuations in the exchange rates between the pound sterling and the U.S. dollar and between the Canadian
dollar and the U.S. dollar. Other income consisted primarily of a gain of $156,000 due to the revaluation of the derivative liability related to the convertible bridge debt repaid in March 2009 and
interest income of $76,000 from the investing of excess cash in money market accounts and certificates of deposit. Other expense, net, was $1.7 million for fiscal year 2008, consisting of
$2.0 million of interest expense primarily attributable to the amortization of the beneficial conversion feature related to the convertible bridge debt, and a $197,000 loss on the
extinguishment and modification of debt, partially offset by $303,000 of other income, primarily due to interest earned on excess cash invested in money market accounts, and net foreign currency
transaction gains of $166,000.
Fiscal 2008 Compared to Fiscal 2007
Revenue.
Revenue increased $12.9 million, or 26%, to $62.7 million for fiscal 2008 compared to $49.8 million for fiscal
2007. Of
this increase, $7.1 million was due to increased sales of our products to new customers and $5.8 million was due to increased sales to our existing customers. The majority of the
$12.9 million increase was due to increased unit sales of our SATA products, primarily the SATABeast, and to a lesser extent, an increase in the number of units sold of our Assureon product.
Cost of revenue and gross profit.
Cost of revenue increased $5.0 million, or 14%, to $40.8 million for fiscal 2008, compared
to
$35.8 million for fiscal 2007. The increase was primarily due to the increase in units sold.
Gross
profit increased $7.9 million, or 56%, to $21.9 million for fiscal 2008, compared to $14.0 million for fiscal 2007. Gross profit as a percentage of revenue
improved to 35% for fiscal 2008 compared to 28% for fiscal 2007. Of the 7% increase in gross profit as a percentage of revenue, 5% was the result of an increase in sales of our higher margin products,
primarily the SATABeast, and 2% was the result of improved leveraging of our operations and customer support costs over a higher revenue base.
Research and development.
Research and development expense increased $1.4 million, or 36%, to $5.4 million for fiscal 2008,
compared to
$3.9 million for fiscal 2007. These expenses
46
Table of Contents
represented
9% and 8% of revenue for fiscal 2008 and fiscal 2007, respectively. Compensation for research and development employees accounted for approximately $1.3 million of the increase,
primarily as a result of an increase in headcount in fiscal 2008.
Sales and marketing.
Sales and marketing expense increased $2.4 million, or 30%, to $10.4 million for fiscal 2008, compared
to
$8.1 million for fiscal 2007. These expenses represented 17% and 16% of revenue for fiscal 2008 and 2007, respectively. This increase was primarily due to a $1.4 million increase in
compensation for sales and marketing personnel, primarily due to an increase in personnel and higher commissions resulting from the increase in sales, a $510,000 increase in commissions paid to
third-party sales representatives, a $355,000 increase in marketing expenses related to trade shows, advertising, and general marketing programs as a result of increased strategic marketing
development activities, and a $273,000 increase in stock-based compensation expense, primarily due to the grant of fully-vested options in consideration of the cancellation of certain restricted
shares, partially offset by a $386,000 charge in fiscal 2007 related to a consulting agreement with a former executive officer.
General and administrative.
General and administrative expense increased $3.2 million, or 102%, to $6.3 million for fiscal
2008,
compared to $3.1 million for fiscal 2007. These expenses represented 10% and 6% of revenue in fiscal 2008 and fiscal 2007, respectively. The increase was primarily due to a $2.1 million
increase in stock-based compensation expense, a $1.0 million increase in professional fees, primarily legal and accounting, and a $340,000 increase in compensation for new and existing
personnel, partially offset by a $401,000 decrease in the amortization of intangible assets from the acquisition of Evertrust as the intangibles were fully amortized by the end of fiscal 2007. The
increase in the stock-based compensation for the period was primarily due to $1.3 million of expense in connection with the non-recurring issuance of additional shares of stock in
November 2007 to the former shareholders of Evertrust in consideration of certain employees' contributions to the combined operations subsequent to the acquisition and $615,000
due to the grant of fully-vested options in consideration of the cancellation of certain restricted shares.
Postponed public offering costs.
As of June 30, 2008, we had incurred $3.4 million of costs directly attributable to the
planned
initial public offering. These costs were being deferred until the completion of the offering. In the quarter ended June 30, 2008, these costs were charged to expense due to an indefinite
postponement of the offering process as a result of overall market conditions.
Other income (expense).
Other expense, net, decreased $344,000, or 16%, to $1.7 million for fiscal 2008, and consisted of
$2.0 million
of interest expense and a $197,000 loss on the extinguishment and modification of debt, partially offset by $303,000 of other income, primarily due to interest earned on excess cash invested in money
market accounts, and net foreign currency transaction gains of $166,000. Other expense, net, was $2.1 million for fiscal 2007, consisting of $1.5 million of interest expense, a
$1.1 million loss on the extinguishment and modification of debt, $870,000 of other income, primarily due to the revaluation of the derivative liability related to outstanding convertible
notes, and net foreign currency transaction losses of $449,000, due to weakness in the U.S. dollar relative to the local currencies in which expenses for our international operations are denominated.
Interest
expense included in other income (expense), net, increased $565,000, or 39%, to $2.0 million for fiscal 2008 compared to $1.5 million for fiscal 2007. The increase
was attributable to the amortization of the beneficial conversion feature related to the convertible bridge debt.
47
Table of Contents
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statement of operations data in dollars and as a percentage of
revenue for each of our last ten quarters in the period ended December 31, 2009. The quarterly data presented below has been prepared on a basis consistent with our audited financial statements
and include, in the opinion of management, all adjustments, which consist of only normal recurring adjustments, that management considers necessary for the fair presentation of this information. You
should read this information
together with our consolidated financial statements and related notes included elsewhere in this prospectus. Our quarterly results of operations may fluctuate in the future due to a variety of
factors. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our results for these quarterly periods are not necessarily indicative
of the results of operations for a full fiscal year or any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Sep. 30,
2007
|
|
Dec. 31,
2007
|
|
Mar. 31,
2008
|
|
Jun. 30,
2008
|
|
Sep. 30,
2008
|
|
Dec. 31,
2008
|
|
Mar. 31,
2009
|
|
Jun. 30,
2009
|
|
Sep. 30,
2009
|
|
Dec. 31,
2009
|
|
|
|
(unaudited, in thousands)
|
|
Revenue
|
|
$
|
14,231
|
|
$
|
15,813
|
|
$
|
16,711
|
|
$
|
15,921
|
|
$
|
16,342
|
|
$
|
16,156
|
|
$
|
13,126
|
|
$
|
15,271
|
|
$
|
16,715
|
|
$
|
17,596
|
|
Cost of revenue(1)
|
|
|
9,772
|
|
|
10,579
|
|
|
10,743
|
|
|
9,660
|
|
|
9,814
|
|
|
9,026
|
|
|
7,663
|
|
|
9,041
|
|
|
9,667
|
|
|
10,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,459
|
|
|
5,234
|
|
|
5,968
|
|
|
6,261
|
|
|
6,528
|
|
|
7,130
|
|
|
5,463
|
|
|
6,230
|
|
|
7,048
|
|
|
7,010
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
1,248
|
|
|
1,314
|
|
|
1,370
|
|
|
1,432
|
|
|
1,295
|
|
|
1,298
|
|
|
1,340
|
|
|
1,383
|
|
|
1,526
|
|
|
1,776
|
|
|
Sales and marketing(1)
|
|
|
2,742
|
|
|
2,489
|
|
|
2,941
|
|
|
2,272
|
|
|
2,538
|
|
|
2,957
|
|
|
2,690
|
|
|
2,927
|
|
|
3,415
|
|
|
4,117
|
|
|
General and administrative(1)
|
|
|
1,059
|
|
|
2,466
|
|
|
1,610
|
|
|
1,154
|
|
|
1,733
|
|
|
1,071
|
|
|
1,055
|
|
|
819
|
|
|
1,194
|
|
|
1,426
|
|
|
Postponed public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
3,447
|
|
|
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,049
|
|
|
6,269
|
|
|
5,921
|
|
|
8,305
|
|
|
5,566
|
|
|
5,326
|
|
|
5,085
|
|
|
5,578
|
|
|
6,135
|
|
|
7,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(590
|
)
|
|
(1,035
|
)
|
|
47
|
|
|
(2,044
|
)
|
|
962
|
|
|
1,804
|
|
|
378
|
|
|
652
|
|
|
913
|
|
|
(309
|
)
|
Other income (expense), net
|
|
|
(427
|
)
|
|
(350
|
)
|
|
(965
|
)
|
|
(4
|
)
|
|
62
|
|
|
437
|
|
|
(253
|
)
|
|
(256
|
)
|
|
531
|
|
|
(461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,017
|
)
|
|
(1,385
|
)
|
|
(918
|
)
|
|
(2,048
|
)
|
|
1,024
|
|
|
2,241
|
|
|
125
|
|
|
396
|
|
|
1,444
|
|
|
(770
|
)
|
Income tax benefit (expense)
|
|
|
38
|
|
|
43
|
|
|
(93
|
)
|
|
47
|
|
|
(134
|
)
|
|
(291
|
)
|
|
366
|
|
|
(220
|
)
|
|
(113
|
)
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(979
|
)
|
$
|
(1,342
|
)
|
$
|
(1,011
|
)
|
$
|
(2,001
|
)
|
$
|
890
|
|
$
|
1,950
|
|
$
|
491
|
|
$
|
176
|
|
$
|
1,331
|
|
$
|
(834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
stock-based compensation expense (credit) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Sep. 30,
2007
|
|
Dec. 31,
2007
|
|
Mar. 31,
2008
|
|
Jun. 30,
2008
|
|
Sep. 30,
2008
|
|
Dec. 31,
2008
|
|
Mar. 31,
2009
|
|
Jun. 30,
2009
|
|
Sep. 30,
2009
|
|
Dec. 31,
2009
|
|
|
|
(unaudited, in thousands)
|
|
Cost of revenue
|
|
$
|
6
|
|
$
|
9
|
|
$
|
(1
|
)
|
$
|
2
|
|
$
|
0
|
|
$
|
1
|
|
$
|
5
|
|
$
|
12
|
|
$
|
3
|
|
$
|
9
|
|
Research and development
|
|
|
56
|
|
|
14
|
|
|
27
|
|
|
6
|
|
|
(20
|
)
|
|
(5
|
)
|
|
13
|
|
|
31
|
|
|
23
|
|
|
107
|
|
Sales and marketing
|
|
|
468
|
|
|
151
|
|
|
467
|
|
|
13
|
|
|
(179
|
)
|
|
(85
|
)
|
|
58
|
|
|
191
|
|
|
96
|
|
|
721
|
|
General and administrative
|
|
|
145
|
|
|
1,392
|
|
|
690
|
|
|
28
|
|
|
(32
|
)
|
|
14
|
|
|
153
|
|
|
180
|
|
|
148
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense (credit)
|
|
$
|
675
|
|
$
|
1,566
|
|
$
|
1,183
|
|
$
|
49
|
|
$
|
(231
|
)
|
$
|
(75
|
)
|
$
|
229
|
|
$
|
414
|
|
$
|
270
|
|
$
|
1,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of Revenue
Three Months Ended
|
|
|
|
Sep. 30,
2007
|
|
Dec. 31,
2007
|
|
Mar. 31,
2008
|
|
Jun. 30,
2008
|
|
Sep. 30,
2008
|
|
Dec. 31,
2008
|
|
Mar. 31,
2009
|
|
Jun. 30,
2009
|
|
Sep. 30,
2009
|
|
Dec. 31,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
Revenue
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost of revenue
|
|
|
69
|
|
|
67
|
|
|
64
|
|
|
61
|
|
|
60
|
|
|
56
|
|
|
58
|
|
|
59
|
|
|
58
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31
|
|
|
33
|
|
|
36
|
|
|
39
|
|
|
40
|
|
|
44
|
|
|
42
|
|
|
41
|
|
|
42
|
|
|
40
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
9
|
|
|
8
|
|
|
8
|
|
|
9
|
|
|
8
|
|
|
8
|
|
|
10
|
|
|
9
|
|
|
9
|
|
|
10
|
|
|
Sales and marketing
|
|
|
19
|
|
|
16
|
|
|
18
|
|
|
14
|
|
|
16
|
|
|
18
|
|
|
20
|
|
|
19
|
|
|
20
|
|
|
23
|
|
|
General and administrative
|
|
|
7
|
|
|
16
|
|
|
10
|
|
|
7
|
|
|
11
|
|
|
7
|
|
|
8
|
|
|
5
|
|
|
7
|
|
|
8
|
|
|
Postponed public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
35
|
|
|
40
|
|
|
35
|
|
|
52
|
|
|
34
|
|
|
33
|
|
|
39
|
|
|
37
|
|
|
37
|
|
|
42
|
|
Income (loss) from operations
|
|
|
(4
|
)
|
|
(7
|
)
|
|
0
|
|
|
(13
|
)
|
|
6
|
|
|
11
|
|
|
3
|
|
|
4
|
|
|
5
|
|
|
(2
|
)
|
Other income (expense), net
|
|
|
(3
|
)
|
|
(2
|
)
|
|
(6
|
)
|
|
0
|
|
|
0
|
|
|
3
|
|
|
(2
|
)
|
|
(2
|
)
|
|
3
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7
|
)
|
|
(9
|
)
|
|
(5
|
)
|
|
(13
|
)
|
|
6
|
|
|
14
|
|
|
1
|
|
|
3
|
|
|
9
|
|
|
(4
|
)
|
Income tax benefit (expense)
|
|
|
0
|
|
|
0
|
|
|
(1
|
)
|
|
0
|
|
|
(1
|
)
|
|
(2
|
)
|
|
3
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7
|
)%
|
|
(8
|
)%
|
|
(6
|
)%
|
|
(13
|
)%
|
|
5
|
%
|
|
12
|
%
|
|
4%
|
|
|
1%
|
|
|
8
|
%
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to rounding to the nearest percent, totals may not equal the sum of the line items in the above table.
Revenue and gross profit have generally increased over the time period except for revenue for the quarters ended June 30, 2008,
December 31, 2008 and March 31, 2009 where revenue decreased 5%, 1%, and 19% respectively. Research and development expenses have remained relatively constant during the periods
presented. Sales and marketing expenses increased in the quarter ended March 31, 2008 due to increased stock-based compensation expense and increased sales levels, in the quarter ended
December 31, 2008 due to an increase in sales personnel, in the quarter ended September 30, 2009 due to an increase in sales personnel and marketing expenses, and in the quarter ended
December 31, 2009 due to an increase in stock-based compensation expense. General and administrative expenses increased in the quarter ended December 31, 2007 due to the
non-recurring stock issuance to the former shareholders of Evertrust in consideration of certain employees' contributions to the combined operations subsequent to the acquisition; the
quarter ended March 31, 2008 included stock-based compensation due to the grant of fully-vested options in consideration of the cancellation of certain restricted shares, the quarter ended
September 30, 2008 included bad debt expense related to uncollectable accounts and the quarter ended December 31, 2009 included $327,000 of stock-based compensation expense. In the
quarter ended June 30, 2008, $3.4 million of costs directly attributable to a planned public offering were written off due to the postponement of the offering process. Other income
(expense), net, was impacted by foreign currency transaction losses in the quarter ended March 31, 2008 and foreign currency transaction gains in the quarter ended December 31, 2008.
Liquidity and Capital Resources
As of December 31, 2009, our principal sources of liquidity consisted of cash and cash equivalents of $10.8 million and
accounts receivable, net, of $11.1 million. We have historically funded our operations primarily through private sales of common stock and preferred stock (approximately $38.3 million in
the aggregate) and proceeds from lines of credit and notes payable, and more recently through cash generated from operations.
Our
principal uses of cash historically have consisted of the purchase of inventory, payroll and other operating expenses related to the development of new products and purchases of
property and equipment.
We
have a $5 million revolving credit line, which has a borrowing base equal to 80% of eligible accounts receivable. Interest will accrue on any outstanding borrowings at a rate
equal to the prime rate plus 1% per annum. Borrowings under this agreement are secured by certain assets, primarily cash, accounts receivable and inventory. The agreement also contains financial
covenants requiring
49
Table of Contents
us
to maintain specified minimum liquidity amounts. As of December 31, 2009, we had no borrowings under this agreement. This agreement expires on July 31, 2011.
We
believe that our cash and cash equivalents at December 31, 2009, together with cash flows from our operations, will be sufficient to fund our operating requirements for at
least 12 months. However, we may need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our future capital requirements will depend on many
factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new
products and enhancements to existing products, the continuing market acceptance of our products and acquisition and licensing activities. We may enter into agreements relating to potential
investments in, or acquisitions of, complementary businesses or technologies in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be
available on terms favorable to us or at all.
The
following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
|
$1,840
|
|
|
$2,591
|
|
|
$1,150
|
|
|
$(79
|
)
|
|
2,176
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,078
|
)
|
|
(1,407
|
)
|
|
(178
|
)
|
|
201
|
|
|
(517
|
)
|
Net cash provided by (used in) financing activities
|
|
|
8,584
|
|
|
(2,600
|
)
|
|
5
|
|
|
12
|
|
|
481
|
|
Cash flows from operating activities
Our cash flows from operating activities are significantly influenced by our cash expenditures to support the growth of our business as
we invest in areas such as research and development, sales and marketing and administration. Our operating cash flows are also influenced by our working capital needs to support growth and
fluctuations in inventory, accounts receivable, vendor accounts payable and other current assets and liabilities. We procure inventory from our contract manufacturers and suppliers and typically pay
them in 30 to 60 days.
Net
cash provided by (used in) operating activities was $2.2 million and ($79,000) for the six months ended December 31, 2009 and 2008, respectively. Net cash provided by
operating activities was $1.2 million, $2.6 million and $1.8 million for the years ended June 30, 2009, 2008 and 2007, respectively.
Net
cash provided by operating activities for the six months ended December 31, 2009 consisted of $2.8 million from net income excluding non-cash adjustments.
For the period net income was $497,000 offset by non-cash adjustments consisting of $1.4 million for stock-based compensation expense, $476,000 of depreciation and amortization
expense, $260,000 of loss on revaluation of warrants and $104,000 for amortization of discounts related to notes payable. Changes in operating assets and liabilities resulted in a net use of cash of
$595,000, primarily consisting of an increase in inventory of $2.2 million, primarily resulting from the purchase of drives to support sales for the quarter ended March 31, 2010 and the
purchase of additional safety stock, an increase in accounts payable of $1.4 million primarily due to the timing of inventory purchases and an increase in deferred revenues of $705,000,
primarily due to the deferral of service.
Net
cash provided by operating activities for the six months ended December 31, 2008 consisted of $3.3 million from net income excluding non-cash adjustments.
For the period net
50
Table of Contents
income
was $2.8 million offset by non-cash adjustments of $453,000. Changes in operating assets and liabilities resulted in a net use of cash of $3.4 million, primarily
consisting of a reduction in inventories for $1.2 million, an increase in trade accounts receivable of $2.5 million due to the timing of sales, a reduction of accounts payable of
$952,000, primarily due to the timing of inventory purchases, and a reduction of deferred revenue balances of $802,000, primarily due to the revenue recognition related to our Assureon business.
Net
cash provided by operating activities for the year ended June 30, 2009 consisted of $5.0 million from net income excluding non-cash adjustments. For the
period net income was $3.5 million partially offset by non-cash adjustments consisting of $881,000 of
depreciation and amortization, $446,000 for amortization of discounts related to notes payable, $337,000 of stock compensation expense and $155,000 for gain on revaluation of note conversion features.
Changes in operating assets and liabilities resulted in a net use of cash of $3.9 million, primarily consisting of a reduction in inventories for $608,000, an increase in trade accounts
receivable of $2.3 million due to the timing of sales, a reduction in accrued expenses of $876,000, primarily due to the payment of accrued interest and entering invoices to accounts payable
for public offering costs that were accrued as of June 30, 2008, and a reduction of deferred revenue balances of $1.2 million, primarily due to the revenue recognition related to our
Assureon business.
Net
cash used in operating activities in fiscal 2008 primarily consisted of a net loss of $5.3 million, largely impacted by the write-off of postponed public offering
costs of $3.4 million, offset by non-cash adjustments consisting of $3.5 million for stock-based compensation expense, $1.5 million of gain on revaluation of note
conversion features, and $1.1 million of depreciation and amortization expense. Changes in operating assets and liabilities in fiscal 2008 resulted in a net source of cash of
$1.6 million, primarily consisting of an increase in accounts payable of $3.9 million due to the timing of inventory purchases, an increase in accrued expenses of $1.6 million due
to higher interest, marketing and selling-related accruals, and an increase in deferred revenue of $1.0 million, primarily on our Assureon business, offset by an increase in accounts receivable
of $3.1 million associated with the timing of sales within the quarter, and an increase in inventories of $1.6 million due to the timing of purchases.
Net
cash used in operating activities in fiscal 2007 primarily consisted of net losses of $3.0 million, offset by non-cash adjustments consisting primarily of depreciation and
amortization expense of $1.9 million, a $1.1 million loss on extinguishment and modification of debt, and $986,000 of stock-based compensation expense. Changes in operating assets and
liabilities in fiscal 2007 resulted in a net source of cash of $860,000, primarily consisting of a decrease in inventories of $1.8 million related to the timing of inventory purchases, and an
increase in deferred revenue of $1.2 million, primarily from the increased volume in our Assureon business and premium warranty offerings, offset by a decrease in accounts payable of
$2.1 million due to the timing of inventory purchases.
Cash flows from investing activities
Cash flows from investing activities primarily relate to capital expenditures to support our growth.
Net
cash used in investing activities was $517,000 for the six months ended December 31, 2009 compared to net cash provided by investing activities of $201,000 for the six months
ended December 31, 2008. For the six months ended December 31, 2009 and 2008 capital expenditures to support our growth were $517,000 and $299,000, respectively. In addition, in the 2008
period, we were no longer subject to the minimum cash balance requirement related to our revolving line of credit, resulting in a source of cash of $500,000. Our requirements for additional capital
51
Table of Contents
expenditures
are subject to change depending upon several factors, including our needs based on our changing business and industry and market conditions.
Capital
expenditures to support our growth were $678,000, $1.4 million and $1.1 million for fiscal 2009, 2008 and 2007, respectively. In addition, as of June 30,
2009, we were no longer subject to the minimum cash balance requirement related to our revolving line of credit, resulting in a source of cash of $500,000.
Cash flows from financing activities
Net cash provided by financing activities was $481,000 for the six months ended December 31, 2009 compared to net cash provided
by financing activities of $12,000 in the six months ended December 31, 2008. The source of cash in the six months ended December 31, 2009 consisted of the $3.6 million of
proceeds from borrowings on a note payable and the $3.0 million repayment on the revolving line of credit.
Net
cash provided by (used in) financing activities was $5,000, ($2.6) million, and $8.6 million in fiscal 2009, 2008 and 2007, respectively. The use of cash in fiscal 2009
consisted of the repayment of a convertible bridge debt of $3.0 million and borrowings on a revolving line of credit for $3.0 million. The use of cash in fiscal 2008 consisted of the
repayment of a loan payable of $2.6 million. Net cash provided by financing activities was $8.6 million for fiscal 2007 due to net proceeds from the issuance of Series C preferred
stock of $7.1 million, proceeds from loans payable of $10.5 million, offset by payments on loans payable of $9.1 million.
Contractual Obligations
The following is a summary of our contractual obligations as of June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
(in thousands)
|
|
|
|
Total
|
|
Less
Than 1
Year
|
|
1 - 3
Years
|
|
3 - 5
Years
|
|
Thereafter
|
|
Operating lease obligations
|
|
$
|
1,633
|
|
$
|
645
|
|
$
|
988
|
|
$
|
|
|
$
|
|
|
Purchase obligations(1)
|
|
|
5,600
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
Notes payable(2)
|
|
|
3,010
|
|
|
3,000
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,243
|
|
$
|
9,245
|
|
$
|
998
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Purchase
obligations represent commitments under non-cancelable orders for inventory with our contract manufacturers. At December 31,
2009, our purchase obligations increased to $8.6 million.
-
(2)
-
Excludes
debt discounts.
We
have entered into agreements with certain of our executive officers to award them IPO Bonus Shares immediately prior to the completion of this offering. We expect to incur cash
withholding obligations with respect to the IPO Bonus Shares in the quarter in which we complete this offering. Based on an assumed initial public offering price of $11.00 per share, the midpoint of
the range set forth on the cover page of this prospectus, we expect these withholding obligations to be approximately $3.2 million in the aggregate.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements nor do we have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured
52
Table of Contents
finance
or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
The majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies of the
countries in which our operations are located. Our operating expenses are incurred where the office or personnel are located. Therefore, our results of operations and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates in some geographies, particularly the U.K. and Canada. For example, we recorded foreign currency transaction gains of $567,000 for the
six months ended December 31, 2009. Fluctuations in currency exchange rates could harm our business in the future. The effect of an immediate 10% adverse change in exchange rates could have the
effect of increasing our operating expenses. To date, the foreign currency exchange rate effect on our cash has not been significant, and we have not entered into any foreign currency hedging
contracts although we may do so in the future.
Interest Rate Sensitivity
As of December 31, 2009, we had cash and cash equivalents of $10.8 million, which were held in deposit accounts and
certificates of deposits. Accordingly, if overall interest rates had fallen by 10% in fiscal 2009, our interest income would not have been materially affected. We expect to hold cash equivalents
following the completion of this offering, and declines in interest rates will reduce our future interest income.
At
December 31, 2009, we had no debt outstanding that bore variable rate interest.
Recent Accounting Pronouncements
In September 2006, the FASB issued guidance which defines fair value, establishes a framework for measuring fair value, and
expands fair value measurement disclosures. In February 2008, the FASB issued additional guidance which deferred the effective date of the fair value guidance to fiscal years beginning after
November 15, 2008 for nonfinancial assets and liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually. The Company adopted the fair
value guidance effective for fiscal year 2009 except for those items specifically deferred and is currently assessing the financial statement impact of the full adoption of this guidance.
In
February 2007, the FASB issued guidance which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. The
provisions of this guidance are effective for fiscal years beginning after November 15, 2007. The Company adopted these changes effective for fiscal year 2009, and the adoption had no impact on
the Company's consolidated results of operations or financial position.
In
May 2009, the FASB issued a new standard to incorporate the accounting and disclosure requirements for subsequent events into U.S. generally accepted accounting
principles. This standard introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and
disclose events or transactions occurring after the balance sheet date. The Company adopted the standard as of June 30, 2009, which was the required effective date.
In
December 2007, the FASB issued a new standard which establishes principles and requirements for how an acquirer in a business combination: (i) recognizes and measures in its
consolidated financial statements the identifiable assets acquired, the liabilities assumed, and any
53
Table of Contents
controlling
interest; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose
to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination. The new standard is to be applied prospectively to business
combinations for which the acquisition date is on or after an entity's fiscal year that begins after December 15, 2008 which is the Company's fiscal year beginning July 1, 2009. The
Company will apply the provisions of this standard to any future acquisition.
In
March 2008, the FASB issued a new standard which updates guidance regarding disclosure requirements for derivative instruments and hedging activities. It responds to constituents'
concerns
that prior guidance does not provide adequate information about how derivative and hedging activities affect an entity's financial position, financial performance, and cash flows. The disclosure of
fair values of derivative instruments and their gains and losses in a tabular format, as required by the new standard should provide a more complete picture of the location in an entity's financial
statements of both the derivative positions existing at period-end and the effect of using derivatives during the reporting period. The Company adopted the new standard as of
July 1, 2009, which was the required effective date.
In
June 2008, the FASB provided guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock for purposes of determining
the appropriate accounting treatment. This guidance was effective for fiscal years beginning after December 15, 2008. As a result of the adoption of the new guidance on July 1, 2009, a warrant
for common stock issued in connection with a note payable that has a down round anti-dilution provision was determined to not be indexed to the Company's stock and therefore required classification as
a liability. On July 1, 2009, the Company recorded a warrant liability of $163,000 and recorded a cumulative effect of change in accounting principle of $57,000 as a reduction of accumulated
deficit representing the decline in fair value between the warrant issuance date and the adoption date. Additionally, warrants subject to this guidance are adjusted to fair value at the end of each
reporting period.
In
June 2009, the FASB issued Accounting Standards Update (ASU) 2009-01, Topic 105,
Generally Accepted Accounting PrinciplesAmendments
based on Statement of Financial Accounting Standards No. 168The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (ASC
105)
, to establish the sole source of authoritative U.S. generally accepted accounting principles recognized by the FASB, excluding Securities and Exchange Commission (SEC)
guidance, to be applied by nongovernmental entities. The guidance in ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The
Company adopted ASC 105 as of July 1, 2009, which was the required effective date.
In
October 2009, the FASB issued ASU 2009-13,
Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task
Force
to amend certain guidance in ASC 605-25. The amended guidance in ASC 605-25 (1) modifies the separation criteria by eliminating the criterion
that requires objective and reliable evidence of fair value for the undelivered item(s) and (2) eliminates the use of the residual method of allocation and instead requires that arrangement
consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price.
The
FASB also issued ASU 2009-14,
Certain Revenue Arrangements That Include Software Elementsa consensus of the FASB Emerging Issues Task
Force
, to amend the scope of arrangements under ASC 985-605 to exclude tangible products containing software components and non-software components that function
together to deliver a product's essential functionality.
54
Table of Contents
The
amended guidance in ASC 605-25 and ASC 985-605 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early application and retrospective application permitted. The Company expects to apply the amended guidance in ASC 985-605, concurrently
with the amended guidance in ASC 605-25, beginning on July 1, 2010. The Company is in the process of evaluating the impact the amendments to ASC 605-25 and ASC
985-605 will have on its consolidated financial statements.
The
FASB issued ASU 2009-12,
Fair Value Measurements and Disclosures: Investments in Certain Entities that Calculate Net Asset Value per
Share,
to amend ASC 820, which permits a reporting entity, as a practical expedient, to measure fair value of an investment on the basis of net asset value per share of the
investment (or its equivalent) if the net asset value of the investment is calculated in a manner consistent with the measurement principles of ASC 946 as of the reporting entity's measurement date,
including measurement of all or substantially all of the underlying investments of the investee in accordance with ASC 820. The Company adopted these changes effective for fiscal year 2010, and the
adoption had no impact on the Company's consolidated results of operations or financial position.
From
time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. Unless otherwise discussed, management
believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's consolidated financial statements upon adoption.
55
Table of Contents
BUSINESS
Overview
We are a leading provider of disk-based storage systems designed for the storage of digital information. Our systems are
used to store information created in the new "digital-age" by the rapidly growing number of digital applications that are creating large amounts of information such as email, office documents, medical
images and digital voice or video recordings. We have designed our products to bring enterprise-class storage features to the mid-tier market, which we define as mid-sized businesses and branch
offices of larger organizations and which historically has been underserved by legacy storage vendors. Our systems help these organizations store and access growing amounts of digital information over
long periods of time by:
-
-
meaningfully lowering the cost of storing digital information on disk;
-
-
providing enterprise-class storage for mid-tier organizations;
-
-
minimizing the use of data center floor space by providing storage with industry-leading densities;
-
-
significantly reducing energy consumption in powering and cooling storage systems;
-
-
ensuring reliability, accessibility, integrity and security of stored data;
-
-
simplifying the management of storage; and
-
-
enabling the rapid search and retrieval of files stored.
As
a pioneer of reliable disk-based storage systems optimized for capacity and cost, our ATA and subsequent SATA RAID technology solutions have significantly reshaped the
economics of storage. We have been able to offer enterprise-class storage systems at price points that have historically been as low as 1/10th of the cost of traditional storage systems. Our storage
systems are designed and priced to be used by the mid-tier market and these efforts have brought the benefits of enterprise-class storage systems within reach of a larger number of organizations and a
wider range of applications. In addition, our storage systems are among the first to offer energy-saving "green" technology such as MAID. Our products include: block storage systems, which communicate
with computers over SANs through Fibre Channel and iSCSI
block-mode protocols; and file storage systems, which send and receive files through standard file-mode interfaces such as NFS and CIFS.
-
-
Block storage systems with Fibre Channel and iSCSI
connectivity.
Our block storage systems are based on SAS and SATA disk drives, our high-performance RAID controllers and our
capacity-optimized chassis and enclosures. Our systems can be used in a wide variety of applications and storage environments, including iSCSI and Fibre Channel, offer industry-leading density, are
highly scalable and are priced to offer significant savings over traditional enterprise-class disk-based storage systems as well as a competitive replacement for tape-based
storage systems.
-
-
Intelligent and high-speed file storage systems with strong archiving
capabilities.
Our software-based file storage systems typically integrate with our block storage systems to offer our customers
scalable, clusterable, secure and searchable file storage and archival systems with encryption and de-duplication.
We
sell our products through resellers, OEM partners, and system integrators and to date have shipped over 24,000 systems worldwide. While our market focus is on the mid-tier market, our
systems have been installed in small businesses, as well as large global enterprises around the world.
56
Table of Contents
Industry Background
The amount of digital information being created and stored on disk by digital-age applications by businesses, governments and other
organizations is growing rapidly. Additionally, disk-based digital information is being kept for longer periods. Examples of digital information created by digital-age applications include digital
media such as photographs, medical images, video and audio recordings; digital correspondence such as e-mail, instant messaging transcripts and voicemail; and e-commerce documents, such as
electronic invoices and purchase orders. As disk-based storage solutions offer many advantages over tape and optical solutions in storing digital information, many organizations are
increasingly using disk-based storage solutions and are reducing the use of tape or optical solutions.
Digital
information is being created by mid-tier organizations faster than ever before and this information needs to be stored longer and be readily available. Some of the key factors
influencing these trends include:
-
-
Increasing number of applications that create digital
information.
Businesses and organizations of all sizes are utilizing applications that create significant amounts of digital
information, such as e-commerce, digital security, digital multimedia, digital medical records, digital design software, and digital imaging. Many of these applications are outside of the
traditional data center and are becoming more widely used, particularly by the mid-tier market.
-
-
Larger sized and more frequently shared files.
The
creation and storage of increasingly larger files associated with high-resolution video, photos, medical images and music and data-intensive documents, as well as the frequent
sharing and re-saving of files, which results in the storage of duplicate data, is accelerating the growth of digital information.
-
-
Evolving business practices to store information in digital
form.
Many organizations are now retaining key information in digital form for indefinite timeframes. For example, local governments are
now retaining records in digital form that had previously been kept in paper form.
-
-
Increasing regulatory requirements.
Regulations resulting
from legislation such as the Sarbanes-Oxley Act of 2002 and the Health Insurance Portability and Accountability Act, or HIPAA, require some companies to retain digital information for specified
periods of time, and then often require guaranteed deletion of data when that time has elapsed. These regulations also require organizations to take reasonable measures to ensure the security and
integrity of their data over sustained periods of time.
Digital-age
applications are creating digital information faster than more traditional data center applications such as transaction-oriented database applications. Additionally, the
Enterprise Strategy Group, a market research firm, estimates that approximately 60%-80% of all new enterprise information will be retained for business reference, compliance or discovery purposes, and
that the average retention period for such information will be between four and ten years. Evolving business practices and regulations are also changing the requirements placed on systems that store
and manage digital information, and are driving the need for readily-available long-term storage.
Traditionally, high-cost disk drives optimized for performance, such as Fibre Channel and SCSI disks, have been used to
store transaction-oriented database information, while less expensive, low-availability storage systems, such as tape and optical disk were used for long-term storage of
digital information. Historically, most research and development in the storage industry has focused
57
Table of Contents
on
improving the speed and performance characteristics for database-related information for large and centralized enterprise data centers. However, as demands have been increasing for storing
digital-age applications that create large amounts of digital content, the requirements for more cost-effective long-term disk storage have emerged. Organizations of all sizes are
increasingly looking for cost-effective and energy-efficient storage solutions with high-availability that can scale to tackle the substantial growth of digital information.
In
light of these factors, organizations are changing their approach to the storage and management of digital information in a number of ways.
-
-
Adoption of low-cost, capacity-optimized disk
storage.
The introduction of low-cost, capacity-optimized disk drives is changing the way organizations store digital
information. More organizations are creating disk-based multi-level storage environments, in which data that is transactional or mission critical is stored on traditional, and more
expensive performance optimized disk drives, such as Fibre Channel or SCSI, while digital information is moved to lower cost disks that are optimized for capacity. These lower cost disks generally
utilize SATA disk drives. As digital information continues to grow faster than other data types, the result has been a shift from the need for performance-optimized storage to capacity-optimized
storage. In addition, the need for ready access to information has led to the replacement of some tape and optical disk solutions with SATA disk drives. IDC estimates that the market for
capacity-optimized storage disk systems will grow from $6.3 billion in 2007 to $17.4 billion in 2013, representing a compound annual growth rate, or CAGR, of 18.6%. Source:
IDC,
Worldwide Disk Storage Systems 2009-2013 Forecast Update
, Doc # 221287, December 2009.
-
-
Utilization of replication and archiving solutions using disk-based
technologies.
In order to obtain greater accessibility and security of their digital information, organizations are replacing tape and
optical based replication and archiving technologies with disk-based solutions that provide access to their data. Many organizations find it important to replicate data to protect their
information from various threats and disasters. Replication helps ensure that an organization will be able to access its data from a secondary source in case of data loss or corruption. The purpose of
an archive is to store information in a secure and cost-effective manner for the long-term while enabling the retrieval of specific files as easily and quickly as possible.
Unlike backup data, which is copied from a primary storage system, typically to tape, in support of short-term recovery efforts, archived data is transferred from primary storage systems
to separate disk-based storage systems for long-term reference and reuse. The Enterprise Strategy Group estimates that the capacity of external disk storage dedicated to
digital archiving will grow from approximately 1,700 petabytes in 2007 to over 34,300 petabytes in 2012, representing a CAGR of 82%.
-
-
Increasing demand for "green" storage to reduce energy consumption in the data
center.
Power use is an increasingly important factor in the data center. As the density of servers, storage and other computing assets
within data centers has increased, the demand for power, exacerbated by mounting cooling needs resulting from increased power consumption, has begun to outstrip supply. The availability of power has
become a significant impediment to the growth of computing capabilities in some data centers. The cost of power is also impacting IT budgets. Customer demand is prompting industry analysts to define a
new class of storage known as "green" storage which is significantly more energy efficient. In addition, because of their increasing power consumption, data centers risk being targeted by "green"
legislation to reduce power consumption and cut carbon emissions. As a result, enterprises are increasingly seeking energy-efficient solutions in the data center to manage power consumption, reduce
operating expense and respond to environmental and political concerns.
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The challenge of implementing storage systems to manage growing amounts of digital information is particularly acute for the mid-tier
market. While organizations in this market face similar storage-related challenges as larger organizations, many storage solutions have been priced or designed for larger enterprises with complex
storage needs, and which do not scale cost-effectively for the smaller organization. Additionally, the mid-tier market has traditionally been unable to obtain the same
feature-sets as those designed for large enterprises. Consequently, organizations in the mid-tier market have been unable to meet their evolving business needs without incurring significant expenses.
Traditional disk and tape storage systems do not fully meet the needs of the mid-tier market for storing digital information. In
particular:
-
-
Reliability and performance limitations of tape-based
systems.
Due to inefficiencies associated with saving, verifying and retrieving information on tape, tape-based storage has
lower recovery rates than disk-based storage. In addition, retrieving information from tape can be a lengthy and cumbersome process, often involving the physical movement of storage media,
causing longer data retrieval times and higher costs.
-
-
Price and bulk of traditional disk-based
systems.
With limited data center floor space and growing volumes of data, traditional disk-based storage systems have not
been well-suited for long-term storage because they typically cost significantly more and take up more space per terabyte than tape-based systems. This is particularly true for
the mid-tier market, which often do not have traditional data centers. Additionally, many new digital applications, such as digital surveillance systems, need to fit in space constrained
environments such as subway tunnels, airport closets and ships' holds.
-
-
Energy consumption of traditional disk-based storage
systems.
Traditional disk-based storage systems typically leave all disk arrays fully powered at all times, drawing energy, generating
heat and requiring additional energy for cooling. This significantly increases energy consumption in the data center and results in higher operating expenses, strained energy resources and increased
carbon emissions.
-
-
Unnecessary storage of duplicate information.
As digital
information is created, shared and stored within an organization, multiple copies are frequently saved to that organization's storage system by multiple users. When this information is transferred to
long-term storage, the multiple copies are saved as well, increasing the consumption of storage capacity and leading to higher storage costs.
-
-
Lack of data protection.
Traditional storage systems do
not monitor and repair files that have been damaged, maliciously changed, or corrupted nor do they ensure that all files still exist and that none have been improperly inserted or deleted.
Our Solutions
We are a leading provider of energy-efficient, disk-based storage systems at cost points that enable the mid-tier market to
efficiently, intelligently, cost effectively and securely store and manage digital information for the long-term. Built on a foundation of industry-leading, capacity-optimized RAID disk
storage technology, we offer a portfolio of enterprise-class storage systems. While our
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storage
systems are priced to meet the needs of enterprises of all sizes, our systems are particularly designed and scaled to address the unmet needs of mid-tier organizations.
Our
block storage systems, the Boy and the Beast product lines, are based on our high-performance RAID controllers and our capacity-optimized chassis and enclosures, and use
both SATA and SAS drives. Key benefits of our block storage product lines include:
-
-
Reliability.
We have designed our storage systems to have
enterprise levels of reliability, and believe, as measured by drives returned for repair, we have exceeded the average reliability statistics of our enterprise storage competitors. Design features
such as vibration dampening, and high performance cooling, along with manufacturing processes that include building and testing of RAID sets before shipment are important reasons for our track record
of high reliability.
-
-
Low-cost and capacity-optimization.
We
pioneered high-density capacity-optimized disk storage technology, initially with the ATABeast and subsequently SATABeast disk-based RAID systems. Our capacity-optimized storage systems
deliver enterprise-class performance and scalability with industry-leading density and speed specifications, with pricing attractive for users who need large amounts of digital storage, and for the
mid-tier market. Our storage systems are priced to allow disk storage to be a cost-effective alternative to tape and optical storage systems.
-
-
All-in-one storage.
Our storage systems are highly
flexible and scalable and, in a single system, provide users the flexibility to utilize low-cost, IP-based iSCSI network connectivity or traditional Fibre Channel network
connectivity, or both simultaneously. They also allow the simultaneous use, in one chassis, of both the lower-priced SATA disks along with performance-oriented SAS disks. Our storage systems are
operating system independent, supporting Windows, Apple and UNIX environments, providing organizations with the flexibility to meet their diverse long-term storage needs.
-
-
Industry leading energy-saving "green" technology.
Our
storage systems are one of the first capacity-optimized RAID storage solutions to offer the energy-saving benefits of MAID technology. Our AutoMAID technology allows our storage systems to place disk
drives into low speeds and/or idle states when not in use, significantly reducing power consumption and operational costs. Energy-saving AutoMAID technology is integrated into all of our storage
systems, enabling reduced energy consumption and a significant decrease in the total cost of ownership of our systems, and supporting the implementation of carbon neutral energy policies. We believe
no other vendor offers a storage product with three different levels of energy-saving MAID technology.
Our
file storage systems, are built on our RAID system expertise and AutoMAID energy-saving technology. These systems integrate de-duplication, file integrity, encryption, backup and
archiving management and security features. Key benefits of our file storage product lines include:
-
-
Data De-Duplication.
Our file storage systems
feature both block and file data de-duplication technologies to eliminate redundant data. Our file storage systems are designed to substantially reduce the amount of disk storage required
as compared to non de-duplicated solutions, leading to lower capital expenditures and operating expenses.
-
-
Data Archiving.
Our file storage systems features a
comprehensive solution of archiving technologies, such as content addressable storage, or CAS, technology to eliminate the unnecessary storage of duplicate files, ongoing monitoring of file integrity,
file authentication, write once read many functionality, intelligent retrieval, data checking, missing file alerts and support for remote replication with encryption technology that is designed to
protect data from outside attack, inadvertent tampering and physical hardware theft.
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-
-
Data Replication.
By combining our multi-site
replication feature with de-duplication technology, our file storage systems enable space-efficient backups at remote offices. Our systems enable a WAN-efficient replication of
backups to a centralized, globally-deduplicated site.
-
-
Data Backup.
Our file storage product line enables
efficient backup storage, compatible with all leading backup software applications, and use our block storage systems to provide greater reliability than tape-based backup solutions.
Frequent media integrity scans are designed to eliminate the possibility of unrecoverable backups, eliminating a key problem with tape-based data recovery.
-
-
Data Security.
Our file storage product line utilizes
advanced encryption technology to provide security, as well as for the ability to digitally "shred" offline copies of files at the end of their retention period.
-
-
Lifecycle management and retrieval.
Our file storage
product line can utilize search and indexing software to enable rapid end user access to hundreds of millions of files with search capabilities and an intuitive user interface. Our file storage
systems help to simplify the policy-driven management of information over its life by using information lifecycle management, or ILM, to securely and simply manage long-term storage and
its disposition.
Strategy
Our goal is to be the leading supplier of disk-based storage systems for the mid-tier market, with a focus on providing
storage for digital applications. Key elements of our strategy include:
-
-
Continuing our history of technical innovation and utilizing technology to drive growth and reduce
cost.
We pioneered the use of low-priced ATA and SATA disks in enterprise-class storage solutions to deliver lower cost storage to
customers. Subsequent technical innovations have included pioneering capacity-optimized storage, which reduces cost amongst other benefits, and our proprietary "green" AutoMAID technology that enables
our storage solutions to consume significantly less power and require less cooling than other disk-based storage systems.
-
-
Continuing to focus on the attractive mid-tier
market.
We have a history of providing systems to meet the storage needs of mid-tier organizations. Our products have helped
to significantly reshape the economics of storage by offering enterprise-class solutions at price points that have historically been as low as 1/10th of the cost of traditional storage
solutions, and which scale to fit the smaller size and capacity requirements of mid-tier organizations. These efforts have brought the benefits of enterprise-class storage solutions within
the reach of a larger number of organizations who were previously unable to afford them. We intend to continue to target the mid-tier market in our sales and marketing activities, as we
believe this market segment has growth and size characteristics superior to other storage market segments.
-
-
Continuing to integrate storage application software in our
products.
We intend to continue to build on our technology base by integrating storage application software to drive the sales of higher
margin storage systems, such as our Assureon file storage system. We also intend to integrate new products with intelligent feature sets that we develop or acquire into our product line to increase
our revenue and gross margins.
-
-
Continuing to sell our products through channel
partners.
Our channel partners are essential to our success and our longstanding relationship with many of these partners is an
important competitive strength. Because mid-tier organizations often purchase from channel partners, a core component of our strategy is to expand our channel model across a broad range of industries
and geographies. With significant consolidation occurring in the storage
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Technology
Our storage systems are comprised of three layers: hardware, firmware and software and storage application software, combined with
commercially-available enterprise-class disk drives.
Layer 1: Hardware.
We have developed our own intellectual property at the hardware layer, and we believe this provides us with a
competitive
advantage in the mid-tier market as it enables us to scale our solutions cost-effectively for mid-tier organizations. Key differentiators of our hardware layer
include:
-
-
extreme density packaging which assists in capacity-optimization and addresses the increasing need for a single solution
that delivers both high performance and high capacity in a small footprint;
-
-
vibration dampening system which provides enhanced drive reliability, reduces drive failures and increases drive
performance;
-
-
specialized cooling system for optimal thermal operation which assists in increasing drive life and reliability;
-
-
full hardware redundancy to reduce the impact of any hardware failures; and
-
-
field replaceable subsystems which reduce the time and cost of maintaining our storage systems.
We
recently introduced our "active drawer" technology in the hardware layer which provides a more efficient way to replace failed disks so that the other drives are fully functional and
operating during replacement. Through this technology, we developed a 60 bay expansion chassis that provides high density enclosures of up to 60 storage drives in 4U of rack space.
Layer 2: Firmware and Software.
We have developed a layer of storage firmware and software running on our controller boards which are
designed to
offer superior "green" reliability, performance and scalability. Key differentiators of our firmware and software layer include:
-
-
our real-time operating system that enables us to design highly efficient and high performance storage
software;
-
-
MAID "green" power management system integrated into all of our storage systems and automatically and transparently places
disk drives into an idle state to vastly reduce power and cooling costs;
-
-
data integrity proprietary firmware that includes features such as battery-backed RAID cache and multiple RAID levels
designed to ensure data protection during power outage or double drive failure;
-
-
active-active RAID controllers with failover/failback which increases fault tolerance;
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-
-
RAID-6 which delivers an additional layer of data protection for critical enterprise storage applications;
-
-
advanced performance software which provides intuitive centralized management and monitoring and ensures complete control
over configuration and optimization of the user's storage environment; and
-
-
a simple-to-use management system, reducing complexity for the end user's installation and management of their storage
needs.
Layer 3: Storage Application Software.
On top of our hardware, firmware and RAID software layers, we have incorporated a comprehensive
array of
enterprise-class storage application software. Through this layer, we bring to the mid-tier market the benefits of software features
that are typically only affordable by large enterprises. Key storage application software features we offer include:
-
-
snapshot-based asynchronous mirroring, which enables replication across any IP network;
-
-
global data replication, which benefits customers during planned and unplanned downtime as well as remote and local data
recovery;
-
-
thin provisioning, which allows an application to be allocated the virtual storage capacity it requires, without having to
dedicate all of the associated physical capacity up front;
-
-
data security features, which enable constant monitoring of file integrity, lifecycle management, file authentication, and
file-level encryption;
-
-
archiving, which enables users to maintain compliant-level privacy, integrity and longevity of data while leveraging the
high speed access of disk drive technology; and
-
-
options for cloud storage providers, allowing for "multi-tenancy" storage operated from a single management system.
Key elements of our block storage technology include:
-
-
Innovative RAID Technology.
We developed our RAID software
and firmware internally. Our architecture allows for either a single or a dual pair of our RAID controllers. To optimize for cost, power and performance we have implemented a design in which each disk
drive has two dedicated links, one to each RAID controller. Our proprietary RAID controller that runs our software includes a microprocessor, iSCSI and Fibre Channel interfaces, battery-backed cache
memory, SATA interface circuits and a field-programmable gate array, or FPGA, that provides data switching services as well as hardware-based RAID level calculations.
-
-
High Density Enclosures.
Our 42-bay Beast product line
delivers up to 84 terabytes of storage in 4U of rack space, which we believe is among the highest density products of their kind currently available. Included in the unitized package are the disk
drives, redundant RAID controllers, and redundant power supplies.
-
-
Active Drawers.
Our recently introduced active drawer
technology enables efficient replacement of failed disks by using drawers that slide out of the front of cabinets such that individual failed drives can be replaced while the other drives are fully
functional and operating. In addition to improving the ease of managing and maintaining the storage solution, active drawers enable a significantly higher capacity of drives in a given vertical rack
space and a large reduction in overhead cost.
-
-
AutoMAID Power Management.
AutoMAID is an automated MAID
power management system integrated into all of our storage systems, which allow end users to save money through
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significantly
reduced energy consumption and cooling expenses. AutoMAID provides three power saving levels, which set the hard drives to more power-efficient modes after a defined period of idle
activity. AutoMAID is designed to quickly return to 100% duty cycle on all drives when full data access is needed.
|
|
|
|
|
|
|
AutoMAID Mode
|
|
Energy-Saving Methodology
|
|
Typical Recovery Time
Upon Data Request
|
|
Potential Power Savings vs.
Idle System without
AutoMAID
|
Level 1
|
|
Unload heads
|
|
Less than 1 second
|
|
15% 20%
|
Level 2
|
|
Slows disks to 4000 rotations per minute
|
|
15 seconds
|
|
35% 45%
|
Level 3
|
|
Stops disks; sets to sleep mode
|
|
30 seconds
|
|
60% 70%
|
Our file storage system product line consists of software loaded onto one or more industry-standard servers, along with switches,
cables and storage, all integrated into a rack-based system. Storage software features include:
-
-
Content Addressable Storage.
CAS provides a number of
benefits such as elimination of duplicate files, detection of file corruption and load balancing across storage nodes. Each file is processed through two independent hashing algorithms that produce a
unique digital "fingerprint" that is unique to that file. The file name, original file path, owner information, classification, retention rule, authenticated date and time, as well as the hashes, are
combined together and stored as a digitally signed metadata record. The metadata is stored as a flat file into one or more databases for fast lookup, as well as a cryptographically-chained composite
file called a "manifest." The manifest may optionally be deposited every few minutes with a remote third-party.
-
-
Serialization.
Each file is assigned a consecutive, unique
serial number, which provides for an additional mechanism to ensure that all files still exist and that none has been improperly inserted or deleted.
-
-
Immutability.
Our file storage systems monitor and repair
files that have been damaged, maliciously changed or corrupted. Each time a file is accessed and during each audit cycle, the integrity of the file is re-checked by comparing the
re-computed file content hashes against the CAS address, against the signed metadata flat file and against the database. The system also checks the redundant or remote copies of these
items, examining the serial numbers to ensure there are no unexpected gaps, auditing the stored manifests, and logging and repairing any damage or corruption that may have occurred.
-
-
Encryption.
To provide for security, as well as the
ability to digitally "shred" offline copies of files at the end of their retention period, each file can be assigned a different Advanced Encryption Standard, or AES, 256-bit encryption
key. Keys are generated and archived at a remote key server site, and transmitted periodically in large batches to individual storage sites. As keys are consumed, a list is created which documents the
serial number and fingerprint of ingested files and their associated encryption key serial numbers, and are returned to the remote key server for safekeeping. The keys are stored in an encrypted key
store database, whose master key is changed monthly to ensure that backup copies of the encrypted database cannot be used to recover expired files.
-
-
Data De-duplication.
By eliminating redundant
data segments within the backup stream, our file storage systems are designed to substantially reduce the amount of disk storage required as compared to a disk-only solution, leading to
lower capital expenditures and operating expenses.
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-
-
Replication.
Central to a long term archive is having more
than one copy of data available. Our file storage systems have a comprehensive object replication engine which replicates locally and/or remotely, data files, metadata, database objects, and audit
objects. The replication engine can recover from disruptions to the wide area network, or WAN, connection.
-
-
Clustering.
Our software features are designed to operate
in a high availability cluster, without the need to use third-party clustering technology. Workload is load balanced across all available nodes, and in the event of failure, workload is spread among
surviving nodes.
Products
We offer energy-efficient RAID-based disk storage systems for both block and file storage designed to overcome the challenges the
mid-tier market faces with storing and managing digital information.
Both our block and file storage systems are based on our Beast product lines and the Boy. In fiscal 2009, the Beast and the Boy product
line each accounted for 64% and 20% of our revenue, respectively. In the six months ended December 31, 2009, the Beast and the Boy product line each accounted for 66% and 14% of our revenue,
respectively. All of our storage system building blocks currently utilize 3
1
/
2
" SATA and/or SAS drives.
-
-
The Beast Product Line.
The Beast product line is our
current generation building block RAID storage system. The Beast product line is a full-featured enterprise-class storage system targeted to the mid-tier market. The Beast product line
features industry leading density of up to 84 terabytes of storage in 4U of rack space and offers dual function Fibre Channel and iSCSI connectivity, and utilizes performance RAID controllers
for wire-speed read/write throughput and high input/output per second performance. The Beast product line advanced mechanical design provides efficient cooling for optimal thermal
operation and reduces drive vibration, while delivering energy efficiency through the integration of AutoMAID technology.
-
-
The Boy.
The Boy is our legacy building block RAID storage
system and provides up to 28 terabytes of storage in 3U of rack space. The Boy offers dual function Fibre Channel and iSCSI connectivity with wire-speed performance and also incorporates
AutoMAID technology, reducing power consumption. The Boy is capable of delivering high performance for transactional applications and sustaining maximum throughput for high bandwidth applications such
as streaming media. Highly scalable, the Boy enables cost-effective storage of large amounts of information online, while its performance ensures faster response times for mission critical
applications.
-
-
Expansion Chassis.
Our recently-introduced expansion
chassis connects to the Beast product line and is equipped with active drawer technology. Through increased capacity, the expansion chassis enables our customers to significantly reduce cost compared
to a comparable system without the expansion chassis.
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|
|
|
|
|
Feature
|
|
Advantage
|
|
Result
|
iSCSI connectivity
|
|
Leverages existing Ethernet networks and expertise of end users
|
|
Lower cost alternative than fibre channel
|
|
|
|
|
|
Fibre Channel connectivity
|
|
High performance storage connectivity
|
|
Increased application productivity
|
|
|
|
|
|
Unified iSCSI and Fibre Channel RAID controller
|
|
Connects to ethernet and Fibre Channel networks simultaneously
|
|
Eliminates need for separate storage systems
|
|
|
|
|
|
60 drives in 4U of rack space
|
|
Industry-leading density
|
|
Reduced need for data center floor space
|
|
|
|
|
|
Active drawers
|
|
Sliding "live" drawers that fit more drives into the same rack space
|
|
Lower overhead storage costs
|
|
|
|
|
|
MAID
|
|
Significantly lowers power consumption and data center cooling required
|
|
Lower operating costs
|
|
|
|
|
|
Active-active RAID controllers
|
|
Dual RAID controllers share the load and are no longer single point of failure
|
|
High availability and increased application uptime and increased disk performance
|
|
|
|
|
|
Anti-accumulative rotational design
|
|
Reduced vibration-related disk failures
|
|
Increased application uptime
|
|
|
|
|
|
Tachometer-monitored/quad redundant blowers
|
|
Reduced heat-related disk failures
|
|
Increased application uptime
|
|
|
|
|
|
Intuitive management interface
|
|
Configure and manage system easily
|
|
Increase capability without increasing or retraining staff
|
Block Storage Systems
DATABeast
The DATABeast is our block storage system targeted for large-scale storage needs. DATABeast combines storage application software
servers and switches with multiple Beasts into a single, high-density, energy-efficient, easy-to-manage solution in a pre-assembled and
pre-configured system with all redundant components installed and cabled. The DATABeast can be controlled locally or remotely. Our DATABeast system utilizes software provided by Cloverleaf
Communications.
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The
following are notable storage application software features included in our DATABeast and the advantages they provide:
|
|
|
|
|
Feature
|
|
Advantage
|
|
Result
|
Thin provisioning
|
|
More efficient use of physical disks
|
|
Lower storage costs
|
|
|
|
|
|
Virtualization
|
|
Easily manage complex storage environments
|
|
Lower operating costs
|
|
|
|
|
|
Snapshot
|
|
Point-in-time data recovery
|
|
Greater data security
|
|
|
|
|
|
Data mirroring (local replication)
|
|
Instant local duplicate copy after each data write
|
|
Greater data security
|
|
|
|
|
|
Remote replication
|
|
Store information in a different physical location
|
|
Greater data security
|
|
|
|
|
|
Server-free data migration
|
|
Migrate data from old storage systems to a new one
|
|
Flexibility to install new storage systems
|
|
|
|
|
|
Automated management
|
|
Eliminates time consuming administrative tasks
|
|
Ease of use and installation
|
The iSeries is our iSCSI SAN solution targeted for mid-sized storage needs. The iSeries incorporates either the Boy or the
Beast product lines with SAS and/or SATA drives into a single storage system with rich storage application software features. The iSeries creates separate storage pools for the needs of different
applications, and has the ability to create and control thousands of virtual volumes simultaneously. The iSeries is designed to ensure continuous access to data during software upgrades as well as
system outage. Our iSeries system utilizes technology provided by SANRAD, Inc.
The
following are notable storage application software features included in our iSeries and the advantages they provide:
|
|
|
|
|
Feature
|
|
Advantage
|
|
Result
|
Thin provisioning
|
|
More efficient use of physical disks
|
|
Lower storage costs
|
|
|
|
|
|
Virtualization
|
|
Easily manage complex storage environments
|
|
Lower operating costs
|
|
|
|
|
|
Snapshot
|
|
Point-in-time data recovery
|
|
Greater data security
|
|
|
|
|
|
Data mirroring (local replication)
|
|
Instant local duplicate copy after each data write
|
|
Greater data security
|
|
|
|
|
|
Remote replication
|
|
Store information in a different physical location
|
|
Greater data security
|
|
|
|
|
|
Server-free data migration
|
|
Migrate data from old storage systems to a new one
|
|
Flexibility to install new storage systems
|
|
|
|
|
|
Automated management
|
|
Eliminates time consuming administrative tasks
|
|
Ease of use and installation
|
|
|
|
|
|
Compatibility with server virtualization software
|
|
Virtual servers requires compatible shared storage
|
|
Ease of use
|
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File Storage Systems
Assureon
Assureon, which represented approximately 6% of our revenue in fiscal 2009 and 10% of our revenue in the three months ended
December 31, 2009, is an integrated solution consisting of:
-
-
software-enabled intelligent archiving features and functionality;
-
-
purpose-built hardware; and
-
-
storage that leverages our industry-leading density, Boy and Beast product lines.
Assureon
features a combination of CAS with AES encryption and other security and data protection technologies. Assureon is designed to reduce costs and prevent any unauthorized access
to stored data including security breaches, attacks and lost or stolen media. Assureon's load balancing enhances performance and enables storage to scale into the petabytes. Storage capacity can be
vastly increased and more server nodes can be added to the configuration for faster performance. In addition to disk, Assureon supports offline media such as tape and optical. Assureon primarily
consists of software developed and owned by Nexsan.
In
addition to offering Assureon as a full system that scales to petabytes of storage, we also offer Assureon as a smaller appliance. This ready-to-install
appliance provides from 3.75 terabytes and greater of usable archive capacity making it well-suited to interface with e-mail archiving, medical imaging and records management,
document management, litigation support and other software applications.
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The
following are key features included in our Assureon system and the advantages they provide:
|
|
|
|
|
Feature
|
|
Advantage
|
|
Result
|
Encryption and key encryption management processes
|
|
Enterprise-class, regulatory-compliant security
|
|
Greater data security
|
|
|
|
|
|
CAS object storage
|
|
Eliminate file duplication
|
|
Lower overhead storage costs
|
|
|
|
|
|
Information Lifecycle Management, ILM, software
|
|
File lifecycle management
|
|
Ease of use; ensure compliant management of files
|
|
|
|
|
|
Embedded object replication engine
|
|
Automated file replication and recovery
|
|
Data tampering recovery, disaster recovery, and business continuity; faster time to recovery
|
|
|
|
|
|
Integrated policy engine
|
|
Optimize file and storage management with application
|
|
Increased application productivity and uptime
|
|
|
|
|
|
Self auditing and healing
|
|
Automated verification of file integrity and repair
|
|
Compliant file protection and availability; reduced cost of file management; greater data integrity
|
|
|
|
|
|
Encryption key shredding
|
|
Enterprise-class, regulatory compliant file destruction
|
|
Compliant disposition of files either on line or off line
|
|
|
|
|
|
Fast metadata search
|
|
Fast, easy access to individual files
|
|
Less time managing files; more efficient electronic discovery
|
|
|
|
|
|
InfiniBand connectivity option
|
|
Enables storage to be used for higher performance applications such as PACS imaging
|
|
Increased applications
|
|
|
|
|
|
Network-attached storage, NAS, interface and/or File System Watcher, FSW, software
|
|
Easy interfacing with application
|
|
Less time required to integrate applications
|
DeDupe SG is our de-duplication system that leverages our industry-leading density, our Beast product line and our Boy. DeDupe SG can
write and store backups on its high speed disk cache and then deduplicate the data at a later time; by first writing backups to a fast disk cache, backup tasks are completed in a fraction of the time.
Data in the DeDupe SG is protected from dual drive failures by our high speed RAID-6. Our DeDupe SG system utilizes certain software provided by FalconStor Software, Inc.
The
DeDupe SG is a turn-key storage solution that offers a variety of distinct savings advantages:
-
-
significantly reduce storage requirements through deduplication; and
-
-
ease of connectivity through a NAS interface.
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The
following are key storage software features included in our DeDupe SG system and the advantages they provide:
|
|
|
|
|
Feature
|
|
Advantage
|
|
Result
|
Data de-duplication
|
|
Eliminate redundant data segments
|
|
Lower overhead storage costs
|
|
|
|
|
|
Industry standard interface, such as CIFS and NFS
|
|
Simple to configure and install across different applications
|
|
Ease of use
|
|
|
|
|
|
Remote replication
|
|
Information stored in a different physical location
|
|
Greater data security
|
|
|
|
|
|
Hosted media backup server
|
|
Serve as the host for selected backup media server software
|
|
Reduce number of systems required for backup solution
|
Customers
Our customers are channel partners and systems integrators who sell our products to end users. We believe most mid-tier
organizations purchase their storage solutions from channel partners. As a result, we believe it is important to have a strong relationship with channel partners. We have a history of delivering
reliable, high performance storage solutions and have established an end user base across a wide spectrum of industries globally. We typically sell our products through channel partners to
mid-tier market end users around the world for a very diverse range of digitally driven applications including: fashion design, digital security, video-on-demand,
adult entertainment, national library archives, ship systems, railway track operations, and local government record keeping. While our market focus is on the mid-tier market, our systems have also
been installed in small businesses, as well as large global enterprises around the world. As of December 31, 2009, we had shipped over 24,000 systems worldwide.
With
significant consolidation occurring in the storage industry, resellers of storage systems have seen many of the vendors that provide them with products acquired by larger
multi-national computer companies that predominately sell directly to the end user. We believe this consolidation has created a significant market gap for storage products for the mid-tier market that
can be sold through channel partners. We believe we have a competitive advantage in selling product through channel partners. Key differentiators of our channel partner strategy
include:
-
-
we are committed to our channel strategy and do not compete with our channel partners by trying to sell directly to end
users;
-
-
our channel partners earn favorable gross margins with our products;
-
-
we seek to prevent any channel conflicts through our LeadGuard reseller management program;
-
-
we design products that are well-suited for the end customer and easy for the channel to sell;
-
-
our products are designed to have a positive "out of the box" experience that facilitates our channel partners'
integration and management;
-
-
we invest in service, training and support; and
-
-
we have a long and successful track record of working with channel partners.
During
fiscal 2007, 2008, 2009 and the six months ended December 31, 2009 no customer accounted for greater than 10% of our revenue. Our top 10 customers accounted for 32%, 33%,
32% and 32% of our revenue in fiscal 2007, 2008, 2009 and the six months ended December 31, 2009, respectively. Revenue from customers outside the U.S. was approximately 29%, 33%, 35% and 33%
of our revenue in fiscal 2007, 2008 and 2009, and the six months ended December 31, 2009,
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respectively.
See note 14 to our consolidated financial statements for information regarding our sales by geographic region.
Sales and Marketing
We sell our products through indirect channels, including resellers, OEM partners and system integrators, throughout North
America, Europe and Asia. Our sales personnel sell to, manage, market to, and support our channel partners. During fiscal 2009, we sold our systems through over 300 channel partners.
To
manage our sales relationships, we and our resellers utilize our LeadGuard management program. Our resellers help to market and sell our products under LeadGuard. LeadGuard is our
custom reseller management software suite that helps us manage qualified sales leads through prospect registration. Prospect registration ensures protection for our reseller partners' investment in
promoting our products throughout the sales process. Once a new sales opportunity is registered, the reseller receives preferred pricing for sales to that customer. Our reseller management program
provides a number of advantages, including providing an incentive to each of our channel partners to seek qualified sales leads.
We
sell our Assureon file storage system primarily through our OEM partners Jack Henry, GE Healthcare, McKesson and Agfa and, in addition, through other channel partners.
We
also rely on a variety of marketing efforts, including tradeshows, advertising, industry research and our website to support our sales activities. We focus our marketing efforts on
communicating product advantages and educating our channel partners to improve their understanding of the benefits of our products. In addition, we work closely on co-marketing and
lead-generating activities with a number of technology partners, including some of the leading suppliers of storage infrastructure products, in an effort to broaden our marketing reach.
Customer Support and Services
Our technical services group provides worldwide support for all of our products and is responsible for our product warranty and
customer support programs. This group also provides post-sales support and installations of Assureon, maintains technical compatibility with data center infrastructure companies and
software vendors, qualifies and tests new hardware or software opportunities and maintains and supports on-site maintenance providers. We operate regional support centers in North America
and the U.K.
We
also offer on-site maintenance support contracts through contracts with third parties such as Kodak for world-wide support along with regional third party
providers. Our agreement with Kodak is non-exclusive, and we do engage other third party service providers for on-site maintenance and support services. End users of our products generally have the
option to purchase warranty extensions as well as annual contract renewals.
Our
agreement with Kodak enables us to offer worldwide on-site maintenance and support services to our end users. When our end users initially purchase or renew an on-site maintenance
and support contract from us, we prepay Kodak a pre-determined rate for their support services. End users may contact us or Kodak directly for support. If an end user contacts us for on-site support,
we contact Kodak to provide the necessary on-site services for such support request within a pre-determined response time. The agreement expires on September 30, 2010, with an automatic
12 month renewal, unless terminated earlier upon 30 days written notice by either party.
The
Boy, the Beast, iSeries and DeDupe SG product families come with a three-year warranty. Assureon and DATABeast systems are shipped with a one-year warranty.
Our warranty also includes technical telephone support during Nexsan business hours with the option to purchase 24 × 7 telephone support. Other support offerings include
on-site support with next business day or business critical 4-hour response, and basic warranty extensions for our base storage models.
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Additionally,
Assureon sales generally generate annual and renewable software support fees which provide users with on-going updates and software upgrades.
Manufacturing and Operations
We currently utilize two contract manufacturers, AWS Cemgraft in England and Cal Quality in California, for the primary assembly of our
products. We do not have a purchase agreement with any of our contract manufacturers, rather we make purchases on a purchase-order basis. At December 31, 2009, we had $8.5 million in
non-cancelable purchase commitments with our contract manufacturers.
Each
contract manufacturer produces the chassis and controllers for our products and is typically responsible for procuring the materials for the products they manufacture. In addition,
we rely on Bell Microproducts to provide us with disk drives, which it generally obtains from Hitachi Global Storage Technologies, Seagate Technology and Western Digital. We obtain our power supplies
from BluTek Power, our microprocessors from PMC-Sierra, Inc., and servers from Dell Inc. Our contract manufacturers are also responsible for controlling and owning inventory,
as well as assembling, testing, inspecting and shipping products to our operations facilities in Derby, England or Escondido, California. We perform disk integration, RAID configuration,
burn-in testing, final inspection and packing at our operations facilities. Both our Escondido and Derby operations facilities are ISO 9001:2000 certified. For our Assureon archive
system, software loading and testing is conducted remotely from our Montreal, Quebec facility on hardware located at either our Escondido or Derby facilities.
While
we require that certain components be sourced from particular approved suppliers, contract manufacturers are permitted to source components, such as high-tolerance
resistors and capacitors, from suppliers of their choice. We currently rely on a limited number of suppliers for other components incorporated within our storage systems. We work closely with our key
suppliers to lower component costs and improve quality. We have not entered into any long-term supply contracts for our components or with our contract manufacturers.
Research and Development
We believe that a key component of our future success is continued investment in research and development to introduce enhancements to
our products and systems and to develop new products to meet an expanding range of customer requirements. Our research and development team includes both hardware and software engineers. We have two
research and development facilities, one of which is located near Didcot, England and the other facility is in Montreal, Quebec.
Our
research and development expenses were $3.9 million in 2007, $5.4 million in 2008, $5.3 million in 2009 and $3.3 million in the six months ended
December 31, 2009. We plan to continue to dedicate significant resources to research and development.
Competition
The market for our products is highly competitive, and we expect competition to intensify in the future. This competition could make it
more difficult for us to sell our products, and result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market
share, any of which would likely materially and adversely affect our business, operating results and financial condition. Currently, we face competition from traditional providers of storage systems.
In addition, we also face competition from other public and private companies, as well as recent market entrants, that offer products with similar functionality as ours. Our products compete with
Compellent, Dell, EMC, Hewlett-Packard, Hitachi Data Systems, Infortrend, IBM, NetApp, Promise Technology, Sun Microsystems, among others. In addition, we
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compete
against internally developed storage solutions, as well as combined third-party software and hardware solutions.
We
believe that the principal factors on which we compete are:
-
-
reliability;
-
-
performance;
-
-
affordability;
-
-
energy consumption and environmental impact;
-
-
features and scalability; and
-
-
quality of customer service and support.
We
believe that we compete favorably on the basis of these factors.
Many
of our current competitors have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly
greater financial, technical, sales, marketing and other resources than we have. Given their capital resources and broad product and service offerings, many of these competitors may be able to offer
reduced pricing for their products that are competitive with ours, which in turn could cause us to reduce our prices to remain competitive. Potential customers may have long-standing
relationships with our competitors, whether for storage or other network equipment, and potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless
of product performance or features. Many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and
prospective customers.
Intellectual Property
Our success depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a
combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.
We
have two patents issued in the U.K. that expire in January 2015 and February 2015, one pending patent application in the U.K., one pending patent application in the U.S., and one
pending Patent Cooperation Treaty application filed in Canada based on the pending U.S. patent application.
The
steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our intellectual property rights and may challenge
our issued patents. In addition, other parties may independently develop similar or competing technologies
designed around any patents that are or may be issued to us. We intend to enforce our intellectual property rights vigorously, and from time to time, we may initiate claims against third parties that
we believe are infringing on our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. If we fail to protect our intellectual property rights adequately,
our competitors could offer similar products, potentially significantly harming our competitive position and decreasing our revenue.
Employees
As of December 31, 2009, we had 126 employees in North America and Europe, of which 31 were in sales and marketing, 42 were in
research and development, 21 were in customer support services, 14 were in general and administrative functions and 18 were in operations. None of our employees is represented by labor unions, and we
consider current employee relations to be good.
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Facilities
We currently lease approximately 44,400 square feet of facilities in North America and the U.K. Our principal locations, their purposes
and the expiration dates for leases on facilities at those locations are shown in the table below.
|
|
|
|
|
|
|
|
|
|
Location
|
|
Purpose
|
|
Approximate
Square Feet
|
|
Lease Expiration
Date
|
|
Thousand Oaks, California
|
|
Corporate headquarters
|
|
|
6,600
|
|
|
June 2011
|
|
Escondido, California
|
|
Operations and technical support
|
|
|
13,800
|
|
|
February 2012
|
|
Montreal, Quebec
|
|
Assureon and other software product development
|
|
|
6,500
|
|
|
April 2012
|
|
Derby, England
|
|
Operations and technical support
|
|
|
13,800
|
|
|
January 2013
|
|
Didcot, England
|
|
RAID product development
|
|
|
3,700
|
|
|
August 2011
|
|
We
have renewal options on all leases listed in the table above, with the exception of the leases for the properties located in Derby, England and Montreal, Quebec.
We
believe that our current facilities are adequate for our current needs, and we intend to add new facilities or expand existing facilities to support future growth. We believe that
suitable additional space will be available on commercially reasonable terms as needed to accommodate our operations.
Legal proceedings
We are not a party to any material legal proceedings. From time to time, we may be subject to legal proceedings and claims in the
ordinary course of business.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information about our executive officers and directors as of December 31, 2009:
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Philip Black
|
|
|
54
|
|
President, Chief Executive Officer and Director
|
Thomas F. Gosnell
|
|
|
51
|
|
Chief Executive Officer, Nexsan Canada
|
Michael P. McGuire
|
|
|
44
|
|
Chief Commercial Officer
|
James Molenda
|
|
|
55
|
|
Executive Vice President of Sales
|
Richard Mussman
|
|
|
54
|
|
Chief Operating Officer
|
Gregg Pugmire
|
|
|
46
|
|
Executive Vice President of Business Development
|
Eugene Spies
|
|
|
47
|
|
Chief Financial Officer
|
Gary Watson
|
|
|
46
|
|
Chief Technology Officer and Co-Founder
|
Geoff Barrall(1)(2)
|
|
|
40
|
|
Director
|
William J. Harding(2)
|
|
|
62
|
|
Director
|
Philip B. Livingston(1)(2)(3)
|
|
|
52
|
|
Director
|
Richard A. McGinn(2)(3)
|
|
|
63
|
|
Co-Chairman of the Board
|
Arthur L. Money(1)(2)
|
|
|
69
|
|
Director
|
Geoff Mott(1)(3)
|
|
|
57
|
|
Director
|
Michael F. Price
|
|
|
56
|
|
Director
|
George M. Weiss(3)
|
|
|
68
|
|
Co-Chairman of the Board
|
-
(1)
-
Member
of our audit committee.
-
(2)
-
Member
of our compensation committee.
-
(3)
-
Member
of our nominating/governance committee.
Philip Black
has served as our President, Chief Executive Officer and as a director since September 2004. From January 2002 to July 2004,
Mr. Black served as Chief Executive Officer and as a director of LightSand Communications, a storage networking provider. Prior to joining LightSand, Mr. Black was the Chief Executive
Officer of Box Hill/Dot Hill, a storage systems manufacturer, and was the founder and Chief Executive Officer of Tekelec, a telecom equipment provider. Mr. Black has previously served as a
director for Simtek Corporation from September 2007 to September 2008.
Thomas F. Gosnell
has served as our Chief Executive Officer of Nexsan Technologies Canada Inc. since March 2005. Mr. Gosnell
was the Chief Executive Officer and Founder of AESign Evertrust Inc., or Evertrust, from November 2001 until our acquisition of that company in March 2005. Mr. Gosnell has also served as Chief
Operating Officer of CS&T (now a division of Oracle) and Vice President of Product Development for Speedware Corporation, a provider of enterprise software solutions and applications development.
Michael P. McGuire
has served as our Chief Commercial Officer since November 2008. Prior to joining us, Mr. McGuire served as
Global Vice President of Agami Systems, Inc., an enterprise-class unified network storage company from October 2007 to July 2008. At Agami, he was responsible for world-wide sales. From August
2005 to October 2007, Mr. McGuire served as Vice President, Americas Storage Sales for Sun Microsystems, Inc. Mr. McGuire joined Storage Technology Corporation in 1990 and held
several positions, including serving as Vice President and General Manager, Sales and Services, U.S. and Canada from 2003 until its acquisition by Sun in August 2005.
James Molenda
has served as our Executive Vice President of Sales since January 2007. From January 2001 to January 2007,
Mr. Molenda was our Vice President of Sales. Prior to joining us, Mr. Molenda was a Director of Sales at Qualstar Corporation, a tape library manufacturer.
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Richard Mussman
has served as our Chief Operating Officer since October 2006. From December 2000 to October 2006, Mr. Mussman
served as our Vice President of Technical Services. Prior to joining us, Mr. Mussman was Vice President of Sales for Lighthouse Technology Inc., a network systems integration company,
and Vice President of Global Services for Andataco, Inc., a data storage company.
Gregg Pugmire
has served as our Executive Vice President of Business Development since December 2006. From September 2004 to December
2006, Mr. Pugmire was our Executive Vice President of Strategic Development. From November 2000 to June 2004, Mr. Pugmire was the Executive Vice President of Business Development for
LightSand Communications.
Eugene Spies
has served as our Chief Financial Officer since January 2007. From May 2005 to January 2007, Mr. Spies served as our
Vice President of Finance and Corporate Controller. Prior to joining us, from December 2002 to May 2005, Mr. Spies served as a Vice President of Finance with the Networking Division of Alcatel,
a global telecommunications equipment provider. Prior to that, Mr. Spies was a Senior Manager at KPMG LLP, a public accounting firm.
Gary Watson
co-founded our company and has served as our Chief Technology Officer since 2000. Previously, Mr. Watson
founded and served as the Chief Technology Officer at Nexsan Technologies Ltd., our U.K. subsidiary. Prior to that, Mr. Watson was an Engineering Manager at Trimm Technologies, Europe, a
provider of data storage subsystems, and a Senior Engineer at Trimm Technologies, U.S.
Geoff Barrall
has served as a director of Nexsan since April 2009. Mr. Barrall was Chief Executive Officer of Data
Robotics, Inc., an automated data products storage company, from May 2005 to December 2009. He served as Principal and Founder of Barrall Consulting, an information technology and services
consulting firm, from August 2004 to April 2005. Mr. Barrall served as Chief Technology Officer of BlueArc Corporation, a data storage company, from 1999 to July 2004. Mr. Barrall was
selected as a director of Nexsan based upon his background experience in the data storage industry, including as Chief Executive Officer at Data Robotics, Inc. and as Chief Technology Officer
at BlueArc Corporation.
William J. Harding
has served as a director of Nexsan since April 2009. Mr. Harding has served as a Managing Director of
VantagePoint Venture Partners, a venture capital firm, since October 2007. Prior to joining VantagePoint, Mr. Harding was a Managing Director of Morgan Stanley & Co., President of Morgan
Stanley Venture Partners and a Managing Member of several venture capital funds affiliated with Morgan Stanley, where he was employed from 1994 through 2007. Mr. Harding also served as an
officer in the Military Intelligence Branch of the U.S. Army Reserve. In the previous five years, Mr. Harding has served as a director for InterNap Network Services Corporation and Aviza
Technology Inc. Mr. Harding brings to the board his substantial prior experience as an investor in technology companies, as well as his prior experience serving on the boards of
directors of technology companies. Mr. Harding is one of the designees of VantagePoint Partners.
Philip B. Livingston
has served as a director of Nexsan since September 2007. Mr. Livingston has served as Senior Vice President,
Marketing and Business Solutions, and Chief Executive Officer of Martindale-Hubbell, a division of Reed Elsevier Inc. and a provider of content-enabled workflow solutions to professionals, since April
2009. Mr. Livingston served as the Senior Vice President and Chief Financial Officer of TouchTunes Music Corp., a provider of touch screen digital juke boxes, from November 2007 to January
2009. He served as Chief Financial Officer of Duff & Phelps LLP, a provider of independent financial advisory and valuation services, from April 2006 to September 2006.
Mr. Livingston served as Vice Chairman of Approva Corporation, a provider of enterprise controls management software, from January 2005 to March 2006. From March 2003 to January 2005, he served
as Chief Financial Officer and a director of World Wrestling Entertainment, Inc., a media and entertainment company. In the previous five years, Mr. Livingston has served as a director
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for
Cott Corporation, MSC Software Inc., World Wrestling Entertainment, Inc., QLT Inc. and Insurance Auto Auction Inc. Mr. Livingston brings to the board his
substantial prior experience in a wide range of executive roles at a number of companies and technology companies, including as a Chief Executive Officer and Chief Financial Officer, as well as his
director role at a number of public companies. Mr. Livingston is one of the designees of MFP Partners.
Richard A. McGinn
has served as a director of Nexsan since October 2003 and was elected co-chairman of our board of directors in September
2008. Mr. McGinn has been a General Partner with RRE Ventures, a venture capital firm, since August 2001. From November 2000 to July 2001, Mr. McGinn served as the Chairman and Chief
Executive Officer of Lucent Technologies, a communications systems and software company. From 1996 to October 2000, Mr. McGinn served as President, Chairman, and Chief Executive Officer of
Viasystems, Inc. Mr. McGinn also previously held several executive positions at AT&T, serving as President and Chief Executive Officer of AT&T's Network Systems Group, President of AT&T
Computer Systems, and President of AT&T's Data Systems Group. Mr. McGinn also serves as a director of the American Express Company, Verifone and Viasystems, Inc. Mr. McGinn brings
to the board his substantial prior experience in executive roles at a number of technology companies, as well as his director role at leading public companies, including leading technology companies.
Since he has served on our board of directors since 2003, he also has experience with the historic growth and changes that have occurred at our company and in our business.
Arthur L. Money
has served as a director of Nexsan since June 2007. Since May 2001, Mr. Money has served as President of ALM
Consulting, which specializes in command control and communications, intelligence, signal processing and information operations. Mr. Money served as U.S. Assistant Secretary of Defense
for Command, Control, Communications and Intelligence (ASD (C3I)) from January 1998 to April 2001. From February 1998 to April 2001, Mr. Money also served as the Department of Defense Chief
Information Officer. In the previous five years, Mr. Money has served as a director for CACI International Inc., Essex Corporation, Federal Services Acquisition Corp., IntelliCheck Mobilisa,
Inc., Intevac, Inc., SafeNet Inc., SGI International, SteelCloud Inc. and Terremark Worldwide, Inc. Mr. Money brings to the board his substantial experience in the information and
communications area, as well his board experience at a variety of technology companies. Mr. Money is the designee of FTQ.
Geoff Mott
has served as a director of Nexsan since October 2003. Mr. Mott has served as Senior Vice President, Strategy and
Business Development for TouchTunes Corporation, a provider of out-of-home interactive entertainment, since March 2009. Mr. Mott has also served as Chief Executive Officer of Exymion
Partners, LLC since January 2009. Prior to joining TouchTunes Corporation and Exymion Partners, LLC, Mr. Mott served as a Managing Director of VantagePoint Venture Partners from
January 2002 to December 2008. Prior to joining VantagePoint, Mr. Mott was the Managing Partner of The McKenna Group, a global strategy consulting firm which he guided through
Chapter 7 bankruptcy proceedings to a sale of assets in 2002. Earlier in his career, Mr. Mott built a business strategy practice for technology firms at Lochridge & Co.
Mr. Mott brings to the board his experience as an investor in, and business strategy consultant to, technology companies. Since he has served on our board of directors since 2003, he also has
experience with the historic growth and changes that have occurred at our company and in our business. Mr. Mott is one of the designees of VantagePoint Partners.
Michael Price
has served as a director of Nexsan since July 2009. Since December 1996, Mr. Price has served as the President
of The Price Family Foundation, Inc. and since November 2008 as Managing Member of MFP Investors LLC, as Managing Partner of MFP Partners, L.P. and as Managing Member of MFP
Services LLC. From 1986 to November 1998, Mr. Price served as Chief Executive Officer, President and Chairman of the Board of Franklin Mutual Advisers and Franklin Mutual Series Fund.
From 1975 to 1986, Mr. Price also served as Vice President of the Franklin Mutual Series Fund. Mr. Price also serves as a director of The Albert Einstein College of Medicine,
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University
of Oklahoma Foundation, Johns Hopkins and Jazz at Lincoln Center. Mr. Price brings to the board his deep experience in the investment industry, including his own investment fund,
which provides an additional perspective from outside of the technology industry to issues considered by the board.
George M. Weiss
has served as a director of Nexsan since August 2001, was elected chairman of our board of directors in August 2001 and
was elected co-chairman of our board of directors in September 2008. Mr. Weiss founded Beechtree Capital LLC, a private venture capital and business advisory firm, in 1993, and is
currently its chairman and chief executive officer. Mr. Weiss previously served as a senior partner at the law firm of Rubin Baum, LLP. Mr. Weiss has served on the board since our
company's early stages and has the longest history with our company. Accordingly, he has experience with the historic growth and changes that have occurred at our company and in our business over most
of our corporate history. Mr. Weiss also brings his experience as an investor and former attorney to provide additional perspective on issues considered by the board.
Each
of Messrs. Harding, Livingston, Money, Mott, Price and Weiss serve as members of the board of directors pursuant to our existing stockholder agreement that was entered into
in connection with our prior financings. As a result, the decisions as to the initial selection and continued service of these directors are made by the investor with the appointment rights. There are
no family relationships between any of our directors or executive officers.
Board Composition
Our board currently consists of nine members. Each director is elected to serve a one-year term, with all directors subject
to annual election. Under the existing stockholders' agreement among us, certain holders of our common stock, Series A preferred stock, Series B preferred stock and Series C
preferred stock, the following principal stockholders have the right to designate the number of directors specified below and the parties to the stockholders' agreement have agreed to vote their
shares for the election of such persons:
-
-
One member of the board is the then-current Chief Executive Officer (currently Philip Black);
-
-
VantagePoint Venture Partners IV (Q), L.P., VantagePoint Venture Partners IV, L.P., and VantagePoint Venture
Partners IV Principals Fund, L.P., or collectively VantagePoint, as a group have the right to designate two directors (currently Geoff Mott and William Harding);
-
-
RRE Ventures III, L.P., RRE Ventures Fund III, L.P. and RRE Ventures III-A, L.P., or
collectively RRE Ventures, collectively, originally had the right to designate one director (currently Richard McGinn); however, RRE Ventures has opted to no longer exercise this right;
-
-
Beechtree Capital, LLC, or Beechtree, has the right to designate one director (currently George Weiss);
-
-
MFP Partners, L.P. has the right to designate two directors (currently Michael F. Price and Philip Livingston);
-
-
Fonds de solidarité des travailleurs du Québec, or F.T.Q., has the right to designate one
director (currently Arthur Money); and
-
-
Holders of Series A preferred stock, Series C preferred stock and our common stock voting together as a
single class, have the right to designate one director (currently Geoff Barrall).
Upon
the completion of this offering, all of these designation rights and voting agreements will terminate, and no stockholders will have any contractual rights with us regarding the
election of our directors. In addition, effective upon completion of this offering, our restated certificate of incorporation will provide that the authorized number of directors may be changed only
by resolution of the board of directors and that any vacancies will be filled by the board of directors. See "Description of Capital StockAnti-takeover Provisions."
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Director Independence
Upon the completion of this offering, our common stock will be listed on The NASDAQ Global Market. The rules of The NASDAQ Stock Market
require that a majority of the members of our board of directors be independent within specified periods following the completion of this offering. Our board of directors has adopted the definitions,
standards and exceptions to the standards for evaluating director independence provided in The NASDAQ Stock Market rules, and determined that Geoff Barrall, William Harding, Michael Price, Richard
McGinn, Arthur Money, Geoff Mott and Philip Livingston are "independent directors" as defined under these rules.
Board Committees
Our board of directors has an audit committee, a compensation committee and a nominating/governance committee. Each of these committees
operates under a charter, which has been approved by the applicable committee and by our board of directors and that satisfies the applicable standards of the SEC and The NASDAQ Stock Market. The
composition
and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.
Our audit committee oversees our corporate accounting and financial reporting processes. Among other matters, the audit
committee:
-
-
evaluates the qualifications, independence and performance of our independent registered public accounting firm;
-
-
determines the engagement of our independent registered public accounting firm and reviews and approves the scope of the
annual audit and the audit fee;
-
-
discusses with management and our independent registered public accounting firm the results of the annual audit and the
review of our quarterly financial statements;
-
-
approves the retention of our independent registered public accounting firm to perform any proposed permissible
non-audit services;
-
-
monitors the rotation of partners of our independent registered public accounting firm on our engagement team as required
by law;
-
-
reviews our critical accounting policies and estimates; and
-
-
annually reviews the audit committee charter and the committee's performance.
Our
audit committee consists of Philip Livingston (Chair), Geoff Barrall, Arthur Money and Geoff Mott. Each of these individuals meets the requirements for financial literacy under the
applicable rules and regulations of the SEC and The NASDAQ Stock Market and is an independent director as defined under the applicable regulations of the SEC and under the applicable rules of The
NASDAQ Stock Market. Our board of directors has determined that Mr. Livingston is an audit committee financial expert, as defined under the applicable rules of the SEC, and therefore has the
requisite financial sophistication required under the rules and regulations of The NASDAQ Stock Market.
Our compensation committee consists of Richard McGinn (Chair), Geoff Barrall, William Harding, Philip Livingston and Arthur Money, each
of whom is an independent director as defined under the applicable rules and regulations of The NASDAQ Stock Market, is an outside director under the applicable rules and regulations of the Internal
Revenue Service, or the IRS, and is a non-employee director under SEC rules. Our compensation committee reviews and approves
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corporate
goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives
and sets the compensation of these officers based on such evaluations. The compensation committee also administers the issuance of stock options and other awards under our equity award plans. The
compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter.
Our nominating/governance committee consists of George Weiss (Chair), Philip Livingston, Richard McGinn and Geoff Mott. Each of
Messrs. Livingston, McGinn and Mott is an independent director as defined under the applicable rules and regulations of The
NASDAQ Stock Market. Mr. Weiss is not considered independent because of our partial forgiveness of a loan and an option granted to Beechtree Capital LLC, an entity affiliated with
Mr. Weiss, in January 2008, as described under "Related Party TransactionsRestricted Stock Transactions with Certain Related Parties and Related MattersRestricted
Stock Transactions with Affiliate of Current Director." We expect that Mr. Weiss will be deemed to be independent under the applicable rules of the Nasdaq Stock Market after January 2011, as
more than three years will have elapsed from the date of this transaction.
Our
nominating/governance committee makes recommendations to the board of directors regarding candidates for directorships and the size and composition of the board of directors and its
committees. In addition, the nominating/governance committee oversees our corporate governance guidelines and reporting, reviews related party transactions and makes recommendations to the board of
directors concerning director compensation, governance matters and conflicts of interest.
Compensation Committee Interlocks and Insider Participation
During fiscal 2009, our compensation committee consisted of Geoff Barrall, Domenico Grassi, William Harding, Philip Livingston, Richard
McGinn, Arthur Money and Geoff Mott. No member of our compensation committee has ever been an executive officer or employee of ours. None of our executive officers currently serves, or has during the
last completed year served, on the compensation committee or board of directors of any other entity that has one or more executive officers serving as a member of our board of directors or
compensation committee.
Director Compensation
The following table provides information for our fiscal year ended June 30, 2009 regarding all plan and non-plan
compensation awarded to or earned by each person who served as a non-employee director for some portion or all of fiscal 2009. Directors who also serve as our employees, such as our chief
executive officer, do not receive additional compensation for their service on the board. Other than as set forth in the table and the narrative that follows it, during fiscal 2009 we have not paid
any fees to or reimbursed any expenses of our directors except travel related expenses in connection with our directors' services to us as board members, made any equity or non-equity
awards to directors, or paid any other compensation to directors.
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned
or Paid in Cash
|
|
Option
awards(1)(2)(3)
|
|
Total
|
|
Geoff Barrall
|
|
$
|
27,203
|
|
$
|
201,664
|
(4)
|
$
|
228,867
|
|
Philip B. Livingston
|
|
|
39,576
|
|
|
|
|
|
39,576
|
|
Richard A. McGinn (Co-Chairman)
|
|
|
21,819
|
|
|
394,712
|
|
|
416,531
|
|
Arthur L. Money
|
|
|
36,000
|
|
|
|
|
|
36,000
|
|
Geoff Mott
|
|
|
14,764
|
|
|
104,055
|
|
|
118,819
|
|
George M. Weiss (Co-Chairman)
|
|
|
20,427
|
|
|
394,712
|
|
|
415,139
|
|
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-
(1)
-
The
amounts in this column represent the fair value of the awards on the date of grant, computed in accordance with ASC 718. See note 1 of the
notes to our consolidated financial statements for a discussion of our assumptions in determining the ASC 718 values of our option awards.
-
(2)
-
On
September 11, 2008, we granted an option to purchase 32,979 shares of our common stock to Mr. Barrall at an exercise price of $7.46 per
share, with a term of ten years, which option vests monthly over two years. The grant date fair value of the award was $100,422. Mr. Barrall temporarily resigned as director on
December 24, 2008 when VantagePoint Venture Partners changed their designees and did not exercise any vested shares under this option, which expired March 24, 2009. On
December 11, 2008, we granted an option to purchase 134,255 shares of our common stock to Messrs. McGinn and Weiss at an exercise price of $6.93 per share, with a term of ten years,
which option vests monthly over two years. The grant date fair value of each of the awards was $394,712. On February 5, 2009, we granted an option to purchase 34,172 shares of our common stock
to Mr. Mott at an exercise price of $6.51 per share, with a term of ten years, which option vests monthly over two years. The grant date fair value of the awards was $104,055. On
April 30, 2009, Mr. Barrall was reappointed to the board as its independent designee and we granted him an option to purchase 32,140 shares of our common stock at an exercise price of
$6.51 per share, with a term of ten years, which option vests monthly over two years. The grant date fair value of the awards was $101,242.
-
(3)
-
The
directors' aggregate stock option holdings at June 30, 2009 were: Mr. Barrall (32,140), Mr. Grassi (5,817 shares),
Mr. Livingston (32,187 shares), Mr. McGinn (153,780 shares), Mr. Money (32,187 shares), Mr. Mott (38,071 shares) and Mr. Weiss (330,548) shares
of which options to purchase 190,476 shares of our common stock are held by Beechtree Capital LLC, an entity affiliated with Mr. Weiss.
-
(4)
-
Includes
$100,422 of the grant date fair value of Mr. Barrall's option award that expired on March 24, 2009.
In
December 2008, the Board revised its compensation program for non-employee directors and directors affiliated with significant stockholders, including cash and equity
components. The cash component includes a $20,000 annual retainer fee to be paid on a quarterly basis, a $2,000 board meeting attendance fee for meetings attended in-person, a $500 board
meeting attendance fee for board meetings attended via teleconference (however if a teleconference lasts for more than two hours, the $2,000 attendance fee applies), a $5,000 annual committee chair
retainer fee to be paid on a quarterly basis, a $2,500 annual committee membership fee paid on a quarterly basis (committee chairs only receive the committee chair retainer fee), and a $1,000
committee meeting fee per meeting held not in conjunction with a board meeting and attended in person or via teleconference. The equity component consists of an option grant of 1.0% of our outstanding
stock, on an as-converted to common stock basis, for the chairman or co-chairman of the board, or 0.25% of our outstanding stock, on an as-converted to common stock
basis, for the other directors, with a term of ten years, which option vests monthly over two years.
Following
the completion of this offering, we intend to revise our compensation program for our non-employee directors.
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EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This section discusses the principles underlying our executive compensation policies and decisions and the most important factors
relevant to an analysis of these policies and decisions. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers
and places in perspective the data presented in the tables and narrative that follow. For fiscal 2009, our "named executive officers" were Philip Black, our chief executive officer; Eugene Spies, our
chief financial officer; Thomas F. Gosnell, our chief executive officer of Nexsan Canada; James Molenda, our executive vice president of sales; and Michael McGuire, our chief commercial officer.
Our executive compensation program is designed to attract, as needed, individuals with the skills necessary for us to achieve our
business plan, to reward those individuals fairly over time, to retain those individuals who continue to perform at or above the levels that we expect and to closely align the compensation of those
individuals with our performance on both a short-term and long-term basis. To that end, our executive officers' compensation program has four primary
componentsbase compensation or salary, cash performance bonuses, equity-based incentives, and severance and change of control arrangements. In addition, we provide our executive officers
a variety of benefits that in most cases are available generally to all salaried employees.
We
view the components of compensation as related but distinct. Although our compensation committee reviews total compensation of our executive officers, we do not believe that
significant compensation derived from one component of compensation should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based
in part, but not exclusively, on our view of internal equity and consistency, overall company performance and other considerations we deem relevant.
Our compensation committee is comprised of five non-employee members of our board of directors, Messrs. McGinn
(Chair), Barrall, Harding, Livingston and Money, each of whom is an independent director under NASDAQ rules, an "outside director" for purposes of Section 162(m) of the IRC, and a
"non-employee director" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934. While our chief executive officer is not a member of the compensation
committee, he has historically attended certain committee meetings and assisted the committee by providing information relating to our financial plans, performance assessments of our executive
officers and other personnel-related information and data. We expect that our chief executive officer will continue to support the committee. Specifically, as the individual to whom our other
executive officers directly report, he will be responsible for evaluating individual executive officers' contributions to corporate objectives, as well as their performance relative to individual
objectives. We anticipate that our chief executive officer will on an annual basis at or around the beginning of each calendar year make recommendations to the compensation committee with respect to
any potential merit salary increases, cash bonuses and equity incentives for our executive officers. We expect that our compensation committee will meet to evaluate, discuss, modify or approve these
recommendations. Without the participation of the chief executive officer, the compensation committee as part of the annual review process will conduct a similar evaluation of the chief executive
officer's contribution and individual performance and make determinations after the beginning of each calendar year with respect to potential merit salary increases, bonus payments, equity awards, or
other forms of compensation for our chief executive officer. The compensation
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committee
reviews and discusses its recommendations regarding compensation for our chief executive officer with the non-employee members of our board of directors.
Our compensation committee has the authority under its charter to engage the services of outside advisors, experts and others for
assistance. Historically, the compensation committee did not retain an independent executive compensation consulting firm to assist it in structuring and implementing our executive compensation
policies. However, in January 2008, the compensation committee retained Compensia, Inc. to serve as a consultant for the calendar 2008 compensation period. In early 2008, Compensia conducted
analyses of our compensation programs against those of other storage-related companies, which include 3ParData Inc., BlueArc Corporation, Compellent Technologies, Inc., CommVault
Systems, Inc., Datalink Corporation, Dataram Corporation, Data Domain, Inc., Dot Hill Systems Corp., Isilon Systems, Inc., Mellanox Technologies, Ltd., Netezza Corporation
and Overland Storage, Inc. We did not perform a
formal benchmarking process in reviewing the analyses of the compensation programs of these other companies. Instead, this data was used to obtain a general understanding of our
then-current executive compensation levels relative to market practices as we began to consider a possible transition to the status of a public reporting company. We believe that the
market data derived from a group of public reporting companies was useful as a reference for guiding the direction of future compensation determinations to ensure that as a public reporting company
our executive compensation program would be consistent with market practice within our industry sector and geographic region. Compensia did not conduct any additional analyses for us for fiscal 2009.
Except as described below, our compensation committee has not adopted any formal policies or guidelines for allocating compensation between long-term and currently paid out compensation,
between cash and non-cash compensation or among different forms of non-cash compensation.
We
currently intend to perform at least annually a strategic review of our executive officers' overall compensation packages to determine whether they provide adequate incentives and
motivation and whether they appropriately compensate our executive officers. For compensation decisions, including decisions regarding the grant of equity compensation, relating to executive officers
other than to our chief executive officer, the compensation committee considers recommendations from the chief executive officer.
Although our fiscal year end is June 30, the compensation committee reviews and makes compensation decisions regarding cash
bonus awards for the current year and performance objectives for the coming year each January on a calendar year basis, since our board of directors establishes our financial plan on a calendar year
basis. Historically, except with respect to cash bonuses, our compensation committee has reviewed and made changes to executive compensation for individual officers on an as-needed basis,
typically as requested by our chief executive officer. For our cash bonuses, the compensation committee reviews data and makes executive compensation decisions on an annual basis, typically during the
first quarter of each calendar year for those individuals who receive annual bonuses and also discusses the recommendations of the chief executive officer for those individuals who receive quarterly
bonuses. The compensation committee reviews, considers, and may amend the terms and conditions proposed by management. In the future, we intend to conduct annual reviews of our executive compensation,
both the overall program and for each individual executive officer. We intend to consider the relative weight of cash and equity compensation and the overall value of our individual executive
officer's compensation packages.
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From
time to time, the compensation committee may make off-cycle adjustments in executive compensation as it determines appropriate.
Our executive compensation program consists of four primary components, in addition to benefits generally available to all salaried
employees:
-
-
base salary;
-
-
cash bonuses;
-
-
equity-based incentives; and
-
-
severance/change of control arrangements.
Currently,
all of our cash compensation plans for our executive officers provide short-term incentives that are paid within one year. We do not have any deferred cash
compensation plans. Our equity-based incentives are long-term incentives that are based on the parameters described below under "Equity-Based Incentives." We believe that a program
containing each of these components, combining both short- and long-term incentives, is necessary to achieve our compensation objectives and that collectively these components will be
effective in properly incentivizing our executive officers and helping us achieve our corporate goals. Historically, equity compensation in the form of restricted stock and stock options has generally
not been a significant portion of our executive officers' compensation program, as our company desired to minimize dilution to our existing investors that would result from such issuances. However, in
connection with this offering, our board of directors approved amendments to our employment agreements with each of Messrs. Black and Spies, which provide, among other things, that each such
officer will receive an award of shares of our common stock upon the successful completion of an initial public offering. For Mr. Spies, this award was approved
to satisfy prior commitments we had made to him to issue options to purchase shares of our common stock. These arrangements are described below under "Equity-Based Incentives." We do not have a formal
policy regarding adjustment or recovery of awards or payments if the relevant performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size
of the award or payment.
Base compensation.
The salaries of Messrs. Black, Spies, Gosnell, Molenda and McGuire for calendar 2009 were $345,000 (increased
effective
December 2008), $195,000 (increased to $195,000 effective August 2009), $206,000, $138,600 and $225,000, respectively. These amounts reflect our compensation committee's view of the appropriate
compensation levels of our named executive officers and remain unchanged for calendar 2010. The compensation committee had previously increased Mr. Black's base salary from $290,000 to $345,000
in December 2008 and Mr. Spies' base salary from $175,000 to $195,000 in July 2009 after a review of Mr. Black's and Mr. Spies' total compensation. It was noted that
Mr. Black's salary had not been increased in four years and Mr. Spies' salary had not been increased in two years and that their compensation was below the 50th percentile of companies
in their peer group identified by Compensia. Following the adjustment of Mr. Black's base salary, his base salary was approximately in the middle of the 50th and 75th percentiles of the peer
group. In August 2009, the base salary for Mr. Spies was increased by $20,000 to $195,000. Mr. Spies' total target compensation was approximately 23% below the average of the total
compensation of the chief financial officers in the 2008 peer group companies, and in light of the contributions made by Mr. Spies, the compensation committee believed it would be appropriate
to increase his total compensation to bring him closer to the average compensation for chief financial officers of the peer group of companies. As a result of the base salary increase and the increase
in target bonus noted below, Mr. Spies' total on-target compensation was $300,000,
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which
remained slightly below the average of the total compensation of chief financial officers of the peer group companies.
The
total compensation for Mr. McGuire was determined based on negotiations between us and Mr. McGuire. We did not perform any formal third-party benchmarking or other market
analysis with respect to the amount of his base salary or total target compensation, although we did receive advice from third-party executive search firms. The compensation committee has generally
not awarded increases in annual base compensation, except as warranted based on a change in circumstances, such as an increase in an executive officer's responsibilities or to keep our company's
operating expenses in line with our financial plan, particularly as a private company that was not yet profitable.
Cash bonuses.
We utilize cash bonuses to reward performance achievements. For Messrs. Black, Spies and Gosnell, bonus targets are
established
annually, are based on calendar-year performance and are paid in the first quarter of the calendar year following the calendar year to
which the bonus relates. Although our fiscal year end is June 30, we base our annual bonus targets on calendar year performance. Mr. Molenda's sales commission plan is established
annually and is paid monthly based on commissions earned in the previous month. The amount of commission Mr. Molenda receives is a specified percentage of sales made, with adjustments made to
reflect returns. The bonus target for Messrs. Black and Gosnell is a pre-determined percentage of their base salary and for our other named executive officers a fixed dollar amount.
The target bonuses are intended to incentivize each executive officer to achieve the performance targets that are designed to help us achieve our current year financial plan and to provide a
competitive level of compensation if the executive officer achieves his performance objectives. For calendar 2009, the target bonus amounts for our named executive officers were determined by our
board of directors based on the recommendation of our compensation committee and, with respect to his direct reports, the recommendations of our chief executive officer, and are reflected in their
employment agreements with us. For Messrs. Black, Spies and Gosnell, the compensation committee determined the actual bonus amount according to the company's and the executive officer's level
of achievement against these performance objectives. Our chief executive officer determined the actual bonus amount earned for calendar 2009 for Mr. McGuire. For calendar 2009 the target bonus
amounts and performance objectives for our executive officers were generally determined by our compensation committee, consistent with each executive's employment contract with us, with input from our
board of directors with respect to our chief executive officer, and with input from our chief executive officer with respect to his direct reports.
The
target bonus for our chief executive officer for calendar 2009 was 50% of his base salary. Pursuant to Mr. Black's employment agreement with us, his target bonus may not be
less than 50% of his base salary (currently, not less than $172,500). The annual bonus objectives are set forth in his employment agreement with us, which was most recently amended in December 2008,
and consisted of: (1) the achievement of financial goals set forth in a financial plan approved by our board of directors based on (a) gross revenue targets representing 21% of his
target bonus, (b) EBITDA representing 21% of his target bonus and (c) cash reserves representing 28% of his target bonus, and which collectively represent 70% of the target bonus; and
(2) other business goals established by the compensation committee, which represent 30% of the target bonus. For calendar 2009, the financial goals for our chief executive officer established
by our board of directors were: (a) gross revenue of at least $65.6 million, on an invoiced basis, (b) EBITDA of at least $3 million and (c) cash reserves of at
least $8.5 million. Our board of directors chose these financial targets because it believed that, as a growth company, we should reward revenue growth, but only if that revenue growth is
achieved cost effectively and adequate cash reserves to fund operations are maintained, since we had not yet been profitable. Our board weighted the financial goals at 70% because it believed that
achievement of our financial plan was important to our success. The
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business
goals for our chief executive officer established by our board of directors were to establish distribution relationships for our products and success with original equipment manufacturers.
Our board of directors believed that the combination of the financial measures and business goals as the chosen metrics for our chief executive officer were the best indicators of our financial
success and the creation of stockholder value. The compensation committee awarded Mr. Black a bonus of $196,650 for calendar 2009, which represented 114% of his target bonus, due to his
achievement of 96% of the gross revenue target representing approximately 20% of the target bonus, 153% of the EBITDA target representing approximately 32% of the target bonus, 127% of the cash target
representing approximately 36% of the target bonus, and 86% of the other business goals, representing approximately 27% of the target bonus.
Mr. Spies'
target annual bonus for calendar 2009 was $75,000 through July 2009, as set forth in his employment agreement with us, and was increased by the Compensation Committee
to $105,000 starting in August 2009 in connection with the increase in his base salary. As set forth in his employment agreement, Mr. Spies' bonus is to be paid out at the same percentage as
Mr. Black's bonus was paid. Mr. Spies earned 114% of his $87,500 pro-rated target bonus for calendar 2009. Mr. Spies' bonus objectives for calendar 2009 were set by our
compensation committee and are the same as Mr. Black's financial objectives.
Mr. Gosnell's
target annual bonus for calendar 2009 was 50% of his base salary, or a target of $100,000, and is set forth in his employment agreement with us. Mr. Gosnell's
bonus objectives for calendar 2009 were the same as Mr. Black's financial goals described above. In addition, Mr. Gosnell is entitled to receive a bonus of $18,750 for achievement of $3.5 million in
sales of our Assureon product during the second half of the 2009 calendar year. Mr. Gosnell received $125,000 of his bonus for achievement of the financial goals and an additional $15,562 for
83% achievement with respect to Assureon sales.
Mr.
McGuire is entitled to receive a target bonus of up to 100% of his base salary, payable quarterly. The amount of Mr. McGuire's target bonus was negotiated as part of his initial
employment offer with us in October 2008. The performance targets for Mr. McGuire were based on us achieving calendar 2009 quarterly gross sales revenue of $15.0 million,
$15.6 million, $17.0 million and $17.9 million, respectively.
Our
senior vice president of sales, Mr. Molenda earned sales commissions of $198,847 for calendar 2009. Mr. Molenda's commission plan for fiscal 2009 was established by our
chief executive officer at the end of calendar 2008 based on the calendar 2009 financial plan approved by our board of directors.
Equity-Based Incentives.
In November 2007, our board of directors approved amendments to our employment agreements with Messrs. Black and
Spies to
provide for awards of shares of our common stock immediately prior to the completion of our initial public offering, or IPO Bonus Shares, which will be fully-vested upon issuance. The number of IPO
Bonus Shares these officers are entitled to receive is calculated by dividing the "IPO Bonus Value" for each officer by the initial public offering price per share. We will withhold that value equal
to the number of shares having a fair market value equal to the amount of federal, state and local income and employment taxes. The IPO Bonus Value varies based on our "Pre-IPO Value,"
which is calculated by multiplying the total number of shares of common stock, preferred stock and exchangeable stock actually outstanding on a treasury stock basis immediately prior to the initial
public offering by the initial public offering price per share. Based on an assumed initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this
prospectus, our Pre-IPO Value would be approximately $137.5 million, resulting in an IPO Bonus Value of $4,647,000 and $1,162,000 for Messrs. Black and Spies, respectively.
For Mr. Black, we will pay the bonus in cash of $2,114,000, representing the tax withholdings, and issue 230,237 shares valued at $2,533,000. For Mr. Spies, we
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will pay the bonus in cash of $529,000, representing the tax withholdings, and issue 57,571 shares valued at $633,000.
These
officers will receive a lesser number of shares, based on the applicable federal, state and local income and employment taxes to be withheld for such officer.
Our
board of directors awarded the IPO Bonus Shares to reward these officers for our prior performance, including positioning us to effect this offering, to ensure that these officers
have a continuing stake in our long-term success and to align them with other executive officers who already had an equity stake in the company.
The
Board also granted Mr. Molenda an option to purchase 114,285 shares of common stock. Effective January 15, 2008, Mr. Molenda satisfied his obligations to us under a
promissory note to us in consideration of his surrendering 114,285 shares of restricted common stock pledged to us as security under the note at a price of $6.93 per share. As of that date, the total
principal amount and accrued and unpaid interest due under the note was $1,104,601. The value of the shares surrendered was approximately $800,000, which was applied to the amount outstanding under
the note, and the unpaid balance of $300,601 was forgiven. We forgave this amount in recognition of Mr. Molenda's service to us and to assist in retaining his services. To place
Mr. Molenda back in substantially the same economic position he was in prior to the cancellation of the note, we granted Mr. Molenda an option to purchase an additional 114,285 shares of
our common stock at an exercise price of $9.12 per share, increasing by 3.23% per year compounded annually on each March 31, from the grant date through the date of exercise and, as of
December 31, 2009, the exercise price was $9.48 per share. This option is currently exercisable and expires on March 31, 2013.
Additionally,
the Board granted Mr. McGuire an option to purchase 198,293 shares of common stock at an exercise price of $6.93 per share. This option vests with respect to 25% of
the shares on the first anniversary of the grant date and the remaining 75% vests ratably and quarterly over the remaining three year period following the first anniversary of the grant date and
expires on October 28, 2018. The number of shares subject to this option was determined based on negotiations between us and Mr. McGuire, and was intended to represent approximately 1.5% of our
then fully-diluted shares outstanding. We did not perform any formal third-party benchmarking or other market analysis with respect to the size of the equity grant, although we did receive informal
advice from executive search firms.
We
do not have any program, plan or obligation that requires us to grant equity compensation on specified dates, and because we have not been a public company, we have not made equity
grants in connection with the release or withholding of material non-public information. However, we intend to implement policies to ensure that equity awards are granted at fair market
value on the date the action approving the award is effective.
During
calendar 2009, our board of directors based its determination of the value of our common stock on various factors. In connection with the preparation of our financial statements
in anticipation of a potential initial public offering, valuations were performed to estimate the fair value of our common stock for financial reporting purposes through the use of contemporaneous
valuations of our common stock.
Authority
to approve stock option grants to executive officers rests with our board of directors and our compensation committee. In determining the size of stock option grants to
executive officers, our board of directors considers our performance against the strategic plan, individual performance against the individual's objectives, the extent to which shares subject to
previously granted options are vested and the recommendations of our chief executive officer and other members of management.
87
Table of Contents
Because
the IPO Bonus Shares will be vested at the time of this offering and some members of the executive team had no other equity awards, the compensation committee desired to ensure
that adequate retention value is in place for our executive team after this offering. Our compensation committee consulted with our compensation consultant, Compensia, and considered typical equity
awards at similar pre-public companies, executive ownership and typical unvested equity allocations for recent technology company initial public offerings, these companies include: Data
Domain, Netezza, Constant Contact, Compellent Technologies, Neutral Tandem, 3Par, Rubicon Technology, Intellon, Netsuite, ArcSight, Rosetta Stone, SolarWinds, Opentable, LogMeIn and
Ancestry.com. On January 20, 2010, the compensation committee granted the equity awards to our named executive officers as follows:
|
|
|
|
|
Name
|
|
Shares Subject
to Options
Granted
|
|
Philip Black
|
|
|
190,476
|
|
Eugene Spies
|
|
|
47,619
|
|
Thomas F. Gosnell
|
|
|
95,238
|
|
Each
of the options has an exercise price of $9.14 per share and vests as to 25% of the shares on the first anniversary of the grant date, the remaining 75% vests ratably every quarter
over the three year period following the first anniversary of the grant date. The options granted to each of Messrs. Black, Spies and Gosnell will immediately vest as to all unvested shares in
the event that, within 12 months of an acquisition of a majority of the voting power of our stock or the sale of all or substantially all of our assets, the named executive officer is
terminated without cause by the acquiring company or is constructively terminated.
In
February 2010, we adopted a new equity incentive plan described below under "Management2010 Equity Incentive Plan." The 2010 equity incentive plan will replace our
existing 2001 stock plan upon completion of this offering and will afford greater flexibility in making a wide variety of equity awards, including stock options, shares of restricted stock and stock
appreciation rights, to directors, executive officers and our other employees.
Employment Arrangements.
We have entered into employment arrangements with each of our named executive officers. We entered into our
employment
contract with Mr. Gosnell in connection with our acquisition of Evertrust. These agreements provide that if such officer is terminated other than for "cause" (which generally includes
unauthorized use or disclosure of our confidential information, a material breach of an agreement with us, a material failure to comply with written company policies, commission of a felony or
misdemeanor involving moral turpitude, failure to perform assigned duties after written notice, willful misconduct or gross negligence or other acts that constitute cause under applicable state law),
or the individual terminates his employment for "good reason" (which generally includes a material reduction in base salary, a material reduction in duties or responsibilities, a transfer of
employment requiring a relocation of certain specified distances, and any other action that constitutes a material breach by us of the employment agreement), he is entitled to receive
(1) continuation of his salary for a period ranging from six to 12 months, (2) payments of annual target cash bonuses ranging from 50% to 100% over a 12-month period,
or in the case of Mr. Molenda, paid monthly, or in the case of Mr. Black, paid when annual bonuses are normally paid, in an amount equal to the amount that he would have received for the
year of termination had he been employed the full year, multiplied by a fraction, the numerator of which is the number of days elapsed during the year through the date of his termination, and the
denominator of which is 365, or in the case of Mr. McGuire, paid quarterly, in an amount equal to the average amount per quarter received over the prior four quarters, for two quarters and
(3) continuation of benefits for periods ranging from six to 12 months. We believe our employment arrangements with these officers are
88
Table of Contents
necessary
for us to attract and retain our executive officers and to maintain competitive compensation arrangements with them.
Change of Control Arrangements.
Our employment agreement with Mr. Spies provides that if he is employed during the three-month
period
preceding a change of control and on the date of the change of control and he is terminated following the change of control, he is entitled to receive (1) continuation of his salary for six
months, (2) a specific percentage of his annual target cash bonus and (3) continuation of benefits for periods ranging from six to 12 months. The employment agreement with
Mr. Spies provides that he is entitled to these benefits only if he is terminated "without cause" or if he terminates his employment for "good reason," (generally as defined above) following
the change of control.
Mr.
McGuire's offer letter provides that all of the unvested shares subject to his option accelerate in full upon the sale of the company.
We
decided to provide these change of control arrangements to mitigate some of the risk that exists for executives working in a small, dynamic startup company, an environment where there
is a meaningful likelihood that we may be acquired. These arrangements are intended to attract and retain qualified executives that have alternatives that may appear to them to be less risky absent
these arrangements, and mitigate a potential disincentive to consideration and execution of such an acquisition, particularly where the services of these executive officers may not be required by the
acquirer. Our change of control arrangements for our executive officers are based on a "double trigger," meaning that the provisions do not become operative upon a change of control unless the
executive's employment is terminated involuntarily (other than for cause) or the executive terminates his employment for "good reason" following the transaction. We believe this structure strikes a
balance between the incentives and the executive hiring and retention effects described above, without providing these benefits to executives who continue to enjoy employment with an acquiring company
in the event of a change of control transaction. We also believe this structure is more attractive to potential acquiring companies, who may place significant value on retaining members of our
executive team and who may perceive this goal to be undermined if executives receive significant acceleration payments in connection with such a transaction and are no longer required to continue
employment to earn the remainder of their equity awards.
For
a description and quantification of these severance and change of control benefits, see "Executive CompensationEmployment, Severance and Change of Control Arrangements."
Benefits.
We also provide the following benefits to our named executive officers, generally on the same basis provided to all of our
employees:
health, dental and vision insurance, life insurance, employee assistance plan, medical and dependent care flexible spending account, short- and long-term disability (generally as defined
above), accidental death and dismemberment, and a 401(k) plan.
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Table of Contents
Summary Compensation Table
The following table presents information on compensation earned by our named executive officers for our fiscal years ended
June 30, 2007, 2008 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal Position
|
|
Fiscal
Year
|
|
Salary(1)
|
|
Stock
Awards(2)
|
|
Option
Awards(3)
|
|
Non-Equity
Incentive Plan
Compensation(4)
|
|
All Other
Compensation
|
|
Total
|
|
|
Philip Black
President and Chief Executive Officer
|
|
|
2009
2008
2007
|
|
$
|
321,154
290,000
290,000
|
|
$
|
4,647,000
|
|
$
|
|
|
$
|
158,750
145,000
119,625
|
|
$
|
|
|
$
|
479,904
5,082,000
409,625
|
|
|
Eugene Spies
Chief Financial Officer
|
|
|
2009
2008
2007
|
|
|
175,673
175,000
166,635
|
|
|
1,162,000
|
|
|
|
|
|
75,000
75,000
50,000
|
|
|
|
|
|
250,673
1,412,000
216,635
|
|
|
Thomas F. Gosnell
Chief Executive Officer Nexsan Canada
|
|
|
2009
2008
2007
|
|
|
227,865
231,660
207,539
|
|
|
|
|
|
|
|
|
100,000
100,000
80,000
|
|
|
|
|
|
327,865
331,660
287,539
|
|
|
James Molenda
Executive Vice President of Sales
|
|
|
2009
2008
2007
|
|
|
139,133
138,600
138,600
|
|
|
|
|
|
293,526
|
|
|
194,417
216,430
187,835
|
|
|
300,601
|
(5)
|
|
333,550
949,157
326,435
|
|
|
Michael McGuire(6)
Chief Commercial Officer
|
|
|
2009
|
|
|
151,442
|
|
|
|
|
|
687,088
|
|
|
137,744
|
|
|
|
|
|
976,274
|
|
-
(1)
-
The
amounts in this column include payments in respect of accrued vacation, holidays, and sick days.
-
(2)
-
For
the IPO Bonus Shares for Messrs. Black and Spies, an assumed initial public offering price of $11.00, the midpoint of the range set forth on the cover
of this prospectus was used. For further description of the IPO Bonus Shares and estimates on the number of IPO Bonus Shares that will be awarded, see the section of this prospectus entitled
"Executive CompensationCompensation Discussion and AnalysisPrincipal Components of Executive Compensation."
-
(3)
-
The
amounts in this column represent the fair value of the awards on the date of grant, computed in accordance with ASC 718. See note 1 of the
notes to our consolidated financial statements for a discussion of our assumptions in determining the ASC 718 values of our option awards.
-
(4)
-
With
the exception of the amount for Mr. Molenda, the amounts in this column represent total performance-based bonuses earned during fiscal 2007,
2008 and 2009. These bonuses were based on our financial performance and the executive officer's performance against his specified individual objectives. For a description of these bonuses, see the
section of this prospectus entitled "Executive CompensationCompensation Discussion and AnalysisPrincipal Components of Executive Compensation." Mr. Molenda received
this amount for sales commissions earned in fiscal 2007, 2008 and 2009.
-
(5)
-
This
amount represents the unpaid balance on an outstanding loan obligation that Mr. Molenda had with us, which was forgiven. For a description of
this transaction see the section of this prospectus entitled "Related Party TransactionsRestricted Stock Transactions with Certain Related Parties and Related Matters."
-
(6)
-
Mr. McGuire
joined us in October 2008.
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Table of Contents
Grants of Plan-Based Awards During Fiscal 2009
The following table provides information with regard to non-equity plan incentive plan awards granted during our fiscal
year ended June 30, 2009 that may be earned by each named executive officer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future
Payouts Under
Non-Equity Incentive
Plan Awards(1)(3)
|
|
All Other
Option
Awards:
Number of
Securities
Underlying
Options
|
|
|
|
|
|
Grant Date
Fair Value of
Stock Awards and
Option Awards(2)
|
|
Name
|
|
Threshold
|
|
Target
|
|
Philip Black
|
|
$
|
0
|
|
$
|
172,500
|
|
|
|
|
$
|
|
|
Eugene Spies
|
|
|
0
|
|
|
87,500
|
|
|
|
|
|
|
|
Thomas F. Gosnell
|
|
|
0
|
|
|
118,750
|
|
|
|
|
|
|
|
James Molenda
|
|
|
0
|
|
|
252,400
|
|
|
|
|
|
|
|
Michael McGuire
|
|
|
0
|
|
|
225,000
|
|
|
198,293
|
|
|
687,088
|
|
-
(1)
-
Represents
target bonuses established for calendar 2009, a portion of which may be earned during the first half of fiscal 2010 (July 1, 2009 through
June 30, 2010). For a description of these bonuses, see the section of this prospectus entitled "Compensation Discussion and AnalysisCash Bonuses." Mr. Molenda
has a sales commission plan, rather than a performance bonus plan.
-
(2)
-
The
amounts in this column represent the fair value of the awards on the date of grant, computed in accordance with ASC 718. See note 1 of the
notes to our consolidated financial statements for a discussion of our assumptions in determining the ASC 718 values of our option awards.
-
(3)
-
The
target bonuses for Messrs. Black, Spies and Gosnell have no maximum amount, Mr. Molenda has a sales commission plan with no maximum amount, and
Mr. McGuire has a variable compensation plan with no maximum amount.
Outstanding Equity Awards at June 30, 2009
The following table shows all outstanding equity awards held by our named executive officers at the end of fiscal year 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
|
|
Option
Exercise
Price
(1)
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
|
|
Market
Value of
Shares or Units
of Stock That
Have Not
Vested(3)
|
|
Philip Black
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
422,455
|
(2)
|
$
|
4,647,000
|
|
Eugene Spies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,636
|
(2)
|
|
1,162,000
|
|
Thomas F. Gosnell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Molenda
|
|
|
114,285
114,285
|
(3)
(4)
|
|
|
|
$
|
2.94
9.48
|
|
|
03/31/2013
03/31/2013
|
|
|
|
|
|
|
|
Michael McGuire
|
|
|
|
|
|
198,293
|
(5)
|
|
6.93
|
|
|
10/28/2018
|
|
|
|
|
|
|
|
-
(1)
-
Represents
the fair market value of a share of our common stock on the grant date, as determined by our board of directors.
-
(2)
-
Represents
IPO Bonus Shares, which will be fully vested on the date of issuance. The number of IPO Bonus Shares these officers are entitled to receive is
calculated by dividing the "IPO Bonus Value" for each officer by the initial public offering price per share. The IPO Bonus Value varies
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Table of Contents
based
on our "Pre-IPO Value," which is calculated by multiplying the total number of shares of common stock, preferred stock and exchangeable stock actually outstanding on a treasury stock
basis immediately prior to the initial public offering by the initial public offering price per share. Based on an assumed initial public offering price of $11.00 per share, the midpoint of the range
set forth on the cover page of this prospectus, Messrs. Black and Spies would receive 422,455 and 105,636 IPO Bonus Shares respectively. For further description of the IPO Bonus Shares and a
table showing the potential number of IPO Bonus Shares that will be awarded, see the section of this prospectus entitled "Executive CompensationCompensation Discussion and
AnalysisPrincipal Components of Executive Compensation."
-
(3)
-
This
option has a ten-year term, is exercisable at $2.94 per share and is subject to a call option held by us exercisable as of June 30, 2009 at
$9.48 per share, the exercise price per share for this call option compounds annually at a rate of 3.23%.
-
(4)
-
This
option is exercisable as of June 30, 2009 at $9.48 per share, the exercise price compounds annually at a rate of 3.23%.
-
(5)
-
This
option was not exercisable for any of its underlying shares as of June 30, 2009.
Employment, Severance and Change of Control Arrangements
We have entered into the following agreements with our executive officers, including our named executive officers:
Philip Black
, our president and chief executive officer, entered into a restated employment agreement with us in November 2007, which was
further amended in December 2008. The agreement has an initial term of two years, provided that after one year the agreement will be continuously extended by one day each day so that the term
will remain one year until either party provides the other party with written notice of intent not to extend the term of the agreement. The agreement sets Mr. Black's starting base salary at
$290,000, subject to annual review by our board of directors. In December 2008, our board of directors approved an increase to Mr. Black's base salary to $345,000, effective December 11,
2008. The agreement entitles Mr. Black to an incentive bonus, as determined by our board of directors, of not less than 50% of his then-current base salary if he achieves his
performance objectives as determined by our board of directors. Except as provided below, Mr. Black must be employed on the last day of the calendar year to be eligible to receive the annual
bonus for that year. See "Compensation Discussion and AnalysisCash Bonuses" for more information regarding Mr. Black's incentive bonus. In addition, the agreement provides that if
Mr. Black remains employed by us through the effective date of our initial public offering, or IPO, then he will receive "IPO Bonus Shares" as described in "Compensation Discussion and
AnalysisEquity-Based Incentives." Mr. Black's minimum IPO Bonus Value is $1.0 million and his maximum IPO Bonus Value is $16.6 million. The agreement also provides
that if Mr. Black (1) is terminated by us without cause or (2) resigns for good reason (in either case prior to a change of control, or COC), then he will be entitled to receive
(a) 12 months of salary continuation, (b) 12 months of continued participation in our benefit plans (other than any qualified retirement plan or other deferred compensation
plan), and (c) a cash bonus payable when annual bonuses are normally paid in an amount equal to the amount that he would have received for the year of termination had he been employed the full
year multiplied by a fraction, the numerator of which is the number of days elapsed during the year through the date of his termination, and the denominator of which is 365. Mr. Black has also
agreed not to compete with us or solicit any of our employees, customers or vendors for the one-year period following his termination of employment with us.
Eugene Spies
, our chief financial officer, entered into a restated employment agreement with us in November 2007. The agreement sets
Mr. Spies' base salary at $175,000 and his eligibility to receive an annual target bonus of $75,000, which shall be paid out at the same percentage that our
92
Table of Contents
chief
executive officer receives on his annual bonus. In July 2009, our board of directors approved an increase to Mr. Spies' base salary to $195,000 and an increase to his annual target bonus
to $105,000, effective August 1, 2009. If Mr. Spies remains employed by us through the effective date of an IPO, or if his employment is terminated by us within three months before the
IPO, then he will receive IPO Bonus Shares as described in "Compensation Discussion and AnalysisEquity-Based Incentives." Mr. Spies' minimum IPO Bonus Value is $250,000 and his
maximum IPO Bonus Value is $4.2 million. Mr. Spies' IPO Bonus Shares will be fully vested on the date of the offering. Additionally, the agreement provides that if Mr. Spies
(1) is terminated by us without cause or (2) resigns after a COC for good reason, then he will receive (a) six months of salary continuation, (b) 50% of the bonus he would
have received if he had remained employed through the end of the year payable when annual bonuses are normally paid, and (c) six months of continued participation in our benefit plans (other
than any qualified retirement plan or deferred compensation plan).
Thomas F. Gosnell
, our chief executive officer of Nexsan Canada, entered into an employment agreement with us in March 2005. The agreement
terminates upon Mr. Gosnell's death, disability for three consecutive months or 120 days within a 12-month period, dismissal for cause, dismissal without cause, or
Mr. Gosnell's resignation upon giving us 120 days advance written notice. The agreement sets Mr. Gosnell's base salary at US$200,000. In addition, Mr. Gosnell is eligible
to receive an annual incentive bonus of up to 50% of his annual base salary based on goals established by the board of directors related to our gross revenue and earnings (before interest, taxes,
depreciation and amortization) and based on the budget approved by the board for the year. If our board of directors requires Mr. Gosnell to relocate to Southern California, we shall reimburse
his relocation expenses (up to US$50,000) and Mr. Gosnell's annual base salary and bonus will be increased by 25%. If Mr. Gosnell is terminated without cause, then subject to his signing
a release, he is entitled to receive his then-current base salary for a period of 12 months, 50% of his target bonus and 12 months of continued participation in our benefit plans.
Mr. Gosnell's agreement was amended in November 2007 to clarify the bonus metrics for 2007 and subsequent years. See "Compensation Discussion and AnalysisCash Bonuses." The
agreement prohibits Mr. Gosnell, until 12 months from the date he ceases to be employed by us, from providing services to certain of our competitors and soliciting our employees and
customers. In addition, Mr. Gosnell is prohibited from owning more than two percent of the issued and outstanding securities of any of our publicly traded competitors.
James Molenda
, our executive vice president of sales, entered into an amended employment agreement with us in January 2007, which provides
for a four-year term. The agreement sets Mr. Molenda's starting base salary at $138,600. In addition, Mr. Molenda will earn a sales-related bonus based on a formula
determined by our chief executive officer. In addition, if Mr. Molenda's employment is terminated by us without cause, or if he resigns for good reason, (as those terms are defined in his
agreement), then Mr. Molenda will be entitled to receive continuation of his base salary for 12 months, plus a cash bonus on a monthly basis for 12 months that equals the average
monthly bonus received during the prior 12 months. Mr. Molenda has also agreed not to
compete with us or solicit any of our employees, customers or vendors for the one-year period following his termination of employment with us. If Mr. Molenda fails to honor these
restrictive covenants, he will forfeit any unpaid severance benefits and he must repay any severance benefits he previously received.
Michael McGuire
, our chief commercial officer, accepted an offer of employment with us in October 2008. The offer letter established
Mr. McGuire's base salary at $225,000 and his eligibility to receive variable based cash compensation in an on-target amount of $225,000 annually, based on meeting certain
performance targets, such as product sales, sales growth and performance objectives defined by the chief executive officer and the compensation committee of the board of directors, which shall be
payable quarterly in arrears. See "Compensation Discussion and AnalysisCash Bonuses." On October 29, 2008, we granted to Mr. McGuire an option to purchase 198,293 shares
93
Table of Contents
of
our common stock at an exercise price of $6.93 per share, which option vests as to 25% of the shares on the first anniversary, the remaining 75% vests ratably every quarter over the three year
period following the first anniversary of the grant date. In the event of a sale of our company, all of Mr. McGuire's then unvested options would fully accelerate. Additionally, the agreement
provides that if Mr. McGuire (1) is terminated by us without cause or (2) resigns after a COC for good reason, then he is entitled to receive (a) six months of salary
continuation, (b) variable based cash compensation for two quarters, with the payment for each quarter equal to the average amount per quarter that Mr. McGuire received over the prior
four quarters, payable quarterly at the time such compensation would normally have been paid, and (c) six months of continued participation in our benefit plans (other than any qualified
retirement plan or deferred compensation plan). Mr. McGuire has also agreed not to solicit any of our employees, customers or vendors for the one-year period following his
termination of employment with us.
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Table of Contents
Potential Payments Upon Termination or Change in Control
The values of the severance, vesting acceleration, vacation payouts and benefit plan premiums shown in the table below were calculated
based on the assumption that the resignation, termination or change in control, if applicable, occurred and the named executive officer's employment terminated on June 30, 2009, and the
employment agreements currently in effect with each of our named executive officers were in effect on that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Nature of
Payment or Benefit(1)
|
|
Voluntary
Resignation or
Termination for
Cause
|
|
Termination
Without
Cause Prior
to a Change
in Control
|
|
Termination
Without
Cause After
a Change in
Control
|
|
Constructive
Termination(2)
|
|
Philip Black
|
|
Severance
Target Bonus
Benefit Plan Premiums(4)
Vacation Payout(7)
Accelerated exercisability of stock options
|
|
$
|
33,582
|
|
$
|
345,000
86,250
15,547
33,582
|
|
$
|
345,000
86,250
15,547
33,582
|
|
$
|
345,000
86,250
15,547
33,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
33,582
|
|
$
|
480,379
|
|
$
|
480,379
|
|
$
|
480,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eugene Spies
|
|
Severance
Target Bonus
Benefit Plan Premiums(4)
Vacation Payout(7)
Accelerated exercisability of stock options
|
|
$
|
16,875
|
|
$
|
87,500
37,500
4,167
16,875
|
|
$
|
87,500
37,500
4,167
16,875
|
|
$
|
87,500
37,500
4,167
16,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
16,875
|
|
$
|
146,042
|
|
$
|
146,042
|
|
$
|
146,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas F. Gosnell
|
|
Severance
Target Bonus
Benefit Plan Premiums(4)
Vacation Payout(7)
Accelerated exercisability of stock options
|
|
$
|
31,288
|
|
$
|
200,000
50,000
2,854
31,288
|
|
$
|
200,000
50,000
2,854
31,288
|
|
$
|
31,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
31,288
|
|
$
|
284,142
|
|
$
|
284,142
|
|
$
|
31,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Molenda
|
|
Severance
Target Bonus(3)
Benefit Plan Premiums(4)
Vacation Payout(7)
Accelerated exercisability of stock options
|
|
$
|
11,993
|
|
$
|
138,600
194,417
15,547
11,993
|
|
$
|
138,600
194,417
15,547
11,993
|
|
$
|
138,600
194,417
15,547
11,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
11,993
|
|
$
|
360,557
|
|
$
|
360,557
|
|
$
|
360,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael McGuire
|
|
Severance
Target Bonus(3)(6)
Benefit Plan Premiums(4)
Vacation Payout(7)
Accelerated exercisability of stock options
|
|
$
|
4,288
|
|
$
|
112,500
108,461
69
4,288
|
|
$
|
112,500
108,461
69
4,288
807,053
|
(5)
|
$
|
112,500
108,461
69
4,288
807,053
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
4,288
|
|
$
|
225,318
|
|
$
|
1,032,371
|
|
$
|
1,032,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
amounts reported for severance and benefit plan premiums are payable monthly over the applicable term.
-
(2)
-
Mr. Black's
employment agreement provides for these benefits upon a constructive termination occurring prior to a change in control.
Messrs. Spies, McGuire and Molenda would receive these benefits for a constructive termination occurring prior to or after a change in control.
-
(3)
-
Based
on the target bonus or variable based cash compensation earned by the named executive officer for calendar 2009.
-
(4)
-
Includes
amounts payable by us for health, dental and vision insurance, life insurance, short- and long-term disability and
accidental death and dismemberment.
-
(5)
-
Mr. McGuire's
outstanding unvested options accelerate in full upon a sale of our company and based on an assumed initial public offering price of
$11.00 per share.
-
(6)
-
Based
on four quarters of variable compensation earned by the named executive officer as of December 31, 2009.
-
(7)
-
Based
on accrued vacation balance as of June 30, 2009.
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Table of Contents
Equity Incentive Plans
This section contains a summary of our equity incentive plans. To date, options to purchase shares of our common stock have been
granted under our 2001 stock plan or pursuant to non-plan grants described below. Upon the completion of this offering, we expect that our 2001 stock plan will be terminated, and
thereafter we will grant equity awards only from our 2010 equity incentive plan. The following descriptions are qualified by the terms of the actual plans filed as exhibits to the registration
statement, of which this prospectus is a part.
Background.
The 2010 equity incentive plan will serve as the successor equity compensation plan to our 2001 stock plan. Our
board of directors adopted our 2010 equity incentive plan in February 2010 and our stockholders approved the 2010 equity incentive plan in February 2010. This equity incentive plan will become
effective upon the completion of this offering and will terminate ten years from adoption. Our 2010 equity incentive plan provides for the grant of incentive stock options, nonqualified stock options,
restricted stock awards, performance shares, stock appreciation rights, restricted stock units and stock bonuses.
Administration.
Our 2010 equity incentive plan will be administered by our compensation committee (or by our board of
directors acting as our compensation committee). This committee will act as the plan administrator and will determine which individuals are eligible to receive awards under our 2010 plan, the time or
times when such awards are to be made, the number of shares subject to each such award, the status of any granted option as either an ISO or an NSO under U.S. federal tax laws, the vesting schedule
applicable to an award and the maximum term for which any
award is to remain outstanding (subject to the limits set forth in our 2010 plan). The committee will also determine the exercise price of options granted, the purchase price for rights to purchase
restricted stock and, if applicable, restricted stock units, and the strike price for stock appreciation rights. Unless the committee provides otherwise, our 2010 equity incentive plan does not allow
for the transfer of awards other than by will or the laws of descent and distribution and only the recipient of an award may exercise an award during his or her lifetime.
Share reserve.
We have reserved up to 476,857 shares of our common stock for issuance under our 2010 equity incentive plan,
which are all shares of our common stock reserved under our 2001 stock plan that are not issued or subject to outstanding grants as of the completion of this offering, plus:
-
-
any shares of our common stock issued under our 2001 stock plan that are forfeited or repurchased by us at the original
purchase price; and
-
-
any shares issuable upon exercise of options granted under our 2001 stock plan that expire without having been exercised
in full.
Additionally,
our 2010 equity incentive plan provides for automatic increases in the number of shares of our common stock available for issuance under it, on the first day of each
January from 2011 through 2020, by:
-
-
1% of the number of shares of our common stock issued and outstanding on the preceding December 31st; or
-
-
a lesser number of shares of our common stock as determined by our board of directors.
Equity awards.
Our 2010 equity incentive plan permits us to grant the following types of awards:
Stock options.
Our 2010 equity incentive plan provides for the grant of ISOs to employees, and NSOs to employees, directors and
consultants. Options
may be granted with terms determined
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Table of Contents
by
the committee, provided that ISOs are subject to statutory limitations. The committee determines the exercise price for a stock option, within the terms and conditions of our 2010 equity incentive
plan and applicable law, provided that the exercise price of an ISO may not be less than 100% (or higher in the case of certain recipients of ISOs) of the fair market value of our common stock on the
date of grant. ISOs exercisable for no more than 1,500,000 shares may be granted over the life of our 2010 equity incentive plan. Options granted under our 2010 equity incentive plan will vest at the
rate specified by the committee and such vesting schedule will be set forth in the stock option agreement to which such stock option grant relates. Generally, the committee determines the term of
stock options granted under our 2010 equity incentive plan, up to a term of ten years, except in the case of certain ISOs.
After
termination of an optionee, he or she may exercise his or her vested option for the period of time stated in the stock option agreement to which such option relates, up to a
maximum of five years from the date of termination. Generally, if termination is due to death or disability, the vested option will remain exercisable for 12 months. In all other cases, the
vested option will generally remain exercisable for three months. However, an option may not be exercised later than its expiration date.
Notwithstanding
the foregoing, if an optionee is terminated for cause (as defined in our 2010 equity incentive plan), then the optionee's options shall expire on the optionee's
termination date or at such later time and on such conditions as determined by our compensation committee.
Restricted stock awards.
A restricted stock award is an offer by us to sell shares of our common stock subject to restrictions that the
committee may
impose. These restrictions may be based on completion of a specified period of service with us or upon the completion of performance goals during a performance period. The price of a restricted stock
award will be determined by the committee.
Performance shares.
Performance share awards represent the right to receive cash or shares of common stock, subject to the completion of
specified
performance goals during a performance period.
Stock appreciation rights.
Stock appreciation rights provide for a payment, or payments, in cash or shares of common stock, to the
holder based upon
the difference between the fair market value of our common stock on the date of exercise and the stated exercise price. Stock appreciation rights may vest based on time or achievement of performance
conditions.
Restricted stock units.
Restricted stock units represent the right to receive shares of our common stock at a specified date in the
future, subject
to forfeiture of such right due to termination of employment or failure to achieve specified performance conditions. If the restricted stock unit has not been forfeited, then on the date specified in
the restricted stock unit agreement, we will deliver to the holder of the restricted stock unit whole shares of our common stock, cash or a combination of our common stock and cash.
Stock bonuses.
Stock bonuses are granted as additional compensation for performance and therefore are not issued in exchange for cash.
Change in control.
In the event of a liquidation, dissolution or corporate transaction (as defined in our 2010 equity incentive plan),
except for
options granted to non-employee directors (which vest and become exercisable in full upon a change in control event (as defined in our 2010 equity incentive plan)), outstanding awards may
be assumed or replaced by the successor company (if any). Outstanding awards that are not assumed or replaced by the successor company (if any) will expire on the consummation of the liquidation,
dissolution or change in control transaction at such time and on such conditions as our board of directors determines (including, without
97
Table of Contents
limitation,
full or partial vesting and exercisability of any or all outstanding awards issued under our 2010 equity incentive plan).
Transferability of awards.
Generally, a participant may not transfer an award other than by will or the laws of descent and
distribution unless, in the case of awards other than ISOs, the committee permits the transfer of an award to certain authorized transferees (as set forth in our 2010 equity incentive plan).
Eligibility.
The individuals eligible to participate in our 2010 equity incentive plan include our officers and other
employees, our directors and any consultants. Unless otherwise determined by the committee at the time of award, vesting ceases on the date the participant no longer provides services to us and
unvested shares are forfeited to us or subject to repurchase by us (except for as described above under stock options).
Payment for purchase of shares of our common stock.
Payment for shares of our common stock purchased pursuant to our 2010
equity incentive plan may be made by any of the following methods (provided such method is permitted in the applicable award agreement to which such shares relate): (1) cash (including by
check); (2) cancellation of indebtedness; (3) surrender of shares; (4) waiver of compensation due or accrued for services rendered or to be rendered; (5) any combination of
these methods or any other method approved by our board of directors or (6) any other method of payment permitted by applicable law.
Limit on Awards.
Under our 2010 equity incentive plan, during any calendar year, no person will be eligible to receive more
than 2,000,000 shares of our common stock.
Amendment and Termination.
Our board of directors may amend or terminate our 2010 equity incentive plan at any time, subject
to stockholder approval where required. In addition, no amendment that is detrimental to a participant in our 2010 equity incentive plan may be made to an outstanding award without the consent of the
affected participant.
Background.
Our 2010 employee stock purchase plan is designed to enable eligible employees to periodically purchase shares of our
common stock at a
discount. Purchases are accomplished through participation in discrete offering periods. Our 2010 employee stock purchase plan is intended to qualify as an employee stock purchase plan under
Section 423 of the IRC. Our board of directors adopted our 2010 employee stock purchase plan in February 2010 and our stockholders approved the plan in February 2010.
Share reserve.
We have initially reserved 193,045 shares of our common stock for issuance under our
2010 employee stock purchase plan. The number of shares reserved for issuance under our 2010 employee stock purchase plan will increase automatically on the first day of each January, for the first
ten years after the first offering date, starting with January 1, 2011, by the number of shares equal to 0.5% of our total outstanding shares as of the immediately preceding
December 31st (rounded down to the nearest whole share). Our board of directors or compensation committee may reduce the amount of the increase in any particular year. No more than
965,225 shares reserved under the 2010 employee stock purchase plan may be issued and no other shares may be added to this plan without the approval of our stockholders.
Administration.
Our compensation committee or board of directors will administer our 2010 employee stock purchase plan. Employees who
are 5%
stockholders, or would become 5% stockholders as a result of their participation in our 2010 employee stock purchase plan, are ineligible to participate in our 2010 employee stock purchase plan. We
may impose additional restrictions on eligibility as well. Under our 2010 employee stock purchase plan, eligible employees may acquire shares of our common stock by accumulating funds through payroll
deductions. Our
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Table of Contents
eligible
employees may select a rate of payroll deduction between 1% and 15% of their cash compensation. We also have the right to amend or terminate our 2010 employee stock purchase plan, except
that, subject to certain exceptions, no such action may adversely affect any outstanding rights to purchase stock under the plan. Our 2010 employee stock purchase plan will terminate on the tenth
anniversary of the last date the first offering period, unless it is terminated earlier by our board of directors or by issuance of all common stock reserved for issuance under the 2010 employee stock
purchase plan.
Purchase rights.
When an offering period commences, our employees who meet the eligibility requirements for participation in that
offering period are
automatically granted a non-transferable option to purchase shares in that offering period. Each offering period may run for no more than 24 months and consist of no more than five
purchase periods. An employee's participation automatically ends upon termination of employment for any reason.
No
participant will have the right to purchase our shares at a rate which, when aggregated with purchase rights under all our employee stock purchase plans that are also outstanding in
the same calendar year(s), have a fair market value of more than $25,000, determined as of the first day of the applicable offering period, for each calendar year in which such right is outstanding.
The purchase price for shares of our common stock purchased under our 2010 employee stock purchase plan will be 85% of the lesser of the fair market value of our common stock on (1) the first
trading day of the applicable offering period and (2) the last trading day of each purchase period in the applicable offering period.
Change in control.
In the event of a change in control transaction, our 2010 employee stock purchase plan and any offering periods that
commenced
prior to the closing of the proposed transaction may terminate on the closing of the proposed transaction and the final purchase of shares will occur on that date, but our compensation committee may
instead terminate any such offering period at a different date.
Our board of directors adopted and our stockholders approved our 2001 stock plan in January 2001. Subsequent to December 31,
2009, we reserved an additional 963,286 shares of our common stock for issuance under the 2001 stock plan, bringing the total shares reserved under the 2001 stock plan to an aggregate of 2,494,957
shares of our common stock. As of December 31, 2009, options to purchase 1,237,065 shares of our common stock were outstanding under our 2001 stock plan. This plan will terminate upon our 2010
equity incentive plan becoming effective upon completion of this offering, and thereafter no additional options will be granted under this plan. However, all stock options and stock purchase rights
outstanding on the termination of the 2001 stock plan will continue to be governed by the terms and conditions of the 2001 stock plan.
The
2001 stock plan is administered by our board of directors or a committee that may be appointed by our board, which has exclusive authority to grant awards under the 2001 stock plan
and to make all interpretations and determinations affecting the 2001 stock plan. The board of directors has the power to determine the individuals to be granted awards, the type of award granted, the
number of shares of common stock to be subject to each award granted, the exercise price of each award, the conditions with respect to vesting and exercisability of awards and all other conditions of
any award under the 2001 stock plan.
Participation
in the 2001 stock plan is limited to our directors, officers, employees and consultants who are selected from time to time by the board of directors or by a committee
appointed by the board of directors. Awards under the 2001 stock plan may be in the form of incentive stock options meeting the requirements of Section 422 of the IRC, non-qualified
stock options which are not intended to meet the requirements of Section 422 of the IRC, or stock
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Table of Contents
purchase
rights. Stock purchase rights are subject to repurchase by us on terms and conditions determined by the board of directors. Under the terms of the plan, the vesting of awards under our 2001
stock plan will accelerate upon a change in control unless the successor corporation assumes or substitutes for the options.
In
April 2003, our board of directors granted options to purchase an aggregate of 403,570 shares of our common stock to James Molenda, Beechtree Capital LLC, an entity with whom George
Weiss, a member of our board of directors is affiliated and Diamond Lauffin and Mohan Vachani. These options are subject to call options and were granted outside our 2001 stock plan. In January 2008,
our board of directors granted options to purchase an aggregate of 352,380 shares of our common stock to James Molenda, Beechtree Capital LLC and Diamond Lauffin. These options were granted outside
our 2001 stock plan. For a description of these transactions see the section of this prospectus entitled "Related Party TransactionsRestricted Stock and Stock Option Transactions with
Certain Related Parties and Related Matters."
Additional Employee Benefit Plans
We offer a 401(k) plan to all U.S. employees who meet specified eligibility requirements. The plan provides for voluntary deferred tax
contributions subject to certain IRS limitations. We presently do not match participant contributions. Participants are immediately vested in their contributions plus actual earnings thereon.
We also offer a retirement savings plan to all eligible U.K. employees. Under this plan, our contributions and our employees'
contributions and accumulated plan earnings qualify for favorable tax treatment under applicable U.K. tax regulations. To date, our contributions to this plan have been immaterial.
Indemnification of Directors and Executive Officers and Limitation of Liability
Our restated certificate of incorporation and bylaws, which will be in effect upon the completion of this offering, will provide that
we will indemnify our directors and officers to the fullest extent permitted by Delaware law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred
in connection with their service for or on our behalf. Our bylaws will provide that we will advance the expenses incurred by a director or officer in advance of the final disposition of an action or
proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her action in that capacity, regardless of whether
Delaware law would otherwise permit indemnification. In addition, the restated certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for
breaches of their fiduciary duty as directors, unless they violate their duty of loyalty to us or our stockholders, act in bad faith, knowingly or intentionally violate the law, authorize illegal
dividends or redemptions or derive an improper personal benefit from their action as directors.
We
will enter into indemnification agreements with each of our directors and officers. These agreements provide for indemnification for related expenses including attorneys' fees,
judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding, and obligate us to advance their expenses incurred as a result of any proceeding against them
as to which they could be indemnified. At present, we are not aware of any pending or threatened litigation or proceeding involving any of our directors, officers, employees or agents in which
indemnification would be required or permitted. We believe provisions in our restated certificate of
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Table of Contents
incorporation,
bylaws and indemnification agreements are necessary to attract and retain qualified persons to serve as directors and officers. In addition, we expect to maintain liability insurance
which insures our directors and officers against certain losses under certain circumstances.
The
limitation of liability and indemnification provisions in our restated certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our
directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us
and other stockholders. Furthermore, a stockholder's investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required
by these indemnification provisions. At present, we are not aware of any pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, and
we are not aware of any threatened litigation that may result in claims for indemnification.
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Table of Contents
RELATED PARTY TRANSACTIONS
In addition to the executive and director compensation arrangements discussed above under "Executive Compensation," the following is a
description of transactions since July 1, 2006 to which we have been a participant, in which the amount involved in the transaction exceeds or will exceed $120,000, and in which any of our
directors, executive officers or beneficial holders of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will
have a direct or indirect material interest.
Issuance of Secured Debt and Preferred Warrant
On September 21, 2009, we issued a $3.6 million note to Fonds de solidarité des travailleurs du
Québec (F.T.Q.), or the F.T.Q. Note, which bears interest at 12% per year. The outstanding principal and accrued and unpaid interest on the F.T.Q. Note is due and payable on
September 21, 2012. We have the right to prepay the F.T.Q. Note at any time provided we pay
such amount outstanding, together with any accrued interest as of the date of such prepayment, plus a premium in an amount equal to three percent (3%) of the amount being prepaid. F.T.Q. has not been
paid any principal or interest on the F.T.Q. Note since issuance. In connection with the issuance of the F.T.Q. Note, we issued to F.T.Q. a warrant to purchase 228,568 shares of our Series C
preferred stock at an exercise price of $8.47 per share. The expiration date of the warrant is September 21, 2016. See note 11 of the notes to our consolidated financial statements for a
discussion of the accounting treatment for this warrant. Upon the completion of this offering, this warrant will be exercisable for 228,568 shares of our common stock at an exercise price of $8.47 per
share. F.T.Q. beneficially owns more than 5% of our outstanding common stock. We intend to repay the F.T.Q. Note with our cash on hand.
Evertrust Acquisition
The initial consideration for this acquisition consisted of payments to the Evertrust Sellers, in the aggregate, of approximately
$1.25 million in cash, 200,917 shares of our common stock, 342,103 shares of exchangeable stock of our Canadian subsidiary, and one share of our Series B preferred stock issued in
connection with the exchangeable stock. The aggregate consideration, including $316,000 of direct acquisition costs, had a value of approximately $5.0 million. Of these shares,
Mr. Gosnell received all of the exchangeable stock and Esther Hotter, his wife, received 27,151 shares of our common stock. In November 2007, we issued to the former shareholders of Evertrust,
or the Evertrust Sellers, in the aggregate, 71,754 shares of our common stock and 122,180 shares of our exchangeable stock. This issuance was made pursuant to the Evertrust purchase agreement, dated
March 14, 2005, which stipulated that the Evertrust Sellers were to receive the additional shares upon the satisfaction of certain performance targets. Although the performance targets were not
satisfied in full, we issued the additional shares of our common stock and exchangeable stock in full satisfaction of all of our obligations arising under the Evertrust purchase agreement in
consideration of mutual releases and other undertakings by the Evertrust Sellers. Of these shares, Mr. Gosnell, our chief executive officer of Nexsan Canada, the chief executive officer of
Evertrust and a significant shareholder of Evertrust, received all of the exchangeable stock and Ms. Hotter received 9,696 shares of our common stock.
Issuance of Convertible Bridge Debt to Stockholders
In January and August 2006, we completed two bridge financings with funds provided by existing stockholders, including affiliates of
VantagePoint Venture Partners and RRE Ventures. VantagePoint Venture Partners and RRE Ventures hold or control entities holding at least 5% of our outstanding capital stock and have an
affiliate serving on our board of directors, and entities controlled by George Weiss, one of our directors. The first was completed in January 2006 with the issuance of our 8% Secured Convertible
Subordinated Promissory Notes dated January 27, 2006 in
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Table of Contents
the
aggregate original principal amount of $2.0 million, and the second was completed in August 2006 with the issuance of our 8% Secured Convertible Subordinated Bridge Notes dated
August 8, 2006 in the aggregate original principal amount of $2.0 million. See the table under "Sales of Series C Preferred Stock" for the largest principal amounts outstanding
for notes held by our affiliates. Pursuant to the F.T.Q. Series C Preferred Stock financing described below, noteholders representing substantially all of the principal amount of the January
notes and the August notes, elected to convert the then outstanding principal and accrued interest on the notes into shares of our Series C preferred stock at a conversion price per share of
$4.17 for the January notes, and $5.25 per share for the August notes, resulting in the issuance of an aggregate of 924,376 shares of Series C preferred stock.
Issuance of Convertible Bridge Debt
On November 2, 2006, we issued a $3.0 million note, or the Terrapin Note, to Terrapin Partners Nexsan Partnership, L.P.,
or Terrapin, which bears interest at 8% per year. We amended the Terrapin Note in 2007 to provide that the outstanding principal and accrued and unpaid interest on the Terrapin Note would be due and
payable on August 15, 2008, and at the option of Terrapin, a date not later than November 15, 2008. On March 26, 2008, we amended and restated the Terrapin Note to allow Terrapin
to extend the November 15, 2008 date to a date not later than November 30, 2009, the later of which we refer to as the Maturity Date. The Terrapin Note was repaid in full on
March 2, 2009, and Terrapin no longer beneficially owns more than 5% of our outstanding common stock.
Sale of Series C Preferred Stock
On March 29, 2007, we consummated an investment transaction with F.T.Q. pursuant to which F.T.Q. purchased 1,428,571 shares of
our Series C preferred stock for cash consideration of $7.5 million. As a result of its purchase of these shares, F.T.Q. became a holder of more than 5% of our capital stock. In
addition, the subscription agreement with F.T.Q. terminates upon the consummation of a qualified public offering. Immediately prior to the consummation of this offering, each outstanding share of
Series C preferred stock will convert into one share of our common stock.
The
following table describes the number of shares of Series C preferred stock issued to holders of more than 5% of our outstanding capital stock and an entity affiliated with a
member of our board of directors.
|
|
|
|
|
|
|
|
|
|
|
Investor
|
|
Shares of
Series C
Preferred
Stock
|
|
Aggregate
Purchase Price(1)
|
|
Percentage of
Total Series C
Preferred Stock
|
|
F.T.Q.
|
|
|
1,428,571
|
|
$
|
7,500,000
|
|
|
60.71
|
%
|
Entities affiliated with VantagePoint Venture Partners
|
|
|
378,103
|
|
|
1,752,202
|
|
|
16.07
|
|
Entities affiliated with RRE
|
|
|
113,808
|
|
|
527,494
|
|
|
4.84
|
|
Entity affiliated with George Weiss(2)
|
|
|
27,109
|
|
|
125,628
|
|
|
1.15
|
|
-
(1)
-
Except
for F.T.Q., the purchase price was paid by conversion of outstanding indebtedness under the January 2006 and August 2006 convertible bridge debt to
stockholders described above.
-
(2)
-
Beechtree
Capital, LLC, or Beechtree, a company controlled by George Weiss, one of our directors, purchased these shares of Series C preferred
stock.
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Table of Contents
Amended and Restated Stockholders' Agreement and Third Amended and Restated Registration Rights Agreement
We entered into an amended and restated stockholders' agreement, dated March 29, 2007, as amended, with the holders of our
Series A preferred stock and Series C preferred stock, and a number of the holders of our common stock. The stockholders' agreement, as amended provides, among other things,
(1) that VantagePoint Venture Partners and MFP each have the right to designate two directors and that F.T.Q., RRE Ventures and Beechtree each have the right to designate one director to our
board of directors and that our then-current Chief Executive Officer (currently Philip Black) shall serve as a member of our board of directors; however, RRE Ventures has opted to no longer exercise
this right, (2) certain rights of first refusal and co-sale with respect to transfers by our stockholders who are a party to the agreement, and (3) certain preemptive rights
with respect to certain issuances of our securities. The April 2009 amendments increased the number of directors constituting our board of directors from eight to nine and provided that one member of
our board of directors should be an individual determined by the board to be independent and elected by holders of our outstanding Series A preferred stock, Series C preferred stock and
common stock, voting together as a single class on an as-if converted to common stock basis. Upon consummation of this offering, the amended and restated stockholders' agreement will
terminate.
We
also entered into a third amended and restated registration rights agreement, dated March 29, 2007, with the holders of our Series A preferred stock and Series C
preferred stock, and a number of the holders of our common stock. We amended this agreement on November 14, 2007 to clarify that the Evertrust holders who received shares of our common stock
and exchangeable stock in connection with our acquisition of Evertrust would have registration rights with respect to such shares issuable upon conversion of the exchangeable stock and on
December 31, 2007 to provide that the stockholder parties to the agreement did not have "piggyback" registration rights in connection with an initial public offering of our capital stock. We
further amended this agreement in March 2008 to provide that the April 2003 and January 2008 stock options described in "Restricted Stock and Stock Option Transactions with Certain
Related Parties and Related Matters" have registration rights under this agreement. For a description of these registration rights, see "Description of Capital StockRegistration Rights."
Consulting Agreement with Beechtree Capital, LLC
Beechtree was a party to an Amended and Restated Consulting Agreement with us, dated July 9, 2001, which expired on
January 4, 2006. The agreement provided, among other things, that Beechtree would provide the services of Mr. Weiss to our company to render advice and assistance to us on business
related matters, strategic corporate planning and financial matters. Beechtree was compensated at a rate of approximately $8,333 per month from January 4, 2001 to July 1, 2001 and
approximately $16,667 per month beginning July 2001 and continuing until the expiration of the agreement in January 2006. We paid total consulting fees to Beechtree of $200,000, $100,000 and $0, in
fiscal 2005, 2006 and 2007, respectively. No consulting fees have since been paid to Beechtree. Under the agreement, we also issued Beechtree restricted stock purchase rights for 95,238 shares of our
common stock. The restricted stock purchase agreements are described below.
Restricted Stock and Stock Option Transactions with Certain Related Parties and Related Matters
Restricted Stock and Stock Option Transactions with Former Executive Officer
On January 4, 2001, we sold 190,476 shares of our restricted common stock to Diamond Lauffin, then our executive vice president,
pursuant to our 2001 stock plan, at a purchase price of $6.93 per share. In payment for the shares, Mr. Lauffin executed a promissory note in the original principal amount of
$1.32 million. The original due date of the note was January 4, 2006 and the
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Table of Contents
note
bore interest at the rate of 5.61% per year. We had recourse under the note for the accrued and unpaid interest and up to 33
1
/
3
% of the original principal amount of the note.
Mr. Lauffin pledged all of the purchased shares to secure the note. The shares were subject to vesting over time and achievement of revenue targets. As of the date of the sabbatical agreement
described below, 142,857 of Mr. Lauffin's restricted shares had vested and the remaining 47,619 restricted shares were subject to a repurchase option in our favor.
On
April 1, 2003, we issued Mr. Lauffin options to purchase 190,476 shares of our common stock exercisable through April 1, 2013 at an exercise price of $2.94 per
share. At the same time, Mr. Lauffin granted us an option to purchase the 190,476 shares covered by the option referred to in the preceding sentence at an exercise price of $7.83 per share. The
exercise price on the call option increases at the rate of 3.23% per year after April 1, 2003 and, as of December 31, 2009 the call price was $9.48 per share.
On
October 23, 2006, we entered into a sabbatical agreement with Mr. Lauffin under which he ceased to serve as executive vice president and his employment with us
terminated on January 4, 2007. Under the terms of the sabbatical agreement, we engaged a company controlled by Mr. Lauffin to provide the services of Mr. Lauffin as a consultant
to us from January 4, 2007 through January 4, 2008. The consulting fees payable during the sabbatical period were at an annualized rate of $148,604 plus a monthly commission of 0.4348%
of total worldwide sales. We paid a total of $278,000 in consulting fees under this agreement.
On
December 19, 2007, we amended the note issued to us in 2001 to provide that the note would be recourse to Mr. Lauffin only in an amount equal to the difference between
(1) the amount actually applied to the payment of principal and accrued but unpaid interest on the note and (2) 33
1
/
3
% of the original principal amount of the note.
On
December 13, 2007, we entered into a termination agreement with Mr. Lauffin in connection with the termination of the sabbatical agreement. Pursuant to the termination
agreement, effective
January 4, 2008, Mr. Lauffin satisfied a portion of his obligations to us under the note in consideration of his surrendering the 190,476 shares of restricted common stock pledged to us
as security under the 2001 note at a price of $6.93 per share. As of that date, the total principal amount and accrued and unpaid interest due under the note was approximately $1.8 million. The
value of the shares surrendered was approximately $1.3 million, which was applied to the amount outstanding under the note, and the unpaid balance of $518,567 was forgiven. To place
Mr. Lauffin back in substantially the same economic position he was in prior to the cancellation of the note, we granted Mr. Lauffin an option to purchase an additional 142,857 shares of
our common stock at an exercise price of $9.08 per share, increasing by 3.23% per year compounded annually on each March 31 from the grant date through the date of exercise. This option is
currently exercisable at an exercise price of $9.45 per share and expires on March 31, 2013.
Restricted Stock and Stock Option Transactions with Current Executive Officer
On January 4, 2001, we sold 114,285 shares of our restricted common stock to James Molenda, our executive vice president of
sales, pursuant to our 2001 stock plan, at a purchase price of $6.93 per share. In payment for the shares, Mr. Molenda executed a promissory note in the original principal amount of $792,000.
The original due date of the note was January 4, 2006 and the note bore interest at the rate of 5.61% per year. We had recourse under the note for the accrued and unpaid interest and up to
33
1
/
3
% of the original principal amount of the note. Mr. Molenda pledged all of the purchased shares to secure the note. The shares were subject to vesting over time and
achievement of revenue targets. All of Mr. Molenda's restricted shares vested during the 2007 calendar year.
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Table of Contents
On
April 1, 2003, we issued Mr. Molenda options to purchase 114,285 shares of our common stock exercisable through April 1, 2013 at an exercise price of $2.94 per
share. At the same time, Mr. Molenda granted us an option to purchase the 114,285 shares covered by the option referred to in the preceding sentence at a per share exercise price of $7.83. The
exercise price on the call option increases at the rate of 3.23% per year after April 1, 2003 and, as of December 31, 2009, the call price was $9.48 per share.
On
November 1, 2007, we amended the promissory note he issued to us in 2001 to modify the maturity date of the note to the earlier of January 15, 2008 or the date we
determined that payment was due and necessary under the Sarbanes-Oxley Act. The note was also amended to provide that the note would be recourse to Mr. Molenda only in an amount equal to the
difference between
(1) the amount actually applied to the payment of principal, after payment of costs, expenses and accrued and unpaid interest on the note and (2) 33
1
/
3
% of the original
principal amount of the note.
Effective
January 15, 2008, Mr. Molenda satisfied his obligations to us under the note in consideration of his surrendering the 114,285 shares of restricted common stock
pledged to us as security under the 2001 note at a price of $6.93 per share. As of that date, the total principal amount and accrued and unpaid interest due under the note was $1,104,601. The value of
the shares surrendered was approximately $800,000, which was applied to the amount outstanding under the note, and the unpaid balance of $300,601 was forgiven. To place Mr. Molenda back in
substantially the same economic position he was in prior to the cancellation of the note, we granted Mr. Molenda an option to purchase an additional 114,285 shares of our common stock at an
exercise price of $9.12 per share, increasing by 3.23% per year compounded annually on each March 31 from the grant date through the date of exercise. This option is currently exercisable at an
exercise price of $9.48 per share and expires on March 31, 2013.
Restricted Stock and Stock Option Transactions with Affiliate of Current Director
On January 4, 2001, we sold 47,619 shares of our restricted common stock to Beechtree pursuant to our 2001 stock plan, at a
purchase price of $6.93 per share. In payment for the shares, Beechtree executed a promissory note in the original principal amount of $330,000. The original due date of the note was January 4,
2006 and the note bore interest at the rate of 5.61% per year. On July 9, 2001, we sold an additional 47,619 shares of our restricted common stock to Beechtree pursuant to our 2001 stock plan
at a purchase price of $5.15 per share. In payment for these shares, Beechtree executed a promissory note in the original principal amount of $245,000. The original due date of the note was
January 4, 2006 and the note bore interest at the rate of 5.12% per year. We had recourse under each of the notes for the accrued and unpaid interest and up to 33
1
/
3
% of the
original principal amount of each note. Beechtree pledged all of the purchased shares to secure the notes. The shares were subject to vesting over time. As of March 31, 2009, all of Beechtree's
restricted shares had vested.
On
April 1, 2003, we issued Beechtree options to purchase 95,238 shares of our common stock exercisable through April 1, 2013 at an exercise price of $2.94 per share. At
the same time, Beechtree granted us an option to purchase the 95,238 shares covered by the option referred to in the preceding sentence at a per share exercise price of $7.83. The exercise price on
the call option increases at the rate of 3.23% per year after April 1, 2003 and, as of December 31, 2009, the call price was $9.48 per share.
Effective
January 30, 2008, Beechtree satisfied a portion of its outstanding obligations to us under the notes in consideration of its surrender of the 95,238 shares of restricted
common stock pledged to us as security under the 2001 notes at a price of $6.93 and $5.15 per share, respectively. As of that date, the total principal amount and accrued and unpaid interest due under
the notes was $788,389. The value of the shares surrendered was approximately $670,000, which was applied to the amount outstanding under the notes, and the unpaid balance of $118,389 was forgiven. To
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Table of Contents
place
Beechtree back in substantially the same economic position it was in prior to the cancellation of the notes, we granted Beechtree an option to purchase an additional 95,238 shares of our common
stock at an exercise price of $9.08 per share, increasing by 3.23% per year compounded annually on each March 31 from the grant date through the date of exercise. This option is currently
exercisable at an exercise price of $9.43 per share and expires on March 31, 2013.
Indemnification Agreements
In addition to the indemnification provided for in our restated certificate of incorporation and bylaws, we will enter into
indemnification agreements with each of our current directors and officers prior to the completion of this offering. These agreements will require us to indemnify each such person against expenses and
liabilities incurred by such person in connection with a proceeding related to such person's services for us, and to advance expenses incurred in connection with such proceeding, all subject to
limited exceptions. See "Executive CompensationIndemnification of Directors and Executive Officers and Limitation of Liability."
Review, Approval or Ratification of Transactions with Related Parties
Our related party transaction policy requires that transactions with related parties shall be subject to approval or ratification by
our nominating/governance committee. The committee will take into account, among other factors it deems appropriate, whether the transaction is on terms no less favorable than terms generally
available to an unaffiliated third party under the same or similar circumstances, and the extent of the related party's interest in the transaction. Prior to the adoption of this policy, a majority of
disinterested members of our board of directors reviewed and approved any potential related party transaction prior to our entering into the proposed transaction. In the event a member of our
nominating/governance committee or other member of board of directors is a related party, such member shall not participate in any discussion or approval of a related party transaction, except that
such member shall provide all material information concerning the related party transaction to our nominating/governance committee.
All
related party transactions are subject to the approval or ratification of our nominating/governance committee, except transactions that involve compensation between us and any of our
executive officers, which require the approval of our compensation committee, or transactions that are available to all employees generally, such as participation in health, dental and vision
insurance, life insurance, short- and long-term disability, accidental death and dismemberment and our 401(k) plan.
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Table of Contents
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information as to the beneficial ownership of our common stock as of February 28, 2010, as adjusted
to reflect the sale of common stock offered by us in this offering, by:
-
-
each of the named executive officers listed in the summary compensation table;
-
-
each of our directors;
-
-
all of our directors and executive officers as a group; and
-
-
each stockholder known by us to be the beneficial owner of more than 5% of our common stock.
We have determined beneficial ownership in accordance with SEC rules. Unless otherwise indicated below, to our knowledge, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned, subject to applicable community property laws. Shares of our common stock subject to options that are currently exercisable or
exercisable within 60 days of February 28, 2010 are deemed to be outstanding and to be beneficially owned by the person holding the options for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
The
number of shares beneficially owned and percentage of our common stock outstanding before and after the offering is based on 11,739,967 shares of our common stock outstanding on
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Table of Contents
February 28,
2010. Except as otherwise noted below, the address for each person or entity listed in the table is c/o Nexsan Corporation, 555 St. Charles Drive, Suite 202,
Thousand Oaks, CA 91360.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned Prior
to This Offering
|
|
|
|
Shares Beneficially Owned
After This Offering
|
|
|
|
Number of
Shares Being
Offered
|
|
Name of Beneficial Owner
|
|
Number
|
|
Percentage
|
|
Number
|
|
Percentage
|
|
Directors and Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip Black(1)
|
|
|
230,237
|
|
|
2.0
|
%
|
|
|
|
|
230,237
|
|
|
1.4
|
%
|
Thomas F. Gosnell(2)
|
|
|
501,131
|
|
|
4.4
|
|
|
116,000
|
|
|
385,131
|
|
|
3.0
|
|
James Molenda(3)
|
|
|
228,570
|
|
|
2.0
|
|
|
|
|
|
228,570
|
|
|
1.4
|
|
Michael McGuire(4)
|
|
|
74,360
|
|
|
*
|
|
|
|
|
|
74,360
|
|
|
*
|
|
Eugene Spies(1)
|
|
|
57,571
|
|
|
*
|
|
|
|
|
|
57,571
|
|
|
*
|
|
Geoff Barrall(5)
|
|
|
14,730
|
|
|
*
|
|
|
|
|
|
14,730
|
|
|
*
|
|
William J. Harding(6)
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
*
|
|
Philip B. Livingston(7)
|
|
|
32,187
|
|
|
*
|
|
|
|
|
|
32,187
|
|
|
*
|
|
Richard A. McGinn(8)
|
|
|
116,153
|
|
|
1.0
|
|
|
|
|
|
116,153
|
|
|
*
|
|
Arthur L. Money(7)
|
|
|
32,187
|
|
|
*
|
|
|
|
|
|
32,187
|
|
|
*
|
|
Geoff Mott(9)
|
|
|
22,853
|
|
|
*
|
|
|
|
|
|
22,853
|
|
|
*
|
|
Michael F. Price(10)
|
|
|
2,534,161
|
|
|
22.3
|
|
|
|
|
|
2,534,161
|
|
|
15.2
|
|
George M. Weiss(11)
|
|
|
697,238
|
|
|
6.0
|
|
|
|
|
|
697,238
|
|
|
4.1
|
|
All officers and directors as a group (17 persons)(12)
|
|
|
4,822,310
|
|
|
39.5
|
|
|
116,000
|
|
|
4,706,310
|
|
|
27.6
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFP Partners, L.P.(10)
|
|
|
2,534,161
|
|
|
22.3
|
|
|
|
|
|
2,534,161
|
|
|
15.2
|
|
The Fonds de solidarité des travailleurs du Québec (F.T.Q.)(13)
|
|
|
1,657,139
|
|
|
14.6
|
|
|
|
|
|
1,657,139
|
|
|
10.0
|
|
Entities affiliated with RRE Ventures(14)
|
|
|
834,092
|
|
|
7.3
|
|
|
|
|
|
834,092
|
|
|
5.0
|
|
Entities affiliated with VantagePoint Venture Partners(15)
|
|
|
2,810,512
|
|
|
24.7
|
|
|
|
|
|
2,810,512
|
|
|
16.9
|
|
-
*
-
Less
than 1%
-
(1)
-
Consists
of 230,237 and 57,571 shares, net of tax withholdings, of our common stock issuable to Messrs. Black and Spies, respectively, immediately
prior to the completion of this offering, or IPO Bonus Shares, based on an assumed initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this
prospectus. See "Executive CompensationCompensation Discussion and AnalysisEquity-Based Incentives" for a description of the effect of an increase or decrease in the initial
public offering price per share on the number of IPO Bonus Shares. The IPO Bonus shares for Messrs. Black and Spies will be fully vested on the date of the offering.
-
(2)
-
Consists
of 464,283 shares of exchangeable stock of our Canadian subsidiary held by Mr. Gosnell, which will be exchanged for the same number of
shares of our common stock upon the completion of this offering. Also includes 36,848 shares of common stock held by Esther Hotter, Mr. Gosnell's wife. Mr. Gosnell's address is c/o
Nexsan Technologies Canada, 1405 Rte Trans-Canada, Dorval, QC H9P 2V9. See the section of this prospectus entitled "Related Party TransactionsEvertrust Acquisition."
-
(3)
-
Consists
of 228,570 shares issuable upon exercise of outstanding stock options held by Mr. Molenda, all of which shares are currently exercisable.
114,285 of the option shares held by Mr. Molenda are subject to a call option held by us. See the section of this prospectus entitled "Related Party TransactionsRestricted Stock
Transactions with Certain Related Parties and Related Matters."
-
(4)
-
Consists
of 74,360 shares issuable upon exercise of outstanding stock options, which shares will be exercisable within 60 days of February 28,
2010.
-
(5)
-
Consists
of 14,730 shares issuable upon exercise of outstanding stock options, which shares will be exercisable within 60 days of February 28,
2010.
-
(6)
-
Excludes
2,810,512 shares held by entities affiliated with VantagePoint Venture Partners, or VantagePoint, (see note 15). Mr. Harding
disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. Mr. Harding's address is c/o VantagePoint Venture Partners, 1001 Bayhill Drive,
Suite 300, San Bruno, California 94066.
-
(7)
-
Consists
of 32,187 shares issuable upon exercise of outstanding stock options, which shares will be exercisable within 60 days of February 28,
2010.
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Table of Contents
-
(8)
-
Includes
13,077 shares of our common stock and 103,076 shares issuable upon exercise of outstanding stock options held by Mr. McGinn, which shares
will be exercisable within 60 days of February 28, 2010. Excludes 834,092 shares held by entities affiliated with RRE Ventures (see note 14). Mr. McGinn disclaims
beneficial ownership of such shares except to the extent of his pecuniary interest therein.
-
(9)
-
Includes
211 shares of our common stock and 22,642 shares issuable upon exercise of outstanding stock options held by Mr. Mott, which shares will be
exercisable within 60 days of February 28, 2010.
-
(10)
-
Consists
of 2,534,161 shares held by MFP Partners, L.P. Mr. Michael F. Price, as a Managing Partner, may exercise voting power and investment
authority over the shares held by MFP Partners, L.P. The address of MFP Partners, L.P. is 667 Madison Avenue, 25th Floor New York, NY 10065.
-
(11)
-
Consists
of (a) 89,611 shares held by Beechtree Capital, LLC, (b) 95,320 shares issuable upon exercise of outstanding stock options,
which shares will be exercisable within 60 days of February 28, 2010, and 190,476 shares issuable upon exercise of options held by Beechtree which will be exercisable within
60 days of February 28, 2010, 95,238 of which option shares are subject to call options held by us, (c) 230,973 shares held by CDLM-Weiss Associates, (d) 9,523
shares held by CDLM-Investments Ltd. and (e) 81,335 shares held by DLG Investment Partnership. Mr. Weiss is the sole member of Beechtree Capital, LLC, he is a
50% owner of CDLM Weiss Associates and he has voting and investment power with respect to the shares held by DLG Investment Partnership. As a result of his relationships to these entities,
Mr. Weiss may be considered the beneficial owner of the shares held by such entities. Mr. Weiss's address is c/o Beechtree Capital, LLC, 1221 Avenue of the Americas, New York, New
York 10020.
-
(12)
-
Includes
the items described in notes (1)-(11) above and (a) 42,855 shares issuable upon exercise of outstanding stock options held by
executive officers, which shares will be exercisable within 60 days of February 28, 2010 and (b) 74,790 IPO Bonus Shares, net of tax withholdings based on an initial public
offering price of $11.00, to be issued to certain other executive officers immediately prior to the completion of this offering, which shares will be fully vested when issued. See "Executive
CompensationCompensation Discussion and AnalysisEquity-Based Incentives" for a description of the effect of an increase or decrease in the initial public offering price per
share on the number of IPO Bonus Shares.
-
(13)
-
Consists
of 1,428,571 shares held by F.T.Q. and a warrant to purchase 228,568 shares. Voting and investment control with respect to these shares is
ultimately shared by F.T.Q's board of directors, which consists of Michel Arsenault, Louis Bolduc, Yvon Bolduc, Luc Desnoyers, Alain DeGrandpré, Daniel Boyer, Jean
Lavallée, Denise Martin, Michel Ouimet, Réjean Parent, Michel Porier, Roland Robichaud, Daniel Roy, René Roy, Louise St-Cyr,
Jérome Turcq and Pierre-Maurice Vachon. The address of F.T.Q. is 545 Crémazie Boulevard, Suite 200, East Montréal, Québec
H2M 2W4.
-
(14)
-
Consists
of (a) 738,407 shares held by RRE Ventures III-A, L.P., (b) 61,705 shares held by RRE Ventures
Fund III, L.P. and (c) 33,980 shares held by RRE Ventures III, L.P. Mr. Andrew Zalasin, as a General Partner of RRE Ventures GP III, LLC,
the general partner of each of these funds, may exercise voting and investment power over the shares separate, apart and to the exclusion of Richard A. McGinn. The address of RRE Ventures is
126 East 56th Street, New York, New York 10022.
-
(15)
-
Consists
of (a) 2,517,582 shares held by VantagePoint Venture Partners IV (Q), L.P., (b) 9,170 shares held by
VantagePoint Venture Partners IV Principals Fund, L.P., (c) 252,300 shares held by VantagePoint Venture Partners IV, L.P., (d) 9,746 shares held by
VantagePoint Venture Associates IV, L.L.C. and (e) 21,714 shares issuable upon exercise of outstanding options held by VantagePoint Management, Inc., which shares will be
exercisable within 60 days of February 28, 2010. VantagePoint Venture Associates IV, L.L.C., is the general partner of each of the entities listed in (a) through (c) and
Alan E. Salzman is the managing member of VantagePoint Venture Associates IV, L.L.C. and the chief executive officer of VantagePoint Management, Inc. Mr. Salzman has voting and
investment authority over the shares held by VantagePoint Venture Partners IV (Q), L.P., VantagePoint Venture Partners IV Principals Fund, L.P., VantagePoint Venture
Partners IV, L.P., VantagePoint Venture Associates IV, L.L.C. and VantagePoint Management, Inc. The address of VantagePoint Venture Partners is 1001 Bayhill Drive,
Suite 300, San Bruno, California 94066.
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Table of Contents
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, $0.001 par value
per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. A description of the material terms and provisions of our certificate of incorporation and bylaws affecting the rights
of holders of our capital stock is set forth below. The description is intended as a summary, and is qualified in its entirety by reference to the form of our restated certificate of incorporation and
the form of our bylaws that will be effective upon the completion of this offering that will be filed with the registration statement relating to this prospectus.
As
of December 31, 2009, and after giving effect to the conversion of all outstanding shares of our convertible preferred stock into common stock prior to completion of this
offering and the issuance of the IPO Bonus Shares, there were outstanding:
-
-
11,739,967 shares of our common stock held by approximately 200 stockholders;
-
-
1,993,015 shares issuable upon exercise of outstanding stock options, including 403,570 shares subject to options that are
subject to call options held by us, exercisable as of December 31, 2009 at $9.48 per share; and
-
-
292,316 shares issuable upon exercise of outstanding warrants.
Common Stock
Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our
common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and only then at the times and in the amounts
that our board of directors may determine.
Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of
stockholders. Under our restated certificate of incorporation, stockholders do not have the right to cumulate votes for the election of directors.
Our common stock is not entitled to preemptive rights and is not subject to conversion, redemption or sinking fund provisions.
Upon our dissolution, liquidation or winding-up, the assets legally available for distribution to our stockholders are
distributable ratably among the holders of our common stock, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights and payment of liquidation preferences,
if any, on any outstanding shares of preferred stock.
Preferred Stock
Upon the completion of this offering, each outstanding share of Series A and Series C convertible preferred stock will be
converted into common stock and our one share of Series B preferred stock will be cancelled upon exchange of the exchangeable stock of our Canadian subsidiary into shares of our common stock.
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Table of Contents
Following
this offering, we will be authorized, subject to limitations prescribed by Delaware law, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish
from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations
or restrictions. Our board of directors can also increase or decrease the number of shares of any series, but not above the total number of authorized shares of each class or below the number of
shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of preferred stock with voting or conversion rights
that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of
preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a
change in control of our company and may adversely affect the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plan to issue any
shares of preferred stock.
Pursuant
to the exchange agreement under which our Series B preferred stock was issued, the holder of the 464,283 shares of exchangeable shares has the same voting power and other
rights as do our holders of common stock. Each exchangeable share is exchangeable for one share of common stock, subject to adjustment for stock splits. The exchangeable stock may be redeemed by the
holder upon election or by us on the earlier of March 24, 2015, or the occurrence of certain specified events associated with the exchangeable stock.
Options
As of December 31, 2009, we had outstanding options to purchase 1,237,065 shares of our common stock pursuant to our 2001 stock
plan, 403,570 shares issuable upon exercise of options, which option shares are subject to call options held by us, exercisable as of December 31, 2009 at $9.48 per share, and an additional
352,380 shares subject to options outstanding granted in January 2008. Subsequent to December 31, 2009, we granted options to purchase 732,358 shares of our common stock pursuant to our
2001 stock plan.
Warrants
As of December 31, 2009, we had outstanding warrants to purchase an aggregate of 54,333 shares of our common stock with a
weighted average exercise price of $6.44 per share and warrants to purchase an aggregate of 237,983 shares of our preferred stock with a weighted average exercise price of $8.39, which will represent
warrants to purchase an equivalent number of shares of our common stock after this offering at a weighted average exercise price of $8.03 per share. The warrants may be exercised on a "net" basis and
expire on various dates between April 2012 and October 2013.
Registration Rights
Upon consummation of this offering, certain holders of shares of our common stock and common stock issuable upon exercise of certain
warrants and upon exercise of certain options will be entitled to registration rights under the Third Amended and Restated Registration Rights Agreement, dated March 29, 2007, as amended (the
"Registration Rights Agreement"), with respect to the registration of a total of 12,120,891 shares of our common stock under the Securities Act, as described below.
Demand Registration Rights.
At any time following six months after the completion of this offering, upon the request of holders of
either
(1) more than 50% of the shares of common stock issued or issuable upon conversion of the Series C Convertible Preferred Stock (the "Series C
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Preferred
Registrable Shares"), (2) more than 50% of the shares of common stock issued or issuable upon conversion of the Series A Convertible Preferred Stock (the "Series A
Preferred Registrable Shares") or (3) more than 50% of the shares of common stock held by certain holders of registration rights under the Registration Rights Agreement which shares were not
issued upon conversion of any series of preferred stock (including shares of common stock issued or issuable upon exercise of warrants issued and held by such holders and shares issued or issuable
upon exchange of the exchangeable stock) (the "Common Registrable Shares"), we will be obligated to use our best efforts to register such shares. We are required to file (1) no more than two
registration statements upon exercise of these demand registration rights for holders of Series A Preferred Registrable Shares and Series C Preferred Registrable Shares and (2) no
more than one registration statement upon exercise of these demand registration rights by those current holders of Common Registrable Shares. We may postpone the filing of a registration statement for
up to 90 days once in a 12-month period if we determine that the effect of the demand registration would materially impede our ability to consummate a significant transaction or
there exists at the time of such demand material non-public information relating to us the disclosure of which would be seriously detrimental to us.
Piggyback Registration Rights.
If we register any of our securities for public sale (excluding this offering), the holders with
piggyback
registration rights under the Registration Rights Agreement will have the right to include their shares in the registration statement. However, these piggyback rights do not apply to a registration
relating to any of our employee benefit plans or any registration made solely in respect of a merger or acquisition. The managing underwriter of any underwritten offering will have the right to limit,
due to marketing reasons, the number of shares registered by these holders; provided, however, in no event shall the aggregate number of Series A Preferred Registrable Shares and
Series C Preferred Registrable Shares be reduced below 20% of the aggregate amount of
securities included in such registration. In addition, no other holder of registration rights under the Registration Rights Agreement may include their shares in any registration in which the
Series A Preferred Registrable Shares and Series C Registrable Shares have been limited to 20%.
Form S-3 Registration Rights.
Once we become eligible to register our securities on a Form S-3, if we register
any securities for public sale, the holders of shares having registration rights under the Registration Rights Agreement can request that we register all or a portion of their shares on
Form S-3, provided that the aggregate price to the public of the shares offered is at least $2.0 million. We are required to file no more than two registration statements on
Form S-3 upon exercise of these rights in any 12-month period.
Registration Expenses.
We will pay all expenses incurred in connection with each of the registrations described above, except for
underwriters'
discounts and selling commissions and stock transfer taxes applicable to the sale of shares held by the holders of registration rights. However, we will not pay for any expenses of any demand
registration if the request is subsequently withdrawn by the holder of registration rights requesting such registration unless the holders of registration rights holding at least a majority of the
shares with these registration rights agree to forfeit their right to one demand registration, subject to limited exceptions. We will pay as part of the registration expenses the fees and
disbursements of one legal counsel chosen by the holders of registration rights participating in the registration.
Expiration of Registration Rights.
The registration rights described above will expire upon the earlier of (1) five years after
this offering
is completed, (2) when there are no longer outstanding any shares that are subject to registration under the Registration Rights Agreement outstanding or (3) as to any holder of
registration rights, when all of the shares held by and issuable to such holder may be sold under Rule 144 of the Securities Act in any 90-day period.
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Holders
of substantially all of our shares with these registration rights have signed agreements with us or the underwriters prohibiting the exercise of their registration rights for
180 days, plus such period thereafter as may be necessary to comply with applicable rules of the Financial Industry Regulatory Authority, following the date of this prospectus. These agreements
with the underwriters are described below under "Underwriting."
Anti-takeover Provisions
Some of the provisions of Delaware law, our restated certificate of incorporation and our bylaws may have the effect of delaying,
deferring or discouraging another person from acquiring control of our company.
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This
section prevents some Delaware corporations from engaging, under some circumstances, in a business combination, which includes a merger or sale of at least 10% of the corporation's assets with any
interested stockholder, meaning a stockholder who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status, did own 15% or more
of the corporation's outstanding voting stock, unless:
-
-
the transaction is approved by the board of directors prior to the time that the interested stockholder became an
interested stockholder;
-
-
upon consummation of the transaction which resulted in the stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or
-
-
at or subsequent to such time that the stockholder became an interested stockholder the business combination is approved
by the board of directors and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock which is not owned by the interested
stockholder.
A
Delaware corporation may "opt out" of these provisions with an express provision in its original certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. We do not plan to "opt out" of these provisions. The statute could
prohibit or delay mergers or other takeover or change in control attempts, and accordingly, may discourage attempts to acquire us.
Charter and Bylaw Provisions
Our restated certificate of incorporation or bylaws will provide that:
-
-
following the completion of this offering, no action shall be taken by our stockholders except at an annual or special
meeting of our stockholders called in accordance with our bylaws and that our stockholders may not act by written consent;
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-
our stockholders may not call special meetings of our stockholders or fill vacancies on our board of directors;
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-
our board of directors may designate the terms of, and issue a new series of preferred stock with, voting or other rights
without stockholder approval;
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-
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the approval of holders of two-thirds of the shares entitled to vote at an election of directors will be
required to adopt, amend or repeal our bylaws or amend or repeal the provisions of our bylaws or repeal the provisions of our restated certificate of incorporation regarding the fixing of the
authorized number of directors, the election and removal of directors, indemnification of directors and the ability of stockholders to take action or call special meetings of stockholders;
-
-
a majority of the authorized number of directors will have the power to adopt, amend or repeal our bylaws without
stockholder approval;
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-
our stockholders may not cumulate votes in the election of directors;
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-
directors can only be removed for cause by holders of at least a majority of the shares entitled to vote at an election of
directors; and
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-
we will indemnify directors and officers against losses that they may incur in investigations and legal proceedings
resulting from their services to us, which may include services in connection with takeover defense measures.
These
provisions of our restated certificate of incorporation or bylaws may have the effect of delaying, deferring or discouraging another person or entity from acquiring control of us.
NASDAQ Global Market Listing
Our common stock has been approved for listing on The NASDAQ Global Market under the trading symbol "NXSN."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, whose telephone number is
(800) 937-5449.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of common stock in
the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and
legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could adversely affect the prevailing market price for
our common stock as well as our ability to raise equity capital in the future.
Upon
the completion of this offering, based on the number of shares of our common stock outstanding as of December 31, 2009, we will have 16,623,967 shares of common stock
outstanding. Of these shares, an aggregate of 5,000,000 shares of common stock sold in this offering by us and the selling stockholder will be freely tradable in the public market without restriction
or further registration under the Securities Act, unless these shares are held by "affiliates," as that term is defined in Rule 144(a)(1) under the Securities Act.
Except
as set forth below, the remaining shares of our common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements.
These remaining shares will generally become available for sale in the public market as follows:
-
-
172,366 shares not subject to a lock-up or market standoff agreement with Thomas Weisel Partners, LLC or with us
will be eligible for immediate sale upon the completion of this offering;
-
-
no restricted shares will be eligible for immediate sale upon the completion of this offering; and
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-
beginning 181 days after the date of this prospectus, subject to extension, 2,818,600 shares will be freely
tradable under Rule 144(b)(1), 8,921,367 shares will be tradable subject to the limitations on shares held by affiliates under Rule 144(b)(2).
Rule 144
In general, under Rule 144 under the Securities Act of 1933, as in effect on the date of this prospectus, a person who is not,
and has not for a period of three months preceding the sale been, an affiliate of us and has beneficially owned shares of our common stock for at least six months would be entitled to freely sell such
common stock subject only to the availability of current public information regarding us, and subject to no restrictions if such person has held the shares for at least 12 months.
An
affiliate of ours who has beneficially owned shares of our common stock for at least six months would be entitled to sell within any three-month period a number of shares that does
not exceed the greater of:
-
-
1% of the number of shares of our common stock then outstanding, which will equal approximately 166,239 shares immediately
after this offering; or
-
-
the average weekly trading volume of our common stock on The NASDAQ Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
Sales
by affiliates under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.
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Rule 701
Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers, directors or consultants who
purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until
90 days after the date of this prospectus before selling their shares. However, substantially all of our Rule 701 shares are subject to lock-up agreements as described below
and under "Underwriting" and will become eligible for sale at the expiration of those agreements.
Lock-up Agreements
We will enter into a lock-up agreement with the underwriters, and all of our directors and officers and the holders of
substantially all of our outstanding shares, stock options and warrants have entered into or will enter into lock-up agreements with the underwriters or us. Under the agreements, we may
not issue any new shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, and the holders of common stock, options and warrants may not
sell, transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock without the prior
written consent of Thomas Weisel Partners LLC for a period of 180 days, subject to specified
exceptions and a possible extension of up to 34 additional days beyond the end of such 180-day period, after the date of this prospectus. These agreements are described below under
"Underwriting."
Registration Rights
Upon completion of this offering, the holders of approximately 12,120,891 shares of our common stock will be entitled to rights with
respect to the registration of these shares under the Securities Act, subject to the lock-up arrangement described above. For a description of these registration rights, please see
"Description of Capital StockRegistration Rights." After these shares are registered, they will be freely tradable without restriction under the Securities Act.
Stock Options
As of December 31, 2009, options to purchase a total of 1,993,015 shares of our common stock were outstanding, including 403,570
shares subject to options that are subject to call options held by us, exercisable as of December 31, 2009 at $9.48 per share. Subsequent to December 31, 2009, we granted options to
purchase 732,358 shares of our common stock pursuant to our 2001 stock plan. Following this offering, we intend to register on a registration statement on Form S-8 up to
approximately 1,947,709 shares of common stock that may be issued upon exercise of outstanding stock options granted under our 2001 stock plan, 565,474 shares of our common stock that may be issued
upon exercise of outstanding stock options granted outside of our equity incentive plans, and 476,857 shares of common stock that are authorized for future issuance or grant under our 2010 equity
incentive plan, 193,045 shares of common stock that are authorized for future issuance or grant under our 2010 employee stock purchase plan, such plans to be effective upon the completion of this
offering, and the 362,598 IPO Bonus Shares. To the extent we register these shares they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to
above and, with respect to affiliates, Rule 144.
In
addition, 212,190 shares subject to options are not eligible for registration on Form S-8. Of these shares, 95,238 will be tradable beginning 181 days after
the date of this prospectus, subject to the limitations on shares sold by affiliates under Rule 144(b)(2), and the remaining 116,952 shares will be tradable beginning 181 days after the
date of this prospectus and six months from the date of exercise of the options, subject to the limitations on shares sold by affiliates under Rule 144(b)(2).
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U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
This section summarizes certain material U.S. federal income and estate tax considerations relating to the ownership and disposition of
our common stock by non-U.S. holders. This summary does not provide a complete analysis of all potential tax considerations. The information provided below is based on existing
authorities. These authorities might be repealed, revoked, or modified, possibly on a retroactive basis, so as to result in U.S. federal income and other tax consequences different from those
discussed below. For purposes of this summary, a "non-U.S. holder" is any beneficial owner of our common stock that holds our common stock as a capital asset for U.S. federal income tax
purposes and is not a citizen or resident of the U.S., a corporation organized under the laws of the U.S. or any state, a trust that is (i) subject to the primary supervision of a U.S. court
and the control of one of more U.S. persons or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person or an estate whose income is subject
to U.S. income tax regardless of source. If a partnership or other flow-through entity is a beneficial owner of our common stock, the tax treatment of a partner in the partnership or an
owner of the entity will depend upon the status of the partner or other owner and the activities of the partnership or other entity. Accordingly, partnerships that hold our common stock and partners
in such partnerships should consult their own tax advisors. This summary generally does not address tax considerations
that may be relevant to particular investors because of their specific circumstances, or because they are subject to special rules, such as:
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-
insurance companies;
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-
tax-exempt organizations;
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-
financial institutions;
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brokers or dealers in securities or currencies;
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-
regulated investment companies;
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-
real estate investment trusts;
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-
persons holding common stock as part of a hedging, integrated, conversion or constructive sale transaction or a straddle;
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-
traders in securities that elect to use a mark-to-market method of accounting for their securities
holdings;
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-
persons liable for alternative minimum tax;
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-
partnerships or entities treated as partnerships;
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owners (actually or constructively) of 5% or more of our common stock;
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-
certain U.S. expatriates; or
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-
persons who acquired our common stock as compensation for services.
Finally,
this summary does not describe the effects of any applicable foreign, state, or local laws.
Investors considering the purchase of our common stock should consult their own tax advisors regarding the application of the U.S. federal income and estate tax
laws to their particular situations and the consequences of foreign, state or local laws, and tax treaties.
Distributions
Any distribution paid to a non-U.S. holder on our common stock (to the extent paid out of our current or accumulated
earnings and profits, as determined for U.S. federal income tax purposes) will be a dividend taxed in the manner described below. Any distribution not constituting a dividend will be treated as first
a return of capital that reduces a non-U.S. holders adjusted tax basis in the common stock but not below zero. Any excess will be treated as gain on the sale or distribution of the common stock as
described below under the heading "Sale of Our Common Stock."
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Dividends
will generally be subject to U.S. withholding tax at a 30 percent rate. The withholding tax might not apply, however, or might apply at a reduced rate, if the
non-U.S. holder satisfies the applicable conditions under the terms of an applicable income tax treaty between the U.S. and the non-U.S. holder's country of residence. A
non-U.S. holder must demonstrate its entitlement to treaty benefits by providing a properly completed Form W-8BEN or appropriate substitute form to us or our paying
agent. If the holder holds the stock through a financial institution or other agent acting on the holder's behalf, the holder will be required to provide appropriate documentation to the agent. The
holder's agent will then be required to provide certification to us or our paying agent, either directly or through other intermediaries. For payments made to a foreign partnership or other flow
through entity, the certification requirements generally apply to the partners or other owners rather than to the partnership or other entity, and the partnership or other entity must provide the
partners' or other owners' documentation to us or our paying agent. Special rules, described below, apply if a dividend is effectively connected with a U.S. trade or business conducted by the
non-U.S. holder.
Sale of Our Common Stock
Non-U.S. holders will generally not be subject to U.S. federal income tax on any gains realized on the sale, exchange, or
other disposition of our common stock, unless:
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-
the gain is effectively connected with the conduct by the non-U.S. holder of a U.S. trade or business (in
which case the special rules described below under the caption "Dividends or Gains Effectively Connected with a U.S. Trade or Business" apply);
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-
subject to certain exceptions, the non-U.S. holder is an individual who is present in the U.S. for
183 days or more in the year of disposition, in which case the gain would be subject to a flat 30% tax, which may be offset by U.S. source capital losses, even though the individual is not
considered a resident of the U.S.; or
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-
we are considered to be, or to have been in the five years prior to the transaction, a "U.S. real property holding
company" and either our common stock ceases to be traded on an established securities market or the gain on the sale, exchange, or other disposition of our common stock is realized by a
non-U.S. holder who has held more than 5% of our common stock in the five years prior to the transaction.
We
do not believe that we are a U.S. real property holding company or that we are likely to become one in the future.
Dividends or Gain Effectively Connected with a U.S. Trade or Business
If any dividend on our common stock, or gain from the sale, exchange or other disposition of our common stock, is effectively connected
with a U.S. trade or business conducted by the non-U.S. holder, then, subject to the application of an income tax treaty, the dividend or gain will not be subject to the withholding tax
described above (assuming proper certification), but will be subject to U.S. federal income tax at the regular graduated rates. If the non-U.S. holder is eligible for the benefits of an
income tax treaty between the U.S. and the holder's country of residence, any "effectively connected" dividend or gain will generally be subject to U.S. federal income tax only if it is also
attributable to a permanent establishment or fixed base maintained by the holder in the U.S. Payments of dividends that are effectively connected with a U.S. trade or business, and therefore included
in the gross income of a non-U.S. holder, will not be subject to the 30 percent withholding tax. To claim exemption from withholding for dividends that are effectively connected
with a U.S. trade or business, the holder must certify its qualification, which can be done by filing a Form W-8ECI. If the non-U.S. holder is a corporation, that
portion of its earnings and profits that is effectively connected with its U.S. trade or business would generally be subject to a "branch profits tax" in addition to any regular U.S. federal income
tax on the dividend or gain. The branch profits
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tax
rate is generally 30 percent, although an applicable income tax treaty might provide for a lower rate.
U.S. Federal Estate Tax
The estates of nonresident alien individuals are generally subject to U.S. federal estate tax on property with a U.S. situs. Because we
are a U.S. corporation, our common stock will be U.S. situs property and therefore will be included in the taxable estate of a nonresident alien decedent. The U.S. federal estate tax liability of the
estate of a nonresident alien may be affected by a tax treaty between the U.S. and the decedent's country of residence.
Backup Withholding and Information Reporting
The IRC and the Treasury regulations promulgated thereunder require those who make specified payments to report the payments to the
IRS. Among the specified payments are dividends and proceeds paid by brokers to their customers. The required information returns enable the IRS to determine whether the recipient properly included
the payments in income. This reporting regime is reinforced by "backup withholding" rules. These rules require the payors to withhold tax from payments subject to information reporting if the
recipient fails to provide his taxpayer identification number to the payor, furnishes an incorrect identification number, or repeatedly fails to report interest or dividends on his returns. The backup
withholding tax rate is currently 28 percent. These backup withholding rules generally do not apply to payments to corporations, whether domestic or foreign.
Payments
to non-U.S. holders of dividends on our common stock will generally not be subject to backup withholding, and payments of proceeds made to non-U.S.
holders by a broker upon a sale of our common stock will not be subject to information reporting or backup withholding, in each case so long as the non-U.S. holder certifies its
nonresident status. Some of the common means of certifying nonresident status are described under "Dividends," above. We must report annually to the IRS any dividends paid to each
non-U.S. holder and the tax withheld, if any, with respect to such dividends. Copies of these reports may be made available to tax authorities in the country where the non-U.S.
holder resides.
Information
reporting and backup withholding also generally will not apply to a payment of the proceeds of a sale of our common stock effected outside the U.S. by a foreign office of a
foreign broker. However, information reporting requirements (but not backup withholding) will apply to a payment of the proceeds of a sale of our common stock effected outside the U.S. by a foreign
office of a broker if the broker (i) is a U.S. person, (ii) derives 50 percent or more of its gross income for certain periods from the conduct of a trade or business in the U.S.,
(iii) is a "controlled foreign corporation" as to the U.S., or (iv) is a foreign partnership that, at any time during its taxable year, is more than 50 percent (by income or
capital interest) owned by U.S. persons or is engaged in the conduct of a U.S. trade or business, unless in any such case the broker has documentary evidence in
its records that the holder is a non-U.S. holder and certain conditions are met, or the holder otherwise establishes an exemption. Payment by a U.S. office of a broker of the proceeds of a
sale of our common stock will be subject to both backup withholding and information reporting unless the holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption.
Any
amounts withheld from a payment to a holder of our common stock under the backup withholding rules can be credited against any U.S. federal income tax liability of the holder
provided the required information is timely provided to the IRS.
The preceding discussion of U.S. federal tax considerations is for general information only. It is not tax advice. Each prospective investor should consult its
own tax advisor regarding the particular U.S. federal, state, local and foreign tax consequences of purchasing, holding and disposing of our common stock, including the consequences of any proposed
change in applicable laws.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement, each of the underwriters named below has severally agreed
to purchase from us and the selling stockholder the aggregate number of shares of common stock set forth opposite their respective names below:
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Underwriters
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Number of Shares
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Thomas Weisel Partners LLC
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Lazard Capital Markets LLC
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Needham & Company, LLC
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Morgan Keegan & Company, Inc.
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Total
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Of
the 5,000,000 shares to be purchased by the underwriters, 4,884,000 shares will be purchased from us and 116,000 shares will be purchased from the selling stockholder.
The
underwriting agreement provides that the obligations of the several underwriters are subject to various conditions, including approval of legal matters by counsel. The nature of the
underwriters' obligations commits them to purchase and pay for all of the shares of common stock listed above if any are purchased.
Thomas
Weisel Partners LLC expects to deliver the shares of common stock to purchasers on or
about , 2010.
Over-Allotment Option
We have granted a 30-day option to the underwriters to purchase up to 750,000 additional shares of our common stock
at the initial public offering price, less the underwriting discount, as set forth on the cover page of this prospectus. If the underwriters exercise this option in whole or in part, then each of the
underwriters will be separately committed, subject to the conditions described in the underwriting agreement, to purchase the additional
shares of our common stock in proportion to their respective commitments set forth in the table above.
Determination of Offering Price
Prior to this offering, there has been no established market for our common stock. The initial public offering price for the shares of
our common stock offered by this prospectus will be determined by negotiation between us and the representatives and may not reflect the market price for our common stock that may prevail following
this offering. The principal factors in determining the initial public offering price will include:
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the information presented in this prospectus and otherwise available to the underwriters;
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the history of and the prospects for our industry;
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the ability of our management;
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our past and present operations;
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our historical results of operations;
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our prospects for future operational results;
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the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and
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the general condition of the securities markets at the time of this offering.
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We
cannot be sure that the initial public offering price will correspond to the price at which the common stock will trade in the public market following this offering or that an active
trading market for the common stock will develop and continue after this offering.
Commissions and Discounts
The underwriters propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover
page of this prospectus, and at this price less a concession not in excess of $ per share of common stock to other dealers specified in a master agreement among underwriters
who are
members of the Financial Industry Regulatory Association. The underwriters may allow, and the other dealers specified may re-allow, concessions not in excess of $ per
share of common stock to these other dealers. After this offering, the offering price, concessions and other selling terms may be changed by the underwriters. Our common stock is offered subject to
receipt and acceptance by the underwriters and to the other conditions, including the right to reject orders in whole or in part.
The
following table summarizes the compensation to be paid to the underwriters by us and by the selling stockholder:
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Per Share
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Total
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Without
Over-allotment
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With
Over-allotment
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Without
Over-allotment
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|
With
Over-allotment
|
|
Underwriting discounts and commissions paid by us
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Expenses paid by us
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and commissions paid by the selling stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses paid by the selling stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnification of Underwriters
We and the selling stockholder will indemnify the underwriters against some civil liabilities, including liabilities under the
Securities Act. If we or the selling stockholder are unable to provide this indemnification, we and the selling stockholder will contribute to payments the underwriters may be required to make in
respect of those liabilities.
No Sales of Similar Securities
All of our directors, certain of our executive officers, the selling stockholder and certain of our other stockholders have agreed not
to offer, sell, contract to sell, directly or indirectly, or otherwise dispose of any shares of common stock or any securities convertible into or exchangeable for shares of common stock without the
prior written consent of Thomas Weisel Partners LLC for a period of 180 days after the date of this prospectus. Notwithstanding the foregoing, if (a) during the period that begins
on the date that is 17 calendar days before the last day of the 180-day period and ends on the last day of the 180-day period, we issue an earnings release
or publicly announce material news or if a material event relating to us occurs, or (b) prior to the expiration of the 180-day period, we announce that we will release
earnings results during the 16-day period beginning on the last day of the 180-day period, the above restrictions will continue to apply until the expiration of
the 18-day period after the date we issued the earnings release, publicly announced the material news or the material event occurred unless otherwise waived by Thomas Weisel
Partners LLC. We do not anticipate requesting a waiver or shortening of the lock-up agreement from Thomas Weisel Partners LLC and
122
Table of Contents
have
no reason to believe that any person who has or will enter into a lock-up agreement with Thomas Weisel Partners LLC in connection with the offering will make such a request.
The
restrictions described in the immediately preceding paragraph do not apply to:
-
-
sales of shares of common stock offered in this offering;
-
-
transactions relating to shares of common stock acquired in open market transactions after the completion of the offering;
-
-
exercises of options or warrants by the holders thereof;
-
-
exercises of call options held by us on certain options to purchase shares of our common stock;
-
-
sales to us;
-
-
transfers among certain of our stockholders prior to the date of this prospectus, provided that such stockholders have
agreed to the restrictions described in the immediately preceding paragraph;
-
-
the transfer of shares of common stock by gift, will or intestacy;
-
-
the transfer of shares to any trust for the stockholder's direct or indirect benefit or a member of the immediate family
of the stockholder; and
-
-
the distribution of shares of common stock to partners, members, stockholders or affiliates of our stockholders;
provided
that in the case of each of the last three types of transactions, subject to limited exceptions, each donee, distributee, transferee and recipient agrees to be subject to the restrictions
described in the immediately preceding paragraph and no filing under Section 16 of the Exchange Act is required or shall be made voluntarily in connection with these transactions. In addition,
our directors and officers are permitted under certain circumstances to enter into a written plan or agreement that meets the requirements of Rule 10b5-1 under the Securities
Exchange Act.
We
have agreed that for a period of 180 days after the date of this prospectus, we will not, without the prior written consent of Thomas Weisel Partners LLC, offer, sell or
otherwise dispose of any shares of common stock, except for:
-
-
the shares of common stock offered in this offering;
-
-
the shares of common stock issuable upon exercise of options outstanding on the date of this prospectus;
-
-
the shares of common stock issuable upon exercise of warrants outstanding on the date of this prospectus; and
-
-
the shares of our common stock that are issued under the equity incentive plans described in this prospectus.
These
restrictions will remain in effect beyond the 180-day period under the same circumstances described above.
NASDAQ Global Market Listing
Our common stock has been approved for listing on The NASDAQ Global Market under the trading symbol "NXSN."
123
Table of Contents
Short Sales, Stabilizing Transactions and Penalty Bids
In order to facilitate this offering, persons participating in this offering may engage in transactions that stabilize, maintain or
otherwise affect the price of our common stock during and after this offering. Specifically, the underwriters may engage in the following activities in accordance with SEC rules.
Short sales.
Short sales involve the sales by the underwriters of a greater number of shares than they are required to purchase in the
offering.
Covered short sales are short sales made in an amount not greater than the underwriters' over-allotment option to purchase additional shares from us in this offering. The underwriters may
close out any covered short position by either exercising their over-allotment option to purchase shares or purchasing shares in the open market. In determining the source of shares to
close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Naked short sales are any short sales in excess of such over-allotment option. The underwriters must close out any naked
short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the
common stock in the open market after pricing that could adversely affect investors who purchase in this offering.
Stabilizing transactions.
The underwriters may make bids for or purchases of the shares for the purpose of pegging, fixing or
maintaining the price
of the shares, so long as stabilizing bids do not exceed a specified maximum.
Penalty bids.
If the underwriters purchase shares in the open market in a stabilizing transaction or syndicate covering transaction,
they may reclaim
a selling concession from the underwriters and selling group members who sold those shares as part of this offering. Stabilization and syndicate covering transactions may cause the price of the shares
to be higher than it would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages presales of the shares.
The
transactions above may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As
a result, the price of our common stock may be higher than the price that might otherwise exist in
the open market. The transactions above may occur on The NASDAQ Global Market or otherwise. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions
described above may have on the price of the shares. If these transactions are commenced, they may be discontinued without notice at any time.
Discretionary Sales
The underwriters have informed us that they do not intend to confirm sales to discretionary accounts that exceed 5% of the total number
of shares offered by them.
Stamp Taxes
If you purchase shares of common stock offered in this prospectus, you may be required to pay stamp taxes and other charges under the
laws and practices of the country of purchase, in addition to the public offering price listed on the cover page of this prospectus.
124
Table of Contents
Relationships
The underwriters may in the future perform investment banking and advisory services for us from time to time for which they may in the
future receive customary fees and expenses. The underwriters may, from time to time, engage in transactions with or perform services for us in the ordinary course of their business.
Lazard
Frères & Co. LLC referred this transaction to Lazard Capital Markets LLC and will receive a referral fee from Lazard Capital Markets LLC in
connection therewith.
125
Table of Contents
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon for us by Fenwick & West LLP, Mountain
View, California. Weil, Gotshal & Manges LLP, Redwood Shores, California, has advised the underwriters in connection with the offering of common stock.
EXPERTS
The consolidated financial statements and schedule of Nexsan Corporation and subsidiaries as of June 30, 2008 and 2009, and for
each of the years in the three-year period ended June 30, 2009, have been included herein and in the registration statement in reliance upon the report of KPMG LLP,
independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares
of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or
the exhibits and schedules filed therewith. For further information about us and the common stock offered by this prospectus, we refer you to the registration statement and the exhibits and schedules
filed thereto. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily
complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. Upon completion of
this offering, we will be required to file periodic reports, proxy statements, and other information with the SEC pursuant to the Securities Exchange Act of 1934. You may read and copy this
information at the Public Reference Room of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference rooms by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us,
that file electronically with the SEC. The address of that site is
www.sec.gov
.
126
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The
Board of Directors
Nexsan Corporation:
We
have audited the accompanying consolidated balance sheets of Nexsan Corporation and subsidiaries (the Company) as of June 30, 2008 and 2009, and the related consolidated
statements of operations, preferred stock, stockholders' deficit and comprehensive income (loss), and cash flows for each of the years in the three-year period ended June 30, 2009.
In connection with our audits of the consolidated financial statements, we also have audited the financial statement Schedule II. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nexsan Corporation and subsidiaries as of
June 30, 2008 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2009, in conformity with U.S.
generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/
KPMG LLP
Los
Angeles, California
December 23, 2009, except as to
note 17, which is as
of March 16, 2010
F-2
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
Stockholders'
Equity (note 1)
as of
December 31,
2009
|
|
|
|
As of
June 30,
|
|
|
|
|
|
As of
December 31,
2009
|
|
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,500
|
|
$
|
9,092
|
|
$
|
10,760
|
|
|
|
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $14, $1, and $36, respectively
|
|
|
9,810
|
|
|
11,384
|
|
|
11,136
|
|
|
|
|
|
Inventories
|
|
|
5,940
|
|
|
4,952
|
|
|
7,053
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
2,527
|
|
|
1,592
|
|
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
26,777
|
|
|
27,020
|
|
|
30,756
|
|
|
|
|
Property and equipment, net
|
|
|
2,014
|
|
|
1,595
|
|
|
1,650
|
|
|
|
|
Other non-current assets
|
|
|
319
|
|
|
242
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
29,110
|
|
$
|
28,857
|
|
$
|
32,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,701
|
|
$
|
5,629
|
|
$
|
6,898
|
|
|
|
|
|
Accrued expenses
|
|
|
4,983
|
|
|
3,864
|
|
|
3,488
|
|
|
|
|
|
Deferred revenue
|
|
|
2,778
|
|
|
1,687
|
|
|
1,993
|
|
|
|
|
|
Notes payable, excluding long-term portion
|
|
|
2,554
|
|
|
3,000
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,016
|
|
|
14,180
|
|
|
12,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to related party
|
|
|
|
|
|
|
|
|
2,580
|
|
|
|
|
|
Notes payable, long-term
|
|
|
10
|
|
|
10
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current
|
|
|
620
|
|
|
439
|
|
|
821
|
|
|
|
|
|
Other long-term liabilities
|
|
|
2,664
|
|
|
2,113
|
|
|
4,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,310
|
|
|
16,742
|
|
|
20,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A, $0.001 par value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized, 8,201,878 shares; issued and outstanding, 4,163,229 shares at June 30, 2008 and 2009 and December 31, 2009 (unaudited); liquidation
preference of $17,340 at June 30, 2008 and 2009 and December 31, 2009 (unaudited); no shares issued and outstanding pro forma (unaudited)
|
|
|
15,431
|
|
|
15,431
|
|
|
15,431
|
|
$
|
|
|
|
Series C, $0.001 par value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized, 2,857,142 shares; issued and outstanding, 2,352,947 shares at June 30, 2008 and 2009 and December 31, 2009 (unaudited); liquidation
preference of $12,353 at June 30, 2008 and 2009 and December 31, 2009 (unaudited); no shares issued and outstanding pro forma (unaudited)
|
|
|
11,998
|
|
|
11,998
|
|
|
11,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total redeemable convertible preferred stock
|
|
|
27,429
|
|
|
27,429
|
|
|
27,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B preferred stock, $0.001 par value. Authorized, issued, and outstanding, 1 share at June 30, 2008 and 2009 and December 31, 2009
(unaudited); no shares issued and outstanding pro forma (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value. Authorized, 20,369,550 shares; issued and outstanding, 4,327,775 shares at June 30, 2008, 4,383,047 at June 30,
2009, 4,396,910 at December 31, 2009 (unaudited) and 11,377,369 at December 31, 2009 pro forma (unaudited)
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
11
|
|
|
Exchangeable stock in wholly-owned subsidiary, no par value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorization based on common share authorization; issued and outstanding, 464,283 at June 30, 2008 and 2009 and December 31, 2009 (unaudited) and
no shares issued and outstanding pro forma (unaudited)
|
|
|
3,033
|
|
|
3,033
|
|
|
3,033
|
|
|
|
|
|
Additional paid-in capital
|
|
|
17,943
|
|
|
18,561
|
|
|
18,921
|
|
|
49,376
|
|
|
Note receivable from stockholder
|
|
|
(35
|
)
|
|
(37
|
)
|
|
(37
|
)
|
|
(37
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(1,445
|
)
|
|
(2,253
|
)
|
|
(2,852
|
)
|
|
(2,852
|
)
|
|
Accumulated deficit
|
|
|
(38,129
|
)
|
|
(34,622
|
)
|
|
(34,068
|
)
|
|
(34,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
|
(18,629
|
)
|
|
(15,314
|
)
|
|
(14,999
|
)
|
$
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
29,110
|
|
$
|
28,857
|
|
$
|
32,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months Ended December 31,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
49,774
|
|
$
|
62,676
|
|
$
|
60,895
|
|
$
|
32,498
|
|
$
|
34,311
|
|
Cost of revenue
|
|
|
35,750
|
|
|
40,754
|
|
|
35,544
|
|
|
18,840
|
|
|
20,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,024
|
|
|
21,922
|
|
|
25,351
|
|
|
13,658
|
|
|
14,058
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,938
|
|
|
5,364
|
|
|
5,316
|
|
|
2,593
|
|
|
3,302
|
|
|
Sales and marketing
|
|
|
8,055
|
|
|
10,444
|
|
|
11,112
|
|
|
5,495
|
|
|
7,532
|
|
|
General and administrative
|
|
|
3,114
|
|
|
6,289
|
|
|
4,678
|
|
|
2,804
|
|
|
2,620
|
|
|
Postponed public offering costs
|
|
|
|
|
|
3,447
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,107
|
|
|
25,544
|
|
|
21,555
|
|
|
10,892
|
|
|
13,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,083
|
)
|
|
(3,622
|
)
|
|
3,796
|
|
|
2,766
|
|
|
604
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,453
|
)
|
|
(2,018
|
)
|
|
(700
|
)
|
|
(602
|
)
|
|
(253
|
)
|
|
Foreign currency transaction gain (loss)
|
|
|
(449
|
)
|
|
166
|
|
|
402
|
|
|
880
|
|
|
567
|
|
|
Other income (expense), net
|
|
|
870
|
|
|
303
|
|
|
288
|
|
|
221
|
|
|
(244
|
)
|
|
Loss on extinguishment and modification of debt
|
|
|
(1,058
|
)
|
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(2,090
|
)
|
|
(1,746
|
)
|
|
(10
|
)
|
|
499
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,173
|
)
|
|
(5,368
|
)
|
|
3,786
|
|
|
3,265
|
|
|
674
|
|
Income tax benefit (expense)
|
|
|
148
|
|
|
35
|
|
|
(279
|
)
|
|
(425
|
)
|
|
(177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,025
|
)
|
$
|
(5,333
|
)
|
$
|
3,507
|
|
$
|
2,840
|
|
$
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, basic
|
|
$
|
(0.61
|
)
|
$
|
(1.09
|
)
|
$
|
0.23
|
|
$
|
0.34
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share, diluted
|
|
$
|
(0.61
|
)
|
$
|
(1.09
|
)
|
$
|
0.22
|
|
$
|
0.24
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per share, basic
|
|
|
4,923
|
|
|
4,910
|
|
|
4,827
|
|
|
4,813
|
|
|
4,851
|
|
Shares used in computing net income (loss) per share, diluted
|
|
|
4,923
|
|
|
4,910
|
|
|
5,154
|
|
|
11,693
|
|
|
4,851
|
|
Pro forma net loss per share, basic and diluted (unaudited)
|
|
|
|
|
|
|
|
$
|
(0.32
|
)
|
|
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma net loss per share, basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
11,706
|
|
|
|
|
|
11,730
|
|
See
accompanying notes to consolidated financial statements.
F-4
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Preferred Stock, Stockholders' Deficit and Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
Series C
|
|
Common stock
|
|
Exchangeable stock
|
|
|
|
Notes
receivable
from
stockholders
|
|
Accumulated
other
comprehensive
loss
|
|
|
|
|
|
|
|
|
|
Additional
paid-in
capital
|
|
Accumulated
deficit
|
|
Total
stockholders'
deficit
|
|
Comprehensive
income (loss)
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Balances at June 30, 2006
|
|
|
4,163
|
|
|
15,431
|
|
|
|
|
|
|
|
|
4,647
|
|
|
5
|
|
|
342
|
|
|
2,186
|
|
|
17,220
|
|
|
(3,534
|
)
|
|
(1,607
|
)
|
|
(29,771
|
)
|
|
(15,501
|
)
|
|
|
|
Issuance of preferred stock for cash, net of issuance costs of $355
|
|
|
|
|
|
|
|
|
1,429
|
|
|
7,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of bridge debt to preferred stock
|
|
|
|
|
|
|
|
|
924
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial debt conversion
|
|
|
|
|
|
|
|
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
|
|
Modification of warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
604
|
|
|
|
|
Interest on stockholders' notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,025
|
)
|
|
(3,025
|
)
|
|
(3,025
|
)
|
Foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
383
|
|
|
|
|
|
383
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007
|
|
|
4,163
|
|
|
15,431
|
|
|
2,353
|
|
|
11,998
|
|
|
4,656
|
|
|
5
|
|
|
342
|
|
|
2,186
|
|
|
18,015
|
|
|
(3,685
|
)
|
|
(1,224
|
)
|
|
(32,796
|
)
|
|
(17,499
|
)
|
|
|
|
Issuance of stock for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
122
|
|
|
847
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
1,344
|
|
|
|
|
Beneficial conversion feature related to convertible bridge debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,756
|
|
|
|
|
|
|
|
|
|
|
|
1,756
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
1,324
|
|
|
|
|
Interest on stockholders' notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of stockholders' notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
(3,731
|
)
|
|
3,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,333
|
)
|
|
(5,333
|
)
|
|
(5,333
|
)
|
Foreign currency translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(221
|
)
|
|
|
|
|
(221
|
)
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2008
|
|
|
4,163
|
|
|
15,431
|
|
|
2,353
|
|
|
11,998
|
|
|
4,328
|
|
|
4
|
|
|
464
|
|
|
3,033
|
|
|
17,943
|
|
|
(35
|
)
|
|
(1,445
|
)
|
|
(38,129
|
)
|
|
(18,629
|
)
|
|
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590
|
|
|
|
|
|
|
|
|
|
|
|
590
|
|
|
|
|
Interest on stockholder's note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,507
|
|
|
3,507
|
|
|
3,507
|
|
Foreign currency translation loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(808
|
)
|
|
|
|
|
(808
|
)
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2009
|
|
|
4,163
|
|
$
|
15,431
|
|
|
2,353
|
|
$
|
11,998
|
|
|
4,383
|
|
$
|
4
|
|
|
464
|
|
$
|
3,033
|
|
$
|
18,561
|
|
$
|
(37
|
)
|
$
|
(2,253
|
)
|
$
|
(34,622
|
)
|
$
|
(15,314
|
)
|
|
|
|
Cumulative effect of change in accounting principleadoption of ASC 815-40 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
57
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at July 1, 2009
|
|
|
4,163
|
|
$
|
15,431
|
|
|
2,353
|
|
$
|
11,998
|
|
|
4,383
|
|
$
|
4
|
|
|
464
|
|
$
|
3,033
|
|
$
|
18,341
|
|
$
|
(37
|
)
|
$
|
(2,253
|
)
|
$
|
(34,565
|
)
|
$
|
(15,477
|
)
|
|
|
|
Exercise of stock options (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
Stock-based compensation (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
|
545
|
|
|
|
|
Net income (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497
|
|
|
497
|
|
|
497
|
|
Foreign currency translation loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(599
|
)
|
|
|
|
|
(599
|
)
|
|
(599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 (unaudited)
|
|
|
4,163
|
|
$
|
15,431
|
|
|
2,353
|
|
$
|
11,998
|
|
|
4,397
|
|
$
|
4
|
|
|
464
|
|
$
|
3,033
|
|
$
|
18,921
|
|
$
|
(37
|
)
|
$
|
(2,852
|
)
|
$
|
(34,068
|
)
|
$
|
(14,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Six Months
Ended December 31,
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,025
|
)
|
$
|
(5,333
|
)
|
$
|
3,507
|
|
$
|
2,840
|
|
$
|
497
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,887
|
|
|
1,130
|
|
|
881
|
|
|
476
|
|
|
476
|
|
|
|
Amortization of intangible assets
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense (credit)
|
|
|
986
|
|
|
3,473
|
|
|
337
|
|
|
(306
|
)
|
|
1,434
|
|
|
|
Amortization of discounts and deferred costs related to notes payable
|
|
|
296
|
|
|
1,525
|
|
|
446
|
|
|
446
|
|
|
104
|
|
|
|
Gain on revaluation of note conversion features
|
|
|
(623
|
)
|
|
(51
|
)
|
|
(155
|
)
|
|
(163
|
)
|
|
|
|
|
|
Loss on revaluation of warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
Loss on extinguishment and modification of debt
|
|
|
1,058
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effect of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(529
|
)
|
|
(3,113
|
)
|
|
(2,264
|
)
|
|
(2,520
|
)
|
|
92
|
|
|
|
|
Inventories
|
|
|
1,823
|
|
|
(1,617
|
)
|
|
608
|
|
|
1,182
|
|
|
(2,206
|
)
|
|
|
|
Prepaid expenses and other current assets
|
|
|
457
|
|
|
(103
|
)
|
|
286
|
|
|
34
|
|
|
(215
|
)
|
|
|
|
Other non-current assets
|
|
|
(173
|
)
|
|
17
|
|
|
81
|
|
|
76
|
|
|
(63
|
)
|
|
|
|
Accounts payable
|
|
|
(2,111
|
)
|
|
3,859
|
|
|
(361
|
)
|
|
(952
|
)
|
|
1,365
|
|
|
|
|
Accrued expenses
|
|
|
514
|
|
|
1,591
|
|
|
(876
|
)
|
|
(354
|
)
|
|
(371
|
)
|
|
|
|
Deferred revenue
|
|
|
1,223
|
|
|
1,030
|
|
|
(1,199
|
)
|
|
(802
|
)
|
|
705
|
|
|
|
|
Other long-term liabilities
|
|
|
(344
|
)
|
|
(14
|
)
|
|
(141
|
)
|
|
(36
|
)
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,840
|
|
|
2,591
|
|
|
1,150
|
|
|
(79
|
)
|
|
2,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,078
|
)
|
|
(1,407
|
)
|
|
(678
|
)
|
|
(299
|
)
|
|
(517
|
)
|
|
Change in restricted cash
|
|
|
|
|
|
|
|
|
500
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,078
|
)
|
|
(1,407
|
)
|
|
(178
|
)
|
|
201
|
|
|
(517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under revolving line of credit
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
Proceeds from issuance of notes payable
|
|
|
10,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of note payable to related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,600
|
|
|
Payments on notes payable
|
|
|
(9,085
|
)
|
|
(2,600
|
)
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
Payments on revolving line of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
Deferred financing fees
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
(154
|
)
|
|
Issuance of Series C redeemable convertible preferred stock
|
|
|
7,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
|
|
25
|
|
|
12
|
|
|
35
|
|
|
Proceeds from warrant exercises
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
8,584
|
|
|
(2,600
|
)
|
|
5
|
|
|
12
|
|
|
481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
9,346
|
|
|
(1,416
|
)
|
|
977
|
|
|
134
|
|
|
2,140
|
|
Effect of foreign exchange rates on cash and cash equivalents
|
|
|
224
|
|
|
(241
|
)
|
|
(385
|
)
|
|
(554
|
)
|
|
(472
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
587
|
|
|
10,157
|
|
|
8,500
|
|
|
8,500
|
|
|
9,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
10,157
|
|
$
|
8,500
|
|
$
|
9,092
|
|
$
|
8,080
|
|
$
|
10,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
513
|
|
$
|
80
|
|
$
|
676
|
|
$
|
12
|
|
$
|
34
|
|
|
Cash paid for income taxes
|
|
|
|
|
|
|
|
|
641
|
|
|
410
|
|
|
274
|
|
Non-cash investing and financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible bridge debt to stockholders and accrued interest to Series C redeemable convertible preferred stock
|
|
|
4,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value assigned to conversion feature in connection with convertible bridge debt
|
|
|
438
|
|
|
1,943
|
|
|
|
|
|
|
|
|
|
|
|
Surrender of notes receivable from stockholders, including accrued interest, and cancellation of restricted stock
|
|
|
|
|
|
3,732
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Series C redeemable convertible preferred stock warrant issued in connection with note payable to related party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,106
|
|
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Description of Business and Significant Accounting Policies
(a) Description of Business
Nexsan Corporation (the Company), a Delaware corporation, was incorporated in November 2000. The Company provides capacity optimized
disk-based storage systems designed for the long-term storage of digital information. The Company's solutions help organizations overcome the challenges they face storing and
accessing growing amounts of fixed content over longer periods of time. The Company has three wholly-owned operating subsidiaries, which are located in California (Nexsan Technologies, Inc.),
England (Nexsan Technologies, Ltd.), and Montreal (Nexsan Technologies Canada, Inc.)
(b) Basis of Presentation
The
consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S.
(c) Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation.
(d) Unaudited Interim Financial Information
The consolidated balance sheet as of December 31, 2009, the consolidated statements of operations and cash flows for the six
months ended December 31, 2008 and 2009, and the consolidated statements of preferred stock, stockholders' deficit and comprehensive income (loss) for the six months ended December 31,
2009 are unaudited. The amounts as of December 31, 2009 and for the six months ended December 31, 2008 and 2009 included within the notes to consolidated financial statements are also
unaudited. In the opinion of the Company's management, the unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and all
adjustments (which include normal recurring adjustments) necessary for a fair presentation of financial position, results of operations and cash flows, and change in preferred stock, stockholders'
deficit and comprehensive income (loss) at December 31, 2009 and for the six months ended December 31, 2008 and 2009 have been made. Interim results are not necessarily indicative of the
results that will be achieved for the year, for any other interim period, or for any future year.
(e) Unaudited Pro Forma Stockholders' Equity
The Company has filed a registration statement with the U.S. Securities and Exchange Commission to sell shares of its common stock to
the public. The unaudited pro forma stockholders' equity gives effect, upon completion of the initial public offering, to the conversion of all of the outstanding shares of Series A and C
redeemable convertible preferred stock and exchangeable stock into 6,980,459 shares of common stock based on the number of shares of Series A and C redeemable convertible preferred stock and
exchangeable stock outstanding at December 31, 2009.
The
IPO Bonus Shares, which are not included in the unaudited pro forma stockholders' equity, will be issued to certain executive officers upon completion of the Company's initial public
offering, as defined in note 5. Based on an assumed initial public offering price of $11.00 per share, the Company would incur an expense in the amount of $7,201,000, resulting in an increase
in pro forma accumulated deficit. The Company would pay the bonus in cash of $3,213,000, representing
F-7
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
the
recipients' tax withholdings, and issue approximately 362,598 shares valued at $3,988,000. Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion of the redeemable
convertible preferred stock and exchangeable stock of $12.4 million would be reduced by $3.2 million to $9.2 million assuming the issuance of the IPO Bonus Shares.
(f) Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires
company management to make a number of judgments, estimates, and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue
recognition, provisions for product warranties granted to customers, valuation allowances for receivables, inventories, and deferred income tax assets, and valuation of stock-based compensation,
warrants, and conversion features associated with notes payable.
The
Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, the current
economic climate has increased the uncertainty inherent in such estimates and judgments, and future events are subject to change and the best estimates and judgments routinely require adjustment.
Actual results could differ from these estimates.
(g) Revenue Recognition
The Company derives revenue from sales of hardware systems, software systems, and services, as defined below. The Company sells its
products primarily through
channel partners including resellers, original equipment manufacturers and systems integrators. Revenues from product sales are recognized when persuasive evidence of an arrangement exists, product
has shipped or delivery has occurred (depending on when title passes), the sales price is fixed or determinable and free of contingencies and significant uncertainties, and collection is reasonably
assured. The Company's fee is considered fixed or determinable at the execution of an agreement, based on specific products and quantities to be delivered at specified prices. The Company's agreements
generally do not include acceptance provisions. To the extent that agreements contain such terms, revenue is recognized once the acceptance provisions have been met. The Company does not offer price
protection or stock rotation rights. The Company assesses the ability to collect from channel partners based on a number of factors, including creditworthiness and past transaction history. If the
channel partner is not deemed creditworthy, all revenue from the arrangement is deferred until payment is received and all other revenue recognition criteria have been met. Shipping charges are
generally paid by the Company's channel partners. However, shipping charges, when billed to channel partners, are recorded as revenue and the related shipping costs are included in cost of revenue.
A
reserve for sales returns is established based on the Company's historical experience with returns. The Company monitors and analyzes the accuracy of sales returns estimates by
reviewing actual returns and adjusts the reserves for future expectations to determine the adequacy of current and future reserve needs. If actual future returns and allowances differ from past
experience and expectations, additional allowances may be required.
F-8
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
The
Company has arrangements with its channel partners to reimburse them for cooperative marketing costs meeting specified criteria. In accordance with FASB Accounting Standards
Codification (ASC) 605-50,
Revenue Recognition, Customer Payments and Incentives
(ASC 605-50), reimbursements to the channel partners
meeting such specified criteria are recorded within sales and marketing expenses in the consolidated statements of operations. Those marketing costs not meeting these criteria are recorded as a
reduction of revenue.
Hardware systems sales consist of the sales of RAID storage products. Software is incidental to the functionality of these products.
Accordingly, the Company applies the provisions of Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition
, and all related interpretations.
Hardware
system sales may also include sales of premium and extended warranties. For multiple element arrangements that include hardware systems and premium and extended warranties, the
Company recognizes revenue in accordance with ASC 605-25,
Revenue Recognition, Multiple-Element Arrangements
(ASC 605-25). The Company has
determined that it has objective and reliable evidence of fair value, in accordance with ASC 605-25, to allocate revenue separately to hardware and hardware warranties. Accordingly, revenue for
hardware components is generally recognized upon shipment, which is when the risk of loss is transferred to the buyer. In accordance with ASC 605-20,
Revenue
Recognition, Services
(ASC 605-20), the Company recognizes revenue relating to its premium and extended hardware warranties ratably over the premium and extended
warranty period, which is generally one to three years.
Software systems sales consist of the sale of the Company's Assureon and DATABeast products where software has been determined to be
essential to the functionality of the product. Accordingly, the Company accounts for revenues from Assureon and DATABeast sales in accordance with ASC 985-605,
Software,
Revenue Recognition
.
The
Company's software systems sales comprise multiple elements, which include hardware, software, installation, training, hardware maintenance, and software support. A system is
considered delivered for revenue recognition purposes when the system is installed, training is provided, and the system is working as expected. Software support includes telephone support, bug fixes,
and unspecified software upgrades and enhancements, on a when-and-if available basis, over the term of the support period. Hardware maintenance and software support are considered post-contract
customer support (PCS), under ASC 985-605. Prior to the fourth quarter of fiscal year 2008, the Company did not have vendor-specific objective evidence (VSOE) of fair value for its PCS.
Accordingly, in these instances, the Company recognized all of the revenue elements from software systems sales ratably over the support period, which is typically one year. Effective in the fourth
quarter of fiscal year 2008, the Company was able to establish VSOE of fair value for PCS on certain arrangements based on a stated renewal rate for PCS services, which the Company determined are
substantive, and in these instances, the Company allocates revenue to the delivered elements using the residual method. The stated renewal rate is the rate billed for the first year PCS services and
is computed in order to provide a competitive offering to our customers and provide a higher gross margin than the Company's product gross margins.
F-9
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
Services revenue consists of installation services, hardware maintenance and training. Installation services are not considered
essential to the functionality of the Company's products as these services do not alter the product capabilities, do not require specialized skills, and may be performed by the Company's customers or
other vendors. Installation services revenues are recognized upon completion of the installation due to their short duration. Hardware maintenance includes the premium and extended warranties
discussed above. Training revenue is recognized as the training services are delivered.
Certain hardware products are shipped as evaluation units whereby the customer is under no obligation to buy until it determines the
product is acceptable. If the customer does not wish to purchase the product, it is returned to the Company and the customer is under no further obligation, assuming the product is in good condition.
For these transactions, the Company does not recognize revenue until the product is accepted by the customer, which is evidenced by the earlier of a valid purchase order or full cash payment.
Evaluation units at customer locations are included in inventory in the accompanying consolidated balance sheets.
(h) Product Warranty Liability
The Company generally warrants its products for a period of three years. A provision for estimated future warranty costs is recorded
when revenue is recognized and is included in cost of revenue. The Company's estimate of product warranty liability involves many factors, including the number of units shipped, historical and
anticipated rates of warranty claims, and cost per claim. The Company periodically assesses the adequacy of its recorded product warranty liability and adjusts the amounts as necessary. The Company
classifies the portion of the product warranty liability that it expects to incur in the next 12 months as a current liability. The Company classifies the portion of the product warranty
liability that it expects to incur more than 12 months in the future as a long-term liability.
(i) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments, including money market funds, with a maturity of ninety days or less at
the time of purchase. Cash equivalents consist of certificates of deposit, which are stated at fair value. Total cash equivalents were $0, $2.0, and $0 million (unaudited) at June 30,
2008, June 30, 2009 and December 31, 2009, respectively.
The
Company had $500,000 of restricted cash as of June 30, 2008 to meet a minimum balance requirement in connection with a revolving loan payable to a bank. This restricted cash
balance was included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. In July 2008, the revolving loan payable agreement was amended, and the
minimum balance requirement was removed.
(j) Trade Accounts Receivable
The Company is exposed to credit risk as a result of extending uncollateralized trade credit to customers.
The
Company maintains an allowance for doubtful trade accounts receivable. This reserve is established based upon an analysis of specific exposures. The provision for doubtful accounts
is
F-10
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
recorded
as a charge to general and administrative expense. The allowance for doubtful accounts as of June 30, 2008 and 2009 and December 31, 2009 was $14,000, $1,000, and $36,000
(unaudited), respectively.
(k) Inventories
Inventories include material and related manufacturing overhead and are stated at the lower of cost or market. Cost is determined using
the average-cost method. The Company reduces the value of its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. Allowances, once established, are not reversed until the related inventory has been sold or
scrapped.
(l) Property and Equipment
Property and equipment are stated at cost, subject to adjustments for impairment.
Depreciation
on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized
straight line over the shorter of the lease term or estimated useful life of the asset. The estimated useful lives are as follows:
|
|
|
Machinery and equipment
|
|
2 to 5 years
|
Furniture and fixtures
|
|
5 to 7 years
|
Leasehold improvements
|
|
Shorter of estimated useful life or lease term
|
(m) Intangible Assets
Intangible assets acquired in a business combination and in an asset acquisition of a development-stage company were amortized on a
straight-line basis in sales and marketing expense (assembled work force and non-compete agreements) and cost of revenue (developed technology) over the following useful lives:
|
|
|
Assembled workforce
|
|
2 years
|
Non-compete agreements
|
|
2 years
|
Developed technology
|
|
5 years
|
The
intangible assets were fully amortized as of June 30, 2007. Amortization expense included in the consolidated statements of operations amounted to $401,000 for year ended
June 30, 2007.
(n) Derivative Financial Instruments
The Company applies the provisions of the ASC 815,
Derivatives and Hedging
(ASC 815) which requires that all derivatives be recorded on the balance sheet at fair value. The Company had recorded derivative liabilities related to the conversion rights held by holders of
the Company's convertible bridge debt in the event of a defined disposition or financing transaction (see note 7).
(o) Research and Development and Software Development Cost
All costs to develop the Company's products are expensed as incurred. In accordance with ASC 985-20,
Software, Costs of Software to be Sold, Leased, or
Marketed
(ASC 985-20), software development costs are capitalized beginning when a product's
technological feasibility has been established and ending when the product is available for general release to customers. Generally, the Company's products are released for sale soon after
technological feasibility has been
F-11
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
established.
As a result, costs subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.
(p) Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the years ended June 30, 2007, 2008 and 2009 were $54,000,
$11,000, and $109,000, respectively, and for the six months ended December 31, 2008 and 2009 were $37,000 and $66,000 (unaudited), respectively.
(q) Stock Option Plan
The Company estimates the value of fixed stock-based awards on the date of grant or modification using the Black-Scholes option pricing
model. For stock-based awards subject to graded vesting, the Company has utilized the straight-line method for recognizing compensation cost by period and a single option award approach.
The fair value of awards expected to vest is amortized over the requisite service periods of the awards, which is generally the period from the grant date to the end of the vesting period.
For
the years ended June 30, 2007, 2008 and 2009, the Company recorded stock-based compensation expense of $986,000, $3.5 million, and $337,000 respectively, in accordance
with ASC 718,
CompensationStock Compensation
(ASC 718). For the six months ended December 31, 2008 and 2009,
stock-based compensation expense (credit) was ($306,000) and $1.4 million (unaudited), respectively.
Given
the absence of an active market for the Company's common stock prior to this offering, the Company's board of directors determined the fair value of the Company's common stock in
connection with the Company's grant of options and stock awards. In periods prior to June 30, 2007, the Company's board of directors made such determinations based on valuation criteria and
analyses, the business, financial, and venture capital experience of the individual directors, and input from management.
In
connection with the preparation of the Company's consolidated financial statements in anticipation of a potential initial public offering (IPO), valuations were performed to estimate
the fair value of the Company's common stock for financial reporting purposes through the use of contemporaneous valuations of the Company's common stock commencing at June 30, 2007.
Determining
the fair value of the Company's common stock requires making complex and subjective judgments. In estimating the fair value of the Company's common stock on a quarterly basis
commencing June 30, 2007, the Company employed a two-step approach that first estimated the fair value of the Company as a whole, and then allocated the enterprise value to the
Company's common stock. This approach is consistent with the methods outlined in the AICPA Practice Aid,
Valuation of Privately-Held-Company Equity
Securities Issued as Compensation
.
The
Company utilized an income approach and two market approaches to estimate the Company's enterprise value. The income approach consisted of the discounted cash flow method, which
involved applying appropriate discount rates to estimated future cash flows that are based on forecasts of revenue and costs. These cash flow estimates were consistent with the plans and estimates
that management used to manage the business. There is inherent uncertainty in making these estimates. The risks associated with achieving the forecasts were assessed in selecting the appropriate
discount rates, which ranged from 16.0% to 23.0%. If different discount rates had been used, the valuations would have been different. The market approaches that we used were a comparable public
company analysis and a comparable acquisition analysis. Based on the three approaches, the Company arrived at a high and low range for the total equity value of the Company and concluded on the
average of the three as the estimated enterprise value.
F-12
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
The
Company then utilized the option-pricing method to allocate the total equity value to the various securities that comprised the Company's capital structure. Application
of this method involved making estimates of the anticipated timing of a potential liquidity event such as a sale of the Company or an IPO. The anticipated timing and likelihood of each scenario was
based on the plans of the Company's board of directors and management as of the respective valuation date. Under each
scenario, the enterprise value of the Company was allocated to preferred and common shares using the option-pricing method under which values are assigned to each class of the Company's
preferred stock and the common stock is viewed as an option on the remaining equity value. The options were then valued using the Black-Scholes option pricing model, which required estimates of the
volatility of the Company's equity securities. Estimating volatility of the share price of a privately held company is complex because there is no readily available market price for the shares. The
volatility of the stock was based on available information on volatility of stocks of publicly traded companies in the Company's industry. Had the Company used different estimates of volatility, the
allocations between preferred and common shares would have been different. The option-pricing method resulted in an estimated fair value per share of the Company's common stock that was reduced for
lack of marketability by a discount of 5.0% to 17.5% in the valuations. The discounts for lack of marketability at each valuation date were determined by considering restricted stock and studies of
pre-IPO company valuations.
Information
regarding stock option grants to the Company's employees and non-employee members of its board of directors for the years ended June 30, 2007, 2008, 2009,
and the six months ended December 31, 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
Number
of Shares
Subject to
Option
Granted
|
|
Exercise
Price Per
Share
|
|
Fair Market
Per Share
|
|
Intrinsic Value
Per Share
|
|
September 2006
|
|
|
11,632
|
|
$
|
6.45
|
|
$
|
4.20
|
|
$
|
|
|
January 2007
|
|
|
3,809
|
|
|
6.45
|
|
|
3.78
|
|
|
|
|
April 2007
|
|
|
49,511
|
|
|
6.45
|
|
|
3.78
|
|
|
|
|
June 2007
|
|
|
36,472
|
|
|
6.45
|
|
|
5.36
|
|
|
|
|
September 2007
|
|
|
81,225
|
|
|
6.45
|
|
|
6.51
|
|
|
0.06
|
|
October 2007
|
|
|
9,521
|
|
|
6.83
|
|
|
6.83
|
|
|
|
|
November 2007
|
|
|
1,904
|
|
|
6.93
|
|
|
6.93
|
|
|
|
|
December 2007
|
|
|
7,618
|
|
|
6.93
|
|
|
7.04
|
|
|
0.11
|
|
January 2008(1)
|
|
|
352,380
|
|
|
9.13
|
|
|
7.04
|
|
|
|
|
April 2008
|
|
|
39,514
|
|
|
7.56
|
|
|
7.56
|
|
|
|
|
September 2008
|
|
|
77,732
|
|
|
7.46
|
|
|
7.04
|
|
|
|
|
October 2008
|
|
|
204,244
|
|
|
6.93
|
|
|
6.83
|
|
|
|
|
December 2008
|
|
|
277,079
|
|
|
6.93
|
|
|
6.62
|
|
|
|
|
February 2009
|
|
|
48,266
|
|
|
6.51
|
|
|
6.51
|
|
|
|
|
April 2009
|
|
|
32,140
|
|
|
6.51
|
|
|
6.51
|
|
|
|
|
July 2009 (unaudited)
|
|
|
69,516
|
|
|
6.93
|
|
|
6.93
|
|
|
|
|
October 2009 (unaudited)
|
|
|
19,997
|
|
|
7.04
|
|
|
7.04
|
|
|
|
|
November 2009 (unaudited)
|
|
|
90,909
|
|
|
7.35
|
|
|
7.35
|
|
|
|
|
-
(1)
-
The
exercise price per share compounds annually at a rate of 3.23%.
F-13
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
(r) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some or all or any
deferred tax assets will not be realized.
(s) Net Income (Loss) per Share
The Company computes net income (loss) per share in accordance with ASC 260,
Earnings Per
Share
(ASC 260). Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common
shares outstanding for that period. Diluted net income (loss) per share is computed giving effect to all dilutive potential shares that were outstanding during the period. Dilutive potential common
shares consist of common shares issuable upon exercise of stock options and warrants, and conversions of preferred stock and conversions of debt. For the years ended June 30, 2007 and 2008, and
the six months ended December 31, 2009 all potential common shares were anti-dilutive. Accordingly, for these periods diluted net loss per share is equivalent to basic net loss per share. For
the six months ended December 31, 2008, certain potential common shares, primarily consisting of preferred stock, options and warrants, were considered dilutive. For the year ended
June 30, 2009, certain potential common shares, primarily consisting of options and warrants, were considered dilutive. The Company's preferred stock has been determined to be participating
securities, but does not participate in losses; therefore, all losses are attributable to common stock.
The
calculations for pro forma net income per share give effect to (1) the conversion of all outstanding shares of preferred stock into common stock as of the beginning of the
period and (2) the issuance of the IPO Bonus Shares (note 5) as of the beginning of the period. In the
calculations for the year ended June 30, 2009 and the six months ended December 31, 2009, certain potential common shares were considered anti-dilutive.
(t) Impairment of Long-Lived Assets
In accordance with ASC 360,
Property, Plant, and Equipment
(ASC 360),
long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less
costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held-for-sale would be presented separately in the appropriate asset
and liability sections of the balance sheet. The Company has considered the potential for impairment of long-lived assets, and
F-14
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)
no
impairment has been recognized during the years ended June 30, 2007, 2008 and 2009, and the six months ended December 31, 2009.
(u) Foreign Currency Translation and Comprehensive Loss
The financial statements of the Company's subsidiaries in the United Kingdom, U.K., and Canada use the respective local currency as
their functional currency. The U.K. subsidiaries' functional currency is the British pound and the Canadian subsidiary's functional currency is the Canadian dollar. Assets and liabilities of the
foreign operations are translated at the rate of exchange at the balance sheet date. Revenues and expenses are translated at the weighted-average rate of exchange during the reporting period.
Translation gains or losses are included in accumulated other comprehensive loss in the stockholders' deficit section of the consolidated balance sheets.
The
Company has not engaged in foreign currency hedging activities.
(v) Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and
notes payable approximate fair value because of the short maturity of these instruments or the variable nature of the underlying interest rates.
The
Company measures and reports its investments in money market funds at fair value on a recurring basis. The fair value of the Company's investments in money market funds is equal to
the net asset value as reported by the funds. Such instruments are classified as Level 1 and are included in cash and cash equivalents. The Company has utilized a valuation model to determine
the fair value of the outstanding warrants. The inputs to the model include fair value of the stock related to the warrant, exercise price of the warrant, expected term, volatility and risk free
interest rate. As several significant inputs are not observable, the overall fair value measurement of the warrant is classified as Level 3.
The
following table summarizes the Company's financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Total Fair
Value as of
December 31,
2009
|
|
Quoted Prices
in Active
Markets for
Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Other
Unobservable
Inputs
(Level 3)
|
|
|
|
(unaudited)
(in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
8,477
|
|
$
|
8,477
|
|
$
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
1,568
|
|
|
|
|
|
|
|
|
1,568
|
|
F-15
Table of Contents
NEXSAN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Description of Business and Significant Accounting Policies (Continued)