This report contains certain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not guarantees of performance and our actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: our ability to maintain and increase sales volumes of our products; our ability to continue to aggressively control costs and operating expenses; our ability to achieve the intended cost savings and maintain quality with our manufacturing partner; our ability to generate cash from operations; the ability of our suppliers to provide an adequate supply of components for our products at prices consistent with historical prices; our ability to raise outside capital and to repay our debt as it comes due; our ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by our competitors; our ability to maintain strong relationships with branded channel partners; our ability to regain compliance with the continued listing requirements of, and thereby maintain the listing of our common stock on, the NASDAQ Capital Market; customers', suppliers' and creditors' perceptions of our continued viability; rescheduling or cancellation of customer orders; loss of a major customer; our ability to enforce our intellectual property rights and protect our intellectual property; general competition and price measures in the market place; unexpected shortages of critical components; worldwide information technology spending levels; and general economic conditions. In evaluating such statements we urge you to specifically consider various factors identified in this report, including the matters set forth under the heading “Risk Factors” in Part I, Item 1A of this report, any of which could cause actual results to differ materially from those indicated by such forward-looking statements. Forward-looking statements speak only as of the date of this report and we undertake no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this report. Actual events or results may differ materially from such statements.
Overview
We are a trusted global provider of unified data management and data protection solutions designed to enable small and medium enterprises (“SMEs”), distributed enterprises, and small and medium businesses (“SMBs”) to anticipate and respond to data storage requirements. Whether an organization's data is locally or globally based, our solutions consolidate and protect data for easy and cost-effective management of different tiers of information. We enable companies to expend fewer resources on information technology (“IT”), allowing them to focus on being more responsive to the needs of their customers.
We develop and deliver a comprehensive solution set of award-winning products and services for storing data throughout the organization and during the entire data lifecycle. Our SnapScale
™
clustered network attached storage (“NAS”) products allow customers to scale-out in capacity and performance as their storage needs grow. Our SnapServer
®
products are unified NAS servers that integrate into businesses requiring simple, expandable block and file storage. Our SnapSAN
®
products are storage area network (“SAN”) arrays designed to ensure primary and secondary data is accessible and protected regardless of its location. Our SnapScale
™
, SnapServer
®
, and SnapSAN
®
solutions are available with backup, replication, and mirroring software in highly scalable configurations. These solutions provide simplified disk-based data protection and maximum flexibility to protect mission critical data for both continuous local backup and remote disaster recovery. Our NEO SERIES
®
and REO SERIES
®
libraries are tape and virtual tape solutions designed to meet the need for cost-effective, reliable data storage for long-term archiving and compliance requirements.
Our approach emphasizes long-term investment protection for our customers and reduces the complexities and ongoing costs associated with storage management. Moreover, most of our products are designed with a scalable architecture which enables companies to purchase additional storage as needed, on a just-in-time basis, and make it available instantly without downtime.
End users of our products include SMEs, SMBs, distributed enterprise companies such as divisions and operating units of large multi-national corporations, governmental organizations, and educational institutions. Our products are used in a broad range of industries including financial services, video surveillance, healthcare, retail, manufacturing, telecommunications, broadcasting, research and development, and many others.
We sell our solutions worldwide in the Americas, Europe, the Middle East and Africa (“EMEA”) and the Asia Pacific (“APAC”) region. We generate sales of our branded products through a worldwide channel, which consists of commercial distributors, direct market resellers (“DMRs”) and value-added resellers (“VARs”).
We were incorporated in California in 1980 as Overland Data, Inc., and changed our name to Overland Storage, Inc. in 2002. Our headquarters is located at 9112 Spectrum Center Boulevard, San Diego, California 92123, and our telephone number is (858) 571-5555.
Our Direction and Strategy
In today's business environment, we believe that improving productivity and effectively managing digital assets, while controlling operating expenses, has become one of the top priorities for organizations worldwide. At the same time, we believe that the cost and complexity of managing vital information has risen exponentially. As a result of these opposing forces, we believe that many companies find themselves lacking the essential resources and expertise required to adequately manage information across their businesses and they continue to spend a significant portion of their time and money tying isolated islands of data together. Without an effective alternative to mitigate the cost and complexity of traditional approaches, their data simply cannot be effectively shared and sufficiently protected. We provide solutions designed to deliver enterprise features with the simplicity that allows organizations to reduce the cost of managing and protecting their information. Our comprehensive data storage and protection solutions are designed to enable IT managers to easily and cost effectively share and preserve critical and non-critical data across their organizations and to provide continuous access, replication for disaster recovery, and reduced backup windows for improved business continuity. Our direction is to extend our current products beyond the data center and distributed enterprise into cloud capabilities and mobile devices.
Our Products and Services
Our data management and data protection solutions provide SMEs, SMBs, distributed enterprises and branch offices with disk-based systems for primary or nearline storage, disk backup and recovery, and software for data management and protection. For long-term storage requirements, we offer automated tape solutions for tape backup and archive.
Data Management Software
Our GuardianOS
™
storage-optimized platform OS is designed for SnapServer
®
NAS devices to deliver simplified data management and consolidation throughout distributed IT environments. The GuardianOS
™
platform provides a flexible solution for storage infrastructures, combining cross-platform file sharing with block-level data access on a single device. In addition to a unified storage architecture, the GuardianOS
™
platform offers scalability through features such as DynamicRAID
™
, centralized storage management and a comprehensive suite of data protection tools. The flexibility and scalability of GuardianOS
™
reduces the total cost of ownership of storage infrastructures.
Our Snap Enterprise Data Replicator
®
(“Snap EDR”) provides multi-directional, WAN-optimized replication for SnapServer
®
systems. With Snap EDR, administrators can automatically replicate data between multiple SnapServer systems for data distribution, data consolidation, and disaster recovery.
Our Protection OS
®
software provides virtualization, data protection, data management and connectivity features for REO
®
virtual tape library (“VTL”) systems. With our Protection OS
®
software, administrators can implement REO
®
appliances in a wide variety of storage and backup environments. The Protection OS
®
software is compatible with all major operating systems, popular backup software solutions, and iSCSI networks and Fibre Channel networks.
SnapSAN
™
Storage Area Network Solutions
Our SnapSAN
™
products provide block-based primary storage for virtual server environments and low latency applications. Systems can be managed through intuitive management interfaces that employ guided wizards to facilitate easy installation and administration. Our SnapSAN
™
products also offer a powerful set of features including thin provisioning, mirroring for high availability, replication and snapshots for data protection.
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•
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The SnapSAN
™
S1000 is a 2U storage array with iSCSI, Fibre Channel, or SAS host connections, designed for providing non-stop services to the most demanding applications. The SnapSAN
™
S1000 can be configured to utilize high capacity Nearline SAS drives for up to 48 terabytes, or high performance SAS drives for up to 7.2 terabytes, with maximum scalability using SnapServer
®
E1000 enclosures up to 240 terabytes.
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The SnapSAN
™
S3000 is a 2U storage array with options for 1Gb or 10Gb iSCSI, Fibre Channel, or SAS host connections, designed for midrange businesses and offers thin provisioning, volume cloning, synchronous and asynchronous remote replication, snapshots and disk spin down for reduced power consumption. The SnapSAN
™
S3000 can scale up to 288TB using the SnapSAN
™
Expansions.
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The SnapSAN
™
S5000 is a 2U storage array with options for 1Gb or 10Gb iSCSI, Fibre Channel, or SAS host connections, designed for the enterprise and offers the same features as the SnapSAN
™
S3000 as well as SSD integration for caching and policy-based tiering, performance analysis, and tuning and compliance tools. The SnapSAN
™
S5000 can scale up to 288TB using the SnapSAN
™
Expansions.
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SnapScale
™
Clustered Network Attached Storage Solutions
Our SnapScale X2
™
product is a clustered NAS solution that enables organizations with rapid or unpredictable data growth to scale capacity and performance without adding management complexity. SnapScale
™
eliminates islands of storage, which enables scaling without having to predict capacity in advance. SnapScale
™
writes data across multiple nodes and drives simultaneously for instant protection and high availability. Our SnapScale X2
™
is a rackmount 2U, 12-bay scale-out NAS system designed for high performance, high scalability, and is available for the storage and archiving of unstructured data. The SnapScale X2
™
can be configured with up to 12 Nearline SAS hard drives for a capacity of 48TB per node, and can scale out to 512PB with 2-way or 3-way data redundancy.
SnapServer
®
Network Attached Storage Solutions
Our SnapServer
®
family is an ideal platform for primary or nearline storage. With a full range of appliances, from desktop systems to rackmount systems that scale to hundreds of terabytes, the SnapServer
®
line delivers stability and best-in-class integration with Windows, UNIX/Linux, and Macintosh environments. For virtual servers and database applications, the SnapServer
®
family supports iSCSI block-level access with Microsoft VSS and VDS integration to simplify Windows management. For data protection, the SnapServer
®
family offers RAID replication, and snapshots for point-in-time data recovery.
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Rackmount System —
The SnapServer
®
DX Series products are rack-mountable systems intended for the server room or data center. The rackmount systems provide higher performance and capacity than desktop systems, and are designed for data protection and server consolidation. The SnapServer
®
DX Series products support Dynamic RAID
™
and traditional RAID levels 0, 1, 5, 6, and 10. The SnapServer
®
DX1 is a 1U server that can be configured with up to four SATA II drives, and can scale to 120 terabytes of storage capacity by adding SnapExpansion enclosures.
The
SnapServer
®
DX2 is a 2U server that can be configured with up to 12 SATA II drives, and can scale to 288 terabytes of storage capacity by adding up to seven SnapExpansion enclosures.
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Desktop System —
The SnapServer
®
210 is designed for easy set up and maintenance and is an ideal solution for branch and remote offices or departments that do not have dedicated IT personnel. These systems provide network accessible storage and cost effective data protection in a compact, portable, desktop storage unit. The SnapServer
®
210 is configured with two SATA II drives for up to 4 terabytes of storage capacity and supports RAID levels 0 and 1.
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REO
®
Virtual Tape Library Solutions
Our REO SERIES
®
VTL solutions provide best-in-class disk-based backup and recovery. Systems can be configured as virtual tape libraries, standalone virtual tape drives, and/or disk volumes, or LUNs. Powered by our REO Protection OS
®
software, our REO
®
system includes a unique feature known as dynamic virtual tape which provides more efficient and cost-effective disk storage than other competitive products on the market. REO
®
solutions are compatible with all popular open systems or windows-based backup software, physical tape drives or tape libraries and connect easily to iSCSI Ethernet networks for seamless integration into existing backup environments.
The REO
®
4600 is a 2U rackmount VTL designed for high performance, scalable backup and recovery. The REO
®
4600 can be configured with 12 SATA II drives for 12 or 24 terabytes of storage capacity. The REO
®
4600 can be scaled to 120 terabytes by adding up to four SnapServer
®
E2000 Expansion enclosures and supports RAID levels 5 and 6.
NEO
®
Tape-Based Backup and Long-Term Archive Solutions
Our NEO
®
Series Tape Libraries and Autoloaders are designed for small and medium businesses looking for simple, cost-effective data protection, or a complex enterprise environment with stringent performance and data availability requirements. We provide a complete range of high capacity, high performance, flexible tape-based solutions for data backup, recovery and archive. When combined with our SnapServer
®
systems, our NEO SERIES
®
products create a complete disk-to-disk-to-tape solution with a variety of storage capacity options. The NEO
®
tape solutions can accommodate up to 24 tape drives and 1,000 cartridges for maximum efficiency and data protection.
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The NEO
®
S Series provides affordable tape backup for small and medium businesses. The NEO
®
S libraries incorporate the latest linear tape-open (“LTO”) technologies, as well as SAS and FC connectivity. The NEO
®
100s is a tape drive in a compact, rack-friendly 1u form factor. The NEO
®
200s is a 2U tape library that supports up to 24 cartridge slots and two tape drives. The NEO
®
400s is a 4U tape library that supports up to 48 cartridge slots and four tape drives.
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•
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The NEO
®
E Series provides scalable, high capacity, data-center class tape automation that is ideal for large businesses. The NEO
®
E systems incorporate the latest LTO technologies as well as redundant robotics, partitioning capability, mail slot access and SCSI, SAS and FC connectivity. The NEO
®
2000e is a 5U tape library that supports up to 30 cartridge slots and two tape drives. The NEO
®
4000e is a 10U tape library that supports up to 60 cartridge slots and four tape drives. The NEO
®
2000e and NEO
®
4000e modules can be combined to provide a maximum capacity of up to 240 cartridge slots and 16 tape drives. The NEO
®
8000e is a 43U tape library that supports up to 500 cartridge slots and 12 tape drives in a single module, scalable to 1,000 cartridge slots and 24 tape drives.
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Customers
Our solution-focused product offerings are designed specifically for SMEs, SMBs, and distributed enterprises. We sell our products through our worldwide distributor and reseller network.
All of our products and services are designed and manufactured to address enterprise customer requirements and reliability standards. The following provides additional detail on our channels:
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Distribution channel
—
Our primary distribution partners in North America include Promark Technology, Synnex Corporation, and Ingram Micro Inc. We have approximately 35 distribution partners throughout Europe and Asia. We sell through a two-tier distribution model where distributors sell our products to system integrators, VARs or DMRs, who in turn sell to end users. We support these distribution partners through our dedicated field sales force and field engineers. In fiscal 2013, one distribution partner accounted for more than 10% of net revenue. No distribution partners accounted for more than 10% of net revenue for fiscal 2012.
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Reseller channel
—
Our reseller channel includes systems integrators, VARs and DMRs. Our resellers frequently package our products as part of a complete data processing system or with other storage devices to deliver a complete storage subsystem. Our resellers sometimes recommend our products as replacement solutions when backup systems are upgraded or bundle our products with storage management software specific to the end user's system. We support the reseller channel through our dedicated field sales representatives, field engineers and technical support organizations.
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We divide our worldwide sales into three geographical regions:
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•
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the Americas, consisting of North America and South America;
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•
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EMEA, consisting of Europe, the Middle East and Africa; and
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•
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APAC, consisting of Asia Pacific countries.
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We support our customers in the Americas primarily from our San Diego, California and San Jose, California locations. We support our EMEA customers through our wholly-owned subsidiaries located in Wokingham, England; Paris, France; and Munich, Germany. Each of these subsidiaries provides sales and technical support. Our subsidiary in England also provides repair services. We support our APAC customers from Singapore and South Korea. We grant our distributors the nonexclusive right to sell our products in a country or group of countries.
Sales to customers outside of the United States represent a significant portion of our sales and international sales are subject to various risks and uncertainties. See “Our international operations are important to our business and involve unique risks” under the heading “Risk Factors” in Part I, Item 1A of this report. Sales generated by our European channel generally show seasonal slowing during our first fiscal quarter (July through September), reflecting the summer holiday period in Europe.
The following table sets forth foreign revenue by geographic area (in thousands):
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2013
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2012
|
Foreign revenue:
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France
|
$
|
5,746
|
|
|
$
|
7,458
|
|
Netherlands
|
2,463
|
|
|
4,867
|
|
United Kingdom
|
3,308
|
|
|
4,201
|
|
Germany
|
3,598
|
|
|
3,741
|
|
Europe (other than UK, France, Germany and Netherlands)
|
3,476
|
|
|
3,636
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Singapore
|
1,535
|
|
|
2,074
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Other foreign countries
|
4,859
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|
6,111
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|
$
|
24,985
|
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|
$
|
32,088
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Foreign revenue as a percentage of net revenue
|
52.0
|
%
|
|
53.8
|
%
|
We provide a full range of marketing materials for our branded products, including training videos, webinars, product specific literature and application notes. We also offer lead generation opportunities and market development funds to key channel partners. Our sales management and field engineering personnel provide support to channel partners and visit potential customer sites to demonstrate the technical advantages of our products. We maintain press relations in the United States and Europe, and we participate in national and regional trade shows worldwide.
Customer Service and Support
Customer service and support are key elements of our strategy and critical components of our commitment to making enterprise-class support and services available to companies of all sizes. Our technical support staff is trained to assist our customers with deployment and compatibility for any combination of hardware platforms, operating systems and backup, data interchange and storage management software. Our application engineers assist with more complex customer issues. We maintain global toll-free service and support phone lines and we also provide self-service and support through our website support portal and email.
In July 2011, we introduced the enhanced OverlandCare
™
service offering for our entire line of disk-based and tape-based products. OverlandCare
™
offers on-site service and installation options, round-the-clock phone access to solution experts, as well as proof of concept and architectural design offerings. The OverlandCare
™
program strengthens our ability to provide comprehensive technical assistance on a global scale.
The following details the warranties we currently offer on our major products:
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three-year advance replacement OverlandCare
™
Level 1 limited warranty on our REO SERIES
®
and SnapSAN
™
products;
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•
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three-year advance replacement OverlandCare
™
Level 1 limited warranty on our SnapServer
®
NAS products;
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•
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one-year on-site by next business day service OverlandCare
™
Level 2 limited warranty on our SnapScale
™
NAS products;
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•
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one-year advance replacement OverlandCare
™
Level 1 limited warranty on our NEO
®
100s, NEO
®
200s, NEO
®
400s and NEO
®
2000e products; and
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•
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one-year on-site by next business day service OverlandCare
™
Level 2 limited warranty on our NEO
®
4000e and NEO
®
8000e products.
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Research and Development
We incurred research and development costs of
$6.5 million
and $8.1 million in fiscal 2013 and 2012, representing 13.6% and 13.7% of net revenue, respectively. In fiscal 2013, we continued to augment our product lines by expanding our hardware platforms and feature enhancements to our software. Noteworthy product releases for fiscal 2013 included the SnapSAN
™
S3000, SnapSAN
™
S5000, and SnapScale X2
™
. Our plans for fiscal 2014 include enhancements across all of our product lines. Particular areas of focus are the introduction of the next generation Scale-out NAS products, cloud capabilities and enterprise storage software.
Manufacturing and Suppliers
We perform product assembly, integration and testing at our manufacturing facility in San Diego, California. We purchase servers, tape drives, chassis, printed circuit boards, integrated circuits, and all other major components from outside suppliers. We carefully select suppliers based on their ability to provide quality parts and components which meet technical specifications and volume requirements. We actively monitor these suppliers but we are subject to substantial risks associated with the performance of our suppliers. For certain components, we qualify only a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier. See “If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations” under the heading “Risk Factors” in Part I, Section 1A of this report.
Backlog
We manufacture our products based on a combination of our forecast of customer demand and specific order requirements. Orders are generally placed by customers on an as-needed basis. A substantial portion of our products are sold on the basis of standard purchase orders that are cancelable prior to shipment without penalty. We ship most of the backlog that we accumulate during any particular fiscal quarter in the same quarter in which the backlog initially occurs. Therefore, our backlog generally grows during each fiscal quarter and shrinks during the latter part of the quarter to reach its lowest levels at the end of that same quarter, by which time shipments have occurred. As a result, our backlog as of the end of any fiscal quarter is not expected to be material and is not a predictor of future sales.
Competition
The worldwide storage market is highly competitive. Competitors vary in size from small start-ups to large multi-national corporations which may have substantially greater financial, research and development and marketing resources. In the tape automation market, we believe our primary competitors are Dell Inc. (“Dell”), Hewlett-Packard Company (“HP”), Spectra Logic and Quantum Corporation. Key competitive factors include product features, reliability, durability, scalability and price. Barriers to entry in tape automation are relatively high.
Our primary disk-based platform competitors are EMC Corporation (both branded EMC and Iomega division), NetGear, Inc., NetApp, Inc., HP, International Business Machines Corporation (“IBM”), and Dell. Key competitive factors in these markets include performance, functionality, scalability, availability, interoperability, connectivity, time to market enhancements and total value of ownership. Barriers to entry for disk-based backup products are low.
The markets for all of our products are characterized by significant price competition and we anticipate that our products will continue to face price pressure.
Proprietary Rights
General —
We presently hold 36 United States patents and we have 19 United States patents pending. In general, these patents have a 20-year term from the first effective filing date for each patent. The patents that are material to our business will begin to expire in November 2015. We also hold a number of foreign patents and patent applications for certain of our products and technologies. These rights, however, may not prevent competitors from developing products substantially equivalent or superior to our products. In addition, our present and future patents may be challenged, invalidated or circumvented, reducing or eliminating our proprietary protection. We continue to be diligent about maintaining our patent portfolio and monitoring potential infringement of our patents.
Employees
As of June 30, 2013, we had 176 full-time employees and 2 part-time employees, including 75 in sales and marketing, 28 in research and development, 50 in manufacturing and operations and 25 in finance, information systems, human resources and other management. There are no collective bargaining contracts covering any of the employees and we believe that our relationship with our employees is good.
Financial Information about Segments and Geographic Areas
We operate our business in one reportable segment. For information about our net revenue by product, and net revenue and long-lived assets broken down by geographic area, see Note 1 to our consolidated financial statements and refer to “Information about Products and Services” and “Information about Geographic Areas”.
Recent Developments
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In July 2013, we entered into a supply agreement, and a technology license agreement, with Sphere 3D Corporation (“Sphere 3D”). As consideration for the transactions contemplated by the technology license agreement, we paid Sphere 3D $250,000 in cash and issued Sphere 3D 213,220 shares of our common stock with a value at the time of issuance of approximately $250,000. In July 2013, as partial payment under the supply agreement, Sphere 3D issued 769,231 common shares to us at $0.65 CAD, or approximately $0.63, with a value as of the date of issuance equal to approximately $0.5 million. In connection with this transaction, Eric Kelly, our President and Chief Executive Officer, was appointed the chairman of the board of directors of Sphere 3D. Mr. Kelly was also awarded an option to purchase up to 850,000 shares of common stock of Sphere 3D with an exercise price of $0.65 CAD, or approximately $0.63, which we believe represents approximately 5% of Sphere 3Ds outstanding shares.
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In August 2013, we amended our Silicon Valley Bank credit facility to, among other things, extend the maturity date to August 7, 2015 and add a separate credit line of $750,000 for letters of credit, foreign exchange contracts and cash management, which is in addition to the existing $8.0 million revolving line of credit.
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In September 2013, we announced that Lisa Loe joined us as Vice President of Worldwide Sales.
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In September 2013, we released our SnapScale X4, a clustered NAS solution that is designed to provide a high-density solution to more efficiently manage growing amounts of unstructured data. The SnapScale X4 unifies NAS and iSCSI storage volumes under one global namespace helping enterprises strike the balance between storage capacity and return on investment, while still maintaining the ability to expand.
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Additional Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available on our website at
http://www.overlandstorage.com
, free of charge, as soon as reasonably practicable after we electronically file such reports with, or furnish those reports to, the Securities and Exchange Commission. The contents of our website are not a part of this report.
An investment in our company involves a high degree of risk. In addition to the other information included or incorporated by reference in this report, you should carefully consider each of the following risk factors in evaluating our business and prospects as well as an investment in our company. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case the trading price of our common stock could decline.
Our cash and other sources of liquidity may not be adequate to fund our operations for the next 12 months. If we raise additional funding through sales of equity or equity-based securities, your shares will be diluted. If we need additional funding for operations and we are unable to raise it, we may be forced to liquidate assets and/or curtail or cease operations.
We have projected that cash on hand, combined with available borrowings under our credit facility, will be sufficient to allow us to continue operations for the next 12 months. Significant changes from our current forecasts, including, but not limited to: (i) shortfalls from projected sales levels, (ii) unexpected increases in product costs, (iii) increases in operating costs and/or (iv) changes to the historical timing of collecting accounts receivable could have a material adverse impact on our ability to access the level of funding necessary to continue our operations at current levels. If any of these events occur or if we are not able to secure additional funding, we may be forced to make further reductions in spending, extend payment terms with suppliers, liquidate assets where possible and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.
We may seek debt, equity or equity-based financing (such as convertible debt) when market conditions permit. Such financing may not be available on favorable terms, or at all. If we need additional funding for operations and are unable to raise it through debt or equity financings, we may be forced to liquidate assets and/or curtail or cease operations. If we raise additional funds by selling additional shares of our capital stock, or securities convertible into shares of our capital stock, the ownership interest of our existing shareholders will be diluted. The amount of dilution could be increased by the issuance of warrants or securities with other dilutive characteristics, such as anti-dilution clauses or price resets.
We urge you to review the additional information about our liquidity and capital resources in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of this report. If we cease to continue as a going concern due to lack of available capital or otherwise, you may lose your entire investment in our company.
We may not have sufficient funds to repay our convertible notes when due and the conversion of the notes or additional payments of interest on the notes in shares may cause dilution to our existing shareholders.
In February 2013, we sold convertible notes in an aggregate original principal amount of $13.25 million to investors in a private placement and the notes are scheduled to mature in February 2017. In the event we are unable to repay the notes when due or extend the notes, we may be unable to continue our business operations. If we are unable to repay the notes when required, the note holders could commence legal action against us to recover the amounts due. Additionally, the notes are convertible into 10,192,304 shares of common stock at an initial conversion price of $1.30 per share and automatically convert into shares of common stock upon the occurrence of certain events. The notes provide that we may pay interest on the notes in cash or in shares of common stock at our option and at any time certain note holders collectively hold 20% or more of the then-outstanding common stock, those holders will have the option to determine whether the applicable interest payment payable to such holders is payable in cash or shares of common stock. In June 2013, we elected to pay interest on the notes in shares of common stock, which also resulted in a downward adjustment to the exercise price of certain of our outstanding warrants and an increase in the number of shares issuable upon exercise of such warrants. As a result, we will receive less proceeds from the exercise of those warrants, if any. The conversion of the notes or the additional issuance of shares of common stock as payment of interest on the notes could cause substantial dilution to our shareholders.
We have a history of net losses. We expect to continue to incur net losses for some time and we may not achieve or maintain profitability.
We have incurred significant operating losses in our last eight fiscal years and we anticipate continued losses during fiscal 2014. As of June 30, 2013, we had an accumulated deficit of
$132.4 million
. To return to profitability we will need to maintain or increase revenue, increase gross profit margins and improve our operating model. We may also need to implement additional cost reduction efforts across our operations as discussed below.
Our financial condition and the “going concern” opinion from our independent registered public accounting firm may negatively impact our business.
As a result of our recurring losses from operations and negative cash flows, the report from our independent registered public accounting firm regarding our consolidated financial statements for the year ended June 30,
2013
includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Such report, and our financial condition and history of net losses, could cause current or potential customers to defer new orders with us or to select other suppliers, and may cause suppliers to require terms that are unfavorable to us.
Our business may be harmed if growth in the storage market declines.
Our industry has experienced significant historical growth due to the continuing increase in the demand for storage by consumers, enterprises and government bodies around the world, and our customers' purchases of storage solutions to address this demand. While information technology (“IT”) spending has fluctuated periodically due to technology transitions and changing economic and business environments, overall growth in demand for storage has continued. Recent technology trends, such as the emergence of hosted (or “cloud”) storage, software as a service (“SaaS”) and mobile data access are driving significant changes in storage architectures and solution requirements. The impact of these trends on overall long-term growth patterns is uncertain. Nevertheless, if the general level of historic industry growth, or if the growth of the specific markets in which we compete, were to decline, our business and results of operations could suffer.
We may need to implement additional cost reduction efforts across our operations.
There can be no assurance that our cost reduction efforts will be successful and we may need to implement additional cost reduction initiatives, such as further reductions in the cost of our workforce and/or suspending or curtailing planned programs, either of which could materially harm our business, results of operations and future prospects.
We rely on indirect sales channels to market and sell our branded products. Therefore, the loss of, or deterioration in, our relationship with one or more of our distributors or resellers could negatively affect our operating results.
We sell all of our branded products through our network of distributors, VARs and DMRs, who in turn sell our products to end users. In fiscal 2013, we had one distributor that accounted for more than 10% of our sales. In fiscal 2012, we had no distributors that accounted for more than 10% of our sales. The long-term success of any of our distributors or resellers is difficult to predict, and we have no purchase commitments or long-term orders from any of them to assure us of any baseline sales through these channels. Most of our distributors and resellers also carry competing product lines that they may promote over our products. A distributor or reseller might not continue to purchase our products or market them effectively, and each determines the type and amount of our products that it will purchase from us and the pricing of the products that it sells to end user customers. Our operating results could be adversely affected by a number of factors, including, but not limited to:
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a change in competitive strategy that adversely affects a distributor's or reseller's willingness or ability to stock and distribute our products;
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the reduction, delay or cancellation of orders or the return of a significant amount of our products;
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the loss of one or more of our distributors or resellers; and
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any financial difficulties of our distributors or resellers that result in their inability to pay amounts owed to us.
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If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations.
Our products have a large number of components and subassemblies produced by outside suppliers. We depend greatly on these suppliers for items that are essential to the manufacture of our products, including tape drives, printed circuit boards and integrated circuits. We work closely with our regional, national and international suppliers, which are carefully selected based on their ability to provide quality parts and components that meet both our technical specifications and volume requirements. For certain items, we qualify only a single source, which magnifies the risk of shortages and decreases our ability to negotiate with that supplier on the basis of price. From time to time, we have been unable to obtain as many drives as we have needed due to drive shortages or quality issues from certain of our suppliers. If our suppliers fail to meet our manufacturing needs, it would delay our production and our product shipments to customers and negatively affect our operations.
We have granted security interests over certain of our assets in connection with various debt arrangements.
We have granted security interests over certain of our assets in connection with our credit facility and we may grant additional security interests to secure future borrowings. If we are unable to satisfy our obligations under these arrangements, we could be forced to sell certain assets that secure these loans, which could have a material adverse effect on our ability to operate our business. In the event we are unable to maintain compliance with covenants set forth in these arrangements or if these arrangements are otherwise terminated for any reason, it could have a material adverse effect on our ability to access the level of funding necessary to continue operations at current levels. If any of these events occur, management may be forced to make further reductions in spending, further extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.
Our success depends on our ability to anticipate rapid technological changes and develop new and enhanced products.
As an advanced technology company, we are subject to numerous risks and uncertainties characterized by rapid technological change and intense competition. Our future success will depend on our ability to anticipate changes in technology, and to develop, introduce, manufacture and achieve market acceptance of new and enhanced products on a timely and cost-effective basis.
Development schedules for technology products are inherently uncertain. We may not meet our product development schedules, and development costs could exceed budgeted amounts. Our business, results of operations, financial position and liquidity may be materially and adversely affected if the products or product enhancements that we develop are delayed or not delivered due to developmental problems, quality issues or component shortage problems, or if our products or product enhancements do not achieve market acceptance or are unreliable. We or our competitors will continue to introduce products embodying new technologies, such as new sequential or random access mass storage devices. In addition, new industry standards may emerge. Such events could render our existing products obsolete or not marketable, which would have a material adverse effect on our business, results of operations, financial position and liquidity.
We face intense competition and price pressure, and many of our competitors have substantially greater resources than we do.
The worldwide storage market is intensely competitive. A number of manufacturers of tape- and disk-based storage solutions compete for a limited number of customers. In addition, barriers to entry are relatively low in these markets. Some of our competitors have substantially greater financial and other resources, larger research and development staffs, and more experience and capabilities in manufacturing, marketing and distributing products. Ongoing pricing pressure could result in significant price erosion, reduced profit margins and loss of market share, any of which could have a material adverse effect on our business, results of operations, financial position and liquidity.
Our business is highly dependent on the continued market acceptance and usage of tape-based systems for data backup and recovery.
We have historically derived a majority of our revenue from products that use magnetic tape drives for backup and recovery of digital data. Our tape-based storage solutions now compete directly with other storage technologies, such as hard disk drives, and may face competition in the future from other emerging technologies. The prices of hard disk drives continue to decrease as their capacity and performance increase. We expect our tape-based products to face increased competition from these alternative technologies and come under increasing pricing pressure. If our strategy to compete in disk-based markets does not succeed, it could have a material adverse effect on our business, results of operations, financial position and liquidity.
If our revenue base continues to decline, we may choose to discontinue or exit some or a substantial portion of our current operations.
Our management team continually reviews and evaluates our product portfolio, operating structure and markets to assess the future viability of our existing products and market positions. We may determine that the infrastructure and expenses necessary to sustain an existing product offering are greater than the potential contribution margin that we would realize. As a result, we may determine that it is in our best interest to exit or divest one or more existing product offerings, which could result in costs incurred for exit or disposal activities and/or impairments of long-lived assets. Moreover, if we do not identify other opportunities to replace discontinued products or operations, our revenues would decline, which could lead to further net losses and adversely impact the market price of our common stock.
Our ability to compete depends in part on our ability to protect our intellectual property rights.
We rely on a combination of patent, copyright, trademark, trade secret and other intellectual property laws to protect our intellectual property rights. However, these rights may not prevent competitors from developing products that are substantially equivalent or superior to our products. To the extent that we have or obtain patents, such patents may not afford meaningful protection for our technology and products. Others may challenge our patents and, as a result, our patents could be narrowed, invalidated or declared unenforceable. The patents that are material to our business will begin to expire in November 2015. In addition, our current or future patent applications may not result in the issuance of patents in the United States or foreign countries. The laws of certain foreign countries may not protect our intellectual property to the same extent as U.S. laws. Furthermore, competitors may independently develop similar products, duplicate our products or, if patents are issued to us, design around these patents.
In order to protect or enforce our patent rights, we may initiate interference proceedings, oppositions, or patent litigation against third parties, such as infringement suits. Such enforcement efforts could be expensive and divert management's time and attention from other business concerns. The patent position of information technology firms in particular is highly uncertain, involves complex legal and factual questions, and continues to be the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under information technology patents.
In August and October 2010, we filed patent infringement lawsuits in the United States District Court for the Southern District of California and United States International Trade Commission (“ITC”), respectively, against various parties. Both lawsuits claim infringement of two of our U.S. Patents, Nos. 6,328,766 and 6,353,581.
In November 2011, we entered into a multi-year settlement and cross-licensing agreement with IBM pursuant to which we released all claims we had against IBM and Dell in connection with the patent infringement lawsuits we had filed in the United States District Court for the Southern District of California and at the ITC against BDT AG and certain of its affiliates, IBM and Dell. However, our infringement case against BDT AG and its affiliates continued. In June 2012, the Chief Administrative Law Judge of the ITC issued a public notice of the Initial Determination affirming that both of our asserted patents are valid, but that BDT did not violate Section 337 of the Tariff Act of 1930. In July 2012, the ITC released the public version of the Initial Determination, which found that the six asserted claims of U.S. Patent No. 6,328,766 were valid. The Initial Determination found no infringement of U.S. Patent No. 6,353,581, but concluded the asserted claims of the patent were valid.
In November 2012, the full Commission issued an opinion that did not revisit the Chief Administrative Law Judge's conclusion that BDT's customers directly infringe every asserted claim of U.S. Patent No. 6,328,766, and affirmed the validity of the asserted claims of U.S. Patent No. 6,353,581. The Commission remanded certain aspects of the Chief Administrative Law Judge's validity findings for U.S. Patent No. 6,328,766. In March 2013, the Chief Administrative Law Judge of the ITC issued a public notice of the Remand Initial Determination. The Remand Initial Determination held that there is no infringement of certain claims of U.S. Patent No. 6,353,581, and that the six asserted claims of U.S. Patent No. 6,328,766 are invalid as anticipated. In May 2013, the ITC granted in part our request to review the Remand Initial Determination, and reviewed the findings that BDT's FlexStor II
®
product line does not infringe one claim of U.S. Patent No. 6,353,581, and that the asserted
claims of U.S. Patent No. 6,328,766 are invalid as anticipated. See “Item 3. Legal Proceedings” for additional information on the patent litigation lawsuits.
In June 2012, we filed five additional patent infringement lawsuits in the United States District Court for the Southern District of California against seven companies. In February 2013, we filed a joint motion to dismiss our case against one of the seven companies. See “Item 3. Legal Proceedings” for additional information on these patent litigation lawsuits.
In August 2012, Quantum Corporation (“Quantum”) filed counterclaims against us in the United States District Court for the Southern District of California action, alleging trademark infringement and unfair competition claims, and infringement of U.S. Patent Nos. 5,491,812, 6,542,787, 6,498,771 and 5,925,119 by our products. In April 2013, Quantum filed a complaint against us in the United States District Court for the Southern District of California alleging infringement of U.S. Patent No. 7,263,596 by our products. Quantum is seeking monetary damages from us and injunctive relief.
In May 2013, Safe Storage LLC (“Safe Storage”), a Delaware limited liability company, filed a complaint against us in the United States District Court for the District of Delaware alleging infringement of U.S. Patent No. 6,978,346 by our products. Safe Storage is seeking monetary damages from us and injunctive relief.
We could incur charges for excess and obsolete inventory.
The value of our inventory may be adversely affected by factors that affect our ability to sell the products in our inventory. Such factors include changes in technology, introductions of new products by us or our competitors, the current or future economic downturns, or other actions by our competitors. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which adversely affects cost of sales and gross profit. We have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay or defer purchases in anticipation of new products that we or our competitors may introduce. We have established reserves for slow moving or obsolete inventory. These reserves, however, may prove to be inadequate, which would result in additional charges for excess or obsolete inventory.
Our warranty reserves may not adequately cover our warranty obligations.
We have established reserves for the estimated liability associated with our product warranties. However, we could experience unforeseen circumstances where these or future reserves may not adequately cover our warranty obligations. For example, the failure or inadequate performance of product components that we purchase could increase our warranty obligations beyond these reserves.
The failure to attract, hire, retain and motivate key personnel could have a significant adverse impact on our operations.
Our business is dependent on our ability to attract, hire, retain and motivate talented, highly skilled personnel. Achieving this objective may be difficult due to many factors, including competition for such highly skilled personnel; fluctuations in global economic and industry conditions; changes in our management or leadership; competitors' hiring practices; and the effectiveness of our compensation programs. Additionally, we have experienced a prolonged period of operating losses and declines in our stock price and cash position, which have affected and may continue to affect employee morale and retention. Turnover, particularly among senior management, may also create distractions as we search for replacement personnel, which could result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations. In addition, manpower in certain areas may be constrained, which could lead to disruptions over time. We cannot guarantee that we will successfully attract or retain the management we need, or be able to maintain an optimal workforce size. Any inability to attract, hire, retain or motivate such personnel or to address manpower constraints could materially adversely affect our results of operations, financial position or cash flows. We do not currently maintain any key-man insurance for any of our employees.
Our financial results may fluctuate substantially for many reasons, and past results should not be relied on as indications of future performance.
The markets that we serve are volatile and subject to market shifts that we may be unable to anticipate. A slowdown in the demand for workstations, mid-range computer systems, networks and servers could have a significant adverse effect on the demand for our products in any given period. In the past, we have experienced delays in the receipt of purchase orders and, on occasion, anticipated purchase orders have been rescheduled or have not materialized due to changes in customer requirements. Our customers may cancel or delay purchase orders for a variety of reasons, including, but not limited to, the rescheduling of new product introductions, changes in our customers' inventory practices or forecasted demand, general economic conditions affecting our customers' markets, changes in our pricing or the pricing of our competitors, new product announcements by us or others, quality or reliability problems related to our products, or selection of competitive products as alternate sources of supply. In particular, our ability to forecast sales to distributors, VARs and DMRs is especially limited because these customers typically provide us with relatively short order lead times or are permitted to change orders on short notice. Because a large portion of our sales is generated by our European channel, our first fiscal quarter (July through September) results of operations are often impacted by seasonally slow European orders, reflecting the summer holiday period in Europe. None of our customers is obligated to purchase a specific amount of our products.
Our financial results have fluctuated and will continue to fluctuate quarterly and annually based on, among others, the following factors:
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changes in customer mix;
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increases in the cost of, or limitations on, the availability of materials;
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fluctuations in average selling prices;
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changes in product mix;
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increases in costs and expenses associated with the introduction of new products; and
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currency exchange fluctuations.
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We therefore believe that our revenue and operating results will continue to fluctuate, and that period-to-period comparisons are not necessarily meaningful and should not be relied on as indications of future performance. Our revenue and operating results may fail to meet the expectations of public market analysts or investors, which could have a material adverse effect on the price of our common stock. In addition, portions of our expenses are fixed and difficult to reduce if our revenues do not meet our expectations. These fixed expenses magnify the adverse effect of any revenue shortfall.
We are in the process of replacing our enterprise resource planning (“ERP”) system. This will be expensive and may be disruptive to our business.
Our ERP system is 16 years old, and we are in the process of replacing it. Transitioning to a new ERP system will be expensive and time consuming, and our business and results of operations may be materially and adversely affected if problems occur during the transition. In addition, we have modified our current ERP system significantly during its term of use and it is possible that we will experience a significant system failure before we replace it. Any such failure may materially and adversely affect our business, liquidity, results of operations and financial position.
Our international operations are important to our business and involve unique risks.
Sales to customers outside of the United States represent a significant portion of our total sales and we expect them to continue to do so. Our future results could be materially adversely affected by a variety of political, economic or other factors relating to our operations outside the United States, including impacts from the global macroeconomic environment and continuing challenges in Europe, any or all of which could have a material adverse effect on our operating results and financial condition, including, but not limited to, the following:
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the worldwide impact of the recent global economic downturn and related market uncertainty, including the ongoing European economic and financial turmoil related to sovereign debt issues in certain countries;
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the imposition of governmental controls mandating compliance with various foreign and U.S. export laws;
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currency exchange fluctuations;
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weak economic conditions in foreign markets;
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political or social unrest;
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economic instability or weakness in a specific country or region;
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environmental and trade protection measures and other legal and regulatory requirements;
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health or similar issues, such as pandemic or epidemic or natural disasters;
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trade restrictions, tariffs and taxes;
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longer payment cycles typically associated with international sales; and
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difficulties in staffing and managing international operations.
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Furthermore, we may be unable to comply with changes in foreign laws, rules and regulations applicable to us in the future, which could have a material adverse effect on our business, results of operations, financial position and liquidity.
We are subject to exchange rate risk in connection with our international operations.
We do not currently engage in foreign currency hedging activities and, therefore, we are exposed to some level of currency risk. While essentially all of our sales in international markets are denominated in U.S. dollars, our wholly-owned subsidiaries in the United Kingdom, France and Germany incur costs that are denominated in local currencies. As exchange rates vary, these results when translated into U.S. dollars may vary from expectations and adversely impact overall expected results. A weaker U.S. dollar would result in an increase to revenue and expenses upon consolidation, and a stronger U.S. dollar would result in a decrease to revenue and expenses upon consolidation.
We have made a number of acquisitions in the past and we may make acquisitions in the future. The failure to successfully integrate acquisitions and successfully complete product development and launch of the related products could harm our business, financial condition and operating results.
We have in the past and may in the future make acquisitions of complementary businesses, products or technologies as we implement our business strategy. Mergers and acquisitions involve numerous risks, including liabilities that we may assume from the acquired company, difficulties in completion of in-process product development and assimilation of the operations and personnel of the acquired business, the diversion of management's attention from other business concerns, risks of entering markets in which we have no direct prior experience, and the potential loss of key employees of the acquired business.
Future mergers and acquisitions by us also may result in dilutive issuances of our equity securities and the incurrence of debt, amortization expense and potential impairment charges related to intangible assets. Any of these factors could adversely affect our business, liquidity, results of operations and financial position.
The market price of our common stock is volatile
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The market price of our common stock has experienced significant fluctuations since it commenced trading in February 1997, and may continue to fluctuate significantly in the future. Many factors could cause the market price of our common stock to fluctuate, including, but not limited to:
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our ability to meet our working capital needs;
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announcements concerning us, our competitors, our customers or our industry;
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changes in earnings estimates by analysts;
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purchasing decisions of significant customers;
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quarterly variations in operating results;
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the introduction of new technologies or products by us or our competitors;
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changes in product pricing policies by us or our competitors;
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the terms of any financing arrangements we enter into; and
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changes in general economic conditions.
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In addition, stock markets have generally experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock.
If our common stock is delisted from the NASDAQ Capital Market, our business, financial condition, results of operations and stock price could be adversely affected, and the liquidity of our stock and our ability to obtain financing could be impaired.
On January 2, 2013, we received a notice from The NASDAQ Stock Market LLC stating that for the last 30 consecutive business days our common stock had not maintained a minimum market value of listed securities, or MVLS, of $35 million as required for continued listing on the NASDAQ Capital Market under NASDAQ Listing Rule 5550(b)(2). In accordance with NASDAQ Listing Rule 5810(c)(3)(C), we had 180 calendar days, or until July 1, 2013, to regain compliance with the MVLS requirement. On July 2, 2013, we received the expected written notification from The NASDAQ Stock Market LLC of the Staff's decision to delist our securities from the NASDAQ Capital Market as a result of our failure to comply with the minimum MVLS requirement. To regain compliance with such rule, the MVLS (which is determined based on the closing bid price of our common stock on the NASDAQ Capital Market) would have had to have been at least $35 million for ten consecutive trading days during the period from January 2, 2013 through July 1, 2013. Based on the number of shares of common stock outstanding as of June 27, 2013, the MVLS would have exceeded $35 million if such closing bid price was at least $1.17 per share for the ten trading day period referred to above. We timely requested an appeal before the NASDAQ Listing Qualifications Panel, or the Panel, to seek continued listing pending our return to compliance with the minimum MVLS requirement under NASDAQ Listing Rule 5550(b)(2)
and the delisting was stayed pending a decision by the Panel. The hearing was held on August 8, 2013. On September 17, 2013, the Panel granted our request to continue the listing of our common stock on the NASDAQ Capital Market, subject to our regaining compliance with minimum MLVS requirement and our demonstrating compliance with all other requirements for continued listing by December 30, 2013, and our complying with certain other requirements. There can be no assurance that we will satisfy these conditions and that our common stock will remain listed on the NASDAQ Capital Market.
Any delisting of our common stock from the NASDAQ Capital Market could adversely affect our ability to attract new investors, decrease the liquidity of our outstanding shares of common stock, reduce our flexibility to raise additional capital, reduce the price at which our common stock trades, and increase the transaction costs inherent in trading such shares with overall negative effects for our shareholders. In addition, delisting of our common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock, and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect our business, financial condition and results of operations.
We are subject to laws, regulations and similar requirements, changes to which may adversely affect our business and operations.
We are subject to laws, regulations and similar requirements that affect our business and operations, including, but not limited to, the areas of commerce, intellectual property, income and other taxes, labor, environmental, health and safety, and our compliance in these areas may be costly. While we have implemented policies and procedures to comply with laws and regulations, there can be no assurance that our employees, contractors, suppliers or agents will not violate such laws and regulations or our policies. Any such violation or alleged violation could materially and adversely affect our business. Any changes or potential changes to laws, regulations or similar requirements, or our ability to respond to these changes, may significantly increase our costs to maintain compliance or result in our decision to limit our business or products, which could materially harm our business, results of operations and future prospects.
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes provisions regarding certain minerals and metals, known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries. These provisions require companies to undertake due diligence procedures and report on the use of conflict minerals in its products, including products manufactured by third parties. Compliance with these provisions will cause us to incur costs to certify that our supply chain is conflict free and we may face difficulties if our suppliers are unwilling or unable to verify the source of their materials. Our ability to source these minerals and metals may also be adversely impacted. In addition, our customers may require that we provide them with a certification and our inability to do so may disqualify us as a supplier.
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Item 1B.
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Unresolved Staff Comments.
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None.