Part II. Item 1A. Risk
Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, which
could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common stock.
Risks
Related to Our Business and Industry
Our limited operating history makes it difficult to evaluate our current business and
future prospects, and may increase the risk of your investment.
We were founded in December 2005 and sold our first products in
April 2007. The majority of our revenue growth has occurred since December 31, 2009. We continue to innovate and develop enterprise data acceleration solutions. For example, we expanded our line of PCIe attached Flash product lines to include
both performance and cost optimized solutions, and in addition to announcing our acceleration appliance businesses, we upgraded our ION Accelerator software, acquired and recently upgraded ioControl, a hybrid storage solution for the SME market,
added extensions to our virtualization direct caching software, and introduced industry standard application programming interfaces, or APIs, under the OpenNVM initiative. In addition, our current management team has only been working together for a
relatively short period of time. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth. We have encountered and will continue to
encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, such as the risks described herein. If we do not address these risks successfully, our business and operating results would be adversely
affected, and our stock price could decline.
Our revenue growth rate in previous periods is not expected to recur in the near term
and may not be indicative of our future performance.
You should not consider our revenue growth in previous periods as indicative
of our future performance. In future periods, we do not expect to achieve similar percentage revenue growth rates as have achieved in some past periods. We have experienced in the past, and continue to expect to experience, substantial concentrated
purchases by customers to complete or upgrade large-scale datacenter deployments. Our revenue in any particular quarterly period could be disproportionately affected if this trend continues. You should not rely on our revenue for any prior quarterly
or annual periods as an indication of our future revenue or revenue growth. If we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability.
We have experienced rapid growth in previous periods and we may not be able to sustain or manage any future growth effectively.
We have significantly expanded our overall business, customer base, and operations, and we anticipate that we will continue to
grow our business. Our future operating results depend to a large extent on our ability to successfully manage our anticipated expansion and growth.
To manage our growth successfully, we believe we must effectively, among other things:
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maintain and extend our leadership in enterprise, hyperscale, and SME application acceleration;
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maintain and expand our existing OEM and channel partner relationships and continue to develop new OEM and channel partner relationships;
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forecast and control expenses;
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retain existing and recruit, hire, train, and manage additional research and development and sales personnel;
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expand our support capabilities;
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enhance and expand our distribution and supply chain infrastructure;
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manage inventory levels;
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enhance and expand our international operations; and
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implement, improve, and maintain our administrative, financial, and operational systems, procedures, and controls.
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We expect that our future growth will continue to place a significant strain on our managerial, administrative, operational, financial, and
other resources. We will incur costs associated with this future growth prior to realizing the anticipated benefits, and the return on these investments may be lower, or may develop more slowly, than we expect or may be nonexistent. If we are unable
to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products or enhancements to existing products, and we may fail to satisfy end-users’ requirements, maintain product quality, execute
on our business plan or respond to competitive pressures, each of which could adversely affect our business and operating results.
We expect large and concentrated purchases by a limited number of customers to continue to represent a substantial majority of our
revenue, and any loss or delay of expected purchases could adversely affect our operating results.
Historically, large purchases
by a relatively limited number of customers have accounted for a substantial majority of our revenue, and the composition of the group of our largest customers changes from period to period. Some of our customers make concentrated purchases to
complete or upgrade specific large-scale data storage installations. These concentrated purchases are short-term in nature and are typically made on a purchase order basis rather than pursuant to long-term contracts. Customers that accounted for 10%
or more of our revenue represented 61% and 60% of revenue for the three months ended March 31, 2013 and 2014, respectively, and 62% and 56% of revenue for the nine months ended March 31, 2013 and 2014, respectively. Revenue from the 10
largest customers in each period, including the applicable OEMs, accounted for 83% and 84% of revenue during the three months ended March 31, 2013 and 2014, respectively, and 85% and 79% of revenue during the nine months ended March 31,
2013 and 2014, respectively.
As a consequence of our limited number of large customers and the concentrated nature of their purchases,
our quarterly revenue, gross margin, and operating results may fluctuate from quarter to quarter and are difficult to estimate. For example, any acceleration or delay in anticipated product purchases or the acceptance of shipped products by our
larger customers could materially impact our revenue and operating results in any quarterly period. Additionally, our revenue and operating results could be adversely affected if any of these larger customers purchase our competitors’ products
instead of purchasing our products. We typically have limited visibility into the timing and size of purchases by our larger customers. We cannot provide any assurance that we will be able to sustain or increase our revenue from our larger customers
or that we will be able to offset the discontinuation of concentrated purchases by our larger customers with purchases by new or existing customers. We expect that sales of our products to a limited number of customers will continue to contribute
materially to our revenue for the foreseeable future, but that competition for these sales will increase. The loss of, or a significant delay or reduction in purchases by or change in the purchasing patterns of, a small number of significant
customers could materially harm our business and operating results.
Our gross margins are impacted by a variety of factors, are
subject to variation from period to period, and are difficult to predict.
Our gross margins fluctuate from period to period due
primarily to product costs, customer mix, and product mix. From the three months ended March 31, 2013 through the three months ended March 31, 2014, our quarterly gross margins ranged from 51.0% to 57.9%. Our gross margins are likely to
continue to fluctuate and may be affected by a variety of factors, including:
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demand for our products;
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adoption and the rate of adoption for new products;
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rebates, sales and marketing initiatives, discount levels, and competitive pricing;
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changes in customer, geographic, or product mix, including mix of configurations within products;
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favorable pricing for volume sales transactions;
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significant new customer deployments;
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the cost of components and freight;
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changes in our manufacturing costs, including fluctuations in yields and production volumes;
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new product introductions and enhancements, potentially with initial sales at relatively small volumes and higher product costs;
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changes in the mix between direct versus indirect sales;
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the timing and amount of revenue recognized and deferred;
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excess inventory levels or purchase commitments as a result of changes in demand forecasts or last time buy purchases;
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write-downs due to excess and obsolete inventory;
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possible product and software defects and related increased warranty or repair costs;
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the timing of technical support service contracts and contract renewals;
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inventory stocking requirements to support new product introductions; and
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product quality and service ability issues.
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Due to such factors, gross margins are subject to
variation from period to period and are difficult to predict. If we are unable to manage these factors effectively, our gross margins may decline, and fluctuations in gross margin may make it difficult to manage our business and achieve or maintain
profitability, which could materially harm our business and operating results.
Some of our larger customers require more favorable
terms and conditions from their vendors and may request pricing concessions. As we seek to sell more products to these customers, we may be required to agree to terms and conditions that may have an adverse effect on our business or ability to
recognize revenue.
Some of our larger customers have significant purchasing power and, accordingly, have requested and received
more favorable terms and conditions, including lower prices, than we typically provide. As we seek to sell more products to this class of customer, we may be required to agree to these terms and conditions, which may include terms that affect the
timing of our revenue recognition or may reduce our gross margins and have an adverse effect on our business and operating results.
The future growth of our sales to OEMs is dependent on OEM customers incorporating our products into their server and data storage
systems and the OEM’s sales efforts. Any failure to grow our OEM sales and maintain relationships with OEMs could adversely affect our business, operating results, and financial condition.
Sales of our products to OEMs represent a significant portion of our revenue and we anticipate that our OEM sales will constitute a
substantial portion of our future sales. In some cases, our products must be designed into the OEM’s products. If that fails to occur for a given product line of an OEM, we would likely be unable to sell our products to that OEM for such
product line during the life cycle of that product. Even if an OEM integrates one or more of our products into its server, data storage systems or appliance solutions, we cannot be assured that its product will be commercially successful, and as a
result, our sales volumes may be less than anticipated. Our OEM customers are typically not obligated to purchase our products and can choose at any time to stop using our products, if their own systems are not commercially successful or if they
decide to pursue other strategies or for any other reason, including the incorporation or development of competing products by these OEMs. Moreover, our OEM customers may not devote sufficient attention and resources to selling our products. We may
not be able to develop or maintain relationships with OEMs for a number of reasons, including because of the OEM’s relationships with our competitors or prospective competitors or other incentives that may not motivate their internal sales
forces to promote our products. In addition, direct sales of our products may compete with products sold by our OEM partners, and our OEM partners may compete directly with our other OEM partners, which may affect the commitment of our OEM partners
to sell our products. Even if we are successful in selling through OEMs, sales through OEMs could result in a lower gross margin business than our direct sales business. If we are unable to grow our OEM sales, if our OEM customers’ systems
incorporating our products are not commercially successful, if our products, including new and next generation products, are not designed into a given OEM product cycle, if we fail to minimize conflicts between our channel partners, in particular
OEMs, if our OEM customers do not timely qualify our products for promotion or sale by them, or if our OEM customers significantly reduce, cancel, or delay their orders with us, our revenue would suffer and our business, operating results, and
financial condition could be materially adversely affected.
Ineffective management of our inventory levels could adversely affect
our operating results.
If we are unable to properly forecast, monitor, control, and manage our inventory and maintain appropriate
inventory levels and mix of products to support our customers’ needs, we may incur increased and unexpected costs associated with our inventory. Sales of our products are generally made through individual purchase orders and some of our
customers place large orders with short lead times, which make it difficult to predict demand for our products and the level of inventory that we need to maintain to satisfy
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customer demand. If we build our inventory in anticipation of future demand that does not materialize, or if a customer cancels or postpones outstanding orders, we could experience an
unanticipated increase in levels of our finished products. For some customers, even if we are not contractually obligated to accept returned products, we may determine that it is in our best interest to accept returns in order to maintain good
relationships with those customers. Product returns would increase our inventory and reduce our revenue. If we are unable to sell our inventory in a timely manner, we could incur additional carrying costs, reduced inventory turns, and potential
write-downs due to obsolescence.
Alternatively, we could carry insufficient inventory, and we may not be able to satisfy demand, which
could have a material adverse effect on our customer relationships or cause us to lose potential sales.
We have often experienced order
changes including delivery delays and fluctuations in order levels from period-to-period, and we expect to continue to experience similar delays and fluctuations in the future, which could result in fluctuations in inventory levels, cash balances,
and revenue.
The occurrence of any of these risks could adversely affect our business, operating results, and financial condition.
Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our
operating results to fall below expectations.
Our operating results may fluctuate due to a variety of factors, many of which are
outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall
below the expectations of investors or any securities analysts that follow our company, the price of our common stock would likely decline.
Factors that are difficult to predict and that could cause our operating results to fluctuate include:
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the timing and magnitude of orders, shipments, and acceptance of our products in any quarter;
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our ability to control the costs of the components we use in our hardware products;
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our ability to adopt subsequent generations of non-volatile memory components into our hardware products;
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our ability to adopt subsequent generations of ioMemory into our software and application acceleration solutions;
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our ability to gain market acceptance of our acceleration appliances
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disruption in our supply chains, component availability, and related procurement costs;
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reductions in customers’ budgets for information technology purchases;
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delays in customers’ purchasing cycles or deferments of customers’ product purchases in anticipation of new products or updates from us or our competitors;
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fluctuations in demand and prices for our products;
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changes in industry standards in the data storage industry;
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our ability to develop, introduce, and ship in a timely manner new products and product enhancements that meet customer requirements;
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the timing of product releases or upgrades or announcements by us or our competitors;
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any change in the competitive dynamics of our markets, including new entrants or discounting of product prices;
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our ability to control costs, including our operating expenses; and
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future accounting pronouncements and changes in accounting policies.
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The occurrence of any
one of these risks could negatively affect our operating results in any particular quarter, which could cause the price of our common stock to decline.
We have incurred significant net losses during our limited operating history and may not consistently achieve or maintain profitability.
We have incurred net losses in each fiscal year other than fiscal 2011 and we may incur losses in future periods. For example, if
our revenue does not increase to offset our operating expenses, we will not be profitable. As of March 31, 2014, we had an accumulated deficit of $188.6 million.
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Changes in our provision for income taxes or adverse outcomes resulting from tax
examinations could adversely affect our results.
Our provision for income taxes is subject to volatility and could be adversely
affected by several factors, many of which are outside of our control, including:
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changes in the valuation of our deferred tax assets and liabilities;
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changes in the research and development tax credit laws;
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an increase in non-deductible expenses for tax purposes, including certain stock-based compensation expense and impairment of goodwill;
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transfer pricing adjustments;
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earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;
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changes in the income allocation methods for state taxes;
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a change in the pattern of stock option exercises by our employees;
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tax assessments resulting from income tax audits or any related tax interest or penalties that could significantly affect our income tax provision for the period in which the settlement takes place;
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a change in our decision to indefinitely reinvest foreign earnings;
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changes in accounting principles;
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the tax effects of purchase accounting for acquisitions and restructuring charges that may cause fluctuations between reporting periods;
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imposition of withholding or other taxes on payments by subsidiaries or customers; or
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changes in tax laws or related interpretations, accounting standards, regulations, and interpretations in multiple tax jurisdictions in which we operate.
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Significant judgment is required to determine the recognition and measurement attribute as prescribed in the income tax accounting standards.
In addition, these standards apply to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence,
including our past operating results, our forecast of future market growth, forecasted earnings, and future taxable income, and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require
significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Due to historical net losses incurred and the uncertainty of realizing the deferred tax assets, for all the periods presented, we
have a full valuation allowance against our deferred tax assets. We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. To the extent that we
generate positive income and expect, with reasonable certainty, to continue to generate positive income we may release all or a portion of our valuation allowance in a future period. This release would result in the recognition of certain deferred
tax assets and a decrease to income tax expense for the period such release is recorded. The release of all or a portion of the valuation allowance will have a significant effect on our tax expense in the period it is released.
As a multinational corporation, we conduct our business in many countries and are subject to taxation in many jurisdictions. The taxation of
our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is dependent upon the availability of tax credits and carryforwards. The
application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of
regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.
In addition, we may be subject to examination of our tax returns by the Internal Revenue Service, or IRS, and other tax authorities. Our
federal income tax return for fiscal 2012 and payroll tax returns for calendar 2012 and 2013 are currently under audit by the IRS as described in Note 7 to our condensed consolidated financial statements. If tax authorities challenge the relative
mix of our U.S. and international income, our future effective income tax rates could be adversely affected. While we regularly assess the
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likelihood of adverse outcomes from such examinations and the adequacy of our provision for income taxes, there can be no assurance that such provision is sufficient or that a determination by a
tax authority will not have an adverse effect on our business, financial condition, and results of operations.
Our sales cycles can
be long and unpredictable, particularly with respect to large orders and OEM relationships, and our sales efforts require considerable time and expense. As a result, it can be difficult for us to predict when, if ever, a particular customer will
choose to purchase our products, which may cause our operating results to fluctuate significantly.
Our sales efforts involve
educating our customers about the use and benefits of our products, including their technical capabilities and cost saving potential. Customers often undertake an evaluation and testing process that can result in a lengthy sales cycle. We spend
substantial time and resources on our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals, and unplanned administrative,
processing, and other delays. Additionally, a significant portion of our sales personnel have been with us for less than a year, and we continue to hire new sales personnel, which could further extend the sales cycle as these new personnel are
typically not immediately productive. These factors, among others, could result in long and unpredictable sales cycles, particularly with respect to large orders.
We also sell to OEMs that incorporate our solutions into their products, which can require an extended evaluation, testing, and qualification
process before our product is approved for inclusion in one of their product lines. We also may be required to customize our product to interoperate with an OEM’s product, which could further lengthen the sales cycle for OEM customers. In
addition, an OEM may align the announcement of our products in conjunction with their fixed product release cycle and may further add delay when not aligned with the current cycle. The length of our sales cycle for an OEM makes us susceptible to the
risk of delays or termination of orders if end-users decide to delay or withdraw funding for datacenter projects, which could occur for various reasons, including global economic cycles and capital market fluctuations.
As a result of these lengthy and uncertain sales cycles of our products, it is difficult for us to predict when customers may purchase and
accept products from us and as a result, our operating results may vary significantly and may be adversely affected.
We compete
with large storage and software providers and expect competition to intensify in the future from established competitors and new market entrants.
The market for data or application acceleration products is highly competitive, and we expect competition to intensify in the future. Our
direct acceleration products compete with various traditional datacenter architectures, including high performance server and storage approaches. These may include offerings from traditional data storage providers, including storage array vendors
such as EMC Corporation, which typically sell centralized storage products as well as high-performance storage approaches utilizing solid state disks, as well as vertically integrated appliance vendors such as Oracle or a number of all Flash or
hybrid array companies such as Nimble Storage, and other privately held companies. In addition, we may also compete with enterprise solid state disk vendors such as Huawei Technologies, Intel, LSI, Marvell Semiconductor, Micron Technology, Samsung
Electronics, SanDisk, Seagate Technology, Toshiba, Western Digital including Virident, and other companies that are privately held. A number of new, privately held companies are currently attempting to enter our market, one or more of which may
become significant competitors in the future.
Our all-flash and hybrid appliances products compete with proprietary integrated flash
arrays from EMC, Dell, flash-based storage products by HP, NetApp, TMS by IBM, Violin Memory Systems, Whiptail by Cisco, and other companies that are privately held.
Our virtualization acceleration products compete with solutions from Adaptec by PMC, EMC, LSI, Oracle, SanDisk, and Western Digital, as well
as several open source software solutions and other software-based hardware cache solutions being developed by companies that are privately held.
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. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product
performance or features. New start-up companies continue to innovate and may invent similar or superior products and technologies that may compete with our products and technology. Some of our competitors have made acquisitions of businesses that
may allow them to offer more directly competitive and comprehensive solutions than they had previously offered. In addition, some of our competitors, including our OEM customers, may develop competing technologies and sell at zero or negative
margins, through product bundling, closed technology platforms, or otherwise, to gain business. Our current and potential competitors may also establish cooperative relationships among themselves or with third parties. As a result, we cannot assure
you that our products will continue to compete favorably, and any failure to do so could seriously harm our business, operating results, and financial condition.
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Competitive factors could make it more difficult for us to sell our products, resulting in
increased pricing pressure, reduced gross margins, increased sales and marketing expenses, longer customer sales cycles, and failure to increase, or the loss of, market share, any of which could seriously harm our business, operating results, and
financial condition. Any failure to meet and address these competitive challenges could seriously harm our business and operating results.
The market for non-volatile storage class memory products is developing and rapidly evolving, which makes it difficult to forecast
end-user adoption rates and demand for our products.
The market for non-volatile storage class memory products is developing,
segmenting, and rapidly evolving. Accordingly, our future financial performance will depend in large part on growth in this market and on our ability to adapt to emerging demands in this market. Sales of our products currently are dependent in large
part upon demand in markets that require high performance data storage solutions such as computing, Internet, and financial services. It is difficult to predict with any precision end-user adoption rates, end-user demand for our products or the
future growth rate and size of our market. The rapidly evolving nature of the technology in the data storage products market, as well as other factors that are beyond our control, reduce our ability to accurately evaluate our future outlook and
forecast quarterly or annual performance. Our products may never reach mass adoption, and changes or advances in technologies could adversely affect the demand for our products. Further, although Flash-based data storage products have a number of
advantages compared to other data storage alternatives, Flash-based storage devices have certain disadvantages as well, including a higher price per gigabyte of storage, potentially shortened product lifespan, more limited methods for data recovery
and lower performance for certain uses, including sequential input/output transactions and increased utilization of host system resources than traditional storage, and may require end-users to modify or replace network systems originally made for
traditional storage media. A reduction in demand for Flash-based data storage caused by lack of end-user acceptance, technological challenges, competing technologies, and products or otherwise would result in a lower revenue growth rate or decreased
revenue, either of which could negatively impact our business and operating results.
If our industry experiences declines in
average sales prices, it may result in declines in our revenue and gross profit.
The industry for data storage products is highly
competitive and has historically been characterized by declines in average sales prices. It is possible that the market for decentralized storage solutions could experience similar trends. Our average sales prices could decline due to pricing
pressure caused by several factors, including competition, the introduction of competing technologies, the worldwide supply of Flash-based or similar memory components, our manufacturing efficiencies, implementation of new manufacturing processes,
and expansion of manufacturing capacity by component suppliers. If we are required to decrease our prices to be competitive and are not able to offset this decrease by improvements in our cost of goods, increases in volume of sales or the sales of
new products with higher margins, our gross margins and operating results would likely be adversely affected.
Developments or
improvements in storage system technologies may materially adversely affect the demand for our products.
Significant developments
in data storage systems, such as advances in solid state storage drives or improvements in non-volatile memory, may materially and adversely affect our business and prospects in ways we do not currently anticipate. For example, improvements in
existing data storage technologies, such as a significant increase in the speed of traditional interfaces for transferring data between storage and a server or the speed of traditional embedded controllers, could emerge as preferred alternative to
our products especially if they are sold at lower prices. This could be the case even if such advances do not deliver all of the benefits of our products. Any failure by us to develop new or enhanced technologies or processes, or to react to changes
or advances in existing technologies, could materially delay our development and introduction of new products, which could result in the loss of competitiveness of our products, decreased revenue, and a loss of market share to competitors.
We derive substantially all of our revenue from our storage class memory products, and a decline in demand for these products would
cause our revenue to grow more slowly or to decline.
Our storage memory products account for substantially all of our revenue and
will continue to comprise a significant portion of our revenue for the foreseeable future. As a result, our revenue could be reduced by:
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the failure of our storage memory products to achieve broad market acceptance;
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any decline or fluctuation in demand for our storage memory products, whether as a result of product obsolescence, technological change, customer budgetary constraints, or other factors;
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the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, these products;
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our inability to release enhanced versions of our products, including any related software, on a timely basis;
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our inability to adequately support our customers;
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our inability to expand in to new markets or geographies; and
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general economic conditions, both domestically and in our foreign markets.
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If the storage
markets grow more slowly than anticipated or if demand for our products declines, we may not be able to increase our revenue sufficiently to achieve and maintain profitability and our stock price would decline.
If we fail to develop and introduce new or enhanced products on a timely basis, including innovations in our software offerings, our
ability to attract and retain customers could be impaired and our competitive position could be harmed.
We operate in a dynamic
environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, we must design, develop, market, and sell new or enhanced products that provide increasingly higher levels of
performance, capacity, and reliability and meet the cost expectations of our customers. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies, or the emergence of new industry
standards could render our existing or future products obsolete. Our failure to anticipate or timely develop new or enhanced products or technologies in response to technological shifts could result in decreased revenue and harm our business. If we
fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating results will be adversely affected.
In order to maintain or increase our gross margins, we will need to continue to create valuable software solutions to be integrated with our
storage class memory products. Any new feature or application that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to help increase our overall gross margins.
If we are unable to successfully develop or acquire, and then market and sell our next generation products, our ability to increase our revenue and gross margin will be adversely affected.
Our products are highly technical and may contain undetected defects, which could cause data unavailability, loss, or corruption that
might, in turn, result in liability to our customers and harm to our reputation and business.
Our products are highly technical
and complex and are often used to store information critical to our customers’ business operations. Our products may contain undetected errors, defects, or security vulnerabilities that could result in data unavailability, loss, or corruption
or other harm to our customers. Some errors in our products may only be discovered after they have been installed and used by customers. Any errors, defects, or security vulnerabilities discovered in our products after commercial release could
result in a loss of revenue or delay in revenue recognition, injury to our reputation, a loss of customers or increased service and warranty costs, any of which could adversely affect our business. In addition, we could face claims for product
liability, tort, or breach of warranty. Many of our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, would be
costly and might divert management’s attention and adversely affect the market’s perception of us and our products. In addition, our business liability insurance coverage could prove inadequate with respect to a claim and future coverage
may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us and our business could be adversely impacted.
Our products must interoperate with operating systems, software applications, and hardware that is developed by others and if we are
unable to devote the necessary resources to ensure that our products interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience a weakening demand for our products.
Our products must interoperate with our customers’ existing infrastructure, specifically their networks, servers, software, and operating
systems, which may be manufactured by a wide variety of vendors and OEMs. When new or updated versions of these software operating systems or applications are introduced, we must sometimes develop updated versions of our software so that our
products will interoperate properly. We may not accomplish these development efforts quickly, cost-effectively, or at all. These development efforts require capital investment and the devotion of engineering resources. If we fail to maintain
compatibility with these applications, our customers may not be able to adequately utilize the data stored on our products, and we may, among other consequences, fail to increase, or we may lose, market share and experience a weakening in demand for
our products, which would adversely affect our business, operating results, and financial condition.
Our products must conform to
industry standards in order to be accepted by customers in our markets.
Generally, our products are applicable to a portion of a
datacenter’s function. The servers, network, software, and other components and systems of a datacenter must comply with established industry standards or fit within a datacenter’s system architecture in order to interoperate and function
efficiently together. We may depend on companies that provide other components of
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the servers and systems in a datacenter to support prevailing industry standards. Often, these companies are significantly larger and more influential in driving industry standards than we are.
Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers. If larger companies do not support the same industry standards that we do, or if competing
standards emerge, market acceptance of our products could be adversely affected, which would harm our business, operating results, and financial condition.
We rely on our key technical, sales, and management personnel to grow our business, and the loss of one or more key employees or the
inability to attract and retain qualified personnel could harm our business.
Our success and future growth depends to a
significant degree on the skills and continued services of our key technical, sales, and management personnel. In particular, we are highly dependent on the services of our Chief Executive Officer, Shane Robison, and our President and Chief
Operating Officer, Lance L. Smith. Our employees generally work for us on an at-will basis, and we could experience difficulty in retaining members of our senior management team. We do not have “key person” life insurance policies that
cover any of our officers or other key employees. In addition, we have recently experienced significant turnover in executive management, including the resignation of David Flynn and the appointment of Mr. Robison as our Chief Executive Officer
in May 2013. As a result, our current management team has only been working together for a short period of time. We cannot provide assurances that we will effectively manage these transitions, which may impact our ability to retain our remaining key
executive officers and which could harm our business and operations to the extent there is customer or employee uncertainty arising from these transitions. The loss of the services of any of our key employees for any reason could disrupt our
operations, delay the development and introduction of our products, and negatively impact our business, prospects, and operating results.
We plan to hire additional personnel in all areas of our business, particularly for sales and research and development. Competition for these
types of personnel is intense. We cannot assure that we will be able to successfully attract or retain qualified personnel.
Our inability
to retain and attract the necessary personnel could adversely affect our business, operating results, and financial condition.
Our
current research and development efforts may not produce successful products that result in significant revenue in the near future, if at all.
Developing our products and related enhancements is expensive. Our investments in research and development may not result in marketable
products or may result in products that are more expensive than anticipated, take longer to generate revenue or generate less revenue, than we anticipate. Our future plans include significant investments in research and development and related
product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not receive significant revenue from these
investments in the near future, if at all, which could adversely affect our business and operating results.
Our ability to sell our
products is dependent in part on ease of use and the quality of our support offerings, and any failure to offer high-quality technical support could harm our business, operating results, and financial condition.
Although our products are designed to be interoperable with existing servers and systems, we may need to provide customized installation and
configuration support to our customers before our products become fully operational in their environments. Once our products are deployed within our customers’ datacenters, they depend on our support organization to resolve any technical issues
relating to our products. Our ability to provide effective support is largely dependent on our ability to attract, train, and retain qualified personnel. In addition, our sales process is highly dependent on our product and business reputation and
on strong recommendations from our existing customers. Any failure to maintain high-quality installation and technical support, or a market perception that we do not maintain high-quality support, could harm our reputation, adversely affect our
ability to sell our products to existing and prospective customers, and could harm our business, operating results, and financial condition.
If we fail to successfully maintain or grow our reseller and other channel partner relationships, our business and operating results
could be adversely affected.
Our ability to maintain or grow our revenue will depend, in part, on our ability to maintain our
arrangements with our existing channel partners and to establish and expand arrangements with new channel partners. Our channel partners may choose to discontinue offering our products or may not devote sufficient attention and resources toward
selling our products. For example, our competitors may provide incentives to our existing and potential channel partners to use or purchase their products and services or to prevent or reduce sales of our products. The occurrence of any of these
events could adversely affect our business and operating results.
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We are exposed to the credit risk of some of our customers and to credit exposure in
weakened markets, which could result in material losses.
Most of our sales are on an open credit basis. As a general matter, we
monitor individual customer payment capability in granting open credit arrangements and may limit these open credit arrangements based on creditworthiness. We also maintain allowances we believe are adequate to cover exposure for doubtful accounts.
Although we have programs in place that are designed to monitor and mitigate these risks, we cannot assure you these programs will be effective in reducing our credit risks, especially as we expand our business internationally. If we are unable to
adequately control these risks, our business, operating results, and financial condition could be harmed.
We currently rely on
contract manufacturers to manufacture our products, and our failure to manage our relationship with our contract manufacturers successfully could negatively impact our business.
We rely on several contract manufacturers to manufacture our products. We continue to evaluate other contract manufacturers. Our reliance on
these contract manufacturers reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs, and product supply. If we fail to manage our relationships with these contract
manufacturers effectively, or if these contract manufacturers experience delays, disruptions, capacity constraints, or quality control problems in their operations, our ability to ship products to our customers could be impaired and our competitive
position and reputation could be harmed. If we are required to change contract manufacturers or assume internal manufacturing operations, we may lose revenue, incur increased costs, and damage our customer relationships. Qualifying a new contract
manufacturer and commencing production is expensive and time-consuming. We may need to increase our component purchases, contract manufacturing capacity, and internal test and quality functions if we experience increased demand. The inability of
these contract manufacturers to provide us with adequate supplies of high-quality products, could cause a delay in our order fulfillment, and our business, operating results, and financial condition would be adversely affected.
We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of these supply
arrangements could delay shipments of our products and could materially and adversely affect our relationships with current and prospective customers.
We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key components of our products, and we have
not generally entered into agreements for the long-term purchase of these components. This reliance on a limited number of suppliers and the lack of any guaranteed sources of supply exposes us to several risks, including:
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the inability to obtain an adequate supply of key components, including non-volatile memory and reprogrammable controllers;
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price volatility for the components of our products;
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failure of a supplier to meet our quality, yield, or production requirements;
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failure of a key supplier to remain in business or adjust to market conditions; and
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consolidation among suppliers, resulting in some suppliers exiting the industry or discontinuing the manufacture of components.
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As a result of these risks, we cannot assure you that we will be able to obtain enough of these key components in the future or that the cost
of these components will not increase. If our supply of certain components is disrupted or delayed, or if we need to replace our existing suppliers, there can be no assurance that additional supplies or components will be available when required or
that supplies will be available on terms that are favorable to us, which could extend our lead times, increase the costs of our components and materially adversely affect our business, operating results, and financial condition. If we are successful
in growing our business, we may not be able to continue to procure components at current prices, which would require us to enter into longer term contracts with component suppliers to obtain these components at competitive prices. This could
increase our costs and decrease our gross margins, harming our operating results.
Our results of operations could be affected by
natural events in locations in which our customers or suppliers operate.
Several of our customers and suppliers have operations
in locations that are subject to natural disasters, such as severe weather and geological events, which could disrupt the operations of those customers and suppliers. For example, in March 2011, the northern region of Japan experienced a severe
earthquake followed by a tsunami. These geological events caused significant damage in that region and have adversely affected Japan’s infrastructure and economy. Some of our customers and suppliers are located in Japan and they have
experienced, and may experience in the future, shutdowns as a result of these events, and their operations may be negatively
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impacted by these events. Our customers affected by this or a future natural disaster could postpone or cancel orders of our products, which could negatively impact our business. Moreover, should
any of our key suppliers fail to deliver components to us as a result of this or a future natural disaster, we may be unable to purchase these components in necessary quantities or may be forced to purchase components in the open market at
significantly higher costs. We may also be forced to purchase components in advance of our normal supply chain demand to avoid potential market shortages. In addition, if we are required to obtain one or more new suppliers for components or use
alternative components in our solutions, we may need to conduct additional testing of our solutions to ensure those components meet our quality and performance standards, all of which could delay shipments to our customers and adversely affect our
financial condition and results of operations.
To the extent we purchase excess or insufficient component inventory in connection
with supply allocation or discontinuations by our vendors of components used in our products, our business or operating results may be adversely affected.
It is common in the storage and networking industries for component vendors to discontinue the manufacture of, or experience lack of supply
on, certain types of components from time to time due to evolving technologies and changes in market demands. A supplier’s discontinuation or allocation of a particular type of component, such as a specific type of NAND Flash memory, may
require us to make significant “last time” or higher cost purchases of component inventory that is being discontinued or limited by the vendor to ensure supply continuity until the transition to products based on next generation components
or until we are able to secure an alternative supply. To the extent we purchase insufficient component inventory in connection with these discontinuations or allocations, we may experience delayed shipments, order cancellations or otherwise purchase
more expensive components to meet customer demand, which could result in reduced gross margins. Alternatively, to the extent we purchase excess component inventory that we cannot use in our products due to obsolescence, we could be required to
reduce or write-off the carrying value of inventory or be required to sell the components at or below our carrying value, which could reduce our gross margins.
Our business may be adversely affected if we encounter difficulties as we upgrade our enterprise resource planning system, or ERP, and
other information technology systems.
We are continually upgrading our ERP system and other information technology systems. This
upgrading and improvement poses a risk to our internal controls over financial reporting and to our business operations. Disruptions or difficulties in upgrading and improving these systems or the related procedures or controls could adversely
affect both our internal and disclosure controls and harm our business, including our ability to forecast or make sales, manage our supply chain, and collect our receivables. Moreover, such a disruption could result in unanticipated costs or
expenditures and a diversion of management’s attention and resources.
We are required to maintain effective internal control
over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act and the failure to do so could have a material adverse effect on our business and stock price.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure
controls and procedures. We are required to perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness
of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, or Section 404. Our compliance with Section 404 may require us to continue to incur substantial expense and expend significant
management efforts. If we are unable to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm notes or identifies 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 New York Stock Exchange, the SEC, or other regulatory authorities, which would require
additional financial and management resources.
Third-party claims that we are infringing intellectual property, whether successful
or not, could subject us to costly and time-consuming litigation or expensive licenses, and our business could be harmed.
The
storage and networking industries are characterized by the existence of a large number of patents, copyrights, trademarks and trade secrets and by frequent litigation based on allegations of infringement or other violations of intellectual property
rights. We have in the past received and may in the future receive inquiries from other intellectual property holders and may become subject to claims that we infringe their intellectual property rights, particularly as we expand our presence in the
market and face increasing competition. For example, on December 5, 2013, e.Digital Corporation filed a lawsuit in U.S. District Court for the Southern District of California against us. e.Digital filed a total of 41 suits in December 2013 and
January 2014 asserting infringement of the same single claim of the same patent. The complaint alleges that our flash memory products infringe U.S. Patent No. 5,839,108. The complaint seeks damages as well as a permanent injunction against us.
We have limited information about the specific infringement allegations, but they appear to focus on a single method claim for managing flash memory. Based on our preliminary investigation of the patent identified in the complaint, we do not believe
our products infringe any valid or enforceable claim of this patent. Nevertheless, the costs associated with any actual, pending, or threatened litigation could negatively impact our operating results regardless of the actual outcome.
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Moreover, on May 18, 2011, Internet Machines LLC filed a lawsuit in U.S. District Court for
the Eastern District of Texas against our company and 20 other companies. The complaint alleges that our products infringe U.S. Patent Nos. 7,454,552; 7,421,532; 7,814,259; and 7,945,722. On August 26, 2011, Internet Machines MC LLC amended its
prior complaint filed in U.S. District Court for the Eastern District of Texas against PLX Technology, Inc. to add our company and several other companies as defendants. This complaint alleges that our products infringe U.S. Patent
No. 7,539,190. These complaints seek both damages and a permanent injunction against us. The specific infringement allegations appear to focus on a PCI switch component that, while used in some of our products, is manufactured by a third-party
supplier. This third-party supplier was found to infringe U.S. Patent Nos. 7,454,552 and 7,421,532 by a jury in a prior case. The judge has stayed the lawsuits against us pending the entry of a final non-appealable judgment in the prior case
between the third-party supplier and Internet Machines. The third-party supplier has agreed to indemnify and defend us with respect to these lawsuits. Based upon our preliminary investigation of the patents identified in the complaints, we do not
believe that our products infringe any valid or enforceable claim of these patents. Nevertheless, the costs associated with any actual, pending, or threatened litigation could negatively impact our operating results regardless of the actual outcome.
We currently have a number of agreements in effect pursuant to which we have agreed to defend, indemnify, and hold harmless our
customers, suppliers, and channel partners from damages and costs which may arise from the infringement by our products of third-party patents, trademarks, or other proprietary rights. The scope of these indemnity obligations varies, but may, in
some instances, include indemnification for damages and expenses, including attorneys’ fees. Our insurance may not cover intellectual property infringement claims. A claim that our products infringe a third party’s intellectual property
rights, if any, could harm our relationships with our customers, may deter future customers from purchasing our products and could expose us to costly litigation and settlement expenses. Even if we are not a party to any litigation between a
customer and a third party relating to infringement by our products, an adverse outcome in any such litigation could make it more difficult for us to defend our products against intellectual property infringement claims in any subsequent litigation
in which we are a named party. Any of these results could harm our brand and operating results.
Any intellectual property rights claim
against us or our customers, suppliers, and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle, could divert management resources and attention and could force us to acquire intellectual property rights
and licenses, which may involve substantial royalty payments. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. An adverse determination also could invalidate our intellectual
property rights and prevent us from offering our products to our customers and may require that we procure or develop substitute products that do not infringe, which could require significant effort and expense. We may have to seek a license for the
technology, which may not be available on reasonable terms or at all, may significantly increase our operating expenses or require us to restrict our business activities in one or more respects. Any of these events could seriously harm our business,
operating results, and financial condition.
The success of our business depends in part on our ability to protect and enforce our
intellectual property rights.
We rely on a combination of patent, copyright, service mark, trademark, and trade secret laws, as
well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. As of May 2, 2014, we had 68 issued patents and 142 patent applications in
the United States, eight issued patents and 42 patent applications in foreign countries, and one Patent Cooperation Treaty, or PCT, application. We cannot assure you that any patents will issue with respect to our currently pending patent
applications in a manner that gives us the protection that we seek, if at all, or that any patents issued to us will not be challenged, invalidated, or circumvented. Our currently issued patents and any patents that may issue in the future with
respect to pending or future patent applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. We cannot be certain that the steps we have taken will prevent unauthorized
use of our technology or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property.
Protecting against the unauthorized use of our intellectual property, products, and other proprietary rights is expensive and difficult.
Litigation may be necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of
management resources, either of which could harm our business, operating results, and financial condition. Further, many of our current and potential competitors have the ability to dedicate substantially greater resources to defending intellectual
property infringement claims and to enforcing their intellectual property rights than we have. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Effective patent, trademark,
service mark, copyright, and trade secret protection may not be available in every country in which our products are available. An inability to adequately protect and enforce our intellectual property and other proprietary rights could seriously
harm our business, operating results, and financial condition.
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Our use of open source and third-party technology could impose limitations on our ability
to commercialize our software.
We use open source software in our products. Although we monitor our use of open source software
closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market our
products. In such event, we could be required to seek licenses from third parties in order to continue offering our products for certain uses, to license portions of our source code at no charge, to re-engineer our technology or to discontinue
offering some of our software in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results, and financial condition.
If we do not successfully integrate our recent acquisitions, or if we do not otherwise achieve the expected benefits of the
acquisitions, our growth may be adversely affected and our operating results may be materially harmed.
Since 2011, we have
acquired three businesses. If we fail to successfully integrate the businesses, operations, and technologies of these acquired companies and assets, we may not realize the potential benefits of those acquisitions. The integration of these
acquisitions, particularly the integration of NexGen, may be time-consuming and will result in the incurrence of ongoing expenses. If our integration efforts are not successful, our results of operations could be harmed, employee morale could
decline, key employees could leave, and customers could cancel existing orders or choose not to place new ones. Even if our integration efforts are successful, we may not achieve anticipated synergies or other benefits of these acquisitions,
including the anticipated benefits from the acquired technologies. We must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. We may
encounter difficulties, costs and delays involved in integrating these operations, including the following:
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failure to successfully manage relationships with channel partners, customers, and other important relationships;
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failure to maintain product development timelines and introduce new features in a timely manner;
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failure of customers to purchase the new products of the combined company;
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difficulties in successfully integrating the employees of the acquired companies;
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challenges encountered in managing larger, more geographically dispersed operations;
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diversion of the attention of management from other ongoing business concerns;
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potential incompatibility of technologies and systems;
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potential impairment charges incurred to write down the carrying amount of intangible assets generated as a result of the acquisitions; and
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potential incompatibility of business cultures.
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If we do not meet the expectations of our
existing customers or those of the acquired companies, then these customers may cease doing business with us altogether, which would harm our results of operations and financial condition.
We may further expand through acquisitions of, or investments in, other companies, each of which may divert our management’s
attention, resulting in additional dilution to our stockholders and consumption of resources that are necessary to sustain and grow our business.
Our business strategy may, from time to time, include acquiring other complementary products, technologies, or businesses. We also may enter
into relationships with other businesses in order to expand our product offerings, which could involve preferred or exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these
transactions can be time-consuming, difficult, and expensive, and our ability to close these transactions may be subject to third-party approvals, such as government regulation, which are beyond our control. Consequently, we can make no assurance
that these transactions, once undertaken and announced, will close.
These kinds of acquisitions or investments may result in unforeseen
operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel, or operations of the acquired companies, particularly if the key personnel of the
acquired business choose not to work for us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that
would otherwise be available for development of our business. Any acquisition or investment could expose us to unknown liabilities. Moreover, we cannot assure you that the anticipated benefits of any acquisition or investment would be realized or
that we would not be exposed to unknown liabilities. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may need in the future to operate our business,
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incur debt on terms unfavorable to us or that we are unable to repay, incur large charges or substantial liabilities, encounter difficulties integrating diverse business cultures, and become
subject to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could adversely affect our business, operating results, and financial condition.
Because our long-term success depends, in part, on our ability to expand the sales of our products to customers located outside of the
United States, our business is susceptible to risks associated with international operations.
We currently maintain operations
outside of the United States. We have been expanding and intend to continue to expand these operations in the future. We have limited experience operating in foreign jurisdictions. Our inexperience in operating our business outside of the United
States increases the risk that our international expansion efforts may not be successful. In addition, conducting and expanding international operations subjects us to new risks that we have not generally faced in the United States. These include:
exposure to foreign currency exchange rate risk; difficulties in managing and staffing international operations; the increased travel, infrastructure, and legal compliance costs associated with multiple international locations; potentially adverse
tax consequences; the burdens of complying with a wide variety of foreign laws, including trade barriers, and different legal standards; increased financial accounting and reporting burdens and complexities; political, social and economic
instability abroad, terrorist attacks, and security concerns in general; and reduced or varied protection for intellectual property rights in some countries. The occurrence of any one of these risks could negatively affect our international business
and, consequently, our business, operating results, and financial condition generally.
Adverse economic conditions or reduced
datacenter spending may adversely impact our revenues and profitability.
Our operations and performance depend in part on
worldwide economic conditions and the impact these conditions have on levels of spending on datacenter technology. Our business depends on the overall demand for datacenter infrastructure and on the economic health of our current and prospective
customers. Weak economic conditions, or a reduction in datacenter spending, would likely adversely impact our business, operating results, and financial condition in a number of ways, including by reducing sales, lengthening sales cycles, and
lowering prices for our products and services.
Governmental regulations affecting the import or export of products could negatively
affect our revenue.
The U.S. and various foreign governments have imposed controls, export license requirements, and restrictions
on the import or export of some technologies, especially encryption technology. In addition, from time to time, governmental agencies have proposed additional regulation of encryption technology, such as requiring the escrow and governmental
recovery of private encryption keys. Governmental regulation of encryption technology and regulation of imports or exports, or our failure to obtain required import or export approval for our products, could harm our international and domestic sales
and adversely affect our revenue. In addition, failure to comply with such regulations could result in penalties, costs, and restrictions on export privileges, which would harm our operating results.
The terms of our revolving line of credit may restrict our ability to engage in certain transactions.
Pursuant to the current terms of our revolving line of credit, we are subject to financial covenants and certain limitations on our ability to
engage in certain transactions, including disposing of certain assets, incurring additional indebtedness, granting liens, declaring dividends, acquiring or merging with another entity, making investments or entering into transactions with
affiliates, unless we receive prior approval from the lender(s) under our revolving line of credit. If the lender(s) do not consent to any of these actions or if we are unable to comply with these covenants, we could be prohibited from engaging in
transactions which could be beneficial to our business and our stockholders.
We might require additional capital to support
business growth, and this capital might not be available on acceptable terms, or at all.
We intend to continue to make
investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new products or enhance our existing products, enhance our operating infrastructure and acquire
complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our stockholders
could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing in the future could involve additional restrictive
covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not
be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory
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to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results,
financial condition, and prospects could be adversely affected.
Our business is subject to the risks of earthquakes and other
natural catastrophic events, and to interruption by man-made problems such as cyber attacks, computer viruses, or terrorism.
Our
two largest facilities and our current contract manufacturers are located in the San Francisco Bay and Salt Lake City areas, which have heightened risks of earthquakes. We may not have adequate business interruption insurance to compensate us for
losses that may occur from a significant natural disaster, such as an earthquake, which could have a material adverse impact on our business, operating results and financial condition. In addition, cyber attacks, acts of terrorism, or malicious
computer viruses could cause disruptions in our or our customers’ businesses or the economy as a whole. We could suffer a loss of revenue and increased costs, or suffer other serious negative consequences if we sustain cyber attacks or other
data security breaches that disrupt our operations or result in the loss or disclosure of our proprietary or confidential information. To the extent that these disruptions result in delays or cancellations of customer orders or the deployment of our
products, our business, operating results, and financial condition would be adversely affected.
Failure to comply with governmental
laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local, and foreign
governmental agencies, including agencies responsible for monitoring and enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal
securities laws and income tax, indirect tax, payroll tax, and other tax laws and regulations. In certain jurisdictions, these regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or
requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages, and civil and criminal penalties, or injunctions. If any governmental sanctions are imposed, or if
we do not prevail in any possible civil or criminal litigation, our business, operating results, and financial condition could be materially adversely affected. In addition, responding to any action will likely result in a significant diversion of
management’s attention and resources and an increase in professional fees. Enforcement actions and sanctions could harm our business, operating results, and financial condition.
Risks Related to Our Common Stock
The trading price of our common stock is likely to be volatile, and an active, liquid, and orderly market for our common stock may not be
sustained.
Our common stock is currently traded on the New York Stock Exchange, but we can provide no assurance that there will
be active trading on that market or any other market in the future. If there is not an active trading market or if the volume of trading is limited, the price of our common stock could decline and holders of our common stock may have difficulty
selling their shares. In addition, the trading price of our common stock has been volatile and will likely continue to be volatile. The trading of our common stock may fluctuate widely in response to various factors, some of which are beyond our
control. For example, after opening at $19.00 per share at the IPO, our common stock has experienced an intra-day trading high of $41.74 per share and a low of $8.04 per share through May 2, 2014. Some of the factors affecting our
volatility include:
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price and volume fluctuations in the overall stock market from time to time;
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significant volatility in the market price and trading volume of technology companies in general, and of companies in our industry;
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actual or anticipated changes in our results of operations or fluctuations in our operating results;
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whether our operating results meet the expectations of securities analysts or investors;
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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;
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litigation involving us, our industry, or both;
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regulatory developments in the United States, foreign countries, or both;
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general economic conditions and trends;
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major catastrophic events;
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sales of large blocks of our stock; or
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departures of key personnel.
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The stock markets in general, and market prices for the securities of technology-based companies
like ours in particular, have from time to time experienced volatility that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our
common stock, regardless of our operating performance. In several recent situations where the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the
stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.
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 is likely to be influenced by any research and reports that securities or
industry analysts publish about us or our business. In the event securities or industry analysts cover our company and one or more of these analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock
price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
We have never paid dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid any 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. 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.
We will continue to incur increased costs as a result of being a public company.
As a public company, we are incurring and will continue to incur significant legal, accounting, and other expenses that we did not incur as a
private company. In addition, new rules implemented by the SEC and the New York Stock Exchange, require changes in corporate governance practices of public companies. We expect these rules and regulations to continue to increase our legal and
financial compliance costs and to make some activities more time-consuming and costly. We will continue to incur additional costs associated with our public company reporting requirements. We expect these rules and regulations to make it more
difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it
may be more difficult for us to attract and retain qualified people to serve on our board of directors or as executive officers.
Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay, or prevent a change of control
of our company or changes in our management and, therefore, depress the trading price of our common stock.
Our certificate of
incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our company may
deem advantageous. These provisions:
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establish a classified board of directors so that not all members of our board of directors are elected at one time;
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authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;
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prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;
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prohibit stockholders from calling a special meeting of our stockholders;
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provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and
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establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
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Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation
from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage,
delay, or prevent a change of control of our company.
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Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect
of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.