e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
OR
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 001-33685
COMPELLENT TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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37-1434895 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
7625 Smetana Lane
Eden Prairie, Minnesota 55344
(952) 294-3300
(Address, including zip code, and telephone number, including area code, of registrants 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):
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Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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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 October 26, 2009, 30,943,116 shares of the registrants common stock, $0.001 par value,
were outstanding.
COMPELLENT TECHNOLOGIES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2009
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
COMPELLENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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See Note |
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(in thousands, except share and per share amounts) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
32,292 |
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$ |
51,989 |
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Short-term investments |
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28,813 |
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29,146 |
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Accounts receivable, net |
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30,664 |
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19,167 |
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Inventories, net |
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4,155 |
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3,564 |
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Other current assets |
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3,088 |
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1,592 |
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Total current assets |
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99,012 |
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105,458 |
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Long-term investments |
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47,932 |
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19,153 |
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Property and equipment, net |
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4,648 |
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3,446 |
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Total assets |
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$ |
151,592 |
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$ |
128,057 |
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Liabilities and stockholders equity |
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Current liabilities |
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Accounts payable |
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$ |
7,121 |
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$ |
2,885 |
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Accrued compensation |
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5,352 |
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4,834 |
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Accrued liabilities |
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1,351 |
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1,480 |
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Deferred revenue |
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21,800 |
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15,128 |
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Total current liabilities |
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35,624 |
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24,327 |
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Deferred revenue, net of current portion |
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9,950 |
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5,464 |
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Commitments and contingencies |
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Stockholders equity |
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Common stock, $0.001 par value, 300,000,000
shares authorized; 30,941,059 and 30,768,706
shares issued and outstanding as of
September 30, 2009 and December 31, 2008 |
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31 |
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31 |
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Additional paid in capital |
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152,045 |
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147,974 |
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Accumulated deficit |
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(46,336 |
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(49,855 |
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Accumulated other comprehensive income |
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278 |
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116 |
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Total stockholders equity |
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106,018 |
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98,266 |
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Total liabilities and stockholders equity |
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$ |
151,592 |
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$ |
128,057 |
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Note: Information derived from the Companys audited consolidated financial statements for the year
ended December 31, 2008.
See notes to these condensed consolidated financial statements.
3
COMPELLENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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For the Three Months |
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For the Nine Months |
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Ended September 30, |
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Ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(in thousands, except
per share amounts) |
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(in thousands, except
per share amounts) |
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Revenues |
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Product |
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$ |
22,987 |
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$ |
19,501 |
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$ |
64,564 |
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$ |
51,416 |
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Support and services |
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9,225 |
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5,109 |
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24,437 |
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12,519 |
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Total revenues |
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32,212 |
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24,610 |
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89,001 |
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63,935 |
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Cost of revenues |
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Cost of product |
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10,957 |
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9,338 |
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32,089 |
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24,716 |
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Cost of support and services |
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2,825 |
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2,064 |
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8,232 |
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5,078 |
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Total cost of revenues |
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13,782 |
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11,402 |
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40,321 |
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29,794 |
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Gross profit |
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18,430 |
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13,208 |
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48,680 |
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34,141 |
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Operating expenses |
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Sales and marketing |
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11,386 |
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9,041 |
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32,052 |
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25,823 |
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Research and development |
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3,276 |
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2,452 |
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9,160 |
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7,111 |
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General and administrative |
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1,680 |
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1,883 |
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4,630 |
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5,087 |
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Total operating expenses |
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16,342 |
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13,376 |
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45,842 |
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38,021 |
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Operating income (loss) |
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2,088 |
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(168 |
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2,838 |
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(3,880 |
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Interest income |
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465 |
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632 |
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1,380 |
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2,125 |
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Income (loss) before taxes |
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2,553 |
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464 |
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4,218 |
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(1,755 |
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Income tax expense |
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(294 |
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(699 |
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Net income (loss) |
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$ |
2,259 |
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$ |
464 |
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$ |
3,519 |
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$ |
(1,755 |
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Net income (loss) per weighted average share, basic |
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$ |
0.07 |
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$ |
0.02 |
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$ |
0.11 |
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$ |
(0.06 |
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Weighted average shares, basic |
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30,818 |
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30,523 |
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30,732 |
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30,434 |
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Net income (loss) per weighted average share, diluted |
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$ |
0.07 |
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$ |
0.01 |
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$ |
0.11 |
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$ |
(0.06 |
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Weighted average shares, diluted |
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31,944 |
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31,695 |
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31,682 |
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30,434 |
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See notes to these condensed consolidated financial statements.
4
COMPELLENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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For the Nine Months |
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Ended September 30, |
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2009 |
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2008 |
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(in thousands) |
Operating activities |
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Net income (loss) |
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$ |
3,519 |
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$ |
(1,755 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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1,700 |
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1,136 |
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Stock-based compensation expense |
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3,033 |
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1,538 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(11,497 |
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(8,075 |
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Inventories, net |
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(591 |
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(1,360 |
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Other current assets |
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(1,496 |
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(293 |
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Accounts payable |
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4,236 |
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2,271 |
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Accrued compensation and liabilities |
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463 |
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2,282 |
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Deferred revenue |
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11,158 |
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6,831 |
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Net cash provided by operating activities |
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10,525 |
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2,575 |
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Investing activities |
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Purchases of property and equipment |
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(2,902 |
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(1,735 |
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Purchases of investments |
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(81,614 |
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(73,884 |
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Proceeds from sales and maturities of investments |
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53,343 |
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35,931 |
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Net cash used in investing activities |
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(31,173 |
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(39,688 |
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Financing activities |
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Proceeds from issuance of common stock |
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951 |
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543 |
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Net decrease in cash and cash equivalents |
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(19,697 |
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(36,570 |
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Cash and cash equivalents, beginning of period |
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51,989 |
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82,382 |
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Cash and cash equivalents, end of period |
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$ |
32,292 |
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$ |
45,812 |
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Supplemental disclosure of cash flow information: |
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Cash paid for income taxes |
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$ |
567 |
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$ |
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Supplemental non-cash disclosure: |
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Vesting of restricted common stock |
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$ |
87 |
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$ |
90 |
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Unrealized gain (loss) on available-for-sale investments |
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$ |
175 |
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$ |
(127 |
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See notes to these condensed consolidated financial statements.
5
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
Companys 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 Companys 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 Companys 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 recognizes product revenue when:
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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. |
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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. |
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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. |
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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 Companys 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 Companys 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.
6
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, 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 has determined that
it has objective and reliable evidence of fair value 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
June 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2009-01, Generally Accepted
Accounting Principles (ASC Topic 105), which establishes the FASB Accounting Standards
Codification, or the Codification or ASC, as the official single source of authoritative GAAP. All
existing accounting standards are superseded. All other accounting guidance not included in the
Codification will be considered non-authoritative. The Codification also includes all relevant SEC
guidance organized using the same topical structure in separate sections within the Codification.
Following
the Codification, FASB will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates, or ASUs, which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the changes to the
Codification.
The Codification is not intended to change GAAP, but it will change the way GAAP is organized
and presented. The Codification is effective for interim and annual periods ending after September
15, 2009. The principal impact on the Companys financial statements is limited to disclosures as
all future references to authoritative accounting literature will be referenced in accordance with
the Codification. The Codification did not have an impact on the Companys financial condition or
results of operation.
In October 2009, the FASB issued the following ASUs:
|
|
ASU No. 2009-13, Revenue Recognition
(ASC Topic 605) Multiple-Deliverable
Revenue Arrangements, a consensus of the
FASB Emerging Issues Task Force; and |
|
|
|
ASU No. 2009-14, Software (ASC Topic
985) Certain Revenue Arrangements That
Include Software Elements, a consensus of
the FASB Emerging Issues Task Force. |
ASU No. 2009-13: This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue
Recognition-Multiple Element Arrangements by allowing the use of the best estimate of selling
price in addition to VSOE and Vendor Objective Evidence (now
referred to as third-party evidence, or TPE) for
determining the selling price of a deliverable. A vendor is now required to use its best estimate
of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the
residual method of allocating arrangement consideration is no longer permitted.
ASU No. 2009-14: This guidance modifies the scope of ASC subtopic 965-605 Software-Revenue
Recognition to exclude from its requirements (a) non-software components of tangible products and
(b) software components of tangible products that are sold, licensed, or leased with tangible
products when the software components and non-software components of the tangible product function
together to deliver the tangible products essential functionality.
7
These updates require expanded qualitative and quantitative disclosures and are effective for
fiscal years beginning on or after June 15, 2010. However, companies may elect to adopt as early as
interim periods ended September 30, 2009. These updates may be applied either prospectively from
the beginning of the fiscal year for new or materially modified arrangements or retrospectively.
The Company is currently evaluating the impact of adopting these updates on our consolidated financial
statements.
2. Investments
Fair Value Measurements
The
Companys available-for-sale investments are subject to fair
value measurement. The following table
details the fair value measurements within the fair value hierarchy of the Companys financial
assets for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2009 Using |
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
|
Description |
|
2009 |
|
|
Level 1 (1) |
|
|
Level 2 (2) |
|
|
Level 3 (3) |
|
|
|
|
|
|
|
|
Available-for-sale investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities (4) |
|
$ |
32,561 |
|
|
$ |
32,561 |
|
|
$ |
|
|
|
$ |
|
|
Variable rate demand notes (5) |
|
|
6,951 |
|
|
|
|
|
|
|
6,951 |
|
|
|
|
|
U.S. agency securities (4) |
|
|
25,616 |
|
|
|
|
|
|
|
25,616 |
|
|
|
|
|
Municipal bonds (4) |
|
|
4,898 |
|
|
|
|
|
|
|
4,898 |
|
|
|
|
|
Commercial paper (5) |
|
|
2,989 |
|
|
|
|
|
|
|
2,989 |
|
|
|
|
|
Certificates of deposit (6) |
|
|
4,631 |
|
|
|
|
|
|
|
4,631 |
|
|
|
|
|
Money market funds (7) |
|
|
30,240 |
|
|
|
30,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
107,886 |
|
|
$ |
62,801 |
|
|
$ |
45,085 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (6) |
|
|
7,406 |
|
|
|
|
|
|
|
7,406 |
|
|
|
|
|
Money market funds (7) |
|
|
36,496 |
|
|
|
36,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
87,739 |
|
|
$ |
47,859 |
|
|
$ |
39,880 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Level 1 classification is applied to any asset that has a readily available quoted price from
an active market where there is significant transparency in the executed/quoted price. |
|
(2) |
|
Level 2 classification is applied to assets that have evaluated prices received from fixed
income vendors where the data inputs to these valuations, which are observable either directly
or indirectly, but do not represent quoted prices from an active market for each individual
security. |
|
(3) |
|
Level 3 classification is applied to assets when prices are not derived from existing market
data. |
|
(4) |
|
Included in short-term and long-term investments on the condensed consolidated balance
sheets. |
|
(5) |
|
Included in short-term investments on the condensed consolidated balance sheets. |
|
(6) |
|
Included in cash and cash equivalents and short-term investments on the condensed
consolidated balance sheets. |
|
(7) |
|
Included in cash and cash equivalents on the condensed consolidated balance sheets. |
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 Companys 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.
8
Investments
The amortized cost, gross unrealized gains and losses, fair values and contractual maturities
of available-for-sale investments as of September 30, 2009 consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Contractual Maturities |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
Corporate debt securities |
|
Less than 3 years |
|
$ |
32,292 |
|
|
$ |
307 |
|
|
$ |
(38 |
) |
|
$ |
32,561 |
|
Variable rate demand notes |
|
Less than 12 months |
|
|
6,951 |
|
|
|
|
|
|
|
|
|
|
|
6,951 |
|
U.S. agency securities |
|
Less than 3 years |
|
|
25,570 |
|
|
|
52 |
|
|
|
(6 |
) |
|
|
25,616 |
|
Municipal bonds |
|
Less than 2 years |
|
|
4,908 |
|
|
|
4 |
|
|
|
(14 |
) |
|
|
4,898 |
|
Commercial paper |
|
Less than 12 months |
|
|
2,989 |
|
|
|
|
|
|
|
|
|
|
|
2,989 |
|
Certificates of deposit |
|
Less than 12 months |
|
|
4,631 |
|
|
|
|
|
|
|
|
|
|
|
4,631 |
|
Money market funds |
|
Less than 12 months |
|
|
30,240 |
|
|
|
|
|
|
|
|
|
|
|
30,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
107,581 |
|
|
$ |
363 |
|
|
$ |
(58 |
) |
|
$ |
107,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and maturities of available-for-sale securities for the nine months ended September 30,
2009 resulted in $82,000 realized gains and no realized losses.
Unrealized gains and losses on securities have not been recognized in the condensed
consolidated statement of operations 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 accumulated other comprehensive income in the condensed consolidated
balance sheets.
3. Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Component materials |
|
$ |
534 |
|
|
$ |
280 |
|
Finished systems |
|
|
3,621 |
|
|
|
3,284 |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,155 |
|
|
$ |
3,564 |
|
|
|
|
|
|
|
|
4. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Computer equipment |
|
$ |
953 |
|
|
$ |
698 |
|
Office furniture and equipment |
|
|
8,045 |
|
|
|
5,632 |
|
Computer software |
|
|
881 |
|
|
|
710 |
|
Leasehold improvements |
|
|
1,137 |
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
11,016 |
|
|
|
8,105 |
|
Accumulated depreciation and amortization |
|
|
(6,368 |
) |
|
|
(4,659 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
4,648 |
|
|
$ |
3,446 |
|
|
|
|
|
|
|
|
5. Comprehensive Income/(Loss)
During the three and nine months ended September 30, 2009, total comprehensive income amounted
to $2.3 million and $3.7 million, respectively. During the three and nine months ended September
30, 2008, total comprehensive income/(loss) amounted to $360,000 and ($1.9 million), respectively.
The components of the Companys 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.
9
6. Stock-Based Compensation
Stock-Based Compensation Expense
A summary of stock-based compensation expense that the Company recorded for stock options and
shares purchased under the Companys employee stock purchase plan for the periods shown is as
follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Cost of product |
|
$ |
10 |
|
|
$ |
54 |
|
|
$ |
36 |
|
|
$ |
141 |
|
Cost of support and services |
|
|
18 |
|
|
|
|
|
|
|
156 |
|
|
|
|
|
Sales and marketing |
|
|
405 |
|
|
|
253 |
|
|
|
1,298 |
|
|
|
688 |
|
Research and development |
|
|
139 |
|
|
|
107 |
|
|
|
552 |
|
|
|
301 |
|
General and administrative |
|
|
386 |
|
|
|
134 |
|
|
|
991 |
|
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on income (loss) before taxes |
|
$ |
958 |
|
|
$ |
548 |
|
|
$ |
3,033 |
|
|
$ |
1,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on basic and diluted earnings (loss) per share |
|
$ |
0.03 |
|
|
$ |
0.02 |
|
|
$ |
0.10 |
|
|
$ |
0.05 |
|
As of September 30, 2009, there was $10.5 million of total unrecognized compensation costs
related to non-vested stock-based compensation arrangements granted under the Companys stock
option plans. This expense will be amortized on a straight-line basis over a weighted-average
period of approximately 2.8 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 optionees employment is
terminated. 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 Companys financial statements. There were
no early exercises of options during the year ended December 31, 2008 or during the nine months
ended September 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 |
|
|
(88,744 |
) |
|
|
|
|
|
|
|
|
|
|
Balance outstanding at September 30, 2009 |
|
|
63,076 |
|
|
|
|
|
|
7. Income Taxes
The Company incurred tax expenses of $294,000, consisting of $84,000 for U.S. federal
alternative minimum income tax expense, $169,000 for state income tax expense, and $41,000 for
foreign income taxes during the three months ended September 30, 2009 compared to no tax expense
recognized during the three months ended September 30, 2008. The Company incurred tax expenses of
$699,000, consisting of $245,000 for U.S. federal alternative minimum income tax expense, $406,000
for state income tax expense, and $48,000 for foreign income taxes during the nine months ended
September 30, 2009 compared to no tax expense recognized during the nine months ended September 30,
2008. The Company has incurred annual net operating losses through the year ended December 31, 2007
and given the Companys 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 September
30, 2009 and December 31, 2008.
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.
10
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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
2,259 |
|
|
$ |
464 |
|
|
$ |
3,519 |
|
|
$ |
(1,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per share, basic |
|
|
30,818 |
|
|
|
30,523 |
|
|
|
30,732 |
|
|
|
30,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options and unvested restricted common stock |
|
|
1,126 |
|
|
|
1,172 |
|
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income (loss) per share, diluted |
|
|
31,944 |
|
|
|
31,695 |
|
|
|
31,682 |
|
|
|
30,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic |
|
$ |
0.07 |
|
|
$ |
0.02 |
|
|
$ |
0.11 |
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, diluted |
|
$ |
0.07 |
|
|
$ |
0.01 |
|
|
$ |
0.11 |
|
|
$ |
(0.06 |
) |
Potential common shares of 1.1 and 1.5 million related to the Companys outstanding stock
options were excluded from the computation of diluted net income per share for the three and nine
months ended September 30, 2009, respectively, as inclusion of these shares would be anti-dilutive.
Potential common shares of 187,000 and all potential common stock equivalents for the three and
nine months ended September 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 partys 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 and 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 Company, 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, against the Company and 14 other storage
vendors, alleging, among other things, patent infringement on a universal storage management system
for which it holds an exclusive license. Data Networks is seeking unspecified monetary damages and
an injunction against further infringement from the Company and the other defendants. The Company
filed an answer to Data Networks complaint denying any liability and is vigorously contesting the
lawsuit. The Company has accrued what it believes to be the probable
costs in connection with this matter.
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 September 30, 2009, that, in the opinion of management,
might have a material adverse effect on the Companys financial position, results of operations or
cash flows.
11
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 Companys 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 Companys products to end users located in the United States. Revenue by geographic region was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
27,166 |
|
|
$ |
21,044 |
|
|
$ |
73,810 |
|
|
$ |
54,292 |
|
International |
|
|
5,046 |
|
|
|
3,566 |
|
|
|
15,191 |
|
|
|
9,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,212 |
|
|
$ |
24,610 |
|
|
$ |
89,001 |
|
|
$ |
63,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Subsequent Events
The Company has evaluated all subsequent events through October 28, 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 September 30, 2009, and events which occurred
subsequent to September 30, 2009 but were not recognized in the financial statements. As of October
28, 2009, there were no subsequent events which required recognition or disclosure.
12
Item 2. Managements 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 managements 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:
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our expectations regarding our revenue, gross margin and expenses; |
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our ability to compete in our industry; |
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our ability to maintain and grow our channel partner relationships; |
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|
our growth strategy and our growth rate; |
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our ability to protect our intellectual property rights; |
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pricing and availability of our suppliers products; and |
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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 September 30, 2009, Storage Center was installed in 1,627
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.
13
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 nine months ended September 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 |
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
Change |
|
|
September 30, |
|
|
Change |
|
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
22,987 |
|
|
$ |
19,501 |
|
|
$ |
3,486 |
|
|
|
17.9 |
% |
|
$ |
64,564 |
|
|
$ |
51,416 |
|
|
$ |
13,148 |
|
|
|
25.6 |
% |
Support and services |
|
|
9,225 |
|
|
|
5,109 |
|
|
|
4,116 |
|
|
|
80.6 |
|
|
|
24,437 |
|
|
|
12,519 |
|
|
|
11,918 |
|
|
|
95.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
32,212 |
|
|
|
24,610 |
|
|
|
7,602 |
|
|
|
30.9 |
|
|
|
89,001 |
|
|
|
63,935 |
|
|
|
25,066 |
|
|
|
39.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product |
|
|
10,957 |
|
|
|
9,338 |
|
|
|
1,619 |
|
|
|
17.3 |
|
|
|
32,089 |
|
|
|
24,716 |
|
|
|
7,373 |
|
|
|
29.8 |
|
Cost of support and
services |
|
|
2,825 |
|
|
|
2,064 |
|
|
|
761 |
|
|
|
36.9 |
|
|
|
8,232 |
|
|
|
5,078 |
|
|
|
3,154 |
|
|
|
62.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
13,782 |
|
|
|
11,402 |
|
|
|
2,380 |
|
|
|
20.9 |
|
|
|
40,321 |
|
|
|
29,794 |
|
|
|
10,527 |
|
|
|
35.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,430 |
|
|
|
13,208 |
|
|
|
5,222 |
|
|
|
39.5 |
|
|
|
48,680 |
|
|
|
34,141 |
|
|
|
14,539 |
|
|
|
42.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
11,386 |
|
|
|
9,041 |
|
|
|
2,345 |
|
|
|
25.9 |
|
|
|
32,052 |
|
|
|
25,823 |
|
|
|
6,229 |
|
|
|
24.1 |
|
Research and development |
|
|
3,276 |
|
|
|
2,452 |
|
|
|
824 |
|
|
|
33.6 |
|
|
|
9,160 |
|
|
|
7,111 |
|
|
|
2,049 |
|
|
|
28.8 |
|
General and
administrative |
|
|
1,680 |
|
|
|
1,883 |
|
|
|
(203 |
) |
|
|
(10.8 |
) |
|
|
4,630 |
|
|
|
5,087 |
|
|
|
(457 |
) |
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
16,342 |
|
|
|
13,376 |
|
|
|
2,966 |
|
|
|
22.2 |
|
|
|
45,842 |
|
|
|
38,021 |
|
|
|
7,821 |
|
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
2,088 |
|
|
|
(168 |
) |
|
|
2,256 |
|
|
|
* |
|
|
|
2,838 |
|
|
|
(3,880 |
) |
|
|
6,718 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
465 |
|
|
|
632 |
|
|
|
(167 |
) |
|
|
(26.4 |
) |
|
|
1,380 |
|
|
|
2,125 |
|
|
|
(745 |
) |
|
|
(35.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
2,553 |
|
|
|
464 |
|
|
|
2,089 |
|
|
|
450.2 |
|
|
|
4,218 |
|
|
|
(1,755 |
) |
|
|
5,973 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(294 |
) |
|
|
|
|
|
|
(294 |
) |
|
|
|
|
|
|
(699 |
) |
|
|
|
|
|
|
(699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,259 |
|
|
$ |
464 |
|
|
$ |
1,795 |
|
|
|
386.9 |
% |
|
$ |
3,519 |
|
|
$ |
(1,755 |
) |
|
$ |
5,274 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage is not meaningful |
14
Comparison of Three Months Ended September 30, 2009 and 2008
Revenues
Revenues and the related changes for the periods shown were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
|
Change |
|
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
% |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
22,987 |
|
|
|
71.4 |
% |
|
$ |
19,501 |
|
|
|
79.2 |
% |
|
$ |
3,486 |
|
|
|
17.9 |
% |
Support and services |
|
|
9,225 |
|
|
|
28.6 |
|
|
|
5,109 |
|
|
|
20.8 |
|
|
|
4,116 |
|
|
|
80.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
32,212 |
|
|
|
100.0 |
% |
|
$ |
24,610 |
|
|
|
100.0 |
% |
|
$ |
7,602 |
|
|
|
30.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenue. Product revenue derived from system sales increased primarily due to a 32%
increase in the number of systems sold. We believe the increase in systems sales was driven by an
increase of 117 channel partners, an increase in sales and marketing headcount to 200 people from
152 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 1,627
as of September 30, 2009 from 1,085 as of September 30, 2008.
Support and Services Revenue. Support revenue increased 78% primarily due to the renewal of
maintenance agreements by existing end users and the growth of the installed base. Services
revenues increased 96% 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
of Related |
|
|
|
|
|
|
of Related |
|
|
Change |
|
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
% |
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product |
|
$ |
10,957 |
|
|
|
47.7 |
% |
|
$ |
9,338 |
|
|
|
47.9 |
% |
|
$ |
1,619 |
|
|
|
17.3 |
% |
Cost of support and services |
|
|
2,825 |
|
|
|
30.6 |
|
|
|
2,064 |
|
|
|
40.4 |
|
|
|
761 |
|
|
|
36.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
13,782 |
|
|
|
42.8 |
% |
|
$ |
11,402 |
|
|
|
46.3 |
% |
|
$ |
2,380 |
|
|
|
20.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
57.2 |
% |
|
|
|
|
|
|
53.7 |
% |
|
|
|
|
|
|
|
|
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 Revenues. Cost of support and services revenues increased
primarily due to increased salaries, employee benefits and stock-based compensation expense of
$478,000 related to growth in our customer service and technical support headcount to 57 people
from 36 people, increased hardware services fees of $366,000 charged by our third-party hardware
maintenance providers associated with the continuing growth of our installed base, and increased
facilities related costs of $57,000, offset by decreased equipment expenses of $209,000.
Gross Margin. Gross margin increased due to the growth in revenues outpacing the growth in
cost of revenues.
15
Operating Expenses
Operating expenses and the related changes for the periods shown were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
|
Change |
|
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
% |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
11,386 |
|
|
|
35.3 |
% |
|
$ |
9,041 |
|
|
|
36.7 |
% |
|
$ |
2,345 |
|
|
|
25.9 |
% |
Research and development |
|
|
3,276 |
|
|
|
10.2 |
|
|
|
2,452 |
|
|
|
10.0 |
|
|
|
824 |
|
|
|
33.6 |
|
General and administrative |
|
|
1,680 |
|
|
|
5.2 |
|
|
|
1,883 |
|
|
|
7.7 |
|
|
|
(203 |
) |
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
16,342 |
|
|
|
50.7 |
% |
|
$ |
13,376 |
|
|
|
54.4 |
% |
|
$ |
2,966 |
|
|
|
22.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing Expense. Sales and marketing expense increased primarily due to an
increase in sales and marketing headcount to 200 people from 152 people, resulting in a $1.8
million increase in salaries, employee benefits, commissions and stock-based compensation expense,
an increase in marketing equipment expense of $256,000 related to systems used for demonstration
and partner certification purposes, a $182,000 increase in channel partner referral fees due to
increased third-party selling activities, and a $70,000 increase in facilities related costs.
Research and Development Expense. Research and development expense increased primarily due to
an increase in research and development headcount to 68 people from 55 people, resulting in a
$518,000 increase in salaries, employee benefits and stock-based compensation expense, an increase
of $220,000 in prototype material costs and depreciation expense, and an increase of $44,000 in
facilities related costs.
General and Administrative Expense. General and administrative expense decreased primarily due
to $779,000 of legal and settlement expenses in defense of a patent infringement claim that we
accrued in the three months ending September 30, 2008, offset by an increase in finance,
information technology, and human resource staff headcount to 21 people from 16 people resulting in
a $363,000 increase in salaries, employee benefits and stock-based compensation expense, an
increase in professional fees of $155,000 for legal and tax services and a $49,000 increase in
facilities related costs.
Interest Income
Interest Income. Interest income decreased by $167,000 due to lower interest rates partially
offset by interest income on increased cash, cash equivalents and investment balances.
Income Tax Expense
Income Tax Expense. Income tax expense of $294,000 for the three months ended September 30,
2009 consisted of $84,000 for U.S. federal alternative minimum income tax expense, $169,000 for
state income tax expense, and $41,000 for foreign income taxes compared to no tax expense
recognized during the three months ended September 30, 2008.
Comparison of Nine Months Ended September 30, 2009 and 2008
Revenues
Revenues and the related changes for the periods shown were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
|
Change |
|
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
% |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product |
|
$ |
64,564 |
|
|
|
72.5 |
% |
|
$ |
51,416 |
|
|
|
80.4 |
% |
|
$ |
13,148 |
|
|
|
25.6 |
% |
Support and services |
|
|
24,437 |
|
|
|
27.5 |
|
|
|
12,519 |
|
|
|
19.6 |
|
|
|
11,918 |
|
|
|
95.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
89,001 |
|
|
|
100.0 |
% |
|
$ |
63,935 |
|
|
|
100.0 |
% |
|
$ |
25,066 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Product Revenue. Product revenue derived from system sales primarily increased due to a 26%
increase in the number of systems sold. We believe the increase in systems sales was driven by an
increase of 117 channel partners, an increase in sales and marketing headcount to 200 people from
152 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 1,627
as of September 30, 2009 from 1,085 as of September 30, 2008.
Support and Services Revenue. Support revenue increased 95% primarily due to the renewal of
maintenance agreements by existing end users and the growth of the installed base. Services
revenues increased 96% 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
of Related |
|
|
|
|
|
|
of Related |
|
|
Change |
|
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
% |
|
Cost of revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product |
|
$ |
32,089 |
|
|
|
49.7 |
% |
|
$ |
24,716 |
|
|
|
48.1 |
% |
|
$ |
7,373 |
|
|
|
29.8 |
% |
Cost of support and services |
|
|
8,232 |
|
|
|
33.7 |
|
|
|
5,078 |
|
|
|
40.6 |
|
|
|
3,154 |
|
|
|
62.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
40,321 |
|
|
|
45.3 |
% |
|
$ |
29,794 |
|
|
|
46.6 |
% |
|
$ |
10,527 |
|
|
|
35.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
|
|
|
|
54.7 |
% |
|
|
|
|
|
|
53.4 |
% |
|
|
|
|
|
|
|
|
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 $1.4 million
related to growth in our customer service and technical support headcount to 57 people from 36
people, increased hardware service fees of $1.5 million charged by our third-party hardware
maintenance provider associated with the continuing growth of our installed base, and $90,000
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
of Total |
|
|
|
|
|
|
of Total |
|
|
Change |
|
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
Revenue |
|
|
$ |
|
|
% |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
$ |
32,052 |
|
|
|
36.0 |
% |
|
$ |
25,823 |
|
|
|
40.4 |
% |
|
$ |
6,229 |
|
|
|
24.1 |
% |
Research and development |
|
|
9,160 |
|
|
|
10.3 |
|
|
|
7,111 |
|
|
|
11.1 |
|
|
|
2,049 |
|
|
|
28.8 |
|
General and administrative |
|
|
4,630 |
|
|
|
5.2 |
|
|
|
5,087 |
|
|
|
8.0 |
|
|
|
(457 |
) |
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
45,842 |
|
|
|
51.5 |
% |
|
$ |
38,021 |
|
|
|
59.5 |
% |
|
$ |
7,821 |
|
|
|
20.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing Expense. Sales and marketing expense increased primarily due to an
increase in sales and marketing headcount to 200 people from 152 people, resulting in a $4.3
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, a $466,000 increase in channel partner referral fees due to
increased third-party selling activities and a $210,000 increase in sales and marketing related
travel.
17
Research and Development Expense. Research and development expense increased primarily due to
an increase in research and development headcount to 68 people from 55 people, resulting in a $1.4
million increase in salaries, employee benefits and stock-based compensation expense and an
increase of $490,000 in prototype materials and depreciation costs.
General and Administrative Expense. General and administrative expense decreased primarily due
to $779,000 of legal and settlement expenses in defense of a patent infringement claim that we
accrued in the nine months ending September 30, 2008 and due to a decrease in professional fees of
$391,000 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. These decreases were offset by an increase in finance, information technology, and
human resource staff headcount to 21 people from 16 people resulting in a $722,000 increase in
salaries, employee benefits and stock-based compensation expense and
a $118,000 increase in
tax-related services.
Interest Income
Interest Income. Interest income decreased by $745,000 due to lower interest rates partially
offset by interest income on increased cash, cash equivalents and investment balances.
Income Tax Expense
Income Tax Expense. Income tax expense of $699,000 for the nine months ended September 30,
2009 consisted of $245,000 for U.S. federal alternative minimum income tax expense, $406,000 for
state income tax expense, and $48,000 for foreign income taxes compared to no tax expense
recognized during the nine months ended September 30, 2008.
Liquidity and Capital Resources
Our cash and cash equivalents and investments available to fund operations were $109.0 million
and $100.3 million at September 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 a majority of the
cash proceeds in investment grade, interest bearing securities. We have used a portion of 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):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net cash provided by operating activities |
|
$ |
10,525 |
|
|
$ |
2,575 |
|
|
Net cash used in investing activities |
|
|
(31,173 |
) |
|
|
(39,688 |
) |
|
Net cash provided by financing activities |
|
|
951 |
|
|
|
543 |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
$ |
(19,697 |
) |
|
$ |
(36,570 |
) |
|
|
|
|
|
|
|
Operating Activities
Cash provided by operating activities was $10.5 million for the nine months ended September
30, 2009. We reported net income of $3.5 million, which included non-cash charges consisting of
$1.7 million in depreciation and amortization expenses and $3.0 million in stock-based compensation
expense related to employees. Other cash generating operating activities included an increase in
deferred revenue of $11.2 million and an increase in accounts payable of $4.2 million, offset by an
increase in accounts receivable of $11.5 million and an increase in other current assets of $1.5
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. The increase in other current assets is primarily due to an increase
in prepayments to third party hardware maintenance service providers.
18
Cash provided by operating activities was $2.6 million for the nine months ended September 30,
2008. We incurred a net loss of $1.8 million, which included non-cash charges consisting of $1.1
million in depreciation and $1.5 million in stock-based compensation expense. Other uses of cash
in operating activities included an increase in accounts receivable of $8.0 million, partially
offset by an increase in deferred revenue of $6.8 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 $31.2 million for the nine months ended September 30,
2009, consisting of $2.9 million for capital additions, which were primarily for computer lab
equipment, and $81.6 million for the purchase of investments, partially offset by the sales and
maturities of investments of $53.3 million.
Cash used in investing activities was $39.7 million for the nine months ended September 30,
2008, consisting of $1.7 million for purchases of property and equipment and $73.9 million for
purchases of investments, partially offset by sales and maturities of investments of $35.9 million.
Financing Activities
Cash provided by financing activities for the nine months ended September 30, 2009 was
$951,000 from the issuance of common stock pursuant to the exercise of stock options and in
conjunction with purchases pursuant to our 2007 Employee Stock Purchase Plan.
Cash provided by financing activities for the nine months ended September 30, 2008 was
$543,000 from the issuance of common stock pursuant to the exercise of stock options and in
conjunction with purchases pursuant to our 2007 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 $1.0
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. In addition, we have filed a registration statement
pursuant to which we may sell additional shares of our common stock. 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 September 30, 2009. Please see Item 7, Managements
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.
19
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 September 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 September 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, against us and 14 other storage vendors alleging, among other things, patent
infringement on a universal storage management system for which it holds an exclusive license. Data Networks is seeking unspecified monetary damages and
an injunction against further infringement from us and the other defendants. We have filed an
answer to Data Networks complaint denying any liability and are vigorously contesting the lawsuit.
We have accrued what we believe to be the probable costs in connection
with this matter.
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 September 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.
20
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 products 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, the 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 since September 30, 2008. We reported net income for the nine months ended
September 30, 2009 of $3.5 million and as of September 30, 2009 our accumulated deficit was $46.3
million. We expect to make significant expenditures related to the development of our products and
expansion of our business, including sales and marketing, research and development 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 will 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 Dell, EMC and NetApp, have made acquisitions of businesses that allow them to offer more
directly competitive and comprehensive solutions than they had previously offered. Most of our
competitors have longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical, sales, marketing and other resources than we have. We
expect to encounter new competitors as we enter new markets as well as increased competition, both
domestically and internationally, from
other established and emerging storage companies, original equipment manufacturers, and from
systems and network management companies.
22
In addition, there may be new technologies that are
introduced that reduce demand for, or make our, storage solution architecture obsolete. Our current
and potential competitors may also establish cooperative relationships among themselves or with
third parties and rapidly acquire significant market share. Increased competition could also result
in price reductions and loss of market share, any of which could result in lower revenue and
reduced gross margins.
We are dependent on a single product and the lack of continued market acceptance of Storage Center
would result in lower revenue.
Storage Center accounts for all of our revenue and will continue to do so for the foreseeable
future. As a result, our revenue could be reduced by:
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any decline in demand for Storage Center; |
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the failure of Storage Center to achieve continued market acceptance; |
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the introduction of products and technologies that serve as a replacement or substitute
for, or represent an improvement over, Storage Center; |
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technological innovations or new communications standards that Storage Center does not
address; and |
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our inability to release enhanced versions of Storage Center on a timely basis. |
We are particularly vulnerable to fluctuations in demand for storage area network products in
general and Storage Center in particular. If the storage markets grow more slowly than anticipated
or if demand for Storage Center does not grow as quickly as anticipated, whether as a result of
competition, product obsolescence, technological change, unfavorable economic conditions, uncertain
geopolitical environments, budgetary constraints of our end users or other factors, we may not be
able to increase our revenues sufficiently to ever reach annual profitability or sustain quarterly
profitability and our stock price would decline.
Our products must meet exacting specifications, and defects and failures may occur, which may cause
channel partners or end users to return or stop buying our products.
Our channel partners and end users generally establish demanding specifications for quality,
performance and reliability that our products must meet. However, our products are highly complex
and may contain undetected defects and failures when they are first introduced or as new versions
are released. We have in the past and may in the future discover software errors in new versions of
Storage Center or new products or product enhancements after their release or introduction, which
could result in lost revenue during the period required to correct such errors. Despite testing by
us and by current and potential end users, errors may not be found in new releases or products
until after commencement of commercial shipments, resulting in loss of or delay in market
acceptance. Storage Center may also be subject to intentional attacks by viruses that seek to take
advantage of these bugs, errors or other weaknesses. If defects or failures occur in Storage
Center, a number of negative effects in our business could result, including:
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lost revenue; |
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increased costs, including warranty expense and costs associated with end user support; |
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delays or cancellations or rescheduling of orders or shipments; |
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product returns or discounts; |
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diversion of management resources; |
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damage to our reputation and brand equity; |
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payment of damages for performance failures; |
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reduced orders from existing channel partners and end users; and |
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declining interest from potential channel partners or end users. |
23
In addition, delays in our ability to fill product orders as a result of quality control
issues may negatively impact our relationship with our channel partners and end users. Our revenue
could be lower and our expenses could increase if any of the foregoing occurs.
Our end users utilize Storage Center to manage their data. As a result, we could face claims
resulting from any loss or corruption of our end users data due to a product defect. Our contracts
with end users contain provisions relating to warranty disclaimers and liability limitations, which
may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert
managements attention and could result in public perception that our products are not effective,
even if the occurrence is unrelated to the use of our products or services. In addition, if our
business liability insurance coverage proves inadequate or future coverage is unavailable on
acceptable terms or at all, our costs to defend and cover such claims, if any, will increase.
We will not sustain our percentage growth rate, and we may not be able to manage any future growth
effectively.
We have experienced significant growth in a short period of time. Our revenues increased from
$3.9 million in 2004 to $90.9 million in 2008, and our revenues were $89.0 million for the nine
months ended September 30, 2009. We may not experience growth rates in future periods to the same
degree as in past periods. You should not rely on our operating results for any prior quarterly or
annual periods as an indication of our future operating performance. If we are unable to maintain
adequate revenue growth in dollars, we may never achieve annual profitability or sustain quarterly
profitability and our stock price could decline.
Our future operating results depend to a large extent on our ability to successfully manage
our anticipated expansion and growth. To manage our growth successfully and handle the
responsibilities of being a public company, we believe we must effectively, among other things:
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increase our channel partners and end users in the mid-size enterprise market; |
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address new markets, such as large enterprise end users and end users outside the United
States; |
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control expenses; |
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recruit, hire, train and manage additional qualified engineers; |
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add additional sales and marketing personnel; |
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expand our international operations; and |
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implement and improve our administrative, financial and operational systems, procedures
and controls. |
We intend to increase our investment in sales and marketing, research and development and
general and administrative and other functions to grow our business. We are likely to recognize the
costs associated with these increased investments earlier than some of the anticipated benefits and
the return on these investments may be lower, or may develop more slowly, than we expect, which
could increase our annual net losses.
If we are unable to manage our growth effectively, we may not be able to take advantage of
market opportunities or develop new products or enhancements to existing products and we may fail
to satisfy end user requirements, maintain product quality, execute on our business plan or respond
to competitive pressures, which could result in lower revenue and a decline in our stock price.
Our gross margin may vary and such variation may make it more difficult to forecast our earnings.
Our gross margin has been and may continue to be affected by a variety of other factors,
including:
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demand for Storage Center and related services; |
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discount levels and price competition; |
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average order system size and end user mix; |
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hardware and software component mix; |
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the cost of components; |
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level of fixed costs of customer service personnel; |
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the mix of services as a percentage of revenue; |
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new product introductions and enhancements; and |
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geographic sales mix. |
Changes in gross margin may result from various factors such as continued investments in our
Copilot Services, increases in our fixed costs, changes in the mix between technical support
services and professional services, as well as the timing and amount of maintenance agreement
initiations and renewals.
We receive a substantial portion of our revenue from a limited number of channel partners, and the
loss of, or a significant reduction in, orders from one or more of our major channel partners would
result in lower revenue.
Our future success is highly dependent upon establishing and maintaining successful
relationships with a variety of channel partners. We market and sell Storage Center through an
all-channel assisted sales model and we derive substantially all of our revenue from these channel
partners. We generally enter into agreements with our channel partners outlining the terms of our
relationship, including channel partner sales commitments, installation and configuration training
requirements, and the channel partners acknowledgement of the existence of our sales registration
process for registering potential systems sales to end users. These contracts typically have a term
of one year and are terminable without cause upon written notice to the other party. Our reseller
agreements with our channel partners do not prohibit them from offering competitive products or
services. Many of our channel partners also sell our competitors products. If our channel partners
give higher priority to our competitors storage products, we may be unable to grow our revenue and
we may continue to incur annual net losses.
We receive a substantial portion of our revenue from a limited number of channel partners. For
the three and nine months ended September 30, 2009, our top ten channel partners accounted for 47%
and 41% of our revenue, respectively. We anticipate that we will continue to be dependent upon a
limited number of channel partners for a significant portion of our revenue for the foreseeable
future and, in some cases, the portion of our revenue attributable to individual channel partners
may increase in the future. The loss of one or more key channel partners or a reduction in sales
through any major channel partner would reduce our revenue. Further, in order to develop and expand
our channels, we must continue to scale and improve our processes and procedures that support our
channel partners, including investments in systems and training, and those processes and procedures
may become increasingly complex and difficult to manage. If we fail to maintain existing channel
partners or develop relationships with new channel partners, our revenue opportunities will be
reduced.
The loss of any key suppliers or the failure to accurately forecast demand for our products or
successfully manage our relationships with our key suppliers could negatively impact our ability to
sell our products.
We maintain relatively low inventory, generally only for repairs and evaluation and
demonstration units, and acquire components only as needed on a purchase order basis, and neither
we nor our key suppliers enter into supply contracts for these components. As a result, our ability
to respond to channel partner or end user orders efficiently may be constrained by the then-current
availability, terms and pricing of these components. Our industry has experienced component
shortages and delivery delays in the past, and we may experience shortages or delays of critical
components in the future as a result of strong demand in the industry or other factors. If we or
our suppliers inaccurately forecast demand for our products, our suppliers may have inadequate
inventory, which could increase the prices we must pay for substitute components or result in our
inability to meet demand for our products, as well as damage our channel partner or end user
relationships.
We currently rely on a limited number of suppliers for components such as system controllers,
enclosures, disk drives and switches utilized in the assembly of Storage Center. We generally
purchase components on a purchase order basis and do not have long-term supply contracts with these
suppliers. In particular, we rely on Bell Microproducts, Inc., a value-added distributor, to
provide us with
customized system controllers, which Bell Microproducts generally obtains from Supermicro
Computer, Inc., a server and component manufacturer.
25
We also rely on Xyratex Corporation, a
provider of data storage subsystems, to provide us with their custom enclosures and disk drives.
Xyratex purchases most of the disk drives that it supplies to us from Seagate Technology, Inc., a
disk drive manufacturer. Our reliance on these key suppliers reduces our control over the
manufacturing process, exposing us to risks, including reduced control over product quality,
production costs, timely delivery and capacity. It also exposes us to the potential inability to
obtain an adequate supply of required components, because we do not have long-term supply
commitments and generally purchase our products on a purchase order basis. Component quality is
particularly significant with respect to our suppliers of disk drives. We have in the past and may
in the future experience disk drive failures, which could cause our reputation to suffer, our
competitive position to be impaired and our customers to select other vendors. To meet our product
performance requirements, we must obtain disk drives of extremely high quality and capacity. In
addition, there are periodic supply-and-demand issues for disk drives that could result in
component shortages, selective supply allocations and increased prices of such components. We may
not be able to obtain our full requirements of components, including disk drives, that we need for
our storage products or the prices of such components may increase. If we fail to effectively
manage our relationships with our key suppliers, or if our key suppliers increase prices of
components, experience delays, disruptions, capacity constraints, or quality control problems in
their manufacturing operations, our ability to ship products to our channel partners or end users
could be impaired and our competitive position and reputation could be adversely affected.
Qualifying a new key supplier is expensive and time-consuming. If we are required to change key
suppliers or assume internal manufacturing operations, we may lose revenue and damage our channel
partner or end user relationships.
If our third-party repair service fails to timely and correctly resolve hardware failures
experienced by our end users, our reputation will suffer, our competitive position will be impaired
and our expenses could increase.
We rely upon Anacomp Inc., or Anacomp, a third-party hardware maintenance provider, which
specializes in providing vendor-neutral support of storage equipment, network devices and
peripherals, to provide repair services to our end users. We currently have limited capabilities
in-house to resolve hardware failures or other issues experienced by our end users. If Anacomp
fails to timely and correctly resolve hardware failures or issues experienced by our end users, our
reputation will suffer, our competitive position will be impaired and our expenses could increase.
In May 2008, we entered into a five year agreement with Anacomp. Our agreement with Anacomp will
automatically renew for successive one-year terms, unless either party notifies the other, in
writing, of its intention to terminate or renegotiate the agreement at least 180 days prior to the
end of the initial five-year term or any successive one-year term. In addition, either party may
immediately terminate the agreement for a material default by the other party that is not cured
within 30 days. If our relationship with Anacomp were to end, we would have to engage a new
third-party provider of hardware support, and the transition could result in delays in effecting
repairs and damage our reputation and competitive position as well as increase our operating
expenses.
If we are unsuccessful in developing and selling new products, services and product enhancements,
our competitive position will be adversely affected and our ability to grow our revenue will be
impaired.
We operate in a dynamic environment characterized by rapid technological change, changing end
user needs, frequent new product introductions and evolving industry standards. The introduction of
products embodying new technologies and the emergence of new industry standards could render our
existing products obsolete and unmarketable. Our competitiveness and future success depend on our
ability to anticipate, develop, market and support new products and product enhancements on a
timely and cost effective basis that keep pace with technological developments and emerging
industry standards and that address the increasingly sophisticated needs of our end users. We may
fail to develop and market products and services that respond to technological changes or evolving
industry standards, experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products and services, or fail to develop products and services
that adequately meet the requirements of the marketplace or achieve market acceptance. Our failure
to develop and market such products and services on a timely basis would erode our competitive
position and impair our ability to grow our revenue.
If our channel partners fail to timely and correctly install and configure our storage systems, or
face disruptions in their business, our reputation will suffer, our competitive position could be
impaired and we could lose customers.
In addition to our small team of installation personnel, we rely upon some of our channel
partners to install Storage Center at our end user locations. Our channel partner agreements
generally contain provisions requiring installation and configuration training by the channel
partners, which we may waive at our discretion. Although we train and certify our channel partners
on the installation and configuration of Storage Center, end users have in the past encountered
installation and configuration difficulties. In addition, if one or more of our channel partners
suffers an interruption in its business, or experiences delays, disruptions or quality control
problems in its operations, or we have to change or add additional channel partners, installation
and configuration of Storage Center to our end users
could be delayed, our revenue could be reduced and our ability to compete could be impaired.
26
As a significant portion of our sales occur in the last month of a quarter, our end users may also
experience installation delays following a purchase if we or our channel partners have too many
installations in a short period of time. If we or our channel partners fail to timely and correctly
install and configure Storage Center, end users may not purchase additional products and services
from us, our reputation could suffer and our revenue could be reduced. In addition, we will incur
additional expenses to correctly install and configure Storage Center to meet the expectations of
our end users.
If we fail to attract or retain engineering or sales and marketing personnel or if we lose the
services of our founders or key management, our ability to grow our business and our competitive
position would be impaired.
We believe our future success will depend in large part upon our ability to attract, retain
and motivate highly skilled managerial, research and development, sales and marketing personnel.
Our management, research and development, sales and marketing personnel represent a significant
asset and serve as the source of our business strategy, technological and product innovations, and
sales and marketing initiatives. As a result, our success is substantially dependent upon our
ability to attract additional personnel for all areas of our organization, particularly in our
research and development department and our sales and marketing department. Competition for
qualified personnel is intense, and we may not be successful in attracting and retaining such
personnel on a timely basis or on competitive terms. Any failure to adequately expand our
management, research and development, sales and marketing personnel will impede our growth. In
addition, many qualified personnel are located outside of the Minneapolis geographic area where our
headquarters are located, and some qualified personnel that we may recruit may not be interested in
relocating. If we are unable to attract and retain the necessary personnel on a cost-effective
basis, our ability to grow our business and our competitive position would be impaired.
In particular, we are highly dependent on the contributions of our three founders, Philip E.
Soran, our Chairman, President and Chief Executive Officer, John P. Guider, our Chief Operating
Officer, and Lawrence E. Aszmann, our Chief Technology Officer. The loss of any of our founders
could make it more difficult to manage our operations and research and development activities,
reduce our employee retention and revenue and impair our ability to compete. If any of our founders
were to leave us unexpectedly, we could face substantial difficulty in hiring qualified successors
and could experience a loss in productivity during the search for and while any such successor is
integrated into our business and operations. The loss of any of our founders or the inability to
attract, retain or motivate qualified personnel, including research and development and sales and
marketing personnel, could delay the development and introduction of, and impair our ability to,
sell our products.
We expect to face numerous challenges as we attempt to grow our operations, and our channel partner
and end user base internationally.
Historically, we have conducted only a small portion of our business internationally. We have
two international sales offices and revenue from international sales was 16% and 17% of total
revenue for the three and nine months ended September 30, 2009, respectively. Although we expect
that part of our future revenue growth will be from channel partners and end users located outside
of the United States, we may not be able to increase international market demand for Storage
Center. In January 2008, we entered into a marketing agreement with AMEX, Inc., an export firm,
pursuant to which we granted AMEX exclusive distribution rights to resell Storage Center to
resellers and end users internationally, except in Canada. In January 2009, we entered into a new
marketing agreement with AMEX containing exclusive distribution rights similar to those contained
in the January 2008 agreement. AMEX agrees to use its best efforts to further the promotion,
marketing and sale of Storage Center. The marketing agreement is renewable on an annual basis each
January unless either party notifies the other party in writing of an intention to discontinue the
relationship at least 90 days prior to the renewal date. If AMEX is not successful in helping us
expand our international distribution channel, our revenue and our ability to compete
internationally could be impaired.
We expect to face numerous challenges as we attempt to grow our operations, channel partner
relationships and end user base internationally, in particular attracting and retaining channel
partners with international capabilities or channel partners located in international markets. Our
revenue and expenses could be adversely affected by a variety of factors associated with
international operations some of which are beyond our control, including:
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difficulties of managing and staffing international offices, and the increased travel,
infrastructure and legal compliance costs associated with international locations; |
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greater difficulty in collecting accounts receivable and longer collection periods; |
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difficulty in contract enforcement; |
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regulatory, political or economic conditions in a specific country or region; |
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compliance with local laws and regulations and unanticipated changes in local laws and
regulations, including tax laws and regulations; |
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export and import controls; trade protection measures and other regulatory requirements; |
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effects of changes in currency exchange rates; |
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potentially adverse tax consequences; |
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service provider and government spending patterns; |
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reduced protection of our intellectual property and other assets in some countries; |
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greater difficulty documenting and testing our internal controls; |
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differing employment practices and labor issues; and |
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man-made problems such as computer viruses and acts of terrorism and international
conflicts. |
In addition, we expect that we may encounter increased complexity and costs of managing
international operations, including difficulties in staffing international operations, local
business and cultural factors that differ from our normal standards and practices, differing
employment practices and labor issues, and work stoppages, any of which could result in lower
revenue and higher expenses.
If we fail to protect our intellectual property rights adequately, our ability to compete
effectively or to defend ourselves from litigation could be impaired which could reduce our revenue
and increase our costs.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as
confidentiality and non-disclosure agreements and other methods, to protect our proprietary
technologies and know-how. We have three issued patents in the United States, one international
patent and additional patents pending in the United States and in foreign countries. The rights
granted to us under our issued patents and, if the pending patent applications are granted, those
applications may not be meaningful or provide us with any commercial advantage and they could be
opposed, contested, circumvented or designed around by our competitors or be declared invalid or
unenforceable in judicial or administrative proceedings. The failure of our patents to adequately
protect our technology might make it easier for our competitors to offer similar products or
technologies. Foreign patent protection is generally not as comprehensive as U.S. patent protection
and may not protect our intellectual property in some countries where our products are sold or may
be sold in the future. Many U.S.-based companies have encountered substantial intellectual property
infringement in foreign countries, including countries where we sell or intend to sell products.
Even if foreign patents are granted, effective enforcement in foreign countries may not be
available.
Monitoring unauthorized use of our intellectual property is difficult and costly. Although we
are not aware of any unauthorized use of our intellectual property in the past, it is possible that
unauthorized use of our intellectual property may have occurred or may occur without our knowledge.
The steps we have taken may not prevent unauthorized use of our intellectual property. Our failure
to effectively protect our intellectual property could reduce the value of our technology in
licensing arrangements or in cross-licensing negotiations, and could impair our ability to compete.
We may in the future need to initiate infringement claims or litigation. Litigation, whether we are
a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our
technical staff and managerial personnel, which could result in lower revenue and higher expenses,
whether or not such litigation results in a determination favorable to us.
Assertions by third parties of infringement by us of their intellectual property rights could
result in a significant diversion of managements time and increased expenses.
The storage industry is characterized by vigorous protection and pursuit of intellectual
property rights and positions, which has resulted in protracted and expensive litigation for many
companies. Litigation can be expensive, lengthy, and disruptive to ordinary
business operations. Moreover, the results of complex legal proceedings are difficult to
predict.
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We have received and expect that in the future we may receive communications from various
industry participants alleging our infringement of their patents, trade secrets or other
intellectual property rights and/or offering licenses to such intellectual property. Any lawsuits
resulting from such allegations could subject us to significant liability for damages and
invalidate our proprietary rights. Any intellectual property litigation also could force us to do
one or more of the following:
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stop selling products or using technology that contains the allegedly infringing
intellectual property; |
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lose the opportunity to license our technology to others or to collect royalty payments
based upon successful protection and assertion of our intellectual property against others; |
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incur significant legal expenses; |
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pay substantial damages to the party whose intellectual property rights we may be found
to be infringing; |
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redesign those products that contain the allegedly infringing intellectual property; or |
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attempt to obtain a license to the relevant intellectual property from third parties,
which may not be available on reasonable terms or at all. |
We expect that companies in the storage market will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Our channel partners and end
users could also become the target of litigation relating to patent and other intellectual property
rights of others. This could trigger technical support and indemnification obligations in our
licenses and maintenance agreements. These obligations could results in substantial expenses,
including the payment by us of costs and damages.
If we fail to comply with the terms of our open source software license agreement, we could be
required to release portions of our software codes, which could impair our ability to compete and
result in lower revenue.
Storage Center utilizes a software application called eCos, an open source, royalty-free,
real-time operating system intended for embedded applications. eCos is licensed to us under a
modified version of version 2.0 of the GNU General Public License. Open source software is often
made available to the public by its authors and/or other third parties under licenses, such as the
GNU General Public License, which impose certain obligations on licensees in the event such
licensees re-distribute and/or make derivative works of the open source software. The terms of our
license to the eCos application require us to make source code for the derivative works freely
available to the public, and/or license such derivative works under a particular type of license,
rather than the forms of commercial license customarily used to protect our intellectual property.
In addition, there is little or no legal precedent for interpreting the terms of certain of these
open source licenses, including the determination of which works are subject to the terms of such
licenses. While we believe we have complied with our obligations under the various applicable
licenses for open source software to avoid subjecting our proprietary products to conditions we do
not intend, in the event the copyright holder of any open source software were to successfully
establish in court that we had not complied with the terms of a license for a particular work, we
could be required to release the source code of that work to the public, stop distribution of that
work and/or recall our products that include that work. In this event, we could be required to seek
licenses from third parties in order to continue offering our products, to make generally
available, in source code form, proprietary code that links to certain open source modules, to
re-engineer our products, or to recall and/or discontinue the sale of our products if
re-engineering could not be accomplished on a timely basis, any of which could impair our ability
to compete, result in lower revenue and increase our expenses.
We may need to raise additional funds in the future, which may not be available to us on terms
acceptable to us, or at all.
We may need to raise additional funds in the future. Any required additional financing may not
be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity
securities or convertible debt, investors may experience significant dilution of their ownership
interest, and the newly-issued securities may have rights senior to those of the holders of our
common stock. If we raise additional funds by obtaining loans from third parties, the terms of
those financing arrangements may include negative covenants or other restrictions on our business
that could impair our operational flexibility, and would also require us to fund additional
interest expense. If additional financing is not available when required or is not available on
acceptable terms, we may be unable to successfully develop or enhance our storage products in order
to take advantage of business opportunities or respond to competitive pressures, which could result
in lower revenue and reduce the competitiveness of our storage product offerings.
29
We may engage in future acquisitions that could disrupt our business, cause dilution to our
stockholders, reduce our financial resources and result in increased expenses.
In the future, we may acquire other businesses, products or technologies. We have not made any
acquisitions to date. Accordingly, our ability as an organization to make acquisitions is unproven.
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 do complete acquisitions, we may not strengthen
our competitive position or achieve our goals, or these acquisitions may be viewed negatively by
channel partners, end users, financial markets or investors. In addition, any acquisitions that we
make could lead to difficulties in integrating personnel, technologies 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 identifiable assets
acquired, potentially dilutive issuances of equity securities or the incurrence of debt. We cannot
forecast the number, timing or size of future acquisitions, or the effect that any such
acquisitions might have on our operating or financial results.
Risks Related to the Ownership of Our Common Stock
Our stock price is volatile and purchasers of our common stock could incur substantial losses.
The market price of our common stock and the securities of other technology companies has been
and may continue to be highly volatile. The market price of our common stock may fluctuate
significantly in response to a number of factors, including:
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quarterly variations in our results of operations or those of our competitors; |
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fluctuations in the valuation of companies perceived by investors to be comparable to us; |
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economic developments in the storage industry as a whole; |
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general economic conditions and slow or negative growth of related markets; |
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changes in financial estimates including our ability to meet our future revenue and
operating profit or loss projections; |
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changes in earnings estimates or recommendations by securities analysts; |
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announcements by us or our competitors of acquisitions, new products, significant
contracts, commercial relationships or capital commitments; |
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our ability to develop and market new and enhanced products on a timely basis; |
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commencement of, or our involvement in, litigation; |
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disruption to our operations; |
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any major change in our board of directors or management; and |
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changes in governmental regulations. |
In addition, the stock market in general, and the market for technology companies in
particular, has experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. These broad market and industry
factors may cause the market price of our common stock to decrease, regardless of our actual
operating performance. These trading price fluctuations may also make it more difficult for us to
use our common stock as a means to make acquisitions or to use options to purchase our common stock
to attract and retain employees. In addition, in the past, following periods of volatility in the
overall market and the market price of a companys securities, securities class action litigation
has often been instituted against these companies. This litigation, if instituted against us, could
result in substantial costs and a diversion of our managements attention and resources.
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If securities analysts or industry analysts downgrade our stock, publish negative research or
reports, or do not publish reports about our business, our stock price and trading volume could
decline.
The trading market for our common stock will be influenced by the research and reports that
industry or securities analysts publish about us, our business and our market. If one or more
analysts adversely change their recommendation regarding our stock or our competitors stock, our
stock price would likely decline. If one or more analysts cease coverage of us or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline.
A limited number of stockholders will have the ability to influence the outcome of director
elections and other matters requiring stockholder approval.
As of October 21, 2009, our directors and executive officers and their affiliates beneficially
own approximately 38.2% of our common stock. These stockholders, if they acted together, could
exert substantial influence over matters requiring approval by our stockholders, including electing
directors, adopting new compensation plans and approving mergers, acquisitions or other business
combination transactions. This concentration of ownership may discourage, delay or prevent a change
of control of our company, which could deprive our stockholders of an opportunity to receive a
premium for their stock as part of a sale of our company and might reduce our stock price. These
actions may be taken even if they are opposed by our other stockholders.
Delaware law and our amended and restated certificate of incorporation and bylaws contain
provisions that could delay or discourage takeover attempts that stockholders may consider
favorable and result in a lower market price for our common stock.
Provisions in our amended and restated certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our management. These provisions
include the following:
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the division of our board of directors into three classes; |
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the right of the board of directors to elect a director to fill a vacancy created by the
expansion of the board of directors or due to the resignation or departure of an existing
board member; |
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the prohibition of cumulative voting in the election of directors, which would otherwise
allow less than a majority of stockholders to elect director candidates; |
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the requirement for the advance notice of nominations for election to the board of
directors or for proposing matters that can be acted upon at a stockholders meeting; |
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the ability of our board of directors to alter our bylaws without obtaining stockholder
approval; |
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the ability of the board of directors to issue, without stockholder approval, up to
10,000,000 shares of preferred stock with terms set by the board of directors, which rights
could be senior to those of our common stock; |
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the elimination of the rights of stockholders to call a special meeting of stockholders
and to take action by written consent in lieu of a meeting; and |
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the required approval of at least 66 2/3% of the shares entitled to vote at an election
of directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended
and restated certificate of incorporation regarding the election and removal of directors. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law. These provisions may prohibit large
stockholders, particularly those owning 15% or more of our outstanding voting stock, from merging
or combining with us. These provisions in our amended and restated certificate of incorporation and
amended and restated bylaws and under Delaware law could discourage potential takeover attempts,
could reduce the price that investors are willing to pay for shares of our common stock in the
future and could potentially result in the market price being lower than they would without these
provisions.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
Not applicable.
Use of Proceeds from the Sale of Registered Securities
Our initial public offering of common stock was effected through a Registration Statement on
Form S-1 (File No. 333-144255), that was declared effective by the SEC on October 9, 2007. We
registered 6,900,000 shares of our common stock with a proposed maximum aggregate offering price of
$93.1 million. The offering did not terminate until after the sale of all of the shares registered
on the Registration Statement. All of the shares of common stock issued pursuant to the
registration statement were sold at a price to the public of $13.50 per share. The managing
underwriters were Morgan Stanley & Co. Incorporated, Needham & Company, LLC, Piper Jaffray & Co.,
RBC Capital Markets and Thomas Weisel Partners LLC.
As a result of our initial public offering, we raised a total of approximately $84.6 million
in net proceeds after deducting underwriting discounts and commissions of $6.5 million and offering
expenses of $2.0 million. As of September 30, 2009, $5.0 million of the $84.6 million in net
proceeds has been utilized as working capital in support of operations, with the remainder included
in our investment portfolio. No payments for such expenses were made directly or indirectly to (i)
any of our officers or directors or their associates, (ii) any persons owning 10% or more of any
class of our equity securities, or (iii) any of our affiliates.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
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Exhibit |
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Incorporated by Reference |
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Filed |
Number |
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Exhibit Description |
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Date |
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Number |
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Herewith |
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3.1
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Amended and Restated Certificate of Incorporation of
Compellent Technologies, Inc.
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8-K
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10/16/07
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3.1 |
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3.2
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Amended and Restated Bylaws of Compellent Technologies, Inc.
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S-1
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07/02/07
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3.4 |
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4.1
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Reference is made to Exhibits 3.1 and 3.2. |
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4.2
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Specimen Common Stock Certificate.
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S-1/A
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09/21/07
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4.2 |
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31.1
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Certification of Chief Executive Officer of Compellent
Technologies, Inc., as required by Rule 13a-14(a) or Rule
15d-14(a).
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X |
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31.2
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Certification of Chief Financial Officer of Compellent
Technologies, Inc., as required by Rule 13a-14(a) or Rule
15d-14(a).
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X |
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32.1
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Certification by the Chief Executive Officer and Chief
Financial Officer, as required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the
United States Code (18 U.S.C. §1350).*
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X |
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* |
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The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form
10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any
filing of Compellent Technologies, Inc. under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the date of this
Form 10-Q, irrespective of any general incorporation language contained in such filing. |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: October 28, 2009
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Compellent Technologies, Inc.
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/s/ John. R. Judd
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John R. Judd |
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Chief Financial Officer |
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EXHIBIT INDEX
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Incorporated by Reference |
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Exhibit |
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Filed |
Number |
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Exhibit Description |
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Form |
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Date |
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Number |
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Herewith |
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3.1
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Amended and Restated Certificate of Incorporation of
Compellent
Technologies, Inc.
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8-K
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10/16/07
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3.1 |
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3.2
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Amended and Restated Bylaws of Compellent Technologies, Inc.
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S-1
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07/02/07
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3.4 |
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4.1
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Reference is made to Exhibits 3.1 and 3.2. |
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4.2
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Specimen Common Stock Certificate.
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S-1/A
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09/21/07
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4.2 |
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31.1
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Certification of Chief Executive Officer of Compellent
Technologies, Inc., as
required by Rule 13a-14(a) or Rule
15d-14(a).
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X |
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31.2
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Certification of Chief Financial Officer of Compellent
Technologies, Inc., as
required by Rule 13a-14(a) or Rule
15d-14(a).
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X |
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32.1
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Certification by the Chief Executive Officer and Chief
Financial Officer, as
required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 36 of
Title 18 of the
United States Code (18 U.S.C. §1350).*
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X |
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* |
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The certification attached as Exhibit 32.1 that accompanies this Quarterly Report on Form
10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any
filing of Compellent Technologies, Inc. under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before or after the date of this
Form 10-Q, irrespective of any general incorporation language contained in such filing. |
34