Dot Hill Systems Corp. Reports Operating Results (10-Q)

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May 12, 2009
Dot Hill Systems Corp. (HILL, Financial) filed Quarterly Report for the period ended 2009-03-31.

Dot Hill Systems Corp. is the leading independent provider of carrier-class data storage solutions for Internet-generation applications. With solutions that include storage area networks and disaster-tolerant systems for Telco and Internet operations Dot Hill is uniquely positioned to address the storage requirements of mission-critical continuous computingenvironments. Its customers include many of the world's leading Internet service providers financial institutions advanced technology and telecommunications companies and government agencies. (PRESS RELEASE) Dot Hill Systems Corp. has a market cap of $32.9 million; its shares were traded at around $0.7 with and P/S ratio of 0.1.

Highlight of Business Operations:

We began shipping products to HP in the fourth quarter of 2007. In January 2008, we amended our agreement with HP to allow for sales to additional divisions within HP. The agreement does not contain any minimum purchase commitments and the term of the agreement was extended from one to five years. In connection with the agreement, we issued a warrant to HP to purchase 1,602,489 shares of our common stock (approximately 3.5% of our outstanding shares prior to the issuance of the warrant) at an exercise price of $2.40 per share. The warrant was fully vested and exercisable at signing. The fair value of the warrant, determined using the Black-Scholes option-pricing model, was approximately $2.3 million. The Black-Scholes option-pricing model utilized the following assumptions; a risk-free interest rate of 3.18%, expected volatility of 59.5% and a contractual life of five years. The warrant was issued to induce the customer to enter into the agreement with us. The fair value of the warrant was recorded as a reduction in revenue for the three months ended March 31, 2008, the period the agreement was signed.

In September 2008, we acquired certain identified RAIDCore and NAS assets of Ciprico for approximately $4.5 million, consisting of cash consideration of $2.3 million, an unsecured non-interest bearing promissory note in the amount of $0.9 million and contingent consideration in the amount of $1.1 million. Additionally, we incurred $0.2 million in acquisition related costs, primarily consisting of legal fees. Payments under the promissory note are due in equal monthly installments over a 42-month period that commenced October 1, 2008. We are also required to pay Ciprico earn-out payments of up to $2.0 million over the 42 months following the date of acquisition. The earn-out payments are payable on a quarterly basis and are equal to 6.67% of RAIDCore and NAS net revenue for the quarterly period. The contingent consideration liability fair value, as of the acquisition date, was $1.1 million and is included in other long-term liabilities. The purchase price was allocated to the assets acquired based on estimated fair values on the transaction date, resulting in the recording of RAIDCore technology of $4.3 million and NAS technology of $0.2 million. The RAIDCore and NAS assets are being amortized on a straight-line basis over four years and three years, respectively. Our primary reasons for the acquisition were to allow us to broaden our product portfolio in the RAID market while allowing us to sell into the Band 1 market, and to pursue opportunities at current and target OEM customers.

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