ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all
of the other information in this Quarterly Report on Form 10-Q before making a decision to invest in our common stock. The description below includes any material changes to and supersedes the description of the risk factors associated with our
business previously disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2016, filed with the SEC on April 6, 2016. The risks and uncertainties described below may not be the only ones we face. If
any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline, and you could lose part or all of
your investment.
Risks Related to Our Business
We have a history of losses and may not be able to achieve profitability or continue as a going concern.
We have incurred recurring operating losses and negative cash flows from operating activities since inception through July 31, 2016, and we have an accumulated
deficit of $603.3 million and cash, cash equivalents and short-term investments of $31.4 million as of July 31, 2016. During the six months ended July 31, 2016, we reported a net loss of $42.7 million and negative cash flows from operations of $32.2
million. During the year ended January 31, 2016, we reported a net loss of $99.1 million and negative cash flows from operations of $78.6 million. These factors raise substantial doubt about our ability to continue as a going concern.
Furthermore, we expect to incur net losses for at least the next twelve months even though we continue to restructure and reduce our expenses to be more in line with our current revenue expectations. Through July 31, 2016, we have relied primarily
on the proceeds from equity offerings and debt financing to fund our operations. If our revenue does not increase substantially, we will not be profitable. Even if we achieve profitability, we may not be able to sustain it. Our ability to continue
as a going concern is dependent upon us successfully addressing viability concerns by our customers, achieving profitability and obtaining the necessary financing to fund our operations until profitability is reached.
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We require additional capital to support our business and this capital might not be available on acceptable
terms, or at all.
Our ability to support our business while we attempt to reach profitability requires us to seek additional funds. Additional
capital through equity markets, debt markets or other financing arrangements may or may not be available to us.
If we issue additional equity or
convertible debt securities, our stockholders could suffer additional significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. For example, if we
issue preferred stock to raise capital, the holders of preferred stock may have liquidation rights senior to our holders of common stock, which would allow them to receive proceeds from a sale of our Company at a preferred rate over our common
holders. Any additional debt financing could involve restrictive covenants, which may restrict our flexibility in operating our business and make it more difficult for us to obtain additional capital and to pursue business opportunities, including
potential acquisitions.
We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate
financing on terms satisfactory to us, our ability to continue to support our business and to respond to business challenges could be significantly limited, and our business, operating results, financial condition and prospects, including our
ability to continue as a going concern, could be adversely affected.
We were notified by the New York Stock Exchange (the NYSE) that we
were not in compliance with certain NYSE continued listing requirements. Our disclosure of the notice of non-compliance could have a material, adverse effect on our business, operating results and financial condition.
We disclosed publicly that, on January 8, 2016, we received a notice from the NYSE that we were not in compliance with an NYSE continued listing standard
because the average closing price of our common stock was less than $1.00 per share over the consecutive 30-day trading period ended January 6, 2016 (the Share Price Listing Requirement). We also disclosed that, on April 27,
2016, we received a notice from the NYSE that we are not in compliance with an NYSE continued listing standard because, as of April 22, 2016, our average global market capitalization over a thirty trading-day period was below the NYSE
requirement of $50 million and, as of January 31, 2016, our stockholders equity deficit was below the NYSEs requirement of $50 million (the Market Capitalization Listing Requirement).
On June 30, 2016, our stockholders approved a reverse stock split with a ratio within a range of 1-for-2 and 1-for-10 and a reduction in the number of our
authorized shares of common stock from 1,000,000,000 to 250,000,000. Our board determined the reverse stock split ratio to be 1-for-4, and the reverse stock split was effective on July 5, 2016. On July 11, 2016, we were notified by the NYSE
that we had achieved compliance with the Share Price Listing Requirement and that we remained non-compliant with the Market Cap Listing Requirement. However, there can be no assurance that we will be able to remain in compliance with the Share Price
Listing Requirement. Our failure to do so will result in a suspension by the NYSE of trading in our common stock and the initiation of procedures to delist our common stock. In addition, the reverse stock split has adversely affected and could
continue to adversely affect our stock price.
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Our non-compliance with the Market Capitalization Listing Requirement could adversely affect our relationships
with our business partners and suppliers and customers and potential customers decisions to purchase our products and services and could have a material, adverse impact on our business, operating results and financial condition.
If we do not regain compliance with the Market Capitalization Listing Requirement, our common stock will be subject to the NYSEs suspension and
delisting procedures. The suspension of trading in or the delisting of our common stock would have a material, adverse effect on our business, operating results, financial condition, prospects and common stock.
We timely submitted to the NYSE a plan of definitive action we are taking which we believe will bring us into compliance with the Market Capitalization
Listing Requirement. On July 21, 2016, we were notified by the NYSE that the NYSEs Listings and Compliance Committee accepted our plan and that NYSE Regulation senior management has acknowledged the acceptance. The NYSE will closely
monitor our attempt to implement our plan over the next 18 months and our failure to achieve the initiatives and goals included in the plan will result in our being subject to an NYSE trading suspension at the time any initiative or goal is not
met. In order to regain compliance with the Market Capitalization Listing Requirement, we will have to maintain the required $50 million global market capitalization for a 180-day period within the plan period. Our failure to do so will
result in a suspension by the NYSE of trading in our common stock and the initiation of procedures to delist our common stock.
In addition, if our average
global market capitalization over a consecutive thirty trading-day period is less than $15 million, the NYSE will promptly initiate suspension and delisting procedures and, under the NYSEs continued listing standards, we will not have any
opportunity to regain compliance and our common stock will be delisted.
A suspension or delisting would adversely affect our relationships with our
business partners and suppliers and customers and potential customers decisions to purchase our products and services, and would have a material, adverse impact on our business, operating results and financial condition. In addition, a
suspension or delisting would impair our ability to raise additional capital through equity or debt financing and our ability to attract and retain employees by means of equity compensation.
In the event of a delisting, our common stock could be traded on the over-the-counter bulletin board, or in the so-called pink sheets. In the
event of such trading, it is highly likely that there would be: significantly less liquidity in the trading of our common stock; decreases in institutional and other investor demand for our common stock, coverage by securities analysts, market
making activity and information available concerning trading prices and volume; and fewer broker-dealers willing to execute trades in our common stock. The occurrence of any of these events could result in a further decline in the market price of
our common stock. The occurrence of any of these events could impair our ability to retain and attract employees and members of management.
A
suspension or delisting of our common stock could result in a default of our obligations under the indenture governing our Convertible Senior Notes (Notes).
A suspension or delisting of our common stock could result in a demand by the holders of our Notes that we repurchase the Notes pursuant to the terms and
conditions of the indenture. In that event, we may not be able to repurchase our Notes, which could result in a default under the indenture. In the event of a default, our Notes would become immediately due and payable. If we are unable to pay our
Notes, the holders, among other things, could pursue legal action against us.
A default under the indenture likely would have a material adverse impact
upon our business, operating results, and financial condition and prospects, and likely would adversely affect our ability to continue as a going concern.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal amount of, to pay interest on or to refinance our indebtedness, including our Notes,
depends upon our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and other fixed
charges, fund working capital needs, and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional
equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage
in these activities on desirable terms, which could result in a default on our debt obligations.
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We may not have the ability to raise the funds necessary to pay interest on our Notes, to repurchase the
Notes upon a fundamental change or to settle conversions of the Notes in cash.
Our Notes bear interest semi-annually at a rate of 4.25% per
year. In addition, in certain circumstances, we are obligated to pay additional interest or special interest on the Notes. If a fundamental change occurs, holders of the Notes may require us to repurchase all or a portion of their Notes
in cash. Furthermore, if we obtain stockholder approval, upon conversion of any Notes, unless we elect to deliver solely shares of our common stock to settle the conversion (excluding cash in lieu of delivering fractional shares of our common
stock), we must make cash payments in respect of the Notes. Any of the cash payments described above could be significant, and we may not have enough available cash or be able to obtain financing so that we can make such payments when due or to
repay the indebtedness under our then outstanding credit facilities in order to be permitted to make such cash payments. Our existing credit agreement prohibits us from making any optional prepayments with respect to the Notes, which may potentially
restrict our ability to make any cash payments upon conversion, and the events that would trigger a fundamental change would be default under the credit agreement, which could prohibit us from repurchasing the Notes. In addition, our ability to
repurchase the Notes or to pay cash upon conversions of the Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. If we fail to pay interest on the Notes, repurchase the Notes when required or
deliver the consideration due upon conversion, we will be in default under the indenture. A default under the indenture would be a default under our credit agreement and could lead also to a default under the agreements governing our future
indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversion of the
Notes. Our inability to do so could result in a default on our debt obligations.
Our future operating results will depend upon our ability to
increase our revenue.
Revenue has been decelerating for the past five quarters. Our total revenue was $15.3 million, $12.5 million, $10.9 million
for the second, third and fourth quarters of fiscal 2016, respectively, and $9.7 million and $7.5 million for the first and second quarters of fiscal 2017, respectively.
To increase our revenue, we believe we must effectively, among other things:
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maintain and extend our leadership in the development of the all flash array market;
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compete effectively in the primary storage market with our Flash Storage Platform, including our Concerto OS 7 operating system software;
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maintain our direct sales force as well as grow and expand our relationships with key customers, systems vendors and technology partners;
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expand our channel relationships and successfully execute our channel strategy;
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forecast and control expenses;
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recruit, hire, train and manage additional research and development, and sales and marketing personnel;
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expand our customer support capabilities on a global basis;
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enhance and expand our distribution and supply chain infrastructure;
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manage inventory levels, including trial deployments of systems;
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enhance and expand our international operations; and
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implement and improve our administrative, financial and operational systems, procedures and controls.
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We
expect that our efforts to increase revenue will continue to place a significant strain on our managerial, administrative, operational, financial and other resources. If we are unable to increase revenue, our business, operating results, financial
condition and prospects, and our ability to continue as a going concern will be adversely affected.
Our customers and potential
customers decisions to purchase our products and services may be influenced by our financial results.
Our customers and potential customers
may consider our financial results in deciding whether to purchase our products and services. To the extent that customers and potential customers view our financial results negatively, they may decide not to purchase our products and services, or
to purchase less, or to delay their purchases, or to demand terms that are not favorable to us, any of which would adversely affect our business, operating results and financial condition.
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The public announcement of our engagement of a financial advisor to assist us in exploring strategic
alternatives and the conclusion of that process whereby there were no buyers of the Company has and could continue to adversely affect our business, financial condition and results of operations.
Our public announcement that we retained a financial advisor to assist us in exploring strategic alternatives has and could further disrupt our business and
create uncertainty about our prospects as a stand-alone entity. Furthermore, our announcement that this process did not yield any buyers for the Company has adversely affected and could continue to adversely affect our business. Such disruption or
uncertainty has and could further have a material adverse effect on our business, financial condition and results of operations. The risks to our business include:
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diversion of substantial management time and resources to address note holder and stockholder concerns;
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difficulties in developing and maintaining relationships with customers and business partners;
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our inability to conclude any of the go-to-market and technology relationship opportunities that we are pursuing; and
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impairment of our ability to attract and retain key managers and other employees.
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We compete with large
data storage providers and expect competition to intensify in the future from established companies and new market entrants.
The market for
primary data storage products is highly competitive, and we expect competition to continue to intensify in the future. Our products compete with various high-performance array-based storage approaches employed by next-generation datacenters.
Our competitors include incumbent primary storage vendors, such as EMC, HP, Hitachi, IBM and NetApp, which typically sell centralized storage products as well as high-performance storage approaches utilizing solid state drives, or SSDs, as well as
vertically integrated appliance vendors such as Oracle. In addition, a number of privately-held and newly public companies are attempting to enter our market, some of which may become significant competitors in the future.
Many of our current competitors have, and some of our potential competitors could have, longer operating histories, greater name recognition, larger customer
bases and significantly greater financial, technical, sales, marketing and other resources than we have. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or
features. New start-up companies continue to innovate and may invent similar or superior products and technologies that may compete with our products and technology. Some of our competitors have made and are continuing to make acquisitions
of other competitors and other businesses that may allow them to offer more directly competitive and comprehensive solutions than they had previously offered. In addition, some of our competitors, including our systems vendor customers, may develop
competing technologies and sell at zero or negative margins, through product bundling, closed technology platforms or otherwise, to gain business. Our current and potential competitors may also establish cooperative relationships among themselves or
with third parties. In addition, consolidations among systems vendors, which can occur unexpectedly, can significantly impact our sales efforts to systems vendors. As a result, there can be no assurance that our products will compete favorably, and
any failure to do so could seriously harm our business, operating results and financial condition. Our competitors may attempt to use certain information, such as the pending securities litigation and changes in our management, against us, which
could delay or prevent future business.
Competitive factors could make it more difficult for us to sell our products, resulting in increased pricing
pressure, reduced gross margins, increased sales and marketing expenses, longer customer sales cycles and failure to increase, or the loss of, market share, any of which could seriously harm our business, operating results and financial condition.
Any failure to meet and address competitive challenges could materially and adversely our business, operating results and financial condition.
If
our Flash Storage Platform products are not successful, our business could be materially and adversely affected.
Our ability to compete
effectively in the primary storage market is dependent upon the success of a single line of products our Flash Storage Platform 7300, 7300E, 7600 and 7700 products. If our Flash Storage Platform products are not successful, it will be
difficult for us to compete in the primary storage market with our current products at margins that enable us to achieve and maintain profitability. We have faced and could continue to face increased pricing pressure, reduced gross margins,
increased sales and marketing expenses, longer customer sales cycles and the loss of market share. In addition, if we have to compete in the primary storage market with our 6000 Series products, we could be forced to modify substantially our
cost structure and business strategy, which could have a material adverse effect on our business and operating results.
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We expect large and concentrated purchases by a limited number of customers to continue to represent a
majority of our product revenue, and any loss of, or delay or reduction in purchases by a small number of customers could adversely affect our operating results.
Historically, large purchases by a relatively limited number of customers have accounted for a majority of our product revenue, and the composition of the
group of our largest customers has changed from period to period. These concentrated purchases are made on a purchase order basis rather than pursuant to long-term contracts. Total revenue from our five largest customers for the years ended
January 31, 2016, 2015 and 2014 were 26%, 30% and 35%, respectively. Total revenue from our five largest customers for the three months ended July 31, 2016 and 2015 were 36% and 48%, respectively, and 34% and 36% for the six months ended
July 31, 2016 and 2015, respectively. As a consequence of our limited number of customers, the concentrated nature of their purchases and the timing of purchases from these large customers, our quarterly revenue and operating results may
fluctuate from quarter to quarter and are difficult to estimate. Any acceleration or delay in anticipated product purchases or the acceptance of shipped products by our larger customers could materially impact our revenue and operating results in
any quarterly period. We cannot provide any assurance that we will be able to offset the discontinuation or reduction of concentrated purchases by our larger customers with purchases by other new or existing customers. We expect that sales of our
products to a limited number of customers will continue to contribute materially to our revenue for the foreseeable future. The loss of, or a significant delay or reduction in purchases by, a small number of customers could materially and adversely
our business, operating results and financial condition.
Toshiba is our sole supplier for flash memory. Any disruption in our relationship with
Toshiba could have a material adverse effect on our business.
The most significant component that we use in our products is flash memory.
Although we have an agreement with Toshiba, the sole supplier of our flash memory components, we may experience a shortage of flash memory if Toshiba is not able to meet our demand. Toshiba may not be able to meet our demand for a variety of
reasons, including our inability to forecast our future needs accurately to Toshiba or a shortfall in production by Toshiba for reasons unrelated to us. In addition, our agreement with Toshiba does not provide us with fixed pricing for flash memory,
which subjects us to fluctuations in pricing. Our agreement with Toshiba also requires us to purchase 70% of our annual requirement for flash memory from Toshiba, subject to specified conditions, and to design our products to be substantially
compatible with Toshiba flash memory. If Toshiba increases the price of its flash memory, we may not be able to implement a corresponding increase in the price of our products and our revenue and gross margins would be materially adversely affected.
In addition, if the flash memory we purchase from Toshiba is not competitive with the performance of other flash memory in the market, the competitiveness of our products may be adversely affected and our business could suffer. For example, the
introduction of three dimensional, or 3D, flash memory allows for improved economics. We will need to find supply in a timely manner in order to develop future generations of product. We do not currently have any agreement in place with other flash
memory providers in the event that Toshiba cannot meet our demand or we are unable to renew our contract with Toshiba. If we cannot obtain sufficient supply of flash memory at an acceptable price to us, our ability to respond to our customer demand
and grow our business could be significantly harmed.
Our products are highly technical and may contain undetected defects, which could cause data
unavailability, loss or corruption that might, in turn, result in liability to our customers and harm to our reputation and business.
Our all
flash array products, including our Flash Storage Platform and Concerto OS 7 operating system software, and related software are highly technical and complex and are often used to store information critical to our end-customers business
operations. Our products may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss or corruption or other harm to our end-customers. Some errors in our products may only be discovered after
they have been installed and used by end-customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release, or any perception of the same in the marketplace, could result in a loss of revenue or delay in
revenue recognition, injury to our reputation, a loss of end-customers or increased service and warranty costs, any of which could adversely affect our business. In addition, we could face claims for product liability, tort or breach of
warranty. Many of our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may be difficult to enforce. Defending a lawsuit, regardless of its merit, would be costly and might divert
managements attention and adversely affect the markets perception of us and our products. In addition, our business liability insurance coverage could prove inadequate or could be subject to coverage exclusions or deductibles with
respect to a claim and future coverage may be unavailable on acceptable terms or at all. These product-related issues could result in claims against us and our business could be adversely impacted.
Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to
fall below expectations.
Our operating results have fluctuated and may continue to fluctuate due to a variety of factors, many of which are
outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall
below expectations, the price of our common stock would likely decline.
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Factors that are difficult to predict and that could cause our operating results to fluctuate include:
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the timing and magnitude of orders, shipments and acceptance of our products in any quarter, including orders from large customers;
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a postponement or cancellation of significant orders;
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cost and timing of trial deployments;
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mix of sales between end-customers and channel partners;
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availability of, and our ability to control the costs of, the components we use in our hardware products, specifically flash memory;
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reductions in customers budgets for information technology purchases;
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additional restrictions on our ability to export our products;
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delays in end-customers purchasing cycles or deferments of end-customers product purchases in anticipation of new products or product enhancements from us or our competitors;
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any change in the competitive dynamics of our markets, including actions by large storage providers who may discount product prices or bundle storage products to provide lower overall systems costs;
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fluctuations in demand and prices for our products;
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changes in standards in the data storage industry;
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our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet end-customer requirements;
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our ability to control costs, including our operating expenses; and
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future accounting pronouncements and changes in accounting policies.
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The occurrence of any one of these risks
could negatively affect our operating results in any particular quarter and cause the price of our common stock to decline.
Our success depends
upon our ability to effectively plan and manage our resources and restructure our business in response to changing market conditions and market demand for our products, and such actions may have an adverse effect on our financial and operating
results.
Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning, forecasting and
management process to enable us to effectively scale and adjust our business in response to fluctuating market opportunities and conditions.
In response
to changes in market conditions and market demand for our products, we have in the past undertaken cost savings initiatives. For example, in March 2016, we announced a restructuring plan focused on aligning our expense structure with revenue
expectations. In connection with the restructuring plan, we reduced headcount by approximately 25% from that as of October 31, 2015. We may in the future undertake initiatives that may include restructuring, disposing of, and/or otherwise
discontinuing certain products, or a combination of these actions. Rapid changes in the size, alignment or organization of our workforce, including sales account coverage, could adversely affect our ability to develop, sell and deliver products and
services as planned or impair our ability to realize our current or future business and financial objectives. Any decision to take these actions may result in charges to earnings associated with, among other things, inventory or other asset
reductions (including, without limitation, impairment charges) and workforce and facility reductions. Charges associated with these activities would harm our operating results. In addition, if we continue to reduce the size of our workforce, our
ability to compete effectively and increase our revenue may be adversely affected. We may not realize any of the anticipated benefits of the underlying restructuring activities.
Our sales cycles can be long and unpredictable, particularly with respect to large orders and establishing technology and systems integrator
relationships that require considerable time and expense. As a result, it can be difficult for us to predict when, if ever, a particular customer will choose to purchase our products, which may cause our operating results to fluctuate significantly.
Our sales efforts include convincing end-customers of our products reliability and interoperability with their existing network
infrastructure. Customers often undertake a trial deployment to evaluate and test our products, which can result in a lengthy sales cycle. We spend substantial time and resources on our sales efforts without any assurance that our efforts will
produce any sales. In
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addition, product purchases are frequently subject to budget constraints, vendor certification, multiple approvals and unplanned administrative, processing and other delays. Additionally, a
significant portion of our sales personnel have been with us for less than a year, which could further extend the sales cycle as these new personnel typically require a significant amount of training and experience until they are productive. These
factors, among others, result in long and unpredictable sales cycles, particularly with respect to large orders and the establishment of technology and systems integrator relationships. Further, we may invest significant management attention and
expense in building relationships that do not ultimately result in successful sales.
We also sell to technology and systems integrators that incorporate
our products into their solutions, which can require an extended evaluation and testing process before our product is approved for inclusion in one of their solutions. We also may be required to customize our product to interoperate with an
integrators solution, which could further lengthen the sales cycle for sales to them. The length of our sales cycle makes us susceptible to the risk of delays or termination of orders if end-customers decide to delay or withdraw
funding for datacenter projects, which could occur for various reasons, including global economic cycles and capital market fluctuations. In addition, as a result of the lengthy and uncertain sales cycles of our products, it is difficult for us to
predict when customers may purchase products from us and as a result, our business, operating results and financial condition may vary significantly and be materially and adversely affected.
Ineffective management of product transitions or our inventory levels, including inventory used in trial deployments, could adversely affect our
operating results.
If we are unable to properly forecast, monitor, control and manage our inventory and maintain appropriate inventory levels and
mix of products to support our customers needs, we may incur increased and unexpected costs. Sales of our products are generally made through individual purchase orders and some of our customers place large orders with short lead times, which
make it difficult to predict demand for our products and the level of inventory that we need to maintain in order to satisfy customer demand. If we build our inventory in anticipation of future demand that does not materialize, or if a customer
cancels or postpones outstanding orders, we could experience an unanticipated increase in the inventory level of our finished products which would cause us to incur manufacturing costs in a period that are not offset by sales of finished products.
In addition, our inability to manage inventory levels in connection with future product transitions may materially and adversely affect our business, operating results and financial condition.
For example, in the fourth quarter of fiscal 2015, we incurred a provision for excess and obsolete inventory of $17.6 million and an increase in accrued
liabilities of $2.3 million for non-cancellable purchase orders when we transitioned from our 6000 Series All Flash Array to our Flash Storage Platform. Again, in the second quarter of fiscal 2017, we incurred a provision for excess and
obsolete inventory and related commitments of $2.9 million as we failed to meet our sales forecasts. Alternatively, we could carry insufficient inventory, and we may not be able to satisfy demand, which could have a material adverse effect on our
customer relationships or cause us to lose potential sales
We typically provide trial deployments to potential customers and maintain the classification
of these products in the field as inventory. We may not be able to convert these trial deployments into sales, which could lead to higher levels of inventory, lost or damaged units, risk of obsolescence and excessive wear making them unsaleable or
saleable only at low margin or at a loss. Although our sales contracts typically provide that we are not obligated to accept product returns, except for warranty claims, for purchased products, in limited circumstances, we may determine that it is
in our best interest to accept returns or exchange products in order to maintain good relationships with customers. Product returns or exchanges would increase our inventory and reduce our revenue. If we are unable to sell our inventory in a timely
manner, we could incur additional carrying costs, reduced inventory turns and potential write-downs due to obsolescence, particularly in periods of product transition.
The occurrence of any of these risks related to inventory could adversely affect our business, operating results and financial condition.
Our gross profit may vary and such variation may make it more difficult to forecast our earnings.
Our gross profit has been and may continue to be affected by a variety of factors, including:
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demand for our products and related services;
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discount levels and price competition;
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average order size and customer mix;
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the provision for excess or obsolete inventory;
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the cost and availability of components;
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an increase in warranty expense or part replacement;
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level of costs for providing customer support;
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the mix of services or software as a percentage of revenue;
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new product introductions and enhancements; and
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Any of these factors could adversely affect our gross profit and operating results
compared to prior periods or future expectations from us or analysts who have issued research reports about us.
The use of flash memory in storage
products is rapidly evolving, which makes it difficult to forecast customer adoption rates and demand for our products.
The market for flash
memory in storage products is rapidly evolving. Accordingly, our future financial performance will depend in large part on growth in this market and on our ability to adapt to trends in this market as they develop and evolve. Sales of our products
are dependent in large part upon our ability to penetrate the primary storage market in addition to markets that require high-performance data storage solutions, such as business-critical applications, virtualization and Big Data. It is difficult to
predict with any precision customer adoption rates, end-customer demand for our products or the future growth rate and size of our market. The rapidly evolving nature of the technology in the data storage products market, as well as other
factors that are beyond our control, reduce our ability to accurately predict our future performance. Our products may never gain broad adoption, and changes or advances in technologies could adversely affect the demand for our products. Further,
although flash-based data storage products have a number of advantages compared to other data storage alternatives, flash-based storage devices have certain disadvantages as well, including increased utilization of host system resources than
traditional storage, and in some circumstances may require end-customers to modify or replace network systems originally installed for traditional storage media. A reduction in demand for flash-based data storage caused by lack
of end-customer acceptance, technological challenges, competing technologies and products or otherwise would result in a lower revenue growth rate or decreased revenue, either of which would materially and adversely affect our business,
operating results and financial condition.
We have derived substantially all of our revenue from a single line of products, and a decline in demand
for these products would cause our revenue to grow more slowly or to decline.
Our all flash array product line has accounted for substantially
all of our revenue and is expected to comprise a significant portion of our revenue for the foreseeable future. As a result, our revenue could be reduced by:
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the failure of our Flash Storage Platform products to achieve broad market acceptance;
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any decline or fluctuation in demand for our products, whether as a result of product obsolescence, technological change, customer budgetary constraints or other factors;
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any constraint on our ability to meet demand for our products, whether as a result of component supply constraint or the inability or unwillingness of our contract manufacturer to timely deliver products;
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the introduction of products and technologies by competitors that serve as a replacement or substitute for, or represent an improvement over, these products;
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an order resulting from a judgment of patent infringement or otherwise, that restricts our ability to market and sell our products; and
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our inability to release enhanced versions of our products, including any related software or future generations of products, on a timely basis.
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If we fail to develop and introduce new or enhanced products on a timely basis, our ability to attract and retain customers could be impaired and our
competitive position would be harmed.
We operate in a dynamic environment characterized by rapidly changing technologies and industry standards
and technological obsolescence. To compete successfully, we must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance, capacity and reliability and meet the cost expectations of our
customers. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies, or the emergence of new
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industry standards could render our existing or future products obsolete. Our failure to anticipate or timely develop new or enhanced products or technologies in response to technological shifts
could result in decreased revenue and harm our business. If we fail to introduce new or enhanced products that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating results will be
adversely affected.
In order to maintain or increase our gross margins, we need to continue to create valuable software solutions to be integrated with
our products. Any new feature or application that we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the broad market acceptance necessary to increase our overall gross margins. If we are unable to
successfully develop or acquire, and then market and sell future generations of our products, our ability to increase our revenue and gross margin will be materially and adversely affected.
Our products must interoperate with network interfaces, such as operating systems, software applications and hardware developed by others, and if we are
unable to ensure that our products interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience reduced demand for our products.
Our storage products comprise only a part of a datacenters infrastructure. Accordingly, our products must interoperate with
our end-customers existing infrastructure, specifically their networks, servers, software and operating systems, which are typically manufactured by a wide variety of systems vendors. When new or updated versions of these software
operating systems or applications are introduced, we must sometimes develop updated versions of our software so that our products interoperate properly. We may not accomplish these development efforts quickly, cost-effectively or at all. These
development efforts require capital investment and the devotion of engineering resources. If we fail to maintain compatibility with these applications, our end-customers may not be able to adequately utilize the data stored on our products, and
we may, among other consequences, fail to increase, or we may lose, market share and experience reduced demand for our products, which would adversely affect our business, operating results and financial condition.
We rely on our key engineering, technical, sales and management employees to grow our business, and the loss of one or more key employees or the
inability to attract and retain qualified personnel could harm our business.
Our success and future growth depend to a significant degree on the
skills and continued services of many of our engineering, technical, sales and management employees. In addition, we are highly dependent on the services of our CEO, Kevin A. DeNuccio. We also are very dependent on the services of our senior vice
presidents. We could experience difficulty in integrating and retaining members of our senior management team. We do not have key person life insurance policies that cover any of our officers or other key employees. The loss of the
services of any of our key employees could disrupt our operations, delay the development and introduction of our products, and negatively impact our business, prospects and operating results.
In the longer term, we expect to hire personnel in all areas of our business, particularly in sales and research and development. Competition for these types
of personnel is intense. There can be no assurance that we will be able to successfully attract or retain qualified personnel. Our inability to attract and retain the necessary personnel could adversely affect our business, operating results and
financial condition.
Our strategic relationship with GlobalLogic is subject to material risks and uncertainties.
We have disclosed publicly that we have entered into a strategic relationship with GlobalLogic, Inc. (GlobalLogic) in connection with our research and
product development efforts, that GlobalLogic currently is working with us on software quality assurance matters, and that our relationship with GlobalLogic may expand into other areas of product development in time. In the event that the
strategic relationship is not successful, we would be required to make other arrangements for the research and product development efforts being handled by GlobalLogic, which could involve considerable expense and which could result in material
delays in our product development efforts or affect our ability to support our customers in a timely fashion. If we were to incur such expense and experience such delays, our business, operating results and financial could be materially and
adversely affected.
In addition, at this time, GlobalLogics research and development work for us is being conducted in Kiev, Ukraine. Ukraine
recently has been subject to armed conflict, civil unrest and government instability. A continuation or worsening of any of these conditions could require us to make arrangements with GlobalLogic to provide its services at other locations,
which could result in our incurring considerable expense and delays in our research and product development efforts. Such expense and delays could materially and adversely affect our business, operating results and financial condition.
Our research and development efforts may not produce successful products that result in significant revenue in the near future, if at all.
Developing our products and related enhancements is expensive. Our investments in research and development may not result in marketable products or may result
in products that are more expensive than anticipated, take longer to generate revenue or generate less revenue, if at all, than we anticipate. Our future plans include significant investments in research and development and related
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product opportunities. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may
not receive significant revenue from these investments in the near future, if at all, which could adversely affect our business, operating results and financial condition.
Developments or improvements in storage system technologies may materially adversely affect the demand for our products.
Significant developments in data storage systems, such as advances in solid state storage drives or improvements in non-volatile memory, may materially and
adversely affect our business and prospects in ways we do not currently anticipate. For example, improvements in existing data storage technologies, such as a significant increase in the speed of traditional interfaces for transferring data between
storage and a server or the speed of traditional embedded controllers, could emerge as preferred alternatives to our products, especially if they are sold at lower prices. This could be the case even if such advances do not deliver all of the
benefits of our products. Any failure on our part to demonstrate the benefits of our products would result in lost sales. In addition, any failure by us to develop new or enhanced technologies or processes, or to react to changes or advances in
existing technologies, including the development of the new 3D flash memory technology, could materially delay our development and introduction of new products, which could result in the loss of competitiveness of our products, decreased revenue and
a loss of market share to competitors.
Our ability to sell our products is highly dependent on the quality of our customer support and services,
and any failure to offer high-quality support and services would harm our business, operating results and financial condition.
Once our products
are deployed, our customers depend on our support organization to resolve any issues relating to our products. Our products provide business-critical services to our customers and a high level of customer support is necessary to maintain our
customer relationships. We rely on authorized service providers in certain locations in the United States to install our products and deliver initial levels of on-site customer support and services. While we attempt to carefully identify,
train and certify our authorized service providers, we may not be successful in ensuring the proper delivery and installation of our products or the quality or responsiveness of the support and services being provided.
As we grow our business, our ability to provide effective customer support and services will be largely dependent on our ability to attract, train and retain
qualified direct customer service personnel and our ability to maintain and grow our network of authorized service providers. Additionally, as we continue to 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, as well as identifying, training and certifying international authorized service providers to support products we may deploy
in geographical areas in which we may not currently have authorized service providers.
Any failure to maintain high-quality customer support and
services, or a market perception that we do not maintain high-quality customer support and services, could harm our reputation, adversely affect our ability to sell our products to existing and prospective customers, and could harm our business,
operating results and financial condition.
In certain markets, we rely on resellers and distributors to sell our products in markets where we do
not have a direct sales force, and on authorized service providers to service and support our products in markets where we do not have direct customer service personnel. Any disruptions to, or failure to develop and manage, our relationships with
resellers, distributors and authorized service providers could have an adverse effect on our customer relationships and on our ability to increase revenue.
Our future success is highly dependent upon our ability to establish and maintain successful relationships with a variety of resellers, distributors and
authorized service providers in markets where we do not have a direct sales force or direct customer service personnel. We currently have direct sales personnel covering over 15 countries as of July 31, 2016. In other markets, we rely and expect to
continue to rely on establishing relationships with systems vendors, resellers and authorized service providers. Our ability to maintain or grow our international revenue will depend, in part, on our ability to carefully select, manage and expand
our network of resellers, distributors and authorized service providers. We also have agreements with authorized service providers that deliver and install our products, as well as provide post-sale customer service and support, on our behalf in
their local markets. In markets where we rely on resellers, distributors and authorized service providers, we have less contact with our customers and less control over the sales process and their responsiveness. As a result, it may be more
difficult for us to ensure the proper delivery and installation of our products or the quality or responsiveness of the support and services being offered. Any failure on our part to effectively identify and train our systems vendor partners,
resellers and authorized service providers and to monitor their sales activity as well as the customer support and services being provided to our customers in their local markets could harm our business, operating results and financial condition.
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Identifying, training, and retaining qualified resellers and authorized service providers require significant
time and resources. In order to maintain and expand our network of resellers, distributors and authorized service providers, we must continue to scale and improve the systems, processes and procedures that support them, which will require continuing
investment in our information technology infrastructure and dedication of significant training resources. As we grow our business and support organization, these systems, processes and procedures may become increasingly complex, difficult and
expensive to manage, particularly as the geographic scope of our customer base expands globally.
We typically enter
into non-exclusive agreements with our resellers, distributors and authorized service providers. These agreements generally have a one-year, self-renewing term, have no minimum sales commitment and do not prohibit our resellers,
distributors and authorized service providers from offering products and services that compete with ours. Accordingly, our resellers, distributors and authorized service providers may choose to discontinue offering our products and services or may
not devote sufficient attention and resources toward selling our products and services. Additionally, our competitors may provide incentives to our existing and potential resellers, distributors and authorized service providers to use, purchase or
offer their products and services, which may prevent or reduce sales of our products and services. The occurrence of any of these events could harm our business, operating results and financial condition.
If our third-party hardware repair service fails to timely and correctly resolve hardware failures experienced by our end-customers, our reputation
will suffer, our competitive position will be impaired and our expenses could increase.
We and our authorized service providers rely upon
third-party hardware maintenance providers, which specialize in providing vendor-neutral support of storage equipment, network devices and peripherals, to provide repair services to our end-customers. If our third-party repair service
fails to timely and correctly resolve hardware failures, our reputation will suffer, our competitive position will be impaired and our expenses could increase. In April 2015, we entered into a three-year agreement with DecisionOne Corporation for
our call center support and onsite maintenance services. Either party may terminate the agreement for any reason by providing the other party 120-day notice of termination. In addition, either party may immediately terminate the agreement
for a material default by the other party that is not cured within 30 days. If our relationship with our third-party repair service were to end, we would have to engage a new third party provider of hardware support, and the transition could result
in delays in effecting repairs and damage our reputation and competitive position as well as increase our operating expenses.
We rely on a single
contract manufacturer to manufacture our products, and our failure to accurately forecast demand for our products or successfully manage our relationship with our contract manufacturer could negatively impact our ability to sell our products.
We rely on Flextronics International Ltd. (Flex) to manufacture all of our products, manage our supply chain and, alone or together
with us, negotiate component costs. We purchase our flash components directly from a single-source supplier and consign these components to Flex. Our reliance on our contract manufacturer reduces our control over the assembly process, quality
assurance, production costs and product supply. If we fail to manage our relationship with our contract manufacturer or if our contract manufacturer experiences delays, disruptions, capacity constraints or quality control problems in its operations,
our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. If we or our contract manufacturer are unable to negotiate with suppliers for reduced component costs, our business,
operating results and financial condition could be materially and adversely affected.
If we are required to change to a new contract manufacturer,
qualify an additional contract manufacturer or assume internal manufacturing operations for any reason, including financial problems of our contract manufacturer, reduction of manufacturing output made available to us, or the termination of our
contract, we may lose revenue, incur increased costs and damage our customer relationships. Our contract manufacturer may terminate our agreement with them with prior notice to us or for reasons such as we fail to perform a material obligation under
our agreements with them. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming.
We are required to
provide forecasts to our contract manufacturer regarding product demand and production levels. We provide our contract manufacturer with purchase orders for products they manufacture for us, and these orders may only be rescheduled or cancelled
under certain limited conditions. If we inaccurately forecast demand for our products, we may have excess or inadequate inventory or incur cancellation charges or penalties, which could adversely impact our operating results.
We intend to introduce new products and product enhancements, which could require us to achieve volume production rapidly by coordinating with our contract
manufacturer and component suppliers. We may need to increase our component purchases, contract manufacturing capacity and internal test and quality functions if we experience increased demand for our products. Our orders may represent a relatively
small percentage of the overall orders received by our contract manufacturer from their customers. As a result, fulfilling our orders may not be considered a priority in the event our contract manufacturer is constrained in its ability to fulfill
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its customer obligations in a timely manner. If our contract manufacturer is unable to provide us with adequate supplies of high-quality products, or if we or our contract manufacturer is unable
to obtain adequate quantities of components, it could cause a delay in our order fulfillment, in which case our business, operating results and financial condition could be materially and adversely affected.
We rely on a limited number of suppliers, and in some cases single-source suppliers, and any disruption or termination of these supply arrangements
could delay shipments of our products and could materially and adversely affect our relationships with current and prospective customers.
We rely
on a limited number of suppliers, and in some cases single-source suppliers, for several key components of our products, and neither our contract manufacturer nor we have entered into agreements for the long-term purchase of these components. This
reliance on a limited number of suppliers and the lack of any guaranteed sources of supply exposes us to several risks, including:
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the inability to obtain an adequate supply of key components in a timely manner, including flash memory and field programmable gate arrays;
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price volatility for the components of our products;
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failure of a supplier to meet our quality, yield or production requirements;
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failure of a key supplier to remain in business or adjust to market conditions; and
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consolidation among suppliers, resulting in some suppliers exiting the industry or discontinuing the manufacture of components.
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If our supply of certain components is disrupted or delayed, or if we need to replace one or more of our existing suppliers, there can be no assurance that
additional supplies or components will be available when required or that supplies will be available on terms that are favorable to us, which could extend our lead times, increase the costs of our components and materially adversely affect our
business, operating results and financial condition. If we are successful in growing our business, we may not be able to continue to procure components at acceptable prices, which would require us to enter into longer term contracts with component
suppliers to obtain these components at competitive prices. In addition, errors or defects may arise in some of our components supplied by third parties that are beyond our detection or control, which could lead to additional customer returns or
product warranty claims. If any of these were to occur, our costs would increase and our gross margins would decrease, and our business, operating results and financial condition could be materially and adversely affected.
Our products incorporate components that are subject to supply and pricing volatility, and, as a result, our ability to respond in a timely manner to
customer demand and our cost structure are sensitive to such volatility in the supply and market prices for these components.
We do not enter
into long-term supply contracts for the components we use in our products, but instead generally we, or our contract manufacturer on our behalf, purchase these components pursuant to individual purchase orders. In addition, it is common in the
storage and networking industries for component vendors to discontinue the manufacture of certain types of components from time to time due to evolving technologies and changes in the market. If we are required to make significant last
time purchases of components that are being discontinued and do not purchase enough components, we may experience delayed shipments, order cancellations or otherwise be required to purchase more expensive components to meet customer demand,
which could negatively impact our revenue, gross margins and operating results. If we purchase too many such components, we could be subject to inventory write-offs adversely affecting our operating results.
A portion of our expenses are directly related to the pricing of components utilized in the manufacture of our products, such as field programmable gate
arrays, memory chips and central processing units, or CPUs. In some cases, our contract manufacturer purchases these components in a competitive-bid purchase order environment with suppliers or on the open market at spot prices. As a
result, our cost structure is affected by price volatility in the marketplace for these components, especially for field programmable gate arrays, memory chips and CPUs. This volatility makes it difficult to predict expense levels and operating
results, and may cause our expense levels and operating results to fluctuate significantly. Furthermore, these components can be subject to limits on supply or other supply volatility, which may negatively impact our ability to obtain quantities
necessary at reasonable prices to grow our business and respond to customer demand for our products.
Third-party claims that we are infringing the
intellectual property rights of others, whether successful or not, could subject us to costly and time-consuming litigation, require us to acquire expensive licenses, prohibit us from selling products and harm our business.
The storage and networking industries are characterized by the existence of a large number of patents, copyrights, trademarks, trade secrets and by frequent
litigation based on allegations of infringement or other violations of intellectual property rights. We have in the past received and may in the future receive inquiries from other intellectual property holders and may become subject to claims
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that we infringe their intellectual property rights, particularly as we expand our presence in the market and face increasing competition. The costs associated with any actual, pending or
threatened litigation could negatively impact our operating results regardless of outcome.
We currently have a number of agreements in effect pursuant to
which we have agreed to defend, indemnify and hold harmless our customers, suppliers and channel partners from damages and costs which may arise from the infringement by our products of third-party patents, trademarks or other proprietary rights.
The scope of these indemnity obligations varies, but may, in some instances, include indemnification for damages and expenses, including attorneys fees. Our insurance may not cover intellectual property infringement claims. A claim that our
products infringe a third partys intellectual property rights could harm our relationships with our customers, may deter future customers from purchasing our products and could expose us to costly litigation and settlement expenses. Even if we
are not a party to any litigation between a customer and a third party relating to infringement by our products, an adverse outcome in any such litigation could make it more difficult for us to defend our products against intellectual property
infringement claims in any subsequent litigation in which we are a named party. Any of these results could harm our brand and operating results.
Any
intellectual property rights claim against us or our customers, suppliers and channel partners, with or without merit, could be time-consuming, expensive to litigate or settle, divert management resources and attention and force us to acquire
intellectual property rights and licenses, which may involve substantial royalty payments. Further, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. An adverse determination also could
invalidate our intellectual property rights and prevent us from offering our products to our customers and may require that we procure or develop substitute products that do not infringe, which could require significant effort and expense. We may
have to seek a license for the technology, which may not be available on reasonable terms or at all, may significantly increase our operating expenses or require us to restrict our business activities in one or more respects. Any of these events
could seriously harm our business, operating results and financial condition. In addition, parties to intellectual property litigation often announce the results of hearings, motions or other interim developments, and if securities analysts or
investors perceive these results to be negative, it could have a material and adverse effect on the price of our common stock.
The success of our
business depends in part on our ability to protect and enforce our intellectual property rights.
We rely on a combination of patent, copyright,
service mark, trademark, and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights, all of which provide only limited protection. There can be no assurance that any
patents will issue with respect to our pending patent applications in a manner that gives us the protection that we seek, if at all, or that any patents issued to us will not be challenged, invalidated or circumvented. Our issued patents and any
patents that may be issued in the future with respect to pending or future patent applications may not provide sufficiently broad protection or they may not prove to be enforceable in actions against alleged infringers. Because of various reasons,
we may not be able to enforce or maintain our intellectual property rights. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology or reverse engineering of our technology. Moreover, others may
independently develop technologies that are competitive with ours or that design around our intellectual property. Although we endeavor to sign confidentiality agreements with our employees and others who may have access to our trade secrets, we
cannot guarantee that we have entered into these agreements with all such parties, nor that the agreements we have entered will not be breached.
Protecting against the unauthorized use of our intellectual property, products and other proprietary rights is expensive and difficult. Litigation may be
necessary in the future to enforce or defend our intellectual property rights or to determine the validity and scope of the proprietary rights of others. There can be no assurance that we will have the financial resources to conduct such litigation.
Any such litigation could result in substantial costs and diversion of management resources, either of which could materially and adversely affect our business, operating results and financial condition. In addition, many of our current and
potential competitors have the ability to dedicate substantially greater resources to defending intellectual property infringement claims and to enforcing their intellectual property rights than we have. As a result, we may not be able to prevent
third parties from infringing upon or misappropriating our intellectual property. Effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our products are available.
An inability to adequately protect and enforce our intellectual property and other proprietary rights could seriously harm our business, operating results and
financial condition.
Adverse economic conditions and reduced information technology spending could have an adverse impact on our revenue, revenue
growth rates and operating results.
Our business depends on the overall demand for information technology, and in particular for storage
infrastructure, and on the capital spending budgets and financial health of our current and prospective customers. The purchase of our products is often discretionary and may require our customers to make significant initial commitments of capital.
A general economic downturn, such as the
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slowdown that began in 2008, could dramatically reduce business spending on technology infrastructure. In response to a global economic slowdown, including a deterioration in their own financial
condition, or an inability to obtain financing for capital investments, our customers and customer prospects could reduce or defer their spending on storage infrastructure, which could result in lost opportunities, declines in bookings and revenue,
order cancellations or indefinite shipping delays.
We expect to face numerous challenges as we transact business internationally.
Our business has developed internationally. As of July 31, 2016, we had 78 sales and marketing employees worldwide as well as over 100 channel partners
in over 30 countries. Although we expect a portion of our future revenue growth will be from channel partners and end-customers located outside of the United States, we may not be able to increase international market demand for our
products.
We expect to face numerous challenges as we attempt to grow our operations, channel partner relationships and end-customer base
internationally, including attracting and retaining distributors and resellers with international capabilities or distributors and resellers located in international markets. Our revenue and expenses could be adversely affected by a variety of
factors associated with international operations, some of which are beyond our control, including:
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difficulties of managing and staffing international offices, and the increased travel, infrastructure and legal compliance costs associated with international locations;
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difficulty in collecting accounts receivable and longer collection periods;
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difficulty in contract enforcement;
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regulatory, political or economic conditions in a specific country or region;
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compliance with local laws and regulations and unanticipated changes in local laws and regulations, including tax laws and regulations;
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compliance with local privacy laws and regulations and unanticipated changes as country or region-specific privacy laws and regulations are enacted or expanded;
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export and import controls, trade protection measures, FCPA compliance and other regulatory requirements;
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economic sanctions enacted by the United States against certain countries, companies, and individuals, including those sanctions enacted in 2014 against entities located in Russia and Ukraine;
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effects of changes in currency exchange rates;
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potentially adverse tax consequences;
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service provider and government spending patterns;
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reduced protection of our intellectual property and other assets in some countries;
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greater difficulty documenting and testing our internal controls;
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differing employment practices and labor issues; and
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acts of terrorism and international conflicts.
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We are exposed to the credit risk of some of our
customers and to credit exposure in weakened markets, which could result in material losses.
Most of our sales are on an open credit basis, which
subjects us to the risk of loss resulting in nonpayment or nonperformance by our customers. Although we have programs in place that are designed to monitor and mitigate our customers credit risks, we cannot assure you these programs will be
effective in reducing our credit risks, especially as we expand our business internationally. If we are unable to adequately control these risks, our business, operating results and financial condition could be harmed.
Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our products.
We incorporate open source software into our products. Although we monitor our use of open source software closely, we cannot guarantee that we
are aware of all the open source software included in our products. Moreover, the terms of many open source licenses have not been interpreted by courts in or outside of the United States, and there is a risk that such licenses could be construed in
a manner that imposes unanticipated conditions or restrictions on our ability to market our products. In this event, we could be
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required to seek licenses from third parties in order to continue offering our products, to make generally available, in source code form, proprietary code that links to certain open source
modules, to re-engineer our products, or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which could materially and adversely affect our business, operating results and financial
condition.
We also incorporate proprietary third-party technologies, including software programs, into our products. We rely on license agreements to
gain access to these third-party technologies and may need to enter into additional license agreements in the future. However, licenses to relevant third-party technology may not be or remain available to us on commercially reasonable terms, or at
all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially and adversely affect our business,
operating results and financial condition.
The accounting method for convertible notes that may be settled in cash if stockholder approval is
obtained, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board, or FASB, issued
FASB Staff Position No. APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (including Partial Cash Settlement)
, which has subsequently been codified as Accounting Standards Codification
470-20,
Debt with Conversion and Other Options
, or ASC 470-20. ASC 470-20 requires an entity to separately account for the liability and equity components of convertible debt instruments whose conversion may be settled entirely or
partially in cash (such as our Notes if we obtain stockholder approval) in a manner that reflects the issuers economic interest cost for non-convertible debt. The liability component of the Notes would initially be valued at the fair value of
a similar debt instrument that does not have an associated equity component and would be reflected as a liability in our consolidated balance sheet. The equity component of the Notes would be included in the additional paid-in capital section of our
stockholders equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component. This original issue discount would be amortized to
non-cash expense over the term of the Notes, and we would record a greater amount of non-cash interest expense in current periods as a result of this amortization. Accordingly, we would report lower net income in our financial results because
ASC 470-20 would require the interest expense associated with the Notes to include both the then current periods amortization of the debt discount and the Notes coupon interest, which could adversely affect our reported or future
financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt
instruments whose conversion may be settled entirely or partly in cash (such as our Notes if we obtain stockholder approval) are currently accounted for using the treasury stock method. Under this method, the shares issuable upon conversion of the
Notes are not included in the calculation of diluted earnings per share unless the conversion value of the Notes exceeds their principal amount, then, for diluted earnings per share purposes, the Notes are accounted for as if the number of shares of
common stock that would be necessary to settle the excess, if we elected to settle the excess in shares, are issued. The accounting standards in the future may not continue to permit the use of the treasury stock method. If we are unable to use the
treasury stock method in accounting for the shares, if any, issuable upon conversion of the Notes, then our diluted earnings per share could be adversely affected.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the
accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
As a public company, we
are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) requires that we evaluate and determine
the effectiveness of our internal control over financial reporting and provide a management report on the internal control over financial reporting. If we have a material weakness in our internal control over financial reporting, we may not detect
errors on a timely basis and our financial statements may be materially misstated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely
manner, if we are unable to assert that our internal control over financial reporting are effective, or if our independent registered public accounting firm, when required, is unable to express an opinion as to the effectiveness of our internal
control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the
stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
We may acquire or make investments in other companies, each of which may divert our managements attention, and result in additional dilution to
our stockholders and consumption of resources that are necessary to sustain and grow our business.
Our business strategy may, from time to time,
include acquiring other complementary products, technologies or businesses. We also may enter into strategic relationships with other businesses in order to expand our product offerings, which could involve preferred or
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exclusive licenses, additional channels of distribution or discount pricing or investments in other companies. Negotiating these transactions can be time-consuming, difficult and expensive, and
our ability to close these transactions may be subject to third-party or governmental approvals. Consequently, we can make no assurance that these transactions, once undertaken and announced, will close. Acquisitions or investments may result in
unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies, particularly if the key personnel
of the acquired business choose not to work for us, and we may have difficulty retaining the customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention
that would otherwise be available for development of our business. Any acquisition or investment could also expose us to unknown liabilities.
Moreover,
we cannot assure you that we would realize the anticipated benefits of any acquisition or investment. In connection with these types of transactions, we may issue additional equity securities that would dilute our stockholders, use cash that we may
need in the future to operate our business, incur debt on terms unfavorable to us or that we are unable to repay, incur significant charges or substantial liabilities, encounter difficulties integrating diverse business cultures, and become subject
to adverse tax consequences, substantial depreciation or deferred compensation charges. These challenges related to acquisitions or investments could materially and adversely affect our business, operating results and financial condition.
Our business is subject to the risks of earthquakes and other natural catastrophic events, and to interruption by man-made problems such as
computer viruses or terrorism.
Our sales headquarters, corporate headquarters and our current contract manufacturer are located in the San
Francisco Bay area, which has a heightened risk of earthquakes. We may not have adequate business interruption insurance to compensate us for losses that may occur from a significant natural disaster, such as an earthquake, which could have a
material adverse impact on our business, operating results and financial condition. In addition, acts of terrorism or malicious computer viruses could cause disruptions in our or our customers businesses or the economy as a whole. To the
extent that these disruptions result in delays or cancellations of customer orders or the deployment of our products, our business, operating results and financial condition would be adversely affected.
Our results of operations could be affected by natural catastrophes in locations in which our customers, suppliers or contract manufacturers operate.
Several of our customers, suppliers and our contract manufacturer have operations in locations that are subject to natural disasters, such as
severe weather and geological events, which could disrupt the operations of those customers, suppliers and our contract manufacturer. Some of our customers and suppliers, including our sole flash memory supplier, Toshiba, are located in Japan and
they have experienced, and may experience in the future, shutdowns as a result of these events, and their operations may be negatively impacted by these events. Our customers affected by a natural disaster could postpone or cancel orders of our
products, which would negatively impact our business. In addition, a natural disaster could delay or prevent our contract manufacturer in the manufacture of our products, and we may need to qualify a replacement manufacturer. Moreover, should any of
our key suppliers fail to deliver components to us as a result of a natural disaster, we may be unable to purchase these components in the necessary quantities or may be forced to purchase components in the open market at significantly higher costs.
We may also be forced to purchase components in advance of our normal supply chain demand to avoid potential market shortages. In addition, if we are required to obtain one or more new suppliers for components or use alternative components in our
solutions, we may need to conduct additional testing of our solutions to ensure those components meet our quality and performance standards, all of which could delay shipments to our customers and adversely affect our financial condition and results
of operations.
The conditional conversion feature of our Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of our Notes is triggered, holders of the notes will be entitled to convert the Notes at any time
during specified periods at their option. Even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than
long-term liability, which would result in a material reduction of our net working capital.
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 expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in our 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, as described
under Managements Discussion and Analysis of Financial Condition and Results of Operations in this
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periodic report, 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. Our operating
results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below market expectations, resulting in a decline in our stock price.
Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, inventory valuation, product warranty, stock-based compensation, and deferred income tax valuation
allowances.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or 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 may be subject to substantial limitations arising from
previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Internal Revenue Code. In addition, 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. Accordingly, we may not be able to utilize a material portion of our NOLs.
Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could materially and adversely affect
our operating results, financial condition and cash flows.
Our provision for income taxes is subject to volatility and could be adversely
affected by the following:
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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 credits;
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transfer pricing adjustments;
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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;
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changes in tax laws and regulations, including possible changes to the taxation of earnings in the United States of our foreign subsidiaries, and the deductibility of expenses attributable to foreign income, or the
foreign tax credit rules; or
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earnings that are 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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Significant judgment is required to determine the recognition and measurement attribute 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. 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 adverse effect on our operating results, financial condition and cash flows.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in foreign markets.
Because we incorporate encryption technology into our products, our products are subject to United States export controls and may be exported
outside the United States 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 introduce 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 affected by such regulations, could result in decreased use of our products by, or an inability to export or sell our products to, existing or
prospective customers with international operations and harm our business. In addition, any failure by us to comply with these rules and regulations could subject us to significant fines and penalties.
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Failure to comply with governmental laws and regulations could harm our business.
Our business is subject to regulation by various federal, state, local and foreign governmental agencies, including agencies responsible for monitoring and
enforcing employment and labor laws, workplace safety, product safety, environmental laws, consumer protection laws, anti-bribery laws, import/export controls, federal securities laws and tax laws and regulations. In certain jurisdictions, these
regulatory requirements may be more stringent than in the United States. Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, disgorgement of
profits, fines, damages, civil and criminal penalties or injunctions. If any governmental sanctions are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, operating results and financial condition could be
materially adversely affected. In addition, responding to any action will likely result in a significant diversion of managements attention and resources and an increase in professional fees. Enforcement actions and sanctions could materially
harm our business, operating results and financial condition.
We are subject to environmental, health and safety laws and regulations pursuant to
which we may incur substantial costs or liabilities, which could harm our business, operating results or financial condition.
We are subject to
various state, federal, local and international laws and regulations relating to the environment or human health and safety, including those governing the presence of certain substances in electronic products and making producers of those products
financially responsible for the collection, treatment, recycling and disposal of certain products. These laws and regulations have been enacted in several jurisdictions in which we sell our products, including the European Union, or EU, and certain
of its member countries. For example, the EU has enacted the Restriction on Hazardous Substances, or RoHS, and Waste Electrical and Electronic Equipment, or WEEE, directives. RoHS prohibits the use of certain substances, including lead, in certain
products, including hard drives, sold after July 1, 2006. The WEEE directive obligates parties that sell electrical and electronic equipment in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member
countries regarding distribution of the equipment and provide a mechanism to take back and properly dispose of the equipment. There is still some uncertainty in certain EU countries as to which party involved in the manufacture, distribution and
sale of electronic equipment will be ultimately responsible for registration, reporting and disposal. Similar legislation may be enacted in other locations where we sell our products. We will need to ensure that we comply with these laws and
regulations as they are enacted, and that our component suppliers also comply with these laws and regulations. If we or our component suppliers fail to comply with the legislation, our customers may refuse or be unable to purchase our products,
which could harm our business, operating results and financial condition.
Pursuant to such laws and regulations, we could incur substantial costs and be
subject to disruptions to our operations and logistics or other liabilities. For example, if we were found to be in violation of these laws or regulations, we could be subject to governmental fines or other sanctions and liability to our customers.
In addition, we have to make significant expenditures to comply with such laws and regulations. Any such costs or liabilities pursuant to environmental, health or safety laws or regulations could have a material adverse effect on our business,
operating results or financial condition.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our financial
condition and results of operations.
While our international revenue has 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 revenue or profitability from sales in that country. We currently do not enter into hedging arrangements to
minimize the impact of foreign currency fluctuations. Our exposure to foreign currency fluctuation may change over time as our business practices evolve and could have a material adverse impact on our financial condition and results of operations.
Gains and losses on the conversion to U.S. dollars of accounts receivable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in operating results.
If our security measures are breached or unauthorized access to our data is otherwise obtained, our products may be perceived as not being secure,
customers may reduce the use of or stop using our solutions and we may incur significant liabilities.
Security breaches could result in the loss
of information, litigation, indemnity obligations and other liability. While we have security measures in place, our systems and networks are subject to ongoing threats and therefore these security measures may be breached as a result of third-party
action, including cyber-attacks or other intentional misconduct by computer hackers, employee error, malfeasance or otherwise. This could result in one or more third parties obtaining unauthorized access to our data, including intellectual property
and other confidential business information. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. Third parties may also attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access
to our data, including intellectual property and other confidential business information. If an actual or perceived breach of our security occurs, the market perception of the security of our products could be harmed, we could lose potential sales
and existing customers or we could incur other liability.
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We have been, and may in the future be, the subject of actions taken by activist stockholders,
which may cause us to incur additional costs which could harm our business and which could adversely affect our operating results and financial condition.
We have been, and may in the future be, the subject of actions taken by activist stockholders. For example, in early 2016, we were advised by
certain activist stockholders that they intended to nominate three directors for election to our board of directors at our 2016 annual meeting of stockholders. Although the activist stockholders ultimately did not pursue a proxy contest, we
incurred additional expense in preparing our proxy materials for our 2016 annual meeting. Any future proxy contests could be costly and time-consuming, and could interfere with the ability of our Board and senior management to devote all of their
attention to our business, which could adversely affect our operations. In addition, any perceived instability in the composition of our Board may create uncertainty in the marketplace about our business and stability and may be exploited by our
competitors or cause concern to our customers which may result in the loss of potential business opportunities. The election of persons to our Board who do not agree with our business strategy could adversely affect the ability of our Board to
function efficiently and could materially and adversely affect our ability to implement our business strategy, our business, operating results, and financial condition.
In addition activist stockholders could take other actions, including, but not limited to, making public demands that we consider certain strategic
alternatives for the Company and, engaging in public campaigns to attempt to influence our corporate governance and/or our management. Such actions could cause us to incur substantial costs, including legal and other professional fees and expenses,
may materially harm our relationships with current and potential customers, current and potential investors, current and potential lenders, and others, may otherwise materially harm our business, and may materially and adversely affect our operating
results and financial condition.
Additional 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.
Our common stock is currently traded on the NYSE, but we can provide no assurance that there will be active trading on that market or any other market in the
future, especially in the event there is a suspension of trading in or a delisting of our common stock or a default under our credit facilities or the indenture governing our Notes. If there is not an active trading market or if the volume of
trading is limited, the price of our common stock could decline and holders of our common stock may have difficulty selling their shares. In addition, the trading price of our common stock may be highly volatile and could be subject to wide
fluctuations in response to various factors, some of which are beyond our control. Effective July 6, 2016 our shares were subject to a 1-for-4 reverse split. Adjusting for this change, our shares were sold in our IPO in September 2013 at $36.00 per
share, and our stock price has ranged from $1.12 to $31.92 per share through July 31, 2016. Some of the factors affecting our volatility include:
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actual or anticipated variation in our and our competitors results of operations;
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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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issuance of new securities analysts reports or changed recommendations for our stock;
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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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any major change in our management; and
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general economic conditions and slow or negative growth of our markets.
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In addition, the stock market in
general, and the market for technology companies in particular, has experienced and may continue to experience 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 of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock during the period
following our recently completed public offering. 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. This litigation, if instituted against us, could result in material costs and expenses, and a diversion of our managements attention and resources.
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Litigation could cause us to incur substantial costs and divert our attention and resources.
In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its
securities. Companies such as ours in the high technology industry are particularly vulnerable to this kind of litigation due to the high volatility of their stock prices. We and a number of our current and former officers and directors and others
are or have been defendants in putative class and derivative action litigation, which is discussed below in the Section entitled Legal Proceedings. Any litigation to which we are a party may result in the diversion of management
attention and resources from our business and business goals. In addition, any litigation to which we are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal and that may require us to make payments of
substantial monetary damages or fines, or we may decide to settle lawsuits on similarly unfavorable terms, which could materially and adversely affect our business, financial condition or results of operations.
If securities or industry analysts issue an adverse 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 will depend in part on the research and reports that equity
research analysts publish about us and our business. We do not control these analysts or the content and opinions included in their reports. The price of our common stock has declined and could decline again when one or more equity analysts
downgrade our common stock or when those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analyst ceases 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 provide research coverage of our common stock, and such lack of research coverage may materially and adversely affect the market price of our common
stock.
The issuance of our Notes could affect the market price of our common stock.
The market price of our common stock could be adversely affected by possible sales of common stock by investors who view our Notes as an attractive means of
equity participation in us and by hedging or arbitrage activity involving our common stock.
Conversion of our Notes may affect the market price of
our common stock.
If we do not obtain stockholder approval and satisfy our conversion obligation by delivering shares of common stock, or if we
obtain stockholder approval and elect to satisfy our conversion obligation by paying cash and delivering shares of common stock, the issuance of additional shares will dilute the ownership of stockholders. In addition, any sales in the public market
of shares of common stock that we issue upon conversion could materially and adversely affect the price of our common stock.
Certain provisions in
the indenture governing our Notes could delay or prevent an otherwise beneficial takeover or other takeover attempt of us.
Certain provisions in
our Notes and the indenture could make it more difficult or more expensive for a third party to acquire us. For example, if a takeover would constitute a fundamental change, holders of the Notes will have the right to require us to repurchase their
notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the conversion rate for holders who convert their notes in connection with such takeover. In either case, and in other cases, our
obligations under the Notes and the indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management.
Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control and may affect the
trading price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a
change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
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authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock;
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require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
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specify that special meetings of our stockholders can be called only by our board of directors or the chief executive officer;
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establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;
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establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;
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provide that our directors may be removed only for cause;
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provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
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specify that no stockholder is permitted to cumulate votes at any election of directors; and
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require a super-majority of votes to amend certain of the above-mentioned provisions.
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In addition, we are
subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a business combination with an interested stockholder subject to certain
exceptions.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have not paid cash dividends on any of our classes of capital stock to date, have contractual restrictions against paying cash dividends, and
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 would be the sole source of gain for the foreseeable future.