e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 001-33685
COMPELLENT TECHNOLOGIES,
INC.
(Exact name of Registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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37-1434895
(I.R.S. Employer
Identification Number)
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7625 Smetana Lane
Eden Prairie, MN 55344
(952) 294-3300
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value
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The New York Stock Exchange Arca, Inc.
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer þ
(Do not check if a smaller reporting company)
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Smaller reporting
Company o
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Indicate by check mark whether registrant is a shell company (as
defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant based upon the closing price of
the common stock listed on the New York Stock Exchange Arca on
March 14, 2008 was $106,816,403, based on a closing price
of $10.87 per share, excluding 20,775,418 shares of the
registrants common stock held by current executive
officers, directors and stockholders whose ownership exceeds 5%
of the common stock outstanding at March 14, 2008.
Exclusion of such shares should not be construed to indicate
that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of
the registrant or that such person is controlled by or under
common control with the registrant. The registrant has elected
to use March 14, 2008 as the calculation date, as on
June 29, 2007 (the last business day of the
registrants second fiscal quarter) the registrant was a
privately held concern.
As of March 14, 2008, 30,602,134 shares of the
registrants common stock, $0.001 par value, were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for
the 2008 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end
of the fiscal year covered by this
Form 10-K
are incorporated by reference in Part III,
Items 10-14
of this
Form 10-K.
COMPELLENT
TECHNOLOGIES, INC.
2007
ANNUAL REPORT ON
FORM 10-K
TABLE OF CONTENTS
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PART I
This Annual Report on
Form 10-K
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
Annual Report on
Form 10-K,
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 anticipated cash needs and our estimates regarding our
capital requirements and our need for additional capital;
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our ability to protect our intellectual property rights;
and
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pricing and availability of our suppliers products.
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In some cases, you can identify forward-looking statements by
terms such as anticipate, believe,
can, continue, could,
estimate, expect, intend,
may, plan, 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 Annual Report on
Form 10-K
in greater detail in Part I, 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 financial statements and the related notes contained
elsewhere in this Annual Report on
Form 10-K
and in our other Securities and Exchange Commission filings.
All references to Compellent, we,
us, our or the Company in
this report mean Compellent Technologies, Inc. and its
subsidiary, except where it is made clear that the term means
only the parent company.
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 is a
Storage Area Network, or SAN, that is designed to significantly
lower storage and infrastructure capital expenditures, reduce
the skill level and number of personnel required to manage
information and enable continuous data availability and storage
virtualization. Storage Center is based on our innovative
Dynamic Block Architecture, which enables users to intelligently
store, recover and manage large amounts of data. We combine our
sophisticated software with standards-based hardware into a
single integrated solution. 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 developed our Storage Center software and hardware solution
to initially target small to medium size enterprises, or SMEs.
We believe SMEs are acutely impacted by the proliferation of
data and that their need for a
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scalable and cost-effective storage solution has historically
been unmet. 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. We also employ a virtual
manufacturing strategy, which significantly reduces inventory
and eliminates the need for in-house and outsourced
manufacturing.
We have achieved broad industry recognition for our innovative
storage solution. Compellent was awarded consecutive
Technology of the Year awards from InfoWorld,
including being named the Best SAN of 2008. Gartner,
a third-party industry analyst, recently reported Compellent to
be the fastest growing disk storage company in the world in
2006, and Computer Reseller News selected Compellent as a top
Storage Standout. A 2007 survey of midsize enterprise customers
by The InfoPro, an independent research firm, showed that
Compellent received the best ratings for innovation and customer
satisfaction among the major SAN providers in the industry in
the spring of 2007.
The
Compellent Solution
Compellent was founded by a team of storage industry veterans
with the vision of delivering a highly scalable, feature rich,
easy to use and cost effective SAN for enterprises. We believe
Storage Center is the only commercially available solution that
provides a
point-and-click
graphical user interface, automated tiered storage, integrated
data and disaster recovery, efficient thin storage provisioning,
storage virtualization and the flexibility to effectively
combine advances in storage technologies into one integrated
solution.
Innovative
Architecture
The foundation of our solution is our Dynamic Block
Architecture, which utilizes block-level intelligence to improve
the movement, placement and access of data at a level of
granularity that delivers significant improvements in the cost,
administration and recovery of data.
Compellents Dynamic Block Architecture records and tracks
specific information about an applications data at the
block level, the lowest level of data granularity within any
storage system. Dynamic Block Architecture allows Storage Center
to record and track specific information about each block of
data in a given enterprise network. This information about the
data, or metadata, provides Storage Center with intelligence on
how each block is being used. The metadata Storage Center
gathers can be extensive, including access frequency,
performance and availability characteristics. Storage Center
combines metadata with our sophisticated data movement engine,
enabling enterprises to take a more intelligent approach to
storing, recovering and managing data in an integrated automated
solution. This metadata is used by Storage Center to
automatically change how blocks of data are stored within each
volume (e.g., by changing disk drive types). We refer to this
capability as managing data within the volume. Because of our
innovative approach to managing data within a storage system,
Storage Center provides significant cost and time saving feature
advantages to our end users.
Storage Center delivers enterprise storage capabilities through
an integrated suite of software applications that are offered in
a modular fashion, so that enterprises can modify the solution
to meet their changing requirements. Building on
Compellents Dynamic Block Architecture, Storage Center
software applications intelligently improve data movement and
access at the block-level, increasing utilization, automating
tiered storage, simplifying replication and speeding data and
disaster recovery.
Storage Centers standards-based hardware platform enables
flexibility and scalability with no single point of failure
architecture. Storage Centers architecture is designed to
enable rapid deployment and expansion of storage without
disruption of service. Furthermore, Compellents
standards-based approach enables enterprises to be technology
neutral, adopting new hardware technologies to adapt to evolving
business requirements.
Storage
Center Directly Addresses Todays Storage
Challenges
We believe Storage Center is a highly sophisticated and
easy-to-use system that addresses the challenges faced by
todays storage users in one integrated solution.
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Simplified
Storage Management
We designed Storage Center to reduce the complexity associated
with traditional storage systems. Our intuitive interface and
integrated architecture enables even less sophisticated users to
accomplish advanced storage tasks in minutes, by automating
manual, time-consuming storage management tasks, such as volume
provisioning, tiering, disaster recovery and boot from SAN. This
enables enterprises to more efficiently deploy their information
technology resources. According to an end user study
commissioned by us and conducted by Enterprise Strategy Group,
an independent third-party consultant, 98% of our end users
surveyed were able to manage their SAN in three hours or less
per week, while only 31% of other storage system users surveyed
were able to do so. We believe that enterprises could purchase
and integrate a number of different hardware and software
products and still not achieve the functionality of Storage
Center.
Automated,
Cost-Effective Management of Inactive Data
Storage Center offers automated tiered storage technology based
on the block level intelligence provided by our Dynamic Block
Architecture. With information about access frequency at the
block level, Storage Center automatically moves inactive blocks
of data to lower cost tiers of storage. Our solution allows for
automatic movement of blocks of data between tiers of high cost,
high performance storage and tiers of lower cost storage based
on access frequency and other parameters. Our solution also
allows for dynamic placement of blocks of data on the preferred
track of each system drive. Traditional storage systems do not
gather information about blocks of data that would enable them
to implement tiered storage with this level of functionality. As
an example, an end users entire email database (calendar,
inbox, sent items, deleted items, attachments, contacts, etc.)
is contained in one single file, yet all of this data does not
require equal performance, reliability, and frequency of access.
Traditional storage systems store this entire file on one
storage tier. With Storage Center, enterprises have the
flexibility to put the frequently accessed items (such as the
majority of a users inbox) on a faster tier of storage,
and inactive items (such as almost all of a users sent and
deleted items) on a less expensive tier of storage.
Storage Center users maintain the ability to establish the
parameters under which tiering will be performed through a
simple intuitive graphical user interface. With over 80% of
customers data inactive, we believe Storage Centers
automated tiered storage can result in significant cost savings
for end users.
Rapid
Data Recovery
Using Storage Center, storage administrators can typically
recover and allocate any size volume to any server in seconds,
without the constraints of traditional recovery methodologies.
Using a simple
point-and-click
interface, administrators can quickly recover data in the event
of disruption. Storage Centers advanced architecture
enables the creation of significantly more snapshots, while
consuming minimal storage space as Storage Center only captures
data changes at the block level. The time intervals between
snapshots on Storage Center are significantly shorter than
traditional storage systems, providing many more recovery points
and greater recovery precision. Storage Centers
architecture enables enterprises storage administrators to
use snapshots as the first line of defense in data recovery,
reducing the frequency of saving data to tapes.
Affordable
and Reliable Disaster Recovery
We designed our replication technology to consume less disk
space and require less bandwidth and management oversight than
traditional storage solutions, which we call thin replication.
Storage Centers thin replication application sends only
written data during the initial site synchronization process
instead of the allocated but unused space sent by other
commercially available replication technologies. For ongoing
replication, Storage Centers thin replication application
transfers only the changed data, consuming less space and
lowering bandwidth costs. Storage Center eliminates the need for
expensive protocol converters, provides the ability to
prioritize replication across applications, enables multi-site
replication using different hardware configurations and reduces
the amount of data that needs to be sent to the replication
site. Enterprises using Storage Center can easily
set-up a
remote replication solution, typically in just a few minutes.
The simplicity and robustness of Storage Centers disaster
recovery solution makes it attractive for a range of end users
from those with limited technical sophistication to large
enterprises with significant technical know-how. One of the most
important differentiators of Storage Center is its ability to
test disaster recovery systems seamlessly
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and without disruption of service. We believe Compellent offers
the only commercially available SAN solution that provides this
level of capability.
Efficient
Storage Utilization
Compellents thin provisioning technology is designed to
maximize storage utilization. Thin provisioning describes a
storage systems ability to provision (or
allocate to an application) more storage space than
is physically in the system. With thin provisioning, end users
can allocate more applications on less physical storage space,
which increases the utilization rate of the physical storage
space installed and requires fewer disk drives. Because of
Dynamic Block Architecture, Storage Center only consumes
physical disk capacity when data is written by an application or
user, as opposed to allocating physical capacity to users and
applications upfront. We believe this capability significantly
reduces an end users total cost of ownership by enabling
them to defer or avoid additional spending on storage until the
capacity is required, if ever. Storage Center enables end users
to allocate capacity at a much more granular level than
traditional storage systems. Storage Center also enables power
and cooling savings, improved performance, data availability and
storage utilization, while automating many of the tasks
associated with capacity planning.
Enabling
the Virtualized Data Center
Compellents advanced storage virtualization technology
enabled by Dynamic Block Architecture enables end users to
create an efficient shared storage pool. This pool can be
comprised of any combination of the disk drive technologies that
Storage Center supports and enables any application to access
all drives in the system. Storage Center dynamically distributes
workloads across the entire pool, automatically improving
utilization of storage resources for applications. The result is
a significant improvement in storage utilization, performance,
flexibility and cost for end users.
Compellents approach to storage virtualization complements
server virtualization technologies. End users realize similar
benefits from Compellents storage virtualization features
as they do from server virtualization, including reduced
hardware costs, high utilization of assets and simplified
management. While virtual server environments are not dependent
on virtualized storage (and vice versa), we believe our storage
virtualization leads to a more cost effective, flexible and high
performing virtual data center. Virtual datacenters have lower
hardware requirements due to higher utilization of both server
and storage hardware and simplified management, which can reduce
operating expenses.
Reducing
Technology Risk
Compellents hardware architecture is designed to mitigate
our end users technology risk. Storage Center enables
users to simultaneously utilize any combination of our various
standards-based hardware options
and/or
connectivity platforms and easily adopt new technologies as they
become available. Storage Center offers disk independence,
enabling end users to use any combination of Fibre Channel,
Mid-Tier Fibre Channel or Serial ATA disk in one
virtualized storage pool. Storage Centers virtualization
engine enables end users to access the full capacity of all the
drives in the system, even if they mix drive types. Similarly,
Storage Center provides server connectivity independence,
supporting both Fibre Channel and iSCSI protocols in the same
system, which gives end users more flexibility. As our
users storage needs expand, Storage Centers modular
design enables them to seamlessly add the appropriate technology
without discarding current hardware and software investments.
Highly-Efficient
and Scalable Business Model
We believe our business model is highly differentiated and gives
us a competitive advantage. Key elements of our business model
are virtual manufacturing, a standards-based hardware
architecture and assisted selling through an all-channel
approach. We believe these combined strategies create an
efficient and scalable business model that enables us to grow
our end user base, significantly reduce operating costs and
improve capital efficiency.
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Virtual
Manufacturing
Our virtual manufacturing model incorporates standards-based
hardware architecture, thereby eliminating the need for in-house
or outsourced manufacturing operations. The different
standards-based hardware components of our solution are provided
by our suppliers. These components are custom configured,
shipped, merged in transit and delivered to the end user as one
order. This is the process we call virtual manufacturing. This
model significantly reduces our working capital needs and
eliminates the need for maintaining assembly facilities,
production inventory, warehouses or complex outsourced
manufacturing relationships. By working with large suppliers and
utilizing standards-based hardware architecture, we are able to
scale rapidly with reduced capital outlay.
Standards-Based
Hardware Architecture
Our hardware approach enables us to offer the best
industry-standard hardware technology that suits the needs of
our end users. Since we use hardware components that are tested
extensively and shipped in high volumes by the manufacturers,
our end users achieve high quality and low cost. This model
enables us to focus our research and development efforts on our
software core competencies to design and develop advanced
software functionality at reasonable costs.
All-Channel
Assisted Sales Model
We employ an all-channel assisted selling model through
value-added resellers, which we refer to as channel partners.
Our channel partners generally sign agreements with us outlining
the terms of our relationship with them. Provisions within these
agreements include a restriction that software is licensed while
the hardware is sold, warranty provisions, agreement term (one
year with automatic successive renewal terms of one year
terminable without cause upon written notice to the other
party), payment terms (generally 30 days), channel partner
sales commitments, installation and configuration training
requirements, which we may waive in our discretion, and the
channel partners acknowledgement of the existance of our
deal registration process for registering potential system sales
to end users. Substantially all of our channel partners sign
similar agreements except for sales commitments. Our channel
partner agreements do not contain financial penalties for either
party. Unlike other enterprise storage vendors who utilize
resellers for distribution but may also compete with them
through direct sales, our business model motivates our channel
partners and significantly reduces our sales expense. By
leveraging the customer reach, technical expertise and industry
knowledge of our channel partners, we believe that we are able
to market to a significantly larger set of end users more
effectively and at lower cost than we could with our own direct
sales force. We have built a strong internal sales team to
assist our channel partners with, among other things, executive
sales calls, service and support offerings, product matter
expertise, configuration and pricing, joint sales calls, product
demonstrations and design assistance. We believe this model
provides us high visibility of demand for Storage Center and
quick market entry. We further believe our close working
relationship with channel partners and end users enables us to
better understand end user needs.
Our
Strategy
Our goal is to be the leading provider of feature rich, easy to
use and cost effective storage solutions for enterprises of all
sizes. Key elements of our strategy include:
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Extend Our Technology Leadership and Product Depth and
Breadth. We intend to further enhance our current
Storage Center solution by increasing our feature set and
service offerings to further address end user needs.
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Increase Market Share in the SME and Large Enterprise
Markets. We initially targeted the fast-growing
SME market. Storage Center is also being used by large
enterprises, such as large financial services institutions and
the federal government, due to its scalability and
functionality. We intend to work with our channel partners to
grow our business in both of these markets.
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Increase Number of Channel Partners, Industry Verticals and
Geographic Markets. We intend to continue to
broaden our relationships with our channel partners and develop
sales channels in additional geographies and industry verticals
through both new and existing channel partners.
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Broaden and Develop Strategic
Relationships. We plan to expand our existing
relationships and develop new relationships with leading
technology and distribution partners, including hardware vendors
such as switch, connectivity, disk and server vendors, as well
as software providers such as operating system, application,
server virtualization and database providers. We believe that
these strategic relationships will enable us to provide enhanced
solutions that will expand our addressable market, increase
sales of our systems through joint selling and marketing
arrangements and improve our insight into emerging industry
trends.
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Realize Upgrade Revenue From Customer Base. As
of December 31, 2007, Storage Center was being utilized by
more than 740 enterprises worldwide. We have designed Storage
Center to enable users to incrementally add software and
hardware features and capacity as their needs grow. We have been
able to realize significant revenue from existing end users
growing or upgrading their systems. We intend to grow our
upgrade revenue by marketing additional functionality, capacity
upgrades and replication systems to our end users.
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Capitalize On Scalable Business Model. We
intend to capitalize on our business model as we grow our
business. We believe our strategy of using virtual
manufacturing, standards-based hardware and an all-channel sales
model will enable us to scale rapidly, without incurring
significant capital expenditures while gaining significant
operating leverage.
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Our
Technology
We have designed a highly scalable, enterprise-class storage
solution with an intelligent software architecture, advanced
storage virtualization capabilities and a modular,
standards-based hardware platform. Storage Center is designed to
work with most server operating systems in use today
(i.e., Apple, AIX, HP-UX, Linux, NetWare, Solaris and
Windows) without installing additional server software. We
believe these underlying technologies enable Storage Center to
overcome the limitations of traditional storage systems and
operate as a fully integrated solution managed through a single,
intuitive, user interface.
Dynamic
Block Architecture
The foundation of Compellents solution is our Dynamic
Block Architecture, which utilizes block level intelligence to
improve the movement, placement and access of data with a level
of functionality that delivers significant improvements in the
cost, administration and recovery of data. Dynamic Block
Architecture enables us to record and track specific information
about each block of data in a given system. This information
about the data, or metadata, provides Storage Center with
intelligence on how each block is being used. The metadata
Storage Center gathers can be extensive, including access
frequency, performance and availability characteristics. Storage
Center combines metadata with our sophisticated data movement
engine, enabling enterprises to take a more intelligent approach
to storing, recovering and managing data in an integrated
automated solution. Because of our innovative approach to
managing data within a storage system, Storage Center provides
significant cost and time saving feature advantages to our end
users.
Advanced
Storage Virtualization
Storage Center accelerates data access by spreading read/write
operations across all disk drives so multiple requests are
processed in parallel. This is known as storage virtualization,
where the physical drives are abstracted from the logical view
of the data that the end user sees. Storage Center removes the
limitations of physical drives by aggregating them into logical,
virtual volumes. Storage Centers advanced virtualization
technology manages all disk space, even across disparate
technologies, as a centralized pool, and when demand increases,
end users can simply add physical drives without downtime. This
centralized pool of storage simplifies capacity planning for end
users, who no longer need to map physical disk drives to
dedicated servers and can provision logical volumes from a
single storage pool without restrictions.
Storage Centers virtualization technology removes the
concept of dedicated disk drives for servers, applications and
users, treating blocks as the basic resource managed by the
system and intelligently placing these blocks across disk drives
in a virtualized environment.
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Standards-Based
Hardware Platform
Storage Centers standards-based architecture enables the
ongoing adoption of new storage technologies, without forcing
enterprises to replace or discard their existing hardware and
software investments. This architecture enables end users to mix
and match server interfaces and disk drive technologies,
simultaneously supporting Fibre Channel
and/or iSCSI
server connections, and any combination of Fibre Channel,
Mid-Tier Fibre
Channel
and/or
Serial ATA disk drives. As part of a complete storage solution,
we also provide switches, host bus adapters, drive enclosures
and controllers.
Storage Centers modular hardware architecture enables
users to add capacity, connectivity and performance
incrementally to match demand, rather than purchasing resources
upfront that may never get used. Organizations can scale
capacity from one to hundreds of terabytes on a single
integrated platform, expanding hardware and upgrading software
online without disruption or downtime.
We have architected Storage Center for high availability by
striping data across all nodes in a cluster so that, if one node
fails, the other nodes can perform the requested function,
thereby preventing any single point of failure. Dual paths from
controllers to disk drives, redundant power and fans, and
controller failover support with a single or dual host bus
adapters are designed to enable continuous data access.
Controllers can be clustered but are connected independently and
fail over without additional software, even with a single server
connection.
Our
Products
Building on our Dynamic Block Architecture, Storage
Centers integrated suite of software applications
dramatically improve utilization, automate tiered storage,
streamline storage administration and speed data and disaster
recovery. A base configuration of Storage Center typically
includes a controller, disk enclosure, disk drives, connectivity
hardware, Storage Center Core software and Dynamic Capacity.
Most users also purchase Data Instant Replay with their initial
order. Based on their capacity or functionality requirements,
users can add hardware or software modules to complete their
solutions. We believe that Storage Centers software
products offer the following key benefits:
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Product
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Key Benefit
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Storage Center Core (includes Graphical User Interface)
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Provides storage virtualization and speeds both common and
complex storage tasks by reducing the time and effort required
for many complex functions into a few simple point-and-click
steps.
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Data Progression Automated Tiered Storage
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Automatically classifies and migrates data at the block-level to
the appropriate tier of storage based on frequency of access.
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Data Instant Replay Continuous Snapshots
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Creates any number of space-efficient copies of data that
deliver nearly instant recovery from data hazards without the
limitations of traditional snapshots.
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Server Instant Replay Boot from SAN
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Automates booting and recovering servers from the SAN by taking
and storing space-efficient copies.
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Remote Instant Replay Thin Replication
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Replicates space-efficient copies between primary and remote
data centers to deliver nearly instant disaster recovery without
the traditional cost or complexity.
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Dynamic Capacity Thin Provisioning
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Maximizes storage utilization by only consuming physical disk
space when data is written by the application, as opposed to
allocating capacity upfront.
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Enterprise Manager Storage Resource Management
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Enables multi-site and multi-system management from a single
console with a suite of advanced storage resource management and
reporting features.
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Single,
Intuitive Management Interface
All of Storage Centers software applications are managed
through a single unified interface that spans our entire set of
technologies, capabilities and configurations. An intuitive
point-and-click
approach enables rapid set up and installation and reduces the
need for training and specialized storage skills.
Complex allocation, configuration and administration functions
can be easily accomplished with a point and click interface,
that we call wizards, that guide the process and expand the
capabilities of a single administrator. Storage consumption and
usage trends are instantly monitored and displayed. Users can
manage individual or multiple systems from the same interface.
We believe Storage Centers wizard-driven interface is easy
to use, speeding both common and complex storage tasks by
reducing the time and effort required for many complex functions
into a few simple
point-and-click
steps. Users can accomplish advanced storage tasks in just
minutes, including implementing information lifecycle management
in a single step, provisioning volumes, automating capacity
planning, creating and expiring snapshots, deploying and testing
disaster recovery and administering their entire storage
environment.
Data
Progression (Automated Tiered Storage)
Storage Centers Data Progression application automatically
classifies and migrates blocks of data based on user selected
policies. When combined with Fast Track application, blocks of
data are dynamically placed on the appropriate tracks on each
drive within the system. For instance, data can be migrated to
the appropriate tier of storage based on usage, retaining
frequently accessed data on the fastest portion of
high-performance storage and storing infrequently accessed data
on lower cost storage. Users can configure storage tiers based
on technology, performance redundancy, or other criteria.
Storage Centers block-level intelligence allows blocks of
data to move both up and down tiers of storage and across drives
for appropriate placement over time based on frequency of
access. A good example is medical imaging applications, which
are storage intensive. All of the data associated with these
applications does not require equal performance, reliability and
frequency of access. With Data Progression technology, images
are automatically placed, or can be manually placed by end
users, on the appropriate tier of storage based on the required
level of performance. Active images are stored on the
Fibre-Channel Drives, which utilize enterprise-class protocols
and hard drives. Inactive images can be stored on lower cost
storage, either the Mid-Tier Fibre Channel Drives, which
utilize enterprise-class protocol and lower tier hard drives, or
Serial ATA Drives, which utilize lower tier protocol and lower
tier hard drives.
Data
Instant Replay (Continuous Snapshots)
Storage Centers Data Instant Replay application creates
space-efficient copies of data, called Replays, that enable
rapid recovery from data hazards, creation of test environments
and duplication of boot volumes. Replays are created without an
initial clone and contain only written data, rather than the
allocated but unused storage typical in traditional storage
systems. After the Replay creation, only the changed data blocks
are stored, resulting in greater space savings. End users are
able to create and store more Replays without consuming excess
storage capacity or negatively impacting performance. Every
Replay can be converted to a readable and writeable volume that
can be quickly mapped to any server.
End users can create Replays at multiple time intervals and keep
those Replays as long as required. With Replays, end users are
able to create more recovery points, which can reduce potential
data loss and dependence on tape backups by allowing recovery to
be targeted as close as possible to the time before the failure
occurred. Replays automatically expire after a user-specified
time and space is automatically returned to the shared storage
pool. Storage Centers intuitive interface typically
enables users to create a manual Replay in less than five
seconds and recover a Replay in less than ten seconds.
Additionally, Replays can be initiated directly by end user
applications.
Server
Instant Replay (Boot from SAN)
Storage Centers Server Instant Replay application
integrates with Storage Centers Data Instant Replay
application to provide snapshots of server boot images that are
stored and booted from a SAN instead of from local
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disks. This capability enables end users to deploy diskless
servers and significantly simplifies server management. Each new
boot image is created by taking a Replay of the initial boot
image, which includes pointers to the original gold
image rather than creating a duplicate copy of equal size. These
space-efficient Replays consume significantly less space per
boot image as compared to traditional storage systems, reducing
overall capacity requirements. An intuitive wizard automates the
set-up,
management and restoration process, enabling end users to simply
provision and recover servers.
Remote
Instant Replay (Thin Replication)
Storage Centers Remote Instant Replay application creates
any number of space-efficient Replays between primary and remote
data centers without a pre-allocation of space. This granularity
enables shorter recovery intervals, enabling end users near
instant recovery from any point in time.
Replication can be synchronous or asynchronous and can be
enabled in bi-directional, point-to-point or multi-point
configurations. System configurations can be different between
primary and remote locations, but all sites are active and
available for recovery. Storage Centers hardware ships
with a native iSCSI interface, allowing our system to replicate
over long distances using existing Ethernet networks. We support
both
IP-based and
Fibre Channel replication.
Remote Instant Replay improves bandwidth utilization by only
sending written data during the initial site synchronization
process, instead of the allocated but unused space sent by other
replication technologies. Remote Instant Replay then transfers
only the changed data, consuming less space and lowering
bandwidth costs. Replay data de-duplication ensures the same
block of data is not sent twice.
With Remote Instant Replays bandwidth simulation, users
can accurately estimate bandwidth requirements upfront based on
actual data, improving the initial bandwidth purchase. Ongoing
bandwidth shaping enables users to customize transfer rates
based on link speed, time of day and replication priority.
Storage Centers intuitive interface also enables users to
test and verify disaster recovery online. There is no need to
bring systems down to test disaster recovery readiness. A
replication can be setup in as few as six clicks and replication
templates can be created without complex scripting, reducing
overall management requirements. This streamlined replication
management is designed to allow recovery from a disaster in
seconds with a single click disaster declaration.
Dynamic
Capacity (Thin Provisioning)
Storage Centers Dynamic Capacity application consumes
physical disk space only when data is written by the
application, as opposed to traditional storage systems, which
require users to allocate potential needed capacity upfront.
This enables Storage Centers end users to reduce storage
purchases and add capacity only when needed. With Storage
Center, maximum capacity does not have to be fixed on a per
volume basis; volumes can easily be created and expanded online
without disruption or downtime. Continual automated monitoring
and alerts of allocated, used and physical storage enable
administrators to ensure that the appropriate physical storage
space is available when it is actually needed.
Using a server copy utility, users can copy thick provisioned
volumes from traditional storage systems onto Storage Center and
convert unused space into thin provisioned volumes. In
traditional implementations of thin provisioning, the operating
system will report deleted files as unavailable space. Storage
Centers Free Space Recovery software identifies and
reclaims space that is no longer in use. These advanced thin
provisioning features improve the efficiency of Storage Center.
Due to Storage Centers use of Dynamic Capacitys thin
provisioned volumes, Storage Center increases the performance of
volume-based operations such as rebuilds, copies, backups and
replications.
Enterprise
Manager (Storage Resource Management)
Enterprise Manager is designed to enable all local and remote
Storage Center systems to be monitored and managed using a
single console, providing a complete, centralized view of all
aspects of an enterprises storage environment and enabling
a single administrator to monitor multiple systems. System
reports present storage
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resource management information, including summaries for
capacity utilization, performance, replications and events.
Users can view storage capacity utilization and performance on
all systems over any period of time, including summaries from
the last week, month or year. Hero reports allow users to easily
show the cost and power savings of Storage Center compared to
traditional storage systems. Users can also chargeback
departments or customer sites for actual storage consumed,
associating different costs with multiple storage tiers and
charging premiums or discounts based on user defined
configurations.
Our
Services
Our Copilot Service is a comprehensive customer service and
technical support program that integrates installation services,
a single point of contact call center, hardware and software
maintenance, and onsite field services to enable reliable
service delivery and execution for Storage Center end users.
Copilot Service provides the convenience of one contract and a
single point of contact to address Storage Center hardware or
software issues.
Support activities are dispatched 24x7 by highly skilled and
trained staff, and Compellents channel partners can
monitor service issues via a secure, online tracking system.
Copilot Service utilizes Storage Centers integrated
PhoneHome functionality to alert users to potential
systems issues via scheduled or event-based notifications.
Onsite hardware repair services are delivered through Anacomp,
Inc., a global field service force of trained technicians,
dispatched via a
24-hour call
center with access to local exchange parts depots in which we
store replacement parts for Storage Center. Our agreement with
Anacomp automatically renews for successive two year periods,
commencing March 1, 2008, unless either party notifies the
other, in writing, of its intention to terminate or renegotiate
the agreement at least 90 days prior to the end of the two
year term. In addition, either party may immediately terminate
the agreement for a material breach by the other party that is
not cured within 30 days. In late 2007, we notified Anacomp
of our intention to engage in renegotiation of certain
contractual terms. To facilitate this renegotiation, Anacomp
agreed to extend our current agreement from March 1, 2008
through April 30, 2008, or the amendment term. If necessary
the amendment term may be further revised for an additional
period or either party may provide a minimum of 60 days
written notice of its intention to terminate the agreement.
Our installation services speed time to deployment with
on-site
configuration and implementation. Our training services improve
system understanding and operation through instruction in system
administration and management. Our professional service
offerings provide access to our technical experts in storage
administration, management and troubleshooting, without
requiring staff overhead for the end user. These services
include regularly scheduled reviews, system health checks and
evaluations as well as advanced configuration and software
support.
End
Users
As of December 31, 2007, Storage Center was being utilized
by more than 740 enterprises worldwide in a variety of
industries, including accounting, agriculture, automotive,
construction, education, entertainment, financial services, food
services, government, healthcare, insurance, legal,
manufacturing, media, real estate, retail, scientific,
technology, telecommunications, transportation and travel.
Distribution
Channel and Marketing
We currently sell Storage Center primarily to SMEs through our
all-channel assisted sales model. We provide our end users with
SAN solutions through our channel partners, who our end users
rely on to address their enterprise-class networking and storage
needs. We selectively recruit value-added-resellers to join our
channel partner network. We have built a strong internal sales
team to train and assist our channel partners with, among other
things, executive sales calls, service and support offerings,
product matter expertise, configuration and pricing, joint sales
calls, product demonstrations and design assistance. In
addition, we currently maintain a small team of installation
professionals to assist channel partners and end users in
installing our products.
In 2007, 2006 and 2005, our top ten channel partners accounted
for 45%, 49% and 60% of our revenue, respectively. During 2007
one channel partner accounted for 13% of revenue, and during
2006 and 2005 no channel partner accounted for more than 10% of
revenue.
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In March 2005, 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 Canada. In
January 2008, we entered into a new marketing agreement with
AMEX containing similar exclusive distribution rights as the
March 2005 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. In the event we elect not to renew
the marketing agreement, we must continue to pay AMEX a
sliding-scale commission based on international sales for a
period of two years following termination.
Virtual
Manufacturing
Our virtual manufacturing model incorporates standards-based
hardware architecture, thereby eliminating the need for in-house
and outsourced manufacturing operations. The different
standards-based hardware components of our solution are provided
by our suppliers. These components are custom configured,
shipped, merged in transit and delivered to the end user as one
order. This is the process we call virtual manufacturing. This
virtual manufacturing and integration approach enables us to
focus resources on the design, development and marketing of
Storage Center.
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 and do
not have long-term supply contracts. 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. We also rely on
Xyratex Corporation, a provider of data storage subsystems, to
provide us with custom enclosures and disk drives. Xyratex
purchases most of the disk drives that it supplies to us from
Seagate Technology, Inc. This model significantly reduces our
working capital needs and eliminates the need for maintaining
assembly facilities, production inventory, warehouses or complex
outsourced manufacturing relationships. We work closely with our
suppliers to lower component costs and improve quality. By
working with large suppliers, we are able to scale rapidly with
limited capital expenditures. We maintain relatively low
inventory, generally only for repairs, evaluation and
demonstration units, and acquire components only as needed. We
do not enter into long-term supply contracts for these
components.
Research
and Development
We believe that our future success depends in part on our
ability to introduce enhancements to Storage Center and to
develop new applications for both existing and new markets. Our
research and development efforts are directed largely to the
development of additional enterprise-class network storage
solutions demanded by our channel partners and end users. We
have assembled a team of highly skilled engineers who have
expertise in designing and developing
enterprise-class SANs. Our research and development group
is located in Eden Prairie, Minnesota. As of December 31,
2007, we had 48 employees in the research and development
group. Our research and development expenses were
$7.6 million in 2007, $5.7 million in 2006, and
$5.2 million in 2005.
Competition
We compete with numerous domestic and international companies,
most of which have longer operating histories, greater name
recognition, larger customer bases and significantly greater
financial, technical, sales, marketing and other resources than
we have. A number of very large corporations have historically
dominated the storage market. We consider our primary
competitors to be companies that provide SAN products, including
a number of established public companies, such as Dell, Inc.,
EMC Corporation, Hewlett-Packard Company, Hitachi Data Systems
Corporation, IBM and Network Appliance, Inc., and newly public
companies, such as 3PAR, Inc. and a number of private companies,
such as Xiotech Corporation, LeftHand Networks and others. Some
of our competitors, including EMC and Network Appliance, have
made acquisitions of businesses that allow them to offer more
directly competitive and comprehensive solutions than they had
previously offered. We expect to encounter new competitors 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
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network management companies. In addition, there may be new
technologies that are introduced that reduce demand for, or make
our, storage solution architecture obsolete.
We believe that the principal competitive factors affecting the
data storage market include such storage system attributes as:
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functionality;
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scalability;
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performance;
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ease of use;
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system reliability and availability; and
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cost efficiency in acquisition, deployment and ongoing support.
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We believe that we compete favorably with our competitors on the
basis of these factors. However, potential end users may prefer
to purchase from their existing suppliers rather than a new
supplier regardless of product performance or features. Our
success will also depend on utilizing new and proprietary
technologies to offer products and features previously not
available in the marketplace. If we fail to continue to compete
favorably, our business will be harmed.
Intellectual
Property
Our success depends in part upon our ability to protect our core
technology and intellectual property. To accomplish this, we
rely on a combination of intellectual property rights, including
patents, trade secrets, copyrights and trademarks, and
contractual protections.
As of December 31, 2007, we had eight pending patent
applications in the United States, two patent applications filed
pursuant to the Patent Cooperation Treaty and four pending
foreign patent applications. Our pending patent applications
relate to Dynamic Block Architecture storage processing and
other SAN concepts. We focus our patent efforts in the United
States, and, when justified by cost and strategic importance, we
file corresponding foreign patent applications in strategic
jurisdictions such as Asia and Europe. Our patent strategy is
designed to provide a balance between the need for coverage in
our strategic markets and the need to maintain costs at a
reasonable level.
We do not know whether any of our patent applications will
result in the issuance of any patents or whether the examination
process will require us to narrow the scope of our claims. To
the extent any of our applications proceed to issuance as a
patent, any such future patent may be opposed, contested,
circumvented, designed around by a third party, or found to be
invalid or unenforceable. In addition, our future patent
applications may not be issued with the scope of the claims
sought by us, if at all, or the scope of claims we are seeking
may not be sufficiently broad to protect our proprietary
technologies. Others may develop technologies that are similar
or superior to our proprietary technologies, duplicate our
proprietary technologies or design around patents owned or
licensed by us. If our products are found to conflict with any
patent held by third parties, we could be prevented from selling
our products or our patent applications may not result in issued
patents.
In addition, we generally control access to and use of our
proprietary software and other confidential information through
the use of internal and external controls, including contractual
protections with employees, contractors, end users and channel
partners. We rely in part on U.S. and international
copyright laws to protect our software. All employees and
consultants are required to execute confidentiality agreements
in connection with their employment and consulting relationships
with us. We also require them to agree to disclose and assign to
us all inventions conceived or made in connection with the
employment or consulting relationship. We cannot provide any
assurance that employees and consultants will abide by the
confidentiality or invention assignment terms of their
agreements. Despite our efforts to protect our intellectual
property through patents, trademarks and confidentiality
agreements, unauthorized parties may copy or otherwise obtain
and use our software and proprietary technology.
12
Our Storage Center suite of products utilizes eCos, an
open source, royalty-free, real-time operating
system intended for embedded applications. eCos is released
under a modified version of the well-known GNU General Public
License. Open source software is generally 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 make derivative works of the open source
software.
Third parties have sent us letters offering to license their
patents, and they and others could claim that our products or
technologies infringe their proprietary rights. The SAN industry
is characterized by the existence of a large number of patents,
trademarks and copyrights and by frequent litigation based on
allegations of infringement or other violations of intellectual
property rights. To the extent that we gain greater visibility
and market exposure as a public company, and as the number of
products and competitors in our market increases, we face a
higher risk of being the subject of intellectual property
infringement claims from other third parties. We cannot assure
you that we do not currently infringe, or that we will not in
the future infringe, upon any third-party patents or other
proprietary rights.
Litigation in this industry is often protracted and expensive.
Questions of infringement in the SAN industry involve highly
technical and subjective analyses. Any claim of infringement
from a third-party, even those without merit, could cause us to
incur substantial costs defending against such claims, and could
distract our management from running our business. Furthermore,
a party making such a claim, if successful, could secure a
judgment that requires us to pay substantial damages. A judgment
could also include an injunction or other court order that could
prevent us from selling Storage Center. In the event we receive
an adverse result in any litigation, we could be required to pay
substantial damages, cease sale of products, expend significant
resources to develop alternative technology and discontinue the
use of processes requiring the relevant technology. In addition,
we might be required to seek a license for the use of such
intellectual property, which may not be available on
commercially reasonable terms or at all.
In addition, litigation may become necessary in the future to
enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or
invalidity, and we may not prevail in any future litigation. The
results of any litigation are inherently uncertain. Any
successful infringement claim or litigation against us could
have a significant adverse impact on our business.
Alternatively, we may be required to develop non-infringing
technology, which would require significant effort and expense
and may ultimately not be successful.
We may also be required to seek licenses under patents or
intellectual property rights owned by third parties. However, we
cannot be certain that third parties will offer licenses to us
or that the terms of any licenses offered to us will be
acceptable. If we fail to obtain such third-party license for
our products, we could incur substantial liabilities or be
forced to suspend sales of our products.
Backlog
We do not believe that backlog as of any particular date is
meaningful, as sales of Storage Center are generally made
primarily pursuant to purchase orders for delivery of products.
Only a small portion of our orders are
non-cancelable,
and the dollar amount associated with the non-cancelable portion
is not significant. We do not believe that backlog as of any
particular date is indicative of future results.
Financial
Information by Business Segment and Geographic Data
We operate in one reportable industry segment: the design,
marketing, and technical support of enterprise class network
storage solutions. Our chief operating decision maker is our
chief executive officer. Our chief executive officer reviews
financial information, accompanied by information about revenue
by geographic region for purposes of allocating resources and
evaluating financial performance. The information included in
Note 13 of the Notes to Consolidated Financial Statements
is hereby incorporated by reference.
13
Employees
As of December 31, 2007, we had 212 employees, which
included 48 employees in research and development, 119 in
sales and marketing, 26 in customer and technical services, 11
in administration and 8 in manufacturing. None of our employees
are represented by a labor union and we consider current
employee relations to be good.
Executive
Officers of the Registrant
Our executive officers, their ages and their positions as of
March 14, 2008, are as follows:
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Name
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Age
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Position(s)
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Philip E. Soran
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Chairman, President and Chief Executive Officer
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John P. Guider
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Chief Operating Officer and Director
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Lawrence E. Aszmann
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Chief Technology Officer
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John R. Judd
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Chief Financial Officer
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Dennis R. Johnson
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63
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Executive Vice President
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Brian P. Bell
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Vice President, Sales
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Philip E. Soran has served as our Chairman, President and
Chief Executive Officer since co-founding Compellent in March
2002. From July 1995 to August 2001, Mr. Soran served as
President and Chief Executive Officer of Xiotech Corporation, or
Xiotech, a storage area networking company, which Mr. Soran
co-founded in July 1995. Xiotech was acquired by Seagate
Technology, or Seagate, a disk drive manufacturer, in January
2000. From October 1992 to April 1995, Mr. Soran served as
Executive Vice President of Prodea Software Corporation, a data
warehousing software company. From 1982 to 1992, Mr. Soran
also held a variety of management, sales, marketing and
technical positions with IBM. Mr. Soran received a B.A. in
Education from the University of Northern Colorado.
John P. Guider has served as our Chief Operating Officer
and a member of our board of directors since co-founding
Compellent in March 2002. From July 1995 to August 2001,
Mr. Guider served as Chief Operating Officer of Xiotech,
which Mr. Guider co-founded in July 1995. Xiotech was
acquired by Seagate in January 2000. From 1987 to 1995,
Mr. Guider served as Chief Technology Officer and Senior
Vice President of Product Development of Tricord Systems, a high
performance server company, which Mr. Guider co-founded in
1987. From December 1982 to January 1987, Mr. Guider served
as Director of Hardware Development at Star Technologies, a
scientific computer company, and held various management and
technical positions with Sperry Corporation, a mainframe systems
company. Mr. Guider received a B.S. in Electrical
Engineering from the University of Minnesota, Minneapolis.
Lawrence E. Aszmann has served as our Chief Technology
Officer and Secretary since co-founding Compellent in March
2002. Mr. Aszmann was a member of our board of directors
from March 2002 through June 2003. From July 1995 to August
2001, Mr. Aszmann served as Chief Technology Officer of
Xiotech, which Mr. Aszmann co-founded in July 1995. Xiotech
was acquired by Seagate in January 2000. From July 1988 to
August 1995, Mr. Aszmann served as Director of Intelligent
Input/Output Subsystems at Tricord Systems. From December 1981
to June 1988, Mr. Aszmann served as Chief Software
Architect of Star Technologies, and Mr. Aszmann previously
held various storage-related technology positions with
Technalysis Corporation, a consulting company, and Control Data
Corporation, a mainframe manufacturing company.
John R. Judd has served as our Chief Financial Officer
since June 2006. From October 2003 to July 2006, Mr. Judd
served as Chief Financial Officer of ATS Medical, Inc., a
medical device manufacturer. From June 2000 to October 2003,
Mr. Judd served as Controller of American Medical Systems
Holdings, Inc., a medical device manufacturer. From 1997 to
1999, Mr. Judd served as Chief Financial Officer of the
Autoglass Division of Apogee Enterprises, Inc., a glass
technology company. Mr. Judd received a B.A. and an M.B.A.
from the University of St. Thomas.
Dennis R. Johnson has served as our Executive Vice
President since April 2003. From May 2002 to April 2003,
Mr. Johnson served as President and Chief Executive Officer
of Marix Technologies, Inc., an enterprise software company.
From November 1999 to January 2002, Mr. Johnson served as
Executive Vice President of Sales for
14
Xiotech. Xiotech was acquired by Seagate in January 2000. From
December 1993 to February 1999, Mr. Johnson served as
President and Chief Executive Officer of XATA Corporation, a
fleet management software company. Mr. Johnson received a
B.A. in Sociology from Mankato State University.
Mr. Johnson has notified us that he intends to retire as of
June 30, 2008.
Brian P. Bell has served as our Vice President, Sales
since April 2006. From August 2003 to April 2006, he served as
our Director of Business Development. From August 2002 to August
2003, Mr. Bell was with Storage Networks, Inc., an
information storage software and services company, as Vice
President of Global Services. From July 1999 to August 2002,
Mr. Bell served in various positions for Storage Network,
Inc. including most recently as Director of Operations. From
1988 to 1999, Mr. Bell served as a commissioned officer in
the U.S. Air Force. Mr. Bell received a B.S. in Human
Factors from the U.S. Air Force Academy and an M.S. in
Human Factors Engineering from the University of Illinois.
Corporate
Information
Compellent Technologies, Inc. was formed in Minnesota in March
2002 and reincorporated in Delaware in June 2002. The address of
our principal executive office is 7625 Smetana Lane, Eden
Prairie, Minnesota 55344, and our telephone number is
(952) 294-3300.
Our website address is
http://www.compellent.com.
Available
Information
Our website address is
http://www.compellent.com.
Information contained on our website is not incorporated by
reference into this
Form 10-K
unless expressly noted. We file reports with the Securities and
Exchange Commission, or the SEC, which we make available on our
website free of charge. These reports include annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to such reports, each of which is provided on our
website as soon as reasonably practicable after we
electronically file such materials with or furnish them to the
SEC. You can also read and copy any materials we file with the
SEC at the SECs Public Reference Room at
100 F Street, N.E., Washington, DC 20549. You can
obtain additional information about the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements, and
other information regarding issuers that file electronically
with the SEC, including us. In addition, our Corporate
Governance Guidelines, Code of Business Conduct and Ethics and
Charters of our Audit, Compensation and Nominating and Corporate
Governance Committees are available on our website and are
available in print to any stockholder who requests such
information.
We have identified the following additional risks and
uncertainties that may have a material adverse effect on our
business, financial condition or results of operations.
Investors should carefully consider the risks described below
before making an investment decision. The risks described below
are not the only ones we face. Additional risks not presently
known to us or that we currently believe are immaterial may also
significantly impair our business operations. Our business could
be harmed by any of these risks. The trading price of our common
stock could decline due to any of these risks, and investors may
lose all or part of their investment.
Risks
Related to Our Business
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 been profitable in any quarterly
period since we were formed. We incurred net losses of
$7.8 million, $6.8 million and $9.1 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. As of December 31, 2007, our accumulated
deficit was $49.4 million. We expect to make significant
expenditures related to the development of our products and
expansion of our business, including research and development,
sales and marketing and general and administrative expenses. As
a public company, we will also incur significant legal,
accounting and other expenses that we did not incur as a private
company. In addition, we may 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
15
profitability, which we may never do. In addition, the
percentage growth rates we achieved in prior periods may not be
sustainable and we may not be able to increase our revenues
sufficiently in absolute dollars to ever reach 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 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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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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reductions in end users budgets for information technology
purchases and delays in their purchasing cycles;
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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.
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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
16
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.
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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,
including a number of established public companies, such as
Dell, Inc., which completed its acquisition of EqualLogic, Inc.
in January 2008, EMC Corporation, Hewlett-Packard Company,
Hitachi Data Systems Corporation, IBM and Network Appliance,
Inc., and newly public companies, such as 3PAR, Inc. and a
number of private companies, such as Xiotech Corporation,
LeftHand Networks and others. Some of our competitors, including
Dell, EMC and Network Appliance, 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. 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.
Aggressive
business tactics by our competitors may reduce our
revenue.
Increased competition in the markets in which we compete may
result in aggressive business tactics by our competitors,
including:
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selling at a discount;
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offering bundled software at no charge;
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announcing competing products combined with extensive marketing
efforts;
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offering to repurchase our system from existing end users;
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providing financing, marketing and advertising assistance to
customers; and
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asserting intellectual property rights irrespective of the
validity of the claims.
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If we fail to compete successfully against our current and
future competitors, or if our current or future competitors
employ aggressive business tactics, including those described
above, demand for Storage Center could decline, we could
experience delays or cancellations of end users orders, or we
could be required to reduce our prices or increase our expenses.
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.
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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 environment, budgetary
constraints of our end users or other factors, we may not be
able to increase our revenues sufficiently to ever achieve
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.
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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 may
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
$51.2 million in 2007. We do not expect to achieve similar
percentage growth rates in future 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 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 small to
medium size enterprises, or SME 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.
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We intend to increase our investment in research and
development, sales and marketing, 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 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.
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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 existance 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. We receive a substantial portion of our revenue
from a limited number of channel partners. For 2007, 2006 and
2005, our top ten channel partners accounted for 45%, 49% and
60% of our revenue, respectively. One channel partner accounted
for 13% of our revenue in 2007, and no channel partner accounted
for more than 10% of our revenue in 2006 and 2005. 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, a portion of our
revenue attributable to individual channel partners may increase
in the future. The loss of one or more key channel partners or a
reduction in sales through any major channel partner would
reduce our revenue.
We may
not be able to maintain existing channel partners or grow our
business to include more channel partners and large enterprise
end users.
In order for us to maintain our current revenue sources and grow
our revenue, we must effectively manage and grow relationships
with qualified channel partners that have relationships with
SMEs. In order to execute on our strategy to expand our sales to
large enterprises and to end users internationally, we must
develop relationships with channel partners that sell into these
markets. Recruiting and retaining qualified channel partners and
training them in our technology and product offerings requires
significant time and resources. 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.
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 net losses.
We have no long-term contracts with any of our channel partners,
and our reseller agreements with our channel partners do not
prohibit them from offering competitive products or services.
Many of our channel partners also sell competitors
products. Our competitors may be effective in providing
incentives to our existing and potential channel partners to
favor their products or to prevent or reduce sales of Storage
Center. Our channel partners may choose not to offer our
products exclusively or at all. Moreover, the channel partners
that we do business with also compete with one another. If one
of our channel partners views our arrangement with another
partner as competing with its products, it may decide to stop
doing business with us. If we fail to establish and maintain
successful relationships with channel partners our revenues will
be reduced and we may continue to incur net losses.
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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. 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. 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. Our agreement with Anacomp
automatically renews for successive two year periods, commencing
in March 1, 2008, unless either party notifies the other,
in writing, of its intention to terminate or renegotiate the
agreement at least 90 days prior to the end of the two year
term. In addition, either party may immediately terminate the
agreement for a material breach by the other party that is not
cured within 30 days. In late 2007, we notified Anacomp of
our intention to engage in renegotiation of certain contractual
terms. To facilitate this renegotiation, Anacomp agreed to
extend our current agreement from March 1, 2008 through
April 30, 2008, or the amendment term. If necessary the
amendment term may be further revised for an additional period
or either party may provide a minimum of 60 days written
notice of its intention to terminate the agreement. If Anacomp
were to end their relationship with us, 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.
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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.
As part of our product development efforts, we release new
versions of our software and related applications on a regular
basis. Due to the complexity of enterprise storage products and
the difficulty in gauging the development effort required to
produce new versions and new products, these new versions and
new products are subject to significant technical risks. New
versions and new products may not be introduced on a timely
basis or at all. If potential new products are delayed or do not
achieve market acceptance, our revenue may be reduced and our
competitive position may be impaired.
We may also find that we need to incorporate certain proprietary
third-party technologies, including software programs, into our
products in the future. However, licenses to relevant
third-party technology may not be available to us on
commercially reasonable terms, or at all. Therefore, we could
face delays in product releases until equivalent technology can
be identified, licensed or developed, and integrated into our
current products and any such delays may adversely affect our
revenue and our ability to compete.
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 configurement of Storage Center to
our end users could be delayed, our revenue could be reduced and
our ability to compete could be impaired. As a significant
portion of our sales occur in the last month of a quarter, our
end 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. We currently maintain a
small team of installation personnel. As our business grows we
will need to recruit, train and retain additional installation
personnel and may not be able to do so, which would adversely
affect our ability to compete. 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.
As we
enter new markets we may encounter longer sales, payment and
implementation cycles, which could have an adverse effect on the
size, timing and predictability of our revenue.
Potential or existing end users, particularly larger business
enterprise end users, generally commit significant resources to
an evaluation of available storage systems and could require us
or our channel partners to expend substantial time, effort
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and money educating them as to the value of our storage
products. Sales of Storage Center to end users sometimes require
an extensive education and marketing effort. If we are able to
penetrate additional large enterprise end users, our sales cycle
may lengthen. In addition, as our end user base grows, we may be
subject to longer payment cycles, particularly in international
markets. Our sales cycle and our collection of revenues for
Storage Center is subject to significant risks and delays over
which we have little or no control, including:
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our end users budgetary constraints;
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the timing of our end users budget cycles and approval
processes;
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our channel partners and end users credit risks;
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our end users willingness to replace their current storage
solutions;
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our or our channel partners need to educate end users
about the uses and benefits of our products and
services; and
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the timing of the expiration of our end users current
license agreements or outsourcing agreements for similar
services.
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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 little business internationally.
We have only one international office and revenue from
international sales was 11%, 5%, and 3% during 2007, 2006 and
2005, 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
March 2005, 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 Canada. In
January 2008, we entered into a new marketing agreement with
AMEX containing similar exclusive distribution rights as the
March 2005 agreement. AMEX agrees to use its best efforts to
further the promotion, marketing and
23
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; 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; 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.
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In addition, we expect that we may encounter increased
complexity and costs of managing international operations,
including longer and more difficult collection of receivables,
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 patents pending in the United
States and in foreign countries. Even if the pending patent
applications are granted, the rights granted to us may not be
meaningful or provide us with any commercial advantage. Even if
the pending patent applications are granted, these patents 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
24
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. We have
received and expect that in the future we may receive,
particularly as a public company, 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
potential 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.
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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.
Any
significant impairment of our intellectual property rights from
any litigation we face could damage our reputation, impair our
ability to compete and increase our expenses.
Our channel partners and end users could also become the target
of litigation relating to the patent and other intellectual
property rights of others. This could trigger technical support
and indemnification obligations in our licenses or maintenance
agreements. These obligations could result in substantial
expenses, including the payment by us of costs and damages
relating to claims of intellectual property infringement. In
addition to the time and expense required for us to provide
support or indemnification to our channel partners or end users,
any such litigation could disrupt the businesses of our channel
partners or end users, which in turn could hurt our
relationships with our channel partners or end users and cause
the sale of our products to decrease. Claims for indemnification
may be made and such claims may adversely affect our reputation,
impair our ability to compete and increase our expenses.
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
25
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.
If our
products do not interoperate with our end users networks,
servers or software applications, installations would be delayed
or cancelled.
Our products must interoperate with our end users existing
infrastructure, specifically their networks, servers and
software applications. This infrastructure often utilizes
multiple protocol standards, products from multiple vendors,
including our channel partners, and a wide range of storage
features. If we find, as we have in the past, defects in the
existing software or hardware used in our end users
infrastructure or an incompatibility or deficiency in Storage
Center, we may have to modify Storage Center so that our product
will interoperate with our end users infrastructure. This
could cause longer sales and implementation cycles for Storage
Center and could cause order cancellations, either of which
would result in lower revenue.
We
cannot predict our future capital needs and we may be unable to
obtain additional financing to fund our
operations.
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.
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
26
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.
We are
subject to governmental export and import controls that could
subject us to liability or impair our ability to compete in
international markets.
We are subject to export control laws that limit the products we
sell and where and to whom we sell Storage Center
internationally. In addition, various countries regulate the
import of certain technologies and have enacted laws that could
limit our ability to distribute Storage Center or could limit
our end users ability to implement Storage Center in those
countries. Changes in Storage Center or changes in export and
import regulations may create delays in the introduction of
Storage Center in international markets, prevent our customers
with international operations from deploying Storage Center
throughout their global systems or, in some cases, prevent the
export or import of Storage Center to certain countries
altogether. Any change in export or import regulations or
related legislation, shift in approach to the enforcement or
scope of existing regulations, or change in the countries,
persons or technologies targeted by such regulations, could
result in decreased use of Storage Center by, or in our
decreased ability to export or sell Storage Center to, existing
or potential customers with international operations.
We
incur significant costs as a result of operating as a public
company and our management devotes substantial time to new
compliance initiatives.
We have incurred and will continue to incur significant legal,
accounting and other expenses as a public company, including
costs resulting from regulations regarding corporate governance
practices. The listing requirements of NYSE Arca require that we
satisfy certain corporate governance requirements relating to
independent directors, committees, distribution of annual and
interim reports, stockholder meetings, stockholder approvals,
solicitation of proxies, conflicts of interest, stockholder
voting rights and a code of conduct. Our management and other
personnel devote a substantial amount of time to these
compliance initiatives. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly. These rules
and regulations, coupled with the increase in potential
litigation exposure associated with being a public company,
could make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board
committees or as executive officers.
In addition, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley
Act, requires, among other things, that we maintain effective
internal control over financial reporting and disclosure
controls and procedures. In particular, for the year ending
December 31, 2008, we must perform system and process
evaluation and testing of our internal control over financial
reporting to allow management and our independent registered
public accounting firm to report on the effectiveness of our
internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, or Section 404.
Our testing, or the subsequent testing by our independent
registered public accounting firm, may reveal deficiencies in
our internal control over financial reporting that are deemed to
be material weaknesses.
Our compliance with Section 404 will require that we incur
substantial expense and expend significant management time on
compliance-related issues. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely
manner, or if we or our independent registered public accounting
firm identify deficiencies in our internal control over
financial reporting that are deemed to be material weaknesses,
the market price of our stock would likely decline and we could
be subject to sanctions or investigations by NYSE Arca, the
Securities and Exchange Commission, or the SEC, or other
regulatory authorities, which would require additional financial
and management resources.
If we
fail to maintain effective internal control over financial
reporting in the future, the accuracy and timing of our
financial reporting may be impaired.
In connection with the audit of 2006, our independent registered
public accounting firm identified a significant deficiency as a
result of our failure to have the appropriate financial
management and reporting infrastructure in place that resulted
in the restatement of our 2004 and 2005 financial statements and
the recording of a 2006 adjustment due to the misallocation of
discounts in our revenue recognition process. Our independent
registered
27
public accounting firm also identified a significant deficiency
in 2006 related to the segregation of duties in our finance
department. A control deficiency exists when the design or
operation of a control does not allow management or employees,
in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis. Control
deficiencies may individually, or in combination, give rise to a
significant deficiency or a material weakness. A significant
deficiency is a deficiency, or combination of deficiencies, in
internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit
attention by those responsible for oversight of the
registrants financial reporting. A material weakness is a
control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected by a companys internal
controls.
We have completed a remediation plan which addressed the
significant deficiencies identified in the 2006 audit.
Specifically, we have (i) implemented improved policies and
procedures to ensure a review of contracts is performed and VSOE
has been established and maintained prior to revenue
recognition; (ii) refined our policies for the designation
of duties for inputting, reviewing and reconciling billing
processes as well as reviews by management; (iii) continued
to limit access to our information technology systems with
financial impact to those individuals who require access to
fulfill their job responsibilities; (iv) increased
uniformity and consistency with respect to customer contracts,
accounting records and related documentation; and
(v) maintained an increased level of management review of
key processes, particularly the revenue cycle and sales process.
Management has completed an evaluation of the effectiveness of
these additional controls and has concluded that the significant
deficiencies described above have been remediated as of
December 31, 2007.
We cannot assure you that we have identified all, or that we
will not in the future have additional, material weaknesses,
significant deficiencies and control deficiencies. Any failure
to maintain or implement required new or improved controls, or
any difficulties we encounter in implementation, could cause us
to fail to meet our periodic reporting obligations or result in
material misstatements in our financial statements. Any such
failure of our internal controls could also adversely affect the
results of the periodic management evaluations regarding the
effectiveness of our internal control over financial
reporting that will be required when the rules of the SEC
under Section 404 of the Sarbanes-Oxley Act become
applicable to us beginning with the required filing of our
Annual Report on
Form 10-K
for the year ending December 31, 2008.
We
expense stock options, which will reduce our net income or
increase our net losses in future periods.
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, or
SFAS No. 123(R), which requires the measurement of all
share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording
of such expense in our statements of operations. Effective
January 1, 2006, we adopted the fair-value-based
recognition provisions of SFAS No. 123(R) using the
prospective transition method, which requires us to apply the
provisions of SFAS No. 123(R) only to awards granted,
modified, repurchased or cancelled after the adoption date.
Under the prospective method, we will continue to account for
any portion of awards outstanding at January 1, 2006 using
accounting principles originally applied to those awards under
Accounting Principles Board, Opinion No. 25, Accounting
for Stock Issued to Employees. The total expense reported
for 2007 and 2006 related to stock options amounted to $762,000
and $52,000, respectively. This amount is expected to increase
in future years as new grants are made to employees and other
service providers. These additional expenses will increase
operating costs and correspondingly reduce our net income or
increase our net losses in future periods.
Risks
Related to the Ownership of Our Common Stock
Our
stock price is volatile and purchasers of our common stock could
incur substantial losses.
Our stock price is volatile and from October 10, 2007, the
first day of trading of our common stock, to March 14,
2008, our stock has had closing low and high sales prices in the
range of $7.94 to $24.19 per share. 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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28
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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.
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In addition, the stock market in general, and the market for
technology companies in particular, have 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.
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.
Our directors and executive officers and their affiliates
beneficially own approximately 54.3% of our outstanding 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, including those who purchase shares in this
offering.
The
price of our stock could decrease as a result of shares of
common stock being sold in the market.
If our existing stockholders, particularly our directors, their
affiliated venture capital funds and our executive officers,
sell substantial amounts of our common stock in the public
market, or are perceived by investors as
29
intending to sell, the trading price of our common stock could
decline significantly. As of December 31, 2007, we had
30,593,468 shares of common stock outstanding.
Of these shares, 23,638,676 shares are currently subject to
market standoff agreements entered into by certain of our
stockholders with us or contractual
lock-up
agreements entered into by certain of our stockholders with the
underwriters in connection with our initial public offering and
will become freely tradable on April 7, 2008, subject to
extension or reduction, upon the expiration of the restrictions
contained in these market standoff agreements and contractual
lock-up
agreements, except for shares of common stock held by directors,
executive officers and our other affiliates which will be
subject to volume limitations under Rule 144 of the
Securities Act of 1933, as amended, and, in certain cases,
various vesting arrangements.
Some of our existing stockholders have demand and piggyback
rights to require us to register with the SEC up to
18,939,164 shares of our common stock. If we register these
shares of common stock, the stockholders would be able to sell
those shares freely in the public market, subject to the market
standoff agreements and the
lock-up
agreements described above.
We also registered 6,411,016 and intend to register
1,682,640 shares of our common stock subject to outstanding
stock options and reserved for issuance under our equity plans.
These shares can be freely sold in the public market upon
issuance, subject to vesting restrictions, the market standoff
agreements and the
lock-up
agreements described above.
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;
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the required approval of at least
662/3%
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 and the inability of
stockholders to take action by written consent in lieu of a
meeting; and
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the required approval of at least a majority of the shares
entitled to vote at an election of directors to remove directors
without cause.
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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
30
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 1B.
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Unresolved
Staff Comments
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Not applicable.
Our principal executive offices are located in a leased facility
in Eden Prairie, Minnesota, consisting of approximately
56,000 square feet of office space under a lease that
expires in February 2014. This facility accommodates our
principal engineering, sales, marketing, operations and finance
and administrative activities. We do not own any real property.
We believe that our leased facilities are adequate to meet our
current needs.
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Item 3.
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Legal
Proceedings
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In April 2007, a channel partner filed a Demand for Arbitration
with the American Arbitration Association, alleging contract and
tort causes of action against us. The channel partner claims we
allegedly breached our channel partner agreement and allegedly
tortuously interfered with their business advantage by offering
identical pricing to another of our channel partners for use in
their response to a request for proposal to an end user. The
channel partner is also claiming trade secret misappropriation,
breach of confidentiality, civil conspiracy, and promissory
estoppel. Pursuant to the Commercial Arbitration Rules of the
American Arbitration Association, the case was arbitrated in
January 2008. The arbitrator currently has the matter under
advisement and a decision is still pending. The channel partner
is seeking to recover $2.2 million in damages. We believe
the claims are without merit and have defended ourselves
vigorously, but we are unable to predict the likelihood of an
outcome.
From time to time, we may become involved in legal proceedings
and claims arising in the ordinary course of our business.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders in the
fourth quarter of 2007.
31
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
for our Common Stock
Our common stock has been traded on the New York Stock Exchange
Arca, or NYSE Arca, under the symbol CML since it
began trading on October 10, 2007. Our initial public
offering was priced at $13.50 per share on October 9, 2007.
The following table sets forth for the period indicated the high
and low closing sale prices of our common stock, as reported by
the NYSE Arca.
|
|
|
|
|
|
|
|
|
|
|
Prices
|
|
|
High
|
|
Low
|
|
Fourth Quarter 2007 (from October 10, 2007)
|
|
$
|
24.19
|
|
|
$
|
12.03
|
|
There were approximately 163 holders of record of our common
stock as of March 14, 2008. In addition, we believe that a
significant number of beneficial owners of our common stock hold
their shares in street name.
Dividend
Policy
We have never declared or paid any cash dividends on our common
stock. We currently expect to retain any future earnings for use
in the operation and expansion of our business and do not
anticipate paying any cash dividends on our common stock in the
foreseeable future.
32
Stockholder
Return Comparison
The following graph shows the cumulative
2-month
total return of an investment of $100 cash on October 10,
2007, the date we became a public company, for our common stock
on NYSE Arca, in the Russell 2000 Index and the NASDAQ Computer
Index. The stock price performance shown on the graph is not
necessarily indicative of future price performance, and we do
not make or endorse any predictions as to future stockholder
returns. This graph is not soliciting material, 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 hereof and irrespective of any general
incorporation language in any such filing.
COMPARISON
OF 2 MONTH CUMULATIVE TOTAL RETURN*
Among
Compellent Technologies, Inc., Russell 2000 Index
and NASDAQ Computer Index
|
|
|
* |
|
$100 invested on 10/10/07 in stock or 9/30/07 in index-including
reinvestment of dividends. |
33
Unregistered
Sales of Equity Securities
From January 1, 2007 through December 31, 2007, we
sold and issued the following unregistered securities:
1. We granted options to our employees for the purchase of
an aggregate of 860,947 shares of our common stock at a
weighted-average exercise price of $3.57, pursuant to our 2002
Stock Option Plan, as amended, or the 2002 Plan. During this
period, stock options to purchase an aggregate of
40,303 shares of our common stock were cancelled without
being exercised and 612,943 shares of our common stock were
issued upon exercise of stock options. The options granted
during this period pursuant to our 2002 Plan are subject to
vesting over four years for the date of grant, subject to the
optionees continuous service with us.
2. In February 2007, we issued 14,492 shares of our
common stock to a consultant at $1.25 per share, in exchange for
$18,116 of real estate consulting services.
3. We granted 4,000 fully vested shares of common stock to
Robert F. Olson in connection with his appointment to our Board
of Directors pursuant to our 2002 Plan. Upon his resignation
from our Board of Directors in August 2007, these shares of
common stock were rescinded.
The issuances described in Item (1) and Item (2) above
were deemed exempt from registration under the Securities Act in
reliance on Rule 701 promulgated under the Securities Act
of 1933, as amended, as offers and sale of securities pursuant
to certain compensatory benefit plans and contracts relating to
compensation in compliance with Rule 701.
The issuance described in Item (3) above was deemed exempt
from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Regulation D
promulgated thereunder as transactions by an issuer not
involving a public offering.
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 Securities and Exchange
Commission 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 a $2.0 million. As of March 14,
2008, $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.
34
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data should be read in
conjunction with our consolidated financial statements and the
notes thereto, and with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations. The consolidated statements of operations data
for the years ended December 31, 2007, 2006, and 2005 and
the consolidated balance sheet data as of December 31, 2007
and 2006 have been derived from and should be read in
conjunction with our audited consolidated financial statements
and the notes thereto included elsewhere in this Annual Report
on
Form 10-K.
The consolidated statements of operations data for the year
ended December 31, 2004 and 2003 and the consolidated
balance sheet data as of December 31, 2005, 2004 and 2003,
are derived from audited consolidated financial statements and
the notes thereto which are not included in this Annual Report
on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
42,831
|
|
|
$
|
19,996
|
|
|
$
|
8,670
|
|
|
$
|
3,638
|
|
|
$
|
|
|
Product support and services
|
|
|
8,368
|
|
|
|
3,337
|
|
|
|
1,241
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
51,199
|
|
|
|
23,333
|
|
|
|
9,911
|
|
|
|
3,889
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
21,554
|
|
|
|
9,897
|
|
|
|
4,915
|
|
|
|
2,446
|
|
|
|
|
|
Cost of product support and services
|
|
|
4,423
|
|
|
|
2,774
|
|
|
|
1,047
|
|
|
|
541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
25,977
|
|
|
|
12,671
|
|
|
|
5,962
|
|
|
|
2,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,222
|
|
|
|
10,662
|
|
|
|
3,949
|
|
|
|
902
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
23,520
|
|
|
|
10,562
|
|
|
|
5,504
|
|
|
|
3,992
|
|
|
|
1,377
|
|
Research and development
|
|
|
7,632
|
|
|
|
5,675
|
|
|
|
5,241
|
|
|
|
4,495
|
|
|
|
4,457
|
|
General and administrative
|
|
|
3,324
|
|
|
|
1,565
|
|
|
|
2,468
|
|
|
|
3,939
|
|
|
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,476
|
|
|
|
17,802
|
|
|
|
13,213
|
|
|
|
12,426
|
|
|
|
6,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,254
|
)
|
|
|
(7,140
|
)
|
|
|
(9,264
|
)
|
|
|
(11,524
|
)
|
|
|
(6,472
|
)
|
Other income, net
|
|
|
1,425
|
|
|
|
316
|
|
|
|
138
|
|
|
|
120
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,829
|
)
|
|
|
(6,824
|
)
|
|
|
(9,126
|
)
|
|
|
(11,404
|
)
|
|
|
(6,346
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
6,330
|
|
|
|
32
|
|
|
|
18
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(7,829
|
)
|
|
$
|
(13,154
|
)
|
|
$
|
(9,158
|
)
|
|
$
|
(11,422
|
)
|
|
$
|
(6,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.77
|
)
|
|
$
|
(3.29
|
)
|
|
$
|
(2.35
|
)
|
|
$
|
(3.02
|
)
|
|
$
|
(1.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per common share, basic and
diluted
|
|
|
10,219
|
|
|
|
4,003
|
|
|
|
3,897
|
|
|
|
3,779
|
|
|
|
3,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
82,382
|
|
|
$
|
15,106
|
|
|
$
|
2,037
|
|
|
$
|
4,398
|
|
|
$
|
14,413
|
|
Short-term investments
|
|
|
11,350
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
95,255
|
|
|
|
17,685
|
|
|
|
1,688
|
|
|
|
3,135
|
|
|
|
14,947
|
|
Total assets
|
|
|
113,376
|
|
|
|
26,407
|
|
|
|
6,006
|
|
|
|
8,162
|
|
|
|
15,891
|
|
Total liabilities
|
|
|
17,960
|
|
|
|
8,503
|
|
|
|
3,736
|
|
|
|
4,190
|
|
|
|
522
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
30,655
|
|
|
|
23,226
|
|
|
|
23,208
|
|
Total stockholders equity (deficit)
|
|
|
95,416
|
|
|
|
17,904
|
|
|
|
(28,385
|
)
|
|
|
(19,254
|
)
|
|
|
(7,839
|
)
|
35
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Annual Report on
Form 10-K
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
Annual Report on
Form 10-K,
including, but not limited to, statements about:
|
|
|
|
|
our expectations regarding our revenue, gross margin and
expenses;
|
|
|
|
our ability to compete in our industry;
|
|
|
|
our ability to maintain and grow our channel partner
relationships;
|
|
|
|
our growth strategy and our growth rate;
|
|
|
|
our anticipated cash needs and our estimates regarding our
capital requirements and our need for additional capital;
|
|
|
|
our ability to protect our intellectual property rights;
and
|
|
|
|
pricing and availability of our suppliers products.
|
In some cases, you can identify forward-looking statements by
terms such as anticipate, believe,
can, continue, could,
estimate, expect, intend,
may, plan, 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 Annual Report on
Form 10-K
in greater detail in Part I, 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 consolidated financial statements and the related notes
contained elsewhere in this Annual Report on
Form 10-K
and in our other Securities and Exchange Commission filings.
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
December 31, 2007, Storage Center was being utilized by
more than 740 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 competing 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. We also employ a virtual manufacturing strategy, which
significantly reduces inventory and eliminates the need for
in-house or 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.
36
Key
Financial Measures and Trends
Sources
of Revenue
Revenue is comprised of product revenue, consisting of software
and hardware revenue, and product support and services revenue.
A sale of Storage Center is typically comprised of (a) an
upfront fully-paid perpetual end-user license fee, (b) the
associated hardware components, (c) a software maintenance
arrangement that includes telephone support, bug fixes and
potential unspecified product updates, (d) a hardware
maintenance agreement that includes telephone support and
on-site
repairs and replacement and (e) in certain cases,
professional services for installation, training and consulting
support. Substantially all of our revenue consists of product
revenue from sales of Storage Center. We expect that product
support and services revenue will grow on an absolute basis as
our installed base of end users continues to grow, but remain
relatively consistent as a percentage of total revenue.
We offer our products and services through value-added
resellers, which we refer to as channel partners. Our channel
partners purchase our products after they have received a
purchase order from an end user, as they do not maintain an
inventory of our products in anticipation of sales to end users.
For 2007, 2006 and 2005, our top ten channel partners accounted
for 45%, 49% and 60% of our revenue, respectively. One channel
partner accounted for 13% of our revenue in 2007, and no channel
partner accounted for more than 10% of our revenue in 2006 and
2005.
Our systems are modular and highly configurable. Variations in
these configurations affect our average system order size and
can significantly impact our overall revenue, cost of revenue
and gross margin performance. Our revenue within a particular
quarter is often significantly affected by the unpredictable
procurement patterns of our end users. Historically, we have
generated the majority of our revenue in the final month of each
quarter primarily because many of our end users do not finalize
their purchasing decisions until the final weeks or days of a
quarter. We expect these purchasing patterns to continue in the
future.
Product
Revenue
Product revenue consists of license fees for software
applications associated with Storage Center and related hardware
sales, including disk drives, system controllers, host bus
adapters, switches and enclosures. We also derive a portion of
our product revenue from software and hardware upgrades, which
generally include additional hardware components and may include
new software applications. We expect that product revenue will
increase on an absolute basis if we are able to execute our
business strategy.
Product
Support and Services Revenue
Product support and services revenue consists of software and
hardware maintenance contracts, which typically have a duration
of one to three years, and professional services for
installation, training and consulting support.
Maintenance. We offer 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. Substantially all of our end users
purchase software and hardware maintenance agreements when they
purchase Storage Center. Revenue is deferred at fair value in
accordance with Statement of Position
No. 97-2,
Software Revenue Recognition, as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions , or SOP No
97-2, at the
time the maintenance agreement is entered into and is recognized
ratably over the term of the maintenance agreement.
Historically, substantially all of our end users have renewed
their maintenance agreements upon expiration of their existing
maintenance agreements. We anticipate that maintenance revenue
will grow on an absolute basis as our installed base of end
users continues to grow, but remain relatively consistent as a
percentage of total revenue.
Professional Services. We generally sell
professional services on a
time-and-materials
basis and recognize revenue when the services are performed.
Professional services include installation, consulting and
training. During 2005, we offered limited installation services
to our end users as our channel partners primarily provided
these services. In 2006, we expanded our internal installation
capabilities in order to compliment our channel partners
capabilities. Also in 2006, we began offering end user and
channel partner training programs.
37
Cost
of Revenue and Gross Margin
Cost of revenue is comprised of cost of product revenue and cost
of product support and services. Cost of product revenue
consists primarily of the cost of component hardware charged by
our component suppliers, shipping and handling, provisions for
excess and obsolete inventory, overhead allocations, and
employee salaries, benefits, and stock-based compensation
expense. We expect cost of product revenue to increase in
absolute dollars, but remain relatively constant as a percentage
of total product revenue. Cost of product support and services
consists of employee salaries, benefits, and stock-based
compensation expense for our customer service and technical
support team and service fees charged by Anacomp, Inc., our
third-party hardware maintenance provider. We expect cost of
product support and services revenue to increase as we expand
the size of our customer service and technical support team and
incur increased third-party services fees associated with
anticipated future revenue growth.
Our gross margin has been and will be affected by many factors,
including (a) the demand for Storage Center and related
services, (b) discount levels and price competition,
(c) average system order size and end user mix,
(d) hardware and software component mix and (e) the
level of fixed costs of customer service and personnel. We
expect gross margin to continue to increase slightly and then
level off.
Operating
Expenses
Operating expenses consist of sales and marketing, research and
development and general and administrative expenses.
Personnel-related costs are the most significant component of
each of these expense categories. We expect to continue to hire
a significant number of new employees to support our anticipated
growth.
Our business strategy is to be a leading provider of
enterprise-class network storage solutions. For us to achieve
our goals substantial investments in our infrastructure were,
and continue to be, necessary to facilitate rapid expansion.
From corporate inception to product commercialization in early
2004, our employee growth was predominantly focused in support
of our product development, as seen by the increase in research
and development expense during that time period. When
commercialization of our product occurred in early 2004, our
growth in operating costs was led by additional spending in
sales and marketing, as evidenced by the increase in sales and
marketing expense and corresponding headcount total since early
2004. Our sales and marketing team geographically covers the
entire United States, with employees physically located at
either our corporate headquarters or working remotely. With our
increased sales and marketing headcount, and the correlating
growth in our revenue, we have also expanded our support
functions such as sales management, sales operations,
information technology, finance and human resources to leverage
our corporate structure to further our business strategy.
Sales and Marketing. Sales and marketing
expense consists primarily of (a) salaries, related
personnel costs and stock-based compensation expense for our
sales and marketing personnel, (b) commissions,
(c) travel expenses, (d) marketing programs and
(e) other related overhead. We expect sales and marketing
expense to increase on an absolute basis for the foreseeable
future as we increase the number of sales and marketing
professionals and, to a lesser extent, increase our marketing
activities. We expect sales and marketing expense to decrease as
a percentage of revenue if our revenue grows as we anticipate.
Research and Development. Research and
development expense consists primarily of (a) salaries,
related personnel costs and stock-based compensation expense for
our research and development personnel, (b) depreciation on
equipment and (c) other related overhead. To date, all of
our research and development expenses have been expensed as
incurred. We expect research and development expense to increase
on an absolute basis for the foreseeable future as we enhance
and expand our product offerings. We expect research and
development expense to decrease as a percentage of revenue if
our revenue grows as we anticipate.
General and Administrative. General and
administrative expense consists primarily of (a) salaries,
related personnel costs and stock-based compensation for our
finance, human resource, and information technology personnel
and certain executive officers, (b) accounting, tax and
legal professional fees and (c) other related overhead. We
expect general and administrative expense to increase on an
absolute basis and as a percentage of total revenue in the short
term as we continue to develop the infrastructure necessary to
operate as a public company, including increased audit and legal
fees, costs of compliance with securities and other regulations,
implementation
38
costs for compliance with the provisions of Sarbanes-Oxley Act
of 2002, investor relations expense and higher insurance
premiums.
Other
Income, Net
Other income, net consists primarily of interest income earned
on cash and cash equivalent and short-term investment balances
less interest expense.
Income
Taxes
We have not recorded a provision for income taxes for the years
ended December 31, 2007, 2006 and 2005, as the tax benefits
of our net loss were offset by the recording of a valuation
allowance. We do not expect to record a provision for income tax
in the foreseeable future as we continue to make significant
expenditures related to the development of our products and
expansion of our business, which we expect will generate future
net losses.
Critical
Accounting Policies and Estimates
The discussion of our financial condition and results of
operations is based upon our financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires us to make estimates, judgments
and assumptions that effect 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.
We believe the following critical accounting policies affect our
more significant judgments used in the preparation of our
financial statements. See the notes to our financial statements
included in this Annual Report on Form 10K for information
about these critical accounting policies, as well as a
description of our other accounting policies.
Revenue
Recognition
We apply the provisions of
SOP No. 97-2
and Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition, to our
combined software and hardware product sales. We recognize
product revenue when:
|
|
|
|
|
Persuasive Evidence of an Arrangement
Exists. We determine that persuasive evidence of
an arrangement exists by receiving a purchase order or by
obtaining a signed quote.
|
|
|
|
Delivery has Occurred. Substantially all
products are shipped to end users. Delivery is deemed to have
occurred upon shipment as title transfers to the end user.
Products shipped with acceptance criteria are not recognized as
revenue until all conditional criteria are satisfied.
|
|
|
|
The Fee is Fixed or Determinable. Fees are
considered 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.
|
|
|
|
Collectibility 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 we are unable to determine from the
outset of an arrangement that collectibility is probable based
upon our review process, revenue is recognized upon cash receipt.
|
We use resellers, who act as brokers, to sell our products and
refer to such resellers as our channel partners. Revenue under
reseller arrangements is not recognized until shipment occurs to
the end user, the fee is fixed and
39
determinable, collectibility is probable and supported, and
there is evidence of a third-party end user sale, generally in
the form of a purchase order from the end user to the channel
partner. Our revenue is the price we charge the channel partner.
We maintain contractual arrangements with our channel partners,
which contain provisions that specify that the risk of loss and
title transfers upon shipment to the end user. In circumstances
where we sell directly to an end user, our revenue is the price
we charge the end user and revenue is recognized upon shipment
to the end user.
A sale of our Storage Center is typically a multiple element
arrangement including software, hardware, software maintenance,
hardware maintenance and in certain cases services. Our
determination of fair value of each element in these multiple
element arrangements is based on vendor-specific objective
evidence, or VSOE. We have analyzed all of the elements included
in our multiple-element arrangements and have determined that we
have sufficient VSOE to allocate revenue to software and
hardware maintenance and services. No software products remain
undelivered at the inception of the arrangement. Accordingly,
assuming all other revenue recognition criteria are met, revenue
from software and hardware is recognized upon delivery using the
residual method in accordance with Statement of Position
98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions, 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, we recognize revenue in
accordance with Emerging Issues Task Force, Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or EITF
No. 00-21.
We have determined that we have objective and reliable evidence
of fair value, in accordance with EITF
No. 00-21,
to allocate revenue separately to hardware and hardware
maintenance.
We generally sell professional services on a
time-and-materials
basis and recognize revenue when the services are performed.
Allowance
for Doubtful Accounts
In the vast majority of sales, we sell our products to channel
partners for resale to end users. In certain limited
circumstances, we may sell directly to the end user and pay the
channel partner a commission, which is recorded in sales and
marketing expense, primarily due to concerns of the credit
worthiness of the channel partner. We perform ongoing
evaluations of our channel partners and end users and
continuously monitor collections and payments. We record an
allowance for doubtful accounts based on the aging of the
underlying receivables, historical experience and any specific
collection issues we have identified. We monitor and analyze the
accuracy of our allowance for doubtful accounts estimate by
reviewing past collectibility and adjusting it for future
expectations to determine the adequacy of our allowance. To
date, we have not incurred any write-offs of accounts receivable
significantly different than the amounts reserved. We believe
appropriate reserves have been established, but may not be
indicative of future credit losses. Our allowance for doubtful
accounts as of December 31, 2007 and 2006 was $408,000 and
$430,000, respectively. If the financial condition of our
channel partners or end users were to deteriorate, resulting in
an impairment of their ability to make payments, additional
allowances may be required.
Inventory
Valuation
Inventories are recorded at the lower of cost, determined on the
first-in,
first-out method, or market value (estimated net realizable
value). Each quarter, we evaluate our inventories for
obsolescence and excess quantities. This evaluation includes
analysis of current inventory levels, expected product lives,
historical loss trends and projections of future sales demand.
Inventories that are considered obsolete are written off, and a
reserve for inventory quantities in excess of forecasted demand
is recorded. If future demand or market conditions are less
favorable than current estimates, additional inventory
write-downs would be required and would adversely affect income
in the period the write-down is made.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for stock option
grants in accordance with Accounting Principles Board, or APB,
Opinion No. 25, Accounting for Stock Issued to
Employees, and complied with the disclosure provisions of
Statement of Financial Accounting Standards, or SFAS,
No. 123, Accounting for Stock-Based
40
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure. Under APB 25, deferred
stock-based compensation expense is recorded for the intrinsic
value of options (the difference between the deemed fair value
of our common stock and the option exercise price) at the grant
date and is amortized ratably over the options vesting
period. No stock-based compensation expense was recorded in 2005.
Effective January 1, 2006, we adopted
SFAS No. 123(R), Share-Based Payment, or
SFAS No. 123(R), which requires the measurement and
recognition of compensation expense for all share-based payment
awards made to employees and non-employee directors based on
fair value. SFAS No. 123(R) supersedes our previous
accounting under APB No. 25. We adopted
SFAS No. 123(R) using the prospective transition
method. Under this method, compensation expense recognized for
2006 included compensation expense for all stock option grants
granted, modified, repurchased or cancelled subsequent to
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of
SFAS No. 123(R). In accordance with the prospective
transition method, our statements of operations for prior
periods have not been restated to reflect, and do not include,
the impact of SFAS No. 123(R).
Determining the appropriate fair value model and calculating the
fair value of stock option grants requires the input of highly
subjective assumptions. We use the Black-Scholes option pricing
model to value our stock option awards. Stock-based compensation
expense is significant to our financial statements and is
calculated using our best estimates, which involve inherent
uncertainties and the application of managements judgment.
Significant estimates include the risk free interest rate, the
expected life of the option, stock price volatility, the
dividend yield and the forfeiture rate. The risk-free interest
rate is based on the yield available on U.S. Treasury
zero-coupon bonds at the date of grant with maturity dates
approximately equal to the expected life at the grant date. The
expected life of the options is based on evaluations of
historical and expected future employee exercise behavior.
Volatility is based on historic volatilities from traded shares
of a selected publicly traded peer group, believed to be
comparable after consideration of size, maturity, profitability,
growth, risk and return on investment. We have not paid
dividends in the past and do not expect to in the foreseeable
future. We utilize historical data to estimate pre-vesting
forfeitures and records stock-based compensation expense only
for those awards that are expected to vest. Forfeitures have
been insignificant during each of the periods presented herein.
Any changes in these highly subjective assumptions may
significantly impact the stock-based compensation expense
recognized, which could have a material impact on our financial
statements. Stock-based compensation expense recorded during
2007 and 2006 was $762,000 and $52,000, respectively.
Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, or
SFAS No. 109, as clarified by Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainties in Income Taxes, or FIN No. 48,
Under this method, deferred income taxes are determined based on
the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities
given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on changes to the assets or
liabilities from year to year. In providing for deferred taxes,
we consider tax regulations of the jurisdictions in which we
operate, estimates of future taxable income, and available tax
planning strategies. If tax regulations, operating results or
the ability to implement tax-planning strategies vary,
adjustments to the carrying value of deferred tax assets and
liabilities may be required. Valuation allowances are recorded
related to deferred tax assets based on the more likely
than not criteria of SFAS No. 109.
FIN No. 48 requires that we recognize the financial
statement benefit of a tax position only after determining that
the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more likely than not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority.
Our deferred tax assets are comprised primarily of net operating
loss, or NOL, carryforwards. As of December 31, 2007, we
had federal and state NOL carryforwards of approximately
$39.0 million, which may be used to offset future taxable
income. The NOL carryforwards expire at various times through
2027 and are
41
subject to review and possible adjustment by the Internal
Revenue Service and state authorities. Under the provisions of
Section 382 of the Internal Revenue Code of 1986, as
amended, substantial changes in our ownership may limit the
amount of NOL carryforwards that can be utilized annually in the
future to offset taxable income. If a change in our ownership is
deemed to have occurred or occurs in the future, our ability to
use our NOL carryforwards in any year may be limited.
Based on the level of projected future taxable income over the
periods in which the deferred tax assets are deductible, and our
past history of losses, we believe that it is more likely than
not that we will not realize the benefits of these deductible
differences. Accordingly, we have recorded a full valuation
allowance against our net deferred tax assets as of
December 31, 2007 and 2006 of $15.9 million and
$13.0 million.
Results
of Operations
The following table sets forth a summary of our Consolidated
Statements of Operations and the related changes for the periods
indicated (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
December 31,
|
|
|
Change
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
42,831
|
|
|
$
|
19,996
|
|
|
$
|
22,835
|
|
|
|
114.2
|
%
|
|
$
|
19,996
|
|
|
$
|
8,670
|
|
|
$
|
11,326
|
|
|
|
130.6
|
%
|
Product support and services
|
|
|
8,368
|
|
|
|
3,337
|
|
|
|
5,031
|
|
|
|
150.8
|
|
|
|
3,337
|
|
|
|
1,241
|
|
|
|
2,096
|
|
|
|
168.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
51,199
|
|
|
|
23,333
|
|
|
|
27,866
|
|
|
|
119.4
|
|
|
|
23,333
|
|
|
|
9,911
|
|
|
|
13,422
|
|
|
|
135.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
21,554
|
|
|
|
9,897
|
|
|
|
11,657
|
|
|
|
117.8
|
|
|
|
9,897
|
|
|
|
4,915
|
|
|
|
4,982
|
|
|
|
101.4
|
|
Cost of product support and services
|
|
|
4,423
|
|
|
|
2,774
|
|
|
|
1,649
|
|
|
|
59.4
|
|
|
|
2,774
|
|
|
|
1,047
|
|
|
|
1,727
|
|
|
|
164.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
25,977
|
|
|
|
12,671
|
|
|
|
13,306
|
|
|
|
105.0
|
|
|
|
12,671
|
|
|
|
5,962
|
|
|
|
6,709
|
|
|
|
112.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,222
|
|
|
|
10,662
|
|
|
|
14,560
|
|
|
|
136.6
|
|
|
|
10,662
|
|
|
|
3,949
|
|
|
|
6,713
|
|
|
|
170.0
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
23,520
|
|
|
|
10,562
|
|
|
|
12,958
|
|
|
|
122.7
|
|
|
|
10,562
|
|
|
|
5,504
|
|
|
|
5,058
|
|
|
|
91.9
|
|
Research and development
|
|
|
7,632
|
|
|
|
5,675
|
|
|
|
1,957
|
|
|
|
34.5
|
|
|
|
5,675
|
|
|
|
5,241
|
|
|
|
434
|
|
|
|
8.3
|
|
General and administrative
|
|
|
3,324
|
|
|
|
1,565
|
|
|
|
1,759
|
|
|
|
112.4
|
|
|
|
1,565
|
|
|
|
2,468
|
|
|
|
(903
|
)
|
|
|
(36.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,476
|
|
|
|
17,802
|
|
|
|
16,674
|
|
|
|
93.7
|
|
|
|
17,802
|
|
|
|
13,213
|
|
|
|
4,589
|
|
|
|
34.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,254
|
)
|
|
|
(7,140
|
)
|
|
|
(2,114
|
)
|
|
|
(29.6
|
)
|
|
|
(7,140
|
)
|
|
|
(9,264
|
)
|
|
|
2,124
|
|
|
|
22.9
|
|
Other income, net
|
|
|
1,425
|
|
|
|
316
|
|
|
|
1,109
|
|
|
|
350.9
|
|
|
|
316
|
|
|
|
138
|
|
|
|
178
|
|
|
|
129.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,829
|
)
|
|
|
(6,824
|
)
|
|
|
(1,005
|
)
|
|
|
(14.7
|
)
|
|
|
(6,824
|
)
|
|
|
(9,126
|
)
|
|
|
2,302
|
|
|
|
25.2
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
6,330
|
|
|
|
(6,330
|
)
|
|
|
(100.0
|
)
|
|
|
6,330
|
|
|
|
32
|
|
|
|
6,298
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(7,829
|
)
|
|
$
|
(13,154
|
)
|
|
$
|
5,325
|
|
|
|
40.5
|
%
|
|
$
|
(13,154
|
)
|
|
$
|
(9,158
|
)
|
|
$
|
(3,996
|
)
|
|
|
(43.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentage not meaningful |
42
Comparison
of Years Ended December 31, 2007 and 2006
Revenue
Revenue and the related changes for the years ended
December 31, 2007 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
of Total
|
|
|
Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
42,831
|
|
|
|
83.7
|
%
|
|
$
|
19,996
|
|
|
|
85.7
|
%
|
|
$
|
22,835
|
|
|
|
114.2
|
%
|
Product support and services
|
|
|
8,368
|
|
|
|
16.3
|
|
|
|
3,337
|
|
|
|
14.3
|
|
|
|
5,031
|
|
|
|
150.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
51,199
|
|
|
|
100.0
|
%
|
|
$
|
23,333
|
|
|
|
100.0
|
%
|
|
$
|
27,866
|
|
|
|
119.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenue. Product revenue derived from
system sales primarily increased due to a 95% increase in the
number of systems sold. We believe the increase in systems sales
was driven by an increase of approximately 90 channel partners,
an increase in sales and marketing headcount to 119 people
from 62, 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 over 740 as of December 31, 2007 from over 355
as of December 31, 2006.
Product Support and Services Revenue. Product
support revenue increased 149% primarily due to the renewal of
maintenance agreements by existing end users and the growth of
the installed base. Product support pricing remained relatively
flat with an adjustment for immaterial inflationary price
increases. Services revenues increased 173% due to an increase
of approximately 105 end user and channel partner training
programs and an increase of approximately 115 Storage Center
installations. These increases were due to both an increase in
the number of products sold and our efforts to grow services
revenue.
Cost
of Revenue and Gross Margin
Cost of revenue and gross margin and the related changes for the
years ended December 31, 2007 and 2006 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
of Related
|
|
|
|
|
|
of Related
|
|
|
Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
$
|
21,554
|
|
|
|
50.3
|
%
|
|
$
|
9,897
|
|
|
|
49.5
|
%
|
|
$
|
11,657
|
|
|
|
117.8
|
%
|
Cost of product support and services
|
|
|
4,423
|
|
|
|
52.9
|
|
|
|
2,774
|
|
|
|
83.1
|
|
|
|
1,649
|
|
|
|
59.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
25,977
|
|
|
|
50.7
|
%
|
|
$
|
12,671
|
|
|
|
54.3
|
%
|
|
$
|
13,306
|
|
|
|
105.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
49.3
|
%
|
|
|
|
|
|
|
45.7
|
%
|
|
|
|
|
|
|
|
|
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 Product Support and Services
Revenue. Cost of product support and services
revenue increased primarily due to increased salaries, employee
benefits and stock-based compensation expense of $637,000
related to growth in our customer service and technical support
headcount to 26 people from 18 people, increased
travel expense of $112,000 and increased hardware service fees
of $822,000 charged by our third-party hardware maintenance
provider associated with the continuing growth of our installed
base.
43
Gross Margin. Gross margin increased due to
revenue increasing faster than cost of revenue as discussed
above.
Operating
Expenses and Other Income, Net
Operating expenses and other income, net and the related changes
for the years ended December 31, 2007 and 2006 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
of Total
|
|
|
Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
23,520
|
|
|
|
45.9
|
%
|
|
$
|
10,562
|
|
|
|
45.3
|
%
|
|
$
|
12,958
|
|
|
|
122.7
|
%
|
Research and development
|
|
|
7,632
|
|
|
|
14.9
|
|
|
|
5,675
|
|
|
|
24.3
|
|
|
|
1,957
|
|
|
|
34.5
|
|
General and administrative
|
|
|
3,324
|
|
|
|
6.5
|
|
|
|
1,565
|
|
|
|
6.7
|
|
|
|
1,759
|
|
|
|
112.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
34,476
|
|
|
|
67.3
|
%
|
|
$
|
17,802
|
|
|
|
76.3
|
%
|
|
$
|
16,674
|
|
|
|
93.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
$
|
1,425
|
|
|
|
2.8
|
%
|
|
$
|
316
|
|
|
|
1.4
|
%
|
|
$
|
1,109
|
|
|
|
350.9
|
%
|
Sales and Marketing Expense. Sales and
marketing expense increased primarily due to an increase in
sales and marketing headcount to 119 people from 62,
resulting in a $7.6 million increase in salaries, employee
benefits, commissions and stock-based compensation expense, a
$1.0 million increase in sales and marketing related travel
and support costs and a $319,000 increase in channel partner
commissions due to increased third-party selling activities. In
addition, due to higher gross accounts receivable balances
during 2007 and the uncertainty and collectibility of certain
accounts, we recorded an additional $303,000 of bad debt expense
to increase our allowance for doubtful accounts. Increased
marketing efforts led to an additional $2.7 million of
expense related to partner programs, trade shows and other
promotional activities. Facilities related costs also increased
$298,000, due primarily to our relocation to our new executive
headquarters in March 2007.
Research and Development Expense. Research and
development expense increased primarily due to an increase in
research and development headcount to 48 people from
39 people, resulting in a $1.1 million increase in
salaries, employee benefits and stock-based compensation
expense, an increase of $415,000 in supplies and prototype
material costs, and an increase of $178,000 in legal fees
associated with intellectual property.
General and Administrative Expense. General
and administrative expense increased primarily due to an
increase in finance and information technology staff headcount
to 11 people from seven people resulting in a $836,000
increase in salaries, employee benefits and stock-based
compensation expense. Professional fees increased $330,000 for
outside legal, accounting, valuation, and consulting services
pertaining to general corporate matters and depreciation expense
increased $264,000 due to higher gross asset balances.
Other Income, Net. Other income, net increased
primarily due to increased interest income resulting from higher
cash and cash equivalent and short-term investment balances
following the closing of the initial public offering in October
2007.
44
Comparison
of Years Ended December 31, 2006 and 2005
Revenue
Revenue and the related changes for the years ended
December 31, 2006 and 2005 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
of Total
|
|
|
Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
19,996
|
|
|
|
85.7
|
%
|
|
$
|
8,670
|
|
|
|
87.5
|
%
|
|
$
|
11,326
|
|
|
|
130.6
|
%
|
Product support and services
|
|
|
3,337
|
|
|
|
14.3
|
|
|
|
1,241
|
|
|
|
12.5
|
|
|
|
2,096
|
|
|
|
168.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
23,333
|
|
|
|
100.0
|
%
|
|
$
|
9,911
|
|
|
|
100.0
|
%
|
|
$
|
13,422
|
|
|
|
135.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenue. Product revenue derived from
system sales primarily increased due to a 99% increase in the
number of systems sold. We believe the increase in systems sales
was driven by an increase of approximately 20 channel partners,
an increase in sales and marketing headcount to 62 people
from 32 people, and additional marketing programs. Our
average system order size and average system sales price
remained relatively constant. 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
over 355 as of December 31, 2006 from over 175 as of
December 31, 2005.
Product Support and Services Revenue. Product
support revenue increased 157% primarily due to the renewal of
maintenance agreements by existing end users and the growth of
the installed base. Product support pricing remained relatively
flat with an adjustment for immaterial inflationary price
increases. Services revenues increased 471% due to the
commencement of our end user and channel partner training
programs, with over 70 held in 2006, and an increase of
approximately 70 Storage Center installations. These increases
were due to both an increase in the number of products sold and
our efforts to grow our services revenue.
Cost
of Revenue and Gross Margin
Cost of revenue and gross margin and the related changes for the
years ended December 31, 2006 and 2005 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
of Related
|
|
|
|
|
|
of Related
|
|
|
Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
$
|
9,897
|
|
|
|
49.5
|
%
|
|
$
|
4,915
|
|
|
|
56.7
|
%
|
|
$
|
4,982
|
|
|
|
101.4
|
%
|
Cost of product support and services
|
|
|
2,774
|
|
|
|
83.1
|
|
|
|
1,047
|
|
|
|
84.4
|
|
|
|
1,727
|
|
|
|
164.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
12,671
|
|
|
|
54.3
|
%
|
|
$
|
5,962
|
|
|
|
60.2
|
%
|
|
$
|
6,709
|
|
|
|
112.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
45.7
|
%
|
|
|
|
|
|
|
39.8
|
%
|
|
|
|
|
|
|
|
|
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 Product Support and Services
Revenue. Cost of product support and services
revenue increased primarily due to increased salaries, employee
benefits and stock-based compensation expense of $919,000
related to growth in our customer service and technical support
headcount to 18 people from nine people, increased travel
45
expense of $138,000, increased supplies expense of $137,000 and
increased hardware services fees of $338,000 charged by our
third-party hardware maintenance provider associated with our
installed base.
Gross Margin. Gross margin increased due to
revenue increasing faster than cost of revenue as discussed
above.
Operating
Expenses and Other Income, Net
Operating expenses and other income, net and the related changes
for the years ended December 31, 2006 and 2005 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
of Total
|
|
|
Change
|
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
Revenue
|
|
|
$
|
|
|
%
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
10,562
|
|
|
|
45.3
|
%
|
|
$
|
5,504
|
|
|
|
55.5
|
%
|
|
$
|
5,058
|
|
|
|
91.9
|
%
|
Research and development
|
|
|
5,675
|
|
|
|
24.3
|
|
|
|
5,241
|
|
|
|
52.9
|
|
|
|
434
|
|
|
|
8.3
|
|
General and administrative
|
|
|
1,565
|
|
|
|
6.7
|
|
|
|
2,468
|
|
|
|
24.9
|
|
|
|
(903
|
)
|
|
|
(36.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
17,802
|
|
|
|
76.3
|
%
|
|
$
|
13,213
|
|
|
|
133.3
|
%
|
|
$
|
4,589
|
|
|
|
34.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
$
|
316
|
|
|
|
1.4
|
%
|
|
$
|
138
|
|
|
|
1.4
|
%
|
|
|
178
|
|
|
|
129.0
|
%
|
Sales and Marketing Expense. Sales and
marketing expense increased primarily due to an increase in
sales and marketing headcount to 62 people from
32 people, resulting in a $2.7 million increase in
salaries, employee benefits, commissions and stock-based
compensation expense, a $377,000 increase in sales and marketing
related travel and support costs and a $602,000 increase in
channel partner commissions due to increased third party selling
activities. Increased marketing efforts led to an additional
$968,000 of expense related to partner programs, trade shows and
other promotional activities.
Research and Development Expense. Research and
development expense increased primarily due to an increase in
research and development headcount to 39 people from
34 people, resulting in a $393,000 increase in salaries,
employee benefits and stock-based compensation expense.
General and Administrative Expense. General
and administrative expense decreased primarily due to a decrease
of $1.5 million in legal fees incurred in defending
non-compete and trade secret infringement claims brought by
Xiotech Corporation, or Xiotech, which were settled in 2005. The
decrease in legal fees was partially offset by an increase in
finance headcount to five people from two people, resulting in a
$509,000 increase in salaries, employee benefits and stock-based
compensation expense.
Other Income, Net. Other income, net increased
primarily due to increased interest income resulting from higher
cash and cash equivalent balances following the closing of the
Series B and Series C preferred stock financings in
January and September 2006, respectively.
46
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
82,382
|
|
|
$
|
15,106
|
|
Short-term investments
|
|
|
11,350
|
|
|
|
258
|
|
Total current assets
|
|
|
110,627
|
|
|
|
25,348
|
|
Total assets
|
|
|
113,376
|
|
|
|
26,407
|
|
Total current liabilities
|
|
|
15,372
|
|
|
|
7,663
|
|
Total liabilities
|
|
|
17,960
|
|
|
|
8,503
|
|
Total stockholders equity
|
|
|
95,416
|
|
|
|
17,904
|
|
Working capital
|
|
|
95,255
|
|
|
|
17,685
|
|
Financing history. Since our inception in
March 2002, we have generated operating losses in every quarter
resulting in an accumulated deficit of $49.4 million as of
December 31, 2007.
Cash, cash equivalents and short-term
investments. Our cash, cash equivalents and
short-term investments available to fund current operations were
$93.7 million and $15.4 million at December 31,
2007 and 2006. We completed an initial public offering of our
common stock on October 9, 2007 in which we sold
6,900,000 shares of our common stock at $13.50 per share
for cash proceeds of $84.6 million, net of underwriting
discounts and commissions and offering expenses. We invested the
cash proceeds in short-term, investment grade, interest bearing
securities. We have used these funds for general corporate
purposes since our initial public offering and expect to
continue to do so. We expect our cash balances to decrease as we
continue to use cash to fund our operations. 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 years
ended December 31, 2007, 2006 and 2005 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net cash used in operating activities
|
|
$
|
(3,476
|
)
|
|
$
|
(8,158
|
)
|
|
$
|
(9,448
|
)
|
Net cash used in investing activities
|
|
|
(13,990
|
)
|
|
|
(1,179
|
)
|
|
|
(337
|
)
|
Net cash provided by financing activities
|
|
|
84,742
|
|
|
|
22,406
|
|
|
|
7,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
67,276
|
|
|
$
|
13,069
|
|
|
$
|
(2,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Cash used in operating activities was $3.5 million in 2007.
We incurred a net loss of $7.8 million, which included
non-cash charges consisting of $1.2 million in depreciation
and $642,000 in stock-based compensation expense related to
employees. Other uses of cash in operating activities included
an increase in accounts receivable of $5.4 million, offset
by an increase in deferred revenue of $6.6 million and an
increase in accrued liabilities of $2.1 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.
Cash used in operating activities was $8.2 million in 2006.
We generated a net loss of $6.8 million, which included
non-cash charges consisting of $747,000 in depreciation and
$52,000 in stock-based compensation expense related to
employees. Other uses of cash in operating activities included
an increase in accounts receivable of $5.8 million and an
increase in inventories of $981,000, partially offset by an
increase in deferred revenues of
47
$2.2 million, an increase in accounts payable of
$1.1 million and an increase in accrued liabilities of
$1.4 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. The increase in inventory primarily relates to an
increase in demonstration and evaluation units for our
prospective end users and an increase in hardware replacement
components, due to the increase in the number of installed
systems.
Cash used in operating activities was $9.4 million in 2005.
We generated a net loss of $9.1 million, which included
non-cash charges of $661,000 in depreciation. Other uses of cash
in operating activities included a decrease in accrued
liabilities of $1.1 million and an increase in accounts
receivable of $1.0 million, partially offset by an increase
in accounts payable of $617,000 and a decrease in inventories of
$528,000. The decrease in accrued liabilities is primarily due
to the decrease in accrued legal fees incurred in defense of
non-compete and trade secret infringement claims brought by
Xiotech Corporation. The increase in accounts receivable
reflects an overall increase in revenue primarily due to the
expansion of our operations.
Investing
Activities
Cash used in investing activities was $14.0 million in
2007, consisting primarily of $11.4 million for the
purchase of short-term investments and $2.9 million for the
purchase of property and equipment.
Cash used in investing activities was $1.2 million in 2006,
consisting of $921,000 for the purchase of property and
equipment and the net purchase of short-term investments of
$258,000.
Cash used in investing activities was $337,000 in 2005 for the
purchase of property and equipment.
Financing
Activities
Cash provided by financing activities was $84.7 million in
2007, primarily from the issuance of 6,900,000 shares of
common stock in conjunction with our initial public offering in
October 2007 with cash proceeds of $84.6 million, net of
underwriting discounts and commissions and offering expenses.
Cash provided by financing activities was $22.4 million in
2006, primarily from the issuance of Series B preferred
stock in January 2006 with net proceeds of $7.5 million and
the issuance of Series C preferred stock in September 2006,
with net proceeds of $14.9 million.
Cash provided by financing activities was $7.4 million in
2005. The primary source of these funds was the issuance of
Series B preferred stock in April 2005, with net proceeds
of $7.4 million.
Operating
and Capital Expenditure Requirements
To date, we have not achieved profitability on a quarterly or
annual basis. We anticipate that we will continue to incur net
losses in the short term as we continue to expand our business
and build our infrastructure.
We believe that our cash and short-term investment balances and
the interest income we earn on these balances will be sufficient
to meet our anticipated cash requirements through at least the
next 12 months. If our available cash and short-term
investment balances are insufficient to satisfy our liquidity
requirements, 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, these
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.
Our forecast of the period of time through which our financial
resources will be adequate to support our operations and the
costs to support our sales and marketing activities and research
and development activities are forward-looking statements and
involve risks and uncertainties, and actual results could vary
materially and negatively as a result of a number of factors,
including the factors discussed in the Risk Factors
section of this
48
Annual Report on
Form 10-K.
We have based these estimates on assumptions that may prove to
be wrong, and we could utilize our available capital resources
sooner than we currently expect.
Our future capital requirements will depend on many factors,
including but not limited to the following:
|
|
|
|
|
the revenue generated by sales of Storage Center;
|
|
|
|
our ability to control our costs;
|
|
|
|
the emergence of competing or complementary technological
developments;
|
|
|
|
the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual product rights, or
participating in litigation-related activities; and
|
|
|
|
the acquisition of businesses, products and technologies,
although we currently have no commitments or agreements relating
to any of these types of transactions.
|
Contractual
Obligations
The following table summarizes our outstanding contractual
obligations as of December 31, 2007 and the effect those
obligations are expected to have on our liquidity and cash flows
in future periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
Less than
|
|
|
|
|
|
More than
|
Contractual Obligations
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Operating Leases
|
|
$
|
5,462
|
|
|
$
|
729
|
|
|
$
|
1,770
|
|
|
$
|
1,857
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,462
|
|
|
$
|
729
|
|
|
$
|
1,770
|
|
|
$
|
1,857
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above reflects only payment obligations that are fixed
and determinable. Our commitments for operating leases relate
only to our current corporate headquarters in Eden Prairie,
Minnesota and equipment.
Credit
Facility
In November 2006, we entered into a line of credit agreement
with a financial institution to provide maximum borrowings of
$6.0 million through March 2008. The financial institution
may demand payment on this line of credit at any time, whether
or not an event of default has occurred. Borrowings under the
line of credit are limited by a $1.4 million letter of
credit that secures a real estate lease obligation, reducing the
availability on the line of credit to $4.6 million as of
December 31, 2007 and 2006. Payments of accrued interest
are due on the first day of each month and one final payment of
any remaining unpaid balance of principal and accrued interest
is due March 2008. Interest is at an annual rate of 1% plus the
banks rate of a
90-day
certificate of deposit (effective rate of 4.97% and 5.96% at
December 31, 2007 and 2006). There were no borrowings
outstanding under this line of credit as of December 31,
2007 and 2006. The line of credit includes various covenants;
however, there are no financial covenants. We were in compliance
with all covenants for the years ended December 31, 2007
and 2006. We have pledged a certificate of deposit as collateral
under the line of credit in the event of default. We did not
renew this line of credit agreement upon its expiration in March
2008.
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
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157, which
defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting
principles and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new
fair value measurements, rather it is applicable under other
accounting pronouncements that require or permit fair value
measurements. The provisions of SFAS No. 157 are to be
applied prospectively as of the beginning of the
49
fiscal year in which it is initially applied, with any
transition adjustment recognized as a cumulative-effect
adjustment to the opening balance of retained earnings. The
provisions of SFAS No. 157 are effective for fiscal
years beginning after November 15, 2007. Adoption of
SFAS No. 157 did not have a material impact on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value
at specified election dates. The provisions of
SFAS No. 159 are effective for fiscal years beginning
after November 15, 2007. Adoption of SFAS No. 159
did not have a material impact on our consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, or SFAS No. 141(R).
SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of
the nature and financial effects of the business combination.
SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008. The adoption of
SFAS No. 141(R) is expected to change our accounting
treatment for business combinations on a prospective basis
beginning in the period it is adopted.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51, or SFAS No. 160.
SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest, and the
valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
is effective for fiscal years beginning after December 15,
2008. We are evaluating the impact that the adoption of
SFAS No. 160 will have on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The primary objective of our investment activities is to
preserve our capital for the purpose of funding operations while
at the same time maximizing the income we receive from our
investments without significantly increasing risk. Our exposure
to market rate risk for changes in interest rates relates
primarily to our investment portfolio. This means that a change
in prevailing interest rates may cause the principal amount of
the investments to fluctuate. By policy, we minimize risk by
placing our investments with high quality debt security issuers
and limit the amount of credit exposure to any one issuer. To
achieve these objectives, our investment policy allows us to
maintain a portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial
paper, money market funds and corporate debt securities. Our
investment policy prohibits investment in derivative
instruments. Through our money managers, we maintain risk
management control systems to monitor interest rate risk. Our
cash and cash equivalents as of December 31, 2007 primarily
included liquid money market accounts and commercial paper. Our
short-term investments as of December 31, 2007 included an
Auction-Rate Note, or ARN, valued at $3.8 million. The ARN
has a stated maturity beyond three months but is priced and
traded as a short-term investment due to the liquidity provided
through the interest rate reset mechanism. On January 25,
2008 the ARN was sold at its fair market value of
$3.8 million. Our investments in Variable Rate Demand Notes
are not subject to auction risk. While we cannot predict future
market conditions or market liquidity, we have taken steps,
including regularly reviewing our investments and associated
risk profiles, which we believe will allow us to effectively
manage the risks of our investment portfolio.
50
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Compellent
Technologies, Inc.
Index to
Consolidated Financial Statements
51
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Compellent Technologies, Inc.
We have audited the accompanying consolidated balance sheets of
Compellent Technologies, Inc. and subsidiary (collectively the
Company) as of December 31, 2007 and 2006, and
the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders equity
(deficit), and cash flows for each of the three years in the
period ended December 31, 2007. Our audit of the basic
financial statements included the financial statement schedule
listed in the index appearing under Item 15. These
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purposes of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Compellent Technologies, Inc. as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the
Company adopted Financial Accounting Standards Board Statement
No. 123(R), Share-Based Payment (SFAS 123R)
effective January 1, 2006.
Minneapolis, Minnesota
March 27, 2008
52
COMPELLENT
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
82,382
|
|
|
$
|
15,106
|
|
Short-term investments
|
|
|
11,350
|
|
|
|
258
|
|
Accounts receivable, net of allowance
of $408 and $430 as of December 31, 2007 and 2006
|
|
|
13,311
|
|
|
|
7,918
|
|
Inventories
|
|
|
2,538
|
|
|
|
1,753
|
|
Prepaid expenses and other current assets
|
|
|
1,046
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
110,627
|
|
|
|
25,348
|
|
Property and equipment, net
|
|
|
2,749
|
|
|
|
1,059
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
113,376
|
|
|
$
|
26,407
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,216
|
|
|
$
|
2,464
|
|
Accrued compensation and benefits
|
|
|
3,083
|
|
|
|
1,482
|
|
Accrued liabilities
|
|
|
1,139
|
|
|
|
585
|
|
Deferred revenue, current
|
|
|
7,934
|
|
|
|
3,132
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
15,372
|
|
|
|
7,663
|
|
Deferred revenue, non-current
|
|
|
2,588
|
|
|
|
840
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
59,366
|
|
Common stock, $0.001 par value;
300,000,000 shares authorized, 30,593,468 issued and
outstanding as of December 31, 2007;
75,000,000 shares
authorized, 4,422,542 issued and outstanding as of
December 31, 2006
|
|
|
31
|
|
|
|
4
|
|
Additional paid in capital
|
|
|
144,824
|
|
|
|
144
|
|
Accumulated deficit
|
|
|
(49,439
|
)
|
|
|
(41,610
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
95,416
|
|
|
|
17,904
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
113,376
|
|
|
$
|
26,407
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
COMPELLENT
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
42,831
|
|
|
$
|
19,996
|
|
|
$
|
8,670
|
|
Product support and services
|
|
|
8,368
|
|
|
|
3,337
|
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
51,199
|
|
|
|
23,333
|
|
|
|
9,911
|
|
Cost of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
21,554
|
|
|
|
9,897
|
|
|
|
4,915
|
|
Cost of product support and services
|
|
|
4,423
|
|
|
|
2,774
|
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
25,977
|
|
|
|
12,671
|
|
|
|
5,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
25,222
|
|
|
|
10,662
|
|
|
|
3,949
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
23,520
|
|
|
|
10,562
|
|
|
|
5,504
|
|
Research and development
|
|
|
7,632
|
|
|
|
5,675
|
|
|
|
5,241
|
|
General and administrative
|
|
|
3,324
|
|
|
|
1,565
|
|
|
|
2,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,476
|
|
|
|
17,802
|
|
|
|
13,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(9,254
|
)
|
|
|
(7,140
|
)
|
|
|
(9,264
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,425
|
|
|
|
329
|
|
|
|
138
|
|
Interest expense
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
1,425
|
|
|
|
316
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,829
|
)
|
|
|
(6,824
|
)
|
|
|
(9,126
|
)
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
6,330
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(7,829
|
)
|
|
$
|
(13,154
|
)
|
|
$
|
(9,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.77
|
)
|
|
$
|
(3.29
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per common share, basic and
diluted
|
|
|
10,219
|
|
|
|
4,003
|
|
|
|
3,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
COMPELLENT
TECHNOLOGIES, INC.
STOCKHOLDERS
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Paid -In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance at January 1, 2005
|
|
|
11,828
|
|
|
$
|
23,226
|
|
|
|
|
|
|
|
$
|
|
|
|
|
3,800
|
|
|
$
|
4
|
|
|
$
|
40
|
|
|
$
|
(19,298
|
)
|
|
$
|
(19,254
|
)
|
Issuance of Series B preferred stock, net
|
|
|
2,472
|
|
|
|
7,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
(32
|
)
|
Common shares issued upon exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
27
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,126
|
)
|
|
|
(9,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
14,300
|
|
|
|
30,655
|
|
|
|
|
|
|
|
|
|
|
|
|
3,947
|
|
|
|
4
|
|
|
|
67
|
|
|
|
(28,456
|
)
|
|
|
(28,385
|
)
|
Issuance of Series B preferred stock, net
|
|
|
2,472
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of redeemable convertible preferred stock
|
|
|
|
|
|
|
6,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,330
|
)
|
|
|
(6,330
|
)
|
Elimination of redeemable convertible preferred stock redemption
feature
|
|
|
(16,772
|
)
|
|
|
(44,485
|
)
|
|
|
|
16,772
|
|
|
|
44,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,485
|
|
Issuance of Series C preferred stock, net
|
|
|
|
|
|
|
|
|
|
|
|
2,167
|
|
|
|
14,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,881
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
52
|
|
Common shares issued upon exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
Stock options exercised for unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,824
|
)
|
|
|
(6,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
18,939
|
|
|
|
59,366
|
|
|
|
4,423
|
|
|
|
4
|
|
|
|
144
|
|
|
|
(41,610
|
)
|
|
|
17,904
|
|
Conversion of convertible preferred stock to common stock
|
|
|
|
|
|
|
|
|
|
|
|
(18,939
|
)
|
|
|
(59,366
|
)
|
|
|
18,939
|
|
|
|
19
|
|
|
|
59,347
|
|
|
|
|
|
|
|
|
|
Common shares issued in conjunction with initial public
offering, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,900
|
|
|
|
7
|
|
|
|
84,601
|
|
|
|
|
|
|
|
84,608
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642
|
|
|
|
|
|
|
|
642
|
|
Common shares issued upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
Common shares repurchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
|
|
|
|
|
|
(142
|
)
|
|
|
|
|
|
|
(142
|
)
|
Stock options exercised for unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Vesting of restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
153
|
|
Issuance of common stock for services provided
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
47
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,829
|
)
|
|
|
(7,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
30,593
|
|
|
$
|
31
|
|
|
$
|
144,824
|
|
|
$
|
(49,439
|
)
|
|
$
|
95,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
55
COMPELLENT
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,829
|
)
|
|
$
|
(6,824
|
)
|
|
$
|
(9,126
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,208
|
|
|
|
747
|
|
|
|
661
|
|
Compensation expense related to stock options
|
|
|
642
|
|
|
|
52
|
|
|
|
|
|
Issuance of common stock for services provided
|
|
|
40
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,393
|
)
|
|
|
(5,842
|
)
|
|
|
(965
|
)
|
Inventories
|
|
|
(785
|
)
|
|
|
(981
|
)
|
|
|
528
|
|
Prepaid expenses
|
|
|
(726
|
)
|
|
|
(77
|
)
|
|
|
(92
|
)
|
Accounts payable
|
|
|
677
|
|
|
|
1,291
|
|
|
|
617
|
|
Accrued liabilities
|
|
|
2,140
|
|
|
|
1,241
|
|
|
|
(1,085
|
)
|
Deferred revenues
|
|
|
6,550
|
|
|
|
2,235
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(3,476
|
)
|
|
|
(8,158
|
)
|
|
|
(9,448
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,898
|
)
|
|
|
(921
|
)
|
|
|
(337
|
)
|
Purchase of short-term investments
|
|
|
(11,350
|
)
|
|
|
(508
|
)
|
|
|
|
|
Maturities of short-term investments
|
|
|
258
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,990
|
)
|
|
|
(1,179
|
)
|
|
|
(337
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock, net
|
|
|
|
|
|
|
22,381
|
|
|
|
7,397
|
|
Proceeds from initial public offering, net
|
|
|
84,851
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
33
|
|
|
|
25
|
|
|
|
27
|
|
Payments for repurchase of common stock
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
84,742
|
|
|
|
22,406
|
|
|
|
7,424
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
67,276
|
|
|
|
13,069
|
|
|
|
(2,361
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
15,106
|
|
|
|
2,037
|
|
|
|
4,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
82,382
|
|
|
$
|
15,106
|
|
|
$
|
2,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
13
|
|
|
$
|
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of inventory to property and equipment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
218
|
|
Issuance of common stock for services provided
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
|
|
Vesting of restricted common stock
|
|
$
|
153
|
|
|
$
|
|
|
|
$
|
|
|
Accounts payable corresponding to IPO expenses
|
|
$
|
243
|
|
|
$
|
|
|
|
$
|
|
|
Conversion of convertible preferred stock to common stock
|
|
$
|
59,366
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
56
COMPELLENT
TECHNOLOGIES, INC.
|
|
1.
|
Business
Description and Significant Accounting Policies
|
Business
Description
Compellent Technologies, Inc., or the Company, develops, markets
and services enterprise-class network storage solutions, which
include software and hardware. The Company was incorporated in
March 2002 and the first revenue was recognized in 2004. Product
sales are predominately derived through third-party value added
resellers, or channel partners. Corporate headquarters are in
Eden Prairie, Minnesota, and the Company has channel partners
and end users located in the United States and certain other
international markets.
All references to Compellent or the
Company mean Compellent Technologies, Inc. and its
subsidiary, except where it is made clear that the term means
only the parent company.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates.
Principles
of Consolidation
The Companys consolidated financial statements include the
accounts of Compellent Technologies, Inc. and its wholly owned
subsidiary. All intercompany balances and transactions have been
eliminated in consolidation.
Risk
and Uncertainties
The Company receives a substantial portion of its revenue from a
limited number of channel partners. The top ten channel partners
accounted for 45%, 49%, and 60% of total revenue for the years
ended December 31, 2007, 2006, and 2005. During the year
ended December 31, 2007 one channel partner accounted for
13% of total revenue, and during the years ended
December 31, 2006 and 2005 no channel partner accounted for
more than 10% of total revenue. Loss of one or more of these key
channel partners could adversely affect the Companys
operating results in the near term. There are no concentrations
of business transacted with a particular end user, market, or
geographic area that would severely impact business in the near
term.
The Company relies on a limited number of key suppliers to
supply components. One supplier comprised 28%, 30%, and 16% of
total purchases, and another comprised 23%, 23%, 17% of total
purchases for the years ended December 31, 2007, 2006, and
2005. The Company relies on one third-party hardware maintenance
provider. Management believes alternate sources of component
materials and maintenance services are available; however,
disruption or termination of these relationships could adversely
affect the Companys operating results in the near term.
Cash
and Cash Equivalents
All highly liquid temporary investments with an original
maturity of three months or less are considered to be cash
equivalents.
Short-Term
Investments
At December 31, 2007 short-term investments consist of
Auction-Rate Notes, or ARN, and Variable Rate Demand Notes, or
VRDN, that have stated maturities beyond three months but are
priced and traded as short-term instruments due to the liquidity
provided through the interest rate reset mechanism of 7 to
35 days. These ARN and VRDN are classified as
available-for-sale
and are recorded at amortized cost, which approximates fair
value.
57
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2006 short-term investments consist of
certificates of deposit, which are classified as
held-to-maturity.
The certificates of deposit have original maturities of twelve
months or less and accordingly are recorded as current assets on
the balance sheet.
Accounts
Receivable
Accounts receivable represent amounts due from channel partners
and end users. Credit is granted in the normal course of
business, without collateral or any other security, to support
amounts due. In the vast majority of sales, the Company sells
its products to channel partners for resale to end users. In
certain limited circumstances, the Company may sell directly to
the end user and pay the channel partner a commission, which is
recorded in sales and marketing expense, primarily due to
concerns of the credit worthiness of the channel partner. The
Company performs ongoing evaluations of its channel partners and
end users and continuously monitors collections and payments.
The Company records an allowance for doubtful accounts based on
the aging of the underlying receivables, historical experience,
and any specific collection issues it has identified. The
Company writes off accounts receivable when they become
uncollectible, and payments subsequently recorded on such
receivables are credited to the allowance for doubtful accounts.
To date, accounts receivable balances written off have been
within managements expectations and have not exceeded the
allowances provided.
Inventories
Inventories are stated at the lower of cost, determined on the
first-in,
first-out method, or market value (estimated net realizable
value).
Property
and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Additions and improvements that
extend the lives of assets are capitalized, while expenditures
for repairs and maintenance are expensed as incurred.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold
improvements is computed on a straight-line basis over the
shorter of the estimated useful lives of the related assets or
life of the lease.
The estimated useful lives are:
|
|
|
|
|
Computer equipment
|
|
|
2 years
|
|
Office furniture and equipment
|
|
|
2 5 years
|
|
Computer software
|
|
|
2 3 years
|
|
Leasehold improvements
|
|
|
5 7 years
|
|
The Company reviews its property and equipment for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by
either a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the
asset or the fair value determined by a third party. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. To date, the
Company has not recognized any impairment loss for property and
equipment.
Fair
Value of Financial Instruments
The Companys financial instruments, including cash and
cash equivalents, short-term investments and accounts receivable
are carried at cost, or amortized cost as applicable, which
approximates their fair value due to the short-term maturity of
these instruments.
58
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
The Company applies the provisions of Statement of Position
No. 97-2,
Software Revenue Recognition, or
SOP No. 97-2,
as amended by
SOP 98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions, and Securities and Exchange Commission Staff
Accounting Bulletin No. 104, Revenue Recognition
to its combined software and hardware product sales. The
Company recognizes product revenue when:
|
|
|
|
|
Persuasive Evidence of an Arrangement
Exists. The Company determines that persuasive
evidence of an arrangement exists by receiving a purchase order
or by obtaining a signed quote.
|
|
|
|
Delivery has Occurred. Substantially all
products are shipped to end users. Delivery is deemed to have
occurred upon shipment as title transfers to the end user, with
the channel partner acting as a broker. Products shipped with
acceptance criteria are not recognized as revenue until all
conditional criteria are satisfied.
|
|
|
|
The Fee is Fixed or Determinable. Fees are
considered 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.
|
|
|
|
Collectibility 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 collectibility is probable
based upon its review process, revenue is recognized upon cash
receipt.
|
The Company uses resellers, who act as brokers, to sell its
products and refer to such resellers as channel partners.
Revenue under reseller arrangements is not recognized until
shipment occurs to the end user, the fee is fixed and
determinable, collectibility is probable and supported, and
there is evidence of a third-party end user sale, generally in
the form of a purchase order from the end user to the channel
partner. Revenue is the price the Company charges the channel
partner. The Company maintains contractual arrangements with its
channel partners, which contain provisions that specify that the
risk of loss and title transfers upon shipment to the end user.
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 shipment 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 software and hardware
maintenance and services. No software products remain
undelivered at the inception of the arrangement. Accordingly,
assuming all other revenue recognition criteria are met, revenue
from software and hardware is recognized upon delivery using the
residual method in accordance with Statement of Position
98-9,
Modification of
SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions, and revenue from software maintenance and
hardware maintenance is recognized ratably over the respective
support period. For multiple element arrangements that include
only hardware and hardware maintenance, the Company recognizes
revenue in accordance with Emerging Issues Task Force, Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or EITF
No. 00-21.
The Company has determined that it has objective and reliable
evidence of fair value, in accordance with EITF
No. 00-21,
to allocate revenue separately to hardware and hardware
maintenance.
Product revenue consists of license fees for software
applications and related hardware sales of disk drives, system
controllers, host bus adapters, switches and enclosures. The
Company also derives a portion of its product revenue from
software and hardware upgrades, which generally includes new
software applications and additional hardware components.
In accordance with Emerging Issues Task Force EITF Issue
06-3, How
Taxes Collected from Customers and Remitted to Governmental
Authorities Should be Presented In the Income Statement (That
Is, Gross Versus Net
59
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Presentation), taxes are presented on a net basis.
Revenue from shipping and handling is included in product
revenue and its related cost is included in cost of product
revenue
Product 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.
Advertising
Costs
Advertising costs are charged to operations in the year
incurred. Advertising costs for the years ended
December 31, 2007, 2006 and 2005 were $3.6 million,
$1.3 million and $431,000.
Research
and Development and Software Development Costs
Expenditures for research and development costs are expensed as
incurred. In accordance with Statement of Financial Accounting
Standards, or SFAS, No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed,
costs related to the development of software products are
capitalized between the time when technological feasibility has
been established and when the product is available for general
release to customers. To date, the Company has not capitalized
any software development costs as the time has been short and
the costs immaterial from the establishment of technological
feasibility to commercial release.
Income
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, or
SFAS No. 109, as clarified by Financial Accounting
Standards Board Interpretation No. 48, Accounting for
Uncertainties in Income Taxes, or FIN No. 48.
Under this method, deferred income taxes are determined based on
the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities
given the provisions of enacted tax laws. Deferred income tax
provisions and benefits are based on changes to the assets or
liabilities from year to year. In providing for deferred taxes,
the Company considers tax regulations of the jurisdictions in
which it operates, estimates of future taxable income, and
available tax planning strategies. If tax regulations, operating
results or the ability to implement tax-planning strategies
vary, adjustments to the carrying value of deferred tax assets
and liabilities may be required. Valuation allowances are
recorded related to deferred tax assets based on the more
likely than not criteria of SFAS No. 109. The
Companys deferred tax assets are comprised primarily of
net operating loss, or NOL, carryforwards. The NOL carryforwards
expire at various times through 2027 and are subject to review
and possible adjustment by the Internal Revenue Service and
state authorities.
FIN No. 48 requires that the Company recognize the
financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely
than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount
recognized in the financial statements is the largest benefit
that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax
authority.
Net
Loss per Common Share
Basic net loss per common share is computed by dividing net loss
available to common stockholders by the weighted-average number
of common shares outstanding for that period. Diluted net loss
per share is computed giving effect to all dilutive potential
shares that were outstanding during the period. Dilutive
potential common
60
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares consist of common shares issuable upon exercise of stock
options, conversion of convertible preferred stock, and common
shares issued with vesting restrictions. For the years ended
December 31, 2007, 2006, and 2005, all potential common
shares were anti-dilutive. Accordingly, diluted net loss per
common share is equivalent to basic net loss per common share.
Stock-Based
Compensation
Prior to January 1, 2006, the Company accounted for stock
option grants in accordance with Accounting Principles Board, or
APB, Opinion No. 25, Accounting for Stock Issued to
Employees, and complied with the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation , as amended by SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure . Under APB 25, deferred
stock-based compensation expense is recorded for the intrinsic
value of options (the difference between the deemed fair value
of the Companys common stock and the option exercise
price) at the grant date and is amortized ratably over the
options vesting period. For the year ended
December 31, 2005, no stock-based compensation expense was
recorded.
Effective January 1, 2006, the Company adopted the
requirements of SFAS No. 123(R), Share-Based
Payment, or SFAS No. 123(R), which requires the
measurement and recognition of compensation expense for all
share-based payment awards made to employees, non-employee
directors and consultants based on fair value.
SFAS No. 123(R) supersedes the Companys previous
accounting under APB No. 25 and SFAS No. 123 for
periods beginning in fiscal 2006. The Company adopted
SFAS No. 123(R) using the prospective transition
method, which requires the application of the accounting
standard as of January 1, 2006, the first day of the
Companys fiscal year. Under this method, compensation
expense recognized for the year ended December 31, 2006
included compensation expense for all stock-based awards
granted, modified, repurchased, or cancelled subsequent to
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of
SFAS No. 123(R). In accordance with the prospective
transition method, the Companys statements of operations
for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R). Under the
prospective method of adoption the Company continues to account
for any portion of awards outstanding at January 1, 2006
using the accounting principles originally applied to those
awards under APB No. 25.
New
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157, which
defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting
principles and expands disclosures about fair value
measurements. SFAS No. 157 does not require any new
fair value measurements, rather it is applicable under other
accounting pronouncements that require or permit fair value
measurements. The provisions of SFAS No. 157 are to be
applied prospectively as of the beginning of the fiscal year in
which it is initially applied, with any transition adjustment
recognized as a cumulative-effect adjustment to the opening
balance of retained earnings. The provisions of
SFAS No. 157 are effective for fiscal years beginning
after November 15, 2007. Adoption of SFAS No. 157
did not have a material impact on the Companys
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115, or SFAS No. 159.
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value
at specified election dates. The provisions of
SFAS No. 159 are effective for fiscal years beginning
after November 15, 2007. Adoption of SFAS No. 159
did not have a material impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations, or SFAS No. 141(R).
SFAS No. 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS No. 141(R) also
establishes disclosure requirements to enable the
61
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective for fiscal
years beginning after December 15, 2008. The adoption of
SFAS No. 141(R) is expected to change the
Companys accounting treatment for business combinations on
a prospective basis beginning in the period it is adopted.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51, or SFAS No. 160.
SFAS No. 160 establishes accounting and reporting
standards for ownership interests in subsidiaries held by
parties other than the parent, the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, changes in a parents ownership interest, and the
valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also
establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160
is effective for fiscal years beginning after December 15,
2008. The Company is evaluating the impact that the adoption of
SFAS No. 160 will have on its consolidated financial
statements.
Reclassifications
Certain reclassifications have been made to prior year amounts
to conform to the current years presentation.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Component materials
|
|
$
|
489
|
|
|
$
|
221
|
|
Finished systems
|
|
|
2,049
|
|
|
|
1,532
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,538
|
|
|
$
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
Property
and Equipment
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Computer equipment
|
|
$
|
541
|
|
|
$
|
349
|
|
Office furniture and equipment
|
|
|
3,953
|
|
|
|
2,384
|
|
Computer software
|
|
|
423
|
|
|
|
291
|
|
Leasehold improvements
|
|
|
1,038
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,955
|
|
|
|
3,057
|
|
Accumulated depreciation and amortization
|
|
|
(3,206
|
)
|
|
|
(1,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,749
|
|
|
$
|
1,059
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2007, 2006 and 2005 was $1.2 million,
$747,000, and $661,000.
In November 2006, the Company entered into a line of credit
agreement with a financial institution to provide maximum
borrowings of $6.0 million through March 2008. The
financial institution may demand payment on this line of credit
at any time, whether or not an event of default has occurred.
Borrowings under the line of credit are
62
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
limited by a $1.4 million letter of credit securing a real
estate lease obligation, reducing the availability on the line
of credit to $4.6 million at December 31, 2007 and
2006. Payments of accrued interest are due on the first day of
each month and one final payment of any remaining unpaid balance
of principal and accrued interest is due March 2008. Interest is
at an annual rate of 1% plus the banks rate of a
90-day
certificate of deposit (effective rate of 4.97% and 5.96% at
December 31, 2007 and 2006). There were no borrowings
outstanding under this line of credit as of December 31,
2007 and 2006. The line of credit includes various covenants;
however, there are no financial covenants. The Company was in
compliance with all covenants for the years ended
December 31, 2007 and 2006. The Company has pledged a
certificate of deposit as collateral under the line of credit in
the event of default. The Company did not renew the line of
credit agreement upon its expiration in March 2008.
On September 14, 2007, the Company effected a
one-for-two-and-one-half (1:2.5) reverse split of the
Companys common stock and convertible preferred stock. In
this report, share and per share data have been adjusted
retroactively to reflect the reverse stock split.
|
|
6.
|
Redeemable
Convertible Preferred Stock and Convertible Preferred
Stock
|
As of December 31, 2007 the Company had no outstanding
classes of convertible preferred stock (see Note 7), and as
of December 31, 2006 the Company had the following
outstanding classes of convertible preferred stock:
|
|
|
|
|
Series A-1
preferred stock; $0.001 par value, 7,723,996 shares
authorized; 7,723,994 issued and outstanding.
|
|
|
|
Series A-2
preferred stock; $0.001 par value, 4,104,791 shares
authorized; 4,104,788 issued and outstanding.
|
|
|
|
Series B preferred stock; $0.001 par value,
4,943,154 shares authorized; 4,943,149 issued and
outstanding.
|
|
|
|
Series C preferred stock; $0.001 par value,
2,167,238 shares authorized; 2,167,233 issued and
outstanding.
|
The
Series A-1
and A-2
financings were completed during the year ended
December 31, 2003. During the year ended December 31,
2005, the Company amended its certificate of incorporation to
authorize 4,943,154 shares of Series B redeemable
convertible preferred stock. On April 7, 2005 and
January 6, 2006, the Company issued and sold 2,471,572 and
2,471,577 shares, respectively, of Series B redeemable
convertible preferred stock at a price of $3.0345 per share.
Costs associated with the Series B financings were $90,000.
The Company was accreting the redeemable convertible preferred
stock to the greater of original issuance or fair value over the
original redemption period.
On September 22, 2006, the Company amended its certificate
of incorporation to authorize 2,167,238 shares of
Series C preferred stock and remove the redemption
provisions present in each of the
Series A-1,
A-2, and B
financings. The Company was obligated, prior to the removal of
this feature, to redeem the Series B preferred stock
beginning on the earlier of July 12, 2009 or upon a
material default, at the greater of its original issuance price
plus declared but unpaid dividends or fair market value if 75%
of the outstanding preferred stockholders voted to redeem. After
the Series B preferred stock had been redeemed, the holders
of at least 75% of Series A preferred stock could have
voted to have their shares redeemed beginning on the earlier of
July 12, 2009 or upon a material default, at the greater of
its original issue price plus declared but unpaid dividends, or
fair market value. As the redemption provision was removed, the
Company recorded $6.3 million of accretion to adjust the
Series A-1,
A-2 and B
issuances to the fair market value on the date the redemption
feature was removed as the fair market value exceeded the face
value on this date. The fair market value was determined by
using the probability weighted expected return method.
Additionally, as the redemption provision was removed the
balances were reclassified from redeemable convertible preferred
equity to stockholders equity (deficit).
63
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On September 22, 2006, 2,167,233 shares of
Series C preferred stock were issued and sold at a price of
$6.92125 per share. Costs associated with the Series C
financing were $119,000.
The holders of preferred stock could, at their option, convert
at any time their shares of preferred stock into shares of
common stock. The preferred stock was converted to common stock
on a 1-for-1
ratio. Each share of preferred stock could be automatically
converted into shares of common stock if 70% of the shares of
preferred stock, voting as a single class voted in favor of a
conversion or if a public offering is closed at $20.78 (amended
to $8.00 on September 14, 2007 in conjunction with the
reverse stock split see Note 5) or more
per share and cash proceeds (net of underwriting discounts,
commissions and expenses) to the Company of at least
$30 million (see Note 7), in each case at the
conversion rate on the date of the event.
The holders of preferred stock were entitled, on a pari passu
basis, to receive cash dividends at the rate of 8.00% per
year. These dividends were payable only when declared by the
board of directors and were non-cumulative. In general, each
share of preferred stock is entitled to the number of votes
equal to the number of shares of common stock into which such
share of preferred stock could be converted. Certain events
specified in the Companys certificate of incorporation
require approval of the holders of at least 70% of the shares of
preferred stock voting as one class, and other events require
approval of the holders of at least 70% of the shares of
Series C preferred stock. The Series B and C preferred
stockholders have a liquidation preference senior to the
Series A-1
and
Series A-2
preferred stockholders.
|
|
7.
|
Initial
Public Offering
|
On October 9, 2007, the Company completed an initial public
offering in which it sold 6,900,000 shares of common stock
at $13.50 per share for cash proceeds of $84.6 million, net
of underwriting discounts and commissions and offering expenses.
In connection with the closing of the initial public offering,
all of the Companys shares of convertible preferred stock
outstanding at the time of the closing of the offering were
automatically converted into 18,939,164 shares of common
stock and the Company filed an amended and restated certificate
of incorporation with the Delaware Secretary of State
authorizing 300,000,000 shares of common stock and
10,000,000 shares of undesignated preferred stock.
|
|
8.
|
Stock-Based
Compensation
|
2007
Employee Stock Purchase Plan
The 2007 Employee Stock Purchase Plan, or ESPP, was approved by
the board of directors in August 2007 and by the stockholders in
September 2007. The ESPP became effective on October 9,
2007 in conjunction with the Companys initial public
offering, and authorizes the issuance of 1,000,000 shares
of common stock pursuant to purchase rights granted to the
Companys employees or to employees of the Companys
designated affiliates. Generally, all regular employees,
including executive officers, may participate in the ESPP and
may contribute up to the lesser of 15% of their earnings or the
statutory limit under the U.S. Internal Revenue Code for
the purchase of the Companys common stock at a price per
share equal to the lower of (a) 85% of the fair market
value of a share of common stock on the first date of an
offering period or (b) 85% of the fair market value of a
share of common stock on the date of purchase. Standard offering
periods are approximately six months in duration, with purchase
dates on or about May 15 and November 15. As of
December 31, 2007 no shares of common stock have been
purchased under the ESPP.
2002
Stock Option Plan
The 2002 Stock Option Plan, or 2002 Plan, was approved by the
board of directors and stockholders in July 2002. The plan
provides that grants of incentive stock options cannot be less
than 100% and nonstatutory stock options cannot be less than 50%
of the fair market value of the Companys common stock on
the date of grant. Options typically vest over a four-year
period and expire within a maximum term of ten years from the
date of grant.
64
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New common shares are issued upon exercise of stock options.
Certain stock option agreements include early exercise
provisions; however, the Company retains the right to repurchase
any unvested shares. In conjunction with the Companys
initial public offering, the 2002 Plan terminated on
October 9, 2007 and no further awards may be granted under
this plan.
2007
Equity Incentive Plan
The 2007 Equity Incentive Plan, or 2007 Plan, was approved by
the board of directors in August 2007 and by the stockholders in
September 2007. The 2007 Plan became effective on
October 9, 2007 in conjunction with the Companys
initial public offering, and will terminate in August 2017,
unless sooner terminated by the board of directors. The 2007
Plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards, restricted
stock unit awards, stock appreciation rights, performance-based
stock awards, and other forms of equity compensation, or
collectively, stock awards, all of which may be granted to
employees, including officers, non-employee directors and
consultants. The aggregate number of shares of common stock that
may be issued initially pursuant to stock awards under the 2007
Plan is 4,200,000, plus any shares subject to outstanding stock
awards granted under the 2002 Plan that expire or terminate for
any reason prior to their exercise or settlement. The 2007 Plan
also provides that grants of incentive and nonstatutory stock
options cannot be less than 100% of the fair market value of the
Companys common stock on the date of grant. Options
typically vest over a four-year period and expire within a
maximum of ten years from the date of grant. New common shares
are issued upon exercise of stock options.
A summary of option activity for the 2002 and 2007 Plans is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
|
of Shares
|
|
|
per Share
|
|
|
Balance at January 1, 2005
|
|
|
444,250
|
|
|
$
|
0.19
|
|
Granted
|
|
|
121,400
|
|
|
|
0.29
|
|
Exercised
|
|
|
(147,285
|
)
|
|
|
0.19
|
|
Cancelled
|
|
|
(17,178
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
401,187
|
|
|
|
0.22
|
|
Granted
|
|
|
1,030,999
|
|
|
|
0.40
|
|
Exercised
|
|
|
(475,701
|
)
|
|
|
0.27
|
|
Cancelled
|
|
|
(15,262
|
)
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
941,223
|
|
|
|
0.39
|
|
Granted
|
|
|
929,447
|
|
|
|
4.31
|
|
Exercised
|
|
|
(612,943
|
)
|
|
|
0.75
|
|
Cancelled
|
|
|
(40,303
|
)
|
|
|
1.71
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
1,217,424
|
|
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2005
|
|
|
167,272
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2006
|
|
|
134,368
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
|
259,423
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
65
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information concerning
outstanding and exercisable stock options at December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Aggregate
|
|
Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Price per
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Price
|
|
Outstanding
|
|
|
Life
|
|
|
Share
|
|
|
Value
|
|
|
Exercisable
|
|
|
Life
|
|
|
Price
|
|
|
Value
|
|
|
$0.18 $0.20
|
|
|
69,793
|
|
|
|
6.06
|
|
|
$
|
0.20
|
|
|
$
|
825,639
|
|
|
|
60,327
|
|
|
|
5.95
|
|
|
$
|
0.20
|
|
|
$
|
713,747
|
|
$0.30
|
|
|
439,951
|
|
|
|
8.25
|
|
|
$
|
0.30
|
|
|
|
5,160,505
|
|
|
|
172,052
|
|
|
|
8.25
|
|
|
$
|
0.30
|
|
|
|
2,018,171
|
|
$1.25
|
|
|
435,160
|
|
|
|
9.13
|
|
|
$
|
1.25
|
|
|
|
4,691,025
|
|
|
|
27,044
|
|
|
|
8.83
|
|
|
$
|
1.25
|
|
|
|
291,532
|
|
$9.68 $12.50
|
|
|
200,020
|
|
|
|
9.59
|
|
|
$
|
10.78
|
|
|
|
263,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$13.50 $17.75
|
|
|
72,500
|
|
|
|
9.74
|
|
|
$
|
13.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,217,424
|
|
|
|
8.75
|
|
|
$
|
3.16
|
|
|
$
|
10,940,450
|
|
|
|
259,423
|
|
|
|
7.78
|
|
|
$
|
0.38
|
|
|
$
|
3,023,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years
ended December 31, 2007, 2006, and 2005 was
$2.8 million, $84,000, and $9,700.
Under the Companys stock option plans, as of
December 31, 2007 a total of 4,137,700 shares of
common stock are reserved for future grants to eligible
employees, directors, and outside consultants.
Stock-Based
Compensation Expense
Prior to January 1, 2006, the Company accounted for stock
option grants in accordance with Accounting Principles Board, or
APB, Opinion No. 25, Accounting for Stock Issued to
Employees, and complied with the disclosure provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure . Under APB 25, deferred
stock-based compensation expense is recorded for the intrinsic
value of options (the difference between the deemed fair value
of the Companys common stock and the option exercise
price) at the grant date and is amortized ratably over the
options vesting period. For the year ended
December 31, 2005, no stock-based compensation expense was
recorded.
Effective January 1, 2006, the Company adopted the
requirements of SFAS No. 123(R), Share-Based
Payment, or SFAS No. 123(R), which requires the
measurement and recognition of compensation expense for all
share-based payment awards made to employees, non-employee
directors and consultants based on fair value.
SFAS No. 123(R) supersedes the Companys previous
accounting under APB No. 25 and SFAS No. 123 for
periods beginning in fiscal 2006. The Company adopted
SFAS No. 123(R) using the prospective transition
method, which requires the application of the accounting
standard as of January 1, 2006, the first day of the
Companys fiscal year. Under this method, compensation
expense recognized for the year ended December 31, 2006
included compensation expense for all stock-based awards
granted, modified, repurchased, or cancelled subsequent to
January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of
SFAS No. 123(R). In accordance with the prospective
transition method, the Companys consolidated statements of
operations for prior periods have not been restated to reflect,
and do not include, the impact of SFAS No. 123(R).
Under the prospective method of adoption the Company continues
to account for any portion of awards outstanding at
January 1, 2006 using the accounting principles originally
applied to those awards under APB No. 25.
66
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Had compensation expense for stock options been determined based
on the fair value method prior to January 1, 2006, the pro
forma net loss attributable to common stockholders would have
been as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net loss attributable to common stockholders, as reported
|
|
$
|
(9,158
|
)
|
Add: Stock-based compensation determined using the fair value
method
|
|
|
12
|
|
|
|
|
|
|
Pro forma net loss attributable to common stockholders
|
|
$
|
(9,170
|
)
|
|
|
|
|
|
Pro forma net loss per common share, basic and diluted
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
Shares used in computing net loss per common share, basic and
diluted
|
|
|
3,897
|
|
|
|
|
|
|
The Company estimates the grant date fair value of stock-based
awards under the provisions of SFAS No. 123(R) using
the Black-Scholes option pricing model which includes, among
other inputs, consideration of the expected volatility of the
stock over the expected life of the option grant. For
stock-based awards granted prior to January 1, 2006, the
fair value of the options was determined, for footnote
disclosure only, using the minimum value method, which does not
take into consideration volatility.
The following table summarizes the weighted-average assumptions
used in determining the fair value of stock options granted
under each of the methods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.46
|
%
|
|
|
4.77
|
%
|
|
|
4.35
|
%
|
Expected life (years)
|
|
|
5
|
|
|
|
5
|
|
|
|
5
|
|
Expected volatility
|
|
|
63.72
|
%
|
|
|
30.42
|
%
|
|
|
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected forfeiture rate
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
The risk-free interest rate is based on the yield available on
U.S. Treasury zero-coupon bonds at the date of grant with
maturity dates approximately equal to the expected life at the
grant date. The expected life of the options is based on
evaluations of historical and expected future employee exercise
behavior. Volatility is based on historic volatilities from
traded shares of a selected publicly traded peer group, believed
to be comparable after consideration of size, maturity,
profitability, growth, risk and return on investment. The
Company has not paid dividends in the past and it does not
expect to in the foreseeable future. The Company utilizes
historical data to estimate pre-vesting forfeitures and records
stock-based compensation expense only for those awards that are
expected to vest. Forfeitures have been insignificant during
each of the periods presented herein.
67
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The stock-based compensation expense included in the
consolidated statements of operations for the years ended
December, 2007, 2006, and 2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of product
|
|
$
|
91
|
|
|
$
|
|
|
|
$
|
|
|
Sales and marketing
|
|
|
430
|
|
|
|
30
|
|
|
|
|
|
Research and development
|
|
|
154
|
|
|
|
5
|
|
|
|
|
|
General and administrative
|
|
|
87
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense before income tax benefit
|
|
|
762
|
|
|
|
52
|
|
|
|
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax benefit
|
|
$
|
762
|
|
|
$
|
52
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense increased basic and diluted net
loss per share by $(0.08) and $(0.02) for the years ended
December 31, 2007 and 2006, and there was no impact on the
year ended December 31, 2005.
As of December 31, 2007 and 2006 there was
$2.7 million and $93,000 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 2.6 and
2.5 years, respectively. There were no unrecognized
compensation costs as of December 31, 2005.
The weighted-average fair values of the options granted during
the years ended December 31, 2007, 2006, and 2005 were
$4.68, $0.14, and $0.06.
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 similar to how 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. This right usually
lapses 25% on the first anniversary of the vesting start date
and in 36 equal monthly amounts thereafter. There were 272,144
and 348,000 shares of unvested restricted stock at
December 31, 2007 and 2006. In accordance with
SFAS No. 123(R), the cash received from employees for
early exercise of unvested options is treated as a refundable
deposit and is recorded as a liability in the Companys
financial statements. As of December 31, 2007 and 2006,
cash received for early exercise of options totaled $429,000 and
$104,000, respectively.
During the year ended December 31, 2007, the Company
purchased 301,667 unvested shares of restricted stock at a price
of $1.25 per share, which was above the original exercise price
of $0.30 per share. The Company also issued new option
agreements to purchase the same number of shares at an exercise
price of $1.25 per share. These transactions resulted in
substance to be a modification of the original award. In
accordance with SFAS No. 123(R), the Company fair
valued the original award just before the modification and the
new award just after the modification using the Black Scholes
methodology. It was determined that the fair value of the new
awards was greater than the value of the original awards, as
modified. In addition, a settlement of the original awards was
deemed to have occurred. The Company recorded compensation
expense of $120,000 representing the additional value of the new
awards and a settlement charge of $116,000 related to the
original awards, as modified. The employees immediately early
exercised their right to purchase restricted shares under the
new option awards.
68
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of activity for unvested restricted common stock is as
follows:
|
|
|
|
|
|
|
Number of
|
|
|
|
Shares
|
|
|
Balance at January 1, 2005
|
|
|
|
|
Stock options exercised for unvested restricted shares
|
|
|
348,000
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
348,000
|
|
Stock options exercised for unvested restricted shares
|
|
|
475,000
|
|
Vested
|
|
|
(249,189
|
)
|
Repurchased
|
|
|
(301,667
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
272,144
|
|
|
|
|
|
|
|
|
9.
|
Net Loss
Per Common Share
|
Basic net loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted-average
number of vested shares of common stock outstanding during the
period. Diluted net loss per common share is computed giving
effect to all potential dilutive common shares, including stock
options, convertible preferred stock (using the if-converted
method), and common stock with vesting restrictions.
The following table sets forth the computation of net loss per
common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(7,829
|
)
|
|
$
|
(13,154
|
)
|
|
$
|
(9,158
|
)
|
Weighted-average common shares outstanding
|
|
|
10,547
|
|
|
|
4,158
|
|
|
|
3,897
|
|
Weighted-average common shares with vesting restrictions
|
|
|
(328
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used to calculate basic and
diluted net loss
|
|
|
10,219
|
|
|
|
4,003
|
|
|
|
3,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.77
|
)
|
|
$
|
(3.29
|
)
|
|
$
|
(2.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outstanding options, common stock with vesting
restrictions and convertible preferred stock were excluded from
the computation of diluted net loss per common share for the
periods presented because including them would have had an
anti-dilutive effect (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Options to purchase common stock
|
|
|
1,217
|
|
|
|
941
|
|
|
|
401
|
|
Common stock with vesting restrictions
|
|
|
272
|
|
|
|
348
|
|
|
|
|
|
Convertible preferred stock (as converted)
|
|
|
|
|
|
|
18,939
|
|
|
|
14,300
|
|
|
|
10.
|
Defined
Contribution Plan
|
The Company sponsors a defined contribution employee retirement
plan, or 401(k) plan, for its employees. The 401(k) plan
provides that each participant may contribute pre tax
compensation up to the statutory limit allowable. Under the
401(k) plan, each participant is fully vested in their deferred
salary contributions, including any matching contributions by
the Company, when contributed. Matching contributions by the
Company are discretionary. No matching contributions were made
by the Company during the years ended December 31, 2007,
2006, and 2005.
69
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded no income tax expense or benefit for the
years ended December 31, 2007, 2006 and 2005. A
reconciliation of income tax expense computed at the United
States statutory rate to the effective income tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of federal benefits
|
|
|
3.4
|
%
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
Stock-based compensation expense
|
|
|
(3.2
|
)%
|
|
|
(0.3
|
)%
|
|
|
|
%
|
Impact of change in deferred tax rates
|
|
|
4.0
|
%
|
|
|
|
%
|
|
|
|
%
|
Impact of change in valuation allowance
|
|
|
(37.6
|
)%
|
|
|
(36.3
|
%
|
|
|
(36.9
|
)%
|
Other
|
|
|
(0.7
|
)%
|
|
|
(0.4
|
)%
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has incurred net operating losses since inception,
but has not reflected any benefit of such net operating loss
carryforwards in the accompanying consolidated financial
statements. The tax effects of temporary differences that give
rise to significant portions of the net deferred tax asset are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Asset allowances
|
|
$
|
371
|
|
|
$
|
220
|
|
Accrued compensation and benefits
|
|
|
300
|
|
|
|
119
|
|
Accrued liabilities
|
|
|
143
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
814
|
|
|
|
394
|
|
Long term deferred tax assets:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
174
|
|
|
|
|
|
Accrued stock-based compensation expense
|
|
|
12
|
|
|
|
|
|
Deferred revenue
|
|
|
319
|
|
|
|
266
|
|
Net operating loss carryforward
|
|
|
14,727
|
|
|
|
12,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,232
|
|
|
|
12,667
|
|
Long term deferred tax liabilities
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
155
|
|
|
|
85
|
|
Depreciation and amortization
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
15,891
|
|
|
|
12,951
|
|
Valuation allowance
|
|
|
(15,891
|
)
|
|
|
(12,951
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. Based on
the level of projected future taxable income over the periods in
which the deferred tax assets are deductible and the history of
losses, management believes that it is more likely than not that
the Company
70
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
will not realize the benefits of these deductible differences.
Accordingly, the Company has provided a valuation allowance
against the deferred tax assets as of December 31, 2007 and
2006.
As of December 31, 2007 and 2006, the Company had federal
tax net operating loss carryforwards of approximately $39.0 and
$34.0 million, respectively, which will be available to
offset earnings during the carryforward period. If not used,
these carryforwards begin to expire in 2022. In addition,
changes in ownership could put limitations on the availability
of the net operating loss carryforwards. Under the provisions of
Section 382 of the Internal Revenue Code of 1986, as
amended, future changes in the Companys ownership could
place limitations on the availability of the net operating loss
carryforwards.
On January 1, 2007, the Company implemented the provisions
of FIN No. 48. This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with
SFAS No. 109. It prescribes a recognition threshold
and measurement criteria for the financial statement recognition
and measurement of an income tax provision taken or expected to
be taken in a tax return. It also provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
cumulative effect of initially applying FIN No. 48 is
to be recognized as a change in accounting principle and any
adjustment is generally reflected as an adjustment to the
balance of retained earnings as of the beginning of the period
in which FIN No. 48 is adopted. There was no impact of
adopting FIN No. 48. For purposes of
FIN No. 48, the Company recognizes interest and
penalties related to uncertain tax provisions as part of its
provision for income taxes. The Company currently has no reserve
for unrecognized tax benefits, and accordingly, there is no
interest and 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 2006
due to the net loss carryforwards from those years.
|
|
12.
|
Commitments
and Contingencies
|
Leases
In November, 2006, the Company entered into a lease agreement
related to its current corporate headquarters in Eden Prairie,
Minnesota, and began to occupy the facility in March 2007. The
lease is for approximately 56,000 square feet, has a term
of 84 months, and includes one five-year renewal option.
Prior to the lease of its current corporate headquarters, the
Company had a lease for office space in Eden Prairie, MN
which was scheduled to expire in September 2010. This lease
agreement included an early termination option, which the
Company elected during fiscal 2006. The Company incurred a rent
termination fee of approximately $100,000 related to this lease
during fiscal 2007.
The Company also leases certain equipment under operating leases
which have varying terms and conditions.
Future minimum rentals under these leases as of
December 31, 2007 are as follows (in thousands):
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
$
|
729
|
|
2009
|
|
|
870
|
|
2010
|
|
|
900
|
|
2011
|
|
|
926
|
|
2012
|
|
|
931
|
|
Thereafter
|
|
|
1,106
|
|
|
|
|
|
|
|
|
$
|
5,462
|
|
|
|
|
|
|
Rent expense related to these operating leases for the years
ended December 31, 2007, 2006 and 2005 was $955,000,
$396,000, and $212,000.
71
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 consolidated financial statements. As
permitted under Delaware law and to the maximum extent allowable
under that law, the Company has certain obligations to indemnify
its executive officers, directors and may indemnify other
employees for certain events or occurrences while the executive
officer, director or employee is or was serving at its request
in such capacity. These indemnification obligations are valid as
long as the executive officer, director or employee acted in
good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and,
with respect to any criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful. The maximum
potential amount of future payments the Company could be
required to make under these indemnification obligations is
unlimited; however, the Company has a director and officer
insurance policy that mitigates its exposure and generally
enables the Company to recover a portion of any future amounts
paid.
|
|
13.
|
Segment
and Geographic Information
|
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Company operates in one reportable
industry segment: the design, marketing, and technical support
of enterprise class network storage solutions. The
Companys chief operating decision maker is the
Companys chief executive officer. The Companys chief
executive officer reviews financial information, accompanied by
information about revenue by geographic region for purposes of
allocating resources and evaluating financial performance.
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. Total revenue by geographic
region was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
45,498
|
|
|
$
|
22,222
|
|
|
$
|
9,602
|
|
International
|
|
|
5,701
|
|
|
|
1,111
|
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
51,199
|
|
|
$
|
23,333
|
|
|
$
|
9,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company does not hold any long-lived assets outside of the
United States as of December 31, 2007 and 2006.
72
COMPELLENT
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
Net Loss per
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
Common
|
|
|
|
|
|
|
Loss from
|
|
|
|
|
|
to Common
|
|
|
Share, Basic
|
|
|
|
Revenue
|
|
|
Operations
|
|
|
Net Loss
|
|
|
Stockholders
|
|
|
& Diluted
|
|
|
|
(in thousands, except per share amounts)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3,250
|
|
|
$
|
(2,019
|
)
|
|
$
|
(1,940
|
)
|
|
$
|
(1,949
|
)
|
|
$
|
(0.49
|
)
|
Second Quarter
|
|
|
6,212
|
|
|
|
(1,508
|
)
|
|
|
(1,451
|
)
|
|
|
(1,462
|
)
|
|
|
(0.37
|
)
|
Third Quarter
|
|
|
6,333
|
|
|
|
(1,504
|
)
|
|
|
(1,443
|
)
|
|
|
(7,753
|
)
|
|
|
(1.94
|
)
|
Fourth Quarter
|
|
|
7,538
|
|
|
|
(2,109
|
)
|
|
|
(1,990
|
)
|
|
|
(1,990
|
)
|
|
|
(0.49
|
)
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
8,861
|
|
|
$
|
(2,353
|
)
|
|
$
|
(2,130
|
)
|
|
$
|
(2,130
|
)
|
|
$
|
(0.51
|
)
|
Second Quarter
|
|
|
12,078
|
|
|
|
(2,069
|
)
|
|
|
(1,923
|
)
|
|
|
(1,923
|
)
|
|
|
(0.45
|
)
|
Third Quarter
|
|
|
13,404
|
|
|
|
(2,082
|
)
|
|
|
(1,994
|
)
|
|
|
(1,994
|
)
|
|
|
(0.45
|
)
|
Fourth Quarter
|
|
|
16,856
|
|
|
|
(2,750
|
)
|
|
|
(1,782
|
)
|
|
|
(1,782
|
)
|
|
|
(0.06
|
)
|
Net loss per common share (basic and diluted) for each quarter
is required to be computed independently. Accordingly, the sum
of the quarterly net loss per common share (basic and diluted)
calculation does not equal the total year net loss per common
share (basic and diluted).
During the third quarter of 2006 the Company recorded
$6.3 million of accretion to adjust its
Series A-1,
A-2 and B
redeemable convertible preferred stock to fair market value. See
Note 6.
The Company is from time to time subject to various legal
proceedings arising in the ordinary course of business. There
are no matters, as of December 31, 2007, that, in the
opinion of management, might have a material adverse effect on
the Companys financial position, results of operations or
cash flows.
In April 2007, a channel partner filed a Demand for Arbitration
with the American Arbitration Association, alleging contract and
tort causes of action against the Company. The channel partner
claims the Company allegedly breached its channel partner
agreement and allegedly tortuously interfered with their
business advantage by offering identical pricing to another of
its channel partners for use in their response to a request for
proposal to an end user. The channel partner is also claiming
trade secret misappropriation, breach of confidentiality, civil
conspiracy, and promissory estoppel. Pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, the
case was arbitrated in January 2008. The arbitrator currently
has the matter under advisement and a decision is still pending.
The channel partner is seeking to recover $2.2 million in
damages. The Company believes the claims are without merit and
have defended them vigorously, but they are unable to predict
the likelihood of an outcome.
73
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Based on their evaluation as of December 31, 2007, 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) of the Securities Exchange Act of 1934) were
effective.
Managements
Annual Report on Internal Control over Financial
Reporting
This Annual Report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys registered public accounting firm due to a
transition period established by rules of the Securities and
Exchange Commission for newly public companies.
Changes
in Internal Control over Financial Reporting
As disclosed in our Registration Statement on
Form S-1
dated July 2, 2007 and in our
Form 10-Q
dated November 20, 2007, our management had determined
that, as of those dates, two significant deficiencies relating
to our lack of appropriate financial management and reporting
infrastructure and the lack segregation of duties in our finance
department. We have now completed a remediation plan which
addressed these significant deficiencies. Specifically, we have
(i) implemented improved policies and procedures to ensure
a review of contracts is performed and VSOE has been established
and maintained prior to revenue recognition; (ii) refined
our policies for the designation of duties for inputting,
reviewing and reconciling billing processes as well as reviews
by management; (iii) continued to limit access to our
information technology systems with financial impact to those
individuals who require access to fulfill their job
responsibilities; (iv) increased uniformity and consistency
with respect to customer contracts, accounting records and
related documentation; and (v) maintained an increased
level of management review of key processes, particularly the
revenue cycle and sales process. Management has completed an
evaluation of the effectiveness of these additional controls and
has concluded that the significant deficiencies described above
have been remediated as of December 31, 2007.
Other than as outlined above, there were no changes in our
internal control over financial reporting during the quarter
ended December 31, 2007 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
Limitations
on the Effectiveness of 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.
|
|
Item 9B.
|
Other
Information
|
None.
74
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item with respect to
Compellents directors, executive officers and corporate
governance is incorporated by reference to the information set
forth in Compellents proxy statement for the 2008 Annual
Meeting of Stockholders to be filed with the Commission within
120 days after the end of Compellents year ended
December 31, 2007. For biographical information pertaining
to our executive officers, refer to the Executive Officers
of the Registrant section of Part 1, Item 1 of
this Annual Report on
Form 10-K.
|
|
Item 11.
|
Executive
Compensation
|
Information responsive to this item is incorporated herein by
reference to Compellents definitive proxy statement with
respect to our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal
year covered by this Annual Report on
Form 10-K.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information responsive to this item is incorporated herein by
reference to Compellents definitive proxy statement with
respect to our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal
year covered by this Annual Report on
Form 10-K.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information responsive to this item is incorporated herein by
reference to Compellents definitive proxy statement with
respect to our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal
year covered by this Annual Report on
Form 10-K.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
Information responsive to this item is incorporated herein by
reference to Compellents definitive proxy statement with
respect to our 2008 Annual Meeting of Stockholders to be filed
with the SEC within 120 days after the end of the fiscal
year covered by this Annual Report on
Form 10-K.
75
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
1. Index
to Financial Statements:
See Index to Consolidated Financial Statements in Item 8 of
this Annual Report on
Form 10-K,
which is incorporated herein by reference.
2. Financial
Statement Schedules:
Schedule II:
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Revenue,
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Cost, or
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(in thousands)
|
|
|
Reserves deducted from asset to which it applies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
Accounts receivable allowance
|
|
$
|
430
|
|
|
$
|
322
|
|
|
$
|
(344
|
)
|
|
$
|
408
|
|
Year ended December 31, 2006
Accounts receivable allowance
|
|
|
310
|
|
|
|
120
|
|
|
|
|
|
|
|
430
|
|
Year ended December 31, 2005
Accounts receivable allowance
|
|
|
|
|
|
|
310
|
|
|
|
|
|
|
|
310
|
|
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the consolidated financial statements or notes thereto.
3. Exhibits
The following exhibits are included herein or incorporated
herein by reference:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1(1)
|
|
Amended and Restated Certificate of Incorporation of Compellent
Technologies, Inc.
|
|
3
|
.2(2)
|
|
Amended and Restated Bylaws of Compellent Technologies, Inc.
|
|
4
|
.1
|
|
Reference is made to Exhibits 3.1 and 3.2.
|
|
4
|
.2(3)
|
|
Specimen Common Stock Certificate.
|
|
10
|
.1(3)
|
|
Amended and Restated Investor Rights Agreement, dated
September 22, 2006, between Compellent and certain of its
stockholders.
|
|
10
|
.2(3)
|
|
Form of Indemnity Agreement for directors and officers.*
|
|
10
|
.3(3)
|
|
2002 Stock Option Plan, as amended.*
|
|
10
|
.4(3)
|
|
Form of Option Agreement under 2002 Stock Option Plan.*
|
|
10
|
.5(3)
|
|
2007 Equity Incentive Plan.*
|
|
10
|
.6(3)
|
|
Form of Option Grant Notice and Option Agreement under 2007
Equity Incentive Plan.*
|
|
10
|
.7(3)
|
|
2007 Employee Stock Purchase Plan.*
|
|
10
|
.8
|
|
Intentionally omitted.
|
|
10
|
.9(3)
|
|
Employment Agreement, by and between Compellent and Philip E.
Soran, dated August 16, 2007.*
|
|
10
|
.10(3)
|
|
Employment Agreement, by and between Compellent and John P.
Guider, dated August 16, 2007.*
|
|
10
|
.11(3)
|
|
Employment Agreement, by and between Compellent and Lawrence E.
Aszmann, dated August 16, 2007.*
|
|
10
|
.12(3)
|
|
Employment Agreement, by and between Compellent and Dennis R.
Johnson, dated August 16, 2007.*
|
|
10
|
.13
|
|
Intentionally omitted.
|
|
10
|
.14(3)
|
|
Lease Agreement, by and between Compellent and Liberty Property
Limited Partnership, dated November 15, 2006, as amended.
|
76
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
10
|
.15
|
|
Intentionally omitted.
|
|
10
|
.16(3)
|
|
2007 Management Incentive Plan.*
|
|
10
|
.17(4)
|
|
Letter Agreement with Dennis R. Johnson, dated February 19,
2008.*
|
|
10
|
.18(4)
|
|
2008 Management Incentive Plan.*
|
|
10
|
.19
|
|
Non-Employee Director Compensation Policy.
|
|
21
|
.1
|
|
Subsidiaries of Compellent Technologies, Inc.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney (included on the signature pages hereto).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer of Compellent
Technologies, Inc., as required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
31
|
.2
|
|
Certification of Chief Financial Officer of Compellent
Technologies, Inc., as required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
32
|
.1
|
|
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).**
|
|
|
|
* |
|
Management contract or compensation plan or arrangement. |
|
(1) |
|
Filed as Exhibit 3.1 to our Current Report on
Form 8-K
(No. 001-33685),
dated October 15, 2007, and filed with the Securities and
Exchange Commission on October 16, 2007, and incorporated
herein by reference. |
|
(2) |
|
Filed as Exhibit 3.4 to our Registration Statement on
Form S-1
(No.
333-144255)
filed with the Securities and Exchange Commission on
July 2, 2007, as amended, and incorporated herein by
reference. |
|
(3) |
|
Filed as a similarly described exhibit to our Registration
Statement on
Form S-1
(No. 333-144255)
filed with the Securities and Exchange Commission on
July 2, 2007, as amended, and incorporated herein by
reference. |
|
(4) |
|
Filed as a similarly described exhibit to our Current Report on
Form 8-K
(No. 001-33685),
filed with the Securities and Exchange Commission on
February 19, 2008, and incorporated herein by reference. |
|
|
|
** |
|
The certification attached as Exhibit 32.1 that accompanies
this Annual Report on
Form 10-K,
is not deemed filed with the Securities and Exchange Commission
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-K,
irrespective of any general incorporation language contained in
such filing. |
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Compellent Technologies, Inc.
(Registrant)
John R. Judd
(Chief Financial Officer)
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Philip E. Soran
and John R. Judd, and each of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution
for him, and in his name in any and all capacities, to sign any
and all amendments to this Annual Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done
therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, and any of them, his
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, the following persons on behalf of the registrant and in
the capacities and on the dates indicated have signed this
report below:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Philip
E. Soran
Philip
E. Soran
|
|
Chairman, President and Chief Executive Officer (Principal
Executive Officer)
|
|
March 27, 2008
|
|
|
|
|
|
/s/ John
R. Judd
John
R. Judd
|
|
Chief Financial Officer
(Principal Accounting and Financial Officer)
|
|
March 27, 2008
|
|
|
|
|
|
John
P. Guider
|
|
Chief Operating Officer and Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ Charles
Beeler
Charles
Beeler
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ Neel
Sarkar
Neel
Sarkar
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ R.
David Spreng
R.
David Spreng
|
|
Director
|
|
March 27, 2008
|
|
|
|
|
|
/s/ Sven
A. Wehrwein
Sven
A. Wehrwein
|
|
Director
|
|
March 27, 2008
|
78
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description of Document
|
|
|
3
|
.1(1)
|
|
Amended and Restated Certificate of Incorporation of Compellent
Technologies, Inc.
|
|
3
|
.2(2)
|
|
Amended and Restated Bylaws of Compellent Technologies, Inc.
|
|
4
|
.1
|
|
Reference is made to Exhibits 3.1 and 3.2.
|
|
4
|
.2(3)
|
|
Specimen Common Stock Certificate.
|
|
10
|
.1(3)
|
|
Amended and Restated Investor Rights Agreement, dated
September 22, 2006, between Compellent and certain of its
stockholders.
|
|
10
|
.2(3)
|
|
Form of Indemnity Agreement for directors and officers.*
|
|
10
|
.3(3)
|
|
2002 Stock Option Plan, as amended.*
|
|
10
|
.4(3)
|
|
Form of Option Agreement under 2002 Stock Option Plan.*
|
|
10
|
.5(3)
|
|
2007 Equity Incentive Plan.*
|
|
10
|
.6(3)
|
|
Form of Option Grant Notice and Option Agreement under 2007
Equity Incentive Plan.*
|
|
10
|
.7(3)
|
|
2007 Employee Stock Purchase Plan.*
|
|
10
|
.8
|
|
Intentionally omitted.
|
|
10
|
.9(3)
|
|
Employment Agreement, by and between Compellent and Philip E.
Soran, dated August 16, 2007.*
|
|
10
|
.10(3)
|
|
Employment Agreement, by and between Compellent and John P.
Guider, dated August 16, 2007.*
|
|
10
|
.11(3)
|
|
Employment Agreement, by and between Compellent and Lawrence E.
Aszmann, dated August 16, 2007.*
|
|
10
|
.12(3)
|
|
Employment Agreement, by and between Compellent and Dennis R.
Johnson, dated August 16, 2007.*
|
|
10
|
.13
|
|
Intentionally omitted.
|
|
10
|
.14(3)
|
|
Lease Agreement, by and between Compellent and Liberty Property
Limited Partnership, dated November 15, 2006, as amended.
|
|
10
|
.15
|
|
Intentionally omitted.
|
|
10
|
.16(3)
|
|
2007 Management Incentive Plan.*
|
|
10
|
.17(4)
|
|
Letter Agreement with Dennis R. Johnson, dated February 19,
2008.*
|
|
10
|
.18(4)
|
|
2008 Management Incentive Plan.*
|
|
10
|
.19
|
|
Non-Employee Director Compensation Policy.
|
|
21
|
.1
|
|
Subsidiaries of Compellent Technologies, Inc.
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
.1
|
|
Power of Attorney (included on the signature pages hereto).
|
|
31
|
.1
|
|
Certification of Chief Executive Officer of Compellent
Technologies, Inc., as required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
31
|
.2
|
|
Certification of Chief Financial Officer of Compellent
Technologies, Inc., as required by
Rule 13a-14(a)
or
Rule 15d-14(a).
|
|
32
|
.1
|
|
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).**
|
|
|
|
* |
|
Management contract or compensation plan or arrangement. |
|
(1) |
|
Filed as Exhibit 3.1 to our Current Report on
Form 8-K
(No. 001-33685),
dated October 15, 2007, and filed with the Securities and
Exchange Commission on October 16, 2007, and incorporated
herein by reference. |
|
(2) |
|
Filed as Exhibit 3.4 to our Registration Statement on
Form S-1
(No.
333-144255)
filed with the Securities and Exchange Commission on
July 2, 2007, as amended, and incorporated herein by
reference. |
79
|
|
|
(3) |
|
Filed as a similarly described exhibit to our Registration
Statement on
Form S-1
(No. 333-144255)
filed with the Securities and Exchange Commission on
July 2, 2007, as amended, and incorporated herein by
reference. |
|
(4) |
|
Filed as a similarly described exhibit to our Current Report on
Form 8-K
(No. 001-33685),
filed with the Securities and Exchange Commission on
February 19, 2008, and incorporated herein by reference. |
|
|
|
** |
|
The certification attached as Exhibit 32.1 that accompanies
this Annual Report on
Form 10-K,
is not deemed filed with the Securities and Exchange Commission
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-K,
irrespective of any general incorporation language contained in
such filing. |
80