Item 1A. RISK FACTORS
Risks Related to Our Business and Industry
In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors should be carefully considered
by investors before making an investment decision. Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occurs, our business and financial
performance could be harmed, our actual results could differ materially from our expectations and the market value of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks
and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial performance. Because of the risks and uncertainties discussed below, as well as other variables affecting our
operating results, our past financial performance should not be considered as a reliable indicator of our future performance and investors should not use historical trends to anticipate results or trends in future periods.
Our operating results may fluctuate significantly as a result of numerous factors, any one of which could cause our operating results to fall below
expectations or guidance, making our future results difficult to predict.
Our quarterly and annual operating results have varied
significantly in the past and could vary significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control,
including the changing and volatile global economic environment, particularly in the U.S. and Europe, and any of which may cause our stock price to fluctuate. 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. A significant portion of our quarterly sales typically occurs during the last month of the quarter, often within the last few weeks or days of the
quarter. As a result, our quarterly operating results are difficult to predict even in the near term and a delay in an anticipated sale past the end of a particular quarter may negatively impact our results of operations for that quarter, or in some
cases, that year. A delay in the recognition of revenue, even from just one account, may have a significant negative impact on our results of operations for a given period. If our revenue or operating results fall below the expectations of investors
or securities analysts or below any guidance we may provide to the market, as has occurred recently and at other times in the past, or if the guidance we provide to the market falls below the expectations of investors or securities analysts, as has
occurred recently and at other times in the past, the price of our common stock could decline substantially. Such a stock price decline could occur, and has occurred in the past, even when we have met our publicly stated revenue and/or earnings
guidance.
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In addition to other risks listed in this Risk Factors section, factors that may
affect our operating results include, but are not limited to:
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fluctuations in demand, including due to seasonality, for our products and services. For example, many companies in our industry experience adverse seasonal fluctuations in customer spending patterns, particularly in
the first and third quarters; we have experienced these seasonal fluctuations in the past and expect that this trend will continue in the future;
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fluctuations in sales cycles, including the timing of large orders, and prices for our products and services;
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reductions in customers budgets for information technology purchases and delays in their purchasing cycles;
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general economic or political conditions in our domestic and international markets;
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limited visibility into customer spending plans;
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changing market conditions, including current and potential customer consolidation;
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variation in sales channels, product costs or mix of products sold;
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the timing of recognizing revenue in any given quarter as a result of revenue recognition accounting rules, including the extent to which sales transactions in a given period are unrecognizable until a future period or,
conversely, the satisfaction of revenue recognition rules in a given period resulting in the recognition of revenue from transactions initiated in prior periods;
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the sale of our products in the timeframes we anticipate, including the number and size of orders, and the product mix within any such orders, in each quarter;
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our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer requirements;
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the timing and execution of product transitions or new product introductions, including any related or resulting inventory costs;
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delays in customer purchasing cycles in response to our introduction of new products or product transitions;
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customer acceptance of new product introductions. For example, we continue to introduce new access points based on 802.11ac technology. These products may not achieve any significant degree of market acceptance or be
accepted into our sales channel by our channel partners. Furthermore, many of our target customers might have recently purchased our 802.11n access points and are not ready to further invest in the newer 802.11ac technology. In addition, these
target customers might not have previously purchased products based on 802.11ac technology and might not have a specific budget for the purchase of these products;
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unpredictability in the development of core, new or adjacent markets, including the public cloud computing market;
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the timing of product releases or upgrades by us or by our competitors;
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our ability to execute our sales strategy focusing primarily on customers in the three verticals of education, hospitality and healthcare;
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any significant changes in the competitive dynamics of our markets, including new entrants or substantial discounting of products;
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our ability to control costs, including our operating expenses and the costs of the components we purchase;
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our ability to establish and maintain successful relationships with channel partners, and the effectiveness of any changes we make to our distribution model;
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any increase or decrease in operating expenses in response to changes in the marketplace or perceived marketplace opportunities;
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the quality and level of our execution of our business strategy and operating plan;
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the effectiveness of our sales and marketing programs, including our ability to provide attractive incentives to our channel partners and customers through our pricing and discount programs; and,
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our ability to derive anticipated benefits from our investments in sales, marketing, engineering or other activities.
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We have incurred significant losses since inception, and could continue to incur losses in the future.
We have incurred significant losses since our inception, including net losses of $12.3 million and $6.7 million during the six months ended
June 30, 2014 and 2013, respectively. As of June 30, 2014 and December 31, 2013, we had an accumulated deficit of $277.7 million and $265.4 million, respectively. These losses have resulted principally from costs incurred in our
research and development programs and sales and marketing programs. We expect to incur operating losses in the future, including through fiscal year 2014, as a result of the expenses associated with the continued development and expansion of our
business. Additionally, we may also be affected by the timing of litigation defense costs. Our ability to attain profitability in the future will be affected by, among other things, our ability to execute our business strategy, the continued
acceptance of our products, the timing and size of orders, the average selling prices of our products, the costs of our products, and the level of investment in sales and marketing, research and development, and general and administrative resources.
Even if we do achieve profitability, we may not be able to sustain or increase that profitability. As a result, our business could be harmed and our stock price could decline.
Fluctuations in our revenues and operating results could cause the market price of our common stock to decline.
Our revenues and operating results are difficult to predict, even in the near term. Our historical operating results have in the past
fluctuated significantly, and may continue to fluctuate in the future, as a result of a variety of factors, many of which are outside of our control. As a result, comparing our revenues and operating results on a period-to-period basis may not be
meaningful, and you should not rely on our past results as an indication of our future performance. We may not be able to accurately predict our future revenues or results of operations. We base our current and future expense levels on our operating
plans and sales forecasts, and our operating costs are relatively fixed in the short-term. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues
could disproportionately and adversely affect financial results for that quarter. It is possible that our operating results in some periods may be below expectations. This would likely cause the market price of our common stock to decline. In
addition to the other risk factors listed in this section, our operating results are affected by a number of factors, including:
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fluctuations in demand for our products and services, including seasonal variations;
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average selling prices and the potential for increased discounting of products by us or our competitors;
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the timing of revenue recognition in any given period as a result of revenue recognition guidance under accounting principles generally accepted in the U.S.;
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our ability to forecast demand and manage lead times for the manufacturing of our products;
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shortages in the availability of components used in our products, including components whose manufacturing lead times have increased significantly or may increase in the future;
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our ability to control costs, including our operating expenses and the costs of the components we purchase;
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our ability to develop and maintain relationships with our channel partners and to increase their sales;
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our ability to develop and introduce new products and product enhancements that achieve market acceptance;
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any significant changes in the competitive dynamics of our markets, including new entrants, or further consolidation;
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reductions in customers budgets for information technology purchases and delays in their purchasing cycles;
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changes in the regulatory environment for the certification and sale of our products;
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changes in funding for customer technology purchases in our markets, such as policy changes in public funding of educational institutions in the United States in accordance with the Federal Communications
Commissions E-Rate program;
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claims of intellectual property infringement against us and any resulting temporary or permanent injunction prohibiting us from selling our products or the requirement to pay settlements, damages or expenses associated
with any such claims, together with the costs incurred in defending such claims;
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other claims made against us and the requirement to pay settlements, damages or expenses associated with any such claims, together with the costs incurred in defending such claims; and,
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general economic conditions in our domestic and international markets.
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Further, as a result
of customer buying patterns, historically we have received a substantial portion of a quarters sales orders and generated a substantial portion of a quarters revenues during the last two weeks of the quarter. If expected revenues at the
end of any quarter are delayed for any reason, including the failure of anticipated purchase orders to materialize, our inability to deliver products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our failure
to properly manage inventory to meet demand, or our inability to release new products on schedule, our revenues for that quarter could be materially and adversely affected and could fall below market expectations.
As a result of the above factors, or other factors, our operating results in one or more future periods may fail to meet or exceed our
expectations and the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.
Our future capital needs are uncertain and we may need to raise additional funds in the future, and if we require additional funds in the future, such
funds may not be available on acceptable terms, or at all.
We believe that our existing cash and cash equivalents will be
sufficient to meet our anticipated cash requirements for the next 12 months. While we received $12.6 million of net proceeds from a secondary offering of our common stock in March 2013, we may need to raise substantial additional capital due to
changes in business conditions or other future developments or in order to:
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expand the commercialization of our products;
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continue our research and development;
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defend, in litigation or otherwise, any claims that we infringe third-party patents or violate other intellectual property rights;
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commercialize new products;
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service our debt obligations and avoid any restrictions on our operations that may result from a failure to do so; and,
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acquire companies and in-licensed products or intellectual property.
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Our future funding
requirements will depend on many factors, including:
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successful implementation of, and achieving benefits from, our marketing and sales activities;
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market acceptance of our products;
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the rate at which the markets for our products develop;
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the cost of our research and development activities;
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the cost of filing and prosecuting patent applications;
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the cost of defending, in litigation or otherwise, any claims that we infringe third-party patents or other intellectual property rights;
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the cost and timing of establishing additional sales, marketing and distribution capabilities;
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the cost and timing of establishing additional technical support capabilities;
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the effect of competing technological and market developments; and,
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the market for such funding requirements and overall economic conditions.
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We may require
additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, as we did in March 2013, our stockholders may experience dilution. The holders of
new equity securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur
additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders, including the issuance of warrants which would cause further overhang for potential shares outstanding. If we
do not have, or are not able to obtain, sufficient funds, we would be required to modify our growth and operating plans to the extent of available funding, which would harm our ability to grow our business. In addition, we believe that the
maintenance of cash balances at a level deemed adequate by our customers and potential customers is necessary to maintain and grow the level of our product sales. The unavailability of additional funding on acceptable terms could also result in our
delaying development or commercialization of our products or licensing third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize in-house. If we raise additional funds through collaboration and
licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate
some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. We also may have to reduce sales, marketing, customer support or other resources devoted to our products or cease operations. Any of these
factors could harm our operating results.
We compete in highly competitive markets, and competitive pressures from existing and new companies may
harm our business and operating results.
The markets in which we compete are highly competitive and are influenced by the
following competitive factors:
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performance, quality, reliability and predictability of the solution;
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initial price and total cost of ownership;
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comprehensiveness of the solution;
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ability to provide quality customer service and support;
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interoperability with other devices;
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scalability of the solution;
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ability to provide secure mobile access to the network; and,
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ability to bundle the solution with other networking offerings.
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Our primary competitors
include Cisco Systems, Aruba Networks, Ruckus Wireless, Aerohive Networks, Motorola Solutions, Hewlett-Packard and Juniper Networks. We also face competition from a number of other companies, such as ADTRAN, AirTight Networks, Extreme Networks,
Extricom, Ubiquiti Networks, and Xirrus. We expect competition to intensify in the future as other companies introduce new products into our markets. This competition could result in increased pricing pressure, reduced profit margins, increased
sales and marketing expenses and our failure to increase, or our loss of, market share, any of which could seriously harm our business, operating results or financial condition. If we do not keep pace with product and technology advances, it could
materially and adversely affect our competitive position, revenues and prospects for growth.
A number of our current or potential
competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we. As a result, our competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, devote greater resources to the promotion and sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisitions or other
opportunities more readily, and more quickly develop and expand their product and service offerings. Our competitors with larger volumes of orders and more diverse product offerings may require our VARs and distributors to stop selling our products,
or to reduce their efforts to sell our products, which could harm our business and results of operations. In addition, certain of our competitors offer, or may in the future offer, more diverse product offerings and may be able to bundle wireless
products with other networking offerings. Potential customers may prefer to purchase all of their equipment from a single provider, or may prefer to purchase wireless networking products from an existing supplier rather than a new supplier,
regardless of product performance or features.
We expect increased competition as our markets continue to expand. Conditions in our
markets, including the vertical markets that we serve, could change rapidly and significantly as a result of technological advancements, funding constraints or other factors. If we do not expand into different markets than the markets we serve, we
may not be able to grow our business. While we monitor and research developments in unserved vertical markets, we may not be able to compete in those markets if we decide to expand our markets.
In addition, current or potential competitors may be acquired by third parties with greater available resources, such as Ciscos
acquisition of Meraki, Motorola Solutions acquisition of Symbol Technologies, Hewlett-Packards acquisition of Colubris Networks, Juniper Networks acquisition of Trapeze Networks and Enterasys Networks acquisition by Extreme
Networks. As a result of such acquisitions, our current or potential competitors might take advantage of the greater resources of the larger organization to compete with us. Continued industry consolidation may adversely impact customers
perceptions of the viability of smaller and even medium-sized wireless networking companies and, consequently, customers willingness to purchase from such companies.
We compete in a rapidly evolving market, and the failure to respond quickly and effectively to changing market requirements could cause our business and
operating results to decline.
The wireless networking market is characterized by rapidly changing technology, changing customer
needs, evolving industry standards and frequent introductions of new products and services. In order to deliver a competitive WLAN, our virtualized WLAN solutions must be capable of operating with an ever increasing array of wireless devices and an
increasingly complex network environment. In addition, our products are designed to be compatible with industry standards for communications over wireless networks. As new wireless devices are introduced and standards in the wireless networking
market evolve, we may be required to modify our products and
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services to make them compatible with these new products and standards. Likewise, if our competitors introduce new products and services that compete with ours, we may be required to reposition
our product and service offerings or introduce new products and services in response to such competitive pressure.
For example, the
Institute of Electrical and Electronics Engineers, or IEEE, recently approved a new standard, IEEE 802.11ac. This major upgrade of IEEE 802.11 technologies is intended to enable very high throughput operation for stations in Wi-Fi networks. In July
2013, we announced our first 802.11ac solution. However, we may not be successful in modifying our current products or introducing new ones in a timely or appropriately responsive manner, or at all, for future technologies. If we fail to address
these changes successfully, our business and operating results could be materially harmed. In addition, in June 2014, we announced that we were the first wireless networking company to receive certification from the Open Networking Foundation (ONF)
OpenFlow Testing Conformance Program for our 802.11ac products. ONF members including us are collaborating with companies around the world to bring open networking solutions to market and are focused on software-defined networking solution
development. While we are leading innovation in software-defined networking through our participation in ONF, this technology may not lead to meaningful revenue in the short term or the long term and any lack of success in this area may delay
or prevent the achievement of other product development or business objectives and could harm our business.
If we are unable to hire, integrate and
retain qualified personnel, our business will suffer.
Our success is substantially dependent upon the continued service and
performance of our management team. All of our executive officers are at-will employees, and therefore may terminate employment with us at any time. The loss of the service of any member of our management team, or any other key employee, may
significantly delay or prevent the achievement of our product development and other business objectives and could harm our business.
Our
future success depends, in part, on our ability to continue to attract, integrate and retain highly skilled personnel. Our inability to attract, integrate or retain qualified personnel, or delays in hiring required personnel, particularly in
engineering and sales, may seriously harm our business, financial condition and results of operations. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area and India where we have a substantial
presence and need for highly-skilled personnel. Our CEO joined the Company in March 2012 and four senior members of our executive management team joined in the second and third quarters of 2013. If we are unable to successfully integrate, as well as
retain, management (including senior management such as these recent hires), our business will be harmed. We also may not be successful in attracting qualified personnel to fulfill our current or future needs.
Often, significant amounts of time and resources are required to train technical, sales and other personnel. Qualified individuals are in high
demand. We have no assurance that our field sales personnel will become fully productive in the time periods anticipated. We may incur significant costs to attract and retain them, and we may lose new employees to our competitors or other technology
companies before we realize the benefit of our investment in recruiting and training them. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial
requirements, on a timely basis or at all, and we may be required to pay increased compensation in order to do so. If we are unable to attract and retain the qualified personnel we need to succeed, our business would suffer.
Further, fluctuations or a sustained decrease in the price of our stock could affect our ability to attract and retain key personnel. When our
stock price declines, our equity incentive awards may lose retention value, which may negatively affect our ability to attract and retain such personnel. We may not be successful in attracting and retaining key personnel on a timely basis, on
competitive terms, or at all. The loss of, or the inability to recruit, key employees could have a material adverse effect on our business.
We must
increase market awareness of our brand and our solution and develop and expand our sales channels, and if we are unsuccessful, our business, financial condition and operating results could be adversely affected.
We must improve the market awareness of our brand and solution and expand our relationships with our channel partners in order to increase our
revenues. Further, we believe that we must continue to develop our
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relationships with new and existing channel partners to effectively and efficiently extend our geographic reach and market penetration. Our efforts to improve sales of our solution could
materially increase our sales and marketing expense and general and administrative expense, and there can be no assurance that such efforts will be successful. If we are unable to significantly increase the awareness of our brand and solution,
expand our relationships with channel partners, or effectively manage the costs associated with these efforts, our business, financial condition and results of operations could be materially and adversely affected.
If we fail to develop new products and enhancements to our WLAN solution, we may not be able to remain competitive.
We must develop new products and continue to enhance our WLAN solution to meet rapidly evolving customer requirements. If we fail to develop
new products or enhancements to our existing products, our business could be adversely affected, especially if our competitors are able to introduce products with enhanced functionality. In addition, as new mobile applications are introduced, our
success may depend on our ability to provide a solution that supports these applications.
We are subject to a number of industry
standards established by various standards bodies, such as the IEEE, and we design our products to comply with these standards. As new industry standards emerge, we could be required to invest a substantial amount of resources to develop new
products that comply with these standards. For example, we devoted a substantial amount of our research and development resources to design a virtualized WLAN solution that could optimize the performance allowed by the 802.11n standard. In addition,
the IEEE recently approved a new standard, IEEE 802.11ac. This major upgrade of IEEE 802.11 technologies is intended to enable very high throughput operation for stations in Wi-Fi networks. In July 2013, we announced our first 802.11ac solution. If
our products do not comply with new or changing standards that are ratified by the IEEE or other standards bodies, our ability to sell our products may be adversely affected and we may not realize the benefits of our research and development
efforts. In addition, in June 2014 we announced that we were the first wireless networking company to receive certification from the Open Networking Foundation (ONF) OpenFlow Testing Conformance Program for our 802.11ac products. This
technology may not lead to meaningful revenue in the short term or the long term and any lack of success in this area may delay or prevent the achievement of other product development or business objectives and could harm our business.
Our research and development efforts relating to new products and technologies are time-consuming, costly and complex. If we expend a
significant amount of resources on research and development and our efforts do not lead to the successful introduction of products that are competitive in the marketplace, this could materially and adversely affect our business and operating
results.
Our WLAN solution incorporates complex technology and may contain defects or errors, which could cause harm to our reputation and
adversely affect our business.
Our WLAN solution incorporates complex technology and must operate with a significant number and
types of wireless devices running new and complex applications in a variety of environments utilizing different wireless communication industry standards. Our products have contained and may in the future contain defects or errors. In many cases,
these defects or errors have delayed the introduction of new products or software updates. Some errors in our products may only be discovered after a product has been installed and used by customers. These issues are most prevalent when new products
or new updates or upgrades are introduced. Any errors or defects discovered in our products after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers, damage to our brand and reputation, diversion
of engineering resources, and increased service and warranty cost, any of which could materially and adversely affect our business and operating results.
We could face claims for product liability, tort or breach of warranty, including claims relating to changes to our products made by our
channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert managements attention
and adversely affect the markets perception of us and our products.
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Although certain technical problems experienced by users may not be caused by our WLAN solution, our
business and reputation may be harmed if users perceive our solution as the cause of a slow or unreliable network connection.
Our
solution has been deployed in many different environments and is capable of providing wireless access to many different types of wireless devices operating a variety of applications. The ability of our WLAN solution to operate effectively can be
negatively impacted by many different elements unrelated to our products. For example, a users experience may suffer from an incorrect setting in a wireless device, which is not a problem caused by the network. Even though certain technical
problems experienced by users may not be caused by our solution, users often perceive the underlying cause to be the poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation.
Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support
and services could have a material and adverse effect on our business and results of operations.
Once our products are deployed
within our customers networks, our customers depend on our support organization and our channel partners to assist in deploying and managing our products and to resolve any issues relating to our products. High-quality support is critical for
the continued successful marketing and sale of our products. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, or provide
effective ongoing support, it could adversely affect our ability to sell our products to existing customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization
will face additional challenges including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality support and services could
have a material and adverse effect on our business and operating results.
We expect our gross margin to vary over time, and our level of gross
margin may not be sustainable.
Our level of gross margin may not be sustainable and may be adversely affected by numerous factors,
including:
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increased price competition;
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changes in customer or product and service mix;
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introduction of new products;
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our ability to reduce production costs;
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increases in material or labor costs;
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increased costs of licensing third party technologies that are used in our products;
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excess inventory, inventory holding charges and obsolescence charges;
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the timing of revenue recognition and revenue deferrals;
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changes in our distribution channels or with our channel sales partners;
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increased warranty costs, including providing additional products at very low or no cost to our customers to resolve product performance issues; and,
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inbound shipping charges.
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As a result of any of these factors, or other factors, our gross
margin may be adversely affected, which in turn would harm our operating results.
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Our revenues may decline as a result of changes in public funding of educational institutions.
We have historically generated a substantial portion of our revenues from sales to educational institutions. Public schools receive funding
from local tax revenue, and from state and federal governments through a variety of programs, many of which seek to assist schools located in underprivileged or rural areas. We believe that the funding for a substantial portion of our sales to
educational institutions comes from federal funding, in particular the E-Rate program. E-Rate is a program of the Federal Communications Commission that subsidizes the purchase of approved telecommunications, Internet access, and internal
connections costs for eligible public educational institutions. In the event that the federal government reduces the amounts dedicated to the E-Rate program in future periods, or eliminates the program completely, our sales to educational
institutions may be reduced. In February 2014, the Federal Communications Commission took steps that effectively halted E-Rate program funding for the purchase of products in our industry. The E-Rate program continues to be under review by the
Federal Communications Commission and there can be no assurance that this program or its equivalent will continue, and as a result, our business may be harmed. Furthermore, if state or local funding of public education is significantly reduced
because of legislative or policy changes or by reductions in tax revenues due to changing economic conditions, our sales to educational institutions may be negatively impacted by these changed conditions. Any reduction in spending on information
technology systems by educational institutions would likely materially and adversely affect our business and results of operations.
Our
international sales and operations subject us to additional risks that may materially and adversely affect our business and operating results.
We derive a significant portion of our revenues from customers outside the U.S. During the six months ended June 30, 2014 and 2013, 49%
and 43% of our revenues were derived from customers outside of the U.S. While our international sales have typically been denominated in U.S. dollars, fluctuations in currency exchange rates could cause our products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales or profitability in that country.
In addition, we have a
research and development facility located in India, and we expect to expand our offshore development efforts and general and administrative functions within India and possibly in other countries. We also have sales and support personnel in numerous
countries worldwide.
Our international operations subject us to a variety of risks, including:
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the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
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difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;
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tariffs and trade barriers, export regulations and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;
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increased exposure to foreign currency exchange rate risk, against which we currently do not hedge;
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heightened exposure to political and economic instability, war and terrorism;
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reduced protection for intellectual property rights in some countries;
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costs of compliance with, and the risks and costs of non-compliance with, differing and changing regulatory and legal requirements in the jurisdictions in which we operate;
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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in,
financial statements;
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multiple conflicting tax laws and regulations;
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the need to localize our products for international customers; and,
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increased cost of managing employees in foreign countries, including increased costs of terminating employees in certain jurisdictions.
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As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage
these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results
and financial condition.
Another significant risk resulting from our international operations is compliance with the U.S. Foreign Corrupt
Practices Act, or FCPA, and other
anti-bribery
laws applicable to our operations, such as the U.K. Anti-Bribery Act of 2010. In many foreign countries, particularly in those with developing economies, it may
be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S. and foreign laws and regulations applicable to us. Although we have implemented training and procedures designed
to ensure compliance with the FCPA and similar laws, there can be no assurance that all of our employees, agents and other channel partners, as well as those companies to which we outsource certain of our business operations, will not take actions
in violation of our policies. Any such violation could have a material and adverse effect on our business.
Our product and service sales
and our international operations may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business.
Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we implemented policies and procedures designed to
ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees,
contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, litigation, fines, penalties or the prohibition of the importation or exportation of our products and services and could have a
material adverse effect on our business and results of operations.
Our use of and reliance on research and development resources in India may
expose us to unanticipated costs or events.
We have a significant research and development center in Bangalore, India and, in
recent years, have increased headcount and development activity at this facility. There is no assurance that our reliance upon research and development resources in India will enable us to achieve meaningful cost reductions or greater resource
efficiency. Further, our research and development efforts and other operations in India involve significant risks, including:
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difficulty hiring and retaining appropriate engineering personnel due to intense competition for such resources and resulting wage inflation;
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the knowledge transfer related to our technology and resulting exposure to misappropriation of intellectual property or information that is proprietary to us, our customers and other third parties;
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heightened exposure to change in the economic, security and political conditions in India;
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differences in cultural expectations regarding various functions and policies;
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fluctuations in currency exchange rates and regulatory compliance in India; and,
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interruptions to our operations in India as a result of floods and other natural catastrophic events as well as manmade problems such as power disruptions or terrorism.
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Difficulties resulting from the factors above and other risks related to our operations in India could expose us to increased expense, impair
our development efforts and harm our competitive position.
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If we fail to maintain an effective system of internal controls, our ability to produce accurate financial
statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The NASDAQ Stock Market. From time to time, new accounting pronouncements and guidance are issued. For example, the
Committee of Sponsoring Organizations of the Treadway Commission published an updated Internal Control-Integrated Framework and related illustrative documents in May 2013. We expect that the requirements of these rules and regulations will continue
to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place a significant burden on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over
financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms.
Our current controls and any new controls
that we develop may become inadequate because of changes in conditions, and our degree of compliance with our policies or procedures may deteriorate. While we have conducted employee training and implemented various controls and procedures,
weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail
to meet our reporting obligations and may result in a restatement of our prior period financial statements. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations
regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports filed with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures
and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we
have expended, and anticipate that we will continue to expend, significant resources and provide significant management oversight and employee training, all of which may involve substantial accounting-related costs. Any failure to maintain the
adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not
able to continue to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors
may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The NASDAQ Global Market.
We have not yet implemented a complete disaster recovery plan or business continuity plan for our accounting and related information
technology systems. Any disaster could therefore materially impair our ability to maintain timely accounting and reporting.
Claims by others that
we infringe their proprietary technology could harm our business.
Our industry is characterized by vigorous protection and pursuit
of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. Third parties, including some of our competitors, have asserted and may in the future assert claims of infringement of intellectual
property rights against us or against our customers or channel partners for which we may be liable. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts
of management time, result in the diversion of significant operational resources, require us to enter into royalty or licensing agreements, or require expensive changes to our products. As a result, these claims could materially and adversely affect
our business, results of operations, cash flows and financial position. For example:
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We previously received letters from, and had lengthy discussions with Motorola Solutions, one of our competitors with a large patent portfolio and substantial resources, concerning its allegations that our products
infringe certain of its patents. Those negotiations ultimately resulted in us entering into a cross-license with Motorola Solutions in 2011 under which we paid Motorola Solutions a substantial settlement.
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In May 2010, Extricom Ltd., filed suit against us in the Federal District Court of Delaware asserting infringement of U.S. Patent No. 7,697,549. The litigation was dismissed after the parties entered into a
settlement, license and release agreement in April 2012, in which we agreed to a one-time payment of approximately $2.4 million to Extricom Ltd., and we and Extricom Ltd. each agreed to a cross-license of each others patents in exchange for a
full release and settlement of the litigation.
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In addition, we are currently subject to the lawsuits involving patent
infringement as set forth under Note 10,
Commitments and Contingencies
, in Item 1 of Part I of this Quarterly Report on Form 10-Q. Although no assurance may be given, we believe that we are not presently a party to any litigation of
which the outcome, if determined adversely, would individually or in the aggregate be reasonably expected to have a material and adverse effect on our business, operating results, cash flows or financial position. We record litigation accruals for
legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined that we do
not have material exposure, or we are unable to develop a range of reasonably possible losses.
As our business expands and the number of
products and competitors in our markets increases and overlaps occur, we expect that infringement claims may increase in number and significance. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the
technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. In addition, because we currently have a limited portfolio of issued patents compared to our major
competitors, we may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Further, litigation may
involve patent holding companies or other adverse patent owners who have no relevant product revenues and against whom our potential patents may provide little or no deterrence. Many of these potential litigants have the capability to dedicate
substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. A successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from
distributing certain products or performing certain services. We may also be required to seek a license and pay royalties for the use of such intellectual property. Any such license may not be available on commercially acceptable terms or at all.
Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be successful.
In addition, much of our business relies on, and many of our products incorporate, proprietary technologies of third parties, including third
party commercial software and open source software. We may not be able to obtain, or continue to obtain, licenses from such third parties on reasonable terms, and such licensing may increase our exposure to claims of infringement by other third
parties.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur
significant expenses to enforce our rights.
We depend on our ability to protect our proprietary technology. We protect our
proprietary information and technology through licensing agreements, nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the U.S. and similar laws in other countries.
These protections may not be available in all cases or may be inadequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. The laws of some foreign countries
may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. For example, the laws of India, where we conduct significant research and
development activities, do not protect our proprietary rights to the same extent as the laws of the U.S. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or
applications for any of the foregoing. Our competitors may independently develop technologies that are substantially equivalent, or superior, to our technology or design around our proprietary rights. In each case, our ability to compete could be
significantly impaired.
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To prevent substantial unauthorized use of our intellectual property rights, it may be necessary
to prosecute actions for infringement or misappropriation of our proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and managements attention, and there can be no
assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we. Accordingly, despite
our efforts, we may not be able to prevent third parties from infringing or misappropriating our intellectual property.
We have a limited
patent and trademark portfolio. To date, we have not applied for patent or trademark protection outside of the U.S. While we plan to protect our intellectual property with, among other things, patent protection, there can be no assurance that:
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current or future U.S. or future foreign patent applications will be approved;
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our issued patents will protect our intellectual property and will not be held invalid or unenforceable if challenged by third parties;
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we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate;
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the patents of others will not have an adverse effect on our ability to do business; or,
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others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.
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The failure to obtain patents with claims of a scope necessary to cover our technology, or the invalidation or our patents, or our inability
to protect any of our intellectual property, may weaken our competitive position and may materially and adversely affect our business and results of operations.
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or
litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the
efforts of our technical and management personnel, which may adversely affect our business, operating results and financial condition.
If market
demand for wireless networks does not continue to develop as we anticipate, demand for our WLAN solution may not grow as we expect.
The success of our business depends on enterprises continuing to adopt wireless networks for use with their business-critical applications. The
market for enterprise-wide wireless networks has only developed in recent years as enterprises have deployed wireless networks to take advantage of the convenient access to the network that they provide. As businesses seek to run their
business-critical applications on these wireless networks, they recognize the limitations of other wireless solutions and the need for our virtualized WLAN solution. Ultimately, however, enterprises may elect not to deploy wireless networks and may
elect not to run their business-critical applications on a wireless network. Accordingly, demand for our solution may not continue to develop as we anticipate, or at all.
Our sales cycles can be long and unpredictable. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter,
which may cause our operating results to fluctuate significantly.
The timing of our sales is difficult to predict. Our sales
efforts involve educating our customers about the use and benefits of our WLAN solution, including the technical capabilities of our products and the potential cost savings achievable by organizations deploying our solution. Customers typically
undertake a significant evaluation process, which frequently involves evaluating not only our products but also those of our competitors and can result in a lengthy sales cycle. We spend substantial time, effort and money in our sales efforts
without any assurance that our efforts will produce any sales. In addition, purchases of our WLAN solution are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. If sales expected
from a specific customer for a particular quarter are not realized in that quarter or at all, our operating results could be materially and adversely affected.
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Seasonality may cause fluctuations in our operating results.
We believe that our business is subject to significant seasonal factors that may cause the first and third quarters of our fiscal year to have
relatively weaker products revenues than the second and fourth fiscal quarters. We believe that this seasonality results from a number of factors, including:
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customers with a December 31 fiscal year end may choose to spend remaining budgets before their year end resulting in a positive impact on our product revenues in the fourth quarter of our fiscal year;
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the structure of our direct sales compensation program may provide additional financial incentives to our sales personnel for exceeding their annual goals;
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many of our education customers have procurement and deployment cycles that can result in stronger order flow in our second fiscal quarter than in other quarters, subject to the availability of traditional funding
sources, such as the E-Rate program in the United States; and
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seasonal reductions in business activity during the summer months in the United States, Europe and certain other regions may have a negative impact on our third quarter revenues.
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We believe that our historical growth, variations in the amount of orders booked in a prior quarter but not shipped until a later quarter and
other variations in the amount of deferred revenues may have overshadowed the nature or magnitude of seasonal or cyclical factors in the past. In addition, the timing of one or more large transactions may diminish the impact of seasonal factors in
any particular quarterly period. Seasonal or cyclical variations in our operations may become more pronounced over time and may materially affect our results of operations in the future.
Our business, operating results and growth rates may be adversely affected by unfavorable economic or market conditions.
Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. Our current business and
operating plan assumes that economic activity in general, and IT spending in particular, will at least remain at close to current levels. However, we cannot be assured of the future level of IT spending and any deterioration in the level of such
spending could have a material adverse effect on our results of operations and growth rates. The purchase of our products involves a significant commitment of capital and other resources, therefore, weak economic conditions, or a reduction in IT
spending, even if economic conditions improve, would likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products and services, and reduced unit
sales. For example, we believe that past economic downturns in the U.S. and international markets, especially in 2008 and 2009, adversely affected our business during that time period as customers and potential customers reduced costs by reducing or
delaying purchasing decisions. Any unfavorable economic or market conditions could materially and adversely affect our results of operations.
The
average sales prices of our products may decrease.
The average sales prices for our products may decline for a variety of reasons,
including competitive pricing pressures, a change in our mix of products, anticipation of the introduction of new products or promotional programs. The markets in which we compete are highly competitive and we expect this competition to increase in
the future, thereby leading to increased pricing pressures. Competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other
products. For example, some of our competitors who provide network switching equipment may offer a wireless overlay network at very low prices or on a bundled basis. Furthermore, average sales prices for our products have typically decreased over
product life cycles. A decline in our average selling prices in excess of our expectations may harm our operating results.
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We rely on channel partners to generate a substantial majority of our revenues. If our partners fail to
perform, our operating results could be materially and adversely affected.
Sales through our channel partners accounted for 98% of
our total net revenues during both the three and six months ended June 30, 2014. Sales through our channel partners accounted for 96% of our total net revenues during the year ended December 31, 2013. To the extent our channel partners are
unsuccessful in selling our products, or we are unable to obtain and retain a sufficient number of high-quality channel partners, our operating results could be materially and adversely affected.
Our largest distributor customers have historically distributed a significant amount of our products worldwide. Resale of product through
Westcon Group, Ingram Micro, Scansource Catalyst and SiraCom accounted for 65% of our worldwide net revenues during the six months ended June 30, 2014. Resale of product through Westcon Group, Catalyst Telecom, SiraCom and Ingram Micro
accounted for 72% and 68% of our worldwide net revenues in the years ended December 31, 2013 and 2012, respectively.
Our channel
partners may be unsuccessful in marketing, selling and supporting our products and services. They may also market, sell and support our competitors products and services, and may devote more resources to the marketing, sales and support of
those competitors products. They may have incentives to promote our competitors products in lieu of our products, particularly for our competitors with larger volumes of orders, more diverse product offerings and a longer relationship
with our VARs or distributors. In these cases, our channel partners may stop selling our products completely. New sales channel partners may take several months or more to achieve significant sales. Our reliance on our channel partners could subject
us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of our products or services to customers, or violates applicable law or our corporate policies. If we fail to
effectively manage our existing or future sales channel partners, our business would be seriously harmed.
Our strategy to invest in sales and
marketing programs and personnel may not generate the revenue increases anticipated or such revenue increases may only be realized over a longer period than currently expected.
We invest in sales and marketing programs and personnel based on the revenue that we anticipate they will generate, but our expectations may
not be met in a timely fashion or at all. For example, we have in the past substantially expanded our field sales organization to provide improved coverage of the growing number of business opportunities in our target markets, and approximately
doubled our sales headcount in connection with the expansion. In addition, we have in the past made a variety of investments in marketing programs to complement the expansion of our field sales headcount. However, our revenue grew more slowly
than we had anticipated as a result of that expansion of our sales organization, so we subsequently took steps to reduce our sales and marketing expenses to be more in line with our revenue expectations.
Market awareness of our capabilities and products is essential to our continued growth and our success in the markets in which we compete and
intend to compete. If our marketing programs are not successful in creating market awareness of our company and products and the value and need for our products or if the timing and degree of increased revenues resulting from our increased sales and
marketing efforts does not meet our expectations, our business, financial condition and results of operations may suffer materially, and we will not be able to achieve sustained growth.
We base our inventory purchase decisions on our forecasts of customers demand and, if our forecasts are inaccurate, our operating results could be
materially harmed.
We place orders with our ODMs or manufacturers based on our forecasts of our customers demand for our
products. Our forecasts are based on multiple assumptions, any of which may introduce errors into our estimates and affect our ability to service our customers. When demand for our products exceeds our forecast, we may not be able to meet demand for
our products on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs in order to expedite the
manufacture and delivery of additional products. If we underestimate customer demand, our manufacturers may have inadequate materials and components required to produce our products and as a result, we may forego revenue opportunities, lose market
share and damage our customer
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relationships. Conversely, if we overestimate customer demand, our manufacturers may assess charges and we may purchase more finished goods inventory than we are able to sell when we expect to or
at all. As a result, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our costs of revenues and reduce our liquidity and which could negatively affect our gross margins. Our
failure to accurately manage inventory against demand would adversely affect our operating results.
We rely on third parties to manufacture our
products, and depend on them for the supply and quality of our products.
We utilize ODMs to manufacture our products, and are
subject to the risk that those manufacturers will not manufacture products with the quality and performance that our customers expect from our products. Our orders may represent a relatively small percentage of the overall orders received by our
manufacturers from their customers. As a result, fulfilling our orders may not be a priority in the event our manufacturers are constrained in their ability to fulfill all of their customer obligations in a timely manner. Quality or performance
failures of our products or changes in our manufacturers financial or business condition could disrupt our ability to supply quality products to our customers and thereby have a material and adverse effect on our business and operating
results. Moreover, an increasing portion of our manufacturing is performed outside the United States, primarily in China and Taiwan, and is, therefore, subject to risks associated with doing business in foreign countries. This includes risks
resulting from the perception that certain jurisdictions, including China, do not comply with internationally recognized rights of freedom of expression and privacy and may permit labor practices that are deemed unacceptable under evolving standards
of social responsibility. If manufacturing or logistics in these foreign countries is disrupted for any reason, including natural disasters, information technology system failures, military or government actions or economic, business, labor,
environmental, public health, or political issues, or if the purchase or sale of products from such foreign countries is prohibited or disfavored our business, financial condition and results of operations could be adversely affected.
Some of the components and technologies used in our products are purchased and licensed from a single source or a limited number of sources. The loss of
any of these suppliers may cause us to incur additional transition costs, result in delays in the manufacturing and delivery of our products, or cause us to carry excess or obsolete inventory and could cause us to redesign our products.
While supplies of our components are generally available from a variety of sources, we currently depend on a single source or limited number of
sources for several components used in our products. For example, the chipsets that we use in our products are currently available only from a limited number of sources, with whom neither we nor our manufacturers have entered into supply agreements.
For example, a substantial portion of our access points and controllers incorporate chipsets from Broadcom. We do not have any supply agreement with Broadcom and if Broadcom is unable to deliver the products that we or our manufacturers order from
them, we may not be able to ship our access points to our customers and our business would be materially and adversely affected.
We have
also entered into license agreements with some of our suppliers for technologies that are used in our products, and the termination of these licenses, which can generally be done on relatively short notice, could have a material adverse effect on
our business. For example, a few of our access points incorporate certain technology that we license from Atheros (acquired by Qualcomm in 2011). We have entered into a license agreement with Atheros, and such license agreement automatically renews
for successive one-year periods unless the agreement is terminated prior to the end of the then-current term. In the event our license agreement with Atheros is terminated, we would be required to redesign some of our products in order to
incorporate technology from alternative sources. The resulting redesign could require procuring additional licenses and incurring additional development costs, and materially and adversely affect our business.
As there may be no other sources for these components and technologies, the loss of any of these suppliers would require that we
transition to a new component or technology, which could increase our costs, result in delays in the manufacturing and delivery of our products or cause us to carry excess or obsolete inventory, and we could be required to redesign our hardware and
software in order to incorporate components or technologies from alternative sources.
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In addition, for certain components for which there are multiple sources, we are still subject to
potential price increases and limited availability due to market demand for such components. In the past, unexpected demand for communication products caused worldwide shortages of certain electronic parts. If such shortages occur in the future, our
business would be adversely affected. We carry very little inventory of our products, and we and our manufacturers rely on our suppliers to deliver necessary components in a timely manner. We and our manufacturers rely on purchase orders rather than
long-term contracts with these suppliers, and as a result, even if available, we or our manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable quality to build products in a timely manner and, therefore,
may not be able to meet customer demands for our products, which would have a material and adverse effect on our business, operating results and financial condition.
We rely on two third parties for the fulfillment of our customer orders, and the failure of these third parties to perform could have an adverse effect
upon our reputation and our ability to distribute our products, which could cause a material reduction in our revenues.
We use two
third party logistics providers to hold our inventory and fulfill our customer orders. If these third-party logistics providers fail to perform, our ability to deliver our products and to generate revenues would be adversely affected. The failure of
our third-party logistics providers to deliver products in a timely manner could lead to the dissatisfaction of our channel partners and customers and damage our reputation, which may cause our channel partners or customers to cancel existing
agreements with us and to stop doing business with us. In addition, this reliance on third-party logistics providers also may impact the timing of our revenue recognition if our logistics providers fail to deliver orders during the prescribed time
period. Although we believe that alternative logistics providers are readily available in the market, in the event we are unexpectedly forced to change providers we could experience short-term disruptions in our delivery and fulfillment process that
could adversely affect our business.
Our use of open source software could impose limitations on our ability to commercialize our products.
Our products contain software modules licensed for use from third-party authors under open source licenses, including the GNU
Public License, the GNU Lesser Public License, the Apache License and others. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide
warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the
type of open source software we use and the manner in which we use it. If we combine our proprietary software with open source software in a certain manner, we could, under certain of those open source licenses, be required to release the source
code of that proprietary software to the public. This could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of product sales for us.
Although we monitor our use of open source 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 could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in
order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event a license could not be obtained or re-engineering could not be accomplished on a timely and cost-effective basis, any of
which could materially and adversely affect our business and operating results.
If our estimates or judgments relating to our critical accounting
policies are based on assumptions that change or prove to be incorrect, our operating results could fall below our expectations and/or expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management estimates include implicit service periods for revenue
recognition, litigation and settlement costs, other loss contingencies, sales returns and allowances, allowance for doubtful accounts, inventory valuation, reserve for warranty costs, valuation of deferred tax assets, loss contingency estimates,
fair value of common stock, stock-based compensation expense, fair value of warrants and fair value of earn-out consideration.
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Our operating results may be adversely affected if our assumptions change or if actual
circumstances differ from those in our assumptions, or if we are required to make revisions to our financial statements as a result of periodic regulatory review, which could cause our operating results to fall below market expectations, resulting
in a decline in our stock price.
We are subject to governmental export and import controls that could subject us to liability or impair our ability
to compete in international markets.
Our products incorporate encryption technology and are subject to United States export
controls, and may be exported outside the U.S. only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and have enacted laws that
could limit our ability to distribute our products or could limit our customers ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of
our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether.
Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use
of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.
In addition, we have implemented limited procedures to ensure our compliance with export regulations, and if our export compliance procedures
are not effective, we could be subject to civil or criminal penalties, which could lead to a material fine or sanction that could have an adverse effect on our business and results of operations.
If we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results could be negatively
affected.
Our future growth, if it occurs, could place significant demands on our management, infrastructure and other resources.
We may need to increasingly rely on IT systems, some of which we do not currently have significant experience in operating, to help manage critical functions. To manage any future growth effectively, we must continue to improve and expand our
information technology and financial infrastructure and our operating and administrative systems and controls, and we must continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement
improvements to our infrastructure, systems and processes in a timely or efficient manner, which could result in additional operating inefficiencies and could cause unanticipated increases in our costs. If we do increase our operating expenses in
anticipation of the growth of our business and this growth does not meet our expectations, our financial results may be negatively impacted. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. Our failure
to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenues, expenses and earnings, or to prevent certain losses.
Any future growth would add complexity to our organization and require effective coordination within our organization. Failure to manage any future growth effectively could result in increased costs and harm our business.
We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results and
financial condition.
We completed our first acquisition, that of Identity Networks, in 2011. In the future we may acquire other
businesses, products or technologies. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, or such acquisitions may be viewed negatively by customers, financial markets or investors. We may
also face additional challenges, because acquisitions entail numerous risks, including:
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difficulties in the integration of acquired operations, technologies, personnel and/or products;
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unanticipated costs associated with the acquisition transaction;
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the diversion of managements attention from the regular operations of the business and the challenges of managing larger and more widespread operations;
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adverse effects on new and existing business relationships with suppliers and customers;
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risks associated with entering geographic or business markets in which we have no or limited prior experience;
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the potential loss of key employees of acquired businesses;
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an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of products and services from either company;
and,
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delays in realizing or failure to realize the benefits of an acquisition.
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Competition within
our industry for acquisitions of businesses, technologies, assets and product lines has been, and may in the future continue to be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able
to complete the acquisition on commercially reasonable terms or because the target is acquired by another company. Furthermore, in the event that we are able to identify and consummate any future acquisitions, we could:
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issue equity securities which would dilute current stockholders percentage ownership;
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incur substantial debt;
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incur significant acquisition-related expenses;
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assume contingent liabilities; or,
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expend significant cash.
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We invest in companies for both strategic and financial reasons, but may not
realize a return on our investments in every instance.
We have made, and may continue to seek to make, investments in companies
around the world to further our strategic objectives and support our key business initiatives. These investments may include equity or debt instruments of public or private companies, and may be non-marketable at the time of our initial investment.
We do not restrict the types of companies in which we seek to invest. These companies may range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business
models. If any company in which we invest fails, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for an equity or debt investment in a public or private
company in which we have invested, we will have to write down the investment to its fair value and recognize the related write-down as an investment loss. The performance of any of these investments could result in significant impairment
charges and gains (losses) on other equity investments. We must also analyze accounting and legal issues when making these investments. If we do not structure these investments properly, we may be subject to certain adverse accounting issues, such
as potential consolidation of financial results.
Furthermore, if the strategic objectives of an investment have been achieved, or if the
investment or business diverges from our strategic objectives, we may seek to dispose of the investment. Our non-marketable equity investments in private companies are not liquid, and we may not be able to dispose of these investments on favorable
terms or at all. The occurrence of any of these events could harm our results. Gains or losses from equity securities could vary from expectations depending on gains or losses realized on the sale or exchange of securities and impairment charges
related to debt instruments as well as equity and other investments.
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The security of our computer systems may be compromised and harm our business.
A significant portion of our business operations is conducted through use of our computer network. Although we have implemented security
systems and procedures to protect the confidential information stored on these computer systems, experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of
third parties. As well, they may be able to create system disruptions, shutdowns or effect denial of service attacks. We have been the subject of a denial of service attack in the past, although it did not materially affect our operations. Computer
programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our networks or client computers, or otherwise exploit any security vulnerabilities, or that misappropriate and
distribute confidential information stored on these computer systems. It is also possible that computer programmers and hackers could penetrate the network security of customers using our solutions. Any of the foregoing could result in damage to our
reputation and customer confidence in our products and services, and could require us to incur significant costs to eliminate or alleviate the problem. Additionally, our ability to transact business may be affected. Such damage, expenditures and
business interruption could seriously impact our business, financial condition and results of operations.
We are exposed to the credit risk of our
VARs, distributors and customers, which could result in material losses and negatively impact our operating results.
Most of our
sales are on an open credit basis, with typical payment terms of net 30 days in the U.S. and, because of local customs or conditions, longer in some markets outside the U.S. If any of our VARs, distributors or customers becomes insolvent or suffers
a deterioration in its financial or business condition and is unable to pay for our products, our results of operations could be harmed.
Our
reported financial results may be adversely affected by changes in accounting principles applicable to us.
Generally accepted
accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. A change in these
principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. Any difficulties in the implementation of these
pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory or administrative discipline, including the possibility of a restatement of our financial statements, or litigation.
New regulations or changes in existing regulations related to our products may result in unanticipated costs or liabilities, which could have a material
and adverse effect on our business, results of operations and future sales, and could place additional burdens on the operations of our business.
Our products are subject to governmental regulations in a variety of jurisdictions. If any of our products becomes subject to new regulations
or if any of our products becomes specifically regulated by additional government entities, compliance with such regulations could become more burdensome, and there could be a material adverse effect on our business and results of operations. For
example, radio emissions are subject to regulation in the U.S. and in other countries in which we do business. In the U.S., various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the
Federal Communications Commission, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of radio/electromagnetic emissions standards. Member countries of the European Union
have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions standards, as well as the Waste Electrical and Electronic Equipment, or WEEE, and Restriction of the Use of Certain Hazardous Substances in
Electrical and Electric Equipment, or RoHS, regulations with which our products and operations in the European Union must comply. We are further required to evaluate compliance with various laws and regulations that may be applicable to our
business, such as the conflict minerals disclosure rules promulgated by the SEC in August 2012. The rule requires investigation and disclosure of the use of certain conflict minerals in our products. These rules apply to our business,
and we are expending resources to ensure compliance. We may face reputational challenges and the loss of sales if we are required to publicly state that we are unable to sufficiently verify the origins for the defined conflict metals
used in our products. The failure to comply with these regulations could result in the assessment of fines or penalties or other relief against us.
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In addition, our wireless communication products operate through the transmission of radio
signals. Currently, operation of these products in specified frequency bands does not require licensing by regulatory authorities. Regulatory changes restricting the use of frequency bands or allocating available frequencies could become more
burdensome and could have a material and adverse effect on our business and results of operations.
Our ability to use net operating losses to
offset future taxable income is subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code, a
corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. Our existing NOLs are subject to limitations arising from
previous ownership changes and it is possible that the recent March 2013 secondary stock offering could result in an ownership change. In addition, if we undergo an ownership change in the future, our ability to utilize NOLs could be further limited
by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. Our net operating losses may
also be impaired under state law. As a consequence, we may not be able to utilize a material portion of our NOLs. At December 31, 2013, we had federal and state net operating loss carryforwards of approximately $146.2 million and $122.4
million, respectively, which begin to expire in 2022 and 2014, respectively.
Changes in our provision for income taxes or adverse outcomes
resulting from examination of our income tax returns could adversely affect our results.
Our provision for income taxes is subject
to volatility and could be adversely affected by the following:
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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 valuation of our deferred tax assets and liabilities;
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expiration of, or lapses in, the research and development tax credit laws;
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transfer pricing adjustments including the effect of acquisitions on our intercompany research and development cost sharing arrangement and legal structure;
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tax effects of nondeductible compensation;
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tax costs related to intercompany realignments;
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changes in accounting principles; or,
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changes in tax laws and regulations including possible U.S. changes to the taxation of earnings of our foreign subsidiaries, and the deductibility of expenses attributable to foreign income, or the foreign tax credit
rules.
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Significant judgment is required to determine the recognition and measurement attributes prescribed in the
accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies 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. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates. Our
failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the
likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. The outcomes from these examinations may have a material and adverse effect on our operating results and financial
condition.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade
problems such as power disruptions, network security breaches or terrorism.
Our corporate headquarters are located in the
San Francisco Bay Area, a region known for seismic activity. We also have significant research and development activities in India and facilities in Japan, regions known for
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typhoons, floods and other natural disasters. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters, our other facilities or where our ODMs and
channel partners are located, could have a material adverse impact on our business, operating results and financial condition. In addition, acts of terrorism could cause disruptions in our or our customers businesses or the economy as a whole.
We also rely on information technology systems to communicate among our workforce located worldwide, and in particular, our research and development activities that are coordinated between our corporate headquarters in the San Francisco Bay Area and
our facility in India. Any disruption to our internal communications, whether caused by a natural disaster or by manmade problems, such as power disruptions or the penetration of our system by hackers, could delay our research and
development efforts and affect our internal operations. To the extent that such disruptions result in delays or cancellations of customer orders, delay of our research and development efforts or the deployment of our products, or interrupt the
orderly operation of our business, our business and operating results could be materially and adversely affected.
Risks Related to Our Common Stock
Our stock price may be volatile. Further, you may not be able to resell shares of our common stock at or above the price you paid.
The trading price of our common stock has been highly volatile and could be subject to wide fluctuations in response to various factors, some
of which are beyond our control. These factors include:
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actual or anticipated variation in anticipated results of operations of us or our competitors;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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announcements by us or our competitors of new products, new or terminated significant contracts, commercial relationships or capital commitments;
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additional dilution to our existing shareholders due to new financing activities;
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failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet the estimates or expectations of analysts or investors;
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developments or disputes concerning our intellectual property or other proprietary rights;
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commencement of, or our involvement in, litigation;
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announced or completed acquisitions of businesses or technologies by us or our competitors;
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changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole, such as the continuing volatility in the financial markets;
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rumors and market speculation involving us or other companies in our industry;
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any major change in our management;
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general economic conditions and slow or negative growth of our markets; and,
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other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
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In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price
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of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular
companys securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our managements attention and
resources.
If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports
about our business, our stock price and trading volume could decline.
The trading market for our common stock relies in part on
the research and reports that equity research and industry analysts publish about us, our business and our products. We do not control these analysts or the content and opinions included in their reports. The price of our common stock could decline
if one or more equity research analysts downgrade our common stock or if an analyst issues other unfavorable commentary. Additionally, if one or more analysts cease coverage of our company, we could lose visibility in the market, which in turn could
cause our stock price to decline. Further, securities analysts may elect not to initiate research coverage of our common stock and such lack of research coverage may adversely affect the market price of our common stock.
Future sales of shares underlying outstanding options, warrants and other rights to acquire our common stock could dilute our existing stockholders and
cause our stock price to decline.
As of June 30, 2014, approximately 23.6 million shares of our common stock were issued
and outstanding. At that date, we had outstanding options and other rights to acquire approximately 4.6 million shares of our common stock, including stock options, restricted stock units, restricted stock and shares anticipated to be purchased
under our ESPP at the next purchase date, to the extent such securities become vested and are exercised as permitted by the provisions of the plans and agreements applicable to those securities. The weighted-average exercise price for options was
$4.76 per share as of June 30, 2014. In addition, on June 30, 2014, there were outstanding warrants to purchase 0.5 million shares of our common stock at a weighted average exercise price of $2.05 per share. If a substantial amount of
these additional shares are issued and are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. Additionally, our existing stockholders will suffer dilution of their
percentage ownership of outstanding common stock.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash
dividends in the foreseeable future.
We have never paid cash dividends on any of our classes of capital stock to date, and we have
contractual restrictions against paying cash dividends that are contained in our loan agreements. We currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our
common stock will be the sole source of gain for our stockholders in the foreseeable future.
Certain provisions of our certificate of incorporation
and bylaws and of Delaware law may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.
Certain provisions of our certificate of incorporation and bylaws and of Delaware law may have the effect of delaying or preventing changes in
control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. The provisions in our certificate or incorporation and bylaws include, among other things, the following:
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the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;
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stockholder action can only be taken at a special or regular meeting and not by written consent;
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advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings;
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allowing only our board of directors to fill vacancies on our board of directors; and,
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supermajority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation.
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While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of
directors, they could enable the board of directors to hinder or frustrate a transaction that some, or even a majority, of the stockholders might believe to be in their best interests by preventing or discouraging attempts to remove and replace
incumbent directors. We are also subject to Delaware laws that could discourage hostile takeover attempts. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met.