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TABLE OF CONTENTS
TABLE OF CONTENTS2

Table of Contents

As filed with the Securities and Exchange Commission on January 25, 2011

Registration No. 333-150446

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Pre-Effective
Amendment No. 7
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



NEXSAN CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  3572
(Primary standard classification
industrial code number)
  13-4149478
(I.R.S. Employer
Identification No.)



555 St. Charles Drive, Suite 202
Thousand Oaks, California 91360
(805) 418-2700
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)



Philip Black
President and Chief Executive Officer
Nexsan Corporation
555 St. Charles Drive, Suite 202
Thousand Oaks, California 91360
(805) 418-2700
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:
William R. Schreiber, Esq.
Jeffrey R. Vetter, Esq.
Fenwick & West LLP
Silicon Valley Center
801 California Street
Mountain View, California 94041
(650) 988-8500
  Craig W. Adas, Esq.
Alexander D. Lynch, Esq.
Weil, Gotshal & Manges LLP
201 Redwood Shores Parkway
Redwood Shores, California 94065
(650) 802-3000



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

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

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

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

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

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities
to be Registered

  Proposed Maximum
Aggregate
Offering Price(1)(2)

  Amount of
Registration Fee(3)

 

Common Stock, $0.001 par value

  $69,000,000.00   $4,919.70

 

(1)
Includes shares the underwriters have the option to purchase to cover over-allotments, if any.
(2)
Estimated pursuant to Rule 457(o) solely for the purpose of calculating the amount of the registration fee.
(3)
Previously paid.

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


Table of Contents

The information in this prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities, and neither we nor the selling stockholder are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION. DATED JANUARY 25, 2011.

                     Shares

NEXSAN    

Common Stock

$       per share


Nexsan Corporation is selling                    shares of our common stock and the selling stockholder named in this prospectus is selling an additional 116,000 shares. We will not receive any of the proceeds from the sale of the shares by the selling stockholder.

This is an initial public offering of our common stock.

We currently expect the initial public offering price to be between $           and $           per share.

Our common stock has been approved for listing on the NASDAQ Global Market under the symbol "NXSN," subject to official notice of issuance.



Investing in our common stock involves risks. See "Risk Factors" beginning on page 9.

 

 

 

 

Per Share

 

Total

 

Public offering price

  $     $    

Underwriting discount

  $     $    

Proceeds, before expenses, to Nexsan Corporation

  $     $    

Proceeds, before expenses, to the selling stockholder

  $     $    

 

 

We have granted the underwriters a 30-day option to purchase up to an additional                shares to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Piper Jaffray

William Blair & Company

 

Needham & Company, LLC

The date of this prospectus is                                        , 2011.


Table of Contents

[ARTWORK TO BE PROVIDED]


Table of Contents

TABLE OF CONTENTS

 
  Page  
Prospectus Summary     1  
Risk Factors     9  
Special Note Regarding Forward-Looking Statements and Industry Data     29  
Use of Proceeds     30  
Dividend Policy     30  
Capitalization     31  
Dilution     33  
Selected Consolidated Financial Data     35  
Management's Discussion and Analysis of Financial Condition and Results of
    Operations
    38  
Business     61  
Management     78  
Executive Compensation     85  
Related Party Transactions     105  
Principal and Selling Stockholders     110  
Description of Capital Stock     112  
Shares Eligible for Future Sale     117  
Material U.S. Federal Tax Consequences to Non-U.S. Holders     120  
Underwriting     124  
Legal Matters     128  
Experts     128  
Where You Can Find Additional Information     128  
Index to Consolidated Financial Statements     F-1  

You should rely only on the information contained in this prospectus and in any related free-writing prospectus. We and the selling shareholder have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus and in any related free-writing prospectus is complete and accurate as of its date, but the information may have changed since that date.

In this prospectus "Nexsan," "we," "us" and "our" refer to Nexsan Corporation, and where appropriate, its subsidiaries. Nexsan and logo, Nexsan Technologies and logo, Assureon, SASBeast, SASBoy, Nexsan iSeries and SATABeast are our United States, U.S., registered trademarks. We have also filed a U.S. trademark application for Beast2, NXS and DeDupe SG. AutoMAID, DATABeast, iSeries and SATABoy. Other trade names, trademarks or service marks referred to in this prospectus are the property of their respective owners.


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PROSPECTUS SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider before investing in our common stock. Therefore, you should also read the more detailed information set out in this prospectus, including the financial statements and the related notes appearing elsewhere in this prospectus and the information set forth under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," in each case appearing elsewhere in this prospectus.

Overview

We are a leading provider of disk-based storage systems that enable mid-sized organizations to store digital information. Our products are optimized for the efficient storage and protection of unstructured data, the type of digital information that mid-sized organizations are producing in increasingly greater quantities. Unstructured data generally refers to data that is fixed and not subject to frequent change, such as digital records, e-mail, medical images, scientific data and video. Our systems are specifically designed for the growing data storage needs of mid-sized organizations by providing a small footprint, low power use, scalability, ease of use, and cost-effectiveness while delivering the enterprise-class reliability, features and performance that are sought by these mid-sized organizations. Our storage systems incorporate innovative technologies, such as advanced power management and capacity optimization, to significantly lower the initial and ongoing cost of storage for our customers compared to typical storage solutions.

We sell our products through our network of over 600 channel partners, including value added resellers, or VARs, original equipment manufacturers, or OEMs, and systems integrators, which enables us to leverage an extensive worldwide channel network to access our highly fragmented, broad and diverse target customer base and to cost-effectively scale our business. We serve several industry vertical markets including medical, financial, local government, law enforcement, gaming, video and entertainment, scientific and research, museums and archives, transportation and cloud storage. To date, we have shipped over 27,000 systems in more than 60 countries. Our storage systems are currently being utilized by organizations worldwide, including traditional small- and medium-sized organizations, branch offices of large enterprises, federal, state and local government agencies and some large organizations with unique unstructured data storage needs.

Our systems target the specific needs of these customers by:

      providing an optimal entry point for mid-sized organizations with a multi-tiered, scalable architecture that can expand with the customers' requirements;

      offering enterprise-class reliability, accessibility, integrity and security of stored data;

      providing industry-leading densities, which reduce the overall storage footprint and the total cost of ownership;

      significantly reducing power consumption and cooling costs per terabyte of storage;

      providing enterprise-class storage features such as multi-tiered storage, multi-protocol storage, high-availability, virtualization and replication, specifically designed for these mid-sized organizations;

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      being available through a global channel network oriented to mid-sized organizations worldwide; and

      providing a product that is easy to set up, simple to use and requires little maintenance.

Industry Background

The Rapid Growth of Unstructured Data in Mid-Sized Organizations

The amount of unstructured data being created, stored and protected on disk-based storage systems by mid-sized organizations is growing rapidly. Unstructured data, including digital records, e-mail, medical images, scientific data and video, is being created faster than data generated from traditional data center applications such as transaction-oriented database applications. Additionally, unstructured data is typically replicated in multiple instances for data protection and stored for longer periods of time. Evolving business practices and regulations are also changing the requirements placed on systems that store and manage unstructured data and are driving the need for readily-available, long-term storage. Additionally, mid-sized organizations are increasingly migrating their long-term storage of information from tape and optical media to disk.

Some of the key growth drivers creating increased amounts of unstructured data in the mid-sized organization market include:

      Increasing number of applications that create unstructured data;

      Evolving business practices, such as the transition to digital records and increased data retention for business and regulatory requirements;

      Larger-sized and more frequently shared files; and

      Growing importance of data protection and availability.

Limitations of Traditional Solutions for the Mid-Sized Organization Market

Mid-sized organizations face the particular challenge of implementing storage systems to manage their newly growing amounts of unstructured data which requires greater storage capacity and results in increased system acquisition and management costs. Data growth is taxing organizations in critical areas such as staffing, training, disaster recovery, capacity management, power and cooling, and regulatory compliance. We believe that mid-sized organizations remain underserved by larger enterprise storage vendors, who traditionally have not effectively addressed the needs of the mid-sized organization market in terms of ease of use, total cost of ownership, feature sets and delivery model. Many storage solutions have been designed and priced for larger enterprises with complex storage needs and substantial IT staff; however, many mid-sized organizations do not have the resources to implement and support these larger complex solutions which often include costly feature sets that may not be required for these mid-sized organizations. Also, the storage system requirements of mid-sized organizations are continuing to expand and these organizations increasingly seek certain features and functionality provided by storage systems targeting large enterprises. As a result, a substantial need has developed among mid-sized organizations for cost-effective storage systems that provide enterprise-class features such as seamless capacity growth, high-reliability, advanced data protection and ease-of-management.

Our Solutions

Our focus on providing first-to-market technologies has made us a leading provider of innovative disk-based storage systems that enable our end users in mid-sized organizations to store digital information efficiently, intelligently, economically and securely. Our storage solutions are specifically designed for the unique needs of this large and growing market segment, which we believe has a

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proportionally greater need to store unstructured data. We believe this focus has enabled us to deliver storage systems with particular benefits for mid-sized organizations. These benefits include:

      Flexible Storage Platform.  Our flexible storage solutions include many storage technologies in one system. This is particularly useful to mid-sized organizations that prefer a single-system solution over having to buy many disparate systems. We pioneered storage systems that featured simultaneous multi-protocol access, and we designed our systems to be multi-tiered, supporting SSD, SAS and SATA drives in one chassis.

      Solutions developed for mid-sized organizations.  Our storage systems allow mid-sized organizations to purchase storage solutions at a lower initial cost point, with the capacity and software features appropriate for their needs, when compared to traditional enterprise storage solutions. These systems have the ability to scale both capacity and additional functionality as their needs grow at a much lower cost than has traditionally been available. We provide an optimized mix of enterprise-class features and functionality scaled for the needs of mid-sized organizations.

      Optimized for storing unstructured data.  Our systems include features specifically designed for storing unstructured data, including capacity optimization, low power usage, and technology designed to maximize performance from SATA drives, which are the optimal drives for unstructured data due to their cost and capacity.

      Easy To Use.  We focus our product development and design efforts on ease of use with our channel ready delivery and distribution model in mind and our storage systems can be managed by IT generalists without the need for professional services or additional software.

      Technology-driven, lower total cost of ownership.  We develop innovative technology to reduce the entry point, acquisition, maintenance and ancillary costs associated with digital storage.

We sell three principal storage products: The Beast, The Boy and Assureon. The Beast and Boy share a common architecture and are different system configurations that incorporate the same bundled storage system software. On a standalone basis, the Beast and Boy operate as fully functional block storage systems, specifically designed to meet the needs of mid-sized organizations. Our storage systems can also be integrated with optional storage software capabilities, such as Assureon. Assureon software runs on a standard, off-the-shelf server, which is packaged with the Beast or Boy and is delivered as an integrated system.

Strategy

Our goal is to be a leading provider of disk-based storage solutions for the storage of unstructured data at mid-sized organizations worldwide. Key elements of our strategy include:

      Further penetrating the mid-sized organization market;

      Evolving and expanding our flexible storage platform;

      Expanding our software content; and

      Being the leading independent storage provider to the channel.

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Corporate Information

We were incorporated in Delaware in November 2000 and are currently headquartered in Thousand Oaks, California, with 147 employees throughout North America and Europe as of December 31, 2010. Our website address is www.nexsan.com. The information contained on our website is not a part of this prospectus. We have three principal operating subsidiaries, Nexsan Technologies Incorporated, a Delaware corporation, Nexsan Technologies Limited, a United Kingdom, U.K., corporation, and Nexsan Technologies Canada Inc., a Canadian corporation.

Office Location

Our principal executive offices are located at 555 St. Charles Drive, Suite 202, Thousand Oaks, California 91360, and our telephone number is (805) 418-2700.

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The Offering

Common stock offered

                      shares

Common stock offered by selling stockholder

 

                    shares

Common stock to be outstanding after this offering

 

                    shares

Over-allotment option

 

                    shares

Use of proceeds

 

We intend to use the proceeds of this offering for working capital and other general corporate purposes. We may use a portion of the proceeds for potential acquisitions. See "Use of Proceeds."

NASDAQ Global Market symbol

 

NXSN

The common stock outstanding after this offering is based on 11,384,628 shares outstanding as of September 30, 2010 and excludes:

      2,723,853 shares issuable upon exercise of options outstanding as of September 30, 2010, at a weighted average exercise price of $6.75 per share, including 403,570 shares subject to options that are subject to call options held by us, exercisable as of September 30, 2010 at $9.79 per share;

      214,627 restricted stock units, or RSUs, outstanding as of September 30, 2010;

      115,800 shares issuable upon exercise of options granted, at a weighted average exercise price of $7.80 per share, and 85,000 RSUs granted between October 1, 2010 and December 31, 2010;

      292,318 shares issuable upon exercise of warrants outstanding as of September 30, 2010, at a weighted average exercise price of $8.03 per share;

      246,038 shares reserved for future issuance under our 2001 stock plan as of September 30, 2010 and to be transferred into our 2010 equity incentive plan and 193,045 shares reserved for future issuance under our 2010 employee stock purchase plan, such plans to be effective upon completion of this offering; and

      IPO Bonus Shares to be issued upon completion of this offering, see "Compensation Discussion and Analysis—Equity-Based Incentives."

Except as otherwise noted, all information in this prospectus:

      reflects the filing of our restated certificate of incorporation prior to the completion of this offering;

      reflects the conversion of all of our outstanding shares of convertible preferred stock into an aggregate of 6,516,176 shares of common stock, effective upon the completion of this offering;

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      reflects the exchange of all of the outstanding exchangeable shares of our wholly owned Canadian subsidiary into an aggregate of 464,283 shares of our common stock;

      assumes the issuance of                IPO Bonus Shares on an after-tax basis, based on an assumed initial public offering price of $         per share of our common stock, immediately prior to the completion of this offering.

      reflects, on a retroactive basis, a 10.5-for-1 reverse split of our common stock, Series A and C convertible preferred stock and exchangeable shares effected in March 2010; and

      assumes no exercise of the underwriters' over-allotment option.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. The consolidated statements of operations data for the fiscal years ended June 30, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the three months ended September 30, 2009 and 2010, and the consolidated balance sheet data as of September 30, 2010, have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all adjustments, that management considers necessary for the fair presentation of the financial information set forth in those financial statements. You should read this data together with our consolidated financial statements and related notes to those statements included elsewhere in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our historical results are not necessarily indicative of the results to be expected in any future period.

 
  Year Ended June 30,   Three Months
Ended
September 30,
 
 
  2008   2009   2010   2009   2010  
 
   
   
   
  (unaudited)
 
 
  (in thousands, except per share data)
 

Consolidated Statements of Operations Data:

                               

Revenue

  $ 62,676   $ 60,895   $ 68,924   $ 16,715   $ 19,281  

Cost of revenue(1)

    40,754     35,544     41,196     9,667     10,589  
                       
   

Gross profit

    21,922     25,351     27,728     7,048     8,692  

Operating expenses:

                               
 

Research and development(1)

    5,364     5,316     6,467     1,526     1,694  
 

Sales and marketing(1)

    10,444     11,112     15,176     3,415     4,237  
 

General and administrative(1)

    6,289     4,678     5,076     1,194     1,424  
 

Postponed public offering costs

    3,447     449              
                       
   

Total operating expenses

    25,544     21,555     26,719     6,135     7,356  
                       
   

Income (loss) from operations

    (3,622 )   3,796     1,009     913     1,337  

Total other income (expense)

    (1,746 )   (10 )   (102 )   531     5  
                       
   

Income (loss) before income taxes

    (5,368 )   3,786     907     1,444     1,342  

Income tax benefit (expense)

    35     (279 )   (308 )   (113 )   455  
                       
   

Net income (loss)

  $ (5,333 ) $ 3,507   $ 599   $ 1,331   $ 1,797  
                       

Net income (loss) per common share, basic(2)

  $ (1.09 ) $ 0.23   $ 0.00   $ 0.15   $ 0.25  
                       

Net income (loss) per common share, diluted(2)

  $ (1.09 ) $ 0.22   $ 0.00   $ 0.12   $ 0.16  
                       

Shares used in computing net income (loss) per common share, basic

    4,910     4,827     4,858     4,847     4,868  

Shares used in computing net income (loss) per common share, diluted

    4,910     5,154     4,858     11,453     11,474  

Pro forma net income per common share, basic and diluted (unaudited)(2)

              $ 0.05         $ 0.16  
                             

Shares used in computing pro forma net income per common share, basic (unaudited)

                11,374           11,384  

Shares used in computing pro forma net income per common share, diluted (unaudited)

                11,763           11,474  

Other Financial Data:

                               

Net cash provided by operating activities

  $ 2,591   $ 1,150   $ 1,978   $ 1,493   $ 984  

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

   
  Year Ended June 30,   Three Months
Ended
September 30,
 
   
  2008   2009   2010   2009   2010  
   
   
   
   
  (unaudited)
 
   
  (in thousands)
 
 

Cost of revenue

  $ 16   $ 18   $ 79   $ 3   $ 36  
 

Research and development

    103     19     255     23     99  
 

Sales and marketing

    1,099     (15 )   417     96     252  
 

General and administrative

    2,255     315     657     148     237  
                         
   

Total stock-based compensation expense

  $ 3,473   $ 337   $ 1,408   $ 270   $ 624  
                         

(Footnotes continued on following page)

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(2)
See note 1 to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per common share and pro forma basic and diluted net income (loss) per common share which gives effect to (1) the 10.5-for-1 reverse split of our outstanding common stock, Series A and C convertible preferred stock and exchangeable shares effected in March 2010.

      The pro forma consolidated balance sheet data set forth below give effect to (1) the conversion of all outstanding shares of convertible preferred stock into common stock upon the completion of this offering; and (2) the exchange of all outstanding exchangeable shares of our Canadian subsidiary into 464,283 shares of our common stock upon the completion of this offering. The pro forma as adjusted balance sheet data set forth below give effect to our receipt of the estimated net proceeds from the sale of                     shares of common stock offered by us at an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the issuance of the IPO Bonus Shares to certain executive officers resulting in expense of $        million related to the vested portion of the awards on the date of this prospectus. The expense is based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus. We will pay the bonus in cash of $        million representing the amount of the recipients' tax liability, and issue approximately                shares valued at $        million.

 
  September 30, 2010  
 
  Actual   Pro Forma   Pro Forma
As Adjusted(1)
 
 
  (unaudited, in thousands)
 

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents

  $ 10,366   $ 10,366   $              

Working capital

    20,686     20,686                  

Total assets

    38,404     38,404                  

Notes payable

    2,829     2,829     2,829  

Convertible preferred stock

    27,429          

Exchangeable stock

    3,033          

Total stockholders' equity (deficit)

    (11,762 )   15,667                  

(1)
Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets and total stockholders' equity on a pro forma as adjusted basis by approximately $        million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes, before deciding whether to invest. Each of these risks could materially adversely affect our business, operating results and financial condition. As a result, the trading price of our common stock could decline and you might lose all or part of your investment.

Risks Related to Our Business and Industry

Our recent profitability and growth rates may not be indicative of our future profitability or growth, and we may not be able to continue to maintain or increase our profitability or growth.

While we have been profitable in recent periods, we had an accumulated deficit of $32.2 million as of September 30, 2010. This accumulated deficit is attributable to net losses incurred from our inception through the end of fiscal year 2008. We expect to make expenditures related to expanding our business, including expenditures for additional sales and marketing, research and development, and general and administrative personnel. As a public company, we will also incur significant legal, accounting and other expenses that we did not incur as a private company. As a result of these increased expenditures, we will need to generate and sustain substantially increased revenue to maintain or increase our recent profitability. Our revenue growth trends in prior periods may not be indicative of future revenue and our recent results of operations may not be indicative of our results of operations for fiscal year 2011 and future periods. Accordingly, we may not be able to maintain profitability, and we may incur losses in the future.

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict. If our operating results fall below expectations, the price of our common stock could decline.

Our annual and quarterly operating results have fluctuated in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. As a result, predicting our future operating results is extremely difficult.

Our quarterly and annual expenses as a percentage of our revenue may be significantly different from our historical rates, and our operating results in future quarters may fall below expectations. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

Factors that may affect or result in period-to-period variability in our operating results include:

      fluctuations in demand for our products;

      reductions in customers' budgets for information technology purchases and delays in their budgeting and purchasing cycles;

      pricing and availability of components;

      the length of time between our receipt of orders and the timing of recognition of revenue from those orders, particularly for our Assureon system;

      fluctuations in the size of our individual sale transactions;

      potential seasonality in some markets;

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      lengthy sales cycles for our Assureon system;

      our ability to develop, introduce and ship, in a timely manner, new products and product enhancements;

      our ability to control costs;

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

      pricing changes by our competitors.

Furthermore, since we sell our products through indirect sales channels rather than a direct sales force, we often lack visibility into the demand for our products and the timing of customer orders. Accordingly, it is difficult for us to accurately predict quarter-to-quarter demand.

In addition, we expect to incur additional cash and non-cash sales and marketing and general and administrative expenses in the quarter in which our initial public offering is completed, including payment of applicable withholding taxes, as a result of the issuance of IPO Bonus Shares immediately prior to the completion of this offering. Based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, we expect to incur expenses of approximately $        million related to the vested portion of these IPO Bonus Shares in the quarter in which they are issued. Please refer to the section of this prospectus entitled "Executive Compensation—Employment, Severance and Change of Control Arrangements," for a further discussion of the IPO Bonus Shares.

Current uncertainty in global economic conditions makes it particularly difficult to predict demand for our products, and makes it more likely that our actual results could differ materially from expectations.

Our operations and performance depend on worldwide economic conditions, which have been challenging in the United States, or U.S., and other countries and may remain challenging for the foreseeable future. These conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities and could cause our customers and potential customers to slow or reduce spending on capital equipment such as our products. These economic conditions could also cause our competitors to drastically reduce prices or take unusual actions to gain a competitive edge, which could force us to provide similar discounts and thereby reduce our profitability. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in the U.S., or in our industry. These and other economic factors could have a material adverse effect on demand for our products and services and on our financial condition including profitability and operating results.

We face intense competition from a number of established companies and expect competition to increase in the future, which could prevent us from increasing our revenue and end user base.

The market for our products is highly competitive, and we expect competition to intensify in the future. This competition could make it more difficult for us to sell our products and result in increased pricing pressure, reduced margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business.

Currently, we face competition from traditional providers of storage systems. In addition, we also face competition from other public and private companies, as well as recent market entrants, that offer products with similar functionality as ours. Our products compete with Compellent Technologies, Inc.

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(which has entered into an agreement to be acquired by Dell Inc.), DataDirect Networks, Inc., Dell, EMC Corporation, Hewlett-Packard Company, Hitachi Data Systems, Infortrend Technology, Inc., International Business Machines Corporation, NetApp, Inc., Oracle Corporation and Promise Technology, Inc., among others. In addition, we compete against internally developed storage solutions, as well as combined third-party software and hardware solutions. Many of our current competitors have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Given their capital resources and broad product and service offerings, many of these competitors may be able to offer reduced pricing for their products that are competitive with ours, which in turn could cause us to reduce our prices to remain competitive. Potential customers may have long-standing relationships with our competitors, whether for storage or other network equipment, and potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. Many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and prospective customers. We expect that our competitors will seek to leverage these existing relationships to encourage customers to purchase their products.

We expect increased competition from other established and emerging companies, including companies such as storage software and networking infrastructure companies that provide complementary technology and functionality. We also expect that some of our competitors may make acquisitions of businesses that would allow them to offer more directly competitive and comprehensive solutions than they had previously offered. For example, EMC acquired Data Domain, Inc. and proposes to acquire Isilon Systems, Inc., Dell acquired EqualLogic, Inc. and proposes to acquire Compellent, HP acquired LeftHand Networks Inc. and Oracle acquired Sun Microsystems, Inc. Our current and potential competitors, including any of our suppliers, may also establish cooperative relationships among themselves or with third parties. If so, new competitors or alliances that include our competitors may emerge that could acquire significant market share. In addition, third parties currently selling our products also market products and services that compete with ours. Any of these competitive threats, alone or in combination with others, could seriously harm our business.

As our product offerings become more complex, the timing of our revenue recognition may become less predictable.

As we expand the range of products and functionality we offer, the revenue recognition requirements that apply to our revenue streams will become more complex than those that apply to our standalone products, for which we generally recognize revenue when the product is shipped. We expect this trend to continue as we expand our offerings. For example, for revenue recognition purposes, our Assureon system is considered a multiple-deliverable arrangement that includes hardware, software, and post-contract customer support, or PCS. We determine the selling price of a deliverable by using a hierarchy which requires the use of vendor-specific objective evidence, or VSOE, of fair value if available, third party evidence, or TPE, if VSOE is not available, or estimated selling price, or ESP, if neither VSOE nor TPE is available. Total invoice consideration is allocated to revenue based on the relative selling prices for each deliverable. As we offer new products and features, we could be required to recognize revenue under the more complex revenue recognition rules, which could make predicting our future revenue more difficult.

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We rely heavily on value-added resellers and other channel partners to sell our products. Any disruptions to, or failure to develop and manage, our relationships with these third parties could have an adverse effect on our existing end user relationships and on our ability to maintain or increase revenue.

We do not use a direct sales force. Instead, we rely on third-parties such as resellers, OEM partners and systems integrators to sell our products. Accordingly, over the past year we have invested, and we intend to continue to invest in, increasing our sales personnel, who sell to, manage, market to, and support our channel partners. Our future success highly depends upon maintaining and managing the existing relationships with our channel partners and establishing relationships with new channel partners. Recruiting and retaining qualified channel partners and training them in our technology and product offerings requires significant time and resources. To develop and expand our relationships with our channel partners, we must continue to scale and improve our processes and procedures that support our channel partners, including investments in systems and training. This may become increasingly complex, difficult and expensive to manage, particularly as the geographic scope of our end user base expands. Any failure on our part to train our channel partners and to manage their sales activities could harm our business.

Our agreements with channel partners generally are short-term, have no minimum sales commitment and do not prohibit them from offering products and services that compete with ours. Accordingly, our channel partners may choose to discontinue offering our products, promote competing products or may not devote sufficient attention and resources toward selling our products. From time to time, our competitors might provide more favorable incentives to our existing and potential channel partners to promote or sell their products, which could have the effect of reducing sales of our products.

Because we rely on channel partners to sell our products, we have less contact with end users, which makes it difficult for us to manage the sales process, quality of service, respond to end user needs and forecast future sales.

Because we rely on third parties to sell our products, we have less contact with our end users and less control over the sales process, quality of service and responsiveness to end user needs. As a result, it may be more difficult for us to ensure the proper delivery and installation of our products and to adequately predict the needs of our end users for enhancements to existing products or for new products. Furthermore, a negative end user experience with our channel partners could cause customers to be dissatisfied with us or our products, which could harm our business. In addition, we have less visibility into future sales than we might otherwise have using a direct sales force, which makes it more difficult for us to forecast demand for our products.

Failure to adequately expand and ramp our sales personnel and further develop and expand our indirect sales channel will impede our growth.

We have invested in growing the number of our sales personnel and channel partners and we plan to continue to expand and ramp our sales force who sell to, manage, market to, support our channel partners and engage additional channel partners, both domestically and internationally. Identifying and recruiting these people and entities, and training them in our systems require significant time, expense and attention. This expansion will require us to invest significant financial and other resources. Our business will be seriously harmed if our efforts to expand and ramp our sales personnel and expand our indirect sales channels do not generate a corresponding significant increase in revenue.

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We derive the substantial majority of our revenue from sales of our Beast and Boy products, and a decline in demand for these products would harm our business.

Historically, we have derived more than 90% of our revenue from sales of our Beast and Boy products. We expect to continue to depend on sales of our Beast and Boy products for the foreseeable future and, accordingly, will be vulnerable to fluctuations in demand for these products, whether as a result of competition, product obsolescence, technological change, customer budgetary constraints or other factors. A decline in demand for our Beast and Boy products would harm our business.

Our gross margins may decrease with decreases in the average selling prices of our current products, changes in our product mix, or increasing costs which may adversely impact our operating results.

To maintain our selling prices and increase our gross margins, we must develop and introduce on a timely basis new products and product enhancements, as well as continually reduce our product costs. Our failure to do so would likely cause our revenue and gross margins to decline, which could harm our operating results and cause the price of our stock to decline. Our industry has historically experienced a decrease in average selling prices for similar types of products. The average selling prices of our products could decrease in response to competitive pricing pressures, evolving technologies and new product introductions by us or our competitors. In addition, increases in the cost of our components could increase our cost of revenue. We also anticipate that our gross margins will fluctuate from period to period as a result of the mix of products we sell in any given period. If our sales of higher margin products do not significantly expand as a percentage of revenue, our overall gross margins and operating results would be adversely impacted.

Our inability to increase sales of our Assureon system, which we sell primarily through OEM partners and systems integrators, could harm our business.

Our Assureon system was commercially released in February 2006 and constituted less than 10% of our total revenues in the year ended June 30, 2010 and the three months ended September 30, 2010. We cannot assure you that our Assureon system will become widely accepted or that we will be able to derive substantial revenue from the sale of this product. Our principal competitors for our Assureon system include EMC and NetApp, which are substantially larger, have greater resources than we do and may utilize a direct sales force to sell their competing products. For us to substantially increase sales of our Assureon system, we must develop additional relationships with OEM partners and systems integrators. As a result, we may need to hire additional sales personnel and expend additional resources developing these relationships. Our failure to increase sales of our Assureon system for any reason could harm our business.

Our sales cycle for our Assureon system can be long and unpredictable. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate.

Sales of our Assureon system can involve substantial education of prospective customers about the use and benefits of the product. Sales are also subject to prospective customers' budget constraints and approval processes, and a variety of unpredictable administrative, processing and other delays. Accordingly, it is difficult to predict future sales activity for this product. Because of the larger size of Assureon system sales as compared to our other products, if Assureon sales expected from specific customers for a particular quarter are not realized in that quarter or at all, our results of operations for that quarter may be materially and adversely affected.

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We purchase our disk drives, power supplies and certain components for our products from a limited number of suppliers. If these or any of our other suppliers are not able to meet our requirements, it could negatively impact our ability to fulfill customer orders and harm our business.

Our products incorporate sophisticated components, including disk drives, high-density memory components and chips, from a variety of suppliers. In particular, we rely on Avnet, Inc., a value-added distributor which recently acquired Bell Microproducts Inc., to provide us with disk drives. Avnet generally obtains disk drives from Hitachi Global Storage Technologies, Seagate Technology LLC and Western Digital Corporation. In addition, we obtain our power supplies from BluTek Power, Inc. and our microprocessors from PMC-Sierra, Inc. and servers from Dell Inc. Qualifying components for our products can take up to several months, as this process involves lengthy testing and substantial work to ensure they are compatible with our products. Accordingly, if we needed to find new suppliers of components, it could take a significant amount of time to transition to the new supplier, which could delay our ability to ship products. Component quality is particularly significant with respect to our disk drives, and we could in the future experience quality control issues and delivery delays with our suppliers, which could negatively impact our ability to ship products, which could harm our business.

Additionally, we periodically need to transition our product lines to incorporate new technologies developed by us or our suppliers. For example, from time to time our suppliers may discontinue production of underlying components and products due to new technologies that have been incorporated into such components and products or due to the acquisition of a supplier by another entity. Such a discontinuance can occur on short notice, and we and our suppliers may require a significant amount of time to qualify the new technologies to ensure that they are compatible with our products. We also may incur significant expenses to purchase "end of life" components.

We do not have long-term contracts with any of our current suppliers, and we purchase all components on a purchase-order basis. If any of our suppliers were to cancel or materially change any commitment they may have with us, or fail to meet the quality or delivery requirements needed to satisfy customer orders for our products, we could lose time-sensitive customer orders, be unable to develop or sell certain products cost-effectively or on a timely basis, if at all, and have significantly decreased revenue.

Any price increases, shortages or interruptions of supply of components for our products would adversely affect our revenue and gross profits.

We may be vulnerable to price increases for components. In addition, in the past we have occasionally experienced shortages or interruptions in supply for certain components, which caused us to purchase these items at a higher cost than we had initially forecast. To help address these issues, we have in the past and we could in the future, decide to purchase quantities of these items that are above our foreseeable requirements. As a result, we could be forced to increase our excess and obsolete inventory reserves to account for excess quantities. If we experience any shortage of components or receive components of unacceptable quality or if we are not able to procure components from alternate sources at acceptable prices and within a reasonable period of time, our revenue and gross profit could decrease significantly.

If we fail to develop and introduce new products in a timely manner, or if we fail to manage product transitions, we could experience decreased revenues.

Our future growth depends on our ability to develop and introduce new products successfully. Due to the complexity of our products, there are significant technical risks that may affect our ability to introduce new products successfully. If we are unable to develop and introduce new products in a timely manner or in response to changing market conditions or customer requirements, or if these products do not achieve market acceptance, our growth could be negatively impacted and our operating results could be materially and adversely affected.

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In addition, components used in our products are periodically discontinued by our suppliers, which could result in our having to change our product designs. We are also periodically required to redesign some of our products in order to remain competitive because of increased functionality or higher performance afforded by new components. If these redesigns are not timely, of if they result in unexpected issues related to quality or performance, sales of our products could be adversely affected.

Product introductions by us in future periods may also reduce demand for our existing products. As new or enhanced products are introduced, we must successfully manage the transition from older products, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered to meet customer demand. Our failure to do so could adversely affect our operating results.

We rely principally on two contract manufacturers and other third parties to assemble portions of our products, perform printed circuit board, or PCB, layout, agency testing and assembling. If we fail to accurately forecast demand for our products or successfully manage our relationships with our contract manufacturers or other third-party service providers, our ability to ship and sell our products could be negatively impacted.

We rely principally on two contract manufacturers to manufacture our products, manage our supply chain and negotiate costs for some components. Specifically, we rely on AWS Cemgraft in England and Cal Quality in California to manufacture our products. We also rely on third parties to perform PCB layout, testing and assembly. Our reliance on third parties for these services reduces our control over the manufacturing process, production costs and product supply. In addition, none of our contract manufacturers is contractually obligated to perform manufacturing services for us, and they may elect not to perform these services or perform at levels that are insufficient to meet our manufacturing needs. If we fail to manage our relationships with our contract manufacturers or if any of our contract manufacturers experiences delays, disruptions, capacity constraints or quality control problems in their operations, our ability to ship products could be impaired and our competitive position, reputation, customer relationships, product sales and revenue could be harmed. If we are required to change any of our contract manufacturers for any reason, we may lose revenue, incur increased costs and damage our customer relationships.

Our contract manufacturers also manufacture products for other companies. If our contract manufacturers experience demand for their services beyond their capacity, they may give priority to other customers, particularly those who place larger orders than us, and this could impact our ability to timely ship our products.

We intend to introduce new products and product enhancements, which could require us to achieve volume production rapidly. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions if we experience increased demand. If our contract manufacturers are unable to provide us with adequate supplies of high-quality products, or if we or any of our contract manufacturers are unable to obtain adequate quantities of components, it could cause a delay in our order fulfillment and harm our business.

If we fail to adequately manage our product inventory, we may incur excess product inventory costs and write downs or we may have insufficient quantities to meet customer demand and our financial results could be adversely affected.

We must effectively manage our product inventory. We place orders to manufacture our products based on rolling forecasts. Since we utilize an indirect, rather than direct, sales channel, our future sales are difficult to predict with certainty. We may seek to increase orders during periods of product shortages or delay orders in anticipation of new products, and as a result may have insufficient

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quantities of products available to meet customer demand. On the other hand, if we manufacture more products than we need, we could incur excess manufacturing and component costs and could be required to write down inventory for any obsolete or excess products. As we introduce new products, we risk creating obsolete or excess inventory of our existing products. For example, in fiscal year 2006, we incurred an inventory write down of approximately $1.0 million related to the excess inventory of our ATA products as we introduced new products.

If our products do not interoperate with our end users' existing network infrastructure, including hardware, software and other networking equipment, installations will be delayed or cancelled and our financial results could be adversely affected.

Our products must interoperate with end users' existing networks, which often have different specifications, utilize multiple protocol standards and products from multiple vendors, and contain multiple generations of products that have been added over time. We may be required to modify our software or hardware, so that our products will interoperate with our end users' existing network infrastructure. This could cause longer installation times for our products, result in reduced new orders for our products, and could cause order delays or cancellations, any of which would adversely affect our business.

Our products are complex and may contain undetected software or hardware errors, which could harm our reputation and future product sales.

Our products are complex and it is possible that despite our testing, defects, incompatibilities with products from other vendors or other errors may not be discovered until after a product has been installed and used by customers. Errors, defects, incompatibilities or other problems with our products or other products within a larger system could result in a number of negative effects on our business, including:

      loss of customers;

      loss of or delay in revenue;

      loss of market share;

      damage to our brand and reputation;

      inability to attract new customers or achieve market acceptance;

      diversion of development resources;

      increased service and warranty costs;

      legal actions by our customers; and

      increased insurance costs.

If any of these occurs, our operating results could be harmed.

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If our channel partners do not properly install our products or integrate our products with other products, our reputation and business may be harmed.

Because we rely on channel partners to sell, install and integrate our products, we have limited control over how our products are used. If any of our channel partners incorporate any of our products into a storage system that does not perform as an end user customer expects, our reputation and business could be harmed, even if our product performs properly.

Our products handle important data for our customers and are highly technical in nature. If end user data is lost or corrupted, or our products contain software errors or hardware defects, our reputation and business could be harmed.

Our products store important data for our end users. The process of storing that data is highly technical and complex. If any data is lost or corrupted in connection with the use of our products, our reputation could be seriously harmed and market acceptance of our products could suffer. In addition, our products could contain software errors, hardware defects or security vulnerabilities. Some software errors or defects in the hardware components of our products may be discovered only after a product has been installed and used by our end users. Any such errors, defects or security vulnerabilities discovered in our products could result in lost revenue or customers, increased service and warranty costs, harm to our reputation and diversion of attention of our management and technical personnel, any of which could significantly harm our business. In addition, we could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention and adversely affect the market's perception of us and our products.

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

We compete in a market characterized by rapid technological change, frequent new product introductions, evolving industry standards and changing customer needs. We cannot assure you that we will be able to anticipate future market needs or be able to develop new products or product enhancements to meet those needs in a timely manner, or at all. The product development process can be lengthy, and we may experience unforeseen delays in developing new products, product enhancements or technologies. In addition, although we invest a considerable amount of money into our research and development efforts, any new products or product enhancements that we develop may not achieve widespread market acceptance. As competition increases in the storage industry and the IT industry in general, it may become even more difficult for us to stay abreast of technological changes or develop new technologies or introduce new products as quickly as our competitors, many of which have substantially greater financial, technical and engineering resources than we do. Additionally, risks associated with the introduction of new products or product enhancements include difficulty in predicting customer needs or preferences, transitioning existing products to incorporate new technologies, the capability of our suppliers to deliver high-quality components required by such new products or product enhancements in a timely fashion, and unknown defects in such new products or product enhancements. If we are unable to keep pace with rapid industry, technological or market changes, our business could be harmed.

Our international sales and operations introduce risks that can harm our business.

In fiscal year 2010 and the three months ended September 30, 2010, we derived approximately 45% and 34%, respectively, of our revenue from customers outside the U.S., and we expect to continue to expand our international operations. We have personnel in the U.S., Canada and the U.K. and sales personnel and channel partners worldwide. We expect to continue to hire additional personnel and add channel partners worldwide, and as a result may need to expand our existing international facilities

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and establish additional international subsidiaries and offices. Our international operations could subject us to a variety of risks, including:

      increased exposure to foreign currency exchange rate risk;

      the potential inability to attract, hire and retain qualified management and other personnel in our international offices;

      the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

      difficulties in enforcing contracts, collecting accounts receivable and managing longer payment cycles, especially in emerging markets;

      tariffs and trade barriers and other regulatory or contractual provisions limiting our ability to sell or develop our products in certain foreign markets;

      export controls, especially for encryption technology; and

      reduced protection for intellectual property rights in some countries.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales.

Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some we may work with, may not be subject to these prohibitions. While we maintain policies that require compliance with these rules, we cannot assure you that our employees, agents or other business partners will not engage in such conduct for which we might be held responsible. If our employees, agents or other business partners are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

If we fail to manage future growth effectively, our business could be harmed.

In recent years, we have experienced growth in the size and scope of our business, and if that growth continues, it will continue to place significant demands on our management, infrastructure and other resources. We have also expanded the geographic scope of our business, establishing operations in Canada as a result of our acquisition of AESign Evertrust Inc. in March 2005 and establishing and managing our reseller networks in China and Japan.

We expect to continue to expand in select international markets. Continued growth in the size and scope, including the geographic scope, of our business operations will require substantial management attention with respect to:

      recruiting, hiring, integrating and retaining highly skilled and motivated individuals;

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      managing increasingly dispersed geographic locations and facilities; and

      establishing an integrated information technology infrastructure; and establishing company-wide systems, processes and procedures.

We intend to rely on third parties to provide some of these services for us. For example, we have contracted with a third party to administer our human resources training, compensation benefit management and compliance activities. If any of these third-party providers are unable to adequately provide the support for which we have retained them, we could be unable to find a suitable replacement service provider or be subject to regulatory actions related to our compliance activities. Our business could be harmed if we are not successful in effectively managing any future growth.

If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.

The Sarbanes-Oxley Act of 2002 requires, among other things, that we establish and maintain adequate disclosure controls and procedures and internal control over financial reporting. In connection with the audit of our financial statements for the fiscal year 2007, material weaknesses in our internal control over financial reporting were noted. Subsequent to that audit, we increased the size of our finance organization by hiring additional technical personnel, implemented new controls and improved processes and no material weaknesses were noted in the audit of our financial statements for fiscal years 2008, 2009 and 2010. We cannot provide assurance that we will not have material weaknesses in the future, which could cause us to be unable to timely report financial information, cause the market price of our stock to decline or subject us to investigations or litigation by regulatory authorities or other persons or entities.

As a public company we will be required to assess our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act and file periodic reports with the SEC. If we are unable to comply with these requirements in a timely manner, or if material weaknesses or significant deficiencies persist, the market price of our stock could decline and we could be subject to sanctions or regulatory investigations, which could harm our business.

Commencing with our fiscal year 2012, we must perform an assessment of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expenses and expend significant management efforts. Prior to this offering, we have never been required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner, particularly if material weaknesses or significant deficiencies persist. In addition, SEC rules require that, as a public company following completion of this offering, we file periodic reports containing our financial statements within a specified time following the completion of quarterly and annual periods. If we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act or the SEC reporting requirements in a timely manner, or if we or our independent registered public accounting firm continue to note or identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange upon which our common stock is listed, the SEC or other regulatory authorities, which would require additional financial and management resources and increase our operating expenses.

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If our third-party providers of on-site product support fail to adequately support the end users of our products, our reputation and business could be harmed.

We rely primarily on Eastman Kodak Company, or Kodak, and on other service providers, in various geographic locations, to provide on-site support for our products. Since Kodak and our other service providers work directly with the end users of our products for their on-site support needs, we have limited contact with our end users that require on-site support. If our end users are not satisfied with the support that they receive from these service providers, our end users may become dissatisfied with our products and purchase products from our competitors in the future.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our products include technology that subjects us to export control laws that limit where and to whom we sell our products. In addition, various countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our products or could limit our end users' ability to deploy our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our existing and new products in international markets, prevent end users with international operations from deploying our products throughout their global systems, or in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import laws, shift in the enforcement or scope of existing laws, or change in the countries, persons or technologies targeted by such laws, could decrease our ability to export or sell our products outside of the United States.

A decrease in government spending on the storage market could adversely affect our revenue and financial results.

Sales to government entities have recently contributed to our revenue. Future revenue from government entities is unpredictable and subject to shifts in government spending patterns. Government agencies are subject to budgetary processes and expenditure constraints that could lead to delays or decreased capital expenditures in information technology spending. If the government or individual agencies within the government reduce or shift their capital spending patterns, our revenues and financial results may be adversely affected.

If we are unable to protect our intellectual property rights, our competitive position could be harmed and we could be required to incur significant expenses to enforce our rights.

We depend on our ability to protect our proprietary information and technology. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. Despite our efforts, the steps we have taken to protect our intellectual property rights may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, particularly outside of the U.S. Further, with respect to patent rights, we do not know whether any of our pending patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims, and even if any patent is issued, it may be contested, circumvented or invalidated over the course of our business. Moreover, the rights granted under our issued patents or patents that may be issued in the future may not provide us with proprietary protection or competitive advantages, and competitors may be able to develop similar or superior technologies to our own now or in the future. Protecting against the unauthorized use of our proprietary rights can be expensive and difficult. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. This litigation could result in substantial costs and diversion of management resources, either of which could harm our business. Furthermore, many of our current and potential competitors have the ability

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to dedicate substantially greater resources to enforce their intellectual property rights than us. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Claims by others that we infringe their intellectual property rights could harm our business.

The storage industry is characterized by a large number of patents and frequent patent litigation. We believe it is common in our industry for competitors or other parties to assert infringement claims, particularly as new products are introduced. Therefore, we may in the future be contacted by third parties suggesting that we seek a license to certain of their intellectual property rights that they may believe we are infringing upon. We expect that infringement claims against us may increase as the number of products and competitors in our market increases and overlaps occur. In addition, as a publicly traded company, we believe that we will face a higher risk of being the subject of intellectual property infringement claims. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment against us could also include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms, or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful. Any of these events could seriously harm our business. Third parties may also assert infringement claims against our customers, channel partners and authorized service providers. Because we generally indemnify our customers, suppliers, channel partners and authorized service providers if our products infringe upon the proprietary rights of third parties, any such claims could require us to initiate or defend protracted and costly litigation on their behalf, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages on behalf of our customers, channel partners and authorized service providers.

If we are unable to obtain the rights necessary to use or continue to use third-party intellectual property in our products, our business could be harmed.

Certain of our products include intellectual property owned by third parties. From time to time we may be required to renegotiate with these third parties, or negotiate with other third parties, to include their technology in our existing products, in new versions of our existing products or in new products. We may not be able to negotiate or renegotiate licenses on reasonable terms on a timely basis, or at all. If we are unable to obtain the rights necessary to use or continue to use third-party intellectual property in our products, we may not be able to sell the affected products, we could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our current or future products. Any of these issues, if they occur, could harm our business.

Our use of open source software could impose limitations on our ability to develop or ship our products.

We incorporate open source software into our products. The terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that these licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to market our products. In such event, we could be required to seek licenses from third parties to continue offering our products, make generally available, in source code form, proprietary code that links to certain open source modules, re-engineer our products, discontinue the sale of our products if re-engineering could not be accomplished on a cost-effective and timely basis, or become subject to other consequences, any of which could adversely affect our business.

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We may seek to expand our business through acquisitions of, or investments in, other companies, each of which could divert management's attention, be viewed negatively, lead to integration problems, disrupt our business, increase our expenses, reduce our cash, cause dilution to our stockholders or otherwise harm our business.

In the future, we may seek to acquire additional companies or assets that we believe may enhance our product offerings or market position. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we complete acquisitions, these transactions may be viewed negatively by our customers, financial markets or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from these businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities and increase our expenses. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to intangible assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business.

The issuance of new accounting standards or future interpretations of existing accounting standards could adversely affect our operating results.

We prepare our financial statements to conform to accounting principles generally accepted in the U.S. A change in those principles could have a significant effect on our reported results and might affect our reporting of transactions completed before a change is announced. Generally accepted accounting principles in the U.S. are issued by and are subject to interpretation by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, or AICPA, the SEC, and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. The regulatory bodies listed above continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales practices and business arrangements applicable to us. The issuance of new accounting standards or future interpretations of existing accounting standards, or changes in our business practices could result in future changes in our revenue recognition or other accounting policies that could have a material adverse effect on our results of operations.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to compliance efforts.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, The Dodd-Frank Act and proposed rules relating to conflict minerals, as well as rules subsequently implemented by the SEC and NASDAQ, impose additional requirements on public companies, including enhanced corporate governance practices. For example, NASDAQ listing requirements require that listed companies satisfy certain corporate governance requirements relating to independent directors, audit committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of business conduct. Our management and other personnel will need to devote a substantial amount of time to comply with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we incurred approximately $5.1 million of costs in preparing for this offering through June 30, 2010 that we would not have incurred if we remained private. These rules and regulations could also make it more difficult for us to

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attract and retain qualified persons to serve on our board of directors and board committees or as executive officers.

Our future success depends on our ability to attract and retain key personnel, and our failure to do so could harm our ability to grow our business.

Our success highly depends upon the performance of our senior management and key accounting and finance, technical and sales personnel. Our management and employees can terminate their employment at any time, and the loss of the services of one or more of our executive officers or other key employees could harm our business. Our success also is substantially dependent upon our ability to attract additional personnel for all areas of our organization, particularly in our finance, sales, and research and development departments. Our dependence on attracting and retaining qualified personnel is particularly significant as we attempt to grow our organization. Competition for qualified personnel in our industry and in the finance area is intense, and we may not be successful in attracting and retaining such personnel on a timely basis, on competitive terms, or at all. If we are unable to attract and retain the necessary technical, sales and other personnel on a cost-effective basis, our business could be harmed.

We are subject to laws and regulations governing the environment and may incur substantial environmental regulation costs, which could harm our operating results.

We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. These laws and regulations have been enacted in several jurisdictions in which we sell our products, including various European Union, or EU, member countries. For example, the EU enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, or RoHS, and the Waste Electrical and Electronic Equipment directives. RoHS regulates the use of certain substances, including lead, in certain products, including hard drives. Similar legislation may be enacted in other locations where we sell our products. We will need to ensure that we comply with these laws and regulations as they are enacted, and that our component suppliers also comply with these laws and regulations.

If we or our component suppliers fail to comply with the legislation, our customers may refuse or be unable to purchase our products, or we could incur penalties or other costs, any of which could harm our business. In addition, in connection with our compliance with these environmental laws and regulations, we could incur substantial costs and be subject to disruptions to our operations and logistics. Furthermore, if we were found to be in violation of these laws, we could be subject to governmental fines and liability to our customers. If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenses in connection with a violation of these laws, our business could suffer.

If we need additional capital in the future, it may not be available on favorable terms, or at all, which could adversely impact our business.

We have historically relied on outside financing to fund our operations, capital expenditures and expansion. However, we may require additional capital from equity or debt financing in the future to fund our operations, or respond to competitive pressures or strategic opportunities. We may not be able to secure additional financing on favorable terms, or at all. The terms of additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into or exercisable for equity, our existing stockholders could suffer significant dilution in their percentage ownership of our

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company, and any new securities we issue could have rights, preferences or privileges senior to those of existing or future holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain necessary financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

Interruption or failure of our information technology and communications systems or other interruptions in our operations or those of our suppliers, manufacturers and channel partners could impair our ability to operate our business, which could harm our operating results.

Our systems, facilities and operations and those of our suppliers, manufacturers, channel partners and other supply chain participants are vulnerable to damage or interruption from earthquakes, pandemics, work stoppages, floods, fires, terrorist attacks, power losses, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm these systems. If any of these events were to occur, our ability to operate our business could be seriously impaired. In addition, we may not have adequate insurance to cover our losses resulting from natural disasters or other significant business interruptions. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.

Risks Related to the Offering

We cannot assure you that a market will develop for our common stock or what the market price of our common stock will be.

Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business. As a result of these and other factors, the price of our common stock may decline, and you could lose some or all of your investment.

The price of our common stock may be volatile and the value of your investment could decline.

The stock market in general, and the market for technology stocks in particular, have been experiencing high levels of volatility. The trading price of our common stock following this offering may fluctuate substantially. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

      price and volume fluctuations in the overall stock market from time to time;

      significant volatility in the market price and trading volume of technology companies;

      actual or anticipated changes in our results of operations or fluctuations in our operating results;

      actual or anticipated changes in the expectations of investors or securities analysts;

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      actual or anticipated developments in our competitors' businesses or the competitive landscape generally;

      litigation involving us, our industry or both;

      regulatory developments in the U.S., foreign countries or both;

      economic conditions and trends in our industry;

      major catastrophic events;

      sales of large blocks of our stock; or

      departures of key personnel.

In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management's attention and resources from our business.

Future sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that these sales may occur, the market price of our common stock could decline. Based on shares outstanding on September 30, 2010, upon the completion of this offering, assuming no outstanding options or warrants are exercised prior to the completion of this offering, we will have approximately                    shares of common stock outstanding. All of the shares offered under this prospectus will be freely tradable without restriction or further registration under the federal securities laws, unless purchased by our affiliates. The remaining shares of our common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements. These remaining shares will generally become available for sale in the public market as follows:

      shares not subject to a lock-up or market standoff agreement with Piper Jaffray & Co. or with us will be eligible for immediate sale upon the completion of this offering;

      no restricted shares will be eligible for immediate sale upon the completion of this offering;

      beginning 181 days after the date of this prospectus, subject to extension, 2,670,498 shares will be tradable under Rule 144(b)(1), and 8,918,738 shares will be tradable, subject to the limitations on shares held by affiliates under Rule 144(b)(2); and

      beginning one year and two years after the date of this prospectus, 88,581 and 88,583 IPO Bonus Shares, respectively, will vest and be tradable, subject to the limitations on shares held by affiliates under Rule 144(b)(2).

Furthermore, following this offering, certain holders of our common stock, including common stock issued upon conversion of our preferred stock and issued upon exercise of warrants or options for common stock will be entitled to rights with respect to the registration of a total of 12,120,893 shares under the Securities Act. For a description of these rights, see the section of this prospectus entitled

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"Description of Capital Stock—Registration Rights." If we register their shares of common stock following the expiration of the lock-up agreements, these stockholders can immediately sell those shares in the public market.

Following this offering, we intend to register on a registration statement on Form S-8 up to approximately 1,955,495 shares of common stock that may be issued upon exercise of outstanding stock options granted under our 2001 stock plan, 214,627 shares of our common stock that may be issued upon the vesting of RSUs granted under our 2001 stock plan, 565,474 shares of our common stock that may be issued upon exercise of outstanding stock options granted outside of our equity incentive plans, 246,038 shares of common stock that are authorized for future issuance or grant under our 2010 equity incentive plan, 193,045 shares of common stock that are authorized for future issuance or grant under our 2010 employee stock purchase plan, such plans to be effective upon the completion of this offering, and the                IPO Bonus Shares. To the extent we register these shares they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above and, with respect to affiliates, Rule 144(b)(2).

In addition, 202,884 shares subject to outstanding stock options are not eligible for registration on Form S-8. All of these shares will be tradable six months from the date of exercise of the options, subject to the limitations on shares sold by affiliates under Rule 144(b)(2).

If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

The trading market for our common stock will rely in part on the availability of research and reports that third-party industry or financial analysts publish about us. If analysts cover us and then one or more of the analysts who cover us downgrade our stock, our stock price may decline. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause the liquidity of our stock and our stock price to decline.

Concentration of ownership among our existing directors, executive officers, and principal stockholders may prevent new investors from influencing significant corporate decisions.

Upon closing of this offering, assuming the underwriters' option to purchase additional shares is not exercised, based upon beneficial ownership as of December 31, 2010, our current directors, executive officers, holders of more than 5% of our common stock, including Fonds de solidarité des travailleurs du Québec (F.T.Q.), MFP Partners, L.P., the funds affiliated with RRE Ventures and VantagePoint Venture Partners, and their respective affiliates will, in the aggregate, beneficially own approximately 56% of our outstanding common stock. As a result, these stockholders may be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant influence over our management and policies. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of our company or otherwise discourage a potential acquirer from attempting to obtain control of our company, which in turn could reduce the price of our common stock. In addition, these stockholders, some of whom have representatives sitting on our board of directors, could use their voting influence to maintain our existing management and directors in office, delay or prevent changes of control of our company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

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We have broad discretion in the use of the net proceeds from this offering.

We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. We will have broad discretion in the application of the net proceeds, including using the net proceeds for any of the purposes described in the section of this prospectus entitled "Use of Proceeds." Accordingly, you will have to rely upon the judgment of our board and management with respect to the use of the proceeds, with only limited information concerning their specific intentions. We may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. Our failure to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

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

We have never declared or paid any cash dividends on our common stock. We intend to retain any earnings to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future. In addition, our loan agreement prohibits the payment of cash dividends without the lender's consent. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution in the pro forma as adjusted net tangible book value per share after giving effect to this offering of $         per share as of September 30, 2010, based on an assumed initial public offering price of $          per share, which is the midpoint of the range set forth on the cover page of this prospectus, because the price that you pay will be substantially greater than the pro forma as adjusted net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. You will experience additional dilution upon exercise of warrants, upon exercise of options to purchase common stock under our equity incentive plans, if we issue restricted stock to our employees under our equity incentive plans or if we otherwise issue additional shares of our common stock.

Our charter documents and Delaware law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.

Upon the completion of this offering, provisions of our restated certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

      prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;

      limit who may call a special meeting of stockholders;

      provide our board of directors with the ability to designate the terms of and issue a new series of preferred stock without stockholder approval;

      require the approval of two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or repeal certain provisions of our certificate of incorporation;

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      allow a majority of the authorized number of directors to adopt, amend or repeal our bylaws without stockholder approval;

      do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors; and

      set limitations on the removal of directors.

In addition, Section 203 of the Delaware General Corporation Law generally limits our ability to engage in any business combination with certain persons who own 15% or more of our outstanding voting stock or any of our associates or affiliates who at any time in the past three years have owned 15% or more of our outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

See the section of this prospectus entitled "Description of Capital Stock—Anti-takeover Provisions" for a more detailed description of these provisions.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus, particularly in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," contains forward-looking statements that are subject to substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including, but not limited to, statements regarding our future financial position, statements regarding our business strategy, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," or "potential," the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section entitled "Risk Factors" and elsewhere in this prospectus. We qualify all of our forward-looking statements by these cautionary statements.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the events described in the section entitled "Risk Factors" and elsewhere in this prospectus could have a material adverse effect on our business, results of operations and financial condition.

You should not rely upon forward-looking statements as predictions of future events. We cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

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

Industry and market data used throughout this prospectus were obtained through surveys and studies conducted by third parties, and industry and general publications. The information contained in the section of this prospectus entitled "Business—Industry Background" is based on studies, analyses and surveys prepared by the Enterprise Strategy Group and IDC which we believe were based on reasonable assumptions. We have not independently verified any of the data from third-party sources nor have we ascertained any underlying economic assumptions relied upon therein. Estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading "Risk Factors."

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USE OF PROCEEDS

We estimate that we will receive net proceeds of $          million from our sale of the                    shares of common stock offered by us in this offering, based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions, estimated offering expenses payable by us and assuming the issuance of IPO Bonus Shares. We will not receive any proceeds from the sale of shares by the selling stockholder. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds from the over-allotment option will be approximately $        million. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds to us from this offering by approximately $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to create a public market for our common stock and facilitate our future access to the public equity markets. We currently anticipate that we will use the net proceeds received by us from this offering for working capital and other general corporate purposes. In addition, we may use a portion of the proceeds of this offering for potential acquisitions of complementary businesses, technologies or other assets. We have no current agreements or commitments with respect to any such acquisitions.

We currently have no specific plans for the use of the net proceeds to us from this offering. The amounts and timing of our actual expenditures will depend on numerous factors, including the amount of cash used in or generated by our operations, sales and marketing activities and competitive pressures. We may find it necessary or advisable to use our net proceeds for other purposes, and we will have broad discretion in the application of our net proceeds.

Pending the uses described above, we intend to invest the net proceeds to us from this offering in short-term, interest-bearing, investment-grade securities. We cannot predict whether the net proceeds will yield a favorable return.


DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Our loan agreement prohibits the payment of cash dividends without the lender's consent.

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CAPITALIZATION

The following table sets forth our cash and capitalization as of September 30, 2010:

      on an actual basis;

      on a pro forma basis to reflect upon the completion of this offering: (1) the conversion of all outstanding shares of preferred stock into 6,516,176 shares of our common stock; and (2) the exchange of all outstanding exchangeable stock of our Canadian subsidiary into 464,283 shares of our common stock; and

      on a pro forma as adjusted basis to reflect the sale of the shares of our common stock offered by us at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and the issuance of the IPO Bonus Shares based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, we will incur an expense in the amount of $        million related to the vested portion of the awards on the date of this prospectus, resulting in an increase in pro forma as adjusted accumulated deficit. We will pay the bonus in cash of $        million representing the amount of the recipients' tax liability, and issue                 shares valued at $        million of which 177,164 shares will be unvested and remain subject to forfeiture. The total value of the award is $          million, with $        million to be recognized as expense over the remaining service period of two years.

You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes, each included elsewhere in this prospectus.

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  As of September 30, 2010  
 
  Actual   Pro Forma   Pro Forma
As Adjusted(1)
 
 
  (unaudited, in thousands, except share and per share data)
 

Cash and cash equivalents

  $ 10,366   $ 10,366   $              
               

Notes payable

  $ 2,829   $ 2,829   $ 2,829  
               

Total redeemable convertible preferred stock, $0.001 par value: 11,059,019 shares authorized, 6,516,176 shares issued and outstanding, actual; no shares authorized or issued and outstanding, pro forma and pro forma as adjusted

  $ 27,429   $   $  

Stockholders' equity (deficit):

                   

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

             

Series B preferred stock, $0.001 par value: 1 share authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

             

Common stock, $0.001 par value, 20,369,550 shares authorized, 4,404,169 shares issued and outstanding, actual; 11,384,628 shares issued and outstanding, pro forma; 100,000,000 shares authorized, and                      shares issued and outstanding, pro forma as adjusted

    4     11           

Exchangeable stock in wholly owned subsidiary, no par value, 464,283 shares authorized, issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

    3,033          

Additional paid-in capital

    20,341     50,796                       

Notes receivable from stockholders

    (38 )   (38 )   (38 )

Accumulated other comprehensive loss

    (2,933 )   (2,933 )   (2,933 )

Accumulated deficit

    (32,169 )   (32,169 )   (41,796 )
               
 

Total stockholders' equity (deficit)

    (11,762 )   15,667                  
               
   

Total capitalization

  $ 15,667   $ 15,667   $              
               

(1)
Each $1.00 increase or decrease in the assumed initial public offering price of $           per share would increase or decrease, respectively, the amount of cash and cash equivalents, additional paid-in capital and total stockholders' equity on a pro forma as adjusted basis, by approximately $        million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

The information in the table above excludes:

      2,723,853 shares issuable upon exercise of options outstanding as of September 30, 2010, at a weighted average exercise price of $6.75 per share, including 403,570 option shares that are subject to call options held by us, exercisable as of September 30, 2010 at $9.79 per share;

      115,800 shares issuable upon exercise of options granted, at a weighted average exercise price of $7.80 per share, and 85,000 RSUs granted between October 1, 2010 and December 31, 2010;

      292,318 shares issuable upon exercise of warrants outstanding as of September 30, 2010, at a weighted average exercise price of $8.03 per share; and

      246,038 shares reserved for future issuance under our 2001 stock plan as of September 30, 2010 to be transferred into our 2010 equity incentive plan and 193,045 shares reserved for issuance under our 2010 employee stock purchase plan, such plans to be effective upon completion of this offering.

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DILUTION

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

As of September 30, 2010, we had a pro forma net tangible book value of $15.7 million, or $1.38 per share of common stock outstanding. Net tangible book value per share is equal to our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of outstanding shares of our common stock. The pro forma net tangible book value of our common stock represents net tangible book value adjusted to give effect, upon completion of this offering, to: (1) the conversion of all outstanding shares of convertible preferred stock into common stock, and (2) the exchange of all outstanding exchangeable stock of our Canadian subsidiary into 464,283 shares of our common stock. The pro forma as adjusted net tangible book value of our common stock represents pro forma net tangible book value as further adjusted to give effect to our application of the net proceeds of this offering and the issuance of the IPO Bonus Shares to certain executive officers resulting in expense of $     million related to the vested portion of the awards on the date of this prospectus. The expense is based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus. We will pay the bonus in cash of $        million representing the amount of the recipients' tax liability, and issue approximately                shares valued at $        million of which 177,164 shares will be unvested and remain subject to forfeiture. The total value of the award is $          million with $        million to be recognized as expense over the remaining service period of two years.

Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and pro forma as adjusted net tangible book value per share of our common stock immediately after the completion of this offering. After giving effect to the sale of                    shares of common stock offered by us under this prospectus at an assumed initial public offering price of $           per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us and the issuance of the IPO Bonus Shares, our pro forma as adjusted net tangible book value as of September 30, 2010 would have been approximately $          million, or approximately $         per share of common stock. This represents an immediate increase in pro forma net tangible book value of $         per share to our existing stockholders and an immediate dilution of $         per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share

      $              
 

Pro forma net tangible book value per share as of September 30, 2010

 
$1.38
       
 

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

 
         
       
             

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

       
         
 
           

Dilution per share to new investors in this offering

     
$

         
 
           

Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, respectively, our pro forma as adjusted net tangible book value per share after

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giving effect to this offering by $         per share and correspondingly decrease or increase the dilution per share to new investors in this offering by $         per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

The following table shows, as of September 30, 2010, on the pro forma basis described above, the number of shares of common stock owned by, the total consideration paid by and the average price paid per share by existing stockholders and by new investors purchasing common stock in this offering at an assumed initial public offering price of           per share, which is the midpoint of the range set forth on the cover page of this prospectus, and before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 
  Shares Purchased   Total Consideration(1)    
 
 
  Average
Price Per
Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders

    11,268,628          % $ 48,504,000          % $ 4.30  

New investors

                                                                           
                         
 

Total

                         100.0 % $                      100.0 %      
                         


(1)
Includes approximately $4.9 million of consideration from the issuance of shares of common stock and exchangeable stock in connection with our prior acquisitions. Also includes                IPO Bonus Shares for which no cash consideration will be paid. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease, respectively, the total consideration paid by new investors and total consideration paid by all stockholders by $        million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

If the underwriters exercise their over-allotment option in full, our pro forma as adjusted net tangible book value per share as of September 30, 2010 would be $         , representing an immediate increase in pro forma net tangible book value per share attributable to new investors in this offering of $          to our existing stockholders and an immediate dilution per share to new investors in this offering of $         . If the underwriters' over-allotment option is exercised in full, our existing stockholders would own    % and new investors would own    % of the total number of shares of our common stock outstanding after this offering.

The information in the table above excludes:

      2,723,853 shares issuable upon exercise of options outstanding as of September 30, 2010, at a weighted average exercise price of $6.75 per share, including 403,570 shares subject to options that are subject to call options held by us, exercisable as of September 30, 2010 at $9.79 per share;

      115,800 shares issuable upon exercise of options granted, at a weighted average exercise price of $7.80 per share, and 85,000 RSUs granted between October 1, 2010 and December 31, 2010;

      292,318 shares issuable upon exercise of warrants outstanding as of September 30, 2010, at a weighted average exercise price of $8.03 per share; and

      246,038 shares reserved for future issuance under our 2001 stock plan as of September 30, 2010 to be transferred into our 2010 equity incentive plan and 193,045 shares reserved for future issuance under our 2010 employee stock purchase plan, such plans to be effective upon the completion of this offering.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following tables summarize our selected consolidated financial data. The selected consolidated statements of operations data for the fiscal years ended June 30, 2008, 2009 and 2010, and the selected consolidated balance sheet data as of June 30, 2009 and 2010, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of June 30, 2006, 2007 and 2008 and the selected consolidated statement of operations for the year ended June 30, 2006 and 2007 have been derived from our audited consolidated financial statements, which are not included in this prospectus. The selected consolidated statements of operations data for the three months ended September 30, 2009 and 2010, and the selected consolidated balance sheet data as of September 30, 2010 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all adjustments that management considers necessary for the fair presentation of the financial information set forth in those financial statements. You should read this data together with our consolidated financial statements and related notes to those statements included elsewhere in this prospectus and the information under "Management's

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Discussion and Analysis of Financial Condition and Results of Operations." Our historical results are not necessarily indicative of the results to be expected in any future period.

 
  Year Ended June 30,   Three Months Ended
September 30,
 
 
  2006   2007   2008   2009   2010   2009   2010  
 
   
   
   
   
   
  (unaudited)
 
 
  (in thousands, except per share data)
 

Consolidated Statement of Operations Data:

                                           

Revenue

  $ 42,799   $ 49,774   $ 62,676   $ 60,895   $ 68,924   $ 16,715   $ 19,281  

Cost of revenue(1)

    34,631     35,750     40,754     35,544     41,196     9,667     10,589  
                               
 

Gross profit

    8,168     14,024     21,922     25,351     27,728     7,048     8,692  

Operating expenses:

                                           
 

Research and development(1)

    3,854     3,938     5,364     5,316     6,467     1,526     1,694  
 

Sales and marketing(1)

    5,889     8,055     10,444     11,112     15,176     3,415     4,237  
 

General and administrative(1)

    3,546     3,114     6,289     4,678     5,076     1,194     1,424  
 

Postponed public offering costs

            3,447     449              
                               
   

Total operating expenses

    13,289     15,107     25,544     21,555     26,719     6,135     7,356  
                               

Income (loss) from operations

    (5,121 )   (1,083 )   (3,622 )   3,796     1,009     913     1,337  

Other income (expense):

                                           
 

Interest expense

    (799 )   (1,453 )   (2,018 )   (700 )   (694 )   (42 )   (230 )
 

Foreign currency transaction gain (loss)

    (227 )   (449 )   166     402     311     567     292  
 

Other income, (expense) net

    15     870     303     288     281     6     (57 )
 

Loss on extinguishment and modification of debt

        (1,058 )   (197 )                
                               
   

Total other income (expense)

    (1,011 )   (2,090 )   (1,746 )   (10 )   (102 )   531     5  
                               

Income (loss) before income taxes

    (6,132 )   (3,173 )   (5,368 )   3,786     907     1,444     1,342  

Income tax benefit (expense)

    542     148     35     (279 )   (308 )   (113 )   455  
                               

Net income (loss)

  $ (5,590 ) $ (3,025 ) $ (5,333 ) $ 3,507   $ 599   $ 1,331   $ 1,797  
                               

Net income (loss) per common share, basic(2)

  $ (1.25 ) $ (0.61 ) $ (1.09 ) $ 0.23   $ 0.00   $ 0.15   $ 0.25  
                               

Net income (loss) per common share, diluted(2)

  $ (1.25 ) $ (0.61 ) $ (1.09 ) $ 0.22   $ 0.00   $ 0.12   $ 0.16  
                               
   

Shares used in computing net income (loss) per common share, basic

    4,482     4,923     4,910     4,827     4,858     4,847     4,868  
   

Shares used in computing net income (loss) per common share, diluted

   
4,482
   
4,923
   
4,910
   
5,154
   
4,858
   
11,453
   
11,474
 
   

Pro forma net income per common share, basic and diluted (unaudited)(2)

                         
$

0.05
       
$

0.16
 
                                         
   

Shares used in computing pro forma net income per common share, basic (unaudited)

                            11,374           11,384  
   

Shares used in computing pro forma net income per common share, diluted (unaudited)

                           
11,763
         
11,474
 

(Footnotes on following page)

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

   
  Year Ended June 30,   Three Months Ended
September 30,
 
   
  2006   2007   2008   2009   2010   2009   2010  
   
   
   
   
   
   
  (unaudited)
 
   
  (in thousands)
 
 

Cost of revenue

  $ (3 ) $ 2   $ 16   $ 18   $ 79   $ 3   $ 36  
 

Research and development

    (57 )   43     103     19     255     23     99  
 

Sales and marketing

    (440 )   826     1,099     (15 )   417     96     252  
 

General and administrative

    (157 )   115     2,255     315     657     148     237  
                                 
   

Total stock-based compensation expense (credit)

  $ (657 ) $ 986   $ 3,473   $ 337   $ 1,408   $ 270   $ 624  
                                 
(2)
See note 1 to our consolidated financial statements for a description of the method used to compute basic and diluted net income (loss) per common share and pro forma basic and diluted net income (loss) per common share, which gives effect to the 10.5-for-1 reverse split of our outstanding common stock, Series A and C preferred stock and exchangeable shares effected in March 2010 and in the case of pro forma basic and diluted net income per common share, the issuance of the IPO Bonus Shares to certain executive officers resulting in expense of $        million related to the vested portion of the awards on the date of this prospectus. The expense is based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus. We will pay the bonus in cash of $        million, representing the recipients' tax withholdings, and issue approximately                shares valued at $        million, of which 177,164 shares will be unvested and remain subject to forfeiture. The total value of the award is $          million, with $        million to be recognized as expense over the remaining service period of two years.

   
  As of June 30,   As of September 30,  
   
  2006   2007   2008   2009   2010   2010  
   
   
   
   
   
   
  (unaudited)
 
   
  (in thousands)
 
 

Consolidated Balance Sheet Data:

                                     
 

Cash and cash equivalents

  $ 587   $ 10,157   $ 8,500   $ 9,092   $ 9,687   $ 10,366  
 

Working capital

    4,268     12,820     9,761     12,840     18,106     20,686  
 

Total assets

    18,588     25,734     29,110     28,857     34,323     38,404  
 

Notes payable, excluding long-term portion

    2,186     2,534     2,554     3,000     10      
 

Notes payable, long-term

    5,643     2,916     10     10     2,744     2,829  
 

Total redeemable convertible preferred stock

    15,431     27,429     27,429     27,429     27,429     27,429  
 

Total stockholders' deficit

    (15,501 )   (17,499 )   (18,629 )   (15,314 )   (14,408 )   (11,762 )

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those previously discussed above in the section entitled "Risk Factors." We report results on a fiscal year ending June 30.

Overview

We are a leading provider of disk-based storage systems that enable mid-sized organizations to store digital information. We sell three principal storage products: The Beast, The Boy and Assureon. We sell our products exclusively through our channel partners, including VARs, OEMs and systems integrators, to mid-sized organizations across all industries. We believe our channel partner strategy allows us to reach a larger number of prospective customers more effectively than if we were to sell directly. Our internal sales and marketing personnel support these channel partners in their selling efforts. Our channel partners generally perform installation and implementation services for the organizations that use our systems. We typically provide ongoing customer support, although we typically rely on third parties to provide on-site support services.

Acquisition of Evertrust

In March 2005, we acquired AESign Evertrust Inc., or Evertrust, a Canadian developer of digital archiving software, for approximately $5.0 million, comprised of cash consideration of approximately $1.3 million, acquisition costs of $316,000, 200,917 shares of our common stock and 342,103 shares of exchangeable stock of our wholly owned Canadian subsidiary, which are exchangeable for an equivalent number of shares of our common stock.

In addition, in November 2007, we issued to the sellers of Evertrust an additional 71,754 shares of our common stock and 122,180 shares of exchangeable stock as consideration of certain employees' contributions to the combined operations subsequent to the acquisition. This additional consideration, valued at $1.3 million, was recorded as general and administrative expense in our consolidated statement of operations for fiscal year 2008.

Sources of Revenue

Revenue primarily consists of sales of our storage systems, net of allowances for returns. We also derive revenue from support services, although historically, support revenue has accounted for less than 10% of our revenue. Channel partners buy our products directly from us, and then sell the products to their end customers and to a much lesser extent other partners, either as a stand-alone product or as part of a larger system implementation. In fiscal years 2008, 2009 and 2010 and the three months ended September 30, 2009 and 2010, no single customer accounted for greater than 10% of our revenue. Our top 10 customers accounted for 33%, 32%, 33% and 47% of our revenue in fiscal years 2008, 2009 and 2010 and the three months ended September 30, 2010, respectively. Revenue from customers outside the U.S. was approximately 33%, 35%, 45% and 34% of our revenue in fiscal years 2008, 2009 and 2010 and the three months ended September 30, 2010, respectively.

Our future revenue will depend significantly on the continued increases in sales of our storage systems. Our future growth also depends on our ability to develop and introduce new products and

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enhancements to our existing products in response to market trends, changing customer requirements and market acceptance of those products.

Cost of Revenue and Gross Margin

Cost of revenue consists primarily of the costs of components we purchase from our contract manufacturers and suppliers, personnel costs, depreciation, facilities and other overhead expenses, freight, warranty costs, payments to third-party support providers and provision for excess inventory.

In general, gross margin on our systems that include Assureon software is greater than gross margin on our other products. However, our gross margin is primarily affected by our ability to reduce hardware component costs faster than the decline in average product prices, which has been a trend in our industry. We will need to monitor and manage these factors successfully in order to increase gross margins and our profitability.

Operating Expenses

Our operating expenses consist of research and development expenses, sales and marketing expenses, and general and administrative expenses. Our operating expenses have increased in recent periods. This growth has primarily been driven by increased stock-based compensation expenses, increased headcount in research and development and sales and marketing, and increased costs associated with preparing to be a public company. We expect to incur additional general and administrative expenses as a public company. In addition, we expect to incur additional cash and non-cash sales and marketing and general and administrative expense in the quarter in which our initial public offering is completed as a result of the issuance of the IPO Bonus Shares immediately prior to the completion of this offering, including payment of applicable withholding taxes. Based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, we expect additional expenses related to the IPO Bonus Shares to be approximately $     million, in the quarter in which they are issued. The total value of the award is $    million with $    million to be recognized as expense over the remaining service period of two years. See note 5 to our consolidated financial statements.

Research and development.    Research and development expenses primarily consist of personnel costs, including stock-based compensation, and to a lesser extent, development costs, such as outside engineering costs, prototype costs and test equipment, depreciation, and facilities and other overhead expenses. Research and development expenses are recognized when incurred. We intend to continue to invest in research and development efforts because we believe they are essential to maintaining and improving our competitive position. Accordingly, we expect research and development expenses will increase in absolute dollars. In March 2010, we received approval from the Canadian province of Quebec for refundable tax credits on eligible research and development expenditures. The credits were applicable effective July 1, 2008 and are paid as part of the annual income tax refund. Since the credits are based on eligible spending and are not dependent on associated taxable income in that jurisdiction, the credits have been recorded as a recovery of research and development expenses in the consolidated statement of operations. The continuing eligibility for these credits is not certain and is determined on an annual basis. We expect to be eligible for this credit through at least fiscal year 2011.

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Sales and marketing.    Sales and marketing expenses primarily consist of personnel costs, including stock-based compensation, sales commissions, travel, advertising, cooperative advertising, and marketing expenses, trade shows, and to a lesser extent, professional services fees, facilities and other overhead expenses. Sales and marketing has historically been our largest operating expense category. We plan to continue investing in development of our sales channel by increasing the number of sales and channel support personnel. We have recently made, and intend to continue to make, an increased investment in our domestic and international marketing activities to help build brand awareness and create sales leads for our channel partners. We expect that sales and marketing expenses will increase in absolute dollars and remain our largest operating expense category.

General and administrative.    General and administrative expenses primarily consist of personnel costs for our finance, executive and human resources functions, including stock-based compensation, professional fees for legal, accounting, tax, compliance and information systems, and to a lesser extent, travel, depreciation, facilities and other overhead expenses, and allowance for bad debts. General and administrative expenses also included amortization of intangible assets, primarily those we acquired in our acquisition of Evertrust. As of June 30, 2008, these intangible assets were fully amortized. We have incurred, and we expect to continue to incur, significant additional accounting, legal and compliance costs as well as additional insurance, investor relations and other costs associated with being a public company and as we grow our company.

Postponed public offering costs.    As of June 30, 2008, we had incurred $3.4 million of costs directly attributable to the planned initial public offering. These costs were being deferred until the completion of the offering. In the quarter ended June 30, 2008, these costs have been charged to expense due to an indefinite postponement of the offering process as a result of overall market conditions. On May 13, 2009, we filed Amendment No. 1 to Form S-1 to update the previously filed registration statement. We incurred $449,000 of costs directly attributable to the amended filing. These costs were charged to expense as incurred due to the indefinite postponement of the offering process. As of June 30, 2009, June 30, 2010 and September 30, 2010, we deferred $0, $1.2 million and $1.2 million, respectively, of costs related to the proposed initial public offering.

Other Income (Expense)

Other income (expense) primarily consists of interest expense, derivative gains and losses, foreign currency transaction gains and losses, other income and net losses on the extinguishment or modification of debt.

Income Taxes

Through fiscal year 2008, income tax benefit results from foreign research and development tax credits related to our development activities in the U.K. and Canada. We realized these tax credits in cash. For the years ended June 30, 2009 and 2010, we recorded income tax expense primarily due to the suspension of net operating loss carryforwards in the State of California and U.S. federal alternative minimum tax. For the three months ended September 30, 2010, we recorded an income tax benefit of $684,000 from the reversal of valuation allowances related to the deferred tax assets in the U.K. tax jurisdiction. This benefit was offset by income tax expense primarily related to our current quarter earnings in the U.S. federal, state and U.K. tax jurisdictions.

As of June 30, 2010, we had net operating loss carryforwards for U.S. federal, California, U.K. and Canada tax jurisdictions of $1.9 million, $3.4 million, $2.0 million and $3.7 million, respectively, which are available to offset future taxable income, if any. Realization of deferred tax assets depends upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, as of September 30, 2010, we have offset all net deferred tax assets in the U.S. federal, California and

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Canada tax jurisdictions by a valuation allowance. If the recent profitability trends in the U.S. federal and California jurisdictions continue, it is reasonably possible that all or a portion of the valuation allowances in those jurisdictions, which amount to $4.3 million as of September 30, 2010, could be released in the near term and the effect could be material to our financial statements. If not utilized, our federal net operating loss carryforwards will begin to expire in fiscal year 2022, and California net operating loss carryforwards begin to expire in fiscal year 2015. Foreign net operating loss carryforwards begin to expire in fiscal year 2011. Deductions related to our California net operating loss carryforwards have been suspended at least until fiscal year 2013. While not currently subject to annual limitation, the utilization of these carryforwards may become subject to annual limitation because of provisions in the Internal Revenue Code of 1986, as amended, or IRC, that are applicable if we experience an "ownership change," which may occur, for example, as the result of this offering or other issuances of stock.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. Although we believe that our judgments and estimates are reasonable under the circumstances, actual results may differ from those estimates.

We believe the following to be our critical accounting policies because they are important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain:

      Revenue recognition;

      Stock-based compensation;

      Valuation of common stock;

      Warranty reserve;

      Inventory valuation; and

      Allowance for doubtful accounts.

If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See the section of this prospectus entitled "Risk Factors" for certain matters that may affect our future financial condition or results of operations.

Revenue Recognition

We derive revenue principally from sales of hardware systems and software systems. We sell our products primarily through indirect channels including resellers, OEM partners and systems integrators. We recognize revenue from product sales when persuasive evidence of an arrangement exists, the product has shipped or delivery has occurred (depending on when title passes), the sales price is fixed or determinable and free of contingencies and significant uncertainties, and collection is reasonably assured. Our fee is considered fixed or determinable at the execution of an agreement,

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based on specific products and quantities to be delivered at specified prices. Our agreements generally do not include acceptance provisions. To the extent that our agreements contain such terms, we recognize revenue once the acceptance provisions have been met. We establish a reserve for sales returns based on historical experience. We assess the ability to collect from channel partners based on a number of factors, including creditworthiness and past transaction history. If the channel partner is not deemed creditworthy, we defer all revenue from the arrangement until payment is received and all other revenue recognition criteria have been met. Shipping charges are generally paid by our channel partners. However, shipping charges, when billed to channel partners, are recorded as revenue and the related shipping costs are included in cost of revenue.

We monitor and analyze the accuracy of sales returns estimates by reviewing actual returns and adjusting the reserves for future expectations to determine the adequacy of our current and future reserves. If actual future returns and allowances differ from past experience and expectations, additional allowances may be required.

We have arrangements with our channel partners to reimburse them for cooperative marketing costs meeting specified criteria. In accordance with ASC 605-50, Revenue Recognition, Customer Payments and Incentives (ASC 605-50), we record the reimbursements to the channel partners meeting specified criteria in sales and marketing expense. We record as a reduction of revenue those marketing costs not meeting these criteria.

Hardware Systems Sales.    Hardware systems sales primarily consist of the sales of our storage systems, including our Boy and Beast lines of products. Software is incidental to the functionality of these products. Accordingly, we apply the provisions of Staff Accounting Bulletin, or SAB No. 104, Revenue Recognition, and all related interpretations.

Hardware system sales may also include sales of premium and extended warranties. For multiple element arrangements that include hardware systems and premium and extended warranties, we recognize revenue in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (ASC 605-25). We have determined that we have objective and reliable evidence of fair value, in accordance with ASC 605-25, to allocate revenue separately to hardware and hardware warranties. Accordingly, revenue for hardware components is generally recognized upon shipment, which is when the risk of loss is transferred to the buyer. In accordance with ASC 605-20 Revenue Recognition, Services (ASC 605-20), we recognize revenue relating to our premium and extended hardware warranties ratably over the premium and extended warranty period, which is generally one to three years.

Software Systems Sales.    Software systems sales consist of the sales of our Assureon product where software has been determined to be essential to the functionality of the product. Accordingly, we account for revenue from Assureon in accordance with the ASC 985-605 Software, Revenue Recognition (ASC 985-605).

Our software systems sales are comprised of multiple elements, which include hardware, software and software support. Software support includes telephone support, bug fixes, and unspecified software upgrades and enhancements, on a when-and-if available basis, over the term of the support period. Software support is considered PCS under ASC 985-605. Prior to the fourth quarter of fiscal year 2008, we did not have VSOE of fair value for our PCS. Accordingly, in these instances, we recognized all of the revenue elements from software systems sales ratably over the support period, which is typically one year. Effective in the fourth quarter of fiscal year 2008, we established VSOE of fair value for PCS on certain arrangements based on a stated renewal rate for PCS services which we

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determined are substantive, and in these instances we allocated revenue to the delivered elements using the residual method.

Revenue Recognition for Arrangements with Multiple Deliverables.    In October 2009, an accounting standards update was issued, which removes tangible products containing software components and non-software components that function together to deliver the product's essential functionality from the scope of industry specific software revenue guidance. At the same time, an accounting standards update was issued amending the accounting standard for multiple element revenue arrangements which are not in the scope of industry specific software revenue recognition guidance to provide updated guidance to separate the deliverables and to measure and allocate arrangement consideration to one or more units of accounting. The new guidance eliminates the use of the residual method and requires an entity to allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method. In contrast to the residual method, this has the effect of allocating any inherent discount in a multiple element arrangement to each of the deliverables on a proportionate basis. The guidance also expands the disclosure requirements to require an entity to provide both qualitative and quantitative information about the significant judgments made in applying the revised guidance and subsequent changes in those judgments that may significantly affect the timing or amount of revenue recognition. The revised revenue recognition accounting standards are effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We adopted the amended accounting guidance at the beginning of our first quarter of fiscal 2011 on prospective basis for applicable revenue transactions originating or materially modified after June 30, 2010.

We enter into revenue arrangements that may contain multiple deliverables of our product and support offerings. For example, a customer may purchase a storage system and PCS. This arrangement would consist of multiple elements with the hardware and software products delivered in one reporting period and the PCS delivered across multiple reporting periods.

Starting in fiscal 2011, when a sales arrangement contains multiple elements and software and non-software components function together to deliver the tangible products' essential functionality, we allocate revenue to each element based on the relative selling price of each element. Under this approach, the selling price of a deliverable is determined by using a selling price hierarchy which requires the use of VSOE of fair value if available, third party evidence (TPE) if VSOE is not available, estimated selling price (ESP) if neither VSOE nor TPE is available. VSOE is based on the price charged when the element is sold separately. Although we often sell storage systems on a stand-alone basis, the availability of VSOE data is limited due to the wide variety of configurations offered. In determining VSOE, we require that a substantial majority of the selling prices fall within a reasonable price range. VSOE is widely available for PCS resulting from annual renewals. TPE of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers. However, consistent and reliable pricing data on a comparable basis from our competitors is not readily available. Therefore, we concluded that no reliable TPE is available for its products and services. The ESP is established considering multiple factors including, but not limited to, our pricing practices in different geographies and through different sales channels, gross margin objectives, internal costs and competitor pricing strategies.

The adoption of the new accounting guidance resulted in additional revenue of $11,000 for the quarter ended September 30, 2010 as compared to the previous accounting guidance. We do not expect that this change in revenue recognition standards will have a significant effect on revenue in the future periods due to our pricing practices and the existence of VSOE for our PCS. We regularly review VSOE, TPE and ESP and maintain internal controls over the establishment and updates of these estimates.

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Services Revenue.    Services revenue consists of installation services, hardware maintenance and training. Installation services are considered to be essential to the functionality of our products in specific circumstances where the services require specialized skills, alter the product capabilities to function properly in the customer's IT environment, and/or may not be performed by our customers or other vendors. In these transactions, the related product revenue is considered to be contingent until the installation services are complete and the equipment is working as expected, at which time the revenue is recognized for the product, including installation services. When installation services are not considered essential to the functionality of the product as described above, the installation revenue is recognized upon the completion of the installation services due to the short time period over which the services are performed. Hardware maintenance includes the premium and extended warranties discussed above. Training revenue is recognized as the training services are delivered.

Stock-Based Compensation

Prior to July 1, 2006, we accounted for stock option grants in accordance with Accounting Standards in effect at that time which required that compensation expense is recorded for the intrinsic value of options (the difference between the deemed fair value of our common stock and the option exercise price) at the grant date and is amortized ratably over the option's vesting period.

Effective July 1, 2006, we adopted the fair value recognition provisions under ASC 718, Compensation—Stock Compensation (ASC 718), using the prospective transition method, which requires us to apply its provisions only to awards granted, modified, repurchased or cancelled after the adoption date. Under this transition method, our stock-based compensation expense recognized beginning July 1, 2006 is based on (1) the grant-date fair value of stock option awards granted or modified beginning July 1, 2006 and (2) the balance of deferred stock-based compensation related to stock option awards granted prior to July 1, 2006, which was calculated using the intrinsic-value method as previously permitted. We recognize stock-based compensation expense on a straight-line basis over the awards' expected vesting terms. We estimated the grant date fair value of stock-based awards under the provisions of ASC 718 using the Black-Scholes option valuation model with the following weighted average assumptions:

 
  Year Ended June 30,   Three Months
Ended
September 30,
 
 
  2008   2009   2010   2009   2010  

Expected life (years)

    6.1     6.0     6.3     6.3     6.3  

Risk-free interest rate

    4.0 %   2.4 %   2.8 %   3.1 %   2.1 %

Expected volatility

    50.8 %   47.9 %   50.3 %   51.7 %   51.1 %

Expected dividend yield

                     

Valuation of Common Stock

Given the absence of an active market for our common stock prior to this offering, our board of directors determined the fair value of our common stock in connection with our grant of options and stock awards. In periods prior to June 30, 2007, our board of directors made such determinations based on valuation criteria and analyses, the business, financial and venture capital experience of the individual directors, and input from management.

In connection with the preparation of our financial statements in anticipation of a potential initial public offering, valuations were performed to estimate the fair value of our common stock for financial reporting purposes through the use of contemporaneous valuations of our common stock commencing at June 30, 2007.

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Determining the fair value of our common stock requires making complex and subjective judgments. In estimating the fair value of our common stock on a quarterly basis commencing June 30, 2007, we employed a two-step approach that first estimated the fair value of Nexsan as a whole, and then allocated the enterprise value to our common stock. This approach is consistent with the methods outlined in the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

We utilized an income approach and two market approaches to estimate our enterprise value. The income approach consisted of the discounted cash flow method which involved applying appropriate discount rates to estimated future cash flows that are based on forecasts of revenue and costs. These cash flow estimates were consistent with the plans and estimates that management used to manage the business. There is inherent uncertainty in making these estimates. The risks associated with achieving the forecasts were assessed in selecting the appropriate discount rates which ranged from 15.0% to 17.5%. If different discount rates had been used, the valuations would have been different. The market approaches that we used were a comparable public company analysis and a comparable acquisition analysis. The following factors were considered in selecting comparable public companies: whether the company operated in the computer storage device industry; whether its common stock had adequate market capitalization and trading volume, and whether the company had quantifiable financial metrics such as historical and projected growth and level of profitability. For each of the valuations, these companies generally consisted of QLogic, Corp., NetApp, Inc., Brocade Communications, Seagate Technology, Quantum Corp., EMC Corporation, Xyratex Ltd., Compellent, Imation Corp., Adaptec and Dot Hill Systems Corp., with 3ParData, Inc. being added after its initial public offering.

Comparable acquisitions were selected based on acquisitions of companies for between $10 million and $5 billion in the storage industry that were publicly announced after January 1, 2004 until the valuation date and for which purchase price multiples were available. The comparable transaction analysis was not used for valuations subsequent to September 30, 2008 due to the lack of sufficient recent data. Our attempted initial public offering in April 2010 was also taken into account in valuations subsequent to March 31, 2010.

Based on these approaches, we arrived at a high and low range for the total equity value of Nexsan and concluded on the average as the estimated enterprise value.

We then utilized the option pricing method to allocate the total equity value to the various securities that comprised our capital structure. Application of this method involved making estimates of the anticipated timing of a potential liquidity event such as a sale of Nexsan or an initial public offering. The anticipated timing and likelihood of each scenario was based on the plans of our board of directors and management as of the respective valuation date. Under each scenario, the enterprise value of Nexsan was allocated to preferred and common shares using the option pricing method under which values are assigned to each class of our preferred stock and the common stock is viewed as an option on the remaining equity value.

The options were then valued using the Black-Scholes option pricing model which required estimates of the volatility of our equity securities. Estimating volatility of the share price of a privately held company is complex because there is no readily available market price for the shares. The volatility of the stock was based on available information on volatility of stocks of publicly traded companies in the industry. The volatility of the comparable public companies varied between 30% and 83% over this period. Had we used different estimates of volatility, the allocations between preferred and common shares would have been different.

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The option pricing method resulted in an estimated fair value per share of our common stock that was reduced for lack of marketability by a discount which ranged from 10.0% to 12.5% in the valuations through March 31, 2009. The discounts for lack of marketability at each valuation date during this period were determined by considering restricted stock and studies of pre-initial public offering company valuations. The lack of marketability discount increased to 15% for the June 30, 2009 valuation and to 17.5% for the September 30, 2009 valuation. These increases were due primarily to the change in our estimate as to the time to liquidity as of those valuation dates. Given the continued economic downturn, we believed that the date of an initial public offering was becoming more distant, and increased the estimated time to liquidity. As a result of the improved market conditions in late December 2009 and the anticipated initial public offering in the first half of 2010, we reduced the time to liquidity to three months and reduced the marketability discount to 5%. For the March 31, 2010 valuation, due to the anticipated initial public offering in April 2010, we reduced the estimated time to liquidity to one-week and reduced the marketability discount to 1%. Given the indefinite postponement of our attempted initial public offering in April 2010, for the June 30, 2010 valuation, we increased the estimated time to liquidity to a range of five to nine months and increased the marketability discount to 10%. For the September 30, 2010 valuation, we increased the estimated time to liquidity to nine months and the marketability discount remained at 10%. Our attempted initial public offering in April 2010 was also taken into account into the option pricing model. We arrived at a high and low range for the value of the options and concluded on the average as the estimated value of the options.

The exercise price for the stock options granted in January 2010 differed from the per share prices reflected in the initial public offering price range on the cover page of this prospectus filed on February 26, 2010 primarily because of the uncertainty as to the consummation of this offering that existed in January 2010. Estimates as to the proposed offering price range were based on the assumption that the offering would occur later in the first quarter of calendar year 2010 at the earliest, or two months after the grants. We also believed that market conditions remained volatile, particularly for recent initial public offerings. The exercise price for options granted in February 2010 had a slightly higher exercise price, but still differed from the proposed initial public offering price range. Because this offering was closer to being consummated, Nexsan determined the grant date fair value per share of the February 2010 options assuming a fair market value of $11.00 per share, the midpoint of the price range on our prospectus filed on February 26, 2010, in our option pricing model for the quarter ending March 31, 2010.

Due to a decline in the fair value of our common stock, outstanding options to purchase shares of our common stock that were granted in January and February 2010 had exercise prices higher than the then-current fair value of our common stock. In July 2010, offers to replace options to purchase a total of 385,712 shares, which were originally granted in January and February 2010 with exercise prices of $9.14 and $9.35 per share, were accepted and the options were exchanged for 296,346 options repriced to an exercise price of $7.04 per share, the fair value of our common stock at the time our board of directors authorized the repricing. The number of shares subject to the new option was reduced to a number of shares multiplied by a fraction, the numerator of which was $7.04, and the denominator of which was the exercise price per share of the option exchanged. Options to purchase a total of 296,346 shares were issued in replacement of the exchanged options. The replacement options are being accounted for as a modification to the original option grants under ASC 718, and did not result in any incremental stock-based compensation expense.

Our enterprise value declined from June 30, 2008 to March 31, 2009. This decline was caused primarily by two factors—a general decline in the valuation multiples within the computer storage device industry and a decline in our latest twelve months or LTM and projected operating results.

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The computer storage device industry was heavily affected by the adverse economic conditions in 2008 and 2009. As the slowdown in the economy accelerated, companies began to execute restructuring initiatives and reduced or delayed headcount and capital expenditures. These factors, in conjunction with a general slowdown in the U.S. and global economy, led to declining stock prices of the comparable companies which in turn compressed valuation multiples for the industry.

In addition, from the quarter ended June 30, 2008 to the quarter ended June 30, 2009, our LTM revenue declined from approximately $62.6 million to $60.9 million. Similarly, our projected results that were used in the income approach also declined. Our enterprise value for the valuation as of December 31, 2009 increased, as a result of the increased likelihood of an initial public offering and increases in the valuation multiples of the comparable companies. Our enterprise value for the valuation as of September 30, 2010 decreased as a result of the increased estimated time to liquidity and a decrease in the valuation multiples of the comparable companies.

For the quarter ended December 31, 2007, stock-based compensation expense also included a $1.3 million non-recurring charge related to the issuance of stock to former shareholders of Evertrust in consideration of certain employees' contributions to the combined operations subsequent to the acquisition.

The following table sets forth certain information regarding our stock option grants commencing July 1, 2007 through December 31, 2010:

Grant date
  Number of Shares
Subject to
Options Granted
  Exercise Price
per Share
  Fair Market Value
per Share
  Intrinsic Value
per Share
 

September 2007

    81,225   $ 6.45   $ 6.51   $ 0.06  

October 2007

    9,521     6.83     6.83      

November 2007

    1,904     6.93     6.93      

December 2007

    7,618     6.93     7.04     0.11  

January 2008(1)

    352,380     9.13     7.04      

April 2008

    39,514     7.56     7.56      

September 2008

    77,732     7.46     7.04      

October 2008

    204,244     6.93     6.83      

December 2008

    277,079     6.93     6.62      

February 2009

   
48,266
   
6.51
   
6.51
   
 

April 2009

    32,140     6.51     6.51      

July 2009

    69,516     6.93     6.93      

October 2009

    19,997     7.04     7.04      

November 2009

    90,909     7.35     7.35      

January 2010

    461,904     9.14     9.14      

February 2010

    270,454     9.35     11.00     1.65  

May 2010

    85,807     7.04     7.04      

July 2010(2)

    296,346     7.04     7.04      

July 2010

    64,000     7.00     7.00      

October 2010

    43,800     7.31     7.31      

December 2010

    72,000     8.10     8.10      

(1)
The exercise price per share compounds annually at a rate of 3.23%.
(2)
Represents the repriced replacement options and their exercise price per share.

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All share amounts and values listed in the table above give effect to a 10.5-for-1 reverse stock split effected in March 2010.

As of September 30, 2010, based on an assumed initial public offering price per share of $         , the aggregate intrinsic value of outstanding unvested and vested stock options was $        million and $        million, respectively. In addition, as of September 30, 2010, we had approximately $4.7 million of total unrecognized compensation costs related to unvested stock-based compensation arrangements.

Warranty Reserve

The Boy, the Beast, iSeries and DeDupe SG products come with a three-year warranty. Assureon and DATABeast systems are shipped with a one-year warranty. Warranty reserves are recorded when we recognize revenue and are reflected in cost of revenue. Our estimate of product warranty liability involves many factors, including the number of units shipped, the warranties provided by contract manufacturers or suppliers, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of the recorded product warranty liability and adjust the amounts as necessary. We classify the portion of the product warranty liability that we expect to incur in the next 12 months as a current liability. We classify the portion of the product warranty liability that we expect to incur more than 12 months in the future as a long-term liability.

Inventory Valuation Reserve

Inventories include material and related manufacturing overhead and are stated at the lower of cost or market value, with cost being determined under the average-cost method. Inventory valuation reserves are reflected in cost of revenue and are established to reduce the carrying amounts of our inventories to their net realizable values. Inventory valuation reserves are based on estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. Inherent in our estimates of market value in determining inventory valuation reserves are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory valuation reserves could be required and would be reflected in cost of revenue in the period in which the reserves are taken. Once a reserve is established, it is maintained until the related inventory is sold or scrapped.

Allowance for Doubtful Accounts

We review our allowance for doubtful accounts on an ongoing basis by assessing individual accounts receivable. Risk assessment for these accounts includes historical collections experience with the specific account and with our similarly-situated accounts coupled with other related credit factors that may evidence a risk of default and loss to us. Accordingly, the amount of this allowance will fluctuate based upon changes in revenue levels, collection of specific balances in accounts receivable and estimated changes in channel partner credit quality or likelihood of collection. If the financial condition of our channel partners were to deteriorate, resulting in their inability to make payments, additional allowances may be required. The allowance for doubtful accounts represents management's best estimate, but changes in circumstances, including unforeseen declines in market conditions and collection rates, may result in additional allowances in the future or reductions in allowances due to future recoveries.

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Results of Operations

The following table sets forth selected consolidated statements of operations data as a percentage of revenue for each of the periods indicated:

 
  Year Ended June 30,   Three Months
Ended
September 30,
 
 
  2008   2009   2010   2009   2010  
 
   
   
   
  (unaudited)
 

Revenue

    100 %   100 %   100 %   100 %   100 %

Cost of revenue

    65     58     60     58     55  
                       
 

Gross profit

    35     42     40     42     45  

Operating expenses:

                               
 

Research and development

    9     9     9     9     9  
 

Sales and marketing

    17     18     22     20     22  
 

General and administrative

    10     8     7     7     7  
 

Postponed public offering costs

    5     1     0     0     0  
                       
   

Total operating expenses

    41     35     38     37     38  
                       

Income (loss) from operations

    (6 )   6     2     5     7  

Other income (expense), net

    (3 )   0     0     3     0  
                       

Income (loss) before income taxes

    (9 )   6     1     9     7  

Income tax benefit (expense)

    0     0     0     (1 )   2  
                       

Net income (loss)

    (9 )%   6 %   1 %   8 %   9 %
                       

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the table above.

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenue.    Revenue increased $2.6 million, or 15%, to $19.3 million for the three months ended September 30, 2010, compared to $16.7 million for the three months ended September 30, 2009. Of this increase, $0.9 million was due to sales to new customers and $1.7 million was due to increased sales to existing customers. The increase in revenue was primarily due to a $1.0 million increase in sales of our Boy products, a $0.3 million increase in sales of Assureon systems, a $0.3 million increase in service revenues, and a $1.3 million increase in the sale of various products, none of which we believe was material. We also had a $0.4 million decrease in sales of our Beast products.

Cost of revenue and gross profit.    Cost of revenue increased $922,000, or 10%, to $10.6 million for the three months ended September 30, 2010, compared to $9.7 million for the three months ended September 30, 2009. The increase was due to higher material costs, primarily from the increased sales volumes.

Gross profit increased $1.6 million, or 23%, to $8.7 million for the three months ended September 30, 2010, compared to $7.0 million for the three months ended September 30, 2009. Gross profit as a percentage of revenue improved to 45% for the three months ended September 30, 2010 compared to 42% for the three months ended September 30, 2009. The increase as a percentage of revenue was primarily due to higher selling prices as a result of the introduction of higher capacity controllers and disk drives, primarily on the Beast products.

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    Operating Expenses

Research and development.    Research and development expense increased $168,000, or 11% to $1.7 million for the three months ended September 30, 2010, compared to $1.5 million for the three months ended September 30, 2009. These expenses represented 9% of revenue for both periods. The increased expense was primarily due to an increase in compensation costs of $177,000 from increased headcount and an increase in stock-based compensation expense of $76,000 primarily due to option grants, offset by $105,000 of tax credits from the Canadian province of Quebec for eligible research and development activities. A similar tax credit was not recognized in the prior year period as final approval was received in March 2010.

Sales and marketing.    Sales and marketing expense increased $822,000, or 24%, to $4.2 million for the three months ended September 30, 2010, compared to $3.4 million for the three months ended September 30, 2009. These expenses represented 22% of revenue for the three months ended September 30, 2010 and 20% of revenue for the three months ended September 30, 2009. The increased expense was primarily due to higher compensation costs of $580,000 from increased headcount, higher stock-based compensation of $156,000 primarily due to option grants, higher professional fees of $94,000 primarily related to legal services and recruiting, and higher travel and entertainment expenses of $87,000 from increased headcount, offset by lower commissions paid to outside representatives of $120,000.

General and administrative.    General and administrative expense increased $230,000, or 19%, to $1.4 million for the three months ended September 30, 2010, compared to $1.2 million for the three months ended September 30, 2009. These expenses represented 7% of revenue for both periods. The increase was primarily due to higher stock-based compensation expense of $89,000 primarily due to option grants, higher compensation costs of $66,000 primarily from increased headcount, and higher bad debt expense related to the $225,000 recovery of previously uncollectible accounts in the prior year period, offset by lower professional fees of $145,000 primarily due to the timing of services.

Other income.    Other income, net, decreased $526,000 to $5,000 for the three months ended September 30, 2010, compared to $531,000 for the three months ended September 30, 2009. The decrease was primarily due to a reduction in net foreign currency transaction gains of $275,000, offset by an increase in interest expense of $188,000 primarily related to the note payable from Series C preferred shareholder issued in September 2009.

Income tax benefit (expense).    Income tax benefit was $455,000 for the three months ended September 30, 2010 consisting of $684,000 of benefit from the reversal of the valuation allowance on the deferred tax assets in the U.K. jurisdiction, offset by $229,000 of current period tax expense, primarily in the U.S. federal and State of California tax jurisdictions. As of June 30, 2010, we believed it was more likely than not that we would not realize the benefits of our tax deductible differences due to a history of net operating losses and the uncertainty of future operating profitability and taxable income. Therefore, a valuation allowance was recorded in an amount equal to the total gross deferred tax assets for all tax jurisdictions. As of September 30, 2010, we have increased our projections of operating profitability and taxable income, primarily due to actual and projected increases in gross profit coupled with recent cumulative profitability over several periods, which now justify the release of the valuation allowance on the deferred tax assets in the U.K. tax jurisdiction in the quarter ended September 30, 2010. We still believe it is more likely than not that we will not realize the benefits of the deductible differences in the U.S. federal, California and Canadian tax jurisdictions, based upon the history of net operating losses and the uncertainty of future operating profitability and taxable income. For the three months ended September 30, 2009, income tax expense was $113,000, primarily consisting of income tax payable to the State of California. The State of California has suspended the

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utilization of net operating loss carryforwards at least until fiscal year 2013, which has resulted in increased tax expense in that jurisdiction for both periods.

Fiscal Year 2010 Compared to Fiscal Year 2009

Revenue.    Revenue increased $8.0 million, or 13%, to $68.9 million for fiscal year 2010 compared to $60.9 million for fiscal year 2009. Of this increase, $7.7 million was due to sales to new customers and $0.3 million was due to increased sales to existing customers. The increase in revenue was primarily due to a $6.1 million increase in sales of our Beast and Assureon products, an increase in service revenues of $0.9 million, and a $3.3 million increase in the sale of various products, none of which we believe was material. We also had a $2.3 million decrease in sales of our Boy product.

Cost of revenue and gross profit.    Cost of revenue increased $5.7 million, or 16%, to $41.2 million for fiscal year 2010, compared to $35.5 million for fiscal year 2009. The increase was due to higher material costs, primarily from the increased sales volumes.

Gross profit increased $2.4 million, or 9%, to $27.7 million for fiscal year 2010, compared to $25.4 million for fiscal year 2009. Gross profit as a percentage of revenue declined to 40% for fiscal year 2010 compared to 42% for fiscal year 2009. The decrease as a percentage of revenue was primarily due to lower selling prices as a result of the global economic climate, primarily on the Boy product.

    Operating Expenses

Research and development.    Research and development expense increased $1.2 million, or 22%, to $6.5 million for fiscal year 2010 compared to $5.3 million for fiscal year 2009. These expenses represented 9% for both fiscal years. The increased expense was primarily due to increases in compensation costs of $904,000 from increased headcount, product development costs of $261,000 due to new projects, stock-based compensation expense of $236,000, and professional fees of $179,000 primarily related to recruiting and legal services offset by $669,000 of tax credits from the Canadian province of Quebec for eligible research and development activities. Due to the timing of the application process and the uncertainty as to the ultimate approval, the tax credits recorded in fiscal year 2010 related to a two-year period consisting of fiscal year 2009 and fiscal year 2010. We expect to realize tax credits in fiscal year 2011 at approximately the same annualized amount.

Sales and marketing.    Sales and marketing expense increased $4.1 million, or 37%, to $15.2 million for fiscal year 2010 compared to $11.1 million for fiscal year 2009. These expenses represented 22% and 18% of revenue for fiscal years 2010 and 2009, respectively. The increased expense was primarily due to sales and marketing headcount additions in the prior and current fiscal years, resulting in increased compensation costs of $2.6 million. The remaining increase in fiscal year 2010 was primarily due to higher expenses in stock-based compensation of $432,000, advertising and marketing programs of $372,000, travel and entertainment of $180,000 from increased headcount, professional fees of $137,000, primarily related to recruiting, depreciation and amortization of $135,000, and temporary labor of $124,000.

General and administrative.    General and administrative expense increased $398,000, or 9%, to $5.1 million for fiscal year 2010 compared to $4.7 million for fiscal year 2009. These expenses represented 7% and 8% of revenue for fiscal years 2010 and 2009, respectively. The increase was primarily due to higher stock-based compensation expense of $342,000 and higher compensation costs of $308,000, offset by lower bad debt expenses of $359,000 resulting from the recovery of previously uncollectible accounts.

Other expense.    Other expense, net, increased $92,000 to $102,000 for fiscal year 2010 compared to $10,000 for fiscal year 2009. The increase was primarily due to an increase in net foreign currency transaction losses.

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Income tax benefit (expense).    For fiscal year 2010, income tax expense was $308,000, consisting primarily of income tax payable to U.S. federal and State of California jurisdictions. For fiscal year 2009, income tax expense was $279,000 consisting of income tax payable to U.S. federal, California and U.K. jurisdictions.

Fiscal Year 2009 Compared to Fiscal Year 2008

Revenue.    Revenue decreased $1.8 million, or 3%, to $60.9 million for fiscal year 2009 compared to $62.7 million for fiscal year 2008. Of the decrease, $5.9 million was due to lower sales to existing customers offset by $4.1 million in sales to new customers. The decrease was primarily due to a $3.5 million decrease in our Beast and Boy products as a result of the global economic climate offset by an increase of $1.7 million in our Assureon product.

Cost of revenue and gross profit.    Cost of revenue decreased $5.2 million, or 13%, to $35.5 million for fiscal year 2009, compared to $40.8 million for fiscal year 2008. The decrease was primarily the result of lower material costs.

Gross profit increased $3.4 million, or 16%, to $25.4 million for fiscal year 2009, compared to $21.9 million for fiscal year 2008. Gross profit as a percentage of revenue improved to 42% for fiscal year 2009 compared to 35% for fiscal year 2008. The increase in gross profit as a percentage of revenue was primarily the result of lower material costs.

    Operating Expenses

Research and development.    Research and development expense remained relatively constant at 9% of revenue for both fiscal years. Research and development expenses for fiscal year 2009 were relatively constant in absolute dollars at $5.3 million compared to $5.4 million in fiscal year 2008. Lower compensation costs for engineering personnel of $387,000 due to lower headcount were offset by increased spending for product development of $313,000.

Sales and marketing.    Sales and marketing expense increased $668,000, or 6%, to $11.1 million for fiscal year 2009, compared to $10.4 million for fiscal year 2008. These expenses represented 18% and 17% of revenue for fiscal years 2009 and 2008, respectively. This increase was primarily due to higher commissions paid to third-party sales representatives of $812,000, higher compensation for sales and marketing personnel of $672,000, primarily due to an increase in personnel, including the hiring of our Chief Commercial Officer in November 2008, and increased travel, entertainment and administrative expenses of $182,000, offset by a reduction in stock-based compensation expense of $1.1 million, primarily due to the grant in fiscal year 2008 of fully-vested options in consideration of the cancellation of certain restricted shares.

General and administrative.    General and administrative expense decreased $1.6 million, or 26%, to $4.7 million for fiscal year 2009, compared to $6.3 million for fiscal year 2008. These expenses represented 8% and 10% of revenue in fiscal years 2009 and 2008, respectively. The decrease was due to a $1.9 million decrease in stock-based compensation expense primarily due to $1.3 million of expense in connection with the non-recurring issuance of additional shares of stock in November 2007 to the former shareholders of Evertrust in consideration of certain employees' contributions to the combined operations subsequent to the acquisition and $615,000 due to the grant of fully-vested options in consideration of the cancellation of certain restricted shares which also occurred during fiscal year 2008. Partially offsetting the decrease in stock-based compensation expense were increases in bad debt expense of $284,000 resulting from uncollectible accounts, and compensation of $273,000, primarily for pay increases and new personnel added during fiscal year 2008.

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Other income (expense).    Other expense, net, was $10,000 for fiscal year 2009, a decrease of $1.7 million from fiscal year 2008. The components of other expense in fiscal 2009 were interest expense of $700,000, net foreign currency transaction gains of $402,000, and other income of $288,000. The interest expense primarily related to the convertible bridge debt, including cash interest paid and the amortization of the related beneficial conversion feature. The convertible bridge debt was repaid in March 2009. Net foreign currency transaction gains related to fluctuations in the exchange rates between the pound sterling and the U.S. dollar and between the Canadian dollar and the U.S. dollar. Other income consisted primarily of a gain of $156,000 due to the revaluation of the derivative liability related to the convertible bridge debt repaid in March 2009 and interest income of $76,000 from the investing of excess cash in money market accounts and certificates of deposit. Other expense, net, was $1.7 million for fiscal year 2008, consisting of $2.0 million of interest expense primarily attributable to the amortization of the beneficial conversion feature related to the convertible bridge debt, and a $197,000 loss on the extinguishment and modification of debt, partially offset by $303,000 of other income, primarily due to interest earned on excess cash invested in money market accounts, and net foreign currency transaction gains of $166,000.

Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statement of operations data in dollars and as a percentage of revenue for each of our last nine quarters in the period ended September 30, 2010. The quarterly data presented below has been prepared on a basis consistent with our audited financial statements and include, in the opinion of management, all adjustments, which consist of only normal recurring adjustments, that management considers necessary for the fair presentation of this information. You should read this information together with our consolidated financial statements and related notes included elsewhere in this prospectus. Our quarterly results of operations may fluctuate in the future due to a variety of factors. As a result, comparing our operating

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results on a period-to-period basis may not be meaningful. Our results for these quarterly periods are not necessarily indicative of the results of operations for a full fiscal year or any future period.

 
  Three Months Ended  
 
  Sep. 30,
2008
  Dec. 31,
2008
  Mar. 31,
2009
  Jun. 30,
2009
  Sep. 30,
2009
  Dec. 31,
2009
  Mar. 31,
2010
  Jun. 30,
2010
  Sep. 30,
2010
 
 
  (unaudited, in thousands)
 

Revenue

  $ 16,342   $ 16,156   $ 13,126   $ 15,271   $ 16,715   $ 17,596   $ 16,941   $ 17,672   $ 19,281  

Cost of revenue(1)

    9,814     9,026     7,663     9,041     9,667     10,586     10,272     10,671     10,589  
                                       
 

Gross profit

    6,528     7,130     5,463     6,230     7,048     7,010     6,669     7,001     8,692  

Operating expenses:

                                                       
 

Research and development(1)

    1,295     1,298     1,340     1,383     1,526     1,776     1,447     1,718     1,694  
 

Sales and marketing(1)

    2,538     2,957     2,690     2,927     3,415     4,117     4,002     3,642     4,237  
 

General and administrative(1)

    1,733     1,071     1,055     819     1,194     1,426     1,371     1,085     1,424  
 

Postponed public offering costs

                449                      
                                       
   

Total operating expenses

    5,566     5,326     5,085     5,578     6,135     7,319     6,820     6,445     7,356  
                                       

Income (loss) from operations

    962     1,804     378     652     913     (309 )   (151 )   556     1,337  

Other income (expense), net

    62     437     (253 )   (256 )   531     (461 )   88     (260 )   5  
                                       

Income (loss) before income taxes

    1,024     2,241     125     396     1,444     (770 )   (63 )   296     1,342  

Income tax benefit (expense)

    (134 )   (291 )   366     (220 )   (113 )   (64 )   (4 )   (127 )   455  
                                       

Net income (loss)

  $ 890   $ 1,950   $ 491   $ 176   $ 1,331   $ (834 ) $ (67 ) $ 169   $ 1,797  
                                       

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

 
  Three Months Ended  
 
  Sep. 30,
2008
  Dec. 31,
2008
  Mar. 31,
2009
  Jun. 30,
2009
  Sep. 30,
2009
  Dec. 31,
2009
  Mar. 31,
2010
  Jun. 30,
2010
  Sep. 30,
2010
 
 
  (unaudited, in thousands)
 

Cost of revenue

  $ 0   $ 1   $ 5   $ 12   $ 3   $ 9   $ 30   $ 37   $ 36  

Research and development

    (20 )   (5 )   13     31     23     107     80     45     99  

Sales and marketing

    (179 )   (85 )   58     191     96     721     147     (547 )   252  

General and administrative

    (32 )   14     153     180     148     327     199     (17 )   237  
                                       

Total stock-based compensation expense (credit)

  $ (231 ) $ (75 ) $ 229   $ 414   $ 270   $ 1,164   $ 456   $ (482 ) $ 624  
                                       

 

 
  As a Percentage of Revenue
Three Months Ended
 
 
  Sep. 30,
2008
  Dec. 31,
2008
  Mar. 31,
2009
  Jun. 30,
2009
  Sep. 30,
2009
  Dec. 31,
2009
  Mar. 31,
2010
  Jun. 30,
2010
  Sep. 30,
2010
 
 
  (unaudited)
 

Revenue

    100 %   100 %   100 %   100 %   100 %   100 %   100 %   100 %   100 %

Cost of revenue

    60     56     58     59     58     60     61     60     55  
                                       
 

Gross profit

    40     44     42     41     42     40     39     40     45  

Operating expenses:

                                                       
 

Research and development

    8     8     10     9     9     10     9     10     9  
 

Sales and marketing

    16     18     20     19     20     23     24     21     22  
 

General and administrative

    11     7     8     5     7     8     8     6     7  
 

Postponed public offering costs

                3                      
                                       
   

Total operating expenses

    34     33     39     37     37     42     40     36     38  

Income (loss) from operations

    6     11     3     4     5     (2 )   (1 )   3     7  

Other income (expense), net

    0     3     (2 )   (2 )   3     (3 )   1     (1 )    
                                       

Income (loss) before income taxes

    6     14     1     3     9     (4 )       2     7  

Income tax benefit (expense)

    (1 )   (2 )   3     (1 )   (1 )   (0 )       (1 )   2  
                                       

Net income (loss)

    5 %   12 %   4%     1%     8 %   (5 )%   0 %   1 %   9 %
                                       

Due to rounding to the nearest percent, totals may not equal the sum of the line items in the above table.

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Revenue and gross profit for the quarter ended March 31, 2009 declined 19% and 23%, respectively, primarily due to a decrease in our Beast and Boy products as a result of the global economic climate. Revenue and gross profit largely recovered in the quarter ended June 30, 2009 with the balance of the recovery occurring in the quarter ended September 30, 2009. Revenue and gross profit increased 9% and 24%, respectively, in the quarter ended September 30, 2010, primarily due to increased sales volumes and higher selling prices. Research and development expenses increased 16% in the quarter ended December 31, 2009, primarily due to higher product development expense and higher stock-based compensation expense, and decreased 19% in the quarter ended March 31, 2010, related to a retroactive tax credit for eligible research and development activities. Sales and marketing expenses increased in the quarter ended December 31, 2008 due to increased marketing programs and stock-based compensation expense, in the quarter ended September 30, 2009 due to an increase in sales personnel and marketing programs, and in the quarter ended December 31, 2009 due to an increase in stock-based compensation expense. Sales and marketing expenses for the quarter ended June 30, 2010 declined 9%, reflecting decreases in stock-based compensation expense offset by increases in sales personnel. Sales and marketing expenses for the quarter ended September 30, 2010 increased due to higher stock-based compensation expense. General and administrative expenses for the quarter ended September 30, 2008 included bad debt expense related to uncollectable accounts, which were subsequently recovered in the quarter ended September 30, 2009. The fluctuations in the general and administrative expenses for the quarters ended December 31, 2009, June 30, 2010 and September 30, 2010 reflect changes in stock-based compensation expense resulting from changes in our enterprise valuation. Other income (expense), net, over the periods was impacted by foreign currency transaction gains and losses.

Liquidity and Capital Resources

As of September 30, 2010, our principal sources of liquidity consisted of cash and cash equivalents of $10.4 million and accounts receivable, net, of $13.0 million. We have historically funded our operations primarily through private sales of common stock and preferred stock (approximately $38.4 million in the aggregate) and proceeds from lines of credit and notes payable, and more recently through cash generated from operations.

Our principal uses of cash historically have consisted of the purchase of inventory, payroll and other operating expenses related to the development of new products and purchases of property and equipment.

We have a $5.0 million revolving credit line, which has a borrowing base equal to 80% of eligible accounts receivable. Interest will accrue on any outstanding borrowings at a rate equal to the prime rate plus 1% per annum. Borrowings under this agreement are secured by certain assets, primarily cash, accounts receivable and inventory. The agreement also contains financial covenants requiring us to maintain specified minimum liquidity amounts. As of September 30, 2010, we had no borrowings under this agreement. This agreement expires on July 31, 2011. Based on preliminary discussions with the lender, we expect to renew the agreement with similar terms and conditions at or before its expiration.

We believe that our cash and cash equivalents at September 30, 2010, together with cash flows from our operations, will be sufficient to fund our operating requirements for at least 12 months. However, we may need to raise additional capital or incur indebtedness to continue to fund our operations in the future. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and acquisition and licensing activities. We may enter into agreements relating to potential investments in, or acquisitions of, complementary

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businesses or technologies in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:

 
  Year Ended June 30,   Three Months
Ended
September 30,
 
 
  2008   2009   2010   2009   2010  
 
   
   
   
  (unaudited)
 
 
  (in thousands)
 

Net cash provided by operating activities

    $2,591     $1,150   $ 1,978   $ 1,493   $ 984  

Net cash used in investing activities

    (1,407 )   (178 )   (1,340 )   (221 )   (385 )

Net cash provided by (used in) financing activities

    (2,600 )   5     563     494     (8 )

Cash flows from operating activities

Our cash flows from operating activities are significantly influenced by our cash expenditures to support the growth of our business as we invest in areas such as research and development, sales and marketing and administration. Our operating cash flows are also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, vendor accounts payable and other current assets and liabilities. We procure inventory from our contract manufacturers and suppliers and typically pay them in 30 to 60 days.

Net cash provided by operating activities for the three months ended September 30, 2010 consisted of $2.2 million of net income adjusted for non-cash items. For the period, net income was $1.1 million and non-cash items consisted primarily of $624,000 for stock-based compensation expense and $314,000 of depreciation and amortization expense. Changes in operating assets and liabilities resulted in a net use of cash of $1.2 million, primarily consisting of an increase in trade accounts receivable of $1.9 million due to increased sales volume offset by an increase in accounts payable and accrued expenses of $461,000 mainly resulting from the timing of inventory purchases.

Net cash provided by operating activities for the three months ended September 30, 2009 consisted of $1.8 million of net income adjusted for non-cash items. For the period, net income was $1.3 million and non-cash items consisted primarily of $270,000 for stock-based compensation expense and $234,000 of depreciation and amortization expense. Change in operating assets and liabilities resulted in a net use of cash of $350,000, primarily consisting of increases in accounts receivable and inventories.

Net cash provided by operating activities for fiscal year 2010 consisted of $3.0 million of net income adjusted for non-cash items. For the period, net income was $599,000 and non-cash items primarily consisted of $1.4 million for stock-based compensation expense and $1.0 million of depreciation and amortization expense. Changes in operating assets and liabilities resulted in a net use of cash of $1.1 million, primarily consisting of an increase in inventory of $3.1 million, primarily resulting from the purchase of additional safety stock, an increase in prepaid expenses and other current assets of $2.0 million primarily related to deferred public offering costs, an increase in accounts payable and accrued expenses of $2.1 million primarily due to the timing of inventory purchases, and an increase in deferred revenues of $1.7 million, primarily due to the deferral of service revenue and revenue recognition related to our systems that include Assureon software.

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Net cash provided by operating activities for fiscal year 2009 consisted of $5.0 million of net income adjusted for non-cash items. For the period, net income was $3.5 million partially offset by non-cash items consisting of $881,000 of depreciation and amortization, $446,000 for amortization of discounts related to notes payable, $337,000 of stock compensation expense and $155,000 for gain on revaluation of note conversion features. Changes in operating assets and liabilities resulted in a net use of cash of $3.9 million, primarily consisting of a reduction in inventories for $608,000, an increase in trade accounts receivable of $2.3 million due to the timing of sales, a reduction in accrued expenses of $876,000, primarily due to the payment of accrued interest and entering invoices to accounts payable for public offering costs that were accrued as of June 30, 2008, and a reduction of deferred revenue balances of $1.2 million, primarily due to the revenue recognition related to our systems that include Assureon software.

Net cash provided by operating activities in fiscal year 2008 primarily consisted of a net loss of $5.3 million, largely impacted by the write-off of postponed public offering costs of $3.4 million, offset by non-cash adjustments consisting of $3.5 million for stock-based compensation expense, $1.5 million of gain on revaluation of note conversion features, and $1.1 million of depreciation and amortization expense. Changes in operating assets and liabilities in fiscal 2008 resulted in a net source of cash of $1.6 million, primarily consisting of an increase in accounts payable of $3.9 million due to the timing of inventory purchases, an increase in accrued expenses of $1.6 million due to higher interest, marketing and selling-related accruals, and an increase in deferred revenue of $1.0 million, primarily on our Assureon business, offset by an increase in accounts receivable of $3.1 million associated with the timing of sales within the quarter, and an increase in inventories of $1.6 million due to the timing of purchases.

Cash flows from investing activities

Cash flows from investing activities primarily relate to capital expenditures to support our growth. Our requirements for additional capital expenditures are subject to change depending upon several factors, including our needs based on our changing business and industry and market conditions.

For the three months ended September 30, 2010 and 2009, net cash used in investing activities was $385,000 and $221,000, respectively, consisting of capital expenditures to support our growth. We do not expect any material changes in the rate of capital expenditures during the remainder of fiscal year 2011.

Net cash used in investing activities was $1.3 million, $178,000 and $1.4 million for fiscal years 2010, 2009 and 2008, respectively. Investing activities consisted exclusively of capital expenditures to support our growth, except for fiscal year 2009 which included $500,000 provided by the removal of the minimum cash balance requirement related to our revolving line of credit.

Cash flows from financing activities

Net cash used in financing activities was $8,000 for the three months ended September 30, 2010 primarily related to the payment of notes payable. Net cash provided by financing activities was $494,000 for the three months ended September 30, 2009, primarily consisting of the $3.6 million of proceeds from borrowings on the note payable from a Series C preferred stockholder and the $3.0 million repayment on our then existing revolving line of credit. We also incurred $119,000 of associated fees in connection with the negotiation of the note payable from Series C preferred stockholder.

Net cash provided by (used in) financing activities was $563,000, $5,000, and ($2.6) million in fiscal years 2010, 2009, and 2008, respectively. The primary sources of cash in fiscal year 2010 consisted of

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the $3.6 million of proceeds from borrowings on the note payable from a Series C preferred stockholder, offset by the $3.0 million repayment on the revolving line of credit.

The use of cash in fiscal year 2009 consisted of the repayment of a convertible bridge debt of $3.0 million and borrowings on a revolving line of credit for $3.0 million. The use of cash in fiscal year 2008 consisted of the repayment of a loan payable of $2.6 million.

Contractual Obligations

The following is a summary of our contractual obligations as of June 30, 2010:

 
   
  Payments Due by Period  
 
   
  (in thousands)
 
 
  Total   Less
Than 1
Year
  1 - 3
Years
  3 - 5
Years
  Thereafter  

Operating lease obligations

  $ 1,079   $ 706   $ 373   $   $  

Purchase obligations(1)

    5,700     5,700              

Notes payable(2)

    3,610     10     3,600          
                       
 

Total

  $ 10,389   $ 6,416   $ 3,973   $   $  
                       

(1)
Purchase obligations represent commitments under non-cancelable orders for inventory with our contract manufacturers. As of September 30, 2010, our purchase obligations increased to $6.8 million.
(2)
Excludes debt discounts. We intend to prepay this note using cash flows generated by normal business operations.

We have entered into agreements with certain of our executive officers to award them IPO Bonus Shares immediately prior to the completion of this offering. We expect to incur cash withholding obligations with respect to the IPO Bonus Shares in the quarter in which we complete this offering. Based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, we expect these withholding obligations to be approximately $        million in the aggregate.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements nor do we have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

The majority of our revenue has been denominated in U.S. dollars. Our expenses are generally denominated in the currencies of the countries in which our operations are located. Our operating expenses are incurred where the office or personnel are located. Therefore, our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates in some geographies, particularly the U.K. and Canada. For example, we recorded foreign currency transaction gains of $292,000 for the three months ended September 30, 2010. Fluctuations in currency exchange rates could harm our business in the future. The effect of an immediate 10% adverse change in exchange rates could have the effect of increasing our operating expenses. To date, the foreign currency exchange rate effect on our cash has not been significant, and we have not entered into any foreign currency hedging contracts although we may do so in the future.

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Interest Rate Sensitivity

As of September 30, 2010, we had cash and cash equivalents of $10.4 million, which were held in deposit accounts. Accordingly, if overall interest rates had fallen by 10% in fiscal year 2010, our interest income would not have been materially affected. We expect to hold cash equivalents following the completion of this offering, and we expect that continued low interest rates will cause our future interest income to be relatively modest.

At September 30, 2010, we had no debt outstanding that bore variable rate interest.

Recent Accounting Pronouncements

In September 2006, the FASB issued guidance which defines fair value, establishes a framework for measuring fair value, and expands fair value measurement disclosures. In February 2008, the FASB issued additional guidance which deferred the effective date of the fair value guidance to fiscal years beginning after November 15, 2008 for nonfinancial assets and liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually. We fully adopted the fair value guidance effective for fiscal year 2010, and the adoption had no impact on our consolidated results of operations or financial position.

In December 2007, the FASB issued a new standard which establishes principles and requirements for how an acquirer in a business combination: (i) recognizes and measures in its consolidated financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination. The new standard is to be applied prospectively to business combinations for which the acquisition date is on or after an entity's fiscal year that begins after December 15, 2008, which is our fiscal year beginning July 1, 2009. We will apply the provisions of this standard to any future acquisition.

In March 2008, the FASB issued a new standard which updates guidance regarding disclosure requirements for derivative instruments and hedging activities. It responds to constituents' concerns that prior guidance does not provide adequate information about how derivative and hedging activities affect an entity's financial position, financial performance, and cash flows. The disclosure of fair values of derivative instruments and their gains and losses in a tabular format, as required by the new standard should provide a more complete picture of the location in an entity's financial statements of both the derivative positions existing at period-end and the effect of using derivatives during the reporting period. We adopted the new standard as of July 1, 2009, which was the required effective date.

In June 2008, the FASB provided guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock for purposes of determining the appropriate accounting treatment. This guidance was effective for fiscal years beginning after December 15, 2008. As a result of the adoption of the new guidance on July 1, 2009, a warrant for common stock issued in connection with a note payable that has a down round anti-dilution provision was determined to not be indexed to our stock and therefore required classification as a liability. On July 1, 2009, we recorded a warrant liability of $163,000 and recorded a cumulative effect of change in accounting principle of $57,000 as a reduction of accumulated deficit representing the decline in fair value between the warrant issuance date and the adoption date. Additionally, warrants subject to this guidance are adjusted to fair value at the end of each reporting period.

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In June 2009, the FASB issued Accounting Standards Update (ASU) 2009-01, Topic 105, Generally Accepted Accounting Principles—Amendments based on Statement of Financial Accounting Standards No. 168—The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (ASC 105), to establish the sole source of authoritative U.S. generally accepted accounting principles recognized by the FASB, excluding Securities and Exchange Commission (SEC) guidance, to be applied by nongovernmental entities. The guidance in ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted ASC 105 as of July 1, 2009, which was the required effective date.

The FASB issued ASU 2009-12, Fair Value Measurements and Disclosures: Investments in Certain Entities that Calculate Net Asset Value per Share, to amend ASC 820, which permits a reporting entity, as a practical expedient, to measure fair value of an investment on the basis of net asset value per share of the investment (or its equivalent) if the net asset value of the investment is calculated in a manner consistent with the measurement principles of ASC 946 as of the reporting entity's measurement date, including measurement of all or substantially all of the underlying investments of the investee in accordance with ASC 820. We adopted these changes effective for fiscal year 2010, and the adoption had no impact on our consolidated results of operations or financial position.

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force to amend certain guidance in ASC 605-25. The amended guidance in ASC 605-25 (1) modifies the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item(s) and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price.

The FASB also issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force, to amend the scope of arrangements under ASC 985-605 to exclude tangible products containing software components and non-software components that function together to deliver a product's essential functionality.

The amended guidance in ASC 605-25 and ASC 985-605 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application and retrospective application permitted. We adopted the amended guidance in ASC 985-605, concurrently with the amended guidance in ASC 605-25, beginning on July 1, 2010. The adoption of the amended guidance did not have a material impact on our consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB that are adopted by us as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

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BUSINESS

Overview

We are a leading provider of disk-based storage systems that enable mid-sized organizations to store digital information. Our products are optimized for the efficient storage and protection of unstructured data, the type of digital information that mid-sized organizations are producing in increasingly greater quantities. Unstructured data generally refers to data that is fixed and not subject to frequent change, such as digital records, e-mail, medical images, scientific data and video. Our systems are specifically designed for the growing data storage needs of mid-sized organizations by providing a small footprint, low power use, scalability, ease of use, and cost-effectiveness while delivering the enterprise-class reliability, features and performance that are sought by these mid-sized organizations. Our storage systems incorporate innovative technologies, such as advanced power management and capacity optimization, to significantly lower the initial and ongoing cost of storage for our customers compared to typical storage solutions. We sell our products through our channel partners, including VARs, OEMs, and systems integrators, which enables us to leverage an extensive worldwide channel network to access our highly fragmented, broad and diverse target customer base and to cost-effectively scale our business. Our storage systems are currently being utilized by organizations worldwide, including traditional small- and medium-sized organizations, branch offices of large enterprises, federal, state and local government agencies and some large organizations with unique unstructured data storage needs.

Storage systems for unstructured data are principally optimized for capacity where factors such as storage density are typically more important than performance. International Data Corporation (IDC) estimates that the market for capacity-optimized storage disk systems will grow from $8.2 billion in 2009 to approximately $20.0 billion in 2014, representing a compound annual growth rate, or CAGR, of 19.6%. Source: IDC, Worldwide Enterprise Storage Systems 2010-2014 Forecast: Recovery, Efficiency, and Digitization Shaping Customer Requirements for Storage Systems, Doc # 223234, May 2010. We believe mid-sized organizations are increasingly using applications that create unstructured data and, consequently, represent a significant percentage of the market for capacity-optimized storage systems. Our systems target the specific needs of these customers by:

      providing an optimal entry point for mid-sized organizations with a multi-tiered, scalable architecture that can expand with the customers' requirements;

      offering enterprise-class reliability, accessibility, integrity and security of stored data;

      providing industry-leading densities, which reduce the overall storage footprint and the total cost of ownership;

      significantly reducing power consumption and cooling costs per terabyte of storage;

      providing enterprise-class storage features such as multi-tiered storage, multi-protocol storage, high-availability, virtualization and replication, specifically designed for these mid-sized organizations;

      being available through a global channel network oriented to mid-sized organizations worldwide; and

      providing a product that is easy to set up, simple to use and requires little maintenance.

Our storage products are based on a common architecture and, to the extent possible, utilize common components and software. This approach maximizes the leverage from our research and development

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investments while simplifying the management and deployment of our systems for our end users and partners. Our storage systems incorporate a substantial amount of our intellectual property and software, including our own real-time operating system, storage system software, advanced power management software and optional advanced software features, such as file de-duplication, replication and intelligent archiving. Through this approach we offer features typically found in enterprise storage systems scaled to fit the needs of mid-sized organizations. We intend to continue to develop additional storage software functionality that is incorporated into our products to meet the evolving needs of our target customers, mid-sized organizations.

We believe our business model provides us with several competitive advantages. We have a network of over 600 channel partners, including VARs, OEMs, and systems integrators, and to date, we have shipped over 27,000 systems in more than 60 countries. We serve several industry vertical markets including medical, financial, local government, law enforcement, gaming, video and entertainment, scientific and research, museums and archives, transportation and cloud storage.

Industry Background

The Rapid Growth of Unstructured Data in Mid-Sized Organizations

The amount of unstructured data being created, stored and protected on disk-based storage systems by mid-sized organizations is growing rapidly. Unstructured data, including digital records, e-mail, medical images, scientific data and video, is being created faster than data generated from traditional data center applications such as transaction-oriented database applications. Additionally, unstructured data is typically replicated in multiple instances for data protection and stored for longer periods of time. According to IDC, email archiving, data retention for complying with government regulations, and the migration of content stored on old media (such as paper or film) into digital format will be among top drivers of terabyte growth. Source: IDC, Worldwide Enterprise Storage Systems 2010-2014 Forecast: Recovery, Efficiency, and Digitization Shaping Customer Requirements for Storage Systems, Doc # 223234, May 2010. Evolving business practices and regulations are also changing the requirements placed on systems that store and manage unstructured data and are driving the need for readily-available, long-term storage. Additionally, mid-sized organizations are increasingly migrating their long-term storage of information from tape and optical media to disk.

Some of the key growth drivers creating increased amounts of unstructured data in the mid-sized organization market include:

      Increasing number of applications that create unstructured data.  Mid-sized organizations are increasingly using applications that create significant amounts of unstructured data such as e-commerce, electronic design, electronic medical records, imaging, multimedia production and distribution, record digitization and surveillance.

      Evolving business practices.  As organizations migrate from traditional recordkeeping to digital records, they are now retaining key unstructured data for extended and often indefinite timeframes. Spurred by increased regulations and accessibility needs, mid-sized organizations are creating large amounts of unstructured data which needs to be stored securely. For example, local governments are now retaining records in digital form that had previously been kept in paper form, and hospitals are increasingly storing and retrieving digital medical images and patient records.

      Larger-sized and more frequently shared files.  The creation and storage of increasingly larger files associated with medical images, data-intensive documents, high-resolution video

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        and photos, as well as the frequent sharing and re-saving of files, which results in the storage of duplicate data, is accelerating the growth of unstructured data.

      Growing importance of data protection and availability.  Due to their increasing reliance on digital information, mid-sized organizations are facing an increased risk to their operations from data loss or corruption. Mid-sized organizations are compensating for this risk by creating multiple backups of their data further increasing the amount of unstructured data they need to store.

Mid-sized organizations face the particular challenge of implementing storage systems to manage their newly growing amounts of unstructured data which requires greater storage capacity and results in increased system acquisition and management costs. Data growth is taxing organizations in critical areas such as staffing, training, disaster recovery, capacity management, power and cooling, and regulatory compliance. We believe that mid-sized organizations remain underserved by larger enterprise storage vendors, who traditionally have not effectively addressed the needs of the mid-sized organization market in terms of ease of use, total cost of ownership, feature sets and delivery model. Many storage solutions have been designed and priced for larger enterprises with complex storage needs and substantial IT staff; however, many mid-sized organizations do not have the resources to implement and support these larger complex solutions. Also, these organizations are increasingly seeking enterprise-level features such as seamless capacity growth, high-reliability, advanced data protection and ease-of-management that have been optimized and scaled for their specific needs.

Demand by Mid-sized Organizations for New Approaches to Storing and Managing Unstructured Data

Historically, high-cost disk drives optimized for performance, such as Fibre Channel and SCSI drives, have been used to store transaction-oriented database information, while less expensive, low-availability storage systems, such as tape and optical disk were used for long-term storage of unstructured data. Additionally, a significant amount of research and development in the storage industry has focused on improving the speed and performance characteristics for database-related information for large and centralized enterprise data centers. However, as demands have been increasing for the storage of larger amounts of unstructured data, requirements have emerged for more cost-effective, long-term disk storage. Organizations of all sizes are increasingly seeking cost-effective and energy-efficient storage solutions with high-availability that can scale to tackle the substantial growth of unstructured data.

In light of these factors, organizations are changing their approach to the storage and management of unstructured data in a number of ways.

      Adoption of multi-tiered storage.  The introduction of low-cost, capacity-optimized disk drives, such as SATA disk drives, is changing the way organizations store data. More mid-sized organizations are looking for multi-tiered storage, often in one system, in which highly transactional data is stored on more expensive performance optimized drives, such as SSD or SAS, while unstructured data is stored on lower cost drives, such as SATA, that are optimized for capacity. The placement of data on the optimal tier of storage reduces costs of storage media while delivering the appropriate performance characteristics for the business demand.

      Utilization of replication and archiving solutions using disk-based technologies.  In order to obtain greater availability and protection of their unstructured data, organizations are replacing tape and optical-based backup systems with SATA disk-based replication and

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        archiving solutions. Many organizations find it important to replicate data to protect their information from various threats and disasters. Replication helps ensure that an organization will be able to access its data from a secondary source in case of data loss or corruption. The purpose of an archive is to store file-based information in a secure and cost-effective manner for the long-term while enabling the retrieval of specific files more quickly and easily than a tape-based or optical-based archive. The Enterprise Strategy Group estimates that the capacity of external disk storage dedicated to archiving will grow from approximately 9,700 petabytes in 2010 to over 106,800 petabytes in 2015, representing a CAGR of 62%.

      Increasing demand for energy-efficient storage.  Virtually all organizations are increasingly seeking energy-efficient solutions to manage power consumption, reduce operating expenses and respond to environmental and political concerns. As the density of servers, storage and other computing assets has increased, the demand for power, exacerbated by mounting cooling needs resulting from increased power consumption, has begun to outstrip supply. The availability of power has become a significant impediment to the growth of computing capabilities and the cost of power is increasingly impacting IT budgets.

      Increasing demand for capacity-optimized storage.  Mid-sized organizations are increasingly housing disk-based storage systems on-site. This shift has forced these organizations to seek capacity-optimized storage solutions that will fit their space constrained environments. IDC estimates that the market for capacity-optimized storage disk systems will grow from $8.2 billion in 2009 to approximately $20.0 billion in 2014, representing a CAGR of 19.6%. Source: IDC, Worldwide Enterprise Storage Systems 2010-2014 Forecast: Recovery, Efficiency, and Digitization Shaping Customer Requirements for Storage Systems, Doc # 223234, May 2010.

      Increased focus on budgets.  Systems administrators are expected to manage increasing data storage requirements within strict budget constraints. Mid-sized organizations require storage solutions that provide optimal total cost of ownership with minimized upfront capital costs and reduced on-going administration, maintenance and other operating costs.

Limitations of Traditional Solutions for the Mid-Sized Organization Market

Traditional storage systems do not fully meet the needs of the mid-sized organization market for storing unstructured data. In particular, mid-sized organizations face:

      High total cost of ownership of traditional disk-based storage systems.  Traditional disk-based storage systems, most of which were designed for large enterprise use, have not historically been well-suited for the mid-sized organization market due to their high acquisition cost, significant support and maintenance requirements, and ancillary operating costs, including labor, energy and space requirements. Mid-sized organizations require storage solutions that minimize space requirements, have low upfront capital costs and reduce on-going administration, maintenance and other operating costs, which may be more significant than the initial capital outlay.

      Lack of appropriate entry-points, scalability and feature sets for mid-sized organization environments.  Mid-sized organizations have different usage patterns and needs that require different feature sets, capabilities and cost entry points than large enterprises. Unstructured data is typically held in high density storage systems that focus more on

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        capacity optimization and data security than input and output speeds. Until recently the mid-sized organization market was required to either piece together proprietary storage solutions or purchase expensive storage solutions designed for a much higher level of functionality and cost than they needed or could afford. In addition, many of the traditional storage competitors have been reluctant to service this market because they do not want to undermine the pricing of their high-end products, nor do they have the appropriate sales distribution to service the market.

      Shift to paperless systems.  A general shift to paperless systems and changes in the regulatory environment have forced mid-sized organizations to find solutions for these increased unstructured data storage needs. Because of the elimination of a physical hard copy, mid-sized organizations need to create and store redundant digital copies to ensure long-term data protection.

      Issues with tape and optical based solutions.  Due to inefficiencies associated with saving, verifying and retrieving information on tape, tape-based storage has lower recovery rates than disk-based storage. In addition, retrieving information from tape can be a lengthy and cumbersome process, often involving the physical movement of storage media, causing longer data retrieval times and higher costs.

      High energy consumption of traditional disk-based storage systems.  Traditional disk-based storage systems typically have all disk arrays fully powered at all times, drawing energy, generating heat and requiring additional energy for cooling. This significantly increases energy consumption and results in higher operating expenses, strained energy resources and increased carbon emissions. Systems that store unstructured data tend to be accessed less frequently and do not require constant power.

      Disparate systems offerings.  Traditional disk-based storage systems are normally offered with specific disk types and specific network interface technologies. However, mid-sized organizations often prefer a single-solution storage approach, with multiple tiers of storage and multiple access protocols in one system.

      Complexity.  Traditional disk-based storage systems are often complex as they have been architected for large data center environments with teams of system administrators specialized in storage. Additionally, many of these traditional systems are complex to install, need to be custom-configured prior to operation and require significant on-going maintenance and support. However, mid-sized organizations often have just one professional tasked with managing telecoms, computer and storage, and whose primary requirement is simplicity.

Our Solutions

Our focus on providing first-to-market technologies has made us a leading provider of innovative disk-based storage systems that enable our end users in mid-sized organizations to store digital information efficiently, intelligently, economically and securely. Our storage solutions are specifically designed for the unique needs of this large and growing market segment, which we believe has a proportionally greater need to store unstructured data. We believe this focus has enabled us to deliver storage systems with particular benefits for mid-sized organizations. These benefits include:

      Flexible Storage Platform. Our flexible storage solutions include many storage technologies in one system. This is particularly useful to mid-sized organizations that prefer a single-

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        system solution over having to buy many disparate systems. We pioneered storage systems that featured simultaneous multi-protocol access, and we designed our systems to be multi-tiered, supporting SSD, SAS and SATA drives in one chassis. Our flexible storage platform supports our proprietary storage software applications, such as: replication, virtualization, de-duplication, data archiving, multi-tenancy, digital data backup and encryption.

      Solutions developed for mid-sized organizations.  Most storage systems offered by traditional vendors were developed for enterprises with greater scale, larger data centers, highly complex storage needs and larger IT teams than is typical for mid-sized organizations. Our storage systems allow mid-sized organizations to purchase storage solutions at a lower initial cost point, with the capacity and software features appropriate for their needs, when compared to traditional enterprise storage solutions. These systems have the ability to scale both capacity and additional functionality as their needs grow at a much lower cost than has traditionally been available. We provide an optimized mix of enterprise-class features and functionality scaled for the needs of mid-sized organizations, such as active drawer technology, and no-single point of failure architecture, in addition to optional storage features such as replication, data protection and storage virtualization.

      Optimized for storing unstructured data.  We have been pioneers of capacity-optimized storage, which maximizes the amount of storage per cubic foot. Our products are focused on the storage of unstructured data which, we believe, is a majority of the data stored by mid-sized organizations. Our systems include features specifically designed for storing unstructured data, including capacity optimization, low power usage, and technology designed to maximize performance from SATA drives, which are the optimal drives for unstructured data due to their cost and capacity. As the amount of unstructured data grows, our platform is scalable to meet storage needs.

      Easy To Use.  We focus our product development and design efforts on ease of use with our channel ready delivery and distribution model in mind and our storage systems can be managed by IT generalists without the need for professional services or additional software. We deliver pre-configured systems that are able to operate common storage tasks out of the box without any further configuration or formatting. Users who would like to further tailor the product may do so through an intuitive graphical user interface. We believe this approach increases the appeal of our product to end users who do not have the resources to maintain IT or storage specialists as well as increasing the ease of sale, installation and support for our units by our channel partners.

      Technology-driven, lower total cost of ownership.  We develop innovative technology to reduce the entry point, acquisition, maintenance and ancillary costs associated with digital storage. In addition to its relatively lower price points and high reliability, the high density of our systems require less floor space for the same capacity, our drive spin-down and power management software significantly reduces operating power consumption, our lower system temperature reduces system cooling costs and the ease of our system implementation and use reduces IT labor costs. We believe these efforts deliver a compelling storage solution at a reduced total cost of ownership to a number of organizations that have traditionally been unable to afford them.

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Strategy

Our goal is to be a leading provider of disk-based storage solutions for the storage of unstructured data at mid-sized organizations worldwide. Key elements of our strategy include:

      Further penetrating the mid-sized organization market.  We intend to continue to target the needs of the attractive, yet underserved mid-sized organization market segment by optimizing our products and feature sets for their needs, leveraging our channel strategy and maintaining our low system total cost of ownership.

      Evolving and expanding our flexible storage platform.  The flexibility of our storage platforms has been a strong driver of sales. We intend to expand the scope of our flexible storage platform to increase the number of options and configurations available to end users, including adding more of our own storage applications such as snap-shot, replication, storage virtualization and an enterprise-wide "single-pane-of-glass" management system to manage multiple storage systems easily and simply.

      Expanding our software content. As mid-sized organizations demand specific storage features, we intend to introduce those software features at scales that are optimal for mid-sized organizations. For example, our storage systems currently may be configured to integrate file de-duplication, data archiving, multi-site replication, digital data back-up, encryption technology and security features, which until recently have only been available through expensive enterprise-class products. We are also focusing on our intuitive graphical user interface to align with the ease of use needs of IT generalists in mid-sized organizations. In addition to meeting the evolving needs of mid-sized organizations, we believe that this increased software content will allow us to offer higher margin products over time.

      Being the leading independent storage provider to the channel.  Because mid-sized organizations often purchase storage through channel partners, we believe our channel partner network is essential to our success. We have longstanding relationships with many of our partners and support them through our channel sales force and lead-generation management tools which allows us to closely monitor their performance and deliver a conflict-free incentive structure. Because of industry consolidation, many of these channel partners have seen their vendors acquired by legacy storage companies that maintain significant direct sales channels to the end user, reducing the overall significance of a reseller. We believe this provides us with an opportunity to gain market share among channel partners and will continue to invest in, manage and enhance the efficiency of our channel partners to further penetrate the mid-sized organization market.

Technology

We have designed our storage systems to deliver a set of solutions optimized for the unstructured data storage needs of mid-sized organizations. Our storage systems can be easily managed through an intuitive user interface, further reducing the overall costs of deploying and managing our systems.

Our flexible storage platform consists of storage systems and storage system software.

Storage System Software.    Through our storage system software, we offer mid-sized organizations the software features that are typically only practical for large enterprises. We provide an array of enterprise-class storage features as core components of our storage systems and other optional software

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that may be purchased by our customers depending on their requirements. Primary software capabilities that are included with all of our storage systems include:

      our enterprise-class fault tolerance and high-availability software features including active-active failover and RAID 6;

      our AutoMAID Drive Spin-Down software which is advanced power management software that enables significantly lower power consumption, meaningfully reducing ongoing operating costs of our storage compared to competitive systems; and

      our simple-to-use management system with advanced performance software, which provides intuitive centralized management and monitoring and ensures complete control over installation, configuration, and optimization of the user's storage environment.

In addition to those software features described above that come standard with all of our storage systems, our Assureon software currently incorporates a number of additional advanced storage software capabilities including:

      data replication, which benefits customers during planned and unplanned downtime as well as remote and local data recovery;

      data security features, which enable constant monitoring of file integrity, lifecycle management, file authentication, and file-level encryption;

      archiving, which enables users to maintain compliant-level privacy, integrity and longevity of data while leveraging the high speed access of disk drive technology; and

      file mode interfaces such as CIFS and NFS.

We intend to continue to develop additional storage software functionality that is incorporated into our products to meet the evolving needs of our target customers, delivering features such as multi-tiered storage, multi-protocol storage, high-availability with full redundancy, virtualization and replication. These capabilities will be offered either as a bundled feature of all of our storage systems or as integrated, optional capabilities that can seamlessly be leveraged by any of our end users.

Storage Systems.    Our storage systems are built on hardware building blocks that incorporate our proprietary, real-time operating system software. Key differentiators of our storage systems include:

      multi-protocol access—our storage systems feature both Fibre Channel and iSCSI storage networking access in one system, with both forms of block-mode access able to work simultaneously. Through our Assureon software we also offer an optional package that allows for NAS file mode access. This integrated storage approach is in demand by mid-sized organizations that prefer to buy a single system solution where possible;

      multi-tiered storage in one system—our storage systems allow for three distinct tiers of storage media in one compact chassis, so that our customers do not have to buy multiple systems for their disparate storage needs. For example, mid-sized organizations may need: very fast input/output oriented storage, such as SSDs for metadata and other small database use, fast storage for primary data, and cost-efficient storage, such as SATA drives for their secondary storage needs;

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      extremely dense packaging—our storage systems enable high capacity storage in a small footprint while still providing exceptional performance. This dense packaging is becoming increasingly important for mid-sized organizations which often do not have the space available as deployed storage capacities continue to grow;

      a fault tolerance system architecture that includes active-active RAID controllers and full hardware redundancy;

      intelligent packaging capabilities, such as active drawer technology and field replaceable subsystems, which enable a new level of storage capacity optimization while reducing the time and cost of maintaining our storage systems; and

      a number of additional reliability and availability capabilities such as vibration dampening and specialized air cooling, which assist in enhancing disk drive reliability, reducing disk drive failures, and increasing disk drive performance.

Products

Our products are specifically designed to meet the unstructured data storage needs of mid-sized organizations by providing a small footprint, low power use, scalability, ease of use and cost-effectiveness. Our storage products utilize common components and software to the extent possible. This approach maximizes the leverage from our research and development investments while simplifying the management and deployment of our systems for our customers and partners. We provide three principal storage products: The Beast, The Boy, and Assureon.

The Beast and Boy

The Beast and Boy share a common architecture and are different system configurations that incorporate the same bundled storage system software. On a standalone basis, the Beast and Boy operate as fully functional block storage systems, specifically designed to meet the needs of mid-sized organizations. Our storage systems can also be integrated with optional storage software capabilities, such as Assureon. Assureon software runs on a standard, off-the-shelf server, which is packaged with the Beast or Boy and is delivered as an integrated system.

      The Beast.  The Beast is our flagship storage system. The Beast is a full-featured, enterprise-class storage system designed to meet the needs of mid-sized organizations. The Beast features an industry-leading density of up to 84 terabytes of storage in 4U of rack space and offers dual function Fibre Channel and iSCSI connectivity while utilizing performance RAID controllers for wire-speed read/write throughput and high input/output per second performance. The overall capacity of the Beast may be increased, through the addition of an expansion chassis, to over 200 terabytes in a single system.

      The Boy.  The Boy provides up to 28 terabytes of storage in 3U of rack space. The Boy offers dual function Fibre Channel and iSCSI connectivity with wire-speed performance and also incorporates our AutoMAID drive spin-down software, reducing power consumption. The Boy enables cost-effective storage of large amounts of information online, yet its performance ensures faster response times for mission critical applications.

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Our storage systems include some or all of the following features:

Feature   Advantage   Result
High-availability software and system architecture   No single points of failure   High-availability, increased application uptime and performance
         
AutoMAID drive spin-down software   Significantly lowers power consumption and heat output   Lower operating costs and can be installed in non-data center environments
         
Intuitive management interface   Configure and manage system easily   Increased capability without increasing or retraining staff
         
iSCSI connectivity   Leverages existing Ethernet networks and expertise of end users   Lower cost alternative than Fibre Channel
         
Fibre Channel connectivity   High performance storage connectivity   Increased application productivity
         
iSCSI and Fibre Channel connectivity   Connects to Ethernet and Fibre Channel networks simultaneously   Eliminates need for separate storage systems
         
Multi-Tiered Storage—supports SATA, SAS and SSD disk drives   Single system that can meet multiple customer storage needs simultaneously   Eliminates need for separate storage systems
         
60 drives in 4U of rack space   Industry-leading density   Eliminates need for separate storage systems
         
Active drawers   Sliding "live" drawers that fit more drives into the same rack space   Lower overhead storage costs and improved uptime
         
Advanced heat management software   Reduced heat-related disk failures   Increased application uptime

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Assureon Software

Our Assureon software is an optional configuration of our flexible storage platform. Key benefits of Assureon include:

      De-Duplication.  Assureon features file data de-duplication technologies to eliminate redundant data. Our file storage systems are designed to substantially reduce the amount of disk storage required as compared to non de-duplicated solutions, leading to lower capital expenditures and operating expenses.

      Archiving.  Assureon features industry-leading advanced archiving technologies, such as content addressable storage, or CAS, technology to eliminate the unnecessary storage of duplicate files, ongoing monitoring of file integrity, file authentication, write once, read many functionality, intelligent retrieval, data checking, missing file alerts and support for remote replication with encryption technology that is designed to protect data from outside attack, inadvertent tampering and physical hardware theft.

      Replication.  By combining our multi-site replication feature with de-duplication technology, Assureon enables space-efficient backups at remote offices. Our systems enable a WAN-efficient replication of backups to a centralized, globally de-duplicated site.

      Backup.  Assureon enables efficient backup storage—compatible with all leading backup software applications and, by using our storage system building blocks, provides greater reliability than tape-based backup solutions. Our software performs file integrity scans which are designed to prevent unrecoverable backups, a key problem associated with tape-based data recovery.

      Security.  Assureon utilizes advanced encryption technology to provide security, as well as the ability to digitally "shred" offline copies of files at the end of their retention period.

      Cloud Storage.  Assureon features multi-tenancy management enabling cloud storage providers to allow their customers fully independent cloud-based storage, while utilizing a single management window for those multiple accounts.

Assureon leverages the Beast and Boy for its underlying block storage capabilities. Assureon software runs on a standard, off-the-shelf server, which is packaged with the Beast and Boy and is delivered as an integrated system.

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Our Assureon software includes the following features:

Feature   Advantage   Result
Encryption and key encryption management processes   Enterprise-class, regulatory-compliant security   Greater data security
         

CAS object storage

 

File de-duplication

 

More efficient use of storage
         

Information Lifecycle Management (ILM) software

 

File lifecycle management

 

Ease of use; ensure compliant management of files
         

Automated file replication and recovery

 

Data protection through remote or local duplication

 

Data tampering recovery, disaster recovery, and business continuity; faster time to recovery
         

Integrated policy engine

 

Optimize file and storage management with application

 

Increased application productivity and uptime
         

Self auditing and healing

 

Automated verification of file integrity and repair

 

Compliant file protection and availability; reduced cost of file management; greater data integrity
         

Encryption key shredding

 

Enterprise-class, regulatory-compliant destruction

 

Compliant disposition of files either on line or off line
         

Fast metadata search

 

Fast, easy access to individual files

 

Less time managing files; more efficient electronic discovery
         

InfiniBand connectivity option

 

Enables storage to be used for higher performance applications such as PACS imaging

 

Increased number of supported applications
         

NAS interface, File System Watcher software

 

Easy interfacing with applications

 

Less time required to integrate applications

Other Products

We also offer a number of storage products that combine our Beast and Boy systems with storage application software from third party providers. Current products include iSeries, an iSCSI SAN solution, DeDupe SG, a de-duplication system, and DATABeast, a high-end block storage system for large data storage needs. These products do not represent a material amount of our revenue individually or in the aggregate.

Customers

As we sell indirectly to our end users, our customers are the channel partners, including VARs, OEMs and systems integrators, who in turn re-sell our products to end users. We believe most mid-sized organizations purchase their storage solutions from channel partners. We have developed a reputation for delivering reliable, high performance storage solutions and have established an end user base across a wide spectrum of industries globally. We typically sell our products through channel partners to mid-sized organization end users around the world for a diverse range of digitally driven applications

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including: e-commerce, electronic design, electronic medical records, imaging, multimedia production and distribution, record digitization and surveillance. By leveraging our extensive reseller network, we are able to effectively access our highly diversified and fragmented end users. As of September 30, 2010, we had shipped approximately 27,000 systems worldwide.

Significant consolidation in the storage industry recently has decreased the number of products sold through storage system resellers. We believe this consolidation has created a significant market gap for storage products for the mid-sized organization market that can be sold through channel partners. We believe we have a competitive advantage in selling products through channel partners. Key differentiators of our channel partner strategy include:

      we are committed to our 100% channel sales strategy and do not compete with our channel partners by trying to sell directly to end users;

      we design products that are well-suited for the end customer and easy for the channel to sell;

      our products are designed to have a positive "out of the box" experience that facilitates our channel partners' integration and management;

      our channel partners earn favorable gross margins with our products;

      we seek to prevent any channel conflicts through our LeadGuard reseller management program; and

      we have a long and successful track record of working with channel partners.

During fiscal years 2008, 2009 and 2010 and the three months ended September 30, 2010 no customer accounted for greater than 10% of our revenue. Our top 10 customers accounted for 33%, 32%, 34% and 47% of our revenue in fiscal years 2008, 2009 and 2010 and the three months ended September 30, 2010, respectively. Revenue from customers outside the U.S. was approximately 33%, 35%, 45% and 34% of our revenue in fiscal years 2008, 2009 and 2010, and the three months ended September 30, 2010, respectively. See note 14 to our consolidated financial statements for information regarding our sales by geographic region.

Sales and Marketing

We sell our products worldwide through channel partners, including VARs, OEMs and systems integrators. Our sales personnel sell to, manage, market to, and support our channel partners. During fiscal year 2010, we offered our systems through over 600 channel partners.

To manage our sales relationships, we and our resellers utilize our LeadGuard management program. Our resellers help to market and sell our products under LeadGuard. LeadGuard is our custom reseller management software suite that helps us manage qualified sales leads through prospect registration. Prospect registration ensures protection for our reseller partners' investment in promoting our products throughout the sales process. Once a new sales opportunity is registered, the reseller receives preferred pricing for sales to that customer. Our reseller management program provides a number of advantages, including providing an incentive to each of our channel partners to seek qualified sales leads.

We sell our Assureon systems primarily through our OEM partners Jack Henry, GE Healthcare, McKesson and Agfa and, in addition, through other channel partners.

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We also rely on a variety of marketing efforts, including tradeshows, advertising, industry research and our website to support our sales activities. We focus our marketing efforts on communicating product advantages and educating our channel partners to improve their understanding of the benefits of our products. In addition, we work closely on co-marketing and lead-generating activities with a number of technology partners, including some of the leading suppliers of storage infrastructure products, in an effort to broaden our marketing reach.

Customer Support and Services

Our technical services group provides worldwide support for all of our products and is responsible for our product warranty and customer support programs. This group also provides post-sales support and installations of Assureon systems, maintains technical compatibility with data center infrastructure companies and software vendors, qualifies and tests new hardware or software opportunities and maintains and supports on-site maintenance providers. We operate regional support centers in North America and the U.K.

We also offer on-site maintenance support contracts through contracts with third parties such as Kodak for worldwide support along with regional third party providers. Our agreement with Kodak is non-exclusive, and we do engage other third party service providers for on-site maintenance and support services. End users of our products generally have the option to purchase warranty extensions as well as annual contract renewals.

Our agreement with Kodak enables us to offer worldwide on-site maintenance and support services to our end users. When our end users initially purchase or renew an on-site maintenance and support contract from us, we prepay Kodak a pre-determined rate for their support services. End users may contact us or Kodak directly for support. If an end user contacts us for on-site support, we contact Kodak to provide the necessary on-site services for such support request within a pre-determined response time. The agreement expires on September 30, 2011, with an automatic 12 month renewal, unless terminated earlier upon 30 days written notice by either party.

The Boy, the Beast, iSeries and DeDupe SG products come with a three-year warranty. Assureon and DATABeast systems are shipped with a one-year warranty. Our warranty also includes technical telephone support during Nexsan business hours with the option to purchase 24 × 7 telephone support. Other support offerings include on-site support with next business day or business critical 4-hour response, and basic warranty extensions for our base storage models.

Additionally, Assureon sales generally generate annual and renewable software support fees which provide users with on-going updates and software upgrades.

Manufacturing and Operations

We currently utilize two contract manufacturers, AWS Cemgraft in England and Cal Quality in California, for the primary assembly of our products. We do not have a purchase agreement with any of our contract manufacturers, rather we make purchases on a purchase-order basis. At September 30, 2010, we had $6.8 million in non-cancelable purchase commitments with our contract manufacturers.

Each contract manufacturer produces the chassis and controllers for our products and is typically responsible for procuring the materials for the products they manufacture. In addition, we rely on Avnet, to provide us with disk drives, which it generally obtains from Hitachi Global Storage Technologies, Seagate Technology and Western Digital. We obtain our power supplies from BluTek Power, our microprocessors from PMC-Sierra, Inc., and servers from Dell Inc. Our contract manufacturers are also responsible for controlling and owning inventory, as well as assembling, testing,

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inspecting and shipping products to our operations facilities in Derby, England or Escondido, California. We perform disk integration, RAID configuration, burn-in testing, final inspection and packing at our operations facilities. Both our Escondido and Derby operations facilities are ISO 9001:2000 certified. For our Assureon archive system, software loading and testing is conducted remotely from our Montreal, Quebec facility on hardware located at either our Escondido or Derby facilities.

While we require that certain components be sourced from particular approved suppliers, contract manufacturers are permitted to source components, such as high-tolerance resistors and capacitors, from suppliers of their choice. We currently rely on a limited number of suppliers for other components incorporated within our storage systems. We work closely with our key suppliers to lower component costs and improve quality. We have not entered into any long-term supply contracts for our components or with our contract manufacturers.

Research and Development

We believe that a key component of our future success is continued investment in research and development to introduce enhancements to our products and systems and to develop new products to meet an expanding range of customer requirements. Our research and development team includes both hardware and software engineers. We have two research and development facilities, one of which is located near Didcot, England and the other facility is in Montreal, Quebec.

Our research and development expenses were $5.4 million in fiscal year 2008, $5.3 million in fiscal year 2009, $6.5 million in fiscal year 2010, and $1.7 million in the three months ended September 30, 2010. We plan to continue to dedicate significant resources to research and development.

Competition

The market for our products is highly competitive, and we expect competition to intensify in the future. This competition could make it more difficult for us to sell our products, and result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely materially and adversely affect our business, operating results and financial condition. Currently, we face competition from traditional providers of storage systems. In addition, we also face competition from other public and private companies, as well as recent market entrants, that offer products with similar functionality as ours. Our products compete with Compellent, DataDirect Networks, Dell, EMC, Hewlett-Packard, Hitachi Data Systems, Infortrend, IBM, NetApp, Oracle, Promise Technology, among others. In addition, we compete against internally developed storage solutions, as well as combined third-party software and hardware solutions.

We believe that the principal factors on which we compete are:

      reliability;

      affordability;

      performance;

      energy consumption and environmental impact;

      capacity optimization;

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      features and scalability; and

      flexibility.

We believe that we compete favorably on the basis of these factors.

Many of our current competitors have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we have. Given their capital resources and broad product and service offerings, many of these competitors may be able to offer reduced pricing for their products that are competitive with ours, which in turn could cause us to reduce our prices to remain competitive. Potential customers may have long-standing relationships with our competitors, whether for storage or other network equipment, and potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. Many of our competitors benefit from established brand awareness and long-standing relationships with key decision makers at many of our current and prospective customers.

Intellectual Property

Our success depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.

As of December 31, 2010, we have two patents issued in the U.K. that expire in January 2015 and February 2015, one patent issued in the U.S. in September 2010, one pending patent application in Japan, one pending patent application in the U.K., two pending patent applications in the U.S., and one pending Patent Cooperation Treaty application filed in Canada based on one of the pending U.S. patent applications. Additionally, as of December 31, 2010, we had 18 U.S. registered trademarks.

The steps we have taken to protect our intellectual property rights may not be adequate. Third parties may infringe or misappropriate our intellectual property rights and may challenge our issued patents. In addition, other parties may independently develop similar or competing technologies designed around any patents that are or may be issued to us. We intend to enforce our intellectual property rights vigorously, and from time to time, we may initiate claims against third parties that we believe are infringing on our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. If we fail to protect our intellectual property rights adequately, our competitors could offer similar products, potentially significantly harming our competitive position and decreasing our revenue.

Employees

As of December 31, 2010, we had 147 employees in North America and Europe, of which 43 were in sales and marketing, 46 were in research and development, 20 were in customer support services, 17 were in general and administrative functions and 21 were in operations. None of our employees is represented by labor unions, and we consider current employee relations to be good.

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Facilities

We currently lease approximately 44,400 square feet of facilities in North America and the U.K. Our principal locations, their purposes and the expiration dates for leases on facilities at those locations are shown in the table below.

Location   Purpose   Approximate
Square Feet
  Lease
Expiration
Date
 

Thousand Oaks, California

 

Corporate headquarters

    6,600     June 2011  

Escondido, California

 

Operations and technical support

    13,800     February 2012  

Montreal, Quebec

 

Assureon and other software application development

    6,500     April 2017  

Derby, England

 

Operations and technical support

    13,800     January 2013  

Didcot, England

 

Storage systems development

    3,700     August 2011  

We have renewal options on all leases listed in the table above, with the exception of the leases for the properties located in Derby, England and Montreal, Quebec.

We believe that our current facilities are adequate for our current needs, and we intend to add new facilities or expand existing facilities to support future growth. We believe that suitable additional space will be available on commercially reasonable terms as needed to accommodate our operations.

Legal proceedings

We are not a party to any material legal proceedings. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business.

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information about our executive officers and directors as of December 31, 2010:

Name
  Age   Position

Philip Black

    55   President, Chief Executive Officer and Director

Thomas F. Gosnell

    52   Chief Executive Officer, Nexsan Canada

Michael P. McGuire

    45   Chief Commercial Officer

Richard Mussman

    55   Chief Operating Officer

Eugene Spies

    48   Chief Financial Officer

Gary Watson

    47   Chief Technology Officer and Co-Founder

Geoff Barrall(1)(2)

    41   Director

William J. Harding(2)

    63   Director

Philip B. Livingston(1)(2)(3)

    53   Director

Richard A. McGinn(2)(3)

    64   Co-Chairman of the Board

Arthur L. Money(1)(2)

    70   Director

Geoff Mott(1)(3)

    58   Director

Michael F. Price

    57   Director

George M. Weiss(3)

    69   Co-Chairman of the Board

(1)
Member of our audit committee.
(2)
Member of our compensation committee.
(3)
Member of our nominating/governance committee.

Philip Black has served as our President, Chief Executive Officer and as a director since September 2004. From January 2002 to July 2004, Mr. Black served as Chief Executive Officer and as a director of LightSand Communications, a storage networking provider. Prior to joining LightSand, Mr. Black was the Chief Executive Officer of Box Hill/Dot Hill, a storage systems manufacturer, and was the founder and Chief Executive Officer of Tekelec, a telecom equipment provider. Mr. Black has previously served as a director for Simtek Corporation from September 2007 to September 2008.

Thomas F. Gosnell has served as our Chief Executive Officer of Nexsan Technologies Canada Inc. since March 2005. Mr. Gosnell was the Chief Executive Officer and Founder of AESign Evertrust Inc., or Evertrust, from November 2001 until our acquisition of that company in March 2005. Mr. Gosnell has also served as Chief Operating Officer of CS&T (now a division of Oracle) and Vice President of Product Development for Speedware Corporation, a provider of enterprise software solutions and applications development.

Michael P. McGuire has served as our Chief Commercial Officer since November 2008. Prior to joining us, Mr. McGuire served as Global Vice President of Agami Systems, Inc., an enterprise-class unified network storage company from October 2007 to July 2008. At Agami, he was responsible for worldwide sales. From August 2005 to October 2007, Mr. McGuire served as Vice President, Americas Storage Sales for Sun Microsystems, Inc. Mr. McGuire joined Storage Technology Corporation in 1990 and held several positions, including serving as Vice President and General Manager, Sales and Services, U.S. and Canada from 2003 until its acquisition by Sun in August 2005.

Richard Mussman has served as our Chief Operating Officer since October 2006. From December 2000 to October 2006, Mr. Mussman served as our Vice President of Technical Services. Prior to joining us, Mr. Mussman was Vice President of Sales for Lighthouse Technology Inc., a network

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systems integration company, and Vice President of Global Services for Andataco, Inc., a data storage company.

Eugene Spies has served as our Chief Financial Officer since January 2007. From May 2005 to January 2007, Mr. Spies served as our Vice President of Finance and Corporate Controller. Prior to joining us, from December 2002 to May 2005, Mr. Spies served as a Vice President of Finance with the Networking Division of Alcatel, a global telecommunications equipment provider. Prior to that, Mr. Spies was a Senior Manager at KPMG LLP, a public accounting firm.

Gary Watson co-founded our company and has served as our Chief Technology Officer since 2000. Previously, Mr. Watson founded and served as the Chief Technology Officer at Nexsan Technologies Ltd., our U.K. subsidiary. Prior to that, Mr. Watson was an Engineering Manager at Trimm Technologies, Europe, a provider of data storage subsystems, and a Senior Engineer at Trimm Technologies, U.S.

Geoff Barrall has served as a director of Nexsan since April 2009. Mr. Barrall was Chief Executive Officer of Data Robotics, Inc., an automated data products storage company, from May 2005 to December 2009. He served as Principal and Founder of Barrall Consulting, an information technology and services consulting firm, from August 2004 to April 2005. Mr. Barrall served as Chief Technology Officer of BlueArc Corporation, a data storage company, from 1999 to July 2004. Mr. Barrall was selected as a director of Nexsan based upon his background experience in the data storage industry, including as Chief Executive Officer at Data Robotics, Inc. and as Chief Technology Officer at BlueArc.

William J. Harding has served as a director of Nexsan since April 2009. Mr. Harding has served as a Managing Director of VantagePoint Venture Partners, a venture capital firm, since October 2007. Prior to joining VantagePoint, Mr. Harding was a Managing Director of Morgan Stanley & Co., President of Morgan Stanley Venture Partners and a Managing Member of several venture capital funds affiliated with Morgan Stanley, where he was employed from 1994 through 2007. Mr. Harding also served as an officer in the Military Intelligence Branch of the U.S. Army Reserve. In the previous five years, Mr. Harding has served as a director for InterNap Network Services Corporation and Aviza Technology Inc. Mr. Harding brings to the board his substantial prior experience as an investor in technology companies, as well as his prior experience serving on the boards of directors of technology companies. Mr. Harding is one of the designees of VantagePoint Venture Partners.

Philip B. Livingston has served as a director of Nexsan since September 2007. Mr. Livingston has served as Senior Vice President, Marketing and Business Solutions, and Chief Executive Officer of Martindale-Hubbell, a division of Reed Elsevier Inc. and a provider of content-enabled workflow solutions to professionals, since April 2009. Mr. Livingston served as the Senior Vice President and Chief Financial Officer of TouchTunes Music Corp., a provider of touch screen digital juke boxes, from November 2007 to January 2009. He served as Chief Financial Officer of Duff & Phelps LLP, a provider of independent financial advisory and valuation services, from April 2006 to September 2006. Mr. Livingston served as Vice Chairman of Approva Corporation, a provider of enterprise controls management software, from January 2005 to March 2006. From March 2003 to January 2005, he served as Chief Financial Officer and a director of World Wrestling Entertainment, Inc., a media and entertainment company. In the previous five years, Mr. Livingston has served as a director for Cott Corporation, MSC Software Inc., World Wrestling Entertainment, Inc., QLT Inc. and Insurance Auto Auction Inc. Mr. Livingston brings to the board his substantial prior experience in a wide range of executive roles at a number of companies and technology companies, including as a Chief Executive Officer and Chief Financial Officer, as well as his director role at a number of public companies. Mr. Livingston is one of the designees of MFP Partners.

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Richard A. McGinn has served as a director of Nexsan since October 2003 and was elected co-chairman of our board of directors in September 2008. Mr. McGinn has been a partner with M.R. Investment Partners, a private equity firm, since December 2009. Mr. McGinn has been a General Partner with RRE Ventures, a venture capital firm, since August 2001. From November 2000 to July 2001, Mr. McGinn served as the Chairman and Chief Executive Officer of Lucent Technologies, a communications systems and software company. From 1996 to October 2000, Mr. McGinn served as President, Chairman, and Chief Executive Officer of Viasystems, Inc. Mr. McGinn also previously held several executive positions at AT&T, serving as President and Chief Executive Officer of AT&T's Network Systems Group, President of AT&T Computer Systems, and President of AT&T's Data Systems Group. Mr. McGinn also serves as a director of the American Express Company, Verifone and Viasystems, Inc. Mr. McGinn brings to the board his substantial prior experience in executive roles at a number of technology companies, as well as his director role at leading public companies, including leading technology companies. Since he has served on our board of directors since 2003, he also has experience with the historic growth and changes that have occurred at our company and in our business.

Arthur L. Money has served as a director of Nexsan since June 2007. Since May 2001, Mr. Money has served as President of ALM Consulting, which specializes in command control and communications, intelligence, signal processing and information operations. Mr. Money served as U.S. Assistant Secretary of Defense for Command, Control, Communications and Intelligence (ASD (C3I)) from January 1998 to April 2001. From February 1998 to April 2001, Mr. Money also served as the Department of Defense Chief Information Officer. In the previous five years, Mr. Money has served as a director for CACI International Inc., Essex Corporation, Federal Services Acquisition Corp., IntelliCheck Mobilisa, Inc., Intevac, Inc., KEYW Holding Corporation, SafeNet Inc., SGI International, SteelCloud Inc. and Terremark Worldwide, Inc. Mr. Money brings to the board his substantial experience in the information and communications area, as well his board experience at a variety of technology companies. Mr. Money is the designee of FTQ.

Geoff Mott has served as a director of Nexsan since October 2003. Mr. Mott has served as Senior Vice President, Strategy and Business Development for TouchTunes Corporation, a provider of out-of-home interactive entertainment, since March 2009. Mr. Mott has also served as Chief Executive Officer of Exymion Partners, LLC since January 2009. Prior to joining TouchTunes Corporation and Exymion Partners, LLC, Mr. Mott served as a Managing Director of VantagePoint Venture Partners from January 2002 to December 2008. Prior to joining VantagePoint, Mr. Mott was the Managing Partner of The McKenna Group, a global strategy consulting firm which he guided through Chapter 7 bankruptcy proceedings to a sale of assets in 2002. Earlier in his career, Mr. Mott built a business strategy practice for technology firms at Lochridge & Co. Mr. Mott brings to the board his experience as an investor in, and business strategy consultant to, technology companies. Since he has served on our board of directors since 2003, he also has experience with the historic growth and changes that have occurred at our company and in our business. Mr. Mott is one of the designees of VantagePoint Partners.

Michael Price has served as a director of Nexsan since July 2009. Since December 1996, Mr. Price has served as the President of The Price Family Foundation, Inc. and since November 2008 as Managing Member of MFP Investors LLC, as Managing Partner of MFP Partners, L.P. and as Managing Member of MFP Services LLC. From 1986 to November 1998, Mr. Price served as Chief Executive Officer, President and Chairman of the Board of Franklin Mutual Advisers and Franklin Mutual Series Fund. From 1975 to 1986, Mr. Price also served as Vice President of the Franklin Mutual Series Fund. Mr. Price also serves as a director of The Albert Einstein College of Medicine, University of Oklahoma Foundation, Johns Hopkins and Jazz at Lincoln Center. Mr. Price brings to the board his deep experience in the investment industry, including his own investment fund, which provides an additional perspective from outside of the technology industry to issues considered by the board.

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George M. Weiss has served as a director of Nexsan since August 2001, was elected chairman of our board of directors in August 2001 and was elected co-chairman of our board of directors in September 2008. Mr. Weiss founded Beechtree Capital LLC, a private venture capital and business advisory firm, in 1993, and is currently its chairman and chief executive officer. Mr. Weiss previously served as a senior partner at the law firm of Rubin Baum, LLP. Mr. Weiss has served on the board since our company's early stages and has the longest history with our company. Accordingly, he has experience with the historic growth and changes that have occurred at our company and in our business over most of our corporate history. Mr. Weiss also brings his experience as an investor and former attorney to provide additional perspective on issues considered by the board.

Each of Messrs. Harding, Livingston, Money, Mott, Price and Weiss serve as members of the board of directors pursuant to our existing stockholder agreement that was entered into in connection with our prior financings. As a result, the decisions as to the initial selection and continued service of these directors are made by the investor with the appointment rights. There are no family relationships between any of our directors or executive officers.

Board Composition

Our board currently consists of nine members. Each director is elected to serve a one-year term, with all directors subject to annual election. Under the existing stockholders' agreement among us, certain holders of our common stock, Series A preferred stock, Series B preferred stock and Series C preferred stock, the following principal stockholders have the right to designate the number of directors specified below and the parties to the stockholders' agreement have agreed to vote their shares for the election of such persons:

      One member of the board is the then-current Chief Executive Officer (currently Philip Black);

      VantagePoint Venture Partners IV (Q), L.P., VantagePoint Venture Partners IV, L.P., and VantagePoint Venture Partners IV Principals Fund, L.P., or collectively VantagePoint, as a group have the right to designate two directors (currently Geoff Mott and William Harding);

      RRE Ventures III, L.P., RRE Ventures Fund III, L.P. and RRE Ventures III-A, L.P., or collectively RRE Ventures, collectively, originally had the right to designate one director (currently Richard McGinn); however, RRE Ventures has opted to no longer exercise this right;

      Beechtree Capital, LLC, or Beechtree, has the right to designate one director (currently George Weiss);

      MFP Partners, L.P. has the right to designate two directors (currently Michael F. Price and Philip Livingston);

      Fonds de solidarité des travailleurs du Québec, or F.T.Q., has the right to designate one director (currently Arthur Money); and

      Holders of Series A preferred stock, Series C preferred stock and our common stock voting together as a single class, have the right to designate one director (currently Geoff Barrall).

Upon the completion of this offering, all of these designation rights and voting agreements will terminate, and no stockholders will have any contractual rights with us regarding the election of our directors. In addition, effective upon completion of this offering, our restated certificate of

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incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors and that any vacancies will be filled by the board of directors. See "Description of Capital Stock—Anti-takeover Provisions."

Director Independence

Upon the completion of this offering, our common stock will be listed on The NASDAQ Global Market. The rules of The NASDAQ Stock Market require that a majority of the members of our board of directors be independent within specified periods following the completion of this offering. Our board of directors has adopted the definitions, standards and exceptions to the standards for evaluating director independence provided in The NASDAQ Stock Market rules, and determined that Geoff Barrall, William Harding, Michael Price, Richard McGinn, Arthur Money, Geoff Mott and Philip Livingston are "independent directors" as defined under these rules. After January 2011, Mr. Weiss will also be an "independent director" under the rules of The NASDAQ Stock Market.

Role of the Board in Risk Oversight

One of the key functions of our board of directors is informed oversight of our risk management process. Our board of directors does not have a standing risk management committee, but rather administers this oversight function directly through the board of directors as a whole, and, after this offering, through various board of directors standing committees that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure, our audit committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures. The audit committee also monitors compliance with legal and regulatory requirements. Our nominating and corporate governance committee will monitor the effectiveness of our corporate governance guidelines. Our compensation committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking.

Board Committees

Our board of directors has an audit committee, a compensation committee and a nominating/governance committee. Each of these committees operates under a charter, which has been approved by the applicable committee and by our board of directors and that satisfies the applicable standards of the SEC and The NASDAQ Stock Market. The composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board.

Audit Committee

Our audit committee oversees our corporate accounting and financial reporting processes. Among other matters, the audit committee:

      evaluates the qualifications, independence and performance of our independent registered public accounting firm;

      determines the engagement of our independent registered public accounting firm and reviews and approves the scope of the annual audit and the audit fee;

      discusses with management and our independent registered public accounting firm the results of the annual audit and the review of our quarterly financial statements;

      approves the retention of our independent registered public accounting firm to perform any proposed permissible non-audit services;

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      monitors the rotation of partners of our independent registered public accounting firm on our engagement team as required by law;

      reviews our critical accounting policies and estimates; and

      annually reviews the audit committee charter and the committee's performance.

Our audit committee consists of Philip Livingston (Chair), Geoff Barrall, Arthur Money and Geoff Mott. Each of these individuals meets the requirements for financial literacy under the applicable rules and regulations of the SEC and The NASDAQ Stock Market and is an independent director as defined under the applicable regulations of the SEC and under the applicable rules of The NASDAQ Stock Market. Our board of directors has determined that Mr. Livingston is an audit committee financial expert, as defined under the applicable rules of the SEC, and therefore has the requisite financial sophistication required under the rules and regulations of The NASDAQ Stock Market.

Compensation Committee

Our compensation committee consists of Richard McGinn (Chair), Geoff Barrall, William Harding, Philip Livingston and Arthur Money, each of whom is an independent director as defined under the applicable rules and regulations of The NASDAQ Stock Market, is an outside director under the applicable rules and regulations of the Internal Revenue Service, or the IRS, and is a non-employee director under SEC rules. Our compensation committee reviews and approves corporate goals and objectives relevant to compensation of our chief executive officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives and sets the compensation of these officers based on such evaluations. The compensation committee also administers the issuance of stock options and other awards under our equity award plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance of the compensation committee with its charter.

Nominating/Governance Committee

Our nominating/governance committee consists of George Weiss (Chair), Philip Livingston, Richard McGinn and Geoff Mott. Each of Messrs. Livingston, McGinn and Mott is an independent director as defined under the applicable rules and regulations of The NASDAQ Stock Market. Mr. Weiss is not considered independent because of our partial forgiveness of a loan and an option granted to Beechtree Capital LLC, an entity affiliated with Mr. Weiss, in January 2008, as described under "Related Party Transactions—Restricted Stock Transactions with Certain Related Parties and Related Matters—Restricted Stock Transactions with Affiliate of Current Director." We expect that Mr. Weiss will be deemed to be independent under the applicable rules of the Nasdaq Stock Market after January 2011, as more than three years will have elapsed from the date of this transaction.

Our nominating/governance committee makes recommendations to the board of directors regarding candidates for directorships and the size and composition of the board of directors and its committees. In addition, the nominating/governance committee oversees our corporate governance guidelines and reporting, reviews related party transactions and makes recommendations to the board of directors concerning director compensation, governance matters and conflicts of interest.

Compensation Committee Interlocks and Insider Participation

During fiscal year 2010, our compensation committee consisted of Geoff Barrall, William Harding, Philip Livingston, Richard McGinn and Arthur Money. No member of our compensation committee has ever been an executive officer or employee of ours. None of our executive officers currently serves, or has during the last completed year served, on the compensation committee or board of directors of

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any other entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Compensation Policies and Practices as They Relate to Risk Management

In connection with this offering, management conducted a risk assessment of our compensation plans and practices and concluded that our compensation programs do not create risks that are reasonably likely to have a material adverse effect on the company. The compensation committee has reviewed and agrees with management's conclusion. The objective of the assessment was to identify any compensation plans or practices that may encourage employees to take unnecessary risk that could threaten the company. No such plans or practices were identified. The risk assessment process included, among other things, a review of our cash and equity incentive-based compensation plans to ensure that they are aligned with our company performance goals and the overall compensation mix to ensure an appropriate balance between fixed and variable pay components and between short- and long-term incentives.

Director Compensation

The following table provides information for our fiscal year ended June 30, 2010 regarding all plan and non-plan compensation awarded to or earned by each person who served as a non-employee director for some portion or all of fiscal year 2010. Directors who also serve as our employees, such as our chief executive officer, do not receive additional compensation for their service on the board. Other than as set forth in the table and the narrative that follows it, during fiscal year 2010 we have not paid any fees to or reimbursed any expenses of our directors except travel related expenses in connection with our directors' services to us as board members, made any equity or non-equity awards to directors, or paid any other compensation to directors.

Name
  Fees Earned
or Paid in Cash
  Option
Awards(1)
  Total  

Geoff Barrall

  $ 37,500       $ 37,500  

Philip B. Livingston

    43,500         43,500  

Richard A. McGinn (Co-Chairman)

    38,000         38,000  

Arthur L. Money

    38,000         38,000  

Geoff Mott

    35,500         35,500  

George M. Weiss (Co-Chairman)

    33,500         33,500  

(1)
The directors' aggregate stock option holdings at June 30, 2010 were: Mr. Barrall (32,140), Mr. Livingston (32,187 shares), Mr. McGinn (143,950 shares), Mr. Money (32,187 shares), Mr. Mott (36,107 shares) and Mr. Weiss (330,548) shares of which options to purchase 190,476 shares of our common stock are held by Beechtree Capital LLC, an entity affiliated with Mr. Weiss.

In December 2008, the Board revised its compensation program for non-employee directors and directors affiliated with significant stockholders, including cash and equity components. The cash component includes a $20,000 annual retainer fee to be paid on a quarterly basis, a $2,000 board meeting attendance fee for meetings attended in-person, a $500 board meeting attendance fee for board meetings attended via teleconference (however if a teleconference lasts for more than two hours, the $2,000 attendance fee applies), a $5,000 annual committee chair retainer fee to be paid on a quarterly basis, a $2,500 annual committee membership fee paid on a quarterly basis (committee chairs only receive the committee chair retainer fee), and a $1,000 committee meeting fee per meeting held not in conjunction with a board meeting and attended in person or via teleconference. The equity component consists of an option grant of 1.0% of our outstanding stock, on an as-converted to common stock basis, for the chairman or co-chairman of the board, or 0.25% of our outstanding stock, on an as-converted to common stock basis, for the other directors, with a term of ten years, which option vests monthly over two years.

Following the completion of this offering, we intend to revise our compensation program for our non-employee directors.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This section discusses the principles underlying our executive compensation policies and decisions and the most important factors relevant to an analysis of these policies and decisions. It provides qualitative information regarding the manner and context in which compensation is awarded to and earned by our executive officers and places in perspective the data presented in the tables and narrative that follow. For fiscal year 2010, our "named executive officers" were Philip Black, our chief executive officer; Eugene Spies, our chief financial officer; Thomas F. Gosnell, our chief executive officer of Nexsan Canada; Michael McGuire, our chief commercial officer; and Richard Mussman, our chief operating officer.

Philosophy and Objectives

Our executive compensation program is designed to attract, as needed, individuals with the skills necessary for us to achieve our business plan, to reward those individuals fairly over time, to retain those individuals who continue to perform at or above the levels that we expect and to closely align the compensation of those individuals with our performance on both a short-term and long-term basis. To that end, our executive officers' compensation program has four primary components—base compensation or salary, cash performance bonuses, equity-based incentives, and severance and change of control arrangements. In addition, we provide our executive officers a variety of benefits that in most cases are available generally to all salaried employees.

We view the components of compensation as related but distinct. Although our compensation committee reviews total compensation of our executive officers, we do not believe that significant compensation derived from one component of compensation should negate or reduce compensation from other components. We determine the appropriate level for each compensation component based in part, but not exclusively, on our view of internal equity and consistency, overall company performance and other considerations we deem relevant.

Role of the Compensation Committee and the Chief Executive Officer

Our compensation committee is comprised of five non-employee members of our board of directors, Messrs. McGinn (Chair), Barrall, Harding, Livingston and Money, each of whom is an independent director under NASDAQ rules, an "outside director" for purposes of Section 162(m) of the IRC, and a "non-employee director" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934. While our chief executive officer is not a member of the compensation committee, he has historically attended certain committee meetings and assisted the committee by providing information relating to our financial plans, performance assessments of our executive officers and other personnel-related information and data. We expect that our chief executive officer will continue to support the committee. Specifically, as the individual to whom our other executive officers directly report, he will be responsible for evaluating individual executive officers' contributions to corporate objectives, as well as their performance relative to individual objectives. We anticipate that our chief executive officer will on an annual basis at or around the beginning of each calendar year make recommendations to the compensation committee with respect to any potential merit salary increases, cash bonuses and equity incentives for our executive officers. We expect that our compensation committee will meet to evaluate, discuss, modify or approve these recommendations. Without the participation of the chief executive officer, the compensation committee as part of the annual review process will conduct a similar evaluation of the chief executive officer's contribution and individual performance and make determinations after the beginning of each calendar year with respect to potential merit salary increases, bonus payments, equity awards, or other forms of compensation for our chief executive officer. The compensation committee reviews and discusses its recommendations regarding

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compensation for our chief executive officer with the non-employee members of our board of directors.

Compensation Committee Process

Our compensation committee has the authority under its charter to engage the services of outside advisors, experts and others for assistance. Historically, the compensation committee did not retain an independent executive compensation consulting firm to assist it in structuring and implementing our executive compensation policies. However, in January 2008, the compensation committee retained Compensia, Inc. to serve as a consultant for the calendar year 2008 compensation period. In early 2008, Compensia conducted analyses of our compensation programs against those of other storage-related companies, which include 3Par, BlueArc, Compellent, CommVault Systems, Inc., Datalink Corporation, Dataram Corporation, Data Domain, Dot Hill Systems, Isilon Systems, Mellanox Technologies, Ltd., Netezza Corporation and Overland Storage, Inc. We did not perform a formal benchmarking process in reviewing the analyses of the compensation programs of these other companies. Instead, this data was used to obtain a general understanding of our then-current executive compensation levels relative to market practices as we began to consider a possible transition to the status of a public reporting company. We believe that the market data derived from a group of public reporting companies was useful as a reference for guiding the direction of future compensation determinations to ensure that as a public reporting company our executive compensation program would be consistent with market practice within our industry sector and geographic region. Compensia did not conduct any additional analyses for us for fiscal year 2009 or 2010, except with respect to the IPO Bonus Shares described below. Except as described below, our compensation committee has not adopted any formal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation or among different forms of non-cash compensation.

We currently intend to perform at least annually a strategic review of our executive officers' overall compensation packages to determine whether they provide adequate incentives and motivation and whether they appropriately compensate our executive officers. For compensation decisions, including decisions regarding the grant of equity compensation, relating to executive officers other than to our chief executive officer, the compensation committee considers recommendations from the chief executive officer.

Review Process

Although our fiscal year end is June 30, the compensation committee reviews and makes compensation decisions regarding cash bonus awards for the current year and performance objectives for the coming year each January on a calendar year basis, since our board of directors establishes our financial plan on a calendar year basis. Historically, except with respect to cash bonuses, our compensation committee has reviewed and made changes to executive compensation for individual officers on an as-needed basis, typically as requested by our chief executive officer. For our cash bonuses, the compensation committee reviews data and makes executive compensation decisions on an annual basis, typically during the first quarter of each calendar year for those individuals who receive annual bonuses and also discusses the recommendations of the chief executive officer for those individuals who receive quarterly bonuses. The compensation committee reviews, considers, and may amend the terms and conditions proposed by management. In the future, we intend to conduct annual reviews of our executive compensation, both the overall program and for each individual executive officer. We intend to consider the relative weight of cash and equity compensation and the overall value of our individual executive officer's compensation packages.

From time to time, the compensation committee may make off-cycle adjustments in executive compensation as it determines appropriate.

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Principal Components of Executive Compensation

Our executive compensation program consists of four primary components, in addition to benefits generally available to all salaried employees:

      base salary;

      cash bonuses;

      equity-based incentives; and

      severance/change of control arrangements.

Currently, all of our cash compensation plans for our executive officers provide short-term incentives that are paid within one year. We do not have any deferred cash compensation plans. Our equity-based incentives are long-term incentives that are based on the parameters described below under "Equity-Based Incentives." We believe that a program containing each of these components, combining both short- and long-term incentives, is necessary to achieve our compensation objectives and that collectively these components will be effective in properly incentivizing our executive officers and helping us achieve our corporate goals. Historically, equity compensation in the form of restricted stock and stock options has generally not been a significant portion of our executive officers' compensation program, as our company desired to minimize dilution to our existing investors that would result from such issuances. However, in connection with this offering, our board of directors approved amendments to our employment agreements with each of Messrs. Black, Mussman and Spies, which provide, among other things, that each such officer will receive an award of shares of our common stock upon the successful completion of an initial public offering. For Mr. Spies, this award was approved to satisfy prior commitments we had made to him to issue options to purchase shares of our common stock. As we have grown and neared an initial public offering, we began to issue stock options, and more recently RSUs, to provide long-term incentives whose value depends on our stock price. We believe that equity-based compensation that is subject to vesting based on continued employment is common in our industry and is an effective tool for retaining our officers, aligning their interests with those of our stockholders, and for building long-term commitment to the company. These arrangements are described below under "Equity-Based Incentives." We do not have a formal policy regarding adjustment or recovery of awards or payments if the relevant performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of the award or payment.

Base compensation.    The salaries of Messrs. Black, Spies, Gosnell, McGuire and Mussman for calendar year 2010 were $345,000, $195,000, $227,000, $225,000 and $255,000, respectively. These amounts reflect our compensation committee's view of the appropriate compensation levels of our named executive officers and remain unchanged for calendar year 2011. The compensation committee had previously increased Mr. Black's base salary from $290,000 to $345,000 in December 2008 and Mr. Spies' base salary from $175,000 to $195,000 in July 2009 after a review of Mr. Black's and Mr. Spies' total compensation. It was noted that Mr. Black's salary had not been increased in four years and Mr. Spies' salary had not been increased in two years and that their compensation was below the 50th percentile of companies in their peer group identified by Compensia. Following the adjustment of Mr. Black's base salary, his base salary was approximately in the middle of the 50th and 75th percentiles of the peer group. In August 2009, the base salary for Mr. Spies was increased by $20,000 to $195,000. Mr. Spies' total target compensation was approximately 23% below the average of the total compensation of the chief financial officers in the 2008 peer group companies, and in light of the contributions made by Mr. Spies, the compensation committee believed it would be appropriate to increase his total compensation to bring him closer to the average compensation for chief financial

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officers of the peer group of companies. As a result of the base salary increase and the increase in target bonus noted below, Mr. Spies' total on-target compensation was $300,000, which remained slightly below the average of the total compensation of chief financial officers of the peer group companies.

The total compensation for Mr. McGuire was determined based on negotiations between us and Mr. McGuire. We did not perform any formal third-party benchmarking or other market analysis with respect to the amount of his base salary or total target compensation, although we did receive advice from third-party executive search firms. The compensation committee has generally not awarded increases in annual base compensation, except as warranted based on a change in circumstances, such as an increase in an executive officer's responsibilities or to keep our company's operating expenses in line with our financial plan, particularly as a private company that was not yet profitable.

Base salaries for the named executive officers were not changed in calendar year 2010.

Cash bonuses.    We utilize cash bonuses to reward performance achievements. For Messrs. Black, Spies and Gosnell, bonus targets are established annually, are based on calendar-year performance and are paid in the first quarter of the calendar year following the calendar year to which the bonus relates. Although our fiscal year end is June 30, we base our annual bonus targets on calendar year performance. Mr. Mussman's bonus targets are established quarterly based on quarterly performance and are paid in the quarter following the quarter to which the bonus relates. The bonus target for Messrs. Black and Gosnell is a pre-determined percentage of their base salary and for our other named executive officers a fixed dollar amount. The target bonuses are intended to incentivize each executive officer to achieve the performance targets that are designed to help us achieve our current year financial plan and to provide a competitive level of compensation if the executive officer achieves his performance objectives. For calendar year 2010, the target bonus amounts for our named executive officers were determined by our board of directors based on the recommendation of our compensation committee and, with respect to his direct reports, the recommendations of our chief executive officer, and are reflected in their employment agreements with us. For Messrs. Black, Spies and Gosnell, the compensation committee determined the actual bonus amount according to the company's and the executive officer's level of achievement against these performance objectives. Our chief executive officer, with compensation committee approval, determined the actual bonus amount earned for calendar year 2010 for Mr. McGuire and Mr. Mussman. For calendar year 2010, the target bonus amounts and performance objectives for our executive officers were generally determined by our compensation committee, consistent with each executive's employment contract with us, with input from our board of directors with respect to our chief executive officer, and with input from our chief executive officer with respect to his direct reports.

The target bonus for our chief executive officer for calendar year 2010 was 50% of his base salary. Pursuant to Mr. Black's employment agreement with us, his target bonus may not be less than 50% of his base salary (currently, not less than $172,500). The annual bonus objectives are set forth in his employment agreement with us, which was most recently amended and restated in January 2011, and consisted of: (1) the achievement of financial goals set forth in a financial plan approved by our board of directors based on (a) gross revenue targets representing 21% of his target bonus, (b) EBITDA representing 21% of his target bonus and (c) cash reserves representing 28% of his target bonus, and which collectively represent 70% of the target bonus; and (2) other business goals established by the compensation committee, which represent 30% of the target bonus. For calendar year 2010, the financial goals for our chief executive officer, established by our board of directors, were: (a) gross revenue of $75.4 million, (b) EBITDA of $67,000 and (c) cash reserves of $9.9 million. Our board of directors chose these financial targets because it believed that, as a growth company, we should reward revenue growth, but only if that revenue growth is achieved cost-effectively and adequate cash reserves to fund operations are maintained, since we had not yet been profitable. Our board weighted the

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financial goals at 70% because it believed that achievement of our financial plan was important to our success. The business goals for our chief executive officer established by our board of directors were to establish distribution relationships for our products and success with original equipment manufacturers. Our board of directors believed that the combination of the financial measures and business goals as the chosen metrics for our chief executive officer were the best indicators of our financial success and the creation of stockholder value. The compensation committee determined that Mr. Black had earned a bonus of $258,750 for calendar year 2010, which represented 150% of his target bonus, due to his achievement of 100% of the gross revenue target, representing approximately 21% of the bonus, substantially exceeded the EBITDA target, representing approximately 75% of the bonus, 109% of the cash target, representing approximately 31% of the bonus, and 74% of the other business goals, representing approximately 23% of the bonus.

Mr. Spies' target annual bonus for calendar year 2010 was $105,000. As set forth in his employment agreement, Mr. Spies' bonus is to be paid out at the same percentage as Mr. Black's bonus was paid. Mr. Spies' bonus objectives for calendar year 2010 were set by our compensation committee and are the same as Mr. Black's financial objectives. Mr. Spies had earned 150% of his $105,000 target bonus for calendar year 2010.

Mr. Gosnell's target annual bonus for calendar year 2010 was up to 50% of his base salary, or a target of $100,000, and is set forth in his employment agreement with us. Mr. Gosnell's bonus objectives for calendar year 2010 were: (a) gross revenue of $75.4 million, (b) EBITDA of $67,000 and (c) cash reserves of $9.9 million. In addition, Mr. Gosnell is entitled to receive a bonus of $37,500, of which 50% of the bonus was based upon achievement of $3.15 million in sales of our Assureon product during the first half of calendar year 2010 and the remaining 50% of the bonus was based upon revenue goals of $39.5 million for the second half of calendar year 2010. The compensation committee determined that Mr. Gosnell had earned a bonus of $100,000 for calendar year 2010 for achievement of 100% of our financial goals, $13,500 for 72% achievement with respect to Assureon sales and an additional $18,750 for 100% achievement of our sales revenue goals.

Mr. McGuire is entitled to receive a target bonus of up to 100% of his base salary, payable quarterly. The amount of Mr. McGuire's target bonus was negotiated as part of his initial employment offer with us in October 2008. In calendar year 2010, the performance targets for Mr. McGuire were based on us achieving quarterly gross sales revenue of $17.9 million, $18.0 million, $19.0 million and $20.5 million, respectively. Our quarterly gross sales revenues for the first three quarters of calendar year 2010 were $16.9 million, $17.7 million and $19.3 million, respectively. Through the first three quarters of calendar year 2010, the compensation committee awarded Mr. McGuire bonuses of $53,930, $55,225 and $57,100, which represented 96%, 98% and 102% achievement of his performance targets, and therefore represented a corresponding percentage of his target bonus. We anticipate that the bonus earned by Mr. McGuire in the fourth quarter of calendar 2010 will be determined in February 2011. In addition, Mr. McGuire received a discretionary bonus of $50,000 based upon our fiscal year 2010 sales revenue.

Mr. Mussman's target bonus for calendar year 2010 was payable quarterly, with a target bonus of $18,750 per quarter based on meeting certain performance targets such as revenue and operating margin, as determined by the chief executive officer. For calendar year 2010, Mr. Mussman's performance targets were: (1) company-wide sales goals ranging from $21.4 million to $22.8 million, which represented 40% of the target bonus (2) gross margin targets, which represented 40% of the target bonus and (3) other business goals established by the chief executive officer, which represented 20% of the target bonus. We believed that these measures were appropriate because they incentivize Mr. Mussman to achieve targets that were consistent with and supported our achieving of our company-wide operating plan. Since these targets were achieved at sufficient levels to earn the associated portion of the quarterly bonus, Mr. Mussman was awarded bonuses, through the first three

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quarters of calendar year 2010, of $16,618, $17,501 and $17,865, which represented 89%, 93% and 95% achievement of his performance targets. We anticipate that the bonus earned by Mr. Mussman in the fourth quarter of calendar 2010 will be determined in February 2011.

Equity-Based Incentives

IPO Bonus Shares.    In November 2007, our board of directors approved amendments to our employment agreements with Messrs. Black, Mussman and Spies to provide for awards of shares of our common stock immediately prior to the completion of our initial public offering, or IPO Bonus Shares. For Mr. Mussman, the number of IPO Bonus Shares that he is entitled to receive is calculated by dividing the "IPO Bonus Value" for each officer by the initial public offering price per share. For Messrs. Black and Spies, the amount of IPO Bonus Shares is fixed as described below. We will withhold that value equal to the number of shares having a fair market value equal to the amount of federal, state and local income and employment taxes. The IPO Bonus Value varies based on our "Pre-IPO Value," which is calculated by multiplying the total number of shares of common stock, preferred stock and exchangeable stock actually outstanding on a treasury stock basis immediately prior to the initial public offering by the initial public offering price per share.

In June 2010, our compensation committee consulted with our compensation consultant, Compensia, to evaluate the IPO Bonus Share structure. Compensia reviewed the equity award structures for technology companies that recently experienced an initial public offering, executive ownership, typical unvested equity allocations and intrinsic value, in connection with considering to revise the grants of the IPO Bonus Shares. These companies consisted of: 3Par, Ancestry.com Inc., ArcSight, Inc., Compellent, Constant Contact, Inc., Data Domain, Intellon Corporation, LogMeIn, Inc., Netezza, Netsuite Inc., Neutral Tandem, Inc., Opentable, Inc., Rosetta Stone Inc., Rubicon Technology Inc., SolarWinds, Inc. and SuccessFactors, Inc.

At a company valuation of greater than $100 million, Mr. Black's total percentage ownership would be approximately at the median of the chief executive officers of the group of companies surveyed, Mr. Spies' total percentage ownership would be approximately at the 75th percentile of the chief financial officers of the companies surveyed and Mr. Mussman's would be approximately 40 basis points higher than the 75th percentile for chief operating officers of the group of companies surveyed. The analysis of total percentage ownership was completed on a "pre-tax" basis and therefore did not take into account the reduction in the number of IPO Bonus Shares to be issued. Accordingly, after taking into account the reduction in IPO Bonus Shares for applicable federal, state and local income and employment taxes, the officers' total equity ownership as compared to the group of companies surveyed would be lower.

In September 2010 and January 2011, subsequent to our fiscal year 2010, our board of directors approved additional amendments to our employment agreements with Mr. Mussman and Messrs. Black and Spies, respectively, which replaced and superseded any previous arrangements related to the issuance of the IPO Bonus Shares. The board of directors entered into this amendment in order to re-align the value ranges associated with the "Pre-IPO Value" and "IPO Bonus Value" for Mr. Mussman and the value to be realized by Messrs. Black and Spies upon completion of the initial public offering, based upon the economic conditions experienced in the capital markets by companies of similar size and value to us that recently completed an initial public offering. For Messrs. Black and Spies, the amendments provide them with the right to receive 750,000 and 187,500 shares of our common stock, respectively, immediately prior to the completion of our initial public offering. Two-thirds of such shares will be vested upon issuance, with the remaining one-third of such shares to become vested on each anniversary of this offering as to 50% of such shares, subject to continuous service with us, through the second anniversary date of our initial public offering. For Mr. Black, we will pay the applicable tax withholdings of approximately $        million and issue 425,194 shares

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valued at $        million, of which 141,731 shares will be unvested and remain subject to forfeiture, and for Mr. Spies, we will pay the applicable tax withholdings of approximately $                and issue 106,298 shares valued at $        million of which 35,433 shares will be unvested and remain subject to forfeiture. For Mr. Mussman, he will receive shares of common stock having a value ranging from $250,000 to $1.4 million, based on the value of our company. Based on an assumed initial public offering price per share of $         , the midpoint of the range set forth on the cover page of this prospectus, he would receive             IPO Bonus Shares. Mr. Mussman's IPO Bonus Shares will be fully-vested upon issuance.

Our board of directors awarded the IPO Bonus Shares to reward these officers for our prior performance, including positioning us to effect this offering, to ensure that these officers have a continuing stake in our long-term success and to align them with other executive officers who already had an equity stake in the company.

Other Equity Awards.    Prior to the September 2010 and January 2011 amendments to our employment agreements with Messrs. Mussman, Black and Spies, respectively, the IPO Bonus Shares were to be fully-vested upon the completion of this offering and because some members of the executive team had no other equity awards at the time, the compensation committee desired to ensure that adequate retention value is in place after this offering. Our compensation committee consulted with our compensation consultant, Compensia, and considered typical equity awards at similar pre-public companies, executive ownership and typical unvested equity allocations for recent technology company initial public offerings, these companies include: Data Domain, Netezza, Constant Contact, Compellent Technologies, Neutral Tandem, 3Par, Rubicon Technology, Intellon, Netsuite, ArcSight, Rosetta Stone, SolarWinds, Opentable, LogMeIn and Ancestry.com. On January 20, 2010, the compensation committee granted the equity awards to our named executive officers as follows:

Name
  Shares Subject
to Options
Granted
 

Philip Black

    190,476  

Eugene Spies

    47,619  

Thomas F. Gosnell

    95,238  

Richard Mussman

    95,238  

Each of the options has an exercise price of $9.14 per share and vests as to 25% of the shares on the first anniversary of the grant date, the remaining 75% vests ratably every quarter over the three year period following the first anniversary of the grant date. The options granted to each of Messrs. Black, Spies, Gosnell and Mussman will immediately vest as to all unvested shares in the event that, within 12 months of an acquisition of a majority of the voting power of our stock or the sale of all or substantially all of our assets, such named executive officer is terminated without cause by the acquiring company or is constructively terminated.

Due to a decline in the fair value of our common stock, outstanding options to purchase shares of our common stock that were granted in January and February 2010 had exercise prices higher than the then-current fair value of our common stock. In July 2010, offers to replace options to purchase a total of 385,712 shares, which were originally granted in January and February 2010 with exercise prices of $9.14 and $9.35 per share, were accepted and the options were exchanged for 296,346 options repriced to an exercise price of $7.04 per share, the fair value of our common stock at the time our board of directors authorized the repricing. Philip Black, Richard Mussman and Eugene Spies agreed to and participated in the July 2010 stock option repricing. The number of shares subject to the new option was reduced to a number of shares multiplied by a fraction, the numerator of which was $7.04, and the denominator of which was the exercise price per share of the option exchanged. Other

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than the exercise price and the number of underlying shares, the terms of each stock option that was exchanged, including the vesting commencement date and vesting schedule, did not change from the initial terms. The stock option repricing did not result in any incremental stock-based compensation expense as computed in accordance with FASB ASC 718.

The following table sets forth the options held by Messrs. Black, Mussman and Spies, which were repriced in July 2010.

Name
  Number of Shares
of Common Stock
Underlying
Original Options
  Original
Exercise
Price
  Number of
Securities
Underlying
Option After
Repricing
  Exercise
Price
After
Repricing
 

Philip Black

    190,476   $ 9.14     146,793   $ 7.04  

Richard Mussman

    95,238     9.14     73,396     7.04  

Eugene Spies

    47,619     9.14     36,698     7.04  

In May 2010, we amended our 2001 Stock Plan to provide for the issuance of RSUs to our officers and employees, described below under "Management—2001 Stock Plan and Non-Plan Stock Options." The amendment provided flexibility to our compensation committee whom desired to ensure that adequate retention value is in place for our executive team after the offering. On May 6, 2010, the compensation committee granted an award of 69,403 RSUs to Michael McGuire for retention purposes. A portion of the RSUs will vest upon the six-month anniversary of the consummation of our initial public offering equal to the number of full calendar months that have elapsed since the date of grant until such six-month anniversary date divided by 48, with the remaining RSUs vesting in equal amounts upon each three-month period thereafter, such that the remaining RSUs will be fully vested 48 months after the date of grant. The RSUs will vest in full immediately prior to the closing of a merger of us with or into another corporation, or the sale of substantially all of our assets provided he provides continuous services to us during such period.

We adopted a new equity incentive plan described below under "Management—2010 Equity Incentive Plan." The 2010 equity incentive plan will replace our existing 2001 stock plan upon completion of this offering and will afford greater flexibility in making a wide variety of equity awards, including stock options, shares of restricted stock and stock appreciation rights, to directors, executive officers, our other employees and consultants.

We do not have any program, plan or obligation that requires us to grant equity compensation on specified dates, and because we have not been a public company, we have not made equity grants in connection with the release or withholding of material non-public information. However, we intend to implement policies to ensure that equity awards are granted at fair market value on the date the action approving the award is effective.

During calendar year 2010, our board of directors based its determination of the value of our common stock on various factors. In connection with the preparation of our financial statements in anticipation of a potential initial public offering, valuations were performed to estimate the fair value of our common stock for financial reporting purposes through the use of contemporaneous valuations of our common stock.

Authority to approve stock option grants to executive officers rests with our board of directors and our compensation committee. In determining the size of stock option grants to executive officers, our board of directors considers our performance against the strategic plan, individual performance against

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the individual's objectives, the extent to which shares subject to previously granted options are vested and the recommendations of our chief executive officer and other members of management.

Employment Arrangements.    We have entered into employment arrangements with each of our named executive officers. We entered into our employment contract with Mr. Gosnell in connection with our acquisition of Evertrust. With the exception of Mr. Mussman, these agreements provide that if such officer is terminated other than for "cause" (which generally includes unauthorized use or disclosure of our confidential information, a material breach of an agreement with us, a material failure to comply with written company policies, commission of a felony or misdemeanor involving moral turpitude, failure to perform assigned duties after written notice, willful misconduct or gross negligence or other acts that constitute cause under applicable state law), or the individual terminates his employment for "good reason" (which generally includes a material reduction in base salary, a material reduction in duties or responsibilities, a transfer of employment requiring a relocation of certain specified distances, and any other action that constitutes a material breach by us of the employment agreement), he is entitled to receive (1) continuation of his salary for a period ranging from six to 12 months, (2) payments of annual target cash bonuses ranging from 50% to 100% over a 12-month period, or in the case of Mr. Black, paid when annual bonuses are normally paid, in an amount equal to the amount that he would have received for the year of termination had he been employed the full year, multiplied by a fraction, the numerator of which is the number of days elapsed during the year through the date of his termination, and the denominator of which is 365, or in the case of Mr. McGuire, paid quarterly, in an amount equal to the average amount per quarter received over the prior four quarters, for two quarters and (3) continuation of benefits for periods ranging from six to 12 months. We believe our employment arrangements with these officers are necessary for us to attract and retain our executive officers and to maintain competitive compensation arrangements with them.

Change of Control Arrangements.    Our employment agreement with Mr. Spies provides that if he is employed during the three-month period preceding a change of control and on the date of the change of control and he is terminated following the change of control, he is entitled to receive (1) continuation of his salary for six months, (2) a specific percentage of his annual target cash bonus and (3) continuation of benefits for six months. The employment agreement with Mr. Spies provides that he is entitled to these benefits only if he is terminated "without cause" or if he terminates his employment for "good reason," (generally as defined above) following the change of control.

Mr. McGuire's offer letter provides that all of the unvested shares subject to his option accelerate in full upon the sale of the company.

We decided to provide these change of control arrangements to mitigate some of the risk that exists for executives working in a small, dynamic startup company, an environment where there is a meaningful possibility that we could be acquired. These arrangements are intended to attract and retain qualified executives that have alternatives that may appear to them to be less risky absent these arrangements, and mitigate a potential disincentive to consideration and execution of such an acquisition, particularly where the services of these executive officers may not be required by the acquirer. Our change of control arrangements for our executive officers are based on a "double trigger," meaning that the provisions do not become operative upon a change of control unless the executive's employment is terminated involuntarily (other than for cause) or the executive terminates his employment for "good reason" following the transaction. We believe this structure strikes a balance between the incentives and the executive hiring and retention effects described above, without providing these benefits to executives who continue to enjoy employment with an acquiring company in the event of a change of control transaction. We also believe this structure is more attractive to potential acquiring companies, who may place significant value on retaining members of our executive team and who may perceive this goal to be undermined if executives receive significant acceleration payments in connection with

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such a transaction and are no longer required to continue employment to earn the remainder of their equity awards.

For a description and quantification of these severance and change of control benefits, see "Executive Compensation—Employment, Severance and Change of Control Arrangements."

Benefits.    We also provide the following benefits to our named executive officers, generally on the same basis provided to all of our employees: health, dental and vision insurance, life insurance, employee assistance plan, medical and dependent care flexible spending account, short- and long-term disability (generally as defined above), accidental death and dismemberment, and a 401(k) plan.

Summary Compensation Table

The following table presents information on compensation earned by our named executive officers for our fiscal years ended June 30, 2008, 2009 and 2010.

Name and Principal Position
  Fiscal
Year
  Salary(1)   Stock
Awards
  Option
Awards(3)
  Non-Equity
Incentive Plan
Compensation(4)
  All Other
Compensation
  Total  

Philip Black
President and Chief Executive Officer

    2010
2009
2008
  $

345,000
321,154
290,000
  $



                


(2)
$

900,000

  $

196,650
158,750
145,000
  $



  $

1,441,650
479,904
435,000
 

Eugene Spies
Chief Financial Officer

    2010
2009
2008
    200,192
175,673
175,000
   

                


(2)
  225,000

    114,750
75,000
75,000
   

    539,942
250,673
250,000
 

Thomas F. Gosnell(5)
Chief Executive Officer Nexsan Canada

    2010
2009
2008
    221,757
202,061
231,660
   

    450,000

    148,325
100,000
100,000
   

    820,082
327,865
331,660
 

Michael McGuire(6)
Chief Commercial Officer

    2010
2009
    225,000
151,442
                 
(7)
 
687,088
    269,473
137,744
   
    494,473
976,274
 

Richard Mussman
Chief Operating Officer

    2010     255,000         450,000     69,520         774,520  

(1)
The amounts in this column include payments in respect of accrued vacation, holidays, and sick days.
(2)
For the IPO Bonus Shares for Messrs. Black and Spies, an assumed initial public offering price of $         , the midpoint of the range set forth on the cover of this prospectus was used. These officers will receive a lesser amount of shares, based on the applicable federal, state and local income and employment taxes to be withheld for such officer. For Messrs. Black and Spies, two-thirds of such shares will be vested upon issuance, with the remaining one-third of such shares to become vested on each anniversary of this offering as to 50% of such shares, subject to continuous service with us, through the second anniversary date of our initial public offering. For further description of the IPO Bonus Shares and estimates on the number of IPO Bonus Shares that will be awarded, see the section of this prospectus entitled "Executive Compensation—Compensation Discussion and Analysis—Principal Components of Executive Compensation."
(3)
The amounts in this column represent the fair value of the awards on the date of grant, computed in accordance with ASC 718. See note 1 of the notes to our consolidated financial statements for a discussion of our assumptions in determining the ASC 718 values of our option awards.
(4)
The amounts in this column represent total performance-based bonuses earned during fiscal years 2008, 2009 and 2010. These bonuses were based on our financial performance and the executive officer's performance against his specified individual objectives. For a description of these bonuses, see the section of this prospectus entitled "Executive Compensation—Compensation Discussion and Analysis—Principal Components of Executive Compensation."
(5)
Mr. Gosnell is paid in Canadian dollars. The amounts indicated have been converted into U.S. dollars at average exchange rates per Canadian dollar of 0.94768 for fiscal year 2010, 0.86351 for fiscal year 2009 and 0.99 for fiscal year 2008.
(6)
Mr. McGuire joined us in October 2008.
(7)
This amount represents the grant date fair value of the RSU award on the date of grant, computed in accordance with ASC 718, based on an assumed initial public offering price of $         per share.

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Grants of Plan-Based Awards During Fiscal Year 2010

The following table provides information with regard to non-equity plan incentive plan awards granted during our fiscal year ended June 30, 2010 that may be earned by each named executive officer:

 
  Estimated Future
Payouts Under
Non-Equity Incentive
Plan Awards(1)(3)
  All Other
Stock
Awards
Number of
Shares of
Stock or
Units
  All Other
Option
Awards:
Number of
Securities
Underlying
Options
   
   
 
 
  Exercise or
Base price
of Option
Awards
($/share)
   
 
 
  Grant Date
Fair Value of
Stock Awards and
Option Awards(2)
 
Name
  Threshold   Target  

Philip Black

  $ 0   $ 172,500         190,476   $ 9.14   $ 900,000  

Eugene Spies

    0     105,000         47,619     9.14     225,000  

Thomas F. Gosnell

    0     137,500         95,238     9.14     450,000  

Michael McGuire

    0     225,000     69,403                            

Richard Mussman

    0     75,000         95,238     9.14     450,000  

(1)
Represents target bonuses established for calendar year 2010, a portion of which may be earned during the first half of fiscal year 2011 (July 1, 2010 through June 30, 2011). For a description of these bonuses, see the section of this prospectus entitled "—Compensation Discussion and Analysis—Cash Bonuses."
(2)
The amounts in this column represent the fair value of the awards on the date of grant, computed in accordance with ASC 718. For Mr. McGuire, the fair value of the RSU award is based on an assumed initial public offering price of $         per share. See note 1 of the notes to our consolidated financial statements for a discussion of our assumptions in determining the ASC 718 values of our option awards.
(3)
The target bonuses for Messrs. Black, Spies and Gosnell have no maximum amount, Mr. McGuire has a variable compensation plan with no maximum amount and Mr. Mussman has a performance bonus plan which target amount is also its maximum.

Outstanding Equity Awards at June 30, 2010

The following table shows all outstanding equity awards held by our named executive officers at the end of fiscal year 2010.

 
  Option Awards   Stock Awards  
Name
  Number of
Securities
Underlying
Unexercised
Options
Exercisable(5)
  Number of
Securities
Underlying
Unexercised
Options
Unexercisable(5)
  Option
Exercise
Price(1)
  Option
Expiration
Date
  Number of
Shares or
Units of
Stock That
Have Not
Vested
  Market
Value of
Shares or Units
of Stock That
Have Not
Vested
 

Philip Black

        190,476   $ 9.14     01/16/2020     750,000 (2) $                  (2)

Eugene Spies

        47,619     9.14     01/16/2020     187,500 (2)                    (2)

Thomas F. Gosnell

        95,238     9.14     01/19/2020          

Michael McGuire

    74,359     123,934 (3)   6.93     10/28/2018               (4)               (4)

Richard Mussman

        95,238     9.14     01/19/2010                 (2)                    (2)

    23,809         2.94     12/30/2012          

    9,523         2.94     07/31/2013          

(1)
Represents the fair market value of a share of our common stock on the grant date, as determined by our board of directors.
(2)
Based on an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover page of this prospectus, Messrs. Black, Spies and Mussman would receive 750,000, 187,500 and                IPO Bonus Shares, respectively, such officers will receive a lesser amount of shares, based on the applicable federal, state and local income and employment taxes to be withheld for such officer. For Messrs. Black and Spies, two-thirds of such shares will be vested upon issuance, with the remaining one-third of such shares to become vested on each anniversary of this offering as to 50% of such shares, subject to continuous service with us, through the second anniversary date of our initial public offering. For Mr. Mussman, such shares will be fully-vested upon issuance. For further description of the IPO Bonus Shares and the potential number of IPO Bonus Shares that will be awarded, see the section of this prospectus entitled "Executive Compensation—Compensation Discussion and Analysis—Principal Components of Executive Compensation."
(3)
This option was exercisable for 37.5% of its underlying shares as of June 30, 2010.
(4)
This amount represents the grant date fair value of the RSU award computed in accordance with ASC 718, based on an assumed initial public offering price of $         per share. A portion of the RSUs will vest upon the six-month anniversary of the consummation of our initial public offering equal to the number of full calendar months that have elapsed since the date of grant until such six-month anniversary date divided by 48, with the remaining RSUs vesting in equal amounts upon each three-month period thereafter, such that the remaining RSUs will be fully vested 48 months after the date of grant. Notwithstanding the foregoing, the RSUs will vest in full immediately prior to the closing of a merger of us with or into another corporation, or the sale of substantially all of our assets.
(5)
For Messrs. Black, Spies, Gosnell, McGuire and Mussman, 25% of their unvested options become vested on the first anniversary of the date of grant, with the remaining unvested portion vesting in an equal amount upon each three-month period thereafter, such that the remaining options will be fully vested 48 months after the date of grant. The two options for Mr. Mussman that are exercisable are fully-vested.

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Employment, Severance and Change of Control Arrangements

We have entered into the following agreements with our executive officers, including our named executive officers:

Philip Black, our president and chief executive officer, entered into an amended and restated employment agreement with us in January 2011. The agreement has a term that continues until Mr. Black's termination of employment. The agreement sets Mr. Black's current base salary at $345,000, subject to annual review by our board of directors. The agreement entitles Mr. Black to an incentive bonus, as determined by our board of directors, of not less than 50% of his then-current base salary if he achieves his performance objectives as determined by our board of directors; 70% of the bonus will be based on satisfying a board approved financial plan of record based upon (1) gross revenue, (2) gross margin, (3) operating expenses, (4) pre-tax profit and (5) cash reserves, and the remaining 30% of the bonus will be based upon other business goals as determined by the board. Except as provided below, Mr. Black must be employed on the last day of the calendar year to be eligible to receive the annual bonus for that year. See "Compensation Discussion and Analysis—Cash Bonuses" for more information regarding Mr. Black's incentive bonus. In addition, the agreement provides that if Mr. Black remains employed by us through the effective date of our initial public offering, or IPO, then he will receive IPO Bonus Shares, or if Mr. Black experiences a Qualifying Termination (as defined in his employment agreement) less than three years prior to the IPO, he will receive a certain percentage of the "IPO Bonus Shares" based on the number of years prior to the IPO, as described in "Compensation Discussion and Analysis—Equity-Based Incentives." The agreement also provides that if Mr. Black (1) is terminated by us without cause or (2) resigns for good reason (in either case prior to a change of control, or COC), then he will be entitled to receive (a) 12 months of salary continuation, (b) 12 months of continued participation in our benefit plans (other than any qualified retirement plan or other deferred compensation plan), and (c) a cash bonus payable when annual bonuses are normally paid in an amount equal to the amount that he would have received for the year of termination had he been employed the full year multiplied by a fraction, the numerator of which is the number of days elapsed during the year through the date of his termination, and the denominator of which is 365. Mr. Black has also agreed not to compete with us or solicit any of our employees, customers or vendors for the one-year period following his termination of employment with us.

Eugene Spies, our chief financial officer, entered into an amended and restated employment agreement with us in January 2011. The agreement sets Mr. Spies' base salary at $195,000 and his eligibility to receive an annual target bonus of $105,000, which shall be paid out at the same percentage that our chief executive officer receives on his annual bonus. If Mr. Spies remains employed by us through the effective date of an IPO, or if his employment is terminated by us within three months before the IPO, then he will receive IPO Bonus Shares as described in "Compensation Discussion and Analysis—Equity-Based Incentives." Additionally, the agreement provides that if Mr. Spies (1) is terminated by us without cause or (2) resigns after a COC for good reason, then he will receive (a) six months of salary continuation, (b) 50% of the bonus he would have received if he had remained employed through the end of the year payable when annual bonuses are normally paid, and (c) six months of continued participation in our benefit plans (other than any qualified retirement plan or deferred compensation plan).

Thomas F. Gosnell, our chief executive officer of Nexsan Canada, entered into an employment agreement with us in March 2005. During calendar year 2008, we agreed to fix Mr. Gosnell's base salary at CDN$234,000. The agreement terminates upon Mr. Gosnell's death, disability for three consecutive months or 120 days within a 12-month period, dismissal for cause, dismissal without cause, or Mr. Gosnell's resignation upon giving us 120 days advance written notice. The agreement sets Mr. Gosnell's base salary at US$200,000. In addition, Mr. Gosnell is eligible to receive an annual incentive bonus of up to 50% of his annual base salary based on goals established by the board of

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directors related to our gross revenue and earnings (before interest, taxes, depreciation and amortization) and based on the budget approved by the board for the year. If our board of directors requires Mr. Gosnell to relocate to Southern California, we shall reimburse his relocation expenses (up to US$50,000) and Mr. Gosnell's annual base salary and bonus will be increased by 25%. If Mr. Gosnell is terminated without cause, then subject to his signing a release, he is entitled to receive his then-current base salary for a period of 12 months, 50% of his target bonus and 12 months of continued participation in our benefit plans. Mr. Gosnell's agreement was amended in November 2007 to clarify the bonus metrics for 2007 and subsequent years. See "Compensation Discussion and Analysis—Cash Bonuses." The agreement prohibits Mr. Gosnell, until 12 months from the date he ceases to be employed by us, from providing services to certain of our competitors and soliciting our employees and customers. In addition, Mr. Gosnell is prohibited from owning more than two percent of the issued and outstanding securities of any of our publicly traded competitors.

Michael McGuire, our chief commercial officer, accepted an offer of employment with us in October 2008. The offer letter established Mr. McGuire's base salary at $225,000 and his eligibility to receive variable based cash compensation in an on-target amount of $225,000 annually, based on meeting certain performance targets, such as product sales, sales growth and performance objectives defined by the chief executive officer and the compensation committee of the board of directors, which shall be payable quarterly in arrears. See "Compensation Discussion and Analysis—Cash Bonuses." On October 29, 2008, we granted to Mr. McGuire an option to purchase 198,293 shares of our common stock at an exercise price of $6.93 per share, which option vested as to 25% of the shares on the first anniversary, the remaining 75% vests ratably every quarter over the three year period following the first anniversary of the grant date. In the event of a sale of our company, all of Mr. McGuire's then unvested options would fully accelerate. Additionally, the agreement provides that if Mr. McGuire (1) is terminated by us without cause or (2) resigns after a COC for good reason, then he is entitled to receive (a) six months of salary continuation, (b) variable based cash compensation for two quarters, with the payment for each quarter equal to the average amount per quarter that Mr. McGuire received over the prior four quarters, payable quarterly at the time such compensation would normally have been paid, and (c) six months of continued participation in our benefit plans (other than any qualified retirement plan or deferred compensation plan). Mr. McGuire has also agreed not to solicit any of our employees, customers or vendors for the one-year period following his termination of employment with us.

Richard Mussman, our chief operating officer, entered into an amended and restated employment agreement with us in September 2010. The agreement sets Mr. Mussman's current base salary at $255,000 and his eligibility to receive quarterly bonuses of up to $18,750 per quarter based on meeting certain performance targets such as revenue and operating margin, as determined by the chief executive officer. Mr. Mussman must be employed on the last day of the calendar quarter to be eligible to receive a bonus for that quarter. If Mr. Mussman remains employed by us through the effective date of an IPO, or if his employment is terminated by us within three months before the IPO, he will receive an award of IPO Bonus Shares as described in the "Compensation Discussion and Analysis—Equity-Based Incentives." In addition, if our Pre-IPO Value is less than $100,000,000, Mr. Mussman has agreed to forfeit his prior stock option grants to purchase an aggregate of 33,332 shares of our common stock at an exercise price of $2.94 per share.

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Potential Payments Upon Termination or Change in Control

The values of the severance, vesting acceleration, vacation payouts and benefit plan premiums shown in the table below were calculated based on the assumption that the resignation, termination or change in control, if applicable, occurred and the named executive officer's employment terminated on June 30, 2010, and the employment agreements currently in effect with each of our named executive officers were in effect on that date.

Name
  Nature of
Payment or Benefit(1)
  Voluntary
Resignation or
Termination for
Cause
  Termination
Without
Cause Prior
to a Change
in Control
  Termination
Without
Cause After
a Change in
Control
  Constructive
Termination(2)
 

Philip Black

  Severance
Target Bonus
Benefit Plan Premiums(4)
Vacation Payout(7)
Accelerated exercisability of stock options
Accelerated vesting of RSUs
  $







35,930

  $




345,000
86,250
14,996
35,930

  $




345,000
86,250
14,996
35,930
          




(8)
$




345,000
86,250
14,996
35,930
           




(8)
                       

           Total Value   $ 35,930   $ 482,176   $     $    
                       

Eugene Spies

 

Severance
Target Bonus
Benefit Plan Premiums(4)
Vacation Payout(7)
Accelerated exercisability of stock options
Accelerated vesting of RSUs

 
$








14,423

 
$





97,500
52,500
7,456
14,423

 
$





97,500
52,500
7,456
14,423
         





(8)

$





97,500
52,500
7,456
14,423