In Part
I-Item
1A (Risk
Factors) of our Annual Report on Form
10-K
for the fiscal year ended December 31, 2016, which was filed with the Securities and Exchange Commission on February 21, 2017, we described risk
factors related to the Company. The following risk factors update and replace those set forth in our Annual Report on Form
10-K
for the year ended December 31, 2016. You should carefully review these
risk factors and those described in other reports we file with the Securities and Exchange Commission in evaluating our business.
Our business, prospects, financial condition, or operating results could be harmed by any of
these risks, as well as other risks not currently known to us or that we currently consider immaterial. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the
plans, projections and other forward-looking statements included in the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report and in our other public
filings. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
We have a history of losses, we expect to continue to incur losses and we may not achieve or sustain profitability in the future.
We have incurred significant losses in each period since our inception in 2004. We experienced a consolidated net loss of $2.8 million for
the three months ended March 31, 2015, a consolidated net loss of $1.6 million for the three months ended March 31, 2016 and a consolidated net loss of $5.1 million for the three months ended March 31, 2017. For the year
ended December 31, 2016, we reported a consolidated net loss of $10.0 million. These losses were due to the substantial investments we made to build our products and services, grow and maintain our business and acquire customers. Key elements of our
growth strategy include acquiring new customers and continuing to innovate and build our brand. As a result, we expect our operating expenses to increase in the future due to expected increased sales and marketing expenses, operations costs,
research and development costs and general and administrative costs and, therefore, our operating losses will continue or even potentially increase for the foreseeable future. In addition, as a public company we incur significant legal, accounting
and other expenses that we did not incur as a private company. Furthermore, to the extent that we are successful in increasing our customer base, we will also incur increased expenses because costs associated with generating and supporting customer
agreements are generally incurred up front, while revenue is generally recognized
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ratably over the committed term of the agreement. You should not rely upon our recent bookings or revenue growth as indicative of our future performance. We cannot assure you that we will reach
profitability in the future or at any specific time in the future or that, if and when we do become profitable, we will sustain profitability. If we are ultimately unable to generate sufficient revenue to meet our financial targets, become
profitable and have sustainable positive cash flows, investors could lose their investment.
Substantially all of our revenue has historically come
from a single product, Video Cloud.
We have historically been substantially dependent on revenue from a single product, Video
Cloud, and we expect that revenue from Video Cloud will continue to comprise a significant portion of our revenue. Our business would be harmed by a decline in the market for Video Cloud, increased competition in the market for online video
platforms, or our failure or inability to provide sufficient investment to support Video Cloud as needed to maintain or grow its competitive position.
If we are unable to retain our existing customers, our revenue and results of operations will be adversely affected.
We sell our products pursuant to agreements that are generally for annual terms. Our customers have no obligation to renew their subscriptions
after their subscription period expires, and we have experienced losses of customers that elected not to renew, in some cases, for reasons beyond our control. For example, our largest customer during 2016 has faced distressing financial
circumstances in recent quarters. As a result, we expect to lose substantially all of the revenue we expected to generate from this customer in 2017. In addition, even if subscriptions are renewed, they may not be renewed on the same or on more
profitable terms. As a result, our ability to retain our existing customers and grow depends in part on subscription renewals. We may not be able to accurately predict future trends in customer renewals, and our customers renewal rates have
and may continue to decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our services, the cost of our services and the cost of services offered by our competitors, reductions in our customers
spending levels or the introduction by competitors of attractive features and functionality. If our customer retention rate decreases, we may need to increase the rate at which we add new customers in order to maintain and grow our revenue, which
may require us to incur significantly higher advertising and marketing expenses than we currently anticipate, or our revenue may decline. If our customers do not renew their subscriptions for our services, renew on less favorable terms, or do not
purchase additional functionality or subscriptions, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed or affected.
Our long term financial targets are predicated on bookings and revenue growth and operating margin improvements that we may fail to achieve, which could
reduce our expected earnings and cause us to fail to meet the expectations of analysts or investors and cause the price of our securities to decline.
We are projecting long-term bookings, revenue and earnings growth. Our projections are based on the expected growth potential in our premium
customer base, as well as the market
for on-demand software
solutions generally. We may not achieve the expected bookings and revenue growth if the markets we serve do not grow at expected rates, if
customers do not purchase or renew subscriptions as we expect, and/or if we are not able to deliver products desired by customers and potential customers. Our long-term operating margin improvement targets are predicated on operating leverage as
long term revenue increases and improved operating efficiencies from moving to additional cloud-based delivery of services, together with lower cost of goods sold, research and development expenses and general and administrative expenses as a
percentage of total revenue. If operating margins do not improve, our earnings could be adversely affected and the price of our securities could decline.
The actual market for our solutions could be significantly smaller than our estimates of our total potential market opportunity, and if customer demand
for our services does not meet expectations, our ability to generate revenue and meet our financial targets could be adversely affected.
While we expect strong growth in the markets for our products, it is possible that the growth in some or all of these markets may not meet our
expectations, or materialize at all. The methodology on which our estimate of our total potential market opportunity is based includes several key assumptions based on our industry knowledge and customer experience. If any of these assumptions
proves to be inaccurate, then the actual market for our solutions could be significantly smaller than our estimates of our total potential market opportunity. If the customer demand for our services or the adoption rate in our target markets does
not meet our expectations, our ability to generate revenue from customers and meet our financial targets could be adversely affected.
Our business
is substantially dependent upon the continued growth of the market
for on-demand software
solutions.
We derive, and expect to continue to derive, substantially all of our revenue from the sale of
our on-demand solutions.
As a result, widespread acceptance and use of
the on-demand business
model is critical to our future growth and success.
Under the perpetual or periodic license model for software procurement, users of the software would typically install and operate the applications on their hardware. Because many companies are generally predisposed to maintaining control of their
information technology, or IT,
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systems and infrastructure, there may be resistance to the concept of accessing software as a service provided by a third party. In addition, the market
for on-demand software
solutions is still evolving, and competitive dynamics may cause pricing levels to change as the market matures and as existing and new market participants introduce new types
of solutions and different approaches to enable organizations to address their technology needs. As a result, we may be forced to reduce the prices we charge for our products and may be unable to renew existing customer agreements or enter into new
customer agreements at the same prices and upon the same terms that we have historically. If the market
for on-demand software
solutions fails to grow, grows more slowly than we currently anticipate
or evolves and forces us to reduce the prices we charge for our products, our bookings growth, revenue, gross margin and other operating results could be materially adversely affected.
Our operating results may fluctuate from quarter to quarter, which could make them difficult to predict.
Our quarterly operating results are tied to certain financial and operational metrics that have fluctuated in the past and may fluctuate
significantly in the future. As a result, you should not rely upon our past quarterly operating results as indicators of future performance. Our operating results depend on numerous factors, many of which are outside of our control. In addition to
the other risks described in this Risk Factors section, the following risks could cause our operating results to fluctuate:
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our ability to retain existing customers and attract new customers;
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the rates at which our customers renew;
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the amount of revenue generated from our customers use of our products or services in excess of their committed contractual entitlements;
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the timing and amount of costs of new and existing marketing and advertising efforts;
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the timing and amount of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure;
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the cost and timing of the development and introduction of new product and service offerings by us or our competitors; and
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system or service failures, security breaches or network downtime.
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We have a relatively short operating
history in a relatively new and rapidly developing market, which makes it difficult to evaluate our business and future prospects.
Our business has a relatively short operating history and the market for our products and services is relatively new and rapidly developing,
which makes it difficult to evaluate our business and future prospects. We have been in existence since 2004, and much of our growth has occurred in recent periods. We have encountered, and will continue to encounter, risks and difficulties
frequently experienced by growing companies in rapidly changing industries, including those related to:
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market acceptance of our current and future products and services;
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customer renewal rates;
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our ability to compete with other companies that are currently in, or may in the future enter, the market for our products;
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our ability to successfully expand our business, especially internationally;
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our ability to control costs, including our operating expenses;
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the amount and timing of operating expenses, particularly sales and marketing expenses, related to the maintenance and expansion of our business, operations and infrastructure;
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network outages or security breaches and any associated expenses;
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foreign currency exchange rate fluctuations;
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write-downs, impairment charges or unforeseen liabilities in connection with acquisitions;
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our ability to successfully manage acquisitions; and
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general economic and political conditions in our domestic and international markets.
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If we do
not manage these risks successfully, our business will be harmed.
Our long-term success depends, in part, on our ability to expand the sales of our
products to customers located outside of the United States, and thus our business is susceptible to risks associated with international sales and operations.
We currently maintain offices and have sales personnel in Australia, France, Japan, Singapore, South Korea, Spain, the United Arab Emirates and
the United Kingdom, and we intend to expand our international operations. Any international expansion efforts that we may undertake may not be successful. In addition, conducting international operations subjects us to new risks that we have not
generally faced in the United States. These risks include:
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unexpected costs and errors in the localization of our products, including translation into foreign languages and adaptation for local practices and regulatory requirements;
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lack of familiarity with and burdens of complying with foreign laws, legal standards, regulatory requirements, tariffs, and other barriers;
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unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
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difficulties in managing systems integrators and technology partners;
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differing technology standards;
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longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
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difficulties in managing and staffing international operations and differing employer/employee relationships;
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fluctuations in exchange rates that may increase the volatility of our foreign-based revenue;
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potentially adverse tax consequences, including the complexities of foreign value added tax (or other tax) systems and restrictions on the repatriation of earnings;
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uncertain political and economic climates; and
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reduced or varied protection for intellectual property rights in some countries.
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factors may cause our costs of doing business in these geographies to exceed our comparable domestic costs. Operating in international markets also requires significant management attention and financial resources. Any negative impact from our
international business efforts could negatively impact our business, results of operations and financial condition as a whole.
We must keep up with
rapid technological change to remain competitive in a rapidly evolving industry.
Our markets are characterized by rapid
technological change, frequent new product and service introductions and evolving industry standards. Our future success will depend on our ability to adapt quickly to rapidly changing technologies, to adapt our services and products to evolving
industry standards and to improve the performance and reliability of our services and products. To achieve market acceptance for our products, we must effectively anticipate and offer products that meet changing customer demands in a timely manner.
Customers may require features and functionality that our current products do not have. If we fail to develop products that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our contracts with existing
customers and our ability to create or increase demand for our products will be harmed.
We may experience difficulties with software
development, industry standards, design or marketing that could delay or prevent our development, introduction or implementation of new products and enhancements. The introduction of new products by competitors, the emergence of new industry
standards or the development of entirely new technologies to replace existing offerings could render our existing or future products obsolete.
If we are unable to successfully develop or acquire new features and functionality, enhance our existing products to anticipate and meet
customer requirements or sell our products into new markets, our bookings growth, revenue and results of operations will be adversely affected.
We
face significant competition and may be unsuccessful against current and future competitors. If we do not compete effectively, our operating results and future growth could be harmed.
We compete with video sharing
sites, in-house solutions,
online video platforms and certain
niche technology providers, as well as larger companies that offer multiple services, including those that may be used as substitute services for our products. Competition is already intense in these markets and, with the introduction of new
technologies and market entrants, we expect competition to further intensify in the future. In addition, some of our competitors may make acquisitions, be acquired, or enter into strategic relationships to offer a more comprehensive service than we
do. These combinations may make it more difficult for us to compete effectively. We expect these trends to continue as competitors attempt to strengthen or maintain their market positions.
Demand for our services is sensitive to price. Many factors, including our advertising, customer acquisition and technology costs,
commoditization of our products and services and our current and future competitors pricing and marketing strategies, can significantly affect our pricing strategies. There can be no assurance that we will not be forced to engage in
price-cutting initiatives, or to increase our advertising and other expenses to attract and retain customers in response to competitive pressures, either of which could have a material adverse effect on our revenue, operating results and resources.
We will likely encounter significant, growing competition in our business from many sources, including portals and digital media
retailers, search engines, social networking and consumer-sharing services companies, broadband media distribution platforms, technology suppliers, direct broadcast satellite television service companies and digital and traditional cable systems.
Many of our present and likely future competitors have substantially greater financial, marketing, technological and other resources than we do. Some of these companies may even choose to offer services competitive with ours at no cost as a strategy
to attract or retain customers
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of their other services. Technological and commercial developments may lead to the increasing commoditization of our products and services, including data delivery and storage, further increasing
downward pressure on the prices we can charge. If we are unable to compete successfully with traditional and other emerging providers of competing services, our business, financial condition and results of operations could be adversely affected.
We depend on the experience and expertise of our executive officers, senior management team and key technical employees, and the loss of any key
employee could have an adverse effect on our business, financial condition and results of operations.
Our success depends upon the
continued service of our executive officers, senior management team and key technical employees, as well as our ability to continue to attract and retain additional highly qualified personnel. Each of our executive officers, senior management team,
key technical personnel and other employees could terminate his or her relationship with us at any time. The loss of any member of our senior management team or key personnel might significantly delay or prevent the achievement of our business
objectives and could materially harm our business and our customer relationships. In addition, because of the nature of our business, the loss of any significant number of our existing engineering, project management and sales personnel could have
an adverse effect on our business, financial condition and results of operations.
Our business and operations have experienced rapid growth and
organizational change in recent periods, which has placed, and may continue to place, significant demands on our management and infrastructure. If we fail to manage our growth effectively and successfully recruit additional highly-qualified
employees, we may be unable to execute our business plan, maintain high levels of service or address competitive challenges adequately.
We increased our number of full-time employees from 410 as of March 31, 2015, to 439 as of March 31, 2016 and to 506 as of
March 31, 2017, and our revenue grew from $32.9 million in the first quarter of 2015 to $36.3 million in the first quarter of 2016 and to $37.6 million in the first quarter of 2017. Our headcount and operations have grown, both
domestically and internationally, since our inception. This growth has placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We anticipate further growth will be
required to address increases in our product and service offerings and continued international expansion. Our success will depend in part upon the ability of our senior management team to manage this growth effectively. To do so, we must continue to
recruit, hire, train, manage and integrate a significant number of qualified managers, technical personnel and employees in specialized roles within our company, including in technology, sales and marketing. If our new employees perform poorly, or
if we are unsuccessful in recruiting, hiring, training, managing and integrating these new employees, or retaining these or our existing employees, our business may suffer.
In addition, to manage the expected continued growth of our headcount, operations and geographic expansion, we will need to continue to
improve our information technology infrastructure, operational, financial and management systems and procedures. Our expected additional headcount and capital investments will increase our costs, which will make it more difficult for us to address
any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth we will be unable to successfully execute our business plan, which could have a negative impact on our business, financial condition
or results of operations.
Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our
business, dilute stockholder value and impair our financial results.
As part of our business strategy, we intend to consider
acquisitions of companies, technologies and products that we believe could accelerate our ability to compete in our core markets or allow us to enter new markets. Acquisitions involve numerous risks, any of which could harm our business, including:
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difficulties in integrating the technologies, products, operations and existing contracts of a target company and realizing the anticipated benefits of the combined businesses;
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difficulties in integrating the personnel of a target company;
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difficulties in supporting and transitioning customers, if any, of a target company;
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diversion of financial and management resources from existing operations;
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the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;
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risks of entering new markets in which we have limited or no experience;
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potential loss of key employees, customers and strategic alliances from either our current business or a target companys business; and
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inability to generate sufficient revenue to offset acquisition costs.
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Acquisitions also frequently result in the recording of goodwill and other intangible assets
which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing equity securities, our existing stockholders may be diluted. As a result, if we fail to properly
evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or
otherwise adequately address these risks could materially harm our business and financial results.
We may experience delays in product and service
development, including delays beyond our control, which could prevent us from achieving our growth objectives and hurt our business.
Many of the problems, delays and expenses we may encounter may be beyond our control. Such problems may include, but are not limited to,
problems related to the technical development of our products and services, problems with the infrastructure for the distribution and delivery of online media, the competitive environment in which we operate, marketing problems, consumer and
advertiser acceptance and costs and expenses that may exceed current estimates. Problems, delays or expenses in any of these areas could have a negative impact on our business, financial conditions or results of operations.
Delays in the timely design, development, deployment and commercial operation of our product and service offerings, and consequently the
achievement of our revenue targets and positive cash flow, could result from a variety of causes, including many causes that are beyond our control. Such delays include, but are not limited to, delays in the integration of new offers into our
existing offering, changes to our products and services made to correct or enhance their features, performance or marketability or in response to regulatory developments or otherwise, delays encountered in the development, integration or testing of
our products and services and the infrastructure for the distribution and delivery of online media and other systems, unsuccessful commercial launches of new products and services, delays in our ability to obtain financing, insufficient or
ineffective marketing efforts and slower-than-anticipated consumer acceptance of our products. Delays in any of these matters could hinder or prevent our achievement of our growth objectives and hurt our business.
There is no assurance that the current cost of Internet connectivity and network access will not rise with the increasing popularity of online media
services.
We rely on third-party service providers for our principal connections to the Internet and network access, and to
deliver media to consumers. As demand for online media increases, there can be no assurance that Internet and network service providers will continue to price their network access services on reasonable terms. The distribution of online media
requires delivery of digital content files and providers of network access and distribution may change their business models and increase their prices significantly, which could slow the widespread adoption of such services. In order for our
services to be successful, there must be a reasonable price model in place to allow for the continuous distribution of digital media files. We have limited or no control over the extent to which any of these circumstances may occur, and if network
access or distribution prices rise, our business, financial condition and results of operations would likely be adversely affected.
Failure of our
infrastructure for the distribution and delivery of online media could adversely affect our business.
Our success as a business
depends, in large part, on our ability to provide a consistently high-quality digital experience to consumers via our relationships and infrastructure for the distribution and delivery of online media generally. There is no guarantee that our
relationships and infrastructure will not experience problems or other performance issues, which could seriously impair the quality and reliability of our delivery of digital media to end users. For example, we primarily use two content delivery
networks, or CDNs, to deliver content to end users. If one or both of these CDNs were to experience sustained technical failures, it could cause delays in our service and we could lose customers. If we do not accurately predict our infrastructure
capacity requirements, our customers could experience service outages or service degradation that may subject us to financial penalties and liabilities and result in customer losses. In the past we have, on limited occasions, suffered temporary
interruptions of certain aspects of our service, including our customers ability to upload new content into our system, our customers ability to access administrative control of their accounts, and our ability to deliver content to end
users in certain geographic locations. These service interruptions were the results of human error, hardware and software failures or failures of third-party networks. On a limited number of occasions, these service interruptions have required us to
provide service credits to customers. We cannot guarantee that service interruptions will not occur again or predict the duration of interruptions of our service or the impact of such interruptions on our customers. Failures and interruptions of our
service may impact our reputation, result in our payment of compensation or service credits to our customers, result in loss of customers and adversely affect our financial results and ability to grow our business. In addition, if our hosting
infrastructure capacity fails to keep pace with increased sales or if our delivery capabilities fail, customers may experience delays as we seek to obtain additional capacity or enable alternative delivery capability, which could harm our reputation
and adversely affect our revenue growth.
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We may have difficulty scaling and adapting our existing infrastructure to accommodate increased traffic
and storage, technology advances or customer requirements.
In the future, advances in technology, increases in traffic and
storage, and new customer requirements may require us to change our infrastructure, expand our infrastructure or replace our infrastructure entirely. Scaling and adapting our infrastructure is likely to be complex and require additional technical
expertise. If we are required to make any changes to our infrastructure, we may incur substantial costs and experience delays or interruptions in our service. These delays or interruptions may cause customers and partners to become dissatisfied with
our service and move to competing service providers. Our failure to accommodate increased traffic and storage, increased costs, inefficiencies or failures to adapt to new technologies or customer requirements and the associated adjustments to our
infrastructure could harm our business, financial condition and results of operations.
We rely on software and services licensed from other
parties. The loss of software or services from third parties could increase our costs and limit the features available in our products and services.
Components of our service and product offerings include various types of software and services licensed from unaffiliated parties. If any of
the software or services we license from others or functional equivalents thereof were either no longer available to us or no longer offered on commercially reasonable terms, we would be required to either redesign our services and products to
function with software or services available from other parties or develop these components ourselves. In either case, the transition to a new service provider or an internally-developed solution could result in increased costs and could result in
delays in our product launches and the release of new service and product offerings. Furthermore, we might be forced to temporarily limit the features available in our current or future products and services. If we fail to maintain or renegotiate
any of these software or service licenses, we could face significant delays and diversion of resources in attempting to license and integrate functional equivalents.
If our software products contain serious errors or defects, then we may lose revenue and market acceptance and may incur costs to defend or settle
claims.
Complex software applications such as ours often contain errors or defects, particularly when first introduced or when new
versions or enhancements are released. Despite internal testing and testing by our customers, our current and future products may contain serious defects, which could result in lost revenue, lost customers, slower growth or a delay in market
acceptance.
Since our customers use our products for critical business applications, such as online video, errors, defects or other
performance problems could result in damage to our customers. They could seek significant compensation from us for the losses they suffer. Although our customer agreements typically contain provisions designed to limit our exposure to claims,
existing or future laws or unfavorable judicial decisions could negate these limitations. Even if not successful, a claim brought against us would likely be time-consuming and costly and could seriously damage our reputation in the marketplace,
making it harder for us to sell our products.
Unauthorized disclosure of data, unauthorized access to our service and misuse of our service could
adversely affect our business.
Any security breaches, unauthorized access, unauthorized usage, virus or similar breach or
disruption could result in loss of confidential information, personal data and customer content, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, increased costs or other liabilities. If our
security measures, or those of our partners or service providers, are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to confidential information, personal
data or customer content, our reputation will be damaged, our business may suffer or we could incur significant liability. If the measures we have put in place to limit or restrict access to and use of functionality, usage entitlements and support
for customers or prospective customers are breached, circumvented or ineffective as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to and use of functionality, usage
entitlements and support, our business may suffer or we could incur significant liability and/or costs.
Techniques used to obtain
unauthorized access or use or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an
actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers. Any significant violations of data privacy or unauthorized disclosure of information could result in
the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. Moreover, if a security breach occurs with respect to another
software as a service, or SaaS, provider, our customers and potential customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing customers or attract new ones.
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We use a limited number of data centers and cloud computing services facilities to deliver our services.
Any disruption of service at these facilities could harm our business.
We manage our services and serve all of our customers from
a limited number of third-party data center facilities and cloud computing services facilities. While we control the actual computer and storage systems upon which our software runs, and deploy them to the data center facilities, we do not control
the operation of these facilities.
The owners of these facilities have no obligation to renew their agreements with us on commercially
reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer to new facilities, and we may incur significant costs and possible service interruption in connection with doing
so.
Any changes in third-party service levels at these facilities or any errors, defects, disruptions or other performance problems at or
related to these facilities that affect our services could harm our reputation and may damage our customers businesses. Interruptions in our services might reduce our revenue, cause us to issue credits to customers, subject us to potential
liability, and cause customers to terminate their subscriptions or harm our renewal rates.
These facilities are vulnerable to damage or
service interruption resulting from human error, intentional bad acts, security breaches, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar
events. For example, on September 18, 2014, we suffered a service disruption resulting from a
distributed denial-of-service attack
at third-party data
center facilities used by us. By September 20, 2014, we had restored the services impacted by the attack. We contacted federal law enforcement authorities regarding
the denial-of-service attack
and cooperated with them. We also conducted an assessment of our internet service providers and data center providers, potential
future vulnerability to malicious activity, and the sufficiency of our infrastructure to withstand and recover rapidly from such attacks. While this matter did not have a material adverse effect on our operating results, there can be no assurance
that such incidents will not occur again, and they could occur more frequently and on a more significant scale. The occurrence of a natural disaster or an act of terrorism, or vandalism or other misconduct, or a decision to close the facilities
without adequate notice or other unanticipated problems could result in lengthy interruptions in our services.
Our business may be adversely
affected by third-party claims, including by governmental bodies, regarding the content and advertising distributed through our service.
We rely on our customers to secure the rights to redistribute content over the Internet, and we do not screen the content that is distributed
through our service. There is no assurance that our customers have licensed all rights necessary for distribution, including Internet distribution. Other parties may claim certain rights in the content of our customers.
In the event that our customers do not have the necessary distribution rights related to content, we may be required to cease distributing
such content, or we may be subject to lawsuits and claims of damages for infringement of such rights. If these claims arise with frequency, the likelihood of our business being adversely affected would rise significantly. In some cases, we may have
rights to indemnification or claims against our customers if they do not have appropriate distribution rights related to specific content items, however there is no assurance that we would be successful in any such claim.
We operate an open publishing platform and do not screen the content that is distributed through our service. Content may be
distributed through our platform that is illegal or unlawful under international, federal, state or local laws or the laws of other countries. We may face lawsuits, claims or even criminal charges for such distribution, and we may be subject to
civil, regulatory or criminal sanctions and damages for such distribution. Any such claims or investigations could adversely affect our business, financial condition and results of operations.
We could incur substantial costs as a result of any claim of infringement of another partys intellectual property rights.
In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. Companies
providing Internet-related products and services are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, particularly patent rights. These risks have been amplified by the increase in third parties whose
sole or primary business is to assert such claims, some of whom have sent letters to and/or filed suit alleging infringement against some of our customers. From time to time, third parties claim that we are infringing upon their intellectual
property rights. For information regarding these claims, see Part I, Item 3, Legal Proceedings. We could incur substantial costs in prosecuting or defending any intellectual property litigation. Additionally, the defense or
prosecution of claims could be time-consuming, and could divert our managements attention away from the execution of our business plan.
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Moreover, any settlement or adverse judgment resulting from a claim could require us to pay
substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license from the
third party asserting the claim on commercially reasonable terms, if at all, that we would be able to develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license to use a suitable alternative technology
to permit us to continue offering, and our customers to continue using, our affected product or service. In addition, we may be required to indemnify our customers for third-party intellectual property infringement claims, which would increase the
cost to us. An adverse determination could also prevent us from offering our products or services to others. Infringement claims asserted against us may have an adverse effect on our business, financial condition and results of operations.
Our agreements with customers often include contractual obligations to indemnify them against claims that our products infringe the
intellectual property rights of third parties. The results of any intellectual property litigation to which we might become a party, or for which we are required to provide indemnification, may force us to do one or more of the following:
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cease selling or using products or services that incorporate the challenged intellectual property;
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make substantial payments for costs or damages;
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obtain a license, which may not be available on reasonable terms, to sell or use the relevant technology; or
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redesign those products or services to avoid infringement.
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If we are required to make
substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or costs could have a material
adverse effect upon our business and financial results.
Failure to adequately protect our intellectual property could substantially harm our
business and operating results.
Because our business depends substantially on our intellectual property, the protection of our
intellectual property rights is important to the success of our business. We rely upon a combination of trademark, patent, trade secret and copyright law and contractual restrictions to protect our intellectual property. These afford only limited
protection. Despite our efforts to protect our property rights, unauthorized parties may attempt to copy aspects of our products, service, software and functionality or obtain and use information that we consider proprietary. Moreover, policing our
proprietary rights is difficult and may not always be effective. In addition, we may need to enforce our rights under the laws of countries that do not protect proprietary rights to as great an extent as do the laws of the United States.
Litigation or proceedings before the U.S. Patent and Trademark Office or other governmental authorities and administrative bodies in the
United States and abroad may be necessary in the future to enforce our intellectual property rights, to protect our patent rights, trade secrets, trademarks and domain names, and to determine the validity and scope of the proprietary rights of
others. Such litigation or proceedings may be very costly and impact our financial performance. We may also incur substantial costs defending against frivolous litigation or be asked to indemnify our customers against the same. Our efforts to
enforce or protect our proprietary rights may prove to be ineffective and could result in substantial costs and diversion of resources and could substantially harm our operating results.
Our exposure to risks associated with the use of intellectual property may increase as a result of acquisitions, as we have less opportunity
to have visibility into the development process with respect to acquired technology or the care taken to safeguard against infringement risks. Third parties may make infringement and similar or related claims after we have acquired technology that
had not been asserted prior to our acquisition.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade
secrets and other proprietary information.
We have devoted substantial resources to the development of our technology, business
operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality agreements with our employees, licensees, independent contractors, advisers and customers. These
agreements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may
independently discover trade secrets and proprietary information, and in such cases we would not be able to assert trade secret rights against such parties. To the extent that our employees and others with whom we do business use intellectual
property owned by others in their work for us, disputes may arise as to the rights in related or
resulting know-how and
inventions. Laws regarding trade secret rights in certain markets in which we
operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying
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functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability
to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could
adversely affect our competitive business position.
Our use of open source software could negatively affect our ability to sell our
services and subject us to possible litigation.
A portion of the technology licensed by us incorporates open source
software, and we may incorporate open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. If we fail to comply with these licenses, we may be subject to
certain conditions, including requirements that we offer our services that incorporate the open source software for no cost, that we make available source code for modifications or derivative works we create based upon, incorporating or using the
open source software and that we license such modifications or alterations under the terms of the particular open source license. If an author or other third party that distributes such open source software were to allege that we had not complied
with the conditions of one or more of these licenses, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages, enjoined from the sale of our services that contained the
open source software and required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our services.
Fluctuations in the exchange rate of foreign currencies could result in currency translation losses.
We currently have foreign sales denominated in Australian dollars, British pound sterling, Euros, Japanese yen and New Zealand dollars and may,
in the future, have sales denominated in the currencies of additional countries in which we establish or have established sales offices. In addition, we incur a portion of our operating expenses in British pound sterling, Japanese yen, Euros and, to
a lesser extent, other foreign currencies. Any fluctuation in the exchange rate of these foreign currencies may negatively impact our business, financial condition and operating results. We have not previously engaged in foreign currency hedging. If
we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets.
We may be required to collect sales and use taxes on the services we sell in additional jurisdictions in the future, which may decrease sales, and we
may be subject to liability for sales and use taxes and related interest and penalties on prior sales.
State and local taxing
jurisdictions have differing rules and regulations governing sales and use taxes and these rules and regulations are subject to varying interpretations that may change over time. In particular, the applicability of sales and use taxes to our
subscription services in various jurisdictions is unclear. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we presently believe sales and use taxes are not due. We reserve
estimated sales and use taxes in our financial statements but we cannot be certain that we have made sufficient reserves to cover all taxes that might be assessed.
If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we may be liable
for past taxes in addition to being required to collect sales or similar taxes in respect of our services going forward. Liability for past taxes may also include substantial interest and penalty charges. Our client contracts typically provide that
our clients must pay all applicable sales and similar taxes. Nevertheless, clients may be reluctant to pay back taxes and may refuse responsibility for interest or penalties associated with those taxes or we may determine that it would not be
feasible to seek reimbursement. If we are required to collect and pay back taxes and the associated interest and penalties and if our clients do not reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be
substantial. Moreover, imposition of such taxes on our services going forward will effectively increase the cost of such services to our clients and may adversely affect our ability to retain existing clients or to gain new clients in the areas in
which such taxes are imposed.
Government and industry regulation of the Internet is evolving and could directly restrict our business or indirectly
affect our business by limiting the growth of our markets. Unfavorable changes in government regulation or our failure to comply with regulations could harm our business and operating results.
Federal, state and foreign governments and agencies have adopted and could in the future adopt regulations covering issues such as user
privacy, content, and taxation of products and services. Government regulations could limit the market for our products and services or impose burdensome requirements that render our business unprofitable. Our products enable our customers to
collect, manage and store a wide range of data. The United States and various state governments have adopted or proposed limitations on the collection, distribution and use of personal information. Several foreign jurisdictions, including the
European Union and the United Kingdom, have adopted legislation (including directives or regulations) that increase or change the requirements governing data collection and storage in these jurisdictions. If our privacy or data security measures
fail to comply with current or future laws and regulations, we may be subject to litigation, regulatory investigations or other liabilities, or our customers may terminate their relationships with us.
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In addition, although many regulations might not apply to our business directly, we expect that
laws regulating the solicitation, collection or processing of personal and consumer information could affect our customers ability to use and share data, potentially reducing demand for our services. The Telecommunications Act of 1996 and the
European Union Data Protection Directive along with other similar laws and regulations prohibit certain types of information and content from being transmitted over the Internet. The scope of this prohibition and the liability associated with a
violation are currently unsettled. In addition, although substantial portions of the Communications Decency Act were held to be unconstitutional, we cannot be certain that similar legislation will not be enacted and upheld in the future. Legislation
like the Telecommunications Act and the Communications Decency Act could dampen the growth in web usage and decrease its acceptance as a medium of communications and commerce. Moreover, if future laws and regulations limit our customers
ability to use and share consumer data or our ability to store, process and share data with our customers over the Internet, demand for our products could decrease, our costs could increase, and our results of operations and financial condition
could be harmed.
In addition, taxation of services provided over the Internet or other charges imposed by government agencies or by
private organizations for accessing the Internet may be imposed. Any regulation imposing greater fees for Internet use or restricting information exchange over the Internet could result in a decline in the use of the Internet and the viability of
Internet-based services, which could harm our business and operating results.
Our stock price has been volatile and is likely to be volatile in the
future.
The market price of our common stock has been and is likely to be highly volatile and could be subject to significant
fluctuations in response to, among other things, the risk factors described in this report and other factors beyond our control. Market prices for securities of early stage companies have historically been particularly volatile. Some, but not all,
of the factors that may cause the market price of our common stock to fluctuate include:
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fluctuations in our quarterly or annual financial results or the quarterly or annual financial results of companies perceived to be similar to us or relevant for our business;
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changes in estimates of our financial results or recommendations by securities analysts;
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failure of our products to achieve or maintain market acceptance;
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changes in market valuations of similar or relevant companies;
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success of competitive service offerings or technologies;
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changes in our capital structure, such as the issuance of securities or the incurrence of debt;
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announcements by us or by our competitors of significant services, contracts, acquisitions or strategic alliances;
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regulatory developments in the United States, foreign countries, or both;
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additions or departures of key personnel;
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investors general perceptions; and
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changes in general economic, industry or market conditions.
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In addition, if the market for
technology stocks, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or results of operations. If any of the
foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
Our business and operations could be adversely affected if we are subject to stockholder activism, which could cause us to incur significant expense and
impact the market price of our common stock.
In recent years, proxy contests and other forms of stockholder activism have been
directed against numerous public companies. Stockholder activism, including potential proxy contests, could result in substantial costs and divert the attention of our management and our board of directors and resources from our business. Activist
campaigns can create perceived uncertainties as to our future direction, strategy or leadership and may result in the loss of potential business opportunities and harm our ability to attract new customers, employees and investors. In addition, we
may be required to incur significant legal fees and other expenses related to any activist stockholder matters. Further, the market price of our common stock could be subject to significant fluctuation or otherwise be adversely affected by the
events, risks, and uncertainties of any stockholder activism.
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If securities or industry analysts do not publish, or cease publishing, research or reports about us, our
business or our market, or if they adversely change their recommendations regarding our stock, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by research and reports that industry or security analysts may publish about us, our
business, our market or our competitors. If any of the analysts who may cover us adversely change their recommendations regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price would likely
decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth
companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in
the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies
including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. However, we chose to opt out of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such
standards is required
for non-emerging growth
companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised
accounting standards is irrevocable.
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely
on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking dividends should not purchase our common stock.
We may be unable to meet our future capital requirements, which could limit our ability to grow.
We believe our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs over
at least the next 12 months. We may, however, need, or could elect to seek, additional funding at any time. To the extent that existing resources are insufficient to fund our business operations, our future activities for the expansion of our
service and our product offerings, developing and sustaining our relationships and infrastructure for the distribution and delivery of digital media online, marketing, and supporting our office facilities, we may need to raise additional funds
through equity or debt financing. Additional funds may not be available on terms favorable to us or our stockholders. Furthermore, if we issue equity securities, our stockholders may experience additional dilution or the new equity securities may
have rights, preferences and privileges senior to those of our existing classes of stock. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.
Failure to maintain effective internal control over financial reporting could result in our
failure to accurately report our financial results. Any inability to report and file our financial results accurately and timely could harm our business and adversely impact investor confidence in our company and, as a result, the value of our
common stock.
We are required to evaluate our internal control over financial reporting in connection with Section 404 of the
Sarbanes-Oxley Act, and our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. This assessment includes the disclosure of any material weaknesses in our internal
control over financial reporting identified by our management, as well as our independent registered public accounting firms attestation report on our internal control over financial reporting. During the evaluation and testing process, if we
identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over
financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, we could lose investor confidence in the accuracy and
completeness of our financial reports, which could have a material adverse effect on the price of our common stock.
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Anti-takeover provisions contained in our amended and restated certificate of incorporation and amended and
restated bylaws, as well as provisions of Delaware law, could impair a takeover attempt.
Our amended and restated certificate of
incorporation and bylaws, and Delaware law, contain provisions that could have the effect of rendering more difficult or discouraging an acquisition deemed undesirable by our board of directors. Our corporate governance documents include provisions:
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authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend, and other rights superior to our common stock;
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limiting the liability of, and providing indemnification to, our directors and officers;
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limiting the ability of our stockholders to call and bring business before special meetings and to take action by written consent in lieu of a meeting;
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requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;
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controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;
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providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings;
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establishing a classified board of directors so that not all members of our board are selected at one time;
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limiting the determination of the number of directors on our board of directors and the filling of vacancies or newly created seats on the board to our board of directors then in office; and
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providing that directors may be removed by stockholders only for cause.
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These provisions,
alone or together, could delay hostile takeovers and changes in control of our company or changes in our management.
As a Delaware
corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain
business combinations without approval of the holders of substantially all of our outstanding common stock. Any provision of our amended and restated certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring
a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
We record substantial expenses related to our issuance of equity awards that may have a material adverse impact on our operating results for the
foreseeable future.
We expect our stock-based compensation expenses will continue to be significant in future periods, which will
have an adverse impact on our operating results. The model used by us requires the input of highly subjective assumptions, including the price volatility of the options underlying stock. If facts and circumstances change and we employ
different assumptions for estimating stock-based compensation expense in future periods, or if we decide to use a different valuation model, the future period expenses may differ significantly from what we have recorded in the current period and
could materially affect the fair value estimate of stock-based payments, our operating income, net income and net income per share.
Failure of our
customers to pay the amounts owed to us, or to pay such amounts in a timely manner, may adversely affect our financial condition and operating results.
If any of our significant customers have insufficient liquidity, we could encounter significant delays or defaults in payments owed to us by
such customers, and we may need to extend our payment terms or restructure the receivables owed to us, which could have a significant adverse effect on our financial condition, including impacting the timing of revenue recognition. Any deterioration
in the financial condition of our customers will increase the risk of uncollectible receivables. Global economic uncertainty could also affect our customers ability to pay our receivables in a timely manner or at all or result in customers
going into bankruptcy or reorganization proceedings, which could also affect our ability to collect our receivables.