UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

COMPELLENT TECHNOLOGIES, INC.

Delaware		37-1434895
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

7625 Smetana Lane
Eden Prairie, Minnesota 55344
(952) 294-3300

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of July 31, 2009, 30,881,720 shares of the registrant’s common stock, $0.001 par value, were outstanding.

 

 

COMPELLENT TECHNOLOGIES, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets — As of June 30, 2009 (unaudited) and December 31, 2008			3
Condensed Consolidated Statements of Operations (unaudited) — Three and Six Months Ended June 30, 2009 and 2008			4
Condensed Consolidated Statements of Cash Flows (unaudited) — Six Months Ended June 30, 2009 and 2008			5
Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			19
Item 4. Controls and Procedures			20
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			20
Item 1A. Risk Factors			20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			33
Item 6. Exhibits			34
Signatures			35
EX-31.1
EX-31.2
EX-32.1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

COMPELLENT TECHNOLOGIES, INC.

		June 30,				December 31,
		2009				2008
		(unaudited)				See Note
		(in thousands, except share and
		per share amounts)
Assets
Current assets
Cash and cash equivalents		$	33,142			$	51,989
Short-term investments			32,757				29,146
Accounts receivable, net			29,449				19,167
Inventories, net			3,497				3,564
Other current assets			2,793				1,592
Total current assets			101,638				105,458
Long-term investments			38,743				19,153
Property and equipment, net			4,227				3,446
Total assets		$	144,608			$	128,057
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	8,255			$	2,885
Accrued compensation			4,176				4,834
Accrued liabilities			1,185				1,480
Deferred revenue			20,108				15,128
Total current liabilities			33,724				24,327
Deferred revenue, net of current portion			8,509				5,464
Commitments and contingencies
Stockholders’ equity
Common stock, $0.001 par value, 300,000,000 shares authorized; 30,879,688 and 30,768,706 shares issued and outstanding as of June 30, 2009 and December 31, 2008			31				31
Additional paid in capital			150,740				147,974
Accumulated deficit			(48,595	)			(49,855	)
Accumulated other comprehensive income			199				116
Total stockholders’ equity			102,375				98,266
Total liabilities and stockholders’ equity		$	144,608			$	128,057

Note: Information derived from the Company’s audited consolidated financial statements for the year ended December 31, 2008.

See notes to these condensed consolidated financial statements.

COMPELLENT TECHNOLOGIES, INC.

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2009				2008				2009				2008
		(in thousands, except								(in thousands, except
		per share amounts)								per share amounts)
Revenues
Product		$	20,288			$	17,039			$	41,577			$	31,915
Support and services			8,428				3,973				15,212				7,410
Total revenues			28,716				21,012				56,789				39,325
Cost of revenues
Cost of product			10,306				8,031				21,132				15,378
Cost of support and services			2,983				1,606				5,407				3,014
Total cost of revenues			13,289				9,637				26,539				18,392
Gross profit			15,427				11,375				30,250				20,933
Operating expenses
Sales and marketing			10,846				8,829				20,666				16,782
Research and development			3,074				2,311				5,884				4,659
General and administrative			1,550				1,459				2,950				3,204
Total operating expenses			15,470				12,599				29,500				24,645
Income (loss) from operations			(43	)			(1,224	)			750				(3,712	)
Interest income			419				621				915				1,493
Income (loss) before taxes			376				(603	)			1,665				(2,219	)
Income tax expense			(129	)			—				(405	)			—
Net income (loss)		$	247			$	(603	)		$	1,260			$	(2,219	)
Net income (loss) per weighted average share, basic		$	0.01			$	(0.02	)		$	0.04			$	(0.07	)
Weighted average shares, basic			30,729				30,434				30,688				30,389
Net income (loss) per weighted average share, diluted		$	0.01			$	(0.02	)		$	0.04			$	(0.07	)
Weighted average shares, diluted			32,840				30,434				32,634				30,389

See notes to these condensed consolidated financial statements.

COMPELLENT TECHNOLOGIES, INC.

		For the Six Months
		Ended June 30,
		2009				2008
		(in thousands)
Operating activities
Net income (loss)		$	1,260			$	(2,219	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			1,076				700
Stock-based compensation expense			2,075				990
Changes in operating assets and liabilities:
Accounts receivable, net			(10,282	)			(5,711	)
Inventories, net			67				(1,183	)
Other current assets			(1,201	)			33
Accounts payable			5,370				889
Accrued compensation and liabilities			(908	)			1,322
Deferred revenue			8,025				5,040
Net cash provided by (used in) operating activities			5,482				(139	)
Investing activities
Purchase of property and equipment			(1,857	)			(1,227	)
Purchase of investments			(54,119	)			(50,675	)
Proceeds from sales and maturities of investments			31,014				26,150
Net cash used in investing activities			(24,962	)			(25,752	)
Financing activities
Proceeds from issuance of common stock			633				535
Net decrease in cash and cash equivalents			(18,847	)			(25,356	)
Cash and cash equivalents, beginning of period			51,989				82,382
Cash and cash equivalents, end of period		$	33,142			$	57,026
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	443			$	—
Supplemental non-cash disclosure:
Vesting of restricted common stock		$	58			$	61
Unrealized gain (loss) on available-for-sale investments		$	96			$	(23	)

See notes to these condensed consolidated financial statements.

COMPELLENT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Business Description and Summary of Significant Accounting Policies

Business Description

     Compellent Technologies, Inc., (“Compellent” or “Company”), develops, markets and services enterprise-class network storage solutions, which include software and hardware. The Company was incorporated in March 2002 and sells their products through an all-channel assisted sales model. Corporate headquarters are in Eden Prairie, Minnesota, and the Company has channel partners and end users located in the United States and in certain international markets.

Basis of Presentation

     The accompanying condensed consolidated financial statements have been prepared by the Company without audit and reflect all adjustments, consisting only of normal recurring adjustments and accruals, which are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows for the interim periods presented. The statements have been prepared in accordance with generally accepted accounting principles in the United States, or GAAP, for interim financial information. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the entire fiscal year or any future operating periods. Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted, as permitted, pursuant to the rules and regulations of the Securities and Exchange Commission (or SEC). Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the SEC on March 16, 2009.

Revenue Recognition

     The Company applies the provisions of AICPA Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, or SOP No. 97-2, as amended by SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition to its combined software and hardware product sales. The Company recognizes product revenue when:

•

Persuasive Evidence of an Arrangement Exists. The Company determines that persuasive evidence of an arrangement exists by receiving a purchase order or by obtaining a signed quote.

•

Delivery has Occurred. Substantially all products are shipped to end users. Delivery is deemed to have occurred upon shipment when title has transferred. Products shipped with acceptance criteria are not recognized as revenue until all conditional criteria are satisfied.

•

The Fee is Fixed or Determinable. Fees are considered to be fixed and determinable upon establishment of an arrangement that contains the final terms of sale including description, quantity and price of each product or service purchased, and the payment term is less than twelve months.

•

Collectability is Probable. Probability of collection is assessed on a case-by-case basis. Customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. If the Company is unable to determine from the outset of an arrangement that collectability is probable based upon its review process, revenue is recognized upon cash receipt.

     The Company uses channel partners, who act as brokers, to sell its products. Revenue under channel partners arrangements is not recognized until delivery occurs, the fee is fixed and determinable, collectability is probable and supported, and an end user has been identified. The Company maintains contractual arrangements with its channel partners, which contain provisions that specify that the risk of loss and title transfers upon shipment. In circumstances where the Company sells directly to an end user, the Company’s revenue is the price the Company charges the end user and revenue is recognized upon delivery to the end user.

     A sale is typically a multiple element arrangement including software, hardware, software maintenance, hardware maintenance and, in certain cases, services. The Company’s determination of fair value of each element in these multiple element arrangements is based on vendor-specific objective evidence, or VSOE. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to all undelivered elements of a contract. VSOE is evaluated and determined by the Company based on separate sales of the specific elements. No software products remain undelivered at the inception of the arrangement. Accordingly, assuming all other revenue recognition criteria are met, revenue from software and hardware is recognized upon delivery using the residual method in accordance with SOP No. 97-2, and revenue from software maintenance and hardware maintenance is recognized ratably over the respective support period. For multiple element arrangements that include only hardware and hardware maintenance, the Company recognizes revenue in accordance with Emerging Issues Task Force, or EITF, Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF No. 00-21. The Company has determined that it has objective and reliable evidence of fair value, in accordance with EITF No. 00-21, to allocate revenue separately to hardware and hardware maintenance.

     Product revenue consists of license fees for software applications and related hardware sales of disk drives, system controllers, host bus adapters, switches and enclosures. The Company also derives a portion of its product revenue from software and hardware upgrades, which generally includes new software applications and additional hardware components. Revenue from shipping and handling is included in product revenue and its related cost is included in cost of product revenue.

     Support and services revenue consists of software and hardware maintenance contracts and professional services for installation, training and consulting support. The Company offers software maintenance that includes telephone support, bug fixes and unspecified product updates and hardware maintenance that includes telephone support and on-site repairs and replacement. Revenue is deferred at the time the maintenance agreement is entered into and is recognized ratably over the term of the maintenance agreement, typically one to three years. The Company generally sells professional services on a time-and-materials basis and recognizes revenue when the services are performed.

Recent Accounting Pronouncements

     In May 2009, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 165, Subsequent Events, which establishes standards for accounting for and disclosing subsequent events (events which occur after the balance sheet date but before financial statements are issued or are available to be issued). SFAS No. 165 requires an entity to disclose the date subsequent events were evaluated and whether that evaluation took place on the date financial statements were issued or were available to be issued. It is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS No. 165 did not have a material impact on the Company’s financial condition or results of operation.

     In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, or SFAS No. 168. SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification ™ (or the Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. Management is currently evaluating the impact of the adoption of SFAS No. 168 and does not expect there to be an impact on the Company’s financial condition or results of operation.

2. Investments

Fair Value Measurements

     The Company’s available-for-sale investments are subject to fair value in accordance with SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurement. The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets (in thousands):

						Fair Value Measurements at June 30, 2009 Using
		June 30,
Description		2009				Level 1 (1)				Level 2 (2)				Level 3 (3)
Available-for-sale investments:
Corporate debt securities (4)		$	30,134			$	25,469			$	4,665			$	—
Variable rate demand notes (4)			7,291				—				7,291				—
U.S. agency securities (4)			25,071				—				25,071				—
Municipal bonds (4)			2,554				—				2,554				—
Certificates of deposit (5)			7,350				—				7,350				—
Money market funds (6)			25,014				25,014				—				—
Total		$	97,414			$	50,483			$	46,931			$	—

						Fair Value Measurements at December 31, 2008 Using
		December 31,
Description		2008				Level 1 (1)				Level 2 (2)				Level 3 (3)
Available-for-sale investments:
Corporate debt securities (4)		$	12,934			$	11,363			$	1,571			$	—
Variable rate demand notes (4)			7,291				—				7,291				—
U.S. agency securities (4)			23,612				—				23,612				—
Certificates of deposit (5)			7,406				—				7,406				—
Money market funds (6)			36,496				36,496				—				—
Total		$	87,739			$	47,859			$	39,880			$	—

     Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments or cash equivalents. Investments with remaining effective maturities of more than 12 months from the balance sheet date are typically classified as long-term investments. However, the Company’s portfolio includes variable rate demand notes that have stated maturities beyond 12 months, but are priced and traded as short-term instruments due to the liquidity provided through the interest reset mechanism of 7 to 35 days. Any unrealized holding gains or losses on these investments are reported in other comprehensive income or loss, a component of stockholders’ equity, until realized.

Investments

     The amortized cost, gross unrealized gains and losses, fair values and contractual maturities of available-for-sale investments consist of the following (in thousands):

								Gross Unrealized
		Contractual Maturities		Cost				Gains				Losses				Fair Value
Corporate debt securities		Less than 3 years		$	29,929			$	223			$	(18	)		$	30,134
Variable rate demand notes		Less than 12 months			7,291				—				—				7,291
U.S. agency securities		Less than 3 years			25,046				30				(5	)			25,071
Municipal bonds		Less than 2 years			2,556				—				(2	)			2,554
Certificates of deposit		Less than 12 months			7,351				—				(1	)			7,350
Money market funds		Less than 12 months			25,014				—				—				25,014
Total				$	97,187			$	253			$	(26	)		$	97,414

     Sales and maturities of available-for-sale securities for the six months ended June 30, 2009 resulted in $12,000 realized gains and no realized losses.

     Unrealized gains and losses on securities have not been recognized in the income statement because the Company has the intent and ability to hold for the foreseeable future, and the decline in fair value is deemed to be temporary. The unrealized gains and losses are reflected in other comprehensive income.

3. Inventories

     Inventories consist of the following (in thousands):

		June 30,				December 31,
		2009				2008
Component materials		$	450			$	280
Finished systems			3,047				3,284
Total		$	3,497			$	3,564

4. Property and Equipment

     Property and equipment consist of the following (in thousands):

		June 30,				December 31,
		2009				2008
Computer equipment		$	888			$	698
Office furniture and equipment			7,181				5,632
Computer software			820				710
Leasehold improvements			1,038				1,065
			9,927				8,105
Accumulated depreciation and amortization			(5,700	)			(4,659	)
Total		$	4,227			$	3,446

5. Comprehensive Income/(Loss)

     During the three and six months ended June 30, 2009, total comprehensive income amounted to $658,000 and $1.3 million. During the three and six months ended June 30, 2008, total comprehensive loss amounted to $694,000 and $2.2 million. The components of the Company’s comprehensive income/(loss) are net income/(loss), foreign currency translation adjustments, and the change in the fair market value of investments. Results of operations were translated using average exchange rates throughout the period. Translation gains or losses are accumulated as a separate component of stockholders’ equity and included in comprehensive income/(loss).

6. Stock-Based Compensation

Stock-Based Compensation Expense

     A summary of stock-based compensation expense that the Company recorded in accordance with SFAS No. 123(R), Share-Based Payment, or SFAS No. 123(R) for stock options and shares purchased under the Company’s employee stock purchase plan for the periods shown is as follows (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Cost of product		$	12			$	53			$	26			$	87
Cost of support and services			75				—				138				—
Sales and marketing			544				243				893				435
Research and development			267				106				413				194
General and administrative			389				135				605				274
Effect on income (loss) before taxes		$	1,287			$	537			$	2,075			$	990
Effect on basic and diluted earnings (loss) per share		$	0.04			$	0.02			$	0.06			$	0.03

     As of June 30, 2009, there was $10.3 million of total unrecognized compensation costs related to non-vested stock-based compensation arrangements granted under the Company’s stock option plans. This expense will be amortized on a straight-line basis over a weighted-average period of approximately 2.6 years.

Stock Options Exercised for Unvested Restricted Common Stock

     Certain stock options granted under the 2002 Stock Option Plan provide the employee option holder the right to early exercise unvested options in exchange for shares of restricted common stock. The restrictions on such common stock lapse over a time frame on the same terms as the original underlying options vested. The Company has a right to repurchase any unvested restricted shares at the original exercise price in the event the respective optionee’s employment is terminated. In accordance with SFAS No. 123(R), the cash received from employees for early exercise of unvested options is treated as a refundable deposit and is recorded as a liability in the Company’s financial statements. There were no early exercises of options during the year ended December 31, 2008 or during the six months ended June 30, 2009.

     A summary of activity for unvested restricted common stock is as follows:

		Number
		of Shares
Balance outstanding at December 31, 2008			151,820
Vested			(59,160	)
Balance outstanding at June 30, 2009			92,660

7. Income Taxes

     The Company incurred tax expenses of $129,000, consisting of $18,000 for U.S. federal alternative minimum income tax expense, $109,000 for state income tax expense, and $2,000 for foreign income taxes during the three months ended June 30, 2009 compared to no tax expense recognized during the three months ended June 30, 2008. The Company incurred tax expenses of $405,000, consisting of $160,000 for U.S. federal alternative minimum income tax expense, $238,000 for state income tax expense, and $7,000 for foreign income taxes during the six months ended June 30, 2009 compared to no tax expense recognized during the six months ended June 30, 2008. The Company has incurred annual net operating losses since inception, but has not reflected any benefit of such net operating loss carryforwards in the accompanying condensed consolidated financial statements. Given the Company’s history of losses and the uncertainty of projecting future taxable income, the Company has provided a full valuation allowance against its deferred tax assets at June 30, 2009 and December 31, 2008.

     In accordance with the Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainties in Income Taxes, the Company currently has no reserve for unrecognized tax benefits, and accordingly, there is no interest or penalties recorded

on the balance sheet for such reserves. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the appropriate state income taxing authorities from 2002 to 2007 due to the NOL carryforwards from those years.

8. Net Income (Loss) Per Common Share

     The following table sets forth the computation of net income (loss) per common share (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net income (loss)		$	247			$	(603	)		$	1,260			$	(2,219	)
Shares used in computing net income (loss) per share, basic			30,729				30,434				30,688				30,389
Dilutive effect of stock options and unvested restricted common stock			2,111				—				1,946				—
Shares used in computing net income (loss) per share, diluted			32,840				30,434				32,634				30,389
Net income (loss) per common share, basic and diluted		$	0.01			$	(0.02	)		$	0.04			$	(0.07	)

     Potential common shares of 985,000 and 1.1 million related to the Company’s outstanding stock options were excluded from the computation of diluted net income per share for the three and six months ended June 30, 2009, respectively, as inclusion of these shares would be anti-dilutive. All potential common stock equivalents for the three and six months ended June 30, 2008 were excluded from the computation of diluted net loss per share as inclusion of these shares would be anti-dilutive.

9. Commitments and Contingencies

Indemnification Obligations

     The Company has agreements with its channel partners and end users, which generally include certain provisions for indemnifying the channel partners and end users against liabilities if its products infringe a third party’s intellectual property rights. To date, the Company has not incurred any material costs as a result of such indemnification provisions and has not accrued any liabilities related to such obligations in its condensed consolidated financial statements. As permitted under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its executive officers, directors and may indemnify other employees for certain events or occurrences while the executive officer, director or employee is or was serving at its request in such capacity. These indemnification obligations are valid as long as the executive officer, director or employee acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification obligations is unlimited; however, the Company has a director and officer insurance policy that mitigates its exposure and generally enables the Company to recover a portion of any future amounts paid.

Legal Proceedings

     In April 2009, Data Network Storage LLC, or Data Networks, filed a lawsuit in the U.S. District Court for the Southern District of California, alleging, among other things, patent infringement on a universal storage management system for which it holds an exclusive license against the Company and 14 other storage vendors. Data Networks is seeking unspecified monetary damages and an injunction against further infringement from the Company and the other defendants. The Company believes the claim in this lawsuit is without merit and the Company intends to defend itself vigorously. The Company has filed an answer denying liability.

     In the ordinary course of business, the Company is from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, commercial and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, as of June 30, 2009, that, in the opinion of management, might have a material adverse effect on the Company’s financial position, results of operations or cash flows.

10. Segment and Geographic Information

     The Company operates in one reportable industry segment: the design, marketing, and technical support of enterprise class network storage solutions. The following table is based on the geographic location of the channel partner or end user who purchased the Company’s products. For sales to channel partners, their geographic location may be different from the geographic locations of the

end user. Historically, channel partners located in the United States have generally sold the Company’s products to end users located in the United States. Revenue by geographic region was as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues
United States		$	22,997			$	17,809			$	46,643			$	33,248
International			5,719				3,203				10,146				6,077
Total		$	28,716			$	21,012			$	56,789			$	39,325

11. Subsequent Events

     The Company has evaluated all subsequent events through August 7, 2009, which represents the filing date of this Quarterly Report on Form 10-Q with the Securities and Exchange Commission, to ensure that this Quarterly Report on Form 10-Q includes appropriate disclosure of events both recognized in the financial statements as of June 30, 2009, and events which occurred subsequent to June 30, 2009 but were not recognized in the financial statements. As of August 7, 2009, there were no subsequent events which required recognition or disclosure.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include all statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including, but not limited to, statements about:

•

our expectations regarding our revenue, gross margin and expenses;

•

our ability to compete in our industry;

•

our ability to maintain and grow our channel partner relationships;

•

our growth strategy and our growth rate;

	•		our ability to protect our intellectual property rights;
	•		pricing and availability of our suppliers’ products; and

•

assumptions underlying or related to any of the foregoing.

     In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail in Part II, Item IA. “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date hereof. We hereby qualify all of our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

     The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this Quarterly Report on Form 10-Q and in our other Securities and Exchange Commission, or SEC, filings, including our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 16, 2009.

Overview

     We are a leading provider of enterprise-class network storage solutions that are highly scalable, feature rich and designed to be easy to use and cost effective. Our Storage Center solution is a Storage Area Network, or SAN, that enables users to intelligently store, recover and manage large amounts of data by combining our sophisticated software with standards-based hardware into a single integrated solution. As of June 30, 2009, Storage Center was being utilized by 1,491 enterprises worldwide, across a wide variety of industries including education, financial services, government, healthcare, insurance, legal, media, retail, technology and transportation. We believe that Storage Center is the most comprehensive enterprise-class network storage solution available today, providing increased functionality and lower total cost of ownership when compared to traditional storage systems.

     We believe our business model is highly differentiated and provides us with several competitive advantages. We sell our products through an all-channel assisted sales model designed to enable us to quickly scale and cost effectively increase sales. Our sales team is spread geographically throughout the United States, and in certain international markets. We also employ a virtual manufacturing strategy, which significantly reduces inventory and eliminates the need for in-house and outsourced manufacturing. We believe these combined strategies create an efficient and scalable business model that enables us to reduce operating costs and improve capital efficiency.

Critical Accounting Policies and Estimates

     Our critical accounting policies are more fully described in Note 1 of the audited financial statements for the year ended December 31, 2008, included in our Annual Report on Form 10-K filed with the SEC on March 16, 2009. There have been no material changes in our critical accounting policies during the six months ended June 30, 2009.

     The discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the allowance for doubtful accounts, inventory valuation, stock-based compensation and income taxes. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. In many cases, we could reasonably have used different accounting policies and estimates. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Management has discussed the development, selection and disclosure of these estimates with the audit committee of our board of directors. Our actual results may differ from these estimates under different assumptions or conditions.

Results of Operations

     The following table sets forth a summary of our condensed consolidated statements of operations and the related changes for the periods shown (in thousands):

		Three Months Ended																Six Months Ended
		June 30,								Change								June 30,								Change
		2009				2008				$				%				2009				2008				$				%
		(unaudited)																(unaudited)
Revenues
Product		$	20,288			$	17,039			$	3,249				19.1	%		$	41,577			$	31,915			$	9,662				30.3	%
Support and services			8,428				3,973				4,455				112.1				15,212				7,410				7,802				105.3
Total revenues			28,716				21,012				7,704				36.7				56,789				39,325				17,464				44.4
Cost of revenues
Cost of product			10,306				8,031				2,275				28.3				21,132				15,378				5,754				37.4
Cost of support and services			2,983				1,606				1,377				85.7				5,407				3,014				2,393				79.4
Total cost of revenues			13,289				9,637				3,652				37.9				26,539				18,392				8,147				44.3
Gross profit			15,427				11,375				4,052				35.6				30,250				20,933				9,317				44.5
Operating expenses
Sales and marketing			10,846				8,829				2,017				22.8				20,666				16,782				3,884				23.1
Research and development			3,074				2,311				763				33.0				5,884				4,659				1,225				26.3
General and administrative			1,550				1,459				91				6.2				2,950				3,204				(254	)			(7.9	)
Total operating expenses			15,470				12,599				2,871				22.8				29,500				24,645				4,855				19.7
Income (loss) from operations			(43	)			(1,224	)			1,181				96.5				750				(3,712	)			4,462				120.0
Interest income			419				621				(202	)			(32.5	)			915				1,493				(578	)			(38.7	)
Income (loss) before taxes			376				(603	)			979				162.4				1,665				(2,219	)			3,884				175.0
Income tax expense			(129	)			—				(129	)			—				(405	)			—				(405	)			—
Net income (loss)		$	247			$	(603	)		$	850				141.0	%		$	1,260			$	(2,219	)		$	3,479				156.8	%

Comparison of Three Months Ended June 30, 2009 and 2008

Revenues

     Revenues and the related changes for the periods shown were as follows (in thousands):

		Three Months Ended June 30,
		2009								2008
						%								%
						of Total								of Total				Change
		$				Revenue				$				Revenue				$				%
Revenues
Product		$	20,288				70.7	%		$	17,039				81.1	%		$	3,249				19.1	%
Support and services			8,428				29.3				3,973				18.9				4,455				112.1
Total revenues		$	28,716				100.0	%		$	21,012				100.0	%		$	7,704				36.7	%

     Product Revenue. Product revenue derived from system sales increased primarily due to a 9% increase in the number of systems sold. We believe the increase in systems sales was driven by an increase of 111 channel partners, an increase in sales and marketing headcount to 190 people from 146 people, and additional marketing programs. While we continued to experience lower revenue per megabyte for disk drives, we believe this was offset by increased revenue from enhanced capacity and complexity of systems purchased by our end users. Product revenue derived from upgrade sales increased due to the ongoing growth in the number of our total end users, which increased to 1,491 as of June 30, 2009 from 972 as of June 30, 2008.

     Support and Services Revenue. Support revenue increased 113% primarily due to the renewal of maintenance agreements by existing end users and the growth of the installed base. Services revenues increased 105% due to an increase in end user and channel

partner training programs and an increase in Storage Center installations. These increases were due to both an increase in the number of products sold and our sales and marketing efforts to grow services revenue.

Cost of Revenues and Gross Margin

     Cost of revenues and gross margin and the related changes for the periods shown were as follows were as follows (in thousands):

		Three Months Ended June 30,
		2009								2008
						%								%
						of Related								of Related				Change
		$				Revenue				$				Revenue				$				%
Cost of revenues
Cost of product		$	10,306				50.7	%		$	8,031				47.1	%		$	2,275				28.3	%
Cost of support and services			2,983				35.4				1,606				40.4				1,377				85.7
Total cost of revenues		$	13,289				46.3	%		$	9,637				45.9	%		$	3,652				37.9	%
Gross margin							53.7	%							54.1	%

     Cost of Product Revenue. Cost of product revenue increased primarily due to increased component hardware costs associated with the increased number of systems and upgrades purchased by our end users.

     Cost of Support and Services Revenue. Cost of support and services revenue increased primarily due to increased salaries, employee benefits and stock-based compensation expense of $497,000 related to growth in our customer service and technical support headcount to 50 people from 34 people and increased hardware service fees of $912,000 charged by our third-party hardware maintenance providers associated with the continuing growth of our installed base.

     Gross Margin. Gross margin decreased due to the growth in cost of revenues outpacing the growth in revenues.

Operating Expenses

     Operating expenses and the related changes for the periods shown were as follows (in thousands):

		Three Months Ended June 30,
		2009								2008
						%								%
						of Total								of Total				Change
		$				Revenue				$				Revenue				$				%
Operating expenses
Sales and marketing		$	10,846				37.8	%		$	8,829				42.0	%		$	2,017				22.8	%
Research and development			3,074				10.7				2,311				11.0				763				33.0
General and administrative			1,550				5.4				1,459				7.0				91				6.2
Total operating expenses		$	15,470				53.9	%		$	12,599				60.0	%		$	2,871				22.8	%

     Sales and Marketing Expense. Sales and marketing expense increased primarily due to an increase in sales and marketing headcount to 190 people from 146 people, resulting in a $1.5 million increase in salaries, employee benefits, commissions and stock-based compensation expense, an increase in marketing expense of $378,000 related to partner programs, advertising campaigns and other promotional activities, and a $108,000 increase in channel partner referral fees due to increased third-party selling activities.

     Research and Development Expense. Research and development expense increased primarily due to an increase in research and development headcount to 68 people from 53 people, resulting in a $586,000 increase in salaries, employee benefits and stock-based compensation expense and an increase of $116,000 in depreciation costs.

     General and Administrative Expense. General and administrative expense increased primarily due to an increase in finance, information technology, and human resource staff headcount to 20 people from 15 people resulting in a $282,000 increase in salaries, employee benefits and stock-based compensation expense, offset by a decrease in professional fees of $237,000 for outside legal and consulting services and public company compliance fees.

Interest Income

     Interest Income. Interest income decreased by $202,000 due to lower interest rates partially offset by interest income on increased cash and cash equivalents and investment balances.

Income Tax Expense

     Income Tax Expense. Income tax expense of $129,000 for the three months ended June 30, 2009 consisted of $18,000 for U.S. federal alternative minimum income tax expense, $109,000 for state income tax expense, and $2,000 for foreign income taxes compared to no tax expense recognized during the three months ended June 30, 2008. We have incurred net annual operating losses since inception, but have not reflected any benefit of such net operating loss carryforwards in the accompanying condensed consolidated financial statements.

Comparison of Six Months Ended June 30, 2009 and 2008

Revenues

     Revenues and the related changes for the periods shown were as follows (in thousands):

		Six Months Ended June 30,
		2009								2008
						%								%
						of Total								of Total				Change
		$				Revenue				$				Revenue				$				%
Revenues
Product		$	41,577				73.2	%		$	31,915				81.2	%		$	9,662				30.3	%
Support and services			15,212				26.8				7,410				18.8				7,802				105.3
Total revenues		$	56,789				100.0	%		$	39,325				100.0	%		$	17,464				44.4	%

     Product Revenue. Product revenue derived from system sales primarily increased due to a 24% increase in the number of systems sold. We believe the increase in systems sales was driven by an increase of 111 channel partners, an increase in sales and marketing headcount to 190 people from 146 people, and additional marketing programs. While we continued to experience lower revenue per megabyte for disk drives, we believe this was offset by increased revenue from enhanced capacity and complexity of systems purchased by our end users. Product revenue derived from upgrade sales increased due to the ongoing growth in the number of our total end users, which increased to 1,491 as of June 30, 2009 from 972 as of June 30, 2008.

     Support and Services Revenue. Support revenue increased 107% primarily due to the renewal of maintenance agreements by existing end users and the growth of the installed base. Services revenues increased 95% due to an increase in end user and channel partner training programs and an increase in Storage Center installations. These increases were due to both an increase in the number of products sold and our sales and marketing efforts to grow services revenue.

Cost of Revenues and Gross Margin

     Cost of revenues and gross margin and the related changes for the periods shown were as follows (in thousands):

		Six Months Ended June 30,
		2009								2008
						%								%
						of Related								of Related				Change
		$				Revenue				$				Revenue				$				%
Cost of revenues
Cost of product		$	21,132				50.8	%		$	15,378				48.2	%		$	5,754				37.4	%
Cost of support and services			5,407				35.5				3,014				40.7				2,393				79.4
Total cost of revenues		$	26,539				46.7	%		$	18,392				46.8	%		$	8,147				44.3	%
Gross margin							53.3	%							53.2	%

     Cost of Product Revenue. Cost of product revenue increased due to increased component hardware costs associated with the increased number of systems and upgrades purchased by our end users.

     Cost of Support and Services Revenue. Cost of support and services revenue increased primarily due to increased salaries, employee benefits and stock-based compensation expense of $939,000 related to growth in our customer service and technical support headcount to 50 people from 34 people, increased hardware service fees of $1.3 million charged by our third-party hardware maintenance provider associated with the continuing growth of our installed base, and $83,000 increase in support and services related travel.

     Gross Margin. Gross margin increased due to the growth in revenues outpacing the growth in cost of revenues.

Operating Expenses

     Operating expenses and the related changes for the periods shown were as follows (in thousands):

		Six Months Ended June 30,
		2009								2008
						%								%
						of Total								of Total				Change
		$				Revenue				$				Revenue				$				%
Operating expenses
Sales and marketing		$	20,666				36.4	%		$	16,782				42.7	%		$	3,884				23.1	%
Research and development			5,884				10.4				4,659				11.8				1,225				26.3
General and administrative			2,950				5.2				3,204				8.2				(254	)			(7.9	)
Total operating expenses		$	29,500				51.9	%		$	24,645				62.7	%		$	4,855				19.7	%

     Sales and Marketing Expense. Sales and marketing expense increased primarily due to an increase in sales and marketing headcount to 190 people from 146 people, resulting in a $2.6 million increase in salaries, employee benefits, commissions and stock-based compensation expense, an increase in marketing expense of $1.1 million related to partner programs, advertising campaigns and other promotional activities, and a $284,000 increase in channel partner referral fees due to increased third-party selling activities.

     Research and Development Expense. Research and development expense increased primarily due to an increase in research and development headcount to 68 people from 53 people, resulting in a $896,000 increase in salaries, employee benefits and stock-based compensation expense and an increase of $244,000 in facilities related and depreciation costs.

     General and Administrative Expense. General and administrative expense decreased primarily due to a decrease in professional fees of $636,000 for outside legal and consulting services spent in 2008 pertaining primarily to public company reporting and compliance requirements in 2008 as we completed an initial public offering in October 2007, offset by an increase in finance, information technology, and human resource staff headcount to 20 people from 15 people resulting in a $360,000 increase in salaries, employee benefits and stock-based compensation expense.

Interest Income

     Interest Income. Interest income decreased by $578,000 due to lower interest rates partially offset by interest income on increased cash and cash equivalents and investment balances.

Income Tax Expense

     Income Tax Expense. Income tax expense of $405,000 for the six months ended June 30, 2009 consisted of $160,000 for U.S. federal alternative minimum income tax expense, $238,000 for state income tax expense, and $7,000 for foreign income taxes compared to no tax expense recognized during the six months ended June 30, 2008. We have incurred net annual operating losses since inception, but have not reflected any benefit of such net operating loss carryforwards in the accompanying condensed consolidated financial statements.

Liquidity and Capital Resources

     Our cash and cash equivalents and investments available to fund operations were $104.6 million and $100.3 million at June 30, 2009 and December 31, 2008, respectively. We completed an initial public offering of our common stock in October 2007, with cash proceeds of $84.6 million, net of underwriting discounts and commissions and offering expenses. We invested the cash proceeds in investment grade, interest bearing securities. We have used these funds for general corporate purposes since our initial public offering and expect to continue to do so. Cash in excess of immediate operating requirements is invested in accordance with our investment policy, primarily with a goal of maintaining liquidity and capital preservation.

Cash Flows

     The following table summarizes our cash flows for the periods shown (in thousands):

		Six Months Ended
		June 30,
		2009				2008
Net cash provided by (used in) operating activities		$	5,482			$	(139	)
Net cash used in investing activities			(24,962	)			(25,752	)
Net cash provided by financing activities			633				535
Net decrease in cash and cash equivalents		$	(18,847	)		$	(25,356	)

Operating Activities

     Cash provided by operating activities was $5.5 million for the six months ended June 30, 2009. We reported net income of $1.3 million, which included non-cash charges consisting of $1.1 million in depreciation and amortization expenses and $2.1 million in stock-based compensation expense related to employees. Other cash generating operating activities included an increase in accounts payable of $5.4 million and an increase in deferred revenue of $8.0 million, offset by an increase in accounts receivable of $10.3 million. The increase in accounts payable is primarily due to the timing of inventory purchases and corresponding payments at the end of the quarter. The increase in deferred revenue reflects an increase in our customer base and related increase in the purchase of our maintenance agreements, which are paid for in advance but recorded as revenue ratably over the term of the agreement. The increase in accounts receivable reflects an overall increase in revenue primarily due to the expansion of our operations.

     Cash used in operating activities was $139,000 for the six months ended June 30, 2008. We incurred a net loss of $2.2 million, which included non-cash charges consisting of $700,000 in depreciation and $990,000 in stock-based compensation expense. Other uses of cash in operating activities included an increase in accounts receivable of $5.7 million, partially offset by an increase in deferred revenue of $5.0 million. The increase in accounts receivable reflects an overall increase in revenue primarily due to the

expansion of our operations. The increase in deferred revenue reflects an increase in our customer base and related increase in the purchase of our maintenance agreements, which are paid for in advance but recorded as revenue ratably over the term of the agreement.

Investing Activities

     Cash used in investing activities was $25.0 million for the six months ended June 30, 2009, consisting of $1.9 million for capital additions, which were primarily for computer lab equipment and $54.1 million for the purchase of investments, partially offset by the maturities of investments of $31.0 million.

     Cash used in investing activities was $25.8 million for the six months ended June 30, 2008, consisting of $1.2 million for capital additions, which were primarily for computer lab equipment and $50.7 million for the purchase of investments, partially offset by the sales and maturities of investments of $26.2 million.

Financing Activities

     Cash provided by financing activities for the six months ended June 30, 2009 and 2008 was due to stock option exercises and purchases of stock through our employee stock purchase plan.

Operating and Capital Expenditure Requirements

     We anticipate using available cash to fund growth in operations and to invest in capital equipment. For the remainder of 2009, capital expenditures are expected to be approximately $2.0 million, primarily for computer equipment to be used for product development. We believe that our cash, cash equivalents, investments and the interest we earn on these balances will be sufficient to meet our anticipated cash requirements for at least the next 12 months. If these sources of cash are insufficient to satisfy our liquidity requirements beyond the next 12 months, we may seek to sell additional equity or convertible debt securities or enter into a credit facility. The sale of additional equity and convertible debt securities may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible debt securities, such securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, if at all.

Contractual Obligations

     There were no material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009, other than scheduled payments through June 30, 2009. Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations, contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2008 for a description of our contractual obligations.

Off-Balance Sheet Arrangements

     Since our inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

Recent Accounting Pronouncements

     See Note 1 to the Notes to Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     Our exposure to market risk has not changed materially since December 31, 2008. For more information on financial market risks related to changes in interest rates, reference is made to Item 7A, Quantitative and Qualitative Disclosure About Market Risk, contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2008.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

     Based on their evaluations as of June 30, 2009, our Chief Executive Officer and Chief Financial Officer, with the participation of management, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

     There were no changes in our internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

     Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

     In April 2009, Data Network Storage LLC, or Data Networks, filed a lawsuit in the U.S. District Court for the Southern District of California, alleging, among other things, patent infringement on a universal storage management system for which it holds an exclusive license against us and 14 other storage vendors. Data Networks is seeking unspecified monetary damages and an injunction against further infringement from us and the other defendants. We believe the claim in this lawsuit is without merit and we intend to defend ourselves vigorously. We have filed an answer denying liability.

     In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation consisting of intellectual property, commercial and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, as of June 30, 2009, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A. Risk Factors.

     We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment.

Risks Related to Our Business

Unfavorable economic and market conditions and a lessening demand in the information technology market could adversely affect our operating results.

     Our operating results may be adversely affected by unfavorable global economic and market conditions as well as a lessening demand in the information technology, or IT, market. Customer demand for our products is intrinsically linked to the strength of the economy. A reduction in demand for storage and data management caused by weak and/or deteriorating economic conditions and customer decreases in corporate spending, deferral or delay of IT projects, longer time frames for IT purchasing decisions, inability of customers to obtain credit to finance purchases of our products and generally reduced capital expenditures for IT storage solutions will result in decreased revenues and lower revenue growth rates for us. If the storage and data management markets grow slower than anticipated or if IT spending is reduced, demand for our products could decline and our operating results could be materially and adversely affected.

We have a limited operating history and a history of losses, and we may not achieve or sustain profitability in the future on a quarterly or annual basis.

     We were established in March 2002 and sold our first product in February 2004. We have not achieved profitability on an annual basis since inception. We have achieved profitability on a quarterly basis only for the three months ended September 30, 2008, December 31, 2008, March 31, 2009 and June 30, 2009. We reported net income for the six months ended June 30, 2009 of $1.3 million and as of June 30, 2009 our accumulated deficit was $48.6 million. We expect to make significant expenditures related to the development of our products and expansion of our business, including research and development, sales and marketing and general and administrative expenses. We may also encounter unforeseen difficulties, complications, product delays and other unknown factors that require additional expenditures. As a result of these increased expenditures, we will have to generate and sustain substantially increased revenues to achieve and maintain profitability, which we may never do. In addition, the percentage growth rates we achieved in prior periods may not be sustainable and we may not be able to increase our revenues sufficiently in absolute dollars to ever reach annual profitability or sustain quarterly profitability.

Our quarterly operating results may fluctuate significantly, which makes our future results difficult to predict.

     Our quarterly operating results fluctuate due to a variety of factors, many of which are outside of our control. Our future revenues are difficult to predict. A significant portion of our sales typically occurs during the last month of a quarter. As a result, we typically cannot predict our revenues in any particular quarter with any certainty until late in that quarter. Our storage products typically are shipped shortly after orders are received. As a result, revenues in any quarter are substantially dependent on orders booked and shipped in that quarter. Revenues for any future period are not predictable with any significant degree of certainty. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. Moreover, spending on storage solutions has historically been cyclical in nature, reflecting overall economic conditions as well as budgeting and buying patterns of business enterprises. We believe our recent rapid growth has masked the cyclicality and seasonality of our business. The third quarter is generally the slowest sales quarter in the storage industry. Our expense levels are relatively fixed in the short term and are based, in part, on our expectations as to future revenues. If revenue levels are below our expectations, we may incur higher losses and may never reach annual profitability or sustain quarterly profitability. Our operating results may be disproportionately affected by a reduction in revenues because a proportionately smaller amount of our expenses varies with our revenues. As a result, our quarterly operating results are difficult to predict, even in the near term. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our common stock would likely decline substantially.

     In addition to other risk factors listed in this “Risk Factors” section, factors that may affect our operating results include:

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reductions in end users’ budgets for information technology purchases and delays in their budgeting and purchasing cycles, given current macroeconomic conditions;

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hardware and software configuration and mix;

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fluctuations in demand, including due to seasonality, for our products and services;

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changes in pricing by us in response to competitive pricing actions;

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the sale of Storage Center in the timeframes we anticipate, including the number and size of orders in each quarter;

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

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the timing of product releases or upgrades by us or by our competitors;

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any significant changes in the competitive dynamics of our market, including new entrants or substantial discounting of products;

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our ability to control costs, including our operating expenses and the costs of the components we purchase;

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the extent to which our end users renew their service and maintenance agreements with us;

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volatility in our stock price, which may lead to higher stock compensation expenses; and

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general economic conditions in our domestic and international markets.

The markets in which we compete are highly competitive and dominated by large corporations and we may not be able to compete effectively.

     The storage market is intensely competitive and is characterized by rapidly changing technology. This competition could make it more difficult for us to sell our products, and result in increased pricing pressure, reduced gross margin, increased sales and marketing expense and failure to increase, or the loss of, market share or expected market share which would likely result in lower revenue.

            Our ability to compete depends on a number of factors, including:

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our products’ functionality, scalability, performance, ease of use, reliability, availability and cost effectiveness relative to that of our competitors’ products;

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our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

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our success in identifying new markets, applications and technologies;

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our ability to attract and retain value-added resellers, which we refer to as channel partners;

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our name recognition and reputation;

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our ability to recruit software engineers and sales and marketing personnel; and

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our ability to protect our intellectual property.

     Potential end users may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. In the event a potential end user decides to evaluate a new storage system, the end user may be more inclined to select one of our competitors whose product offerings are broader than just storage systems. In addition, potential end users may prefer to purchase from their existing suppliers rather than a new supplier, regardless of product performance or features. Most of our new end users have installed storage systems, which gives an incumbent competitor an advantage in retaining an end user because it already understands the network infrastructure, user demands and information technology needs of the end user, and also because it is costly and time-consuming for end users to change storage systems.

     A number of very large corporations have historically dominated the storage market. We consider our primary competitors to be companies that provide Storage Area Network, or SAN products, such as 3Par, Inc., Dell, Inc., EMC Corporation, Hewlett-Packard Company, Hitachi Data Systems Corporation, IBM and NetApp, Inc., and Xiotech Corporation. Some of our competitors, including