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 report, including our consolidated financial statements and related notes, before investing in our common stock. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. If any of the following risks occur, our business, operating results and prospects could be materially
harmed. In that event, the price of our common stock could decline, and you could lose part or all of your investment.
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Risks Related to Our Business and Our Industry
We have a history of losses, anticipate increasing our operating expenses in the future, and may not be able to achieve or maintain profitability. If we cannot
become profitable or maintain our profitability in the future, our business and operating results may suffer.
We have incurred net losses in
all fiscal years since our inception, including net losses of $43.1 million, $98.8 million, $120.1 million and $121.9 million in the years ended January 31, 2014, 2015 and 2016 and the nine months ended October 31, 2016, respectively. As of
October 31, 2016, we had an accumulated deficit of $441.9 million. We anticipate that we will continue to operate in a net loss position for the foreseeable future as we continue to develop our technology, enhance our product and service offerings,
expand our sales channels, expand our operations and hire additional employees, particularly in sales, marketing and research and development. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing
our revenue sufficiently, or at all, to offset these higher expenses. In future periods, our profitability could be adversely affected for a number of possible reasons, including slowing demand for our products or services, increasing competition,
returns on investments we make in our business that are less than expected, changes in the way storage services are consumed, a decrease in the growth of the storage market or general economic conditions. If we are unable to meet these risks and
challenges as we encounter them, our business and operating results may suffer.
Our limited operating history makes it difficult to evaluate our current
business and future prospects.
We were incorporated in November 2007 and shipped our first products in August 2010. The majority of our
revenue growth has occurred in the years ended January 31, 2012 and later. Our limited operating history makes it difficult to evaluate our current business and our future prospects, including our ability to plan for and model future growth and
profitability. We have encountered and will continue to encounter risks and difficulties frequently experienced by rapidly growing companies in constantly evolving industries, including the risks described in this report. If we do not address these
risks successfully, our business and operating results will be adversely affected, and our stock price could decline. Further, we have limited historical financial data. As such, any predictions about our future revenue and expenses may not be as
accurate as they would be if we had a longer operating history or operated in a more predictable market.
If the market for our storage products does not grow
as we anticipate, our revenue may not grow and our operating results would be harmed.
We are vulnerable to fluctuations in overall demand
for storage products. Our business plan assumes that the demand for storage products will increase as organizations collect, process and store an increasing amount of data. However, if storage markets in general or markets for captive storage
experience downturns or grow more slowly than anticipated, or if demand for our products does not grow as quickly as we anticipate, whether as a result of competition, product obsolescence, budgetary constraints of our end-customers, technological
changes, unfavorable economic conditions, uncertain geopolitical environments or other factors, we may not be able to increase our revenue sufficiently to ever achieve profitability and our stock price would decline. For example, the emergence of
cloud computing and storage-as-a-service may impact both short-term and long-term growth patterns in the markets in which we compete.
Our revenue growth rate
in recent periods may not be indicative of our future performance.
You should not consider our revenue growth rate in recent periods as
indicative of our future performance. While we have recently experienced significant revenue growth rates, we may not achieve similar revenue growth rates in future periods. You should not rely on our past revenue growth rates for any prior periods
as any indication of our future revenue or revenue growth rates.
Our quarterly operating results may fluctuate significantly, which could cause the trading
price of our common stock to decline.
Our operating results have historically fluctuated and may continue to fluctuate from quarter to
quarter, and we expect that this trend will continue as a result of a number of factors, many of which are outside of our control and may be difficult to predict, including:
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the budgeting cycles and purchasing practices of end-customers;
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increasing number and size of orders from Global 5000 companies and other large enterprises and cloud service providers that may require longer sales cycles;
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our ability to attract and retain new channel partners and end-customers;
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the timing and success of new product and service introductions by us or our competitors, including the success of our AF-Series All Flash arrays;
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the increasing use of cloud computing and storage-as-a-service by our end-customers;
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deferral of orders in anticipation of new products or product enhancements announced by us or our competitors;
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our ability to sell additional products to existing channel partners and end-customers;
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changes in end-customer requirements or market needs and our inability to make corresponding changes to our business;
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any potential disruption in our sales channels or termination of our relationship with important channel partners;
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changes in the competitive landscape, including consolidation among our competitors or end-customers;
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potential seasonality in the markets we serve;
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general economic conditions, both domestically and in our foreign markets;
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material changes in end-customer adoption of our product or service offerings, such as our Storage on Demand, or SoD, offering, that may change the timing of revenue recognition;
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our inability to provide adequate support to our end-customers;
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our inability to control the costs of manufacturing our products, including the cost of components;
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our inability to fulfill our end-customers’ orders due to supply chain delays or events that impact our manufacturers or their suppliers;
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our inability to adjust certain fixed costs and expenses, particularly in research and development, for changes in demand;
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the timing of certain payments and related expenses, such as sales commissions;
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increases or decreases in our revenue and expenses caused by fluctuations in foreign currency exchange rates, as an increasing portion of our revenue is collected and expenses are incurred and paid in currencies other
than the U.S. dollar;
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the cost of and potential outcomes of existing and future claims or litigation, which could have a material adverse effect on our business;
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future accounting pronouncements and changes in our accounting policies; and
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changes in tax laws or tax regulations.
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Any one of the factors above or the cumulative effect of some
of the factors above may result in significant fluctuations in our operating results. In particular, because we have historically received a substantial portion of sales orders during the last few weeks of each fiscal quarter, we are particularly
vulnerable to any delay in order fulfillment, failure to close anticipated orders or any other problems encountered during the last few weeks of each fiscal quarter. This variability and unpredictability could result in our failure to meet our
revenue or other operating result expectations or those of investors for a particular period. The failure to meet or exceed such expectations could have a material adverse effect on our business, results of operations and financial condition that
could ultimately adversely affect our stock price.
We have limited visibility into future sales, which makes it difficult to forecast our future operating
results.
Because of our limited visibility into end-customer demand, our ability to accurately forecast our future revenue is limited. We
sell our products primarily through our network of channel partners that accounted for 92%, 98%, 99% and 98%of our total revenue in the years ended January 31, 2014, 2015 and 2016 and the nine months ended October 31, 2016, respectively. We
place orders with our third-party manufacturer based on our forecasts of our end-customers’ requirements and forecasts provided by our channel partners. These forecasts are based on multiple assumptions, each of which might cause our estimates
to be inaccurate, thereby affecting our ability to provide products to our end-customers. When demand for our products increases significantly, we may not be able to meet it on a timely basis, and we may need to expend a significant amount of time
working with our end-customers to allocate limited supply and maintain positive end-customer relationships, or we may incur additional costs to accelerate the manufacture and delivery of additional products. If we or our channel partners
underestimate end-customer demand, we may forego revenue opportunities, lose market share and damage our end-customer relationships. Conversely, if we overestimate demand for our products and consequently purchase significant amounts of components
or hold inventory, we could incur additional costs and potentially incur related charges, which could adversely affect our operating results.
Adverse
economic conditions or reduced IT spending may adversely impact our business.
Our business depends on the overall demand for IT and on the
economic health of our current and prospective end-customers. In general, worldwide economic conditions remain unstable, and these conditions make it difficult for our current and prospective end-customers and us to forecast and plan future business
activities accurately, and such
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conditions could cause our end-customers or prospective end-customers to reevaluate their decision to purchase our products or services. Weak global economic conditions, or a reduction in IT
spending even if economic conditions improve, could adversely impact our business and operating results in a number of ways, including longer sales cycles, lower prices for our products or services, reduced bookings and lower or no growth.
We are dependent on a small number of product lines, and the lack of continued market acceptance of these product lines would result in lower revenue.
Our CS-Series of storage products accounted for a majority of our total revenue in the year ended January 31, 2016. In February 2016, we
introduced our new AF-Series of storage products. We anticipate that our AF products and our CS products will account for a majority of our revenue for the foreseeable future. As a result, our revenue could be reduced as a result of:
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any decline in demand for these products;
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the introduction of products and technologies by us or our competitors that serve as a replacement or substitute for, or represent an improvement over, these products;
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technological innovations or new communications standards that our products do not address;
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our failure or inability to predict changes in our industry or end-customers’ demands or to design products or enhancements that meet end-customers’ increasing demands; and
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our inability to release enhanced versions of our current products or new product lines on a timely basis.
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rely on third-party channel partners to sell substantially all of our products, and if our partners fail to perform, our ability to sell and distribute our products and services will be limited, and our operating results will be harmed.
We depend on our channel partners to sell our products. Our contracts with channel partners typically are terminable without cause upon written notice to
the other party. Our channel partner agreements do not prohibit channel partners from offering competitive products or services and do not contain any purchase commitments. Many of our channel partners also sell our competitors’ products. If
our channel partners give higher priority to our competitors, we may be unable to grow our revenue and our net loss could increase. Further, in order to develop and expand our channels, we must continue to scale and improve our processes and
procedures that support our channel partners, including investments in systems and training, and those processes and procedures may become increasingly complex and difficult to manage. If we fail to maintain existing channel partners or develop
relationships with new channel partners, our revenue opportunities will be reduced.
We receive a substantial portion of our total revenue from a limited
number of channel partners and the loss of, or a significant reduction in, orders from one or more of our major channel partners would harm our business.
We receive a substantial portion of our total revenue from a limited number of channel partners. For the years ended January 31, 2014, 2015 and 2016
our top ten channel partners accounted for 47%, 90% and 94%, respectively, of our total revenue. We have transitioned order fulfillment in North America largely to three distributors. The majority of our existing VARs now contract directly with
one or all of these three distributors, Avnet, Inc., Ingram Micro Inc. and Carahsoft Technology Corp. Avnet accounted for more than 10% of our revenue for the years ended January 31, 2014, 2015 and 2016. Carahsoft accounted for more than 10% of our
revenue for the years ended January 31, 2015 and 2016, but less than 10% of our revenue for the year ended January 31, 2014. Ingram Micro started to account for more than 10% of our revenue beginning in the year ended January 31, 2016. During the
year ended January 31, 2016, these three distributors accounted for, in the aggregate, approximately 79% of our total revenue. We anticipate that we will continue to depend upon a limited number of channel partners for a substantial portion of our
total revenue for the foreseeable future and, in some cases, the portion of our revenue attributable to individual channel partners may increase in the future. The loss of one or more key channel partners or a reduction in sales through any major
channel partner would reduce our revenue.
We face intense competition in our market, especially from larger, well-established companies, and we may lack
sufficient financial or other resources to maintain or improve our competitive position.
A number of very large corporations have
historically dominated the storage market. We consider our primary competitors to be companies that provide enterprise storage products, including Dell Technologies, Hewlett-Packard Company, NetApp, Inc. and Pure Storage, Inc. We also compete to a
lesser extent with a number of other private companies and certain well-established companies. Some of our competitors have made acquisitions of businesses that allow them to offer more directly competitive and comprehensive solutions than they had
previously offered. In addition, the emergence of cloud computing and storage-as-a-service may impact both short-term and long-term growth patterns in the markets in which we compete. We expect to encounter new competitors domestically and
internationally as other companies enter our market or if we enter new markets.
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Many of our existing competitors have, and some of our potential competitors could have, substantial
competitive advantages such as:
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potential for broader market acceptance of their storage architectures and solutions;
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greater name recognition and longer operating histories;
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larger sales and marketing and end-customer support budgets and resources;
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broader distribution and established relationships with distribution partners and end-customers;
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the ability to bundle storage products with other technology products and services, or offer a broader range of storage solutions to better fit certain end-customers’ needs;
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lower labor and development costs;
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larger and more mature intellectual property portfolios;
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substantially greater financial, technical and other resources; and
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greater resources to make acquisitions.
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If we are not successful in executing our strategy to increase sales of
our products to larger enterprise end-customers, our operating results may suffer.
Our growth strategy is dependent, in part, upon
continuing to increase sales of our products to larger enterprises. Sales to these types of end-customers involve risks that may not be present or that are present to a lesser extent with sales to smaller entities. These risks include:
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competition from larger competitors that traditionally target larger enterprises and that may have pre-existing relationships or purchase commitments from those end-customers;
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successfully selling and supporting our AF-Series All Flash arrays;
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successfully supporting fibre channel products, as many large enterprises often require products that support this technology;
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successfully introducing and supporting other new products in the future that are either required or preferred by large enterprises;
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increased purchasing power and leverage held by large end-customers in negotiating price and other contractual arrangements;
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more stringent support requirements;
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longer sales cycles and the associated risk that substantial time and resources may be spent on potential end-customers that elect not to purchase our products; and
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certain end-customers may have already adopted modern competitive storage system architectures in some of their operations, thereby making adoption of our architecture a more difficult value proposition for our sales
force to make.
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Large enterprises often undertake a significant evaluation process that results in a lengthy sales cycle. Although we
have a channel sales model, our sales representatives may invest substantial time and resources in engaging with sales to larger end-customers without being successful in generating any sales. In addition, product purchases by large enterprises are
frequently subject to bidding processes involving multiple competing suppliers, budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Finally, large enterprises typically have longer implementation
cycles, require greater product functionality and scalability (including, for example, fibre channel products and all flash array products) and a broader range of services, demand that vendors take on a larger share of risks, sometimes require
acceptance provisions that can potentially lead to a delay in revenue recognition, and expect greater payment flexibility from vendors. All of these factors can add risk to business conducted with these end-customers. If we fail to realize an
expected sale from a large end-customer in a particular quarter or at all, our business, operating results and financial condition could be adversely affected.
Our sales cycle is unpredictable, which makes it difficult to predict our results even in the near term.
A substantial portion of our quarterly sales typically occurs during the last month of the quarter, which we believe largely reflects sales cycles of
storage products and other products in the technology industry generally. We have little visibility at the start of any quarter as to which existing end-customers, if any, will make additional purchases and when any additional purchases may occur,
if at all.
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Our sales cycles vary based on factors such as customer size, customer type, order size, competition,
industry trends, and customer anticipation of new or updated products. For example, potential end-customers (including large enterprises) may undertake a longer evaluation process with multiple competing storage providers that has, in the past,
resulted in a longer sales cycle. Customers also may delay their purchases of our current products after the introduction of new products that are not yet shipping in volume. In addition, our sales cycle may be extended if potential end-customers
decide to re-evaluate other aspects of their storage infrastructure at the same time they are considering a purchase of our products. As a result, our quarterly operating results are difficult to predict even in the near term.
If we do not successfully anticipate market needs and develop products and product enhancements that meet those needs, or if those products do not gain market
acceptance, our business will suffer.
The storage market is characterized by rapidly evolving technology, end-customer needs and industry
standards. We might not be able to anticipate future market needs or changes in existing technologies, and we might not be able to develop new products or product enhancements to meet such needs, either in a timely manner or at all. For example, if
changes in technology result in a significant reduction in the price for flash memory, enterprises may not need to utilize flash-optimized storage in order to cost effectively protect their data. Also, one or more new technologies could be
introduced that compete favorably with our storage products or that cause our storage products to no longer be of significant benefit to our end-customers.
The process of developing new technology is complex and uncertain, and we may not be able to develop our products in a manner that enables us to
successfully address the changing needs of our end-customers. For example, in February 2016, we introduced our new AF-Series of storage products in order to address the demands of our end-customers for an all flash product. If our AF-Series product
line does not perform to expectations, appropriately address the needs of our end-customers or otherwise fails to achieve market acceptance, our business and operating results will be harmed.
Moreover, slow market acceptance of new products and product enhancements will delay or eliminate our ability to recover our investment in these products
and product enhancements. We must commit significant resources to developing new products and product enhancements before knowing whether our investments will result in products the market will accept. Additionally, we may not achieve the cost
savings or the anticipated performance improvements we expect, and we may take longer to generate revenue, or generate less revenue, than we anticipate. If we are not able to successfully identify new product and product enhancement opportunities,
develop and bring new products and product enhancements to market in a timely manner, or achieve market acceptance of our products and product enhancements, our business and operating results will be harmed.
Failure to adequately expand our sales force will impede our growth.
We will need to continue to expand and optimize our sales infrastructure in order to grow our end-customer base and our business. In particular, our
ability to increase our business with both large enterprises as well as international end-customers will require qualified personnel with experience selling into these types of end-customers. We plan to continue to expand our sales force globally.
Identifying, recruiting and training qualified personnel require significant time, expense and attention. It can take time before our sales representatives are fully-trained and productive. Moreover, strategies that may be successful in one region
may not be relevant for another region. Our business may be adversely affected if our efforts to expand and train our sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire, develop and retain
talented sales personnel globally or if new sales personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the expected benefits of this investment or increase our revenue.
Our growth depends in part on the success of our strategic relationships with third parties.
Our future growth will depend on our ability to enter into successful strategic relationships with third parties. For example, our strategic partnership
with Lenovo, our alliance activity with Citrix Systems, Inc., Commvault Systems, Inc., Microsoft Corporation, Oracle Corporation, SAP, Splunk Inc., Veeam Software, and VMware, Inc., and our SmartStack initiative with Cisco Systems, Inc. are
intended to create broader integrated technology solutions to address our end-customers’ needs. In addition, we work with global distributors to streamline and grow our sales channel. These relationships may not result in additional
end-customers or enable us to generate significant revenue. These relationships are typically non-exclusive and do not prohibit the other party from working with our competitors or from offering competing services. If we are unsuccessful in
establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results could suffer.
Our products handle mission-critical data for our end-customers and are highly technical in nature. If our products have defects, failures occur or end-customer
data is lost or corrupted, our reputation and business could be harmed.
Our products are highly technical and complex and are involved in
storing and replicating mission-critical data for our end-customers. Our products may contain undetected defects, failures or vulnerabilities when they are first introduced or as new versions are released. We have in the past and may in the future
discover software errors in new versions of
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our existing products, new products or product enhancements after their release or introduction, which could result in lost revenue. Despite testing by us and by current and potential
end-customers, errors might not be found in new releases or products until after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Our products may also have security vulnerabilities and be subject to
intentional attacks by viruses that seek to take advantage of these bugs, errors or other weaknesses. If defects, failures or vulnerabilities occur in our products, a number of negative effects to our business could result, including:
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lost revenue or lost end-customers;
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increased costs, including warranty expense and costs associated with end-customer support;
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delays, cancellations, reductions or rescheduling of orders or shipments;
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product returns or discounts;
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diversion of management resources;
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legal claims for breach of contract, product liability, tort or breach of warranty; and
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damage to our reputation and brand.
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Because our end-customers use our products to manage and protect
their data, we could face claims resulting from any loss or corruption of our end-customers’ data due to a product defect, failure or vulnerability. While our sales contracts contain provisions relating to warranty disclaimers and liability
limitations, these provisions might not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention from our business and could result in public perception that our products are not effective, even
if the occurrence is unrelated to the use of our products. In addition, our business liability insurance coverage might not be adequate to cover such claims. If any data is lost or corrupted in connection with the use or support of our products, our
reputation could be harmed and market acceptance of our products could suffer.
We rely on a limited number of suppliers, and in some cases single-source
suppliers, and any disruption or termination of these supply arrangements, failure to successfully manage our relationships with our key suppliers or component quality problems could delay shipments of our products and damage our channel partner or
end-customer relationships.
We rely on a limited number of suppliers, and in some cases single-source suppliers, for several key components
of our products. We generally purchase components on a purchase order basis and do not have long-term supply contracts with our suppliers. Our reliance on key suppliers reduces our control over the manufacturing process and exposes us to risks,
including reduced control over product quality, production costs, timely delivery and capacity. It also exposes us to the potential inability to obtain an adequate supply of required components because we do not have long-term supply commitments. In
particular, replacing the single-source suppliers of our solid state drives and chassis would require a product re-design that could take months to implement.
We generally maintain minimal inventory for repairs, evaluation and demonstration units and acquire components only as needed. We do not enter into
long-term supply contracts for these components. As a result, our ability to respond to channel partner or end-customer orders efficiently may be constrained by the then-current availability, terms and pricing of these components. Our industry has
experienced component shortages and delivery delays in the past, and we may experience shortages or delays of critical components in the future as a result of strong demand in the industry or other factors. If we or our suppliers inaccurately
forecast demand for our products or we ineffectively manage our enterprise resource planning processes, our suppliers may have inadequate inventory, which could increase the prices we must pay for substitute components or result in our inability to
meet demand for our products, as well as damage our channel partner or end-customer relationships.
Component quality is particularly important with
respect to disk drives. We have in the past and may in the future experience disk drive failures, which could cause our reputation to suffer, our competitive position to be impaired and our end-customers to select other vendors. To meet our product
performance requirements, we must obtain disk drives of extremely high quality and capacity. In addition, there are periodic supply-and-demand issues for disk drives and flash memory that could result in component shortages, selective supply
allocations and increased prices of such components. We may not be able to obtain our full requirements of components, including disk drives, that we need for our storage products or the prices of such components may increase.
If we fail to effectively manage our relationships with our key suppliers, or if our key suppliers increase prices of components, experience delays,
disruptions, capacity constraints, quality control problems in their manufacturing operations or adverse changes to their financial condition, our ability to ship products to our channel partners or end-customers could be impaired and our
competitive position and reputation could be adversely affected. Qualifying a new key supplier is expensive and time-consuming. If we are required to change key suppliers or assume internal manufacturing operations, we may lose revenue and damage
our channel partner or end-customer relationships.
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Because we depend on a single third-party manufacturer to build our products, we are susceptible to manufacturing
delays and pricing fluctuations that could prevent us from shipping orders on time, if at all, or on a cost-effective basis, which would cause our business to suffer.
In the first quarter of the year ended January 31, 2015, we completed the transition of our manufacturing activities from two third-party manufacturers
to one, Flextronics International Ltd., or Flex. Our reliance on this third-party manufacturer reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs and product
supply and timing. Any manufacturing disruption by Flext could severely impair our ability to fulfill orders. Our current agreement with Flex, which is terminable at will or upon short notice by Flex, does not contain any minimum commitment to
manufacture our products, and any orders are fulfilled only after a purchase order has been delivered and accepted. As a result, Flex may stop taking new orders or fulfilling our orders on short notice or limit our allocations of products. Moreover,
our orders represent a relatively small percentage of the overall orders received by Flex from its end-customers; therefore, fulfilling our orders may not be a priority in the event Flex is constrained in its ability to fulfill all of its
end-customer obligations. If we are unable to manage our relationship with Flex effectively, or if Flex suffers delays or disruptions for any reason, experiences increased manufacturing lead-times, capacity constraints or quality control problems in
its manufacturing operations, limits our allocations of products, stops taking new orders or fulfilling our orders on short notice, or otherwise fails to meet our future requirements for timely delivery, our ability to ship products to our
end-customers would be impaired, and our business and operating results would be harmed.
Our business and operations have experienced rapid growth in recent
periods. If we do not effectively manage any future growth or are unable to improve our systems and processes, our operating results could be harmed.
We have experienced rapid growth over the last few years. Our employee headcount and number of end-customers have increased significantly, and we expect
to continue to grow our headcount significantly over the next 12 months. Since we initially launched our products in August 2010, our number of end-customers has grown to over 9,450 as of October 31, 2016. The growth and expansion of our business
and product and service offerings places a continuous significant strain on our management, operational and financial resources.
To manage any
future growth effectively, we must continue to improve and expand our IT and financial infrastructure, our operating and administrative systems and controls, our enterprise resource planning systems and processes and our ability to manage headcount,
capital and processes in an efficient manner. In addition, our systems and processes may not prevent or detect all errors, omissions, or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may
result in our inability to manage the growth of our business and to accurately forecast our revenue and expenses, or to prevent losses. Our productivity and the quality of our products and services may also be adversely affected if we do not
integrate and train our new employees quickly and effectively. Failure to manage any future growth effectively could result in increased costs, negatively impact our end-customers’ satisfaction and harm our operating results.
Our ability to sell our products is dependent on the quality of our technical support services, and our failure to offer high quality technical support services
could have a material adverse effect on our sales, operating results and end-customers’ satisfaction with our products and services.
Once our products are deployed within our end-customers’ networks, our end-customers depend on our technical support services to resolve any issues
relating to our products. We may be unable to respond quickly enough to accommodate short-term increases in end-customer demand for support services. We also may be unable to modify the format of our support services to compete with changes in
support services provided by competitors. Increased end-customer demand for these services, without corresponding revenue, could increase costs and adversely affect our operating results. Any failure by us to effectively help our end-customers
quickly resolve post-deployment issues or provide high-quality technical support, or a market perception that we do not maintain high-quality support, could harm our reputation and adversely affect our ability to sell our solutions to existing and
prospective end-customers.
Our future growth plan depends in part on expanding outside of the United States, and we are therefore subject to a number of
risks associated with international sales and operations.
As part of our growth plan, we intend to expand our operations globally. We have a
limited history of marketing, selling and supporting our products and services internationally. International sales and operations are subject to a number of risks, including the following:
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greater difficulty in enforcing contracts and accounts receivable collection and longer collection periods;
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increased expenses incurred in establishing and maintaining office space and equipment for our international operations;
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fluctuations in exchange rates between the U.S. dollar and foreign currencies in markets where we do business;
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management communication and integration problems resulting from cultural and geographic dispersion;
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difficulties in attracting and retaining personnel with experience in international operations;
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risks associated with trade restrictions and foreign legal requirements, including the importation, certification and localization of our products required in foreign countries;
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greater risk of unexpected changes in regulatory practices, tariffs, and tax laws and treaties;
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the uncertainty of protection for intellectual property rights in some countries;
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greater risk of a failure of foreign employees to comply with both U.S. and foreign laws, including antitrust regulations, the U.S. Foreign Corrupt Practices Act and any trade regulations ensuring fair trade practices;
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general economic and political conditions in these foreign markets.
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These factors and other factors
could harm our ability to generate future international revenue and, consequently, materially impact our business and operating results. The expansion of our existing international operations and entry into additional international markets will
require significant management attention and financial resources. Our failure to successfully manage our international operations and the associated risks effectively could limit the future growth of our business.
Interruptions to and failures of our IT infrastructure could disrupt our operations and services.
We depend on our IT infrastructure, which includes our data centers and networks, to operate our business and to provide services to our end-customers
through our InfoSight platform. This infrastructure, including our back-up systems, resides in two locations. Currently we do not have a complete disaster recovery program, but we are in the process of implementing such a program in the upcoming
quarters. Any interruptions to or failures of, or attacks on, our IT infrastructure, whether due to natural disasters, system failures, computer viruses, security breaches, computer hacking attacks or other causes, whether through third-party action
or employee error or malfeasance, would affect our ability to operate our business and to also provide services through our InfoSight platform. As a result, it could be difficult to operate our business and we could also face liability with respect
to any diminished performance of our InfoSight platform or support services generally during the periods when our IT infrastructure is compromised and any subsequent periods required to repair such interruptions or failures. Moreover, we would
likely suffer reputational damage, and our ability to sell our solutions to existing and prospective end-customers could be harmed.
The inability of our
products to interoperate with leading business software applications, hypervisors and data management tools would cause our business to suffer.
Our products are also designed to interoperate with virtualization solutions in the market. Virtual environment solutions require a fast and flexible
network storage foundation. If our products are not compatible with leading business software applications, hypervisors and data management tools, demand for our products will decline. We must devote significant resources to enhancing our products
to continue to interoperate with these software applications, hypervisors and data management tools. Any current or future providers of software applications, hypervisors or data management tools could make future changes that would diminish the
ability of our products to interoperate with them, and we might need to spend significant additional time and effort to ensure the continued compatibility of our products, which might not be possible at all. Any of these developments could harm our
business.
If our products do not interoperate with our end-customers’ infrastructure, sales of our products could be negatively affected, which would
harm our business.
Our products must interoperate with our end-customers’ existing infrastructure, which often have different
specifications, utilize multiple protocol standards, deploy products from multiple vendors, and contain multiple generations of products that have been added over time. As a result, when problems occur in a network, it may be difficult to identify
the sources of these problems. If we find errors in the existing software or defects in the hardware used in our end-customers’ infrastructure or problematic network configurations or settings, we may have to modify our software or hardware so
that our products will interoperate with our end-customers’ infrastructure. In such cases, our products may be unable to provide significant performance improvements for applications deployed in our end-customers’ infrastructure. In
addition, government and other end-customers may require our products to comply with certain security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards,
or our competitors achieve compliance with these certifications and standards, we may be disqualified from, or disadvantaged in, selling our products to such end-customers, which could harm our business and operating results.
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If our industry experiences declines in average sales prices, our revenue and gross profit may also decline.
The data storage products industry is highly competitive and has historically been characterized by declines in average sales prices. It is
possible that the market for our storage products could experience similar trends in equal or greater degree than the rest of the industry. Our average sales prices could decline due to pricing pressure caused by several factors, including
competition, the introduction of competing technologies, overcapacity in the worldwide supply of flash memory or disk drive components, increased manufacturing efficiencies, implementation of new manufacturing processes and expansion of
manufacturing capacity by component suppliers. If we are required to decrease our prices to be competitive and are not able to offset this decrease by increases in the volume of sales or the sales of new products with higher margins, our gross
margins and operating results could be adversely affected.
Governmental regulations affecting the export or import of certain of our solutions could
negatively affect our business.
Our products, technology and software are subject to U.S. export control laws and economic sanctions, and we
incorporate encryption technology into certain of our products. These encryption products and the underlying technology may be exported outside the United States only with the required export authorizations, including by license, a license exception
or other appropriate government authorizations, including the filing of an encryption registration. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products to U.S. embargoed or sanctioned countries,
governments and persons and for certain end-uses. In addition, various countries regulate the import of certain encryption technology, including through import permit and license requirements. Governmental regulation of encryption technology and
regulation of exports or imports, or our failure, or inability due to governmental action or inaction, to obtain required export or import approval for our products could harm our international sales and adversely affect our revenue. Obtaining the
necessary export or import license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities even if the export or import license ultimately may be granted. Even though we take
precautions to ensure that our channel partners comply with all relevant regulations, any failure by our channel partners to comply with such regulations could have negative consequences, including reputational harm, government investigations and
penalties.
We have in the past had to make a voluntary disclosure to the Office of Export Enforcement of the U.S. Commerce Department to report a
failure to obtain an encryption registration number prior to shipment of a particular hardware appliance product to a limited number of international end-customers. In the future, failure to comply with export regulations could result in penalties,
costs, and restrictions on export privileges, which could also harm our operating results, as well as our inability to service certain products already in the hands of our end-customers, which could have negative consequences, including reputational
harm. The U.S. Commerce Department’s Bureau of Industry and Security has granted the service authorization and closed the enforcement matter by issuing us a warning letter, rather than assessing a civil penalty.
A portion of our revenue is generated by sales to government entities, which are subject to a number of challenges and risks.
We may in the future increase sales to government entities. Selling to government entities can be highly competitive, expensive and time consuming, often
requiring significant upfront time and expense without any assurance that these efforts will result in a sale. Government certification requirements for products like ours may change and in doing so restrict our ability to sell into certain
government sectors until we have attained the revised certification. Government demand and payment for our products and services may be impacted by public sector budgetary cycles and funding authorizations, with funding reductions or delays
adversely affecting public sector demand for our products and services. Government entities may have statutory, contractual or other legal rights to terminate contracts with our channel partners for convenience or due to a default, and any such
termination may adversely impact our future operating results. Government entities may require contract terms that differ from standard arrangements and may impose compliance requirements that are complicated, require preferential pricing or
“most favored nation” terms and conditions, or are otherwise time consuming and expensive to satisfy. Government entities routinely investigate and audit government contractors’ administrative processes, and any unfavorable audit
could result in the government entity refusing to continue buying our products and services, a reduction of revenue, fines or civil or criminal liability if the audit uncovers improper or illegal activities, which could adversely impact our
operating results.
We may be subject to claims that our employees have wrongfully disclosed or we have wrongfully used proprietary information of our
employees’ former employers. These claims may be costly to defend and if we do not successfully do so, our business could be harmed.
Many of our employees were previously employed at current or potential competitors. We may be subject to claims that these employees have divulged or we
have used proprietary information of these employees’ former employers. For example, in 2013 and 2014, NetApp filed lawsuits against us alleging that we and certain of our employees violated NetApp’s proprietary rights. Although we have
settled the NetApp lawsuits and both matters have been dismissed with
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prejudice, litigation may be necessary to defend against other similar future claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. A loss of key research personnel or their work product could hamper our ability to develop new products and features for existing products, which could severely harm our business. Even if we are successful
in defending against future claims, litigation could result in substantial costs and be a distraction to management.
Our proprietary rights may be difficult
to enforce or protect, which could enable others to copy or use aspects of our products without compensating us.
We rely and expect to
continue to rely on a combination of confidentiality agreements, as well as trademark, copyright, patent and trade secret protection laws, to protect our proprietary rights with our employees, consultants and third parties with whom we have
relationships. We have filed various applications for certain aspects of our intellectual property. Valid patents may not issue from our pending applications, and the claims eventually allowed on any patents may not be sufficiently broad to protect
our technology or products. Any issued patents may be challenged, invalidated or circumvented, and any rights granted under these patents may not actually provide adequate defensive protection or competitive advantages to us. Additionally, the
process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to misappropriate, copy aspects of our products or obtain and
use information that we regard as proprietary. We generally enter into confidentiality or license agreements with our employees, consultants, vendors and end-customers, and generally limit access to and distribution of our proprietary information.
However, we cannot assure you that the agreements we have entered into will not be breached. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States, and many
foreign countries do not enforce these laws as diligently as government agencies and private parties in the United States.
From time to time, we
may need to take legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business and operating results. Attempts to enforce our rights against third parties could also provoke these third parties to
assert their own intellectual property or other rights against us, or result in a holding that invalidates or narrows the scope of our rights, in whole or in part. Any of these events would have a material adverse effect on our business and
operating results.
Claims by others that we infringe their proprietary technology or other rights could harm our business.
Companies in the storage industry own large numbers of patents, copyrights, trademarks, domain names and trade secrets, and frequently enter into
litigation based on allegations of infringement, misappropriation or other violations of intellectual property or other rights. Third parties have asserted and may in the future assert claims of infringement of intellectual property rights against
us or our end-customers and channel partners. Our standard license and other agreements obligate us to indemnify our end-customers and channel partners against claims that our products infringe the intellectual property rights of third parties, and
in some cases this indemnification obligation is uncapped as to the amount of the liability. As the number of products and competitors in our market increases and overlaps occur, and our profile within this market grows, infringement claims may
increase. While we intend to increase the size of our patent portfolio, our competitors and others may now and in the future have significantly larger and more mature patent portfolios than we have. In addition, future litigation may involve patent
holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. Any claim of infringement by a third party, even those without merit,
could cause us to incur substantial costs defending against the claim and could distract our management from our business. Furthermore, a successful claimant could secure a judgment or we may agree to a settlement that requires us to pay substantial
damages, royalties or other fees. Any of these events could harm our business and operating results.
Although third parties may offer a license to
their technology or other intellectual property, the terms of any offered license may not be acceptable and the failure to obtain a license or the costs associated with any license could materially and adversely affect our business and operating
results. If a third party does not offer us a license to its technology or other intellectual property on reasonable terms, or at all, we could be enjoined from continued use of such intellectual property. As a result, we may be required to develop
alternative, non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected products or services), effort and expense, and may ultimately not be successful.
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If we are unable to hire, retain, train and motivate qualified personnel and senior management, our business could be
harmed.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. In particular, we
are highly dependent on the contributions of our executive team as well as members of our research and development organization. The loss of any key personnel could make it more difficult to manage our operations and research and development
activities, reduce our employee retention and revenue and impair our ability to compete. Although we have entered into employment offer letters with our key personnel, these agreements have no specific duration and constitute at-will employment.
Competition for highly skilled personnel is often intense, especially in the San Francisco Bay Area where we have a substantial presence and need
for highly skilled personnel. We may not be successful in attracting, integrating or retaining qualified personnel to fulfill our current or future needs. We have from time to time experienced, and we expect to continue to experience, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived value
of our stock declines, it may adversely affect our ability to hire or retain highly skilled employees. In addition, since we expense all stock-based compensation, we may periodically change our equity compensation practices, which may include
reducing the number of employees eligible for equity awards or reducing the size of equity awards granted per employee. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth
prospects could be harmed.
If we or our channel partners fail to timely and correctly install our storage products, or if our channel partners face
disruptions in their business, our reputation will suffer, our competitive position could be impaired and we could lose end-customers.
In
addition to our small team of installation personnel, we rely upon some of our channel partners to install our storage products at our end-customer locations. Although we train and certify our channel partners on the installation of our products,
end-customers have in the past encountered installation difficulties with our channel partners. In addition, if one or more of our channel partners suffers an interruption in its business, or experiences delays, disruptions or quality control
problems in its operations, our revenue could be reduced and our ability to compete could be impaired. As a significant portion of our sales occur in the last month of a quarter, our end-customers may also experience installation delays following a
purchase if we or our channel partners have too many installations in a short period of time. If we or our channel partners fail to timely and correctly install our products, end-customers may not purchase additional products and services from us,
our reputation could suffer and our revenue could be reduced. In addition, if our channel partners are unable to correctly install our products, we might incur additional expenses to correctly install our products.
We are exposed to the credit risk of some of our channel partners and direct end-customers, which could result in material losses and negatively impact our
operating results.
Some of our channel partners and direct end-customers have experienced financial difficulties in the past. A channel
partner or direct end-customer experiencing such difficulties will generally not purchase or sell as many of our products as it would under normal circumstances and may cancel orders. Our typical payment terms are 30 days from invoice. Because of
local customs or conditions, payment terms may be longer in some circumstances and markets. In addition, a channel partner or direct end-customer experiencing financial difficulties generally increases our exposure to uncollectible receivables. If
any of our channel partners or direct end-customers that represent a significant portion of our total revenue becomes insolvent or suffers a deterioration in its financial or business condition and is unable to pay for our products, our results of
operations could be harmed.
Changes in laws, regulations and standards related to data privacy and the Internet could harm our business.
Federal, state or foreign government bodies or agencies have in the past adopted, and could in the future adopt, laws and regulations affecting data
privacy and the use of the Internet as a commercial medium. Changing laws, regulations and standards applying to the solicitation, collection, processing or use of various information could affect our end-customers’ ability to use and
share data, potentially restricting our ability to store, process and share data with our end-customers through our InfoSight platform, and in turn limit our ability to provide real-time and predictive end-customer support. For example, in Europe,
the Court of Justice of the European Union has invalidated the “US-EU Safe Harbor framework,” (which created a safe harbor under the European Data Protection Directive for certain European data transfers to the U.S.) and the European
Commission and U.S. Department of Commerce have replaced this with the “Privacy Shield” framework. However, the Privacy Shield has been the subject of much criticism from European regulators and it is unclear whether it will be subject to
further challenge in European courts. In addition, text of a new EU General Data Protection Regulation has been agreed which will be implemented by May 2018, creating a new data privacy regime in Europe. As such, the privacy landscape in Europe is
in a state of flux and any stricter regulation with regards to the solicitation, collection, processing or use of various information (including European data transfers to the U.S.) in the future may impact our end-customers and our business.
If we are not able to adjust to changing laws, regulations and standards related to the Internet, our business could be harmed.
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Some of our products use “open source” software, which may restrict how we use or distribute our products
or require that we release the source code of certain software subject to open source licenses.
Some of our products may incorporate
software licensed under so-called “free,” “open source” or other similar licenses where the licensed software is made available to the general public under the terms of a specific non-negotiable license. Some open source licenses
require that software subject to the license be made available to the public and that any modifications or derivative works based on open source software be licensed in source code form under the same open source licenses. Few courts have
interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We rely on multiple software programmers to design our proprietary technologies, we are not able to
exercise complete control over the development methods and efforts of our programmers, and we cannot be certain that our programmers have not incorporated open source software into our products without our knowledge or that they will not do so in
the future. Some of our products incorporate third-party software under commercial licenses. We cannot be certain whether such third-party software incorporates open-source software without our knowledge. In the event that portions of our
proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our products, or otherwise be limited in the licensing
of our technologies, each of which could reduce or eliminate the value of our products and materially and adversely affect our ability to sustain and grow our business. Many open source licenses include additional obligations and restrictions, such
as providing attribution to the authors of the open source software or providing a copy of the applicable open source license to recipients of the open source software. If we distribute products outside the terms of applicable open source licenses,
we could be exposed to claims of breach of contract or intellectual property infringement.
Our failure to raise additional capital or generate the
significant capital necessary to expand our operations and invest in new products could reduce our ability to compete and could harm our business.
We expect that our existing cash and cash equivalents will be sufficient to meet our anticipated operating cash needs for at least the next 12 months. In
the future, we may need to raise additional funds, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our stockholders may experience significant dilution of
their ownership interests and the per share value of our common stock could decline. Furthermore, if we engage in debt financing, the holders of debt would have priority over the holders of common stock, and we may be required to accept terms that
restrict our ability to incur additional indebtedness. We may also be required to take other actions that would otherwise be in the interests of the debt holders and force us to maintain specified liquidity or other ratios, any of which could harm
our business and operating results. If we need additional capital and cannot raise it on acceptable terms, we might not be able to, among other things:
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develop or enhance our products;
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continue to expand our sales and marketing and research and development organizations;
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acquire complementary technologies, products or businesses;
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expand operations in the United States or internationally;
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hire, train and retain employees; or
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respond to competitive pressures or unanticipated working capital requirements.
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Our failure to do any
of these things could harm our business and operating results.
If we fail to maintain an effective system of internal controls, our ability to produce timely
and accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the
reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and the rules and regulations of the New York Stock Exchange. We expect the requirements of these rules and regulations will increase our legal, accounting, financial compliance and
audit costs, make some activities more challenging, time consuming and costly, and place strain on our personnel, systems and resources. For example, to comply with the requirements, we have taken various actions, such as implementing new internal
controls and procedures and hiring accounting and internal audit staff.
The Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. We are continuing to enhance and refine our disclosure controls and other procedures designed to ensure
information required to be disclosed in the reports filed with the SEC, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the
Exchange Act is accumulated and communicated to our principal executive and financial officers.
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Our current controls, and any new controls developed, may become inadequate because of changes in external
conditions and in our business. Any failure to update, implement and maintain effective internal controls could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation
reports regarding the effectiveness of our internal control over financial reporting required in periodic reports filed with the SEC under Section 404 of the Sarbanes-Oxley Act. Further, weaknesses in our internal controls may be discovered in
the future and result in a restatement of our financial statements for prior periods. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results, or
cause us to fail to meet our reporting obligations.
To maintain and improve the effectiveness of our disclosure controls and procedures and
internal control over financial reporting, we have expended and will continue to expend significant resources, including accounting and professional services fees related costs and in providing diligent management oversight. Any failure to maintain
the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could impair our ability to operate our business. In the event that our disclosure
controls and procedures and/or our internal controls are assessed or perceived as inadequate, we are unable to produce timely and accurate financial statements, or if our independent registered public accounting firm is unable to express an opinion
on the effectiveness of our internal control over financial reporting, investors may lose confidence in our reported financial results and other information, which would likely have a negative effect on the trading price of our common stock. In
addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange and we may be subject to investigation or sanctions by the SEC.
We have performed system and process evaluation and testing of our internal control over financial reporting to allow management to report on the
effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Commencing with the audit of our fiscal year ended January 31, 2016, we have complied with the attestation requirements of Section
404(b) of the Sarbanes-Oxley Act and our independent registered public accounting firm has formally attested to the effectiveness of our internal control over financial reporting.
If we fail to comply with environmental requirements, our business, operating results and reputation could be adversely affected.
We are subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to
the collection of and recycling of electrical and electronic equipment. Examples of these laws and regulations include the European Union, or EU, Restriction of Hazardous Substances Directive, or RoHS, and the EU Waste Electrical and Electronic
Equipment Directive, or WEEE, as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in China, South Korea, Norway and Japan and may be enacted in other regions, including in the
United States, and we are, or may in the future be, subject to these laws and regulations.
The EU RoHS and similar laws of other jurisdictions ban
the use of certain hazardous materials such as lead, mercury and cadmium in the manufacture of electrical equipment, including our products. Currently, the manufacturer of our hardware appliances and our major component part suppliers comply with
the EU RoHS requirements. However, if there are changes to this or other laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to re-engineer our products to use components compatible with these
regulations. This re-engineering and component substitution could result in additional costs to us or disrupt our operations or logistics.
The WEEE
requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Changes in interpretation of the directive may increase the burden associated with complying with the directive.
Our failure to comply with past, present and future similar laws could result in reduced sales of our products, substantial product inventory
write-offs, reputational damage, penalties and other sanctions, any of which could harm our business and operating results. We also expect that our products will be affected by new environmental laws and regulations on an ongoing basis. To date, our
expenditures for environmental compliance have not had a material impact on our results of operations or cash flows, and although we cannot predict the future impact of such laws or regulations, they will likely result in additional costs and may
increase penalties associated with violations or require us to change the content of our products or how they are manufactured, which could have a material adverse effect on our business and operating results.
We are exposed to fluctuations in currency exchange rates, which could negatively affect our operating results.
Our sales contracts are primarily denominated in U.S. dollars. In addition, we also invoice in British pound sterling, Australian dollar, Canadian
dollar and Euro. A strengthening of the U.S. dollar could increase the real cost of our products to our end-customers outside of the United States, which could adversely affect our operating results. For example, the
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Brexit referendum has caused significant volatility in global stock markets and currency exchange rate fluctuations, resulting in the strengthening of the U.S. dollar against many foreign
currencies. In addition, an increasing portion of our operating expenses is incurred and an increasing portion of our assets is held outside the United States. These operating expenses and assets are denominated in foreign currencies and are subject
to fluctuations due to changes in foreign currency exchange rates. If we are not able to successfully hedge against the risks associated with currency fluctuations, our operating results could be adversely affected.
Our business is subject to the risks of earthquakes, fire, power outages, floods, and other catastrophic events, and to interruption by man-made problems such as
terrorism.
A significant natural disaster, such as an earthquake, fire, flood, or significant power outage could have a material adverse
impact on our business or operating results. Both our corporate headquarters and the location where our products are manufactured are located in the San Francisco Bay Area, a region known for seismic activity. In addition, natural disasters could
affect our supply chain, manufacturing vendors, or logistics providers’ ability to provide materials and perform services such as manufacturing products or assisting with shipments on a timely basis. In the event we or our service providers are
hindered by any of the events discussed above, shipments could be delayed, resulting in missed financial targets, such as revenue and shipment targets, for a particular quarter. In addition, acts of terrorism and other geo-political unrest could
cause disruptions in our business or the businesses of our supply chain, manufacturers, logistics providers, partners or end-customers, or the economy as a whole. Any disruption in the business of our supply chain, manufacturers, logistics
providers, partners or end-customers that impacts sales at the end of a fiscal quarter could have a significant adverse impact on our quarterly results. All of the aforementioned risks may be further increased if we do not implement a disaster
recovery plan or our suppliers’ disaster recovery plans prove to be inadequate. To the extent that any of the above should result in delays or cancellations of end-customer orders, or delays in the manufacture, deployment or shipment of our
products, our business and operating results would be adversely affected.
The SEC’s conflict minerals rule has caused us to incur additional costs,
could limit the supply and increase the cost of certain minerals used in manufacturing our products, and could make us less competitive in our target markets.
The SEC’s conflict minerals rule requires disclosure by public companies of information relating to the origin, source and chain of custody of
specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires companies to obtain sourcing data from suppliers, engage in supply
chain due diligence, and file annually with the SEC a specialized disclosure report on Form SD covering the prior calendar year. The rule could limit our ability to source at competitive prices and to secure sufficient quantities of certain minerals
(or derivatives thereof) used in the manufacture of our products, specifically tantalum, tin, gold and tungsten, as the number of suppliers that provide conflict-free minerals may be limited. We have and will continue to incur costs associated with
complying with the rule, such as costs related to the determination of the origin, source and chain of custody of the minerals used in our products, the adoption of conflict minerals-related governance policies, processes and controls, and possible
changes to products or sources of supply as a result of such activities. Within our supply chain, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the data collection and due diligence
procedures that we implement, which may harm our reputation. Furthermore, we may encounter challenges in satisfying those end-customers that require that all of the components of our products be certified as conflict free, and if we cannot satisfy
these end-customers, they may choose a competitor’s products. We filed our Conflict Minerals Report with the SEC on May 31, 2016.
Our ability to
use net operating losses to offset future taxable income may be subject to certain limitations.
As of January 31, 2016, we had federal
and state net operating loss, or NOL, carryforwards of $262.8 million and $188.8 million due to prior period losses, which if not utilized, will begin to expire in 2036. If these NOLs expire unused and are unavailable to offset future income
tax liabilities, our profitability may be adversely affected. In addition, under Section 382 of the U.S. 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 NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes and, if we undergo an ownership change in the future, our
ability to utilize our NOLs could be further limited by Section 382. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382. Regulatory changes, such as
suspension of the use of NOLs, could result in the expiration of our NOLs or otherwise cause them to be unavailable to offset future income tax liabilities. Our NOLs could also be impaired under state law. As a result, we might not be able to
utilize a material portion of our NOLs.
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We may acquire other businesses which could require significant management attention, disrupt our business, dilute
stockholder value and adversely affect our operating results.
As part of our business strategy, we may make investments in complementary
companies, products or technologies. However, we have not made any material acquisitions to date, and as a result, our ability as an organization to acquire and integrate other companies, products or technologies in a successful manner is unproven.
We may not be able to find suitable acquisition candidates, or we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our
goals, and any acquisitions we complete could be viewed negatively by our end-customers, investors or securities analysts. In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with such acquisitions,
into our Company, our operating results could be adversely affected. We may also incur unforeseen liabilities which could materially and adversely affect our operating results. We may not successfully evaluate or utilize the acquired technology or
personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence
of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that impede our ability to manage our operations.
Risks Related to Ownership of Our Common Stock
The
price of our common stock has been, and is likely to continue to be, volatile and may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price at which you purchased your shares.
The trading price of our common stock has been volatile, and could be subject to wide fluctuations in response to various factors, many of
which are beyond our control, including:
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overall performance of the equity markets;
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our operating performance and the performance of other similar companies;
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changes in the estimates of our operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;
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announcements of technological innovations, new applications or enhancements to services, acquisitions, strategic alliances or significant agreements by us or by our competitors;
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announcements of end-customer additions and end-customer cancellations or delays in end-customer purchases;
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recruitment or departure of key personnel;
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the economy as a whole, market conditions in our industry, and the industries of our end-customers;
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the size of our market float; and
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any other factors discussed in this report.
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In addition, the stock markets have experienced extreme
price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. In the past, stockholders have filed securities class action litigation following periods of market volatility. We are the target of this type of litigation as described in Note 6. Commitments and
Contingencies in the “Notes to the Consolidated Financial Statements” included elsewhere in this report. Securities litigation against us could result in substantial costs, divert resources and the attention of management from our
business, and adversely affect our business.
If securities or industry analysts choose to publish or refrain from publishing research, publish inaccurate or
unfavorable research, or discontinue publishing research, 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 securities or industry analysts publish about us or our business. If industry analysts cease coverage of us or fail to publish reports on us regularly, demand for our
common stock could decrease, which might cause our common stock price and trading volume to decline. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common
stock price could decline.
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Our directors, executive officers and their affiliates have significant influence over us.
Our directors and executive officers, together with their affiliates, beneficially own, in the aggregate, 20% of our outstanding common stock as of
November 30, 2016. As a result, these stockholders, acting together, have the ability to significantly influence the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or
sale of all or substantially all of our assets. Accordingly, this concentration of ownership could harm the market price of our common stock by:
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delaying, deferring or preventing a change in control of us;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.
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We
do not intend to pay dividends for the foreseeable future.
We have never declared nor paid cash dividends on our capital stock. We currently
intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. Consequently, stockholders must 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.
Delaware law and provisions in our restated
certificate of incorporation and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the trading price of our common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change
in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing
stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our Company more difficult, including the following:
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our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause;
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only our board of directors has the right to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill
vacancies on our board of directors;
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only our chairman of the board, our chief executive officer, our president or a majority of our board of directors are authorized to call a special meeting of stockholders;
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certain litigation against us can only be brought in Delaware;
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our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without the approval of the holders of common stock; and
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advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
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