S-1 1 ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on December 18, 2009

Registration No. 333-            

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

 

MERU NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware  

3576

  26-0049840

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

894 Ross Drive

Sunnyvale, California 94089

(408) 215-5300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Ihab Abu-Hakima

President and Chief Executive Officer

894 Ross Drive

Sunnyvale, California 94089

(408) 215-5300

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Stanley F. Pierson, Esq.   Jeffery D. Saper, Esq.
James J. Masetti, Esq.   Rezwan D. Pavri, Esq.
Heidi E. Mayon, Esq.   Wilson Sonsini Goodrich & Rosati
Pillsbury Winthrop Shaw Pittman LLP   Professional Corporation
2475 Hanover Street   650 Page Mill Road
Palo Alto, California 94304   Palo Alto, California 94304

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

  Accelerated filer  ¨   Non-accelerated filer  x   Smaller reporting company  ¨
    (Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of

securities to be registered

 

Proposed maximum

aggregate offering
price (1)(2)

  Amount of
registration fee

Common Stock, $0.0005 par value per share

  $86,250,000   $4,813
 
 
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
(2) Includes shares that the underwriters have the option to purchase, if any.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated December 18, 2009

PROSPECTUS

             Shares

LOGO

Common Stock

 

 

This is Meru Networks, Inc.’s initial public offering. We are selling              shares of our common stock and the selling stockholders are selling              shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.

We expect the public offering price to be between $              and $              per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol ‘‘MERU.’’

Investing in the common stock involves risks that are described in the ‘‘Risk Factors’’ section beginning on page 9 of this prospectus.

 

 

 

      

Per Share

    

Total

Public offering price

     $                   $                         

Underwriting discount

     $        $  

Proceeds, before expenses, to us

     $        $  

Proceeds, before expenses, to the selling stockholders

     $        $  

The underwriters may also purchase up to an additional              shares from us, and up to an additional                      shares from the selling stockholders, at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                             .

 

 

BofA Merrill Lynch

Baird   Cowen and Company
JMP Securities   ThinkEquity LLC

 

 

The date of this prospectus is                             , 2010.


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LOGO


Table of Contents

LOGO


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LOGO


Table of Contents

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

   1

THE OFFERING

   6

SUMMARY CONSOLIDATED FINANCIAL DATA

   7

RISK FACTORS

   9

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

   30

USE OF PROCEEDS

   31

DIVIDEND POLICY

   31

CAPITALIZATION

   32

DILUTION

   34

SELECTED CONSOLIDATED FINANCIAL DATA

   36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   38

BUSINESS

   62

MANAGEMENT

   76

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   88

PRINCIPAL AND SELLING STOCKHOLDERS

   91

DESCRIPTION OF CAPITAL STOCK

   94

CERTAIN MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS TO NON-U.S. HOLDERS

   97

SHARES ELIGIBLE FOR FUTURE SALE

   100

UNDERWRITING

   102

LEGAL MATTERS

   107

EXPERTS

   107

WHERE YOU CAN FIND ADDITIONAL INFORMATION

   107

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   F-2

You should rely only on the information contained in this prospectus and any free writing prospectus we may specifically authorize to be delivered or made available to you. We have not, and the selling stockholders and the underwriters have not, authorized anyone to provide you with additional or different information. The information contained in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

This prospectus is an offer to sell only the shares offered hereby but only under circumstances and in jurisdictions where it is lawful to do so.

Until                     , 2010 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including our consolidated financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included elsewhere in this prospectus. Unless the context otherwise requires, in this prospectus, “Meru,” “we,” “us,” “our” and the “Company” refer to Meru Networks, Inc. and, where appropriate, its subsidiaries.

Overview

We provide a virtualized wireless LAN solution that cost-effectively optimizes the enterprise network to deliver the performance, reliability, predictability and operational simplicity of a wired network, with the advantages of mobility. We enable enterprises to migrate their business-critical applications from wired networks to wireless networks, and become what we refer to as All-Wireless Enterprises.

Our solution represents an innovative approach to wireless networking that utilizes virtualization technology to create an intelligent and self-monitoring wireless network. Our solution is designed to provide users with reliable access to their business-critical applications, improved performance of their applications, and an enhanced ability to run converged applications, such as voice, video and data, over a wireless network. Enterprises deploying our virtualized wireless LAN solution are able to reduce infrastructure costs, lower operational expenses and efficiently scale the capacity and coverage of their wireless networks.

We believe that other widely-deployed wireless networking solutions struggle to deliver the performance, reliability and predictability of wired networks at scale, and to maximize the cost efficiencies that wireless networking has the potential to provide. Other wireless networking solutions share similar legacy networking architectures, which involve setting up a wireless network coverage area made up of small, independent cells of different radio frequencies emitted by uncoordinated access points. Our solution represents a fundamentally different approach to wireless networking by combining wireless resources into one virtual, seamless pool and then partitioning this virtual pool to match device and application requirements.

Our solution overcomes the limitations of legacy wireless networking architectures that cause enterprises to maintain two separate access networks: a wired network for business-critical applications, and a wireless network for casual use. Enterprises are now seeking to become All-Wireless Enterprises in order to improve business processes, increase workforce efficiency and respond to the evolving requirements of users. The need to transition to an All-Wireless Enterprise is becoming more urgent as wireless devices increasingly become the means by which users access applications. Our virtualized wireless LAN solution enables organizations to become All-Wireless Enterprises.

We sell a virtualized wireless LAN solution that is built around our System Director™ Operating System, which runs on our controllers and access points. We offer additional products designed to deliver centralized network management, predictive and proactive diagnostics, as well as enhanced security. We also offer customer support and services to address the needs of our customers. We sell our products and services primarily through value-added resellers, or VARs, and distributors. Our solution has been deployed by over 2,700 customers in 36 countries worldwide in many markets, including education, finance, government, healthcare, hospitality, manufacturing, retail, technology, telecom, transportation and utilities.

As more enterprises seek to leverage the benefits of an all-wireless networking infrastructure, we intend to capitalize on the significant opportunity presented by both the wireless networking market and the wired

 

 

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networking market, which is commonly referred to as the network switching market. The enterprise market for wireless LAN equipment is expected to grow from $1.9 billion in 2009 to $3.6 billion in 2013,1 and the network switching market is expected to reach $16.0 billion in 2013.2

Our revenues have grown from $1.1 million in 2005 to $54.7 million in 2008. Our revenues for the nine months ended September 30, 2009 were $50.2 million. We have incurred losses since inception as we grew our business and invested in our research and development, sales and marketing and administrative functions. As of September 30, 2009, we had an accumulated deficit of $150.7 million.

Industry Background

Growing Demand for Wireless Networks

As enterprises have deployed wireless networks, many have maintained both a wired and a wireless network, because wireless networks, while providing convenience, have generally not been able to deliver the performance, reliability and predictability that enterprises require for their business-critical applications. The need to maintain two networks has resulted in significant complexity and high cost. We believe that enterprises will increasingly seek to leverage the benefits of an all-wireless network infrastructure as a result of the following main drivers:

 

   

Growing Number of Wireless Devices and Increased User Expectations – The number of Wi-Fi-enabled devices used in enterprise wireless LANs is expected to grow from 115 million in 2009 to 432 million by 2013.3 These wireless devices are increasingly being used to access business-critical applications; and users increasingly expect performance and reliability from their wireless networks.

 

   

Drive for Greater Business Process Efficiency – Enterprises increasingly view wireless networks as a means to deliver better service to their customers and increase the productivity of their workforces. As a result, enterprises are seeking wireless networks that can deliver business-critical applications with the performance, reliability and predictability of wired networks.

 

   

Rationalization of IT Budgets – The combination of increasing pressure on IT departments to operate more efficiently and the growing demands on IT departments to improve network performance and support is causing enterprises to seek cost-effective, high-performance and reliable all-wireless networking solutions.

 

   

Catalyst Provided by a New Wireless Communication Standard – The performance capabilities of the 802.11n standard, a recently ratified wireless communication standard, are significantly superior to those of previous wireless standards, and can exceed the performance capabilities of widely-deployed wired access networks. Enterprises are increasingly realizing that wireless networks designed to optimize the 802.11n standard can deliver the capacity and performance to support their business-critical applications, and are seeking to transform themselves into All-Wireless Enterprises.

 

1. Gartner, Forecast: Enterprise Wireless LAN Equipment, Worldwide, 2005-2013, 4Q09 Update, December 2009.
2. Gartner, Forecast: Enterprise Ethernet Switches, Worldwide, 2007-2013, 4Q09 Update, December 2009.
3 Gartner, Dataquest Insight: Factors Driving the Worldwide Enterprise Wireless LAN Market, 2005-2013, June 2009.

 

 

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The Limitations of Legacy Wireless Networking Architectures

We believe that other widely-deployed wireless networking solutions are fundamentally similar to one another in their architectures, and that they struggle to deliver the performance, reliability and predictability of wired networks at scale, and to maximize the cost efficiencies that wireless networking has the potential to provide. Other wireless networking solutions are based on architectures that do not coordinate and do not efficiently optimize the resources of the wireless network, and we believe that they are not adequate to support latency-sensitive applications in an environment with a high density of wireless devices.

As a result of the limitations inherent to legacy wireless networking architectures, we believe enterprises have retained their wired networks for business-critical applications, and have deployed these other wireless networking solutions to provide users with some of the convenience of wireless communications. Consequently, users and enterprises are not able to realize the full benefits that a wireless network can deliver. Users may experience unreliable access to applications, inadequate network performance and suboptimal delivery of converged applications, such as voice, video and data. Enterprises struggle to realize the full benefits available from enabling users to access business-critical applications on wireless devices, incur high infrastructure costs and operational expenses, and experience challenges in attempting to scale the capacity and coverage of the wireless network.

Our Solution

Our virtualized wireless LAN solution is designed to cost-effectively meet the increasing demands of users and enterprises for a wireless network that delivers the performance, reliability, predictability and operational simplicity of a wired network, with the advantages of mobility. Our solution combines wireless resources into one virtual, seamless pool and partitions this virtual pool to match device and application requirements. Our use of virtualization technology for wireless networking has enabled us to deliver a solution that optimizes the enterprise network. In addition, our virtualized wireless LAN solution enables the network to monitor itself and proactively diagnoses issues affecting wireless network service. Our solution also provides comprehensive and centralized wireless management.

Our virtualized wireless LAN solution is designed to deliver the following benefits to users:

 

   

Reliable Access to Applications – Through our virtualization process, our solution is capable of ensuring that each wireless device, whether stationary or in motion, is optimally connected to the network, and provides a reliable experience for users regardless of the device or application they are using.

 

   

High Performance – Our solution is designed specifically to leverage the capabilities of the recently ratified 802.11n wireless communication standard; and the performance of wireless networks using our solution can surpass the performance delivered by widely-deployed wired access networks.

 

   

Enhanced Ability to Run Converged Applications – The performance, reliability and predictability of our solution enable a wired-like experience that allows users to access their business-critical applications, including voice, video and data, on their wireless devices.

Further, enterprises can realize the following benefits by deploying our solution:

 

   

Ability to Maximize the Benefits of Business-Critical Applications – We deliver a reliable and predictable solution that enables enterprises to run their business-critical applications over a wireless network.

 

 

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Reduced Infrastructure Costs – Our solution enables enterprises to deploy a wireless network without expensive and detailed site surveys and configuration efforts, and typically requires fewer access points than other wireless networking solutions. This often results in significantly reduced capital expenditures for their network infrastructures.

 

   

Lower Operational Expenses – Our solution reduces the need to maintain and manage a wired network and the need to reconfigure access points on an ongoing basis. Our solution also typically decreases the number of access points required for a wireless network compared to other wireless networking solutions and reduces the amount of power consumed by the wireless network. With our solution, unlike other wireless networking solutions, there is typically no need to re-survey an enterprise’s facilities or physically redeploy existing installed access points in order to respond to changes in the workplace environment.

 

   

Efficient Scalability – In order to expand wireless coverage areas, an enterprise deploying our solution can add access points as necessary. For increases in capacity, an enterprise operating our solution can easily add another layer of access points. With our solution, unlike with other wireless networking solutions, there is typically no need to re-survey an enterprise’s facilities or physically redeploy existing installed access points in order to expand the wireless network’s capacity or increase the network’s coverage.

Our Growth Strategy

Our goal is to become the leading provider of wireless networking solutions for the enterprise. Key elements of our strategy include:

 

   

increasing the awareness of our brand, our solution and the strategic benefits of becoming an All-Wireless Enterprise;

 

   

expanding the adoption of our solution within the markets we currently target and across new markets;

 

   

expanding and leveraging our relationships with channel partners to extend our market penetration and geographic reach;

 

   

extending our position as a leader in wireless networking through continued technological innovation; and

 

   

enhancing our solution to address our customers’ evolving application and deployment requirements.

Risks Associated With Our Business

Our business is subject to numerous risks. You should carefully read “Risk Factors” beginning on page 9 for an explanation of these risks before investing in our common stock. These risks include, among others, that:

 

   

we have a limited operating history, which makes it difficult to plan for and manage our operations and predict our future operating results;

 

   

our revenues and operating results are likely to fluctuate;

 

 

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the wireless networking market is a rapidly evolving market, and we may not be able to respond quickly and effectively to changing market requirements;

 

   

we may not be able to increase market awareness of our brand and our solution or expand our sales channels;

 

   

we compete in highly competitive markets, and a number of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we; and

 

   

we may be unable to protect our intellectual property rights or we may encounter claims by others that we infringe their intellectual property.

If we are unable to adequately address these and other risks we face, our business, financial condition, results of operations and prospects may be materially and adversely affected.

Corporate Information

We were incorporated in Delaware in January 2002. Our principal executive offices are located at 894 Ross Drive, Sunnyvale, California, 94089, U.S.A., and our telephone number is 1-408-215-5300. Our website address is www.merunetworks.com. The information on or accessible through our website is not part of this prospectus.

Meru Networks is our registered trademark in the U.S. This prospectus also refers to the products or services of other companies by the trademarks and trade names used and owned by those companies.

The Gartner Reports described herein (the “Gartner Reports”), represent(s) data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice.

 

 

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THE OFFERING

 

Common stock offered by us

             shares

 

Common stock offered by the selling stockholders

             shares

 

Common stock to be outstanding after this offering

             shares

 

Overallotment option

The underwriters have an option to purchase a maximum of              additional shares of common stock to cover overallotments. Of the shares subject to the option,              shares would be sold by us, and              shares would be sold by the selling stockholders. The underwriters could exercise this option at any time within 30 days from the date of the prospectus.

 

Use of proceeds

We intend to use the net proceeds received by us from this offering for working capital and general corporate purposes, including further expansion of our sales and marketing efforts, continued investments in research and development and for capital expenditures. In addition, we may use a portion of the proceeds of this offering for acquisitions of complementary businesses, technologies or other assets. However, we do not have agreements for any material acquisitions at this time. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

 

Proposed New York Stock Exchange symbol

“MERU”

The number of shares of common stock that will be outstanding after this offering is based on the number of shares outstanding as of September 30, 2009, and excludes:

 

   

30,065,842 shares of common stock issuable upon the exercise of options outstanding, at a weighted average exercise price of $0.45 per share;

 

   

53,097,374 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock, at a weighted average exercise price of $0.82 per share;

 

   

6,313,302 shares of common stock, on an as-converted basis assuming the conversion immediately prior to the completion of this offering, issuable upon the exercise of outstanding warrants to purchase convertible preferred stock, at a weighted average exercise price of $0.70 per share; and

 

   

1,358,307 shares of common stock reserved for future issuance under our 2002 Stock Incentive Plan.

Unless otherwise indicated, all information in this prospectus assumes:

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 141,832,095 shares of common stock, on an as-converted basis, effective upon the completion of this offering; and

 

   

no exercise by the underwriters of their overallotment option to purchase up to              additional shares of common stock from us.

In addition, unless otherwise indicated, all share numbers presented in this prospectus do not give effect to the 1-for-     reverse stock split that will be effected prior to the completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

We have derived the summary consolidated statement of operations data for 2006, 2007 and 2008 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statement of operations data for the nine month periods ended September 30, 2008 and 2009 and the consolidated balance sheet data as of September 30, 2009 from our unaudited consolidated financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2006     2007     2008     2008     2009  
    (in thousands, except share and per share amounts)  
                      (Unaudited)  

Consolidated Statement of Operations Data:

         

Revenues:

         

Products

  $      $ 4,981      $ 29,532      $ 21,092      $ 31,809   

Support and services

           401        1,300        669        3,907   

Ratable products and services

    4,382        10,578        23,820        15,767        14,526   
                                       

Total revenues

    4,382        15,960        54,652        37,528        50,242   
                                       

Costs of revenues:

         

Products

           3,996        15,318        11,116        12,252   

Support and services

           57        123        75        595   

Ratable products and services

    6,619        10,593        13,376        9,973        7,261   
                                       

Total costs of revenues

    6,619        14,646        28,817        21,164        20,108   
                                       

Gross profit (loss)

    (2,237     1,314        25,835        16,364        30,134   
                                       

Operating expenses:

         

Research and development

    8,924        12,052        12,527        9,922        7,086   

Sales and marketing

    15,465        25,687        30,209        23,763        18,723   

General and administrative

    2,628        4,850        7,386        5,627        5,318   
                                       

Total operating expenses

    27,017        42,589        50,122        39,312        31,127   
                                       

Loss from operations

    (29,254     (41,275     (24,287     (22,948     (993

Interest expense, net

    (56     (39     (2,365     (1,574     (1,512

Other income (expense), net

    (86     178        108        141        (6,777
                                       

Loss before provision for income taxes

    (29,396     (41,136     (26,544     (24,381     (9,282

Provision for income taxes

    45        60        209        157        147   
                                       

Net loss

    (29,441     (41,196     (26,753     (24,538     (9,429

Accretion on convertible preferred stock

    (45     (66     (68     (51     221   

Cumulative dividend reversal

    329                               
                                       

Net loss attributable to common stockholders

  $ (29,157   $ (41,262   $ (26,821   $ (24,589   $ (9,208
                                       

Net loss per share of common stock, basic and diluted (1)

  $ (24.00   $ (18.53   $ (6.17   $ (5.84   $ (1.88
                                       

Shares used in computing net loss per share of common stock, basic and diluted (1)

    1,214,645        2,226,978        4,344,058        4,208,883        4,889,783   
                                       

Pro forma net loss per share of common stock, basic and diluted (1)

      $ (0.18     $ (0.07
                     

Shares used in computing pro forma net loss per share of common stock, basic and diluted (1)

        146,176,153          146,721,878   
                     

 

 

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     As of September 30, 2009
     Actual     Pro Forma (2)     Pro Forma as
Adjusted (3) (4)
           (in thousands)      
           (Unaudited)      

Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 23,172      $ 23,172      $             

Working capital (deficit)

     (13,917     (12,713  

Total assets

     42,839        42,839     

Total debt

     13,631        13,631     

Warrant liability

     11,292        10,088     

Convertible preferred stock

     125,255            

Total stockholders’ equity (deficit)

   $ (148,096   $ (21,637   $  

 

(1) Please see Note 1 to our audited consolidated financial statements for an explanation of the calculations of our basic and diluted net loss per share of common stock and pro forma net loss per share of common stock.

 

(2) The pro forma column in the consolidated balance sheet data table above reflects the conversion of all outstanding shares of our convertible preferred stock into common stock immediately prior to the completion of this offering and the resulting reclassification of the portion of the warrant liability related to our convertible preferred stock warrants to additional paid-in capital.

 

(3) The pro forma as adjusted column in the consolidated balance sheet data table above reflects (i) the conversion of all outstanding shares of our convertible preferred stock into common stock immediately prior to the completion of this offering and the resulting reclassification of the portion of the warrant liability related to certain of our convertible preferred stock warrants to additional paid-in capital and (ii) the receipt of the estimated net proceeds from the sale of the shares of common stock offered by us in this offering.

 

(4) A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1.0 million shares in the number of shares of common stock offered by us would increase each of cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $             million. Similarly, each decrease of 1.0 million shares in the number of shares offered by us would decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ equity by approximately $             million. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. If any of the following risks is realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Related to our Business and Industry

We have a limited operating history, which makes it difficult to predict our future operating results.

We were incorporated in January 2002 and began commercial shipments of our products in December 2003. As a result of our limited operating history, it is very difficult to forecast our future operating results. We face challenges in our business and financial planning as a result of the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to more mature companies with longer operating histories. These uncertainties make it difficult to predict our future operating results. If the assumptions we use to plan our business are incorrect or change in reaction to a change in our markets, our financial results could suffer.

We have incurred significant losses since inception, and could continue to incur losses in the future.

We have incurred significant losses since our inception, including net losses of $29.4 million, $41.2 million, $26.8 million and $9.4 million during 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively. As of September 30, 2009, we had an accumulated deficit of $150.7 million. These losses have resulted principally from costs incurred in our research and development programs and sales and marketing programs. We expect to incur operating losses in the future as a result of the expenses associated with the continued development and expansion of our business, including expenditures to hire additional personnel for sales and marketing. Additionally, following the completion of this offering, we expect that our general and administrative expenses will increase due to the additional operational and reporting costs associated with being a public company. We may also increase our research and development expenses. Our ability to attain profitability in the future will be affected by, among other things, our ability to execute on our business strategy, the continued acceptance of our products, the timing and size of orders, the average selling prices of our products, the costs of our products, and the extent that we invest in our sales and marketing, research and development, and general and administrative resources. Even if we do achieve profitability, we may not be able to sustain or increase our profitability. As a result, our business could be harmed and our stock price could decline.

Fluctuations in our revenues and operating results could cause the market price of our common stock to decline.

Our revenues and operating results are difficult to predict, even in the near term. Our historical operating results have in the past fluctuated significantly, and may continue to fluctuate in the future. It is possible that our operating results in some periods may be below market expectations. This would likely cause the market price of our common stock to decline. Our operating results are affected by a number of factors, including:

 

   

our sales volume;

 

   

fluctuations in demand for our products and services, including seasonal variations;

 

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average selling prices and the potential for increased discounting of products by us or our competitors;

 

   

the timing of revenue recognition in any given period as a result of revenue recognition guidance under the accounting principles generally accepted in the U.S.;

 

   

our ability to forecast demand and manage lead times for the manufacturing of our products;

 

   

shortages in the availability of components used in our products;

 

   

our ability to control costs, including our operating expenses and the costs of the components we purchase;

 

   

our ability to develop and maintain relationships with our channel partners;

 

   

our ability to develop and introduce new products and product enhancements that achieve market acceptance;

 

   

any significant changes in the competitive dynamics of our markets, including new entrants, or further consolidation;

 

 

   

reductions in customers’ budgets for information technology purchases and delays in their purchasing cycles;

 

   

changes in the regulatory environment for the certification and sale of our products;

 

   

claims of intellectual property infringement against us and any resulting temporary or permanent injunction prohibiting us from selling our products or the requirement to pay damages or expenses associated with any such claims; and

 

   

general economic conditions in our domestic and international markets.

Further, as a result of customer buying patterns, historically we have received a substantial portion of a quarter’s sales orders and generated a substantial portion of a quarter’s revenues during the last two weeks of the quarter. If expected revenues at the end of any quarter are delayed for any reason, including the failure of anticipated purchase orders to materialize, our inability to deliver products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our failure to manage inventory properly in a way to meet demand, or our inability to release new products on schedule, our revenues for that quarter could be materially and adversely affected and could fall below market expectations.

As a result of the above factors, or other factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.

We compete in a rapidly evolving market, and the failure to respond quickly and effectively to changing market requirements could cause our business and operating results to decline.

The wireless networking market is characterized by rapidly changing technology, changing customer needs, evolving industry standards and frequent introductions of new products and services. In order to deliver a competitive wireless LAN, our virtualized wireless LAN solution must be capable of operating with an ever increasing array of wireless devices and an increasingly complex network environment. In addition, our products

 

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are designed to be compatible with industry standards for communications over wireless networks. As new wireless devices are introduced and standards in the wireless networking market evolve, we may be required to modify our products and services to make them compatible with these new products and standards. Likewise, if our competitors introduce new products and services that compete with ours, we may be required to reposition our product and service offerings or introduce new products and services in response to such competitive pressure. We may not be successful in modifying our current products or introducing new ones in a timely or appropriately responsive manner, or at all. If we fail to address these changes successfully, our business and operating results could be materially harmed.

We must increase market awareness of our brand and our solution and develop and expand our sales channels, and if we are unsuccessful, our business, financial condition and operating results could be adversely affected.

We must improve the market awareness of our brand and solution and expand our relationships with our channel partners in order to increase our revenues. We intend to continue to add personnel and to expend resources in our sales and marketing functions as we focus on expanding awareness of our brand and our solution, capitalizing on our market opportunities and increasing our sales. Further, we believe that we must continue to develop our relationships with new and existing channel partners to effectively and efficiently extend our geographic reach and market penetration. Our efforts to improve sales of our solution could result in a material increase in our sales and marketing expense and general and administrative expense, and there can be no assurance that such efforts will be successful. If we are unable to significantly increase the awareness of our brand and solution, expand our relationships with channel partners, or effectively manage the costs associated with these efforts, our business, financial condition and results of operations could be materially and adversely affected.

If the demand for wireless networks does not continue to develop as we anticipate, demand for our virtualized wireless LAN solution may not grow as we expect.

The success of our business depends on enterprises continuing to adopt wireless networks for use with their business-critical applications. The market for enterprise-wide wireless networks has only developed in recent years as enterprises have deployed wireless networks to take advantage of the convenient access to the network that they provide. As businesses seek to run their business-critical applications on these wireless networks, they recognize the limitations of other wireless solutions and the need for our virtualized wireless LAN solution. Ultimately, however, enterprises may not elect to deploy wireless networks and may not elect to run their business-critical applications on a wireless network. Accordingly, demand for our solution may not continue to develop as we anticipate, or at all.

We compete in highly competitive markets, and competitive pressures from existing and new companies may harm our business and operating results.

The markets in which we compete are highly competitive and influenced by the following competitive factors:

 

   

performance, reliability and predictability of wireless networking solutions;

 

   

initial price and total cost of ownership;

 

   

comprehensiveness of the solution;

 

   

ability to provide quality customer service and support;

 

   

interoperability with other devices;

 

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scalability of solution;

 

   

ability to provide secure mobile access to the network; and

 

   

ability to bundle wireless products with other networking offerings.

We expect competition to intensify in the future as other companies introduce new products into our markets. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results or financial condition. If we do not keep pace with product and technology advances, there could be a material and adverse effect on our competitive position, revenues and prospects for growth.

A number of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the promotion and sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisitions or other opportunities more readily and develop and expand their product and service offerings more quickly than we. Our competitors with larger volumes of orders and more diverse product offerings may require our VARs and distributors to stop selling our products, or to reduce their efforts to sell our products, which could harm our business and results of operations. In addition, certain of our competitors offer, or may in the future offer, more diverse product offerings and may be able to bundle wireless products with other networking offerings. Potential customers may prefer to purchase all of their equipment from a single provider, or may prefer to purchase wireless networking products from an existing supplier rather than a new supplier, regardless of product performance or features.

We expect increased competition if our market continues to expand. Conditions in our markets could change rapidly and significantly as a result of technological advancements or other factors. In addition, current or potential competitors may be acquired by third parties with greater available resources, such as Motorola’s acquisition of Symbol Technologies and Hewlett-Packard’s acquisition of Colubris Networks. As a result of such acquisitions, our current or potential competitors might take advantage of the greater resources of the larger organization to compete with us. Continued industry consolidation may adversely impact customers’ perceptions of the viability of smaller and even medium-sized wireless networking companies and, consequently, customers’ willingness to purchase from such companies.

Claims by others that we infringe their proprietary technology could harm our business.

Our industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. Third parties have asserted and may in the future assert claims of infringement of intellectual property rights against us or against our customers or channel partners for which we may be liable. Much of our business relies on, and many of our products incorporate, proprietary technologies of third parties, and we may not be able to obtain, or continue to obtain, licenses from such third parties on reasonable terms. As our business expands and the number of products and competitors in our market increases and overlaps occur, we expect that infringement claims may increase in number and significance. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from distributing certain products or performing certain services. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially acceptable terms or at all. Alternatively, we may be required to develop non-infringing technology, which could require significant effort and expense and may ultimately not be

 

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successful. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, or require us to enter into royalty or licensing agreements.

If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.

We depend on our ability to protect our proprietary technology. We protect our proprietary information and technology through licensing agreements, nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the U.S. and similar laws in other countries. These protections may not be available in all cases or may be inadequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. For example, the laws of India, where we conduct significant research and development activities, do not protect our proprietary rights to the same extent as the laws of the U.S. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. Our competitors may independently develop technologies that are substantially equivalent, or superior, to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired.

To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement or misappropriation of our proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and management’s attention, and there can be no assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating our intellectual property.

We have a limited patent portfolio. To date, we have not applied for patent protection outside of the U.S. While we plan to protect our intellectual property with, among other things, patent protection, there can be no assurance that:

 

   

current or future U.S. or future foreign patent applications will be approved;

 

   

our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third parties;

 

   

we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate;

 

   

the patents of others will not have an adverse effect on our ability to do business; or

 

   

others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.

The failure to obtain patents with claims of a scope necessary to cover our technology, or the invalidation or our patents, or our inability to protect any of our intellectual property, may weaken our competitive position and may materially and adversely affect our business and results of operations.

Our sales cycles can be long and unpredictable. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.

The timing of our sales is difficult to predict. Our sales efforts involve educating our customers about the use and benefits of our virtualized wireless LAN solution, including the technical capabilities of our products

 

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and the potential cost savings achievable by organizations deploying our solution. Customers typically undertake a significant evaluation process, which frequently involves not only our products but also those of our competitors and can result in a lengthy sales cycle. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. In addition, purchases of our virtualized wireless LAN solution are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our operating results could be materially and adversely affected.

The average sales prices of our products may decrease.

The average sales prices for our products may decline for a variety of reasons, including competitive pricing pressures, a change in our mix of products, anticipation of the introduction of new products or promotional programs. The markets in which we compete are highly competitive and we expect this competition to increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products. For example, some of our large competitors who provide network switching equipment may offer a wireless overlay network at very low prices or on a bundled basis. Furthermore, average sales prices for our products have typically decreased over product life cycles. A decline in our average selling prices in excess of our expectations may harm our operating results.

We expect gross margin to vary over time, and our level of gross margin may not be sustainable.

Our level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:

 

   

increased price competition;

 

   

changes in customer or product and service mix;

 

   

introduction of new products;

 

   

our ability to reduce production costs;

 

   

increases in material or labor costs;

 

   

excess inventory, inventory holding charges and obsolescence charges;

 

   

the timing of revenue recognition and revenue deferrals;

 

   

changes in our distribution channels or with our channel sales partners;

 

   

increased warranty costs; and

 

   

inbound shipping charges.

As a result of any of these factors, or other factors, our gross margin may be adversely affected, which in turn would harm our operating results.

We rely on channel partners to generate a substantial majority of our revenues. If our partners fail to perform, our operating results could be materially and adversely affected.

A substantial majority of our revenues is generated through sales by our channel partners, which are distributors and value-added resellers, or VARs. To the extent our channel partners are unsuccessful in selling

 

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our products, or we are unable to obtain and retain a sufficient number of high-quality channel partners, our operating results could be materially and adversely affected.

Our channel partners may be unsuccessful in marketing, selling and supporting our products and services. They may also market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of such products. They may have incentives to promote our competitors’ products in lieu of our products, particularly for our competitors with larger volumes of orders, more diverse product offerings and a longer relationship with our VARs or distributors. In these cases, our channel partners may stop selling our products completely. We cannot assure you that we will retain these channel partners or that we will be able to secure additional or replacement partners, and the loss of one or more of our significant channel partners could materially and adversely harm our operating results. New sales channel partners may take several months or more to achieve significant sales. Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of our products or services to customers, violate laws or our corporate policies. If we fail to effectively manage our existing or future sales channel partners, our business would be seriously harmed.

We base our inventory purchase decision on our forecasts of customers’ demand, and if our forecasts are inaccurate, our operating results could be materially harmed.

We place orders with our manufacturers based on our forecasts of our customers’ demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. When demand for our products increases significantly, we may not be able to meet demand on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs in order to rush the manufacture and delivery of additional inventory. If we underestimate customer demand, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, we may purchase more inventory than we are able to sell when we expect to or at all. As a result, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our costs of revenues and reduce our liquidity. Our failure to accurately manage inventory against demand would adversely affect our operating results.

Our virtualized wireless LAN solution incorporates complex technology and may contain defects or errors, which could cause harm to our reputation and adversely affect our business.

Our virtualized wireless LAN solution incorporates complex technology and must operate with a significant number and types of wireless devices, which attempt to run new and complex applications in a variety of environments that utilize different wireless communication industry standards. Our products have contained and may in the future contain defects or errors. In some cases, these defects or errors have delayed the introduction of our new products. Some errors in our products may only be discovered after a product has been installed and used by customers. These issues are most prevalent when new products are introduced into the market. Any errors or defects discovered in our products, after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers, damage to our brand and reputation, and increased service and warranty cost, any of which could materially and adversely affect our business and operating results.

We could face claims for product liability, tort or breach of warranty, including claims relating to changes to our products made by our channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products.

 

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If we fail to develop new products and enhancements to our virtualized wireless LAN solution, we may not be able to remain competitive.

We must develop new products and continue to enhance our virtualized wireless LAN solution to meet rapidly evolving customer requirements. If we fail to develop new products or enhancements to our existing products, our business could be adversely affected, especially if our competitors are able to introduce products with enhanced functionality. In addition, as new mobile applications are introduced, our success may depend on our ability to provide a solution that supports these applications.

We design our products to comply with standards established by various standards bodies, such as the Institute of Electrical and Electronics Engineers, Inc., or IEEE. As new industry standards emerge, we could be required to invest a substantial amount of resources to develop new products that comply with these standards. For example, we devoted a substantial amount of our research and development resources to design a virtualized wireless LAN solution that could optimize the performance allowed by the recently ratified 802.11n standard. If we are not able to adapt to new or changing standards that are ratified by the IEEE or other standards bodies, our ability to sell our products may be adversely affected and we may not realize the benefits of our research and development efforts.

Our research and development efforts of new products and technologies are time-consuming, costly and complex. If we expend a significant amount of resources on research and development and our efforts do not lead to the successful introduction of products that are competitive in the marketplace, this could materially and adversely affect our business and operating results.

Although certain technical problems experienced by users may not be caused by our virtualized wireless LAN solution, our business and reputation may be harmed if users perceive our solution as the cause of a slow or unreliable network connection.

Our solution has been deployed in many different environments and is capable of providing wireless access to many different types of wireless devices operating a variety of applications. The ability of our virtualized wireless LAN solution to operate effectively can be negatively impacted by many different elements unrelated to our products. For example, a user’s experience may suffer from an incorrect setting in a wireless device, which is not a problem caused by the network. Although certain technical problems experienced by users may not be caused by our solution, users often perceive the underlying cause to be a result of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation.

Our international sales and operations subject us to additional risks that may materially and adversely affect our business and operating results.

We derive a significant portion of our revenues from customers outside the U.S. In 2008 and the nine months ended September 30, 2009, 29% and 24% of our revenues, respectively, were derived from customers outside of the U.S. While our international sales have typically been denominated in U.S. dollars, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country.

In addition, we have a research and development facility located in India, and we expect to expand our offshore development efforts and general and administrative functions within India and possibly in other countries. We have sales and support personnel in numerous countries worldwide. We expect to continue to add personnel in additional countries.

Our international operations subject us to a variety of risks, including:

 

   

the difficulty of managing and staffing international offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

 

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difficulties in enforcing contracts and collecting accounts receivable, and longer payment cycles, especially in emerging markets;

 

   

tariffs and trade barriers, export regulations and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;

 

   

increased exposure to foreign currency exchange rate risk;

 

   

heightened exposure to political instability, war and terrorism;

 

   

reduced protection for intellectual property rights in some countries;

 

   

the need to localize our products for international customers; and

 

   

increased cost of terminating employees in some countries.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.

Another significant risk resulting from our international operations is compliance with the U.S. Foreign Corrupt Practices Act, or FCPA. In many foreign countries, particularly in those with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S. laws and regulations. Although we have implemented limited procedures designed to ensure compliance with the FCPA and similar laws, there can be no assurance that all of our employees, and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies. Any such violation could have a material and adverse effect on our business.

Our use of and reliance on research and development resources in India may expose us to unanticipated costs or events.

We have a significant research and development center in Bangalore, India and, in recent years, have increased headcount and development activity at this facility. There is no assurance that our reliance upon research and development resources in India will enable us to achieve meaningful cost reductions or greater resource efficiency. Further, our research and development efforts and other operations in India involve significant risks, including:

 

   

difficulty hiring and retaining appropriate engineering personnel due to intense competition for such resources and resulting wage inflation;

 

   

the knowledge transfer related to our technology and resulting exposure to misappropriation of intellectual property or information that is proprietary to us, our customers and other third parties;

 

   

heightened exposure to change in the economic, security and political conditions in India;

 

   

fluctuations in currency exchange rates and regulatory compliance in India; and

 

   

interruptions to our operations in India as a result of floods and other natural catastrophic events as well as manmade problems such as power disruptions or terrorism.

Difficulties resulting from the factors above and other risks related to our operations in India could expose us to increased expense, impair our development efforts and harm our competitive position.

 

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If we are unable to hire, integrate and retain qualified personnel, our business will suffer.

Our future success depends, in part, on our ability to continue to attract, integrate and retain highly skilled personnel. Our inability to attract, integrate or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. Competition for highly skilled personnel is frequently intense, especially in the locations where we have a substantial presence and need for highly-skilled personnel, including the San Francisco Bay Area and India. We may not be successful in attracting qualified personnel to fulfill our current or future needs.

In addition, several members of our management team have recently joined us. For example, our Senior Vice President of Worldwide Sales and Services joined us in September 2009, our Senior Vice President of Marketing joined us in October 2009, our General Counsel joined us in November 2009 and our Vice President of Human Resources joined us in December 2009. If we cannot effectively integrate key employees, the execution of our business strategy may be significantly delayed or may not occur.

None of our key employees has an employment agreement for a specific term, and any of our employees may terminate their employment at any time. The loss of services of key employees could significantly delay or prevent the achievement of our strategic objectives, which could adversely affect our business and operating results.

We rely on third parties to manufacture our products, and depend on them for the supply and quality of our products.

We outsource the manufacturing of our products, and are therefore subject to the risk that our third-party manufacturers do not provide our customers with the quality and performance that they expect from our products. Our orders may represent a relatively small percentage of the overall orders received by our manufacturers from their customers. As a result, fulfilling our orders may not be considered a priority in the event our manufacturers are constrained in their ability to fulfill all of their customer obligations in a timely manner. We must also accurately predict the number of products that we will require. If we overestimate our requirements, our manufacturers may assess charges, or we may incur liabilities for excess inventory, each of which could negatively affect our gross margins. Conversely, if we underestimate our requirements, our manufacturers may have inadequate materials and components required to produce our products. This could result in an interruption of the manufacturing of our products, delays in shipments and deferral or loss of revenues. Quality or performance failures of our products or changes in our manufacturers’ financial or business condition could disrupt our ability to supply quality products to our customers and thereby have a material and adverse effect on our business and operating results.

Some of the components and technologies used in our products are purchased and licensed from a single source or a limited number of sources. The loss of any of these suppliers may cause us to incur additional transition costs, result in delays in the manufacturing and delivery of our products, or cause us to carry excess or obsolete inventory and could cause us to redesign our products.

While supplies of our components are generally available from a variety of sources, we currently depend on a single source or limited number of sources for several components for our products. For example, the chipsets that we use in our products are currently available only from a limited number of sources, with whom neither we nor our manufacturers have entered into supply agreements. We have also entered into license agreements with some of our suppliers for technologies that are used in our products, and the termination of these licenses, which can generally be done on relatively short notice, could have a material adverse effect on our business. As there are no other sources identical to these components and technologies, if we lost any of these suppliers, we could be required to transition to a new supplier, which could increase our costs, result in delays in the manufacturing and delivery of our products or cause us to carry excess or obsolete inventory, and we could be required to redesign our hardware and software in order to incorporate components or technologies from alternative sources.

 

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In addition, for certain components for which there are multiple sources, we are still subject to potential price increases and limited availability due to market demand for such components. In the past, unexpected demand for communication products caused worldwide shortages of certain electronic parts. If such shortages occur in the future, our business would be adversely affected. We carry very little inventory of our products, and we and our manufacturers rely on our suppliers to deliver necessary components in a timely manner. We and our manufacturers rely on purchase orders rather than long-term contracts with these suppliers, and as a result, even if available, we or our manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable quality to build products in a timely manner and, therefore, may not be able to meet customer demands for our products, which would have a material and adverse effect on our business, operating results and financial condition.

We rely on a third party for the fulfillment of our customer orders, and the failure of this third party to perform could have a material adverse effect upon our reputation and our ability to distribute our products, which will cause a material reduction in our revenues.

We use a third party to hold our inventory and fulfill our customer orders. If our third-party fulfillment agent fails to perform, our ability to deliver our products and to generate revenues would be adversely affected. The failure of our third-party logistics provider to deliver products in a timely manner could lead to the dissatisfaction of our channel partners and customers and damage our reputation, which may cause our channel partners or customers to cancel existing agreements with us and to stop doing business with us. In addition, this reliance on a third-party logistics provider also greatly reduces our ability to safeguard our inventory.

Our reliance on a third-party logistics provider to hold our inventory and fulfill our customer orders exposes us to a number of other risks which are outside our control, including:

 

   

unexpected increases in holding costs;

 

   

inability to control delivery schedules;

 

   

inability to accurately assess and report inventory levels; and

 

   

the accuracy and timeliness of fulfillment of customer orders.

If any of these risks occur, our business and operating results could be harmed.

Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services could have a material and adverse effect on our business and results of operations.

Once our products are deployed within our customers’ networks, they depend on our support organization to resolve any issues relating to our products. High-quality support is critical for the continued successful marketing and sale of our products. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, or provide effective ongoing support, it could adversely affect our ability to sell our products to existing customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality support and services could have a material and adverse effect on our business and operating results.

Our reported financial results may be adversely affected by changes in accounting principles applicable to us.

Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and other various bodies formed to promulgate and interpret

 

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appropriate accounting principles. A change in these principles or interpretations could have a significant affect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below market expectations, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation, valuation of inventory, fair value of financial instruments, allowance for doubtful accounts, and accounting for income taxes.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

Our products incorporate encryption technology and are subject to United States export controls, and may be exported outside the U.S. only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.

In addition, we have implemented limited procedures to ensure our compliance with export regulations, and if our export compliance procedures are not effective, we could be subject to civil or criminal penalties, which could lead to a material fine or sanction that could have an adverse effect on our business and results of operations.

Our use of open source software could impose limitations on our ability to commercialize our products.

Our products contain software modules licensed for use from third-party authors under open source licenses, including the GNU Public License, the GNU Lesser Public License, the Apache License and others. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the

 

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open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of product sales for us.

Although we monitor our use of open source closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business and operating results.

If we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results could be negatively affected.

Our future growth, if it occurs, could place significant demands on our management, infrastructure and other resources. We may need to increasingly rely on information technology, or IT, systems, some of which we do not currently have significant experience in operating, to help manage critical functions. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner, which could result in additional operating inefficiencies and could cause our costs to increase more than planned. If we do increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results may be negatively impacted. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenues, expenses and earnings, or to prevent certain losses. Any future growth would add complexity to our organization and require effective coordination within our organization. Failure to manage any future growth effectively could result in increased costs and harm our business.

Our revenues may decline as a result of changes in public funding of educational institutions.

We have historically generated a substantial portion of our revenues from sales to educational institutions. Public schools receive funding from local tax revenue, and from state and federal government through a variety of programs, many of which seek to assist schools located in underprivileged or rural areas. We believe that the funding for a substantial portion of our sales to educational institutions comes from federal funding, in particular the E-Rate program. E-Rate is a program of the Federal Communications Commission that subsidizes the purchase of approved telecommunications, Internet access, and internal connections costs for eligible public educational institutions. In the event that the federal government reduces the amounts dedicated to the E-Rate program in future periods, or eliminates the program completely, our sales to educational institutions may be reduced. Furthermore, if state or local funding of public education is significantly reduced because of legislative changes or by fluctuations in tax revenues due to changing economic conditions, our sales to educational institutions may be negatively impacted. Any reduction in spending on information technology systems by educational institutions would likely materially and adversely affect our business and results of operations.

 

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We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results and financial condition.

In the future we may acquire other businesses, products or technologies. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, or such acquisitions may be viewed negatively by customers, financial markets or investors. We may also face additional challenges, because acquisitions entail numerous risks, including:

 

   

difficulties in the integration of acquired operations, technologies and/or products;

 

   

unanticipated costs associated with the acquisition transaction;

 

   

the diversion of management’s attention from the regular operations of the business and the challenges of managing larger and more widespread operations;

 

   

adverse effects on new and existing business relationships with suppliers and customers;

 

   

risks associated with entering markets in which we have no or limited prior experience;

 

   

the potential loss of key employees of acquired businesses; and

 

   

delays in realizing or failure to realize the benefits of an acquisition.

Competition within our industry for acquisitions of businesses, technologies, assets and product lines has been, and may in the future continue to be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or because the target is acquired by another company. Furthermore, in the event that we are able to identify and consummate any future acquisitions, we could:

 

   

issue equity securities which would dilute current stockholders’ percentage ownership;

 

   

incur substantial debt;

 

   

incur significant acquisition-related expenses;

 

   

assume contingent liabilities; or

 

   

expend significant cash.

Our business, operating results and growth rates may be adversely affected by unfavorable economic or market conditions.

Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. Our current business and operating plan assumes that economic activity in general, and IT spending in particular, will at least remain at close to current levels. However, we cannot be assured of the level of IT spending, the deterioration of which could have a material adverse effect on our results of operations and growth rates. The purchase of our products involves a significant commitment of capital and other resources. Therefore, weak economic conditions, or a reduction in IT spending, even if economic conditions improve, would likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products and services, and reduced unit sales. For example, we believe that the recent economic downturns in the U.S. and international markets, adversely affected our business as customers and potential customers reduced costs by reducing or delaying purchasing decisions. Any unfavorable economic or market conditions could materially and adversely affect our results of operations.

 

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We are exposed to the credit risk of our VARs, distributors and customers, which could result in material losses and negatively impact our operating results.

Most of our sales are on an open credit basis, with typical payment terms of 30 days in the U.S. and, because of local customs or conditions, longer in some markets outside the U.S. If any of our VARs, distributors or customers becomes insolvent or suffers a deterioration in its financial or business condition and is unable to pay for our products, our results of operations could be harmed.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change in connection with or after this offering, our ability to utilize NOLs could be further limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. Our net operating losses may also be impaired under state law. We may not be able to utilize a material portion of the NOLs.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

Our provision for income taxes is subject to volatility and could be adversely affected by the following:

 

   

earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expiration of, or lapses in, the research and development tax credit laws;

 

   

transfer pricing adjustments including the effect of acquisitions on our intercompany research and development cost sharing arrangement and legal structure;

 

   

tax effects of nondeductible compensation;

 

   

tax costs related to intercompany realignments;

 

   

changes in accounting principles; or

 

   

changes in tax laws and regulations including possible U.S. changes to the taxation of earnings of our foreign subsidiaries, and the deductibility of expenses attributable to foreign income, or the foreign tax credit rules.

Significant judgment is required to determine the recognition and measurement attribute prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates and in some cases is wholly exempt from tax. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly

 

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assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. The outcomes from these examinations may have a material and adverse effect on our operating results and financial condition.

New regulations or changes in existing regulations related to our products may result in unanticipated costs or liabilities, which could have a material and adverse effect on our business, results of operations and future sales, and could place additional burdens on the operations of our business.

Our products are subject to governmental regulations in a variety of jurisdictions. If any of our products becomes subject to new regulations or if any of our products becomes specifically regulated by additional government entities, compliance with such regulations could become more burdensome, and there could be a material adverse effect on our business and results of operations. For example, radio emissions are subject to regulation in the U.S. and in other countries in which we do business. In the U.S., various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the Federal Communications Commission, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of radio/electromagnetic emissions standards. Member countries of the European Union have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions standards.

In addition, our wireless communication products operate through the transmission of radio signals. Currently, operation of these products in specified frequency bands does not require licensing by regulatory authorities. Regulatory changes restricting the use of frequency bands or allocating available frequencies could become more burdensome and could have a material and adverse effect on our business and results of operations.

If we fail to comply with environmental requirements, our business, financial condition, operating results and reputation could be adversely affected.

We are also subject to various environmental laws and regulations including laws governing the hazardous material content of our products and laws relating to the recycling of electrical and electronic equipment. The laws and regulations to which we are subject include the European Union, or EU, RoHS and the EU Waste Electrical and Electronic Equipment, or WEEE, Directive as well as the implementing legislation of the EU member states. Similar laws and regulations have been passed or are pending in several other countries, including in the U.S. and we are, or may in the future be, subject to these laws and regulations.

The EU RoHS and the 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. We have incurred costs to comply with these laws, including research and development costs, costs associated with assuring the supply of compliant components and costs associated with writing off noncompliant inventory. We expect to incur more of these costs in the future. With respect to the EU RoHS, we and our competitors rely on an exemption for lead in network infrastructure equipment. It is possible this exemption will be revoked in the near future. If revoked, if there are other changes to these laws (or their interpretation) or if new similar laws are passed in other jurisdictions, we may be required to reengineer our products to use components compatible with these regulations. This reengineering and component substitution could result in additional costs to us or disrupt our operations or logistics.

The EU has also adopted the WEEE Directive, which requires electronic goods producers to be responsible for the collection, recycling and treatment of such products. Although currently our EU International channel partners are responsible for the requirements of this directive as the importer of record in most of the European countries in which we sell our products, changes in interpretation of the regulations may cause us to incur costs or have additional regulatory requirements in the future to meet in order to comply with this directive, or with any similar laws adopted in other jurisdictions.

 

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Our failure to comply with these and future similar laws could result in reduced sales of our products, substantial product inventory write-offs, reputational damage, penalties and other sanctions.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as power disruptions or terrorism.

Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. We also have significant research and development activities in India and facilities in Japan, regions known for typhoons, floods and other natural disasters. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters, our other facilities or where our ODMs and channel partners are located, could have a material adverse impact on our business, operating results and financial condition. In addition, acts of terrorism could cause disruptions in our or our customers’ businesses or the economy as a whole. We also rely on information technology systems to communicate among our workforce located worldwide, and in particular, our research and development activities that are coordinated between our corporate headquarters in the San Francisco Bay Area and our facility in India. Any disruption to our internal communications, whether caused by a natural disaster or by manmade problems, such as power disruptions, could delay our research and development efforts. To the extent that such disruptions result in delays or cancellations of customer orders, our research and development efforts or the deployment of our products, our business and operating results would be materially and adversely affected.

Our future capital needs are uncertain and we may need to raise additional funds in the future.

We believe that our existing cash and cash equivalents, combined with the amounts available under our line of credit facility and the proceeds to us from sales of our common stock in this offering, will be sufficient to meet our anticipated cash requirements for at least the next 12 months. We may, however, need to raise substantial additional capital to:

 

   

expand the commercialization of our products;

 

   

fund our operations;

 

   

continue our research and development;

 

   

defend, in litigation or otherwise, any claims that we infringe third-party patents or violate other intellectual property rights;

 

   

commercialize new products; and

 

   

acquire companies and in-license products or intellectual property.

Our future funding requirements will depend on many factors, including:

 

   

market acceptance of our products;

 

   

the cost of our research and development activities;

 

   

the cost of filing and prosecuting patent applications;

 

   

the cost of defending, in litigation or otherwise, any claims that we infringe third-party patents or violate other intellectual property rights;

 

   

the cost and timing of establishing additional sales, marketing and distribution capabilities;

 

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the cost and timing of establishing additional technical support capabilities;

 

   

the effect of competing technological and market developments; and

 

   

the market for such funding requirements and overall economic conditions.

If we require additional funds in the future, such funds may not be available on acceptable terms, or at all.

We may require additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. We also may have to reduce marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.

We will incur significant increased costs as a result of operating as a public company, our management has limited experience managing a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, or NYSE, has imposed various new requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal, accounting and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

In addition, the Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and disclosure controls and procedures quarterly. In particular, for the fiscal year ending on December 31, 2011, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on, and our independent auditor to attest to, the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, that must be performed for the fiscal year ending on December 31, 2011 may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance related issues. We will evaluate the need to hire additional accounting and financial staff with appropriate public company experience and technical accounting and financial knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NYSE, the SEC or other regulatory authorities, which would require additional financial and management resources.

 

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Furthermore, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors. If we are unable to retain enough independent directors to our board of directors to meet the listing standards of the NYSE by the deadlines set by the exchange, it could affect our continued listing on the exchange.

Risks Related to this Offering and our Common Stock

Our stock price may be volatile. Further, you may not be able to resell shares of our common stock at or above the price you paid.

Prior to this offering, there has been no public market for shares of our common stock, and an active public market for these shares may not develop or be sustained after this offering. We and the representative of the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:

 

   

actual or anticipated variation in anticipated results of operations of us or our competitors;

 

   

announcements by us or our competitors of new products, new or terminated significant contracts, commercial relationships or capital commitments;

 

   

issuance of new or changed securities analysts’ reports or recommendations for our stock;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

commencement of, or our involvement in, litigation;

 

   

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

   

any major change in our management; and

 

   

general economic conditions and slow or negative growth of our markets.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts or the content and opinions

 

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included in their reports. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. Further, securities analysts may elect not to provide research coverage of our common stock after the completion of this offering, and such lack of research coverage may adversely affect the market price of our common stock.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $             in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $             per share, the mid-point of the range set forth on the cover page of this prospectus. In addition, new investors who purchase shares in this offering will contribute approximately     % of the total amount of equity capital raised by us through the date of this offering, but will only own approximately     % of the outstanding share capital and approximately     % of the voting rights. The exercise of outstanding options and warrants will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Insiders have substantial control over us and will be able to influence corporate matters.

As of September 30, 2009, our directors and executive officers and their affiliates beneficially owned, in the aggregate, 66% of our outstanding capital stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Based on shares outstanding as of September 30, 2009, upon completion of this offering, we will have outstanding a total of              shares of common stock, assuming no exercise of the underwriters’ over-allotment option. Of these shares, only the shares of common stock sold in this offering by us will be freely tradable, without restriction, in the public market immediately after the offering. Each of our directors and officers, and certain of our stockholders, has entered into lock-up agreements with the underwriters that restrict their ability to sell or transfer their shares. The lock-up agreements pertaining to this offering will expire 180 days from the date of this prospectus, although they may be extended for up to an additional 34 days under certain circumstances. Our underwriters, however, may, in their sole discretion, permit our officers, directors and other current stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements. After the lock-up agreements expire, based on shares outstanding as of September 30, 2009, up to an additional              shares of common stock will be eligible for sale in the public market,             of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act and various vesting agreements. In addition,             shares of common stock that are subject to outstanding options as of September 30, 2009 will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

 

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We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, have contractual restrictions against paying cash dividends and currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, as expected to be restated immediately prior to the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits or restricts the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

We will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our products and cause the price of our common stock to decline.

 

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “design,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

   

anticipated trends and challenges in our business and competition in the markets in which we operate;

 

   

our intent to increase awareness of our brand, our solution and the strategic benefits of becoming an All-Wireless Enterprise;

 

   

our intent to expand adoption of our solution within the markets we currently target and across new markets;

 

   

our intent to expand and leverage our relationships with channel partners to extend our market penetration and geographic reach;

 

   

our intent to extend our position as a leader in wireless networking through continued technological innovation;

 

   

our intent to enhance our solution to address our customers’ evolving application and development requirements;

 

   

expected future financial performance;

 

   

our liquidity and working capital requirements;

 

   

our expectations regarding future expenses; and

 

   

our expectations regarding the use of proceeds from this offering.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this prospectus to confirm these statements to actual results or revised expectations.

You may rely only on the information contained in this prospectus. Neither we nor any of the underwriters have authorized anyone to provide information different from that contained in this prospectus. Neither the delivery of this prospectus, nor sale of common stock, means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy shares of common stock in any circumstances under which the offer or solicitation is unlawful.

This prospectus also contains statistical data and estimates, including those relating to market size and growth rates of the markets in which we participate, that we obtained from industry publications and reports generated by Gartner and International Data Corporation, or IDC. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Although we have assessed the information in the publications and found it to be reasonable and believe the publications are reliable, we have not independently verified their data.

 

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be $             million, based on an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us by $             million, after deducting estimated underwriting discounts and commissions and estimated offering expenses, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us would increase the net proceeds to us by $             million. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would decrease the net proceeds to us by $             million. If the underwriters’ overallotment option to purchase additional shares from us is exercised in full, we estimate that we will receive net proceeds of $             million.

The principal purposes of this offering are to obtain additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets.

We cannot specify with certainty the particular uses for the net proceeds to be received by us from this offering. Accordingly, our management team will have broad discretion in using the net proceeds to be received by us from this offering. We currently intend to use the net proceeds received by us from this offering for working capital and general corporate purposes, including further expansion of our sales and marketing efforts, continued investments in research and development and for capital expenditures. Specifically, we intend to hire additional personnel to support the growth in our business. In addition, we may use a portion of the proceeds received by us from this offering for acquisitions of complementary businesses, technologies or other assets. We have no agreements with respect to any material acquisitions at this time.

Pending such uses, we plan to invest the net proceeds in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will be dependent on a number of factors, including our earnings, capital requirements and overall financial conditions. Additionally, under the terms of our Term Loan and Security Agreement dated as of November 30, 2007, as amended, by and between us and Silicon Valley Bank, we must obtain written consent from Silicon Valley Bank prior to paying any cash dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2009, as follows:

 

   

our actual cash and cash equivalents and capitalization as of September 30, 2009;

 

   

our pro forma cash and cash equivalents and capitalization after giving effect to the conversion of all outstanding shares of our convertible preferred stock into common stock, assuming the conversion immediately prior to the completion of this offering, and the resulting reclassification of the portion of the warrant liability related to our convertible preferred stock warrants to additional paid-in capital; and

 

   

our pro forma as adjusted cash and cash equivalents and capitalization after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into common stock assuming the conversion immediately prior to the completion of this offering, the resulting reclassification of the portion of the warrant liability related to our convertible preferred stock warrants to additional paid-in capital, and the receipt of the estimated net proceeds from the sale of              shares of common stock offered by us in this offering, at the initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus.

You should read this table in conjunction with the sections titled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of September 30, 2009
     Actual     Pro Forma     Pro Forma as
Adjusted (1)
     (Unaudited)
     (in thousands, except share data)

Cash and cash equivalents

   $ 23,172      $ 23,172      $             
                      

Long-term debt, current and long-term portions

     13,631        13,631     
                  

Warrant liability

     11,292        10,088     
                  

Convertible preferred stock, $0.0005 par value, per share: 118,476,760 shares authorized, 110,032,788 shares issued and outstanding actual;          shares authorized, issued and outstanding pro forma and pro forma as adjusted

     125,255            
                  

Stockholders’ equity (deficit):

      

Common stock, $0.0005 par value, per share: 250,000,000 shares authorized, 5,081,460 shares issued and outstanding actual; 146,838,898 shares issued and outstanding pro forma;
         shares issued and outstanding pro forma as adjusted

     3        69     

Additional paid-in capital

     2,635        129,028     

Accumulated other comprehensive loss

     (74     (74  

Accumulated deficit

     (150,660     (150,660  
                      

Total stockholders’ equity (deficit)

     (148,096     (21,637  
                      

Total capitalization

   $ 2,082      $ 2,082      $  
                      

 

(1)

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus,

 

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remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1.0 million shares in the number of shares offered by us would increase cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $             million. Similarly, each decrease of 1.0 million shares in the number of shares offered by us would decrease cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $             million. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and terms of this offering determined at pricing.

If the underwriters’ option to purchase additional shares were exercised in full, pro forma as adjusted cash and cash equivalents, common stock and additional paid-in capital, stockholders’ equity (deficit) and shares issued and outstanding as of September 30, 2009 would be $             million, $             million, $             million and             , respectively.

The number of shares of common stock issued and outstanding actual, pro forma, and pro forma as adjusted in the table above excludes the following shares:

 

   

30,065,842 shares of common stock issuable upon the exercise of options outstanding, at a weighted average exercise price of $0.45 per share;

 

   

53,097,374 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock, at a weighted average exercise price of $0.82 per share;

 

   

6,313,302 shares of common stock, on an as if converted basis, issuable upon the exercise of outstanding warrants to purchase convertible preferred stock assuming the conversion immediately prior to the completion of this offering, at a weighted average exercise price of $0.70 per share;

 

   

1,358,307 shares of common stock reserved for future issuance under our 2002 Stock Incentive Plan; and

 

   

74,657 shares of common stock that were legally issued and outstanding but were not included in stockholders’ equity pursuant to accounting principles generally accepted in the U.S. as these shares are subject to repurchase by us.

 

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DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value (deficit) as of September 30, 2009, was $             million, or $             per share. Our pro forma net tangible book value as of September 30, 2009 was $             million, or $             per share, based on the total number of shares of our common stock outstanding as of September 30, 2009, after giving effect to the conversion of all outstanding shares of our convertible preferred stock into common stock assuming the conversion immediately prior to the completion of this offering and the resulting reclassification of the preferred stock warrant liability to additional paid-in capital.

After giving effect to our sale of shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2009 would have been $             million, or $             per share. This represents an immediate increase in net tangible book value of $             per share to existing stockholders and an immediate dilution in net tangible book value of $             per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Initial public offering price per share

      $             

Historical net tangible book value per share as of September 30, 2009

   $                

Pro forma net tangible book value per share as of September 30, 2009

     

Increase in pro forma net tangible book value per share attributable to new investors

     
         

Pro forma as adjusted net tangible book value per share after this offering

     

Dilution per share to investors in this offering

      $  
         

Each $1.00 increase (decrease) in the assumed public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by approximately $             million, or approximately $             per share, and the pro forma dilution per share to investors in this offering by approximately $             per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million shares in the number of shares offered by us would result in a pro forma as adjusted net tangible book value of approximately $             million, or $             per share, and the pro forma dilution per share to investors in this offering would be $             per share. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would result in an pro forma as adjusted net tangible book value of approximately $             million, or $             per share, and the pro forma dilution per share to investors in this offering would be $             per share. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

If the underwriters’ over-allotment option to purchase additional shares from us is exercised in full, the pro forma as adjusted net tangible book value per share after this offering would be $             per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be $             per share and the dilution to new investors purchasing shares in this offering would be $             per share.

 

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The following table presents on a pro forma as adjusted basis as of September 30, 2009, after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock assuming the conversion immediately prior to the closing of this offering, the differences between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid, which includes net proceeds received from the issuance of common and convertible preferred stock, cash received from the exercise of stock options and the value of any stock issued for services and the average price paid per share (in thousands, except per share amounts and percentages):

 

     Shares Purchased     Total Consideration (1)     Average Price
per Share
     Number    Percent     Amount    Percent    

Existing stockholders

             $                        $                

New investors

               
                                   

Totals

      100.0   $      100.0   $     
                                   

 

(1) Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the total consideration paid to us by new investors and total consideration paid to us by all stockholder by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase of 1.0 million shares in the number of shares offered by us would increase the total consideration paid to us by new investors and total consideration paid to us by all stockholder by $             million. Similarly, a decrease of 1.0 million shares in the number of shares offered by us would decrease the total consideration paid to us by new investors and total consideration paid to us by all stockholder by $             million.

If the underwriters exercise their over-allotment option in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding after this offering.

The foregoing calculations are based on 146,913,555 shares outstanding as of September 30, 2009 assuming our outstanding convertible preferred stock converts into 141,832,095 shares of common stock and excludes the following shares:

 

   

30,065,842 shares of common stock issuable upon the exercise of options outstanding, at a weighted average exercise price of $0.45 per share;

 

   

53,097,374 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock, at a weighted average exercise price of $0.82 per share;

 

   

6,313,302 shares of common stock, on an as if converted basis, issuable upon the exercise of outstanding warrants to purchase convertible preferred stock assuming the conversion immediately prior to the closing of this offering, at a weighted average exercise price of $0.70 per share; and

 

   

1,358,307 shares of common stock reserved for future issuance under our 2002 Stock Incentive Plan.

The tables above do not give effect to the 1-for              reverse stock split that will be effected prior to the completion of this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the selected consolidated financial data for 2006, 2007 and 2008 and as of December 31, 2007 and 2008 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the selected consolidated financial data for 2005 and as of December 31, 2005 and 2006 from our audited consolidated financial statements which are not included in this prospectus. The selected consolidated financial data for the nine months ended September 30, 2008 and 2009 and as of September 30, 2009 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2004 is derived from unaudited consolidated financial statements which are not included in this prospectus. The unaudited consolidated financial statements include, in the opinion of management, all adjustments, which consist only of normal recurring adjustments, that management considers necessary for the fair statement of the financial information set forth in those statements. Historical results are not necessarily indicative of future results. You should read the following selected consolidated historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes, and other financial information included in this prospectus. The selected consolidated financial data in this section is not intended to replace the consolidated financial statements and is qualified in its entirety by the consolidated financial statements and related notes and schedule included in this prospectus.

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2005     2006     2007     2008     2008     2009  
                             (Unaudited)  
     (in thousands)  

Consolidated Statement of Operations Data:

            

Revenues:

            

Products

   $      $      $ 4,981      $ 29,532      $ 21,092      $ 31,809   

Support and services

                   401        1,300        669        3,907   

Ratable products and services

     1,094        4,382        10,578        23,820        15,767        14,526   
                                                

Total revenues

     1,094        4,382        15,960        54,652        37,528        50,242   
                                                

Costs of revenues (1):

            

Products

                   3,996        15,318        11,116        12,252   

Support and services

                   57        123        75        595   

Ratable products and services

     2,670        6,619        10,593        13,376        9,973        7,261   
                                                

Total cost of revenues

     2,670        6,619        14,646        28,817        21,164        20,108   
                                                

Gross profit (loss)

     (1,576     (2,237     1,314        25,835        16,364        30,134   
                                                

Operating expenses:

            

Research and development (1)

     7,552        8,924        12,052        12,527        9,922        7,086   

Sales and marketing (1)

     9,252        15,465        25,687        30,209        23,763        18,723   

General and administrative (1)

     1,735        2,628        4,850        7,386        5,627        5,318   
                                                

Total operating expenses

     18,539        27,017        42,589        50,122        39,312        31,127   
                                                

Loss from operations

     (20,115     (29,254     (41,275     (24,287     (22,948     (993

Interest expense, net

            (56     (39     (2,365     (1,574     (1,512

Other income (expense), net

     (23     (86     178        108        141        (6,777
                                                

Loss before provision for income taxes

     (20,138     (29,396     (41,136     (26,544     (24,381     (9,282

Provision for income taxes

     21        45        60        209        157        147   
                                                

Net loss

     (20,159     (29,441     (41,196     (26,753     (24,538     (9,429

Accretion on convertible preferred stock

            (45     (66     (68     (51     221   

Cumulative dividend reversal

            329                               
                                                

Net loss attributable to common stockholders

   $ (20,159   $ (29,157   $ (41,262   $ (26,821   $ (24,589   $ (9,208
                                                

Net loss per share of common stock, basic and diluted

   $ (24.06   $ (24.00   $ (18.53   $ (6.17   $ (5.84   $ (1.88
                                                

Shares used in computing net loss per share of common stock, basic and diluted

     837,883       1,214,645       2,226,978        4,344,058        4,208,883        4,889,783   
                                                

 

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(1) Includes employee stock-based compensation as follows:

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
     2005     2006     2007     2008     2008     2009  
                             (Unaudited)  
     (in thousands)  

Cost of revenues

   $      $ 1      $ 10      $ 62      $ 46      $ 41   

Research and development

            17        61        92        73        70   

Sales and marketing

            20        158        365        246        187   

General and administrative

            10        33        187        114        135   
                                                

Total employee stock-based compensation

   $      $ 48      $ 262      $ 706      $ 479      $ 433   
                                                
     As of December 31,     As of
September 30,

2009
 
     2004     2005     2006     2007     2008    
     (Unaudited)                             (Unaudited)  
     (in thousands)  

Consolidated Balance Sheet Data:

            

Cash and cash equivalents

   $ 6,670      $ 3,470      $ 1,664      $ 19,384      $ 5,172      $ 23,172   

Working capital (deficit)

     6,755        1,406        (808     8,700        (28,677     (13,917

Total assets

     8,901        11,974        23,760        51,881        30,812        42,839   

Total debt

            3,332        1,692        17,432        16,101        13,631   

Convertible promissory notes

                                 11,450          

Warrant liability

                   686        574        505        11,292   

Convertible preferred stock

     29,611        41,849        66,512        94,089        94,157        125,255   

Total stockholders’ deficit

   $ (23,484   $ (44,086   $ (73,159   $ (113,499   $ (139,359   $ (148,096

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We provide a virtualized wireless LAN solution that cost-effectively optimizes the enterprise network to deliver the performance, reliability, predictability and operational simplicity of a wired network, with the advantages of mobility. Our solution represents an innovative approach to wireless networking that utilizes virtualization technology to create an intelligent and self-monitoring wireless network. We sell a virtualized wireless LAN solution built around our System Director™ Operating System, which runs on our controllers and access points. We also offer additional products designed to deliver centralized network management, predictive and proactive diagnostics and enhanced security.

We were founded in January 2002 with the vision of developing a virtualized wireless LAN solution that enables enterprises to deliver business-critical applications over wireless networks, and become what we refer to as All-Wireless Enterprises. From our inception through 2003, we were principally engaged in the design and development of our virtualized wireless LAN solution. We focused on developing technology that could reliably and predictably deliver business-critical applications using voice, video and data over wireless networks in dense environments. We began commercial shipments of our products in December 2003, and initially targeted markets where the wireless delivery of applications in dense environments is critical, such as healthcare and education. Since that time, we have broadened our focus to include organizations in more markets, and have significantly expanded our geographic reach. To date, our products have been deployed by over 2,700 customers worldwide in many markets, including education, finance, government, healthcare, hospitality, manufacturing, retail, technology, telecom, transportation and utilities.

We outsource the manufacturing of our hardware products, including all of our access points and controllers, to original design manufacturers and contract manufacturers. We also outsource the warehousing and delivery of our products to a third-party logistics provider in the United States for worldwide fulfillment.

Our products and support services are sold worldwide, primarily through VARs and distributors, which serve as our channel partners. We employ a sales force that is responsible for managing sales within each geographic territory in which we market and sell our products.

Since inception, we have expended significant resources on our research and development operations. Our research and development activities were primarily conducted at our headquarters in Sunnyvale, California until 2005, when we significantly expanded our research and development operations in Bangalore, India. In 2006, we began developing products specifically to leverage the capabilities of a new wireless communication standard promulgated by the Institute of Electrical and Electronics Engineers, or IEEE, the 802.11n standard, and began commercial shipments of our 802.11n products in the second half of 2007.

We believe several emerging trends and developments will be integral to the future growth of our business. The growing number of wireless devices and the increased expectations of the users of these devices are driving demand for better performing wireless networks. Enterprises increasingly view wireless networks as a

 

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means to deliver better service to their customers and increase the productivity of their workforce, and as a result, they are shifting from the casual use of wireless networks to the strategic use of wireless networks for business-critical applications. Further, enterprises are increasingly realizing that wireless networks designed to optimize the 802.11n standard can deliver the capacity and performance to support their business-critical applications.

Our ability to capitalize on emerging trends and developments will depend, in part, on our ability to execute our growth strategy of increasing the recognition of our brand and the effectiveness of our solution, expanding the adoption of our solution across markets, and expanding and leveraging our relationships with the channel partners. Our ability to achieve and maintain profitability in the future will be affected by, among other things, the continued acceptance of our products, the timing and size of orders, the average selling prices for our products and services, the costs of our products, and the extent to which we invest in our sales and marketing, research and development, and general and administrative resources.

Our revenues have grown from $1.1 million in 2005 to $54.7 million in 2008. Our revenues for the nine months ended September 30, 2009 were $50.2 million. We have incurred losses since inception as we grew our business and invested in research and development, sales and marketing, and administrative functions. As of September 30, 2009, we had an accumulated deficit of $150.7 million.

Components of Revenues, Costs of Revenues and Operating Expenses

Revenues. We derive our revenues from sales of our products, and support and services. Our total revenues are comprised of the following:

 

   

Product Revenues – We generate product revenues from sales of our software and hardware products, which primarily consist of our System Director Operating System running our access points and controllers, as well as additional software applications.

 

   

Support and Services Revenues – We generate support and services revenues primarily from service contracts for our MeruAssure customer support program, which includes software updates, maintenance releases and patches, telephone and internet access to our technical support personnel and hardware support. We also generate support and services revenues from the professional and training services that we provide to our VARs, distributors and customers.

 

   

Ratable Products and Services Revenues – We recognize ratable products and services revenues from sales of our products and services in circumstances where the vendor specific objective evidence of fair value, or VSOE, for support services being provided cannot be segregated from the value of the entire sales arrangement, or where we have provided technical support or unspecified software upgrades outside of contractual terms. In these cases, revenues are deferred and recognized ratably over either the economic life of the product or the contractual period. As of January 1, 2009, we have established VSOE for support services for all our channel partners and customers, and we no longer offer support outside of contractual terms, and therefore, we are able to recognize product revenues and support and services revenues separately. See “—Critical Accounting Policies and Estimates—Revenue Recognition.”

For periods prior to April 1, 2008, we provided technical support and unspecified software upgrades to certain VARs, distributors and customers outside of the contractual terms, or implied support services. For these periods, we deferred revenue recognition and recognized revenues ratably over the implied support services period, which we determined was equal to the economic life of the product. However, for one particular channel partner to which we commenced shipments of our products in the first quarter of 2007, we established VSOE for support services that we sold to this channel partner. As such, we separately recognized the revenues attributable to our products and services sold to this channel partner when all revenue recognition criteria have been met.

 

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Beginning on April 1, 2008, we determined that we had established VSOE for support services for all sales to distributors. Accordingly, for sales of our products to our distributors we recognize revenues when all revenue recognition criteria have been met. We recognize revenues for sales of our support services to distributors on a straight-line basis over the support period, which typically ranges from one year to three years. A substantial majority of our revenues are derived from sales to distributors, and therefore, establishing VSOE for support services for sales to distributors on April 1, 2008 had a significant impact on the timing of our revenue recognition.

On January 1, 2009, we established VSOE for support services for all VARs and customers. For a more detailed description of our revenue recognition policy, please see the section below under “Critical Accounting Policies” entitled “Revenue Recognition.”

Deferred Revenue. Prior to establishing VSOE for our support services provided to VARs, distributors and customers, we recognized the revenues from such sales over either the economic life of the related products or the contractual support period, depending on the party and the time at which the sale occurred. As such, prior to establishing VSOE for support services sold to VARs, distributors and customers, only a small amount of our invoiced products and services within a quarter were recognized as revenues in such quarter, with the majority recorded as deferred revenue. Invoiced products and services represent the total amount of our products and services sold in a particular period. Deferred revenue from such arrangements increases each quarter by the amount of invoiced products and services in that quarter and decreases by the amount of product revenues, support and services revenues and ratable products and services revenues recognized in that quarter. However, because we established VSOE for support services sold to our channel partners, including VARs, distributors and customers, at different times during 2007, 2008 and 2009, our revenues and deferred revenue are difficult to compare on a period-over-period basis. The following table illustrates the changes in our deferred revenue for the periods presented (in thousands):

 

    

 

Years Ended December 31,

    Nine Months Ended
September 30,
 
     2006     2007     2008     2008     2009  

Total Deferred Revenue

          

Beginning balance

   $ 7,877      $ 22,774      $ 43,290      $ 43,290      $ 40,237   

Invoiced products and services*

     19,279        36,476        51,599        40,456        41,245   

Product revenues

            (4,981     (29,532     (21,092     (31,809

Support and services revenues

            (401     (1,300     (669     (3,907

Ratable products and services revenues

     (4,382     (10,578     (23,820     (15,767     (14,526
                                        

Ending balance

   $ 22,774      $ 43,290      $ 40,237      $ 46,218      $ 31,240   
                                        

 

* Invoiced products and services represent the total amount of our products and services sold in a particular period.

Costs of Revenues. Our total costs of revenues is comprised of the following:

 

   

Costs of product revenues – A substantial majority of the costs of product revenues consists of third-party manufacturing costs and component costs. Our costs of product revenues also includes shipping costs, third-party logistics costs, write-offs for excess and obsolete inventory and warranty costs.

 

   

Costs of services revenues – Costs of services revenues is primarily comprised of personnel costs associated with our technical support, professional services and training teams.

 

   

Costs of ratable products and services revenues – Costs of ratable products and services revenues is comprised primarily of deferred costs of product revenues and an allocation of costs of services revenues.

Operating Expenses. Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses is personnel costs.

 

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Personnel costs consist of salaries and benefits for our employees. Professional services consist of outside legal and accounting services and information technology and other consulting costs. We expect our operating expenses to continue to grow in absolute dollars in the near term, although they are likely to fluctuate as a percentage of revenues.

Research and Development Expenses

Research and development expenses primarily consist of personnel, engineering, testing and compliance, facilities and professional services costs. We expense research and development costs as incurred. We are devoting substantial resources to the continued development of additional functionality for our existing products and the development of new products.

Sales and Marketing Expenses

Sales and marketing expenses represent the largest component of our operating expenses and primarily consist of personnel costs, sales commissions, travel costs, cost for marketing programs and facilities costs. We plan to continue to invest in sales and marketing, including our VARs and distributors, and increase the number of our sales personnel worldwide.

General and Administrative Expenses

General and administrative expenses primarily consist of personnel, professional services and facilities costs related to our executive, finance, human resource and information technology function. Professional services consist of outside legal and accounting services and information technology consulting costs. Following the completion of this offering, we expect to incur significant additional accounting and legal costs related to compliance with rules and regulations enacted by the Securities and Exchange Commission, including the additional costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act, as well as additional insurance, investor relations and other costs associated with being a public company.

Interest Expense, net. Interest expense, net consists primarily of interest expense on our outstanding debt and interest income on cash balances.

Other Income (Expense), net. Other income (expense), net consists primarily of charges to record fair value adjustments for our warrants to purchase convertible preferred stock and warrants to purchase common stock. Our outstanding warrants are classified as a liability on our consolidated balance sheets and any changes in fair value are recognized as a component of other income (expense), net. If the fair value of our common stock increases, we would expect the fair value of the warrant liability to increase, which would also increase the charges recognized through other income (expense), net.

Major Channel Partners

We sell products and services directly to our channel partners, including VARs and distributors. The following table sets forth our channel partners representing greater than 10% of revenues in the periods presented (in percentages):

 

       Years Ended
December 31,
     Nine Months Ended
September 30,

Major Channel Partners

     2006      2007      2008      2008      2009

Westcon Group, Inc.

     *      *      15      15      19

Catalyst Telecom, Inc.

     *      *      13      14      15

Avaya, Inc.

     10      11      *      *      10

Foundry Networks, Inc. / Brocade Communications Systems, Inc.

     *      35      13      16      *

Nissho Electronics Corporation

     24      *      *      *      *

 

* Less than 10%

 

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Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue Recognition

Our revenues are derived from the sale of our products and services. Our hardware products are integrated with software that is essential to the functionality of our virtualized wireless LAN solution. As a result, we recognize our revenues in accordance with software revenue recognition rules. Further, we provide unspecified software upgrades and enhancements related to the hardware through support agreements.

We recognize revenues when all of the following have occurred: (1) we have entered into a legally binding arrangement; (2) delivery has occurred, which is when product title has transferred, when software is delivered, or when the support period has lapsed; (3) payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable. The sales prices for our products are typically considered to be fixed or determinable at the inception of an arrangement. To the extent that agreements contain rights of return or acceptance provisions, revenues are deferred until the acceptance provisions or rights of return lapse.

The majority of our sales are generated through our distributors. Revenues from distributors with return rights are generally recognized when the distributor reports that the product has been sold through provided all other revenue recognition criteria have been met. For transactions with all other distributors, we recognize product revenues generally at the time of shipment, assuming all other revenue recognition criteria have been met.

The evaluation of these revenue recognition criteria requires significant management judgment. For instance, we use judgment to assess collectibility based on factors such as credit-worthiness and past collection history, if applicable. If we determine that collection of a payment is not reasonably assured, revenue recognition is deferred until the time collection becomes reasonably assured, which is generally upon receipt of payment. We also use judgment to assess whether a price is fixed or determinable by reviewing contractual terms and conditions related to payment terms.

We use the residual method to recognize revenues when an arrangement includes one or more elements to be delivered at a future date and VSOE of all undelivered elements exists. Under the residual method, the VSOE of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as product revenues. In cases where VSOE of the undelivered elements does not exist, revenues for the entire arrangement are recognized ratably over the performance period of the undelivered elements. Revenues related to these arrangements are included in ratable products and services revenues in the accompanying consolidated statements of operations. VSOE for support services is based upon the pricing for those services when sold separately.

 

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As of January 1, 2009, we had established VSOE for support services for all sales of our channel partners, including VARs and distributors, and to our customers. However, our ability to establish VSOE for the different elements of our sales arrangements has changed over time depending on the party and the time at which the sale occured. These changes have had a significant impact in the timing of the recognition of our revenues.

For periods prior to April 1, 2008, we had implied support services obligations because we provided technical support and unspecified software upgrades outside contractual terms. For these periods, we deferred revenue recognition from all sales, except for sales to one channel partner, and recognized the revenues ratably over the implied support services period, which we determined was equal to the economic life of the product. For sales to the one channel partner, we recognized all of the revenues attributable to our products and services sold to this channel partner when all revenue recognition criteria have been met. We commenced selling our products and services to this channel partner in the first quarter of 2007.

We estimated the economic life of our products to be three and a half years based on several factors such as: (1) the history of technology development of comparable products sold in the industry, including the ratification of new standards; (2) a company-specific evaluation of product life cycles from both a sales and product development perspective; and (3) information on customer usage of products, such as how long they anticipated using our products and when they anticipated or actually purchased upgrades. Our estimate of the economic life of the product involves significant judgment by management. If we had selected a shorter economic life, we would have recognized the revenues from a sale arrangement more quickly, resulting in greater revenues per quarter over fewer total quarters from a single sale. If we had selected a longer economic life, we would have recognized the revenues from a sale arrangement over a longer period of time, resulting in lower revenues per quarter over more total quarters from a single sale.

Beginning on April 1, 2008, we established VSOE for support services for all sales to distributors. Accordingly, for sales of our products to our distributors, we recognize revenues using the residual method when all revenue recognition criteria have been met. We recognize revenues for sales of our support services to distributors on a straight-line basis over the support period, which typically ranges from one year to three years.

A substantial majority of our revenues are derived from sales to distributors, and therefore, establishing VSOE for support services for all sales to distributors on April 1, 2008 had a significant impact on the timing of revenue recognition.

Effective as of January 1, 2009, we had established VSOE for support services for all sales, which also impacted the timing of our revenue recognition.

Significant contract interpretation is sometimes required to determine the appropriate accounting for recognition of our revenues, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting, and, if so, how the price should be allocated among the elements, when to recognize revenues for each element, and the period over which revenues should be recognized. Further, we use judgment to evaluate whether there is VSOE of the undelivered items. Changes in judgments and estimates regarding application of these revenue recognition guidelines as well as changes in facts and circumstances, including the establishment or loss of VSOE, could result in a change in the timing or amount of revenues recognized in future periods.

Stock-Based Compensation

Prior to January 1, 2006, we accounted for stock options granted to employees using the intrinsic value method. The intrinsic value method requires a company to recognize compensation expense for stock options granted to employees based on any differences between the exercise price of the stock options granted and the fair value of the underlying common stock. Under the intrinsic value method, any compensation expense relating to stock options was recorded on the date of the grant in the balance sheet under stockholders’ equity (deficit) as deferred compensation and was thereafter amortized to expense over the vesting period of the grant. We

 

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generally did not recognize stock-based compensation for stock options granted to our employees prior to January 1, 2006 as we granted stock options with an exercise price equal to the fair value of the underlying common stock.

Effective January 1, 2006, we adopted the fair value method of accounting for our stock options granted to employees which requires us to measure the cost of employee services received in exchange for the stock options, based on the grant date fair value of the award. The fair value of the awards is estimated using the Black-Scholes option-pricing model. The resulting expense is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period which for our stock option grants has generally been four years.

We adopted the fair value method using the prospective-transition method. The prospective-transition method requires us to continue to apply the intrinsic value method in future periods to equity awards outstanding as of January 1, 2006. Under the prospective-transition method, any compensation expense that will be recognized from January 1, 2006 will include only (a) compensation expense for all stock-based awards granted prior to, but not yet vested as of, December 31, 2005, based on the intrinsic value method, and (b) compensation expense for all stock-based awards granted or modified subsequent to December 31, 2005, net of estimated forfeitures, based on fair value. In accordance with the prospective-transition method, results for prior periods are not restated.

We account for stock options issued to nonemployees based on their estimated fair value determined using the Black-Scholes option-pricing model. However, the fair value of the equity awards granted to nonemployees is remeasured as the awards vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

The Black-Scholes option-pricing model requires inputs such as the expected volatility, risk-free interest rate and the expected term of the grant. Further, the forfeiture rate also affects the amount of aggregate compensation that we are required to record as an expense. These inputs are subjective and generally require significant judgment.

Our expected volatility is derived from the historical volatilities of several unrelated public companies within our industry because we have limited information on the volatility of the price of our common stock since we have no trading history. When making the selections of our industry peer companies to be used in the volatility calculation, we also considered the stage of development and size of potential comparable companies. Our historical volatility is weighted based on certain qualitative factors and combined to produce a single volatility factor. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each grant’s expected term. For option grants that are considered to be “plain vanilla” we used the simplified method to calculate the expected term in accordance with guidance provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. For option grants that are not considered “plain vanilla,” the expected term is based on historical option exercise behavior and post-vesting cancellations of options by employees.

Beginning on January 1, 2006, the fair value of each employee option awarded was estimated on the grant date for the periods below using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

     Years Ended December 31,     Nine Months Ended
September 30,

2009
 

Assumptions

   2006     2007     2008    

Risk-free interest rates

   4.8   4.1   3.3   3.0

Expected term (in years)

   6.3      6.3      6.2      6.1   

Dividend yield

   0   0   0   0

Expected volatility

   74.3   62.2   62.2   62.2

 

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If, in the future, we determine that another method for calculating the fair value of our stock options is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate expected volatility or expected term, the fair value calculated for our employee stock options could change significantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-based compensation expense affects our cost of revenues and operating expenses.

We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant affect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements. We will continue to use judgment in evaluating the expected term, volatility and forfeiture rate related to our own stock-based compensation on a prospective basis and incorporating these factors into the Black-Scholes option-pricing model.

Also required for the fair value calculation of the options is the fair value of the underlying common stock. We have generally granted stock options with exercise prices equal to the fair value of our common stock as determined at the date of grant by our board of directors with input from management. The following table summarizes, by grant date, the number of shares of common stock subject to options granted since January 1, 2008 and the associated per share exercise price and fair value of our common stock:

 

Grant Date

   Number of Options
Granted
   Exercise
Price
   Fair Value Per Share of
Common Stock

July 22, 2008

   2,080,000    $ 0.37    $ 0.37

September 9, 2008

   559,000    $ 0.37    $ 0.37

October 7, 2008

   1,410,000    $ 0.37    $ 0.37

October 21, 2008

   198,000    $ 0.37    $ 0.37

December 10, 2008

   10,000    $ 0.37    $ 0.37

January 29, 2009

   60,000    $ 0.37    $ 0.37

June 23, 2009

   429,000    $ 0.27    $ 0.27

September 24, 2009

   16,298,000    $ 0.60    $ 0.53

Our board of directors determined to award options to purchase a significant number of shares of our common stock in September 2009 in connection with our board’s company-wide review of the long-term equity incentive compensation of all our current employees. Our board of directors determined to make these option awards in September 2009 principally to existing employees across the entire company to increase employee incentives and more closely align employee compensation with the interest of our stockholders and the creation of long-term value. In making the grants, our board of directors took into account each employee’s position and responsibilities, the number of shares and options to purchase shares currently held by each employee and the remaining vesting schedule, if any, applicable to the options held by each employee. Our board of directors used its judgment to establish an exercise price in excess of the fair value of our common stock in pricing these awards.

Given the absence of an active market for our common stock, our board of directors determined the fair value of our common stock for our grants of stock options. Our board of directors determined the fair value of our common stock based in part on an analysis of relevant metrics, including some or all of the following for each grant date:

 

   

the prices of our convertible preferred stock sold to outside investors in arms-length transactions;

 

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the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

   

the rights of freestanding warrants and other similar instruments;

 

   

our operating and financial performance;

 

   

the present value of future cash flows;

 

   

the market value of similar companies in our industry;

 

   

experience of our management team;

 

   

the hiring of key personnel;

 

   

the history of the company and the introduction of new products;

 

   

our stage of development;

 

   

the fact that the option grants involve illiquid securities in a private company;

 

   

the likelihood of achieving a liquidity event, such as an initial public offering of our common stock or sale of our company given prevailing market conditions; and

 

   

the general and industry specific economic outlook.

Our board determined the fair value of our common stock in part by using valuations based on the market approach and the income approach to estimate our aggregate enterprise value at each valuation date. The market approach measures the value of a company through the analysis of recent sales of comparable companies. Consideration is given to the financial condition and operating performance of the company being valued relative to those of publicly traded companies operating in the same or similar lines of business. When choosing the comparable companies to be used for the market approach, we focused on companies in our industry. Some of the specific criteria used to select comparable companies within this industry include the business description, business size, projected growth, financial condition and historical earnings. The income approach measures the value of a company as the present value of its future economic benefits by applying an appropriate risk-adjusted discount rate to expected cash flows, based on forecasted revenues and costs. We prepared a financial forecast for each valuation to be used in the computation of the enterprise value for both the market approach and the income approach. The financial forecasts took into account our past experience and future expectations. The risks associated with achieving these forecasts were assessed in selecting the appropriate discount rate.

In order to arrive at the fair value of our common stock, the indicated enterprise value of our company calculated at each valuation date was allocated to the shares of convertible preferred stock and the warrants to purchase convertible preferred stock, and shares of common stock and the options and warrants to purchase common stock using an option-pricing methodology. The option-pricing method treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value only if the funds available for distribution to stockholders exceed the value of the liquidation preference at the time of a liquidity event, such as a strategic sale, merger or initial public offering, assuming the enterprise has funds available to make a liquidation preference meaningful and collectible by the holders of preferred stock. The common stock is modeled as a call option on the underlying equity value at a predetermined exercise price. In the model, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular call option, a comparison with a per share stock price. Thus, common

 

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stock is considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock is liquidated. The option-pricing method uses the Black-Scholes option-pricing model to price the call options. This model defines the securities’ fair values as functions of the current fair value of a company and uses assumptions such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities. The anticipated timing of a liquidity event utilized in these valuations was based on then-current plans and estimates of our board of directors and management regarding a liquidity event. Estimates of the volatility of our stock were based on available information on the volatility of capital stock of comparable publicly traded companies. This approach is consistent with the methods outlined in the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Also, we considered the fact that our stockholders cannot freely trade our common stock in the public markets. Therefore, the estimated fair value of our common stock at each grant date reflected a non-marketability discount.

There is inherent uncertainty in these estimates and if we had made different assumptions than those described above, the amount of our stock-based compensation expense, net loss and net loss per share amounts could have been significantly different.

We recorded stock-based compensation of $0.7 million and $0.4 million during 2008 and the nine months ended September 30, 2009. As of December 31, 2008 and September 30, 2009, we had $0.9 million and $2.9 million of unrecognized stock-based compensation expense related to stock options granted under our 2002 Stock Incentive Plan, which is expected to be recognized over an average period of 2.9 and 3.6 years. In future periods, our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation and as we issue additional stock-based awards to continue to attract and retain employees and nonemployee directors.

Fair Value of Financial Instruments

Freestanding warrants to purchase shares of our convertible preferred stock are classified as a liability on the consolidated balance sheets at fair value because the warrants may conditionally obligate us to transfer assets at some point in the future. The warrants are subject to remeasurement at each balance sheet date, and any change in fair value will be recognized as a component of other income (expense), net in the consolidated statements of operations. We estimated the fair value of these warrants at the respective balance sheet dates and a number of the assumptions used to determine these estimates, especially the fair value and the expected volatility of our common stock, are highly judgmental and could differ significantly in the future.

In connection with our private placement of Series A-1 convertible preferred stock in 2005, we issued warrants to purchase 72,242 shares of Series A-1 convertible preferred stock. The Series A-1 warrants expired unexercised in January 2007. Prior to the expiration, the fair value of the Series A-1 warrants was recorded on our consolidated balance sheets as a warrant liability. The changes in the fair value of the Series A-1 warrants resulted in a gain through other income (expense), net in the amounts of $0.1 million and $1,000 during the years ended December 31, 2006 and 2007.

In connection with entering into a credit facility in November 2005, we issued a warrant to purchase 541,346 shares of our Series B convertible preferred stock. The fair value of our Series B warrant in the amounts of $0.6 million, $0.5 million and $0.1 million was recorded on our consolidated balance sheets as a warrant liability as of December 31, 2007 and 2008 and September 30, 2009. The change in fair value of this warrant resulted in a charge to other income (expense), net in the amount of $0.2 million during the year ended December 31, 2006 and resulted in a gain through other income (expense), net in the amounts of $0.1 million, $0.1 million and $0.4 million during 2007 and 2008 and the nine months ended September 30, 2009.

In connection with our private placement of Series E convertible preferred stock in 2009, we issued warrants to purchase 4,510,843 shares of our Series E convertible preferred stock. The relative fair value of our

 

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Series E warrants in the amount of $1.2 million was recorded on our consolidated balance sheet as a warrant liability upon issuance, and, subsequently, the Series E warrants were remeasured to fair value. As of September 30, 2009, the warrant liability related to the Series E warrants was $1.4 million. The change in fair value of these warrants resulted in a charge to other income (expense), net in the amount of $0.1 million during the nine months ended September 30, 2009.

As of September 30, 2009, our warrant liability related to our common stock warrants that were issued at various time from January 2007 to September 2009 was $9.9 million. The change in fair value of the warrants resulted in a charge to other income (expense), net in the amount of $6.9 million during the nine months ended September 30, 2009.

We will continue to record adjustments to the fair value of the warrants until they are exercised or expire, wherein the warrants will no longer be remeasured at each balance sheet date. At that time, the then- current aggregate fair value of these warrants will be reclassified from current liabilities to additional paid-in capital and we will cease to record any related periodic fair value adjustments.

In the event that we have not completed an initial public offering of our common stock or a reverse merger into a public company by March 31, 2010, we would be required to pay $0.6 million to a holder of our Series E convertible preferred stock. If we still have not completed an initial public offering of our common stock or reverse merger into a public company by April 15, 2010, we would be required to pay an additional $0.6 million, and an additional $0.2 million would be due each month beginning April 30, 2010 until the completion of an initial public offering of our common stock or reverse merger into a public company. We may in our discretion pay up to fifty percent of these fees with our equity securities. We elected the fair value option for this provision and as of September 30, 2009, we estimated the fair value of the potential liability to be $0.1 million based on our best estimate of the probability that we would not meet the required deadlines. As a result, we have accrued $0.1 million within accrued liabilities on the consolidated balance sheet related to this potential liability as of September 30, 2009.

Inventory Valuation

Inventory consists of hardware and related component parts and is stated at the lower of cost or fair market value. We record inventory write-downs for potentially excess inventory based on forecasted demand, economic trends and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in costs of product revenues in the period the revision is made. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If actual demand and market conditions are less favorable than anticipated, additional inventory adjustments could be required in future periods.

Allowances for Doubtful Accounts

We record a provision for doubtful accounts based on historical experience and a detailed assessment of the collectibility of our accounts receivable. To assist with the estimate, our management considers, among other factors, (1) the aging of the accounts receivable, including trends within the age of the accounts receivable, (2) our historical write-offs, (3) the credit-worthiness of each purchaser, (4) the economic conditions of the purchaser’s industry, and (5) general economic conditions. In cases where we are aware of circumstances that may impair a specific purchaser’s ability to meet their financial obligations to us, we record a specific allowance against amounts due from the customer, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. There is significant judgment involved in estimating the allowance for doubtful accounts.

We recorded allowances for doubtful accounts of $0.1 million, $6,000, $0.3 million and $23,000 during 2006, 2007, 2008 and the nine months ended September 30, 2009, respectively.

 

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Income Taxes

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. As of December 31, 2008 and September 30, 2009, we have recorded a full valuation allowance on our net deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of certain net operating loss carryforwards and research and development tax credits. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.

Since inception, we have incurred operating losses, and, accordingly, we have not recorded a provision for income taxes for any of the periods presented other than foreign and state provisions for income tax. Accordingly, there have not been significant changes to our provision for income taxes during 2006, 2007, 2008 or the nine months ended September 30, 2009, and we expect this to continue until we are no longer incurring losses.

As of December 31, 2008, we had federal net operating loss carryforwards of $87.5 million and state net operating loss carryforwards of $78.5 million. We also had federal and state research credit carryforwards of $2.4 million and $1.7 million. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If not utilized, the federal net operating loss and tax credit carryforwards will expire beginning in 2023 and the state net operating loss will begin expiring in 2009. Utilization of these net operating losses and credit carryforwards may be subject to an annual limitation due to applicable provisions of the Internal Revenue Code of 1986, as amended, and state and local tax laws if we have experienced an “ownership change” in the past, or if an ownership change occurs in the future, including, for example, as a result of the shares issued in this offering aggregated with certain other sales of our stock before or after this offering.

 

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Results of Operations

Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008

The following table presents our historical operating results in dollars (in thousands) and as a percentage of revenues for the periods presented:

 

    Nine Months Ended September 30,  
    2008     2009  
    (Unaudited)  

REVENUES:

       

Products

  $ 21,092      56.2   $ 31,809      63.3

Support and services

    669      1.8       3,907      7.8   

Ratable products and services

    15,767      42.0        14,526      28.9   
                           

Total revenues

    37,528      100.0       50,242      100.0  
                           

COSTS OF REVENUES:

       

Products

    11,116      29.6        12,252      24.4   

Support and services

    75      0.2        595      1.2   

Ratable products and services

    9,973      26.6        7,261      14.4   
                           

Total costs of revenues

    21,164      56.4       20,108      40.0  
                           

Gross profit

    16,364      43.6        30,134      60.0   
                           

OPERATING EXPENSES:

       

Research and development

    9,922      26.5        7,086      14.1   

Sales and marketing

    23,763      63.3        18,723      37.3   

General and administrative

    5,627      15.0        5,318      10.6   
                           

Total operating expenses

    39,312      104.8       31,127      62.0  
                           

Loss from operations

    (22,948   (61.2     (993   (2.0
                           

Interest expense, net

    (1,574   (4.2     (1,512   (3.0

Other income (expense), net

    141      0.4       (6,777   (13.5
                           

Loss before provision for income taxes

    (24,381   (65.0     (9,282   (18.5

Provision for income taxes

    157      0.4        147      0.3   
                           

Net loss

  $ (24,538   (65.4 )%    $ (9,429   (18.8 )% 
                           

Revenues

Our total revenues increased by $12.7 million, or 34%, to $50.2 million in the nine months ended September 30, 2009 from $37.5 million in the nine months ended September 30, 2008. This increase primarily reflected an increase in the recognition of revenues from invoiced products sold during the nine months ended September 30, 2009, which was the result of the establishment of VSOE for support services sold to distributors on April 1, 2008, and the establishment of VSOE for support services sold to VARs and customers on January 1, 2009. In addition, the increase in total revenues reflected an increase of $0.7 million in invoiced products and services, to $41.2 million in the nine months ended September 30, 2009 from $40.5 million in the nine months ended September 30, 2008.

Product revenues increased by $10.7 million, or 51%, to $31.8 million in the nine months ended September 30, 2009 from $21.1 million in the nine months ended September 30, 2008. Support and services revenues increased by $3.2 million, to $3.9 million in the nine months ended September 30, 2009 from $0.7 million in the nine months ended September 30, 2008. Our product revenues and support and services revenues for the nine months ended September 30, 2008 included, for the first quarter of 2008, revenues from sales to one particular channel partner and, for the second and third quarters of 2008, revenues from sales only to our distributors and that channel partner. Product revenues and support and services revenues for the nine months ended September 30, 2009 included revenues from sales to all of our VARs, distributors and customers.

 

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Ratable products and services revenues decreased by $1.3 million, or 8%, to $14.5 million in the nine months ended September 30, 2009 from $15.8 million in the nine months ended September 30, 2008. This reflects an increase in the recognition of product revenues and support and services revenues from sales of products and services following our establishment of VSOE for support services sold to distributors on April 1, 2008 and for all our VARs and customers starting January 1, 2009.

Costs of Revenues and Gross Margin

Total costs of revenues decreased by $1.1 million, or 5%, to $20.1 million in the nine months ended September 30, 2009 from $21.2 million in the nine months ended September 30, 2008. Costs of product revenues increased by $1.2 million, or 11%, to $12.3 million in the nine months ended September 30, 2009 from $11.1 million in the nine months ended September 30, 2008. Costs of support and services revenues increased $0.5 million, to $0.6 million in the nine months ended September 30, 2009 from $0.1 million in the nine months ended September 30, 2008. Costs of ratable products and services revenues decreased by $2.7 million, or 27%, to $7.3 million in the nine months ended September 30, 2009 from $10.0 million in the nine months ended September 30, 2008.

Our gross margin increased from 44% during the nine months ended September 30, 2008 to 60% for the nine months ended September 30, 2009. This increase in gross margin was primarily the result of an increase in the sales of our next generation of products and economies of scale as we grew our revenues.

Operating Expenses

Our operating expenses decreased by $8.2 million, or 21%, to $31.1 million in the nine months ended September 30, 2009 from $39.3 million in the nine months ended September 30, 2008. In 2008, we undertook increased efforts to become more efficient in the use of our assets, and as a result, operating expenses were lower in the first nine months of 2009 compared to the same period in 2008.

Research and Development Expenses

Research and development expenses decreased by $2.8 million, or 28%, to $7.1 million in the nine months ended September 30, 2009 from $9.9 million in the nine months ended September 30, 2008. This decrease was primarily the result of a decrease of $1.2 million in the cost of engineering, testing, compliance and certifications, $1.1 million in personnel costs and $0.4 million in the cost of professional services.

Sales and Marketing Expenses

Sales and marketing expenses decreased by $5.1 million, or 21%, to $18.7 million in the nine months ended September 30, 2009 from $23.8 million in the nine months ended September 30, 2008, primarily due to a decrease of $2.1 million in personnel costs, $1.3 million in commissions and bonuses, $1.0 million in travel expense and $0.6 million in professional services.

General and Administrative Expenses

General and administrative expenses decreased by $0.3 million, or 5%, to $5.3 million in the nine months ended September 30, 2009 from $5.6 million in the nine months ended September 30, 2008.

Interest Expense, net

Interest expense, net decreased by $0.1 million, or 6%, to $1.5 million in the nine months ended September 30, 2009 from $1.6 million in the nine months ended September 30, 2008.

 

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Other Income (Expense), net

Other income (expense), net changed by $6.9 million, to an expense of $6.8 million in the nine months ended September 30, 2009 from income of $0.1 million in the nine months ended September 30, 2008. The change was primarily due to the issuance of warrants to purchase convertible preferred stock and warrants to purchase common stock as part of our private placement of Series E convertible preferred stock during the nine months ended September 30, 2009 and the subsequent increase in the fair value of all of our warrants in the amount of $6.6 million.

Year ended December 31, 2008 compared to the year ended December 31, 2007

The following table presents our historical operating results in dollars (in thousands) and as a percentage of revenues for the periods presented:

 

     Years Ended December 31,  
     2007     2008  

REVENUES:

        

Products

   $ 4,981      31.2   $ 29,532      54.0

Support and services

     401      2.5        1,300      2.4   

Ratable products and services

     10,578      66.3        23,820      43.6   
                            

Total revenues

     15,960      100.0       54,652      100.0  
                            

COSTS OF REVENUES:

        

Products

     3,996      25.0        15,318      28.0   

Support and services

     57      0.4        123      0.2   

Ratable products and services

     10,593      66.4        13,376      24.5   
                            

Total costs of revenues

     14,646      91.8       28,817      52.7  
                            

Gross profit

     1,314      8.2        25,835      47.3   
                            

OPERATING EXPENSES:

        

Research and development

     12,052      75.5        12,527      22.9   

Sales and marketing

     25,687      160.9        30,209      55.3   

General and administrative

     4,850      30.4        7,386      13.5   
                            

Total operating expenses

     42,589      266.8       50,122      91.7  
                            

Loss from operations

     (41,275   (258.6     (24,287   (44.4
                            

Interest expense, net

     (39   (0.2     (2,365   (4.3

Other income (expense), net

     178      1.1        108      0.1   
                            

Loss before provision for income taxes

     (41,136   (257.7     (26,544   (48.6

Provision for income taxes

     60      0.4        209      0.4   
                            

Net loss

   $ (41,196   (258.1 )%    $ (26,753   (49.0 )% 
                            

Revenues

Our total revenues increased by $38.7 million, to $54.7 million in 2008 from $16.0 million in 2007. This increase primarily reflected an increase in the recognition of revenues from invoiced products sold during 2008, which was the result of the establishment of VSOE for support services sold to distributors on April 1, 2008. In addition, the increase in total revenues reflected an increase of $15.1 million, or 41%, in invoiced products and services, to $51.6 million in 2008 from $36.5 million 2007. This increase in invoiced products and services was primarily due to the growth in sales of our virtualized wireless LAN solution, including increased international sales.

Product revenues increased by $24.5 million, to $29.5 million in 2008 from $5.0 million in 2007. Support and services revenues increased by $0.9 million, to $1.3 million in 2008 from $0.4 million in 2007. Our product revenues and support and services revenues for 2007 included revenues from sales to one particular

 

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channel partner. Our product revenues and support and services revenues for 2008 includes sales from only that channel partner during the first quarter of 2008 and, for the second, third and fourth quarters of 2008, revenues from sales to that channel partner and our distributors.

Ratable products and services revenues increased by $13.2 million, to $23.8 million in 2008 from $10.6 million in 2007. The increase in ratable products and services revenues during 2008 compared to 2007 was due to the increase in product sales for which we had not established VSOE and the timing of the recognition of the deferred revenue associated with these sales. Because we had only established VSOE for support services for one channel partner during 2007, all of our sales to our VARs, distributors and customers during 2007 were deferred and recognized as ratable products and services revenues over the implied support period. Therefore, the increase in the ratable products and services revenues from 2007 to 2008 is a culmination of previous years’ sales that are being recognized as revenues during the related periods. In addition, we ceased providing customer support outside of the contractual support periods during 2008. As a result, we no longer recognized revenues for sales in which we did not have VSOE for support services over the economic life of the product, or approximately three and a half years, and instead recognized the revenues ratably over the contractual support period, which ranged between one and three years. Therefore, the shorter periods in which the revenues were recognized resulted in an increase in the ratable products and services revenues after the change.

Costs of Revenues and Gross Margin

Total costs of revenues increased by $14.2 million, to $28.8 million in 2008 from $14.6 million in 2007 as a result of an increase in costs of product revenues of $11.3 million, to $15.3 million in 2008 from $4.0 million in 2007, and an increase in costs of ratable products and services in the amount of $2.8 million, to $13.4 million in 2008 from $10.6 million in 2007.

Gross margin increased from 8% in 2007 to 47% in 2008. In 2007, we deferred a substantial majority of our revenues from sales, which adversely impacted our gross margin in that period, because certain costs, such as operations and support personnel and related overhead, were expensed as incurred and not deferred with the associated revenues. We deferred less of our revenues from sales in 2008. To a lesser extent, our gross margin increased in 2008 as a result of an increase in the sales of our next generation of products and our economies of scale as we grew our revenues.

Operating Expenses

Our operating expenses increased by $7.5 million, or 18%, to $50.1 million in 2008 from $42.6 million in 2007.

Research and Development Expenses

Research and development expenses increased by $0.4 million, or 3%, to $12.5 million in 2008 from $12.1 million in 2007. The increase in research and development expenses was primarily due to an increase of $0.8 million in personnel costs, partially offset by a decrease of $0.2 million in the cost of engineering, testing, compliance and certifications.

Sales and Marketing Expenses

Sales and marketing expenses increased by $4.5 million, or 18%, to $30.2 million in 2008 from $25.7 million in 2007, primarily as a result of an increase of $3.0 million in personnel costs, $1.9 million in commissions and $0.3 million in travel expenses due to an increase in sales and marketing personnel. These increases were partially offset by a decrease in sales and marketing-related programs of $0.8 million.

 

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General and Administrative Expenses

General and administrative expenses increased by $2.5 million, or 51%, to $7.4 million in 2008 from $4.9 million in 2007, primarily due to an increase of $1.5 million in personnel costs and $0.8 million in professional services.

Interest Expense, net

Interest expense, net increased by $2.3 million, to $2.4 million in 2008 from $39,000 in 2007. The increase was primarily a result of an increase in interest expense in the amount of $1.6 million due to a credit facility that we entered into in December 2007 and $0.5 million in interest expense related to our issuance of convertible promissory notes beginning in June 2008.

Other Income (Expense), net

Other income (expense), net decreased by $0.1 million, to $0.1 million in 2008 from $0.2 million in 2007.

Year ended December 31, 2007 compared to the year ended December 31, 2006

The following table presents our historical operating results in dollars (in thousands) and as a percentage of revenues for the periods presented:

 

     Years Ended December 31,  
     2006     2007  

REVENUES:

        

Products

   $        $ 4,981      31.2

Support and services

                 401      2.5   

Ratable products and services

     4,382      100.0        10,578      66.3   
                            

Total revenues

     4,382      100.0       15,960      100.0  
                            

COSTS OF REVENUES:

        

Products

                 3,996      25.0   

Support and services

                 57      0.4   

Ratable products and services

     6,619      151.0        10,593      66.4   
                            

Total costs of revenues

     6,619      151.0       14,646      91.8  
                            

Gross profit

     (2,237   (51.0     1,314      8.2   
                            

OPERATING EXPENSES:

        

Research and development

     8,924      203.7        12,052      75.5   

Sales and marketing

     15,465      352.9        25,687      160.9   

General and administrative

     2,628      60.0        4,850      30.4   
                            

Total operating expenses

     27,017      616.6       42,589      266.8  
                            

Loss from operations

     (29,254   (667.6     (41,275   (258.6
                            

Interest expense, net

     (56   (1.3     (39   (0.2

Other income (expense), net

     (86   (2.0     178      1.1   
                            

Loss before provision for income taxes

     (29,396   (670.8     (41,136   (257.7

Provision for income taxes

     45      1.0        60      0.4   
                            

Net loss

   $ (29,441   (671.8 )%    $ (41,196   (258.1 )% 
                            

Revenues

Our total revenues increased by $11.6 million, to $16.0 million in 2007 from $4.4 million in 2006 primarily as a result of a $17.2 million increase in invoiced products sold in 2007 from 2006. In addition, the

 

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establishment of VSOE for support services during 2007 for sales to one particular channel partner resulted in $5.0 million in product revenues and $0.4 million in support and services revenues.

In 2006, we did not recognize any product revenues or support and services revenues because we had not established VSOE for support services that we provided with any of our products. As a result, we recognized revenues for our sales made in 2006 ratably over the estimated support period.

Ratable products and services revenues increased by $6.2 million, to $10.6 million in 2007 from $4.4 million in 2006, as a result of increased sales and the recognition of deferred revenue associated with sales in prior periods.

Costs of Revenues and Gross Margin

Total costs of revenues increased by $8.0 million, to $14.6 million in 2007 from $6.6 million in 2006.

Our gross margin increased to 8% in 2007 compared to a negative gross margin of 51% primarily as a result of achieving higher economies of scale. In 2006 and 2007, we deferred a substantial majority of our revenues from sales, which adversely impacted our gross margin in those periods, because certain costs, such as operations and support personnel and related overhead, were expensed as incurred and not deferred with the associated revenues.

Operating Expenses

Our operating expenses increased by $15.6 million, to $42.6 million in 2007 from $27.0 million in 2006.

Research and Development Expenses

Research and development expenses increased by $3.2 million, to $12.1 million in 2007 from $8.9 million in 2006. The increase was primarily due to an increase of $1.3 million for engineering, testing, compliance and certifications, $1.2 million in personnel costs and $0.3 million in facilities costs.

Sales and Marketing Expenses

Sales and marketing expenses increased by $10.2 million, to $25.7 million in 2007 from $15.5 million in 2006, primarily as a result of an increase of $5.2 million in personnel costs, $1.7 million in commissions, $1.4 million for marketing-related programs, $0.8 million in professional services, $0.5 million in travel expenses and $0.4 million in facilities costs.

General and Administrative Expenses

General and administrative expenses increased by $2.3 million, to $4.9 million in 2007 from $2.6 million in 2006, primarily due to an increase of $1.2 million in professional services costs, $0.5 million in facilities and equipment costs and $0.3 million in personnel costs.

Interest Expense, net

Interest expense, net did not materially change in 2007 compared to 2006.

Other Income (Expense), net

Other income (expense), net changed from an expense of $0.1 million in 2006 to income of $0.2 million in 2007.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statement of operations data for each of the seven quarters in the period ended September 30, 2009. In management’s opinion, the data has been prepared on the same basis as the audited consolidated financial statements included in this filing, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    Three Months Ended  
    March 31,
2008
    June 30,
2008
    September 30,
2008
    December 31,
2008
    March 31,
2009
    June 30,
2009
    September 30,
2009
 
    (in thousands, except share and per share data)  

REVENUES:

             

Products

  $ 1,360      $ 10,239      $ 9,493      $ 8,440      $ 8,824      $ 10,933      $ 12,052   

Support and services

    87        172        410        631        993        1,331        1,583   

Ratable products and services

    3,860        5,402        6,505        8,053        5,506        4,811        4,209   
                                                       

Total revenues

    5,307        15,813        16,408        17,124        15,323        17,075        17,844   
                                                       

COSTS OF REVENUES:

             

Products

    881        5,471        4,764        4,202        3,494        4,263        4,495   

Support and services

    12        21        42        48        93        147        355   

Ratable products and services

    3,477        3,087        3,409        3,403        2,639        2,503        2,119   
                                                       

Total costs of revenues

    4,370        8,579        8,215        7,653        6,226        6,913        6,969   
                                                       

Total gross profit

    937        7,234        8,193        9,471        9,097        10,162        10,875   
                                                       

OPERATING EXPENSES:

             

Research and development

    3,544        3,327        3,051        2,605        2,385        2,315        2,386   

Sales and marketing

    7,406        8,598        7,759        6,446        6,359        6,258        6,106   

General and administrative

    1,938        1,801        1,888        1,759        1,668        1,796        1,854   
                                                       

Total operating expenses

    12,888        13,726        12,698        10,810        10,412        10,369        10,346   
                                                       

Income (loss) from operations

    (11,951     (6,492     (4,505     (1,339     (1,315     (207     529   

Interest expense, net

    (298     (511     (765     (791     (704     (424     (384

Other income (expense), net

    54        52        35        (33     (72     (1,648     (5,057
                                                       

Loss before provision from income taxes

    (12,195     (6,951     (5,235     (2,163     (2,091     (2,279     (4,912

Provision for income taxes

    52        52        53        52        49        49        49   
                                                       

Net loss

  $ (12,247   $ (7,003   $ (5,288   $ (2,215   $ (2,140   $ (2,328   $ (4,961
                                                       

Net loss per share of common stock, basic and diluted

  $ (3.27   $ (1.62   $ (1.17   $ (0.47   $ (0.44   $ (0.48   $ (1.00
                                                       

Shares used in computing net loss per share of common stock, basic and diluted

    3,750,091        4,332,985        4,518,262        4,739,667        4,850,878        4,879,100        4,942,043   
                                                       

 

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Comparisons of our revenues from period to period are affected by the timing of when we ceased providing customer support outside of the contractual terms and the timing of when we established VSOE for support services for sales to channel partners or customers during 2007, 2008 and the nine months ended September 30, 2009. In the second quarter of 2008, we established VSOE for support services for all sales to distributors, which resulted in a significant impact on the timing of the recognition of our revenues from the second quarter of 2008 onward.

Commencing in the second quarter of 2008, we started to experience the impact of a slowdown in general economic conditions, and as a result our product revenues declined sequentially from the second quarter of 2008 to the fourth quarter of 2008. During this same time period, our operating expenses declined sequentially as a result of improved efficiencies in our operations. Beginning in the first quarter of 2009, our product revenues and our support and services revenues began to increase sequentially through the third quarter of 2009 as a result of increased demand for our solution and improving general economic conditions.

Despite the growth in our total revenues during the nine months ended September 30, 2009, our net loss increased to a net loss of $5.0 million in the third quarter of 2009 from $2.3 million in the second quarter of 2009, primarily as a result of an increase of $5.0 million in the amount of the expense incurred in marking to fair value our outstanding warrants to purchase convertible preferred stock and common stock.

We may experience seasonal fluctuations in the various markets we serve. For example, we have experienced increased demand in our second quarter associated with the purchasing decisions of customers in the education market. As a result, our operating results may vary significantly from quarter to quarter.

Liquidity and Capital Resources

Since inception, we have funded our operations primarily with proceeds from issuances of convertible preferred stock, long-term debt and our credit facility. From 2006 through the nine months ended September 30, 2009, we raised an aggregate of $87.3 million from the sale of our convertible preferred stock, including amounts received through the conversion of promissory notes. We have also funded purchases of equipment and other general corporate services with proceeds from our long-term debt in the amount of $16.5 million and net proceeds of $4.3 million from our credit facility.

Cash Flows from Operating Activities

Our primary uses of cash from operating activities are for personnel-related expenditures, purchases of inventory and costs for our facilities. Cash used in operating activities was $3.2 million, $23.1 million, $25.6 million and $24.6 million in the nine months ended September 30, 2009 and the years ended December 31, 2008, 2007 and 2006, respectively.

Cash used in operating activities of $3.2 million in the nine months ended September 30, 2009 reflected a net loss of $9.4 million, partially offset by non-cash charges of $6.6 million in warrant expense and an increase of $1.5 million in our net operating assets and liabilities. The increase in our net operating assets and liabilities was primarily a result of a decrease of $9.0 million in deferred revenue, partially offset by a decrease of $6.0 million in deferred inventory costs.

Cash used in operating activities of $23.1 million in 2008 reflected a net loss of $26.8 million, partially offset by aggregate non-cash charges of $2.1 million and a decrease of $1.6 million in our net operating assets

 

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and liabilities. The decrease in our net operating assets and liabilities was primarily a result of a decrease of $5.4 million in deferred inventory costs, partially offset by a decrease of $3.1 million in deferred revenue and a decrease of $2.1 million in accounts payable.

Cash used in operating activities of $25.6 million in 2007 reflected a net loss of $41.2 million, partially offset by aggregate non-cash charges of $0.7 million and a decrease of $14.9 million in our net operating assets and liabilities. The decrease in our net operating assets and liabilities was primarily a result of an increase of $20.5 million in deferred revenue, partially offset by an increase of $6.8 million in deferred inventory costs.

Cash used in operating activities of $24.6 million in 2006 reflected a net loss of $29.4 million, partially offset by aggregate non-cash charges of $0.7 million and a decrease of $4.2 million in our net operating assets and liabilities. The decrease in our net operating assets and liabilities was primarily a result of an increase of $14.9 million of deferred revenue and an increase in $2.2 million in our accounts payable, partially offset by an increase of $7.3 million in deferred inventory costs and an increase of $4.2 million in accounts receivables.

Cash Flows from Investing Activities

Our investing activities consisted solely of our capital expenditures and changes in restricted cash.

During the nine months ended September 30, 2009, cash used in investing activities was $0.1 million as a result of our capital expenditures.

In 2008, cash used in investing activities was $0.5 million as a result of our capital expenditures.

In 2007, cash used in investing activities was $0.7 million, as result of $0.9 million of capital expenditures, partially offset by the release of restricted cash of $0.2 million.

In 2006, cash used in investing activities was $0.3 million as a result of our capital expenditures.

Cash Flows from Financing Activities

To date, we have financed our operations primarily with proceeds from sale of convertible preferred stock, the incurrence of long-term debt and the use of a line of credit facility.

In the nine months ended September 30, 2009, cash provided by financing activities was $21.3 million, primarily as a result of the receipt of $23.8 million from our sale of Series E convertible preferred stock, including the issuance and subsequent conversion of promissory notes issued in 2009 and a net increase of $1.3 million in borrowings on our credit facility, partially offset by principal repayments on our long-term debt of $3.9 million.

In 2008, cash provided by financing activities was $9.5 million, primarily as a result of the receipt of $11.0 million from the sale of convertible promissory notes and a net increase of $1.2 million in borrowings on our credit facility, partially offset by principal repayments on our long-term debt of $2.7 million.

In 2007, cash provided by financing activities was $44.0 million, primarily as a result of the receipt of $27.5 million from our sale of Series D convertible preferred stock, the receipt of $16.5 million from long-term debt and a net increase of $1.8 million in borrowings on our credit facility, partially offset by principal repayments on our long-term debt of $2.3 million.

In 2006, cash provided by financing activities was $23.1 million, primarily as a result of the receipt of $24.9 million from our sale of Series C convertible preferred stock and principal repayments on our long-term debt of $1.9 million.

 

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Capital Resources

We believe our existing cash and cash equivalents combined with the amounts available under our line of credit facility and the proceeds to us from sales of our common stock in this offering, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including, among other things, market acceptance of our products, the cost of our research and development activities and overall economic conditions.

Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2008:

 

     Payments Due by Period

Contractual Obligations:

    Less Than 
1 Year
   1 to 3
    Years    
   3 to 5
    Years    
   More Than
5 Years
   Total
     (in thousands)

Principal payments on long-term debt

   $ 8,193    $ 8,193    $    $   —    $ 16,386

Operating lease obligations

     867      1,319      245           2,431

Purchase commitments

     1,721                     1,721
                                  

Total

   $ 10,781    $ 9,512    $ 245    $    $ 20,538
                                  

As of December 31, 2008, we had an aggregate of $11.5 million outstanding under our convertible promissory notes. In January 2009, we sold another $3.2 million in convertible promissory notes. These convertible promissory notes converted to shares of Series E convertible preferred stock in March 2009 and are therefore no longer outstanding. We also received net proceeds from our credit facility of $1.3 million during the nine months ended September 30, 2009. In addition, we made cash payments on our long-term debt of $3.9 million during the nine months ended September 30, 2009.

We also made cash payments of $0.6 million on our operating leases during the nine months ended September 30, 2009.

No other significant changes impacted our contractual obligations during the nine months ended September 30, 2009.

Off-Balance Sheet Arrangements

As of December 31, 2008 and September 30, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Quantitative and Qualitative Disclosures about Market Risk

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

Foreign Currency Risk

Most of our sales are denominated in U.S. dollars, and therefore, our revenues are not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Indian rupee, Euro, British Pound Sterling and Japanese yen relative to the U.S. dollar. To date, we have not entered into any hedging contracts. During the nine months ended September 30, 2009,

 

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a 10% appreciation or depreciation in the value of the U.S. dollar relative to the other currencies in which our expenses are denominated would not have had a material impact on our financial position or results of operations.

Interest Rate Sensitivity

We had cash and cash equivalents of $19.4 million, $5.2 million and $23.2 million as of December 31, 2007 and 2008 and September 30, 2009, respectively. These amounts were held primarily in cash deposits and money market funds. Cash and cash equivalents are held for working capital purposes. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income. During the nine months ended September 30, 2009, a 10% appreciation or depreciation in overall interest rates would not have had a material impact on our interest income.

As of December 31, 2007 and 2008 and September 30, 2009, the principal amount of our long-term debt outstanding, including our credit facility, was $17.9 million, $16.4 million and $13.8 million, respectively. The interest rates on our long-term debt are variable and may adjust periodically based on changes in the prime rate. During the nine months ended September 30, 2009, a 10% appreciation or depreciation in the prime rate would not have had a material impact on our interest expense.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB, issued a new accounting standard that defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. In February 2008, the FASB issued a staff position which amends the new accounting standard to exclude accounting pronouncements that address fair value measurements for purposes of lease classification or measurement. In February 2008, the FASB issued another staff position which delays the effective date of the new standard until the first quarter of 2009 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). The new standard does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. We adopted the new accounting standard during 2009. The adoption of the new accounting standard did not have a material impact on our consolidated financial statements.

In December 2007, the FASB issued a revised accounting standard which changes the accounting for business combinations. The revised standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of the revised standard did not have a material impact on our consolidated financial statements, but is likely to have a material impact on how we account for future business combinations into which we may enter.

In December 2007, the FASB issued a new accounting standard which establishes accounting and reporting standards for non-controlling interests in consolidated financial statements. Early adoption is prohibited. We adopted the new standard as of January 1, 2009. The adoption of the new accounting standard did not have a significant impact on our consolidated financial position or results of operations.

In May 2008, the FASB issued a staff position which requires recognition of both the liability and equity components of convertible debt instruments with cash settlement features. The debt component is required to be recognized at the fair value of a similar instrument that does not have an associated equity component. The equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The new staff position also requires the accretion of the resulting debt discount over the expected term of the debt. Retrospective application to all periods presented is required. We adopted the new staff position effective January 1, 2009. The adoption did not have a material effect on our consolidated financial statements.

 

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In June 2008, the FASB ratified a new accounting standard that specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to a company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. The new standard provides a two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and is not required to account for the instruments or features under the derivative accounting guidance. We adopted the new standard effective January 1, 2009. The adoption of the new accounting standard did not have a significant impact on our consolidated financial position and results of operations.

In June 2008, the FASB issued a staff position which clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common stockholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. We adopted the new staff position effective January 1, 2009. The adoption did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued a new staff position which changes the existing guidance for determining whether an impairment is other-than-temporary to debt securities. This guidance also requires an entity to present the total other-than-temporary impairment in the statement of operations with an offset for the amount recognized in other comprehensive income. We adopted the new staff position during 2009. The adoption of the new staff position did not have a material impact on our consolidated financial statements.

In May 2009, the FASB issued a new accounting standard which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Although there is new terminology, the standard is based on the same principles as those that are currently exist in the auditing standards. The standard, which includes a new required disclosure of the date through which an entity has evaluated subsequent events, is effective for interim or annual periods ending after June 15, 2009. The adoption of the new accounting standard did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued a new accounting standard that requires a qualitative approach to identifying a controlling financial interest in a variable interest entity, or VIE, and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. The new accounting standard is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact that the pending adoption of the new accounting standard will have on our consolidated financial statements.

In June 2009, the FASB issued a new accounting standard which identifies the Accounting Standards Codification, or ASC, as the authoritative source of GAAP. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. We adopted the new accounting standard during 2009. The adoption of the new accounting standard did not have a material effect on our consolidated financial statements.

In October 2009, the FASB issued a new accounting standard that requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In addition, the new standard eliminates the use of the residual method of allocation and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables. In October 2009, the FASB issued another new accounting standard that changes revenue recognition for tangible products containing software and hardware elements. Specifically, if certain requirements are met, revenue arrangements that contain tangible products with software elements that are essential to the functionality of the products are scoped out of the existing software revenue recognition accounting guidance and will be accounted for under these new standards. Both standards will be effective in the first quarter of 2011. Early adoption is permitted. We are currently assessing the impact that the adoption of these standards will have on our consolidated financial statements.

 

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BUSINESS

Overview

We provide a virtualized wireless LAN solution that cost-effectively optimizes the enterprise network to deliver the performance, reliability, predictability and operational simplicity of a wired network, with the advantages of mobility. We enable enterprises to migrate their business-critical applications from wired networks to wireless networks, and become what we refer to as All-Wireless Enterprises.

Our solution represents an innovative approach to wireless networking that utilizes virtualization technology to create an intelligent and self-monitoring wireless network. Our solution is designed to overcome the limitations of legacy wireless networking architectures that cause most enterprises to maintain two separate access networks: a wired network for business-critical applications, and a wireless network for casual use. Enterprises are now seeking to become All-Wireless Enterprises in order to improve business processes, increase workforce efficiency and respond to the evolving requirements of users. The need to transition to an All-Wireless Enterprise is becoming more urgent as wireless devices increasingly become the means by which users access applications. Our virtualized wireless LAN solution enables organizations to become All-Wireless Enterprises.

Our virtualized wireless LAN solution takes a fundamentally different architectural approach to wireless networking compared to other wireless solutions. Our solution combines wireless resources into one virtual, seamless pool, and partitions this virtual pool to match device and application requirements. The core of our virtualized wireless LAN solution is comprised of our innovative System Director™ Operating System and complementary software applications, which are coupled with our controllers and access points. These software and hardware products operate in concert to create a virtual wireless LAN that intelligently monitors, manages and directs network traffic to optimize application performance in a secure environment. Our solution is designed to be easily deployed and integrated into our customers’ existing IT infrastructure, to be easily managed and to address the wireless networking needs of enterprises of all sizes in every major market.

We were founded with the vision of enabling organizations to become All-Wireless Enterprises. We began commercial shipments of our products in 2003. Our products are sold worldwide primarily through VARs and distributors, and have been deployed by over 2,700 customers in 36 countries.

Industry Background

Growing Demand for Wireless Networks

As enterprises have deployed wireless networks, many have maintained both wired and wireless networks, which has resulted in significant complexity and high cost. Both networks have been maintained, because wireless networks, while convenient, have generally not been able to provide the performance, reliability, predictability and security that enterprises require for their business-critical applications. As such, enterprises have retained a wired network for business-critical applications in order to ensure reliable access to these applications. Due to the rapid growth of Wi-Fi-enabled devices and increased user expectations, the strategic need of enterprises to increase business process efficiency, the rationalization of IT budgets and new, higher-performing wireless networking standards, enterprises are seeking ways to improve the performance and cost-effectiveness of their wireless networks.

 

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As more enterprises seek to leverage the benefits of an all-wireless infrastructure, we intend to capitalize on the significant opportunity presented by both the wireless networking market and the wired networking market, which is commonly referred to as the network switching market. These markets are large and robust, and we believe that the size of these markets along with other trends, will provide us an opportunity for sustained long-term growth:

 

   

The enterprise market for wireless LAN equipment is expected to grow from $1.9 billion in 2009 to $3.6 billion in 2013;1 and the network switching market is expected to reach $16.0 billion in 2013.2

 

   

There were 556.7 million mobile office workers worldwide in 2009.3

 

   

In 2009, worldwide shipments of laptop computers are estimated to exceed shipments of desktop computers for the first time in history.4

We believe that we are at the beginning of a cycle where enterprises are shifting from wired to wireless networks for access to their business-critical applications, including voice, video and data, and that this transition of organizations to All-Wireless Enterprises represents a material upgrade cycle. This shift presents us with a significant opportunity, because our solution has been designed specifically to enable organizations to become All-Wireless Enterprises.

We believe there are four main factors driving the transition to the All-Wireless Enterprise:

 

   

Growing Number of Wireless Devices and Increased User Expectations – The number of Wi-Fi-enabled devices used in enterprise wireless LANs is expected to grow from 115 million in 2009 to 432 million by 2013, representing a compound annual growth rate of 39%.5 These wireless devices are increasingly being used to access business-critical applications; and users increasingly expect seamless mobility, performance and reliability from their wireless networks.

 

   

Drive for Greater Business Process Efficiency – Enterprises increasingly view wireless networks as a means to deliver better service to their customers and increase the productivity of their workforces. These enterprises are shifting from the casual use of wireless networks to the strategic use of wireless networks for all business-critical applications, including converged applications such as voice, video and data. Organizations in markets such as healthcare, education, hospitality, manufacturing and retail are increasingly using wireless networks to access business-critical applications. As enterprises find innovative ways to utilize wireless networks to serve customer needs and improve worker productivity, they are requiring networks that can support their demanding requirements.

 

   

Rationalization of IT Budgets – IT departments are under pressure to deliver a high level of performance and support in a cost-effective manner. IT departments are also expected to find ways to make their wireless networks more reliable in the face of increasing user demand to use wireless devices to access applications. The combination of growing demands on IT departments to improve operating performance and increasing pressure on IT budgets is causing enterprises to seek cost-effective, high-performance and reliance all-wireless networking solutions.

 

   

Catalyst Provided by a New Wireless Communication Standard – The performance capabilities of the 802.11n standard, a wireless communication standard recently ratified by IEEE, are

 

1. Gartner, Forecast: Enterprise Wireless LAN Equipment, Worldwide, 2005-2013, 4Q09 Update, December 2009.
2. Gartner, Forecast: Enterprise Ethernet Switches, Worldwide: 2007-2013, 4Q09 Update, December 2009.
3. IDC, Worldwide PC 2009-2013 Forecast Update, November 2009. IDC defines mobile office workers as employees who are mobile within an office or campus environment, home-based workers and workers whose jobs require them to travel outside their primary office.
4. IDC, Worldwide Mobile Worker 2007-2011 Forecast & Analysis, March 2008.
5. Gartner, Dataquest Insight: Factors Driving the Worldwide Enterprise Wireless LAN Market, 2005-2013, June 2009.

 

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significantly superior to those of previous wireless standards, and can exceed the performance capabilities of widely-deployed wired access networks. The net data rate, or the rate at which information can be sent over the network, of the 802.11n standard is significantly higher than the net data rates of the widely-deployed wired access networks and of the predecessor 802.11a/b/g wireless standards. Enterprises are increasingly realizing that wireless networks designed to optimize the 802.11n standard can deliver the capacity and performance to support their business-critical applications, and are seeking to transform their organizations into All-Wireless Enterprises.

The combination of these forces has resulted in the need for wireless networks to deliver the performance, reliability, predictability, operational simplicity and security of wired networks.

The Limitations of Legacy Wireless Networking Architectures

We believe that other widely-deployed wireless networking solutions are fundamentally similar to one another in their architectures, and that they struggle to deliver the performance, reliability and predictability of wired networks at scale, and to maximize the cost efficiencies that wireless networking has the potential to provide. Other wireless networking solutions are based on architectures that do not coordinate and do not efficiently optimize the resources of the wireless network, and we believe that they are not adequate to support latency-sensitive applications in an environment with a high density of wireless devices.

Most other wireless networking solutions are delivered via microcell architecture. Microcell architecture involves setting up a wireless network coverage area made up of small, independent cells of different radio frequencies, channels, emitted from uncoordinated access points, each of which is a hub. In hub technology, multiple wireless devices access a shared connection and these devices independently and randomly compete to utilize these shared radio frequency, or RF, resources.

The use of hub technology delivered via microcell architecture has fundamental limitations that make it difficult for a wireless network to operate in a predicable and reliable manner to meet the growing demands of enterprises. In microcell architecture, individual wireless devices determine the access point at which they connect to the network; and the access points do not communicate or coordinate with one another. Due to this lack of coordination, the entire network is unable to efficiently allocate appropriate resources to meet the demands of devices and applications. This problem is further exacerbated as the number of wireless devices grows and the applications accessed by these devices become more latency-sensitive and bandwidth-intensive.

As the density of user devices increases, the microcell architecture attempts to expand the capacity of the wireless network by adding more access points into a coverage area. However, regardless of the number of access points within the network, the performance of the wireless network may be compromised if too many devices elect to connect to the same access point. In addition, microcell architecture results in overlapping pools of RF as the number of access points grows. To mitigate these effects, the access points are set to different RF channels and transmit power may be reduced in order to reduce interference between access points. This degrades the effectiveness of the network connection and the overall performance of the wireless network.

Microcell architecture was developed for networks running 802.11a/b/g standards, and is unable to leverage fully the superior performance capabilities offered by the recently ratified 802.11n standard. Microcell-based solutions were designed for the static and uniform signal shapes of the 802.11a/b/g standards. However, the 802.11n signal is dynamic and non-uniform. As a result, networks using microcell architecture struggle to deliver predictable wireless coverage and minimize interference in these networks. This, coupled with the inability to optimize network traffic, prevents these other wireless networking solutions from fully leveraging 802.11n’s superior capabilities.

As a result of the limitations inherent to legacy wireless networking architectures, we believe enterprises have retained their wired networks for business-critical applications, and have deployed these other wireless

 

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networks to provide users with some of the convenience of wireless communications. Consequently, users and enterprises are not able to realize the full benefits that a wireless network can deliver.

The architectural limitations of other wireless networking solutions can result in the following consequences for users:

 

   

Unreliable Access to Applications – In other wireless networking solutions, wireless devices remain in control of their own connections to the network, which often leads to wireless devices selecting an access point that may provide unreliable service. Further, as users move through an enterprise, their wireless devices must disconnect from one access point and connect to another access point, and application performance may suffer. These deficiencies may cause unreliable connections to the wireless network.

 

   

Inadequate Performance – Other wireless networking solutions that are based on hub technology are unable to deliver the performance of wired networks at scale, particularly for latency-sensitive and bandwidth-intensive applications. Users are increasingly demanding better performance in order to maximize the competitive advantages that mobility can provide.

 

   

Suboptimal Delivery of Converged Applications – Other wireless networking solutions struggle to deliver network connections that allow users to effectively run converged applications, such as voice, video and data, on a wireless network. As a result, users become less productive than they otherwise can be in a mobile environment.

The architectural limitations of other wireless networking solutions can result in the following consequences for enterprises:

 

   

Inability to Realize the Full Benefits of Business-Critical Applications – Enterprises may be reluctant to run business-critical applications over a wireless network because of the unreliable and unpredictable performance of other wireless networking solutions. This may limit the efficiency of the enterprise’s workforce because each user may need to retain a wired connection to the network in order to access business-critical applications.

 

   

High Infrastructure Costs – Enterprises often maintain two separate access networks as a result of the limitations of other wireless networking solutions, resulting in greater infrastructure costs. Other wireless networking solutions typically require expensive and detailed site surveys and configuration efforts in order to deploy a wireless network.

 

   

High Operational Expenses – The need to operate both a wired and wireless network increases the expenses and complexity of network management. Other wireless networking solutions also may require periodic site surveys and the physical redeployment of access points on an ongoing basis in order to maintain the network in response to changes in the enterprise environment. These factors result in greater demands on IT departments and could result in high operational expenses.

 

   

Inefficient Scalability – In order to scale, other wireless networking solutions can require enterprises to perform expensive and detailed site surveys, physical redeployment of existing installed access points and new channel plans for incremental increases in network capacity.

Our Solution

Our virtualized wireless LAN solution is designed to cost-effectively meet the increasing demands of users and enterprises for a wireless network that delivers the performance, reliability, predictability and operational simplicity of a wired network, with the advantages of mobility. Our solution represents an innovative

 

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approach to wireless networking that utilizes virtualization technology to create a wireless network that is unimpeded by the architectural deficiencies of other wireless networking solutions. We have developed a wireless networking solution that enables enterprises to migrate their business-critical applications to a wireless network, and to become All-Wireless Enterprises.

Our solution combines wireless resources into one virtual, seamless pool and partitions this virtual pool to match device and application requirements. Our use of virtualization technology for wireless networking has enabled us to deliver a solution that cost-effectively optimizes the enterprise network. Our System Director™ Operating System limits the ability of the wireless device to select which physical access point to use, and instead shifts control of network connections to the wireless network infrastructure. When a wireless device enters the enterprise and attempts to connect with the wireless network, it is presented with a unique virtual connection point.

Further, our virtualized wireless LAN solution enables the network to monitor itself and provide predictive and proactive diagnosis of issues affecting network service. Our solution also provides comprehensive and centralized wireless management. It represents a new approach to wireless network management, using continuous recording of key network events, as well as data collection and analysis to reduce the time spent by IT personnel troubleshooting user issues and minimize user downtime. Our solution offers access to real-time and cumulative performance metrics for both individual wireless user devices and access points, as well as the network as a whole. From a single interface, which can be accessed remotely, IT personnel can engage in focused and deep analysis of the entire wireless network, and view activity details at each level of the infrastructure: controllers, access points and individual wireless user devices.

Our solution is based on our System Director, embedded with Virtual Cell™ and Virtual Port™ technologies. Our System Director coordinates all of the components of our solution, including our access points and controllers. Our software, controllers and access points are designed to be easily deployed and integrated into existing IT infrastructure. Our solution is designed to be easily managed and scalable across enterprises of all sizes. In addition, it provides comprehensive security capabilities to ensure that the wireless network is at least as secure as a wired network. It has been deployed by enterprises in many markets, such as education, healthcare, hospitality, manufacturing and retail. We have achieved significant success among enterprises in these markets, which have been at the forefront of the transition from using wireless networks for casual use to using wireless networks for strategic advantages.

Our solution optimizes the wireless enterprise network to cost-effectively deliver the performance, reliability, predictability and operational simplicity of a wired network.

Our virtualized wireless LAN solution is designed to deliver the following benefits to users:

 

   

Reliable Access to Applications – Our solution places control of wireless connections with the network instead of the wireless device. Through our virtualization process, our solution ensures that each wireless device, whether stationary or in motion, is optimally connected to the network, and provides a reliable experience for users regardless of the device or application they are using.

 

   

High Performance – Our solution is designed specifically to leverage the capabilities of the recently ratified 802.11n wireless communication standard; and the performance of wireless networks using our solution can surpass the performance delivered by widely-deployed wired access networks.

 

   

Enhanced Ability to Run Converged Applications – The performance, reliability and predictability of our solution enable a wired-like experience that allows users to access their business-critical applications, including voice, video and data, on their wireless devices.

 

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Further, enterprises can realize the following benefits by deploying our solution:

 

   

Ability to Maximize the Benefits of Business-Critical Applications – We deliver a reliable and predictable solution that enables enterprises to run business-critical applications over a wireless network. By enabling their workforces to run business-critical applications in a mobile environment, enterprises can better serve their customers and increase the productivity of their workforces.

 

   

Reduced Infrastructure Costs – Our solution enables enterprises to significantly reduce their network infrastructure expenses. Our solution enables enterprises to deploy a wireless network without expensive and detailed site surveys and configuration efforts. Further, we believe that creating new wireless connections is significantly less capital-intensive than creating new wired connections, because less hardware and labor is required to provide network connectivity. Additional cost savings are realized as enterprises add or move employees. Moreover, our solution typically requires fewer access points than other wireless networking solutions, thereby reducing the hardware and labor costs associated with installing a wireless network.

 

   

Lower Operational Expenses – Our solution enables enterprises to significantly reduce their network infrastructure operational expenses. It reduces the need for maintenance and management of a wired network. Our solution also reduces the need for periodic site surveys and the physical redeployment of existing installed access points on an ongoing basis. Our solution coordinates the access points allowing them to operate at peak transmit power, thus achieving a greater range of coverage, and typically requires fewer access points than other wireless solutions. Our solution is engineered so that each access point consumes energy more efficiently than access points in other wireless networking solutions. This reduces the overall power consumption of the network and reduces ongoing operational expenses. All of these factors enhance an IT department’s ability to maintain and manage the network in a cost-effective manner.

 

   

Efficient Scalability – Our solution has been designed to easily increase the network’s capacity in response to the changing needs of the enterprise. In order to expand the wireless network coverage areas, an enterprise deploying our solution can easily add access points as necessary. For increases in the capacity of a wireless network, an enterprise operating our solution can easily add another RF channel and deploy additional access points on that added RF channel. With our solution, unlike with other wireless networking solutions, typically there is no need to re-survey the enterprise’s facilities or physically redeploy existing installed access points, which can significantly reduce the labor and material expenses of building out a wireless network.

Our Growth Strategy

Our goal is to become the leading provider of wireless networking solutions for the enterprise. Key elements of our strategy include:

 

   

Increasing Awareness of Our Brand and Solution – We intend to continue to promote our brand and the effectiveness of our virtualized wireless LAN solution. We also intend to expand market awareness of the strategic benefits and cost-savings of becoming an All-Wireless Enterprise. We expect to increase our sales and marketing activities with both our partners and customers through targeted marketing programs.

 

   

Expanding Adoption across Markets – To date, we have focused on markets that have begun the transition from using wireless networks for casual use to using wireless networks for strategic advantages. These markets include education, healthcare, hospitality, manufacturing and retail. We intend to continue to increase our sales within these markets and expand the use of our solution into new markets, such as the federal government.

 

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Expanding Distribution – We intend to expand and leverage our relationships with our VARs and distributors to extend our market penetration and geographic reach.

 

   

Extending Our Technological Advantage – We believe that we currently offer a wireless LAN solution unlike any other widely-deployed wireless networking solution in the market today, with a virtualized networking architecture that is fundamentally different than the legacy networking architectures used in other solutions. We intend to enhance our position as a leader in wireless networking through continued technological innovation.

 

   

Enhancing Our Solution – We plan to enhance our current solution to address our customers’ evolving application and deployment requirements.

Technology

Our virtualized wireless LAN architecture integrates our proprietary software on industry-standard hardware and protocols. In order to achieve wired-like performance, reliability, predictability and operational simplicity in a wireless network, our System Director™ Operating System integrates two key technologies: Virtual Cell™ and Virtual Port™.

Virtual Cell – A Virtual Cell is created when wireless resources from multiple physical access points are pooled together to provide the abstraction of a single access point to a wireless device, with each physical access point operating on the same radio channel and offering identical services. This pooling completely masks the identities of individual access points from the perspective of users and their wireless devices. The physical access points become indistinguishable to wireless devices which only see one common network connection. The entire Virtual Cell has one common identity, and the wireless device effectively connects to the Virtual Cell and not to individual access points. As a wireless device moves, our System Director determines the best physical access point to serve the device and seamlessly migrates the wireless device to the appropriate access point.

The graphic below shows RF coverage using microcell architecture compared to our Virtual Cell technology.

LOGO

The use of Virtual Cell technology can provide a number of key advantages over legacy wireless network architectures:

 

   

Predictable Service through Network Control – In legacy wireless network architectures, the wireless device remains in control of its connection to the network and is allowed to make connection decisions based on its own needs, which can degrade the overall performance of the

 

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network. In a Virtual Cell, the network controls the connection decision for each device, ensuring optimum use of the network resources, independent of the hardware, software, or settings of the device. Virtual Cell technology converts wireless service from a device-controlled network to a network-controlled system, increasing the predictability of service available to each wireless device.

 

   

Stable Coverage – The design of legacy wireless architectures requires that neighboring access points be placed on different channels to mitigate interference. This approach creates a complex optimization problem of ensuring that there are no gaps in wireless coverage while simultaneously minimizing coverage overlap between access points on the same channel—a difficult problem to solve since coverage is practically impossible to predict accurately. Virtual Cell takes a fundamentally different approach by pooling all access points together on the same channel. Our System Director coordinates each device’s access to the network, and through this coordination, mitigates interference across access points. Using this approach, coverage issues are solved by simply adding access points to the Virtual Cell.

 

   

Cost Reductions from Fewer Access Points – Unlike with legacy wireless architectures, where the RF transmit power of access points is typically lowered to reduce interference, with Virtual Cell all access points operate at peak power, and thus achieve a greater range of coverage. We believe this approach results in more robust wireless coverage and also reduces the number of access points in the network.

 

   

Rapid and Cost-Effective Deployment – The deployment of other wireless networks involves the cumbersome and iterative process of placing and tuning access points in an effort to maximize wireless coverage and minimize interference. This often requires detailed and expensive site surveys and configuration efforts. By pooling wireless resources without having to consider whether access points are poorly spaced, Virtual Cell allows enterprises to deploy wireless networks more quickly and at lower cost than alternate approaches. Wireless network deployment with Virtual Cell is more closely related to simple “painting” of the coverage area than to careful placing and adapting of access points. Our Virtual Cell technology allows enterprises to react quickly to significant increases in the number of wireless devices and to changes in the physical layout of a particular location by adding access points as necessary. Virtual Cell technology enables enterprises to avoid expensive and detailed site surveys and reconfiguration efforts often required to adapt to these changes on networks deploying other wireless networking solutions.

 

   

Efficient Network Redundancy – In order to support business-critical applications over a network, enterprises require redundancy in the network infrastructure. We believe pooling wireless resources provides the most effective method for providing redundancy on a wireless network. Unlike legacy wireless architectures, which utilize multiple channels to provide basic coverage, a Virtual Cell occupies only one channel, leaving the remaining channels available. Adding a second Virtual Cell on one of these available channels instantly doubles the capacity of the network, and also provides a redundant channel.

Virtual Port – Within the Virtual Cell, our System Director assigns each wireless device a unique identifier and a dedicated virtual link to the network, which we refer to as a Virtual Port. The Virtual Port allows our System Director to allocate resources to each individual device taking into account that particular device’s unique network needs and the applications running on that device. The Virtual Port remains with each wireless device for the life of its connection to the network, even as the wireless device moves. This allows the wireless network to deliver a dedicated and customized wireless service for each device. At the same time, our System Director continues to optimize the overall performance and reliability of the network.

 

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Generating a unique Virtual Port for each wireless device can provide a number of key benefits:

 

   

Optimized Allocation of ResourcesVirtual Port allows our System Director to optimize the allocation of network resources among devices, thereby ensuring that the service for a device is not impacted by the behavior of any other device. This provides wire-like predictability and the ability to support diverse wireless devices.

 

   

Improved Support for Converged ApplicationsVirtual Port provides an effective method for controlling the quality of service parameters for each device and application, thereby enabling the network to support multiple types of applications, including latency-sensitive voice and video applications.

 

   

Enhanced Mobility – The Virtual Port always follows the wireless device and the associated network policies throughout the network. Our System Director seamlessly migrates the connection and associated network policies of the device to whichever physical access point can optimally service that device, thus providing the user with a predictable connection to the network.

Products

We provide a virtualized wireless LAN solution that is built around our System Director™ Operating System, which runs on our controllers and access points. We offer additional products designed to deliver centralized network management, predictive and proactive diagnostics, as well as enhanced security. Our products allow enterprises to leverage their investments in their existing IT infrastructures.

Meru System Director Operating System

Our System Director Operating System forms the core of our virtualized wireless LAN solution and is the common software foundation that runs on our scalable range of controllers and our line of Wi-Fi-certified wireless access points. It provides centralized coordination and control of all the access points on the network and delivers a set of services for application-aware optimization of the network, comprehensive security, high availability, flexible deployment and simple operations.

 

   

Application-Aware Optimization – Our System Director monitors and classifies applications being accessed by wireless devices on the network to optimize the performance of these applications over our virtualized wireless LAN. This enables our solution to support a high density of wireless devices and deliver wired-like performance for business-critical applications, such as voice, video and other latency-sensitive applications like medical telemetry.

 

   

Comprehensive Security – Our System Director delivers firewalling and policy enforcement of centralized security policies that manage network access by application type, by device and by user. Our System Director also provides strong authentication and encryption using the industry-standard WPA2 protocol, integration with enterprise authentication and authorization infrastructure, as well as guest access management for temporary users. Additional security features embedded within our System Director include wireless intrusion detection and mitigation capabilities, as well as user access logging and accounting capabilities.

 

   

High Availability – Our System Director includes a redundancy feature that increases the availability of the wireless network in a cost-effective manner. It allows one of our controllers to serve as a backup to multiple controllers, providing cost-effective redundancy. Controller redundancy increases the reliability of wireless networks by mitigating the failure of a controller in the network. Our System Director also allows an additional layer of access points to be easily added by deploying an additional channel, providing another cost-effective redundancy alternative.

 

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Flexible Deployment – Our System Director has numerous capabilities that allow for the flexible deployment of a wireless network. It supports the deployment of access points and controllers anywhere within an enterprise’s global infrastructure from headquarters to branch offices. Our System Director allows access points to connect to an enterprise’s existing network infrastructure wirelessly instead of through a wired connection, which is commonly referred to as having wireless mesh capabilities. This, in turn, allows enterprises to lower the costs of installation and increase deployment flexibility by being able to install access points without wire. In addition, remote access point functionality allows enterprises to extend the enterprise wireless network to the home offices of telecommuters, eliminating the need for separate virtual private networking.

 

   

Simplified Operations – Our System Director simplifies the ongoing operation of wireless networks. It allows all management and security policies for the entire wireless network to be centrally configured and administered. Our System Director enables predictive and proactive diagnosis of service problems and rapid troubleshooting by recording and replaying network events. In addition, our System Director integrates with third-party enterprise IT management systems through industry-standard protocols.

Meru Controllers

We provide a family of scalable Meru controllers that run our System Director and work in conjunction with our access points to provide high performance and reliable network service to wireless devices. Our controllers synchronize access points to optimize the user experience and manage all traffic on the network.

Our family of controllers, summarized in the following table, is designed to meet the scale and performance needs of different sized networks from small branch offices or small enterprises to large campus environments or enterprise headquarters. All of the controller platforms run our System Director Operating System and each controller delivers a common set of capabilities independent of the size of the network.

 

     MC5000    MC4100    MC3000    MC1500

Maximum Number of Access Points

   1,500    300    150    30

Typical Deployment

   Headquarters,
Large
Campus
   Regional
Office,
Large
Campus
   Mid-sized
Enterprise,
Branch
Office
   Small
Enterprise,
Remote Office

Meru Access Points

Our 802.11a/b/g/n industry-standard, Wi-Fi-certified access points provide network connectivity for wireless devices. They are typically deployed in ceilings within buildings, and they automatically discover and connect to our controllers, providing wireless service to users based on the centralized policies configured for the network. Our access points also monitor the network and gather information that is used to provide enhanced security, centralized network management, and proactive and predictive diagnostic capabilities.

We provide a comprehensive line of 802.11a/b/g/n industry-standard access points that can be combined with a set of external antennae to support different coverage needs. We have access point models for deployment indoors and outdoors.

 

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Meru E(z)RF Application Suite

The Meru Networks ® E(z)RF™ Application Suite enables enterprises to configure, monitor, troubleshoot, secure and operate our virtualized wireless LAN solution. Each of the following software applications can be purchased separately:

 

   

E(z)RF Network Manager – Our E(z)RF Network Manager provides a comprehensive, centralized wireless management and troubleshooting system designed to lower the total cost of ownership for an organization. It provides centralized management through network visualization, configuration, wireless performance dashboards and fault management. From a single interface, IT managers can rapidly view activity details at each level of the infrastructure: controllers, access points and individual wireless devices. It offers access to real-time and cumulative performance metrics covering both individual wireless devices or access points and the network as a whole. It is a highly scalable platform representing a new approach to wireless LAN management, using continuous recording of key network events, as well as data collection and analysis to reduce the time spent by IT personnel troubleshooting user issues and to minimize user downtime.

 

   

E(z)RF Service Assurance Manager – Our E(z)RF Service Assurance Manager is designed to deliver end-to-end service assurance for the network and the applications that run on the wireless network. It creates virtual devices on existing access points, which actively inject traffic over the air to test and verify the performance of the network. This allows the system to quickly isolate faults or potential issues, whether they occur in the wireless network or in the backend wired infrastructure even before users experience them.

 

   

E(z)RF Location Manager – Our E(z)RF Location Manager provides the capability to automatically track the physical location of thousands of wireless devices, including wireless-enabled laptops and PDAs, wireless VoIP handsets as well as unauthorized access points. It also has the capability to create security policies based on enterprise-defined parameters, and it provides an application programming interface that enables integration with third-party business process applications, such as asset tracking.

 

   

E(z)RF OnTheGo – Our E(z)RF OnTheGo provides customized dashboards on mobile devices, such as smartphones, allowing IT personnel to monitor and manage the network from any location in the world with a Wi-Fi or cellular connection.

Security Applications

We also provide a number of hardware and software security solutions that allow constant monitoring and defense against security breaches. Each of the following security applications can be purchased separately:

 

   

RFBarrier™ – Our RFBarrier is designed to provide security around the perimeter of a building to prevent eavesdropping from outside the building. This product consists of access points running the RFBarrier software module and special antennae that are able to mask specific signals, rendering them invisible outside the perimeter of a facility.

 

   

AirFirewall™ – Our AirFirewall is designed to intercept and block unwanted communications as they are transmitted over the air, stopping them before they reach the network. It prevents unauthorized access to the network, while leaving authorized services unaffected.

 

   

Security Gateway SG1000 – Our Security Gateway SG1000 is a centralized system designed to meet the exacting demands of the Federal Information Processing Standard, or FIPS, 140-2 Level 3 security required by federal government agencies and other security-conscious organizations as they broadly adopt wireless LANs. It secures our entire wireless LAN to the FIPS 140-2 standard.

 

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Support and Services

We offer customer support and services based on the deployment needs of our customers. We offer service contracts in varying lengths of up to five years.

MeruAssure™, our customer support offering, maximizes and protects our customers’ wireless LAN investment with comprehensive services and support. By helping to keep network operations running efficiently, MeruAssure minimizes disruption to business operations, combining incident detection, investigation and diagnosis with the monitoring, recovery and resolution needed to support business-critical network resources. Our customer support offering provides our customers with software upgrades, online access to our knowledge database of technical information related to our virtualized wireless LAN solution and access to our customer service personnel. In order to better serve our customers, we have support centers in Sunnyvale, California and Bangalore, India and an outsourced support center in Chennai, India available to respond live 24 hours a day, every day. Our customers also receive Tier 1 support through our VARs.

In addition, we provide professional services to our customers. Our professional service offerings help our customers extract additional strategic value from our virtualized wireless LAN solution. With a team of experienced engineers and consultants, our professional services organization assists enterprises in deploying and operating our solution. We offer a variety of professional service engagements to meet the varying needs of our customers.

We also train our VARs and offer training to our customers. Our training department conducts basic and advanced courses online, onsite at customer locations and at our training facility in Sunnyvale, California. In addition to our standard training programs, we offer different levels of Meru certification programs, which certify participants upon successful completion of the program covering our products and wireless technologies.

Customers

Our virtualized wireless LAN solution has been deployed by over 2,700 customers in 36 countries worldwide in many markets, including education, finance, government, healthcare, hospitality, manufacturing, retail, technology, telecom, transportation and utilities. Our solution is deployed in a wide range of enterprises, from smaller enterprises with single locations to large global enterprises.

Sales and Marketing

We sell our products and support worldwide primarily through VARs and distributors. These channel partners help market and sell our products and services to a broad array of enterprises and allow us to leverage our sales force. In some cases, we support our VARs’ market development efforts through contributions to their marketing spending.

Our sales force is responsible for managing sales within each of our geographic territories. As of September 30, 2009, we had sales personnel located in the Americas, Europe, Middle East and Africa (EMEA) and the Asia Pacific region. In 2006, 2007, 2008 and the nine months ended September 30, 2009, 38%, 18%, 29% and 24% of our revenues, respectively, were derived from customers outside of the U.S.

Our marketing activities consist primarily of public relations, demand generation, direct marketing, website operations, technology conferences, trade shows, seminars and events, advertising and promotions.

 

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Research and Development

Our continued investment in research and development is critical to our business. We have assembled a team of engineers with expertise in various fields, including networking technologies, applications, wireless communications, and network and systems management. Our research and development team is based in Sunnyvale, California and Bangalore, India. We staff our development projects with engineers in both locations and operate our research and development team as an integrated unit. We have invested significant time and financial resources into the development of our System Director Operating System and related software and hardware products. We plan to expand our product offerings and solutions capabilities in the future and plan to dedicate significant resources to these continued research and development efforts.

Operations

We outsource manufacturing of our hardware products from original design manufactures, or ODMs, and contract manufacturers, or CMs. Our ODMs and CMs are responsible for sourcing all the components included in our hardware products. We perform rigorous in-house quality control testing to ensure the reliability of our products. We outsource the warehousing and delivery of our products to a third-party logistics provider in the U.S. for worldwide fulfillment.

Competition

The wireless networking market is highly competitive and continually evolving. We believe that we compete primarily on the basis of providing a comprehensive solution that delivers high-performing, reliable and predictable wireless networking solutions in a cost-effective manner. We believe other principal competitive factors in our market include the ability to provide quality customer service and support, the ease with which a wireless network can be initially deployed and scaled to meet an enterprise’s needs, the interoperability of a wireless network with a wide range of devices, the ability to provide appropriate levels of security and the ability to bundle wireless products with other networking offerings. We generally compete favorably with our competitors; however, many of our actual and potential competitors enjoy substantial competitive advantages over us, such as greater name recognition, more products and services and substantially greater financial, technical and other resources.

Our primary competitors include Cisco Systems, primarily through its wireless networking business unit, Aruba Networks, Motorola through its acquisition of Symbol Technologies and Hewlett-Packard through its acquisition of Colubris Networks. We also face competition from a number of smaller private companies.

Intellectual Property

Our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.

We have been granted two U.S. patents, which will expire in 2022 and 2026. We have 29 non-provisional patent applications pending in the U.S. Patent and Trademark Office. Our registered trademark in the U.S. is Meru Networks.

In addition to the foregoing protections, we generally control access to and use of our proprietary software and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners, and our software is protected by U.S. and international copyright laws. We also incorporate certain generally available software programs into our products pursuant to license agreements with third parties.

 

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Employees

As of September 30, 2009, we had 232 employees in offices across the Americas, Europe, the Middle East and the Asia. None of our employees are represented by labor unions, and we consider current employee relations to be good.

Facilities

We have approximately 44,000 square feet of office space in Sunnyvale, California pursuant to a lease that expires in March 2011. We also lease approximately 15,000 square feet for a research and development facility in Bangalore, India pursuant to a lease that expires in November 2012. We have a right to extend our lease in Bangalore until November 2015. We also maintain customer service centers and sales offices in multiple locations worldwide. We believe that our current facilities are suitable and adequate to meet our current needs, and we intend to add new facilities or expand existing facilities as we add employees. We believe that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.

Legal Proceedings

We are subject to various claims arising in the ordinary course of business. Although no assurance may be given, we believe that we are not presently a party to any litigation of which the outcome, if determined adversely, would individually or in the aggregate be reasonably expected to have a material and adverse effect on our business, operating results, cash flows or financial position.

Third parties have from time to time claimed, and others may claim in the future, that we have infringed their past, current or future intellectual property rights. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, require expensive changes to our products or could require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business, results of operations, cash flows and financial position.

 

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MANAGEMENT

Executive Officers, Other Key Employees and Directors

Our executive officers, other key employees and directors, and their ages and positions as of September 30, 2009 are as set forth below:

 

Name

   Age   

Position

Ihab Abu-Hakima

   54    President, Chief Executive Officer and Director

Dr. Vaduvur Bharghavan

   40    Founder, Chief Technical Officer and Director

Brett White

   46    Chief Financial Officer

Glenn Cross

   52    Senior Vice President of Worldwide Sales, Service and Support

Kamal Anand

   45    Senior Vice President of Corporate Development and Strategy

Ram Appalaraju

   49    Senior Vice President of Marketing

Richard Mosher

   40    Vice President and General Counsel

Sarosh Vesuna

   50    Vice President of Business Development

Keith Matasci

   49    Vice President of Operations

Tom Erickson (1)

   48    Director

Nicholas Mitsakos (2)

   50    Director

Barry A. Newman (1)

   51    Director

William Quigley (1)

   45    Director

Andre Turenne (2)

   48    Director

 

(1) Member of the Audit Committee

 

(2) Member of the Compensation Committee

 

(3) Member of the Nominating and Corporate Governance Committee

Executive Officers

Ihab Abu-Hakima has served as our President and Chief Executive Officer since January 2005. Prior to joining us, Mr. Abu-Hakima served as Vice President of Sales and Corporate Development at Proxim Corporation, a broadband wireless systems provider, from 2002 to 2004, and Vice President of Marketing and Business Development at Western Multiplex Corporation, a broadband wireless systems provider, from 2000 to 2002. Mr. Abu-Hakima also worked at Silicon Graphics, Inc., a manufacturer of high-performance computing solutions from 1990 to 1996 and 1997 to 1999 where he rose to the position of Vice President and General Manager. He also worked at Pictra, Inc., a digital photo sharing company, from 1996 to 1997, and at Liveknowledge.com, an internet-based knowledge exchange, from 1999 to 2000. Mr. Abu-Hakima also worked at Hewlett-Packard Company, a technology company, and at the Bechtel Corporation, a construction and engineering company. He holds a B.S. in Electrical Engineering, with honors, and an M.B.A. from McGill University in Montreal, Canada.

Dr. Vaduvur Bharghavan is one of our Founders and has served as our Chief Technology Officer since February 2002. Prior to co-founding Meru, Dr. Bharghavan founded Bytemobile Inc., a mobile internet solution provider, in 2000, where he served as Chairman and Chief Technology Officer. From 1995 to 2000, he was on the faculty of the Electrical and Computer Engineering Department at the University of Illinois at Urbana-Champaign. Dr. Bharghavan holds a B.Tech in Computer Science from the Indian Institute of Technology at Madras and an M.S. and Ph.D. in Computer Science from the department of Electrical Engineering and Computer Science at the University of California, Berkeley.

Brett White has served as our Chief Financial Officer since December 2007. Prior to joining us, Mr. White served as Chief Financial Officer at Fortinet, Inc., a network security appliances provider, from 2005 to 2007, at Corio, Inc., a software application service provider, from 2002 to 2005; and at KANA Software, Inc.,

 

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a software company, from 2001 to 2002. Mr. White also worked at Oracle Corporation, a business software company, from 1989 to 1999, where he rose to the position of Vice President of Finance. Mr. White holds a B.A. in Business Economics with honors from the University of California, Santa Barbara.

Glenn Cross has served as our Senior Vice President of Worldwide Sales, Service and Support since September 2009. From November 2007 to August 2009, Mr. Cross served as Executive Vice President of Worldwide Sales for Secure Computing Corporation, a computer security appliances provider, and then Senior Vice President of Worldwide Network Security Sales for McAfee, Inc., a software and computer security company, when it acquired Secure Computing, Inc. in 2008. From November 2005 to November 2007, he served as Executive Vice President for Global Sales at SurfControl Plc., a software company; and from May 2004 to November 2005, he was the Senior Vice President of Worldwide Sales for Nuance Communications, Inc., a software company. Mr. Cross holds a B.S. in Marketing and Economics from Florida Southern College.

Kamal Anand has served as our Senior Vice President of Corporate Development and Strategy since October 2009. From April 2003 to October 2009, Mr. Anand served as our Senior Vice President of Marketing and Strategy, Vice President of Product Management and Vice President of Sales and Marketing. Prior to joining us, Mr. Anand served as Vice President of Business Development and International Sales at Atoga Systems, a technology company from 2001 to 2003; he co-founded and served as Vice President of Marketing for NetContinuum Inc., a computer and networking security company, from 1999 to 2001; and served as Vice President of Field Marketing for FORE Systems Inc., an internet switching equipment company, from 1998 to 1999. Mr. Anand also worked as a strategy consultant at McKinsey & Co. from 1995 to 1997. Mr. Anand holds a B.E. in Mechanical Engineering and a B.S. in Computer Science from Birla Institute of Technology & Science, Pilani, India, an M.B.A. from The Wharton School of the University of Pennsylvania, and an M.S. in Computer Science from the University of Southern California.

Ram Appalaraju has served as our Senior Vice President of Marketing since October 2009. Prior to joining us, Mr. Appalaraju was Vice President of Marketing at Isilon Systems Inc., a storage system and software provider, from November 2008 to November 2009. From November 2006 to November 2008, Mr. Appalaraju was Vice President of Marketing for Azul Systems, Inc., a computer appliance manufacturer. From 1995 to 2006, Mr. Appalaraju was Vice President of Marketing at Hewlett-Packard Company, a technology company. Mr. Appalaraju holds a B.S.E.E. from the University of Madras, India, and a M.S.E.E. from Northeastern University.

Richard Mosher has served as our Vice President and General Counsel since November 2009. From November 2007 to November 2009, Mr. Mosher served as Vice President and General Counsel for Ingres Corporation, an open source database company formed by a divestiture from CA, Inc. Prior to working at Ingres, from 2006 until 2007, Mr. Mosher served as Vice President and General Counsel of SNOCAP, Inc., a digital music licensing company. From 2000 to 2006, Mr. Mosher was Vice President and General Counsel for Intellisync Corporation (formerly known as Pumatech, Inc.), a mobile device software company, through the acquisition of Intellisync by Nokia Corporation. Mr. Mosher worked from February 2006 through June 2006 with Nokia Corporation, a technology company, following its acquisition of Intellisync. Mr. Mosher holds a B.A. in Political Science from the University of California, San Diego and a J.D. from the University of the Pacific.

Sarosh Vesuna has served as our Vice President of Business Development since January 2008. Prior to joining us, Mr. Vesuna served as Senior Director of Strategy and Business Development for Motorola Inc., a technology company, from January 2007 to January 2008. From February 1998 to January 2007, Mr. Vesuna served as Senior Director of Strategy and Business Development at Symbol Technologies Inc., a mobile data capture and delivery company. Mr. Vesuna holds a B.S.E.E. from the University of Bombay and an M.S.E.E. from Pennsylvania State University.

Keith Matasci has served as our Vice President of Operations since July 2007. Prior to joining us, Mr. Matasci served as Vice President of Operations for Terayon Communications Systems, Inc., a provider of

 

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digital video solutions for broadcasters, from December 2003 to July 2007. From 2000 to 2003, Mr. Matasci was Vice President of Operations for CoSine Communications Inc., a developer of managed service platforms; and from 1987 to 2000 he served as Vice President of Customer Service at Silicon Graphics, Inc., a provider of high performance computing platforms. Mr. Matasci holds a B.S. in Engineering Technology and Mechanical Engineering from California Polytechnic State University, and an honorary M.S. in Engineering Management from California Polytechnic State University.

Board of Directors

Thomas Erickson has served as one of our directors since 2004. Mr. Erickson has served as a co-founder and general partner of BlueStream Ventures, a venture capital firm, since 2000. From 1990 to 2000, Mr. Erickson worked as a network technology analyst for Dain Rauscher Wessels and its predecessor Wessels, Arnold & Henderson. Mr. Erickson holds a B.A. in Mathematics from St. Olaf College and an M.B.A. from the Kellogg School of Management at Northwestern University Kellogg School of Management. He is a Chartered Financial Analyst.

Nicholas Mitsakos has served as one of our directors since 2002. Since 1989, Mr. Mitsakos has served as the Chairman and CEO of Arcadia Holdings, Inc., an investment firm focused on private equity and venture capital globally. He has also served as a senior advisor to Sardis Capital, a London-based merchant bank since 2003, and to Franklin Templeton China, in Shanghai, China, since 2001, and Templeton International, since 1996. He holds B.S. degrees in Computer Science and Microbiology from the University of Southern California and an M.B.A. from Harvard University. He taught at UCLA’s Anderson School of Business from 1992 to 1998, and is also on the board to UCLA’s Center for Cerebral Palsy at the UCLA Medical School.

Barry A. Newman has served as one of our directors since June 2006. Mr. Newman is a Managing Director at NeoCarta Ventures, a venture capital firm, which he joined in July 2006. Mr. Newman served as a Vice Chairman of the Technology Group at Bear, Stearns and Co. Inc. from 2001 to 2004, the Head of Global Technology Corporate and Investment Banking for Banc of America Securities L.L.C. and its predecessor Nationsbanc Montgomery Securities LLC from 1999 to 2001 and as the head of Global Technology Corporate finance at Salomon Brothers and Salomon Smith Barney from 1996 to 1999. Mr. Newman holds a B.S. degree in both Chemical Engineering and Life Sciences from the Massachusetts Institute of Technology, an M.B.A. and a J.D. from Stanford University and an L.L.M. (Taxation) from NYU.

William Quigley has served as one of our directors since 2002. Mr. Quigley is a Managing Director at Clearstone Venture Partners, a venture capital firm. He joined Clearstone shortly after its formation in 1999, from Mid-Atlantic Venture Funds, where he served as an investor and Kauffman Fellow. He holds a B.S. in Accounting, with honors, from the University of Southern California and he received his M.B.A., with distinction, from Harvard Business School.

Andre Turenne has served as one of our directors since 2002. Mr. Turenne is a Senior Vice President of D.E. Shaw & Co., L.P., a venture capital firm, and an executive of the D.E. Shaw group’s venture capital unit. Prior to joining the D.E. Shaw group in June 2006, Mr. Turenne was a managing director of NeoCarta Ventures, Inc., a venture capital investment firm, from 2001 to May 2006. From 1996 to 2000, he served as senior manager of strategic investments at Intel Capital, the venture capital unit of Intel Corporation. Mr. Turenne received his B.S. in Engineering from Rensselaer Polytechnic Institute, and his M.B.A. from Northeastern University.

Board Composition

Our board of directors is currently composed of seven members, five of whom are independent. We currently have one vacancy on our board of directors. Our restated certificate of incorporation and bylaws provide that the number of our directors, which is currently eight members, shall be fixed from time to time by a resolution of the majority of our board of directors. Each officer serves at the discretion of the board of directors

 

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and holds office until his successor is duly elected and qualified or until his or her earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

Board Committees

Audit Committee The audit committee provides assistance to the board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by our independent registered public accounting firm and reviewing their reports regarding our accounting practices and systems of internal accounting controls. The audit committee also oversees the audit efforts of our independent registered public accounting firm and takes those actions as it deems necessary to satisfy itself that the independent registered public accounting firm is independent of management. Our audit committee is comprised of Thomas Erickson, Barry A. Newman and William Quigley, each of whom is a non-employee member of our board of directors. We believe that each member of our audit committee meets the requirements for independence and financial literacy under the applicable requirements of the SEC rules and regulations.              is our audit committee financial expert as currently defined under SEC rules.

Compensation Committee. After completion of this offering, the compensation committee will determine our general compensation policies and the compensation provided to our directors and officers. The compensation committee will also review and determine bonuses for our officers and other employees. In addition, the compensation committee will review and determine equity-based compensation for our directors, officers, employees and consultants and will administer our stock option plans and employee stock purchase plan. Our compensation committee will also oversee our corporate compensation programs. Our compensation committee is currently comprised of Nicholas Mitsakos and Andre Turenne. We believe that the composition of our compensation committee meets the criteria for independence under, and the functioning of our compensation committee complies with the applicable requirements of, the Sarbanes-Oxley Act of 2002 and the SEC rules and regulations.

Nominating and Corporate Governance Committee. After completion of this offering, the nominating and corporate governance committee will be responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the nominating and corporate governance committee will be responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board of directors concerning corporate governance matters. The members of the nominating and governance committee are              and             . We believe that the composition of our nominating and governance committee meets the criteria for independence under, and the functioning of our nominating and corporate governance committee currently complies with the applicable requirements of, the Sarbanes-Oxley Act of 2002, and the SEC rules and regulations.

Compensation Committee Interlocks and Insider Participation

No interlocking relationship exists between our board of directors or compensation committee and the board of directors or compensation committee of any other entity, nor has any interlocking relationship existed in the past.

Director Compensation

Our directors do not currently receive any cash or stock-based compensation for their services as members of our board of directors or any committee of our board of directors. However, we intend to review and consider future proposals regarding board compensation.

 

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The aggregate number of shares subject to stock options outstanding at September 30, 2009 for each director is as follows:

 

Name

   Aggregate Number of Stock Options Outstanding
as of September 30, 2009

Nicholas Mitsakos

   147,344

Executive Compensation

Compensation Discussion and Analysis

Compensation Philosophy and Objectives

The primary goal of our executive compensation program is to ensure that we hire and retain talented and experienced executives who are motivated toward achieving or exceeding our short-term and long-term corporate goals. We design our compensation programs for our named executive officers to serve the following purposes:

 

   

to reward them for sustained financial and operating performance and leadership excellence;

 

   

to align their interests with those of our stockholders; and

 

   

to encourage them to remain with us for the long-term.

Role of the Compensation Committee and Management

Our compensation committee of our board has overall responsibility for advising the board of directors regarding the compensation of our named executive officers. Members of the compensation committee are appointed by our board. The compensation committee makes its compensation recommendations based on input from our Chief Executive Officer and Chief Financial Officer and the judgment of its members based on their tenure and experience. The board of directors, taking into account the recommendations of the compensation committee, has the ultimate responsibility of formulating, evaluating and determining the compensation of our named executive officers, including the compensation of our Chief Executive Officer. Following this offering, we anticipate our compensation committee will be primarily and ultimately responsible for determining the compensation program for our named executive officers.

Elements of Compensation

In 2008 and 2009, the three main elements to our compensation program were base salary, long-term equity compensation in the form of stock options and a cash bonus incentive plan. Our board of directors is still considering our 2010 compensation program for our named executive officers and any changes that may be appropriate as a result of our becoming a public company. These deliberations are in their infancy, and we intend that formal action will be taken in the first half of 2010. Historically, we have not formally benchmarked our compensation program, but we may consider doing so in the future.

Base Salary

We pay each named executive officer a base salary based on the experience, skills, knowledge and responsibilities required of such officer. Base salaries are initially set when a named executive officer joins us, and they represent the amounts that we believe are necessary to attract and retain such individual, along with the factors described below. We believe base salaries are an important element in our overall compensation program because base salaries provide a fixed element of compensation that reflects job responsibilities and value to the company.

 

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The base salaries of our named executive officers were initially set at the time they joined us based on the following:

 

   

nature and responsibility of the position and the base salary at the executive’s former position;

 

   

expertise of the individual executive;

 

   

competitiveness of the market for the executive’s services based on the substantive judgment of the board of directors; and

 

   

recommendations of the Chief Executive Officer and Chief Financial Officer, except in the case of their own compensation.

Adjustments are made to the base salaries of our named executive officers based on periodic evaluations that take into account the factors listed above and overall company performance (without any reference to a specific goal). In 2009, we did not make any adjustments to the base salaries of our named executive officers as the board of directors believed the base salary levels were sufficient to satisfy our compensation objectives.

Long-Term Equity Compensation

We currently provide our named executive officers with long-term equity compensation through our 2002 Stock Incentive Plan, pursuant to which we grant employees and consultants options to purchase shares of our common stock. We believe that providing our named executive officers with an equity interest in the company brings their interests in line with that of our stockholders and that the vesting of those equity interests encourages those named executive officers to remain with us for the long term. Our board of directors does not apply a rigid formula in allocating stock options to our named executive officers. Our board of directors exercises its judgment and discretion and considers, among other things, the role and responsibility of the named executive officer, competitive factors, the amount of stock-based equity compensation already held by the executive, and the cash-based compensation received by the named executive officer. Typically, our named executive officers are granted options upon joining us and are granted additional options from time to time as determined by our board of directors.

In 2008, our board of directors awarded our Chief Executive Officer additional stock options after considering his relative equity interest in our company. In 2008, our Board offered all employees the opportunity to exchange their options that had exercise prices in excess of the then fair market value for new options with exercise prices at then current fair market value if they agreed to forfeit any vesting on those options that had already accrued. Our Chief Financial Officer along with 10 other employees elected to participate in this program.

In September 2009, the board of directors granted our named executive officers additional options to purchase our common stock in connection with refresh option grants to a large number of our employees. These grants to our named executive officers were intended to meet the board’s objective of aligning the interests of our employees with those of our stockholders. The board of directors granted our Chief Executive Officer, our Chief Financial Officer and our Chief Technology Officer options to purchase approximately 1.9%, 0.8% and 1.7%, respectively, of our total outstanding stock on a fully diluted basis as of September 30, 2009, which brought their collective equity interest, should they purchase all of the shares underlying options granted to them, to approximately 8.5%. The board believed that this was an appropriate level of ownership to motivate these executives to execute our business and financial plan. In addition to considering each executive’s relative ownership interest in our company in determining the size of these option grants, the board also considered the functional role and responsibility of each executive’s position, the importance of such position within the organization, and the relative ease or difficulty of identifying and hiring a well-qualified candidate to assume the individual’s role. The board determined that our Chief Executive Officer should have the greatest equity interest in the company relative to our other executives and employees as he oversees all functions within our company.

 

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Cash Bonus Incentive Plan

Our cash bonus incentive plan rewards our named executive officers for meeting and exceeding performance targets set by the board of directors based, in part, on recommendations from the compensation committee. We believe establishing specific objectives with specific compensation rewards encourages our named executive officers to perform at their highest potential.

In 2008, our board of directors adopted a cash bonus incentive plan pursuant to which our named executive officers were eligible to receive a cash bonus upon the attainment of certain quarterly revenues and gross margin targets. Under the plan, our Chief Executive Officer was eligible to receive a cash bonus of $20,000 for each quarter in which the performance criteria were met at the target level and a $20,000 cash bonus if the annual performance criteria were met at the target level. While the performance criteria and target levels were established in 2008, the cash bonus amount that our Chief Executive Officer was eligible to receive was established in March 2006 when our Chief Executive Officer’s compensation package was last reevaluated by the board of directors.

In addition, our Board set the award amounts payable to our Chief Financial Officer and Chief Technical Officer. Under the 2008 cash bonus incentive plan, our Chief Financial Officer and Chief Technical Officer, were each eligible to receive a cash bonus equal to 7% of each of their annual base salaries for each quarter in which the performance criteria were met at the target level and a cash bonus equal to 7% of each of their annual base salaries if the annual performance criteria were met at the target level.

In third quarter of 2008, the board of directors amended the performance criteria under our 2008 cash bonus incentive plan so that the only criteria was the achievement of positive operating income (exclusive of stock-based compensation). This performance criteria was met in the third quarter of 2009 and each named executive officer was awarded a $25,000 cash bonus.

For the fourth quarter of 2009, the board of directors established a new cash bonus plan. If the performance criteria for this plan is achieved at the target levels, our Chief Executive Officer will be entitled to a quarterly cash bonus equal to 12.5% of his annual base salary and each of our Chief Financial Officer and Chief Technical Officer will be entitled to a quarterly cash bonus equal to 8.75% of each of their annual base salaries. The actual amount of the bonus earned will depend upon the achievement of positive operating income (exclusive of stock-based compensation) and specified amount of bookings. Each of these factors is weighted equally and a payment may be made upon achievement of one of the targets even if both criteria are not achieved. In order for any portion of the cash bonus that is tied to our attainment of the bookings targets to be payable, a minimum threshold of 85% of the bookings target has to be achieved. For performance in excess of the target booking level, additional bonus amounts are payable.

We do not publicly disclose our booking targets because such information is an integral part of our business plan, and as such is highly confidential commercial and business information. Disclosing this target would provide competitors and other third parties with insights into our planning process and would therefore cause competitive harm. In addition, as bookings is not a GAAP number, we believe disclosure of this number may be confusing to investors. At the time the board of directors set the bookings targets it believed the targets were challenging but achievable based on its review of the Company’s operating plan and their assessment of the general economic environment.

The board of directors has retained discretion to reduce the actual incentive bonus amount to be paid, or determine no bonus amount should be paid to, any named executive officer. The board does not have the discretion to increase bonuses under the cash bonus plan for any of the named executive officers. However, the board may determine to grant bonuses outside of the cash bonus plan for extraordinary performance.

In the second quarter of 2009, the board granted our Chief Financial Officer a discretionary cash bonus for his contribution to the successful closing of our Series E offering during that quarter.

 

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Other Supplemental Benefits

We provide all of our employees with a broad range of benefits, including medical and dental insurance and the opportunity to participate in the Company’s 401(k) plan, which is open to all regular, full-time US employees.

Tax Considerations

Because of the limitations of Internal Revenue Code Section 162(m), we generally receive a federal income tax deduction for compensation paid to our Chief Executive Officer and to certain other highly compensated officers only if the compensation is less than $1,000,000 per person during any fiscal year or is “performance-based” under Code Section 162(m). In addition to salary and bonus compensation, upon the exercise of stock options that are not treated as incentive stock options, the excess of the current market price over the option price, or option spread, is treated as compensation and accordingly, in any year, such exercise may cause an officer’s total compensation to exceed $1,000,000. Option spread compensation from options that meet certain requirements will not be subject to the $1,000,000 cap on deductibility, and in the past we have granted options that we believe met those requirements. Additionally, under a special Code Section 162(m) exception, any compensation paid pursuant to a compensation plan in existence before the effective date of this public offering will not be subject to the $1,000,000 limitation until the earliest of: (i) the expiration of the compensation plan, (ii) a material modification of the compensation plan (as determined under Code Section 162(m), (iii) the issuance of all the employer stock and other compensation allocated under the compensation plan, or (iv) the first meeting of stockholders at which directors are elected after the close of the third calendar year following the year in which the public offering occurs. While the Board cannot predict how the deductibility limit may impact our compensation program in future years, it is anticipated the compensation committee intends to maintain an approach to executive compensation that strongly links pay to performance. In addition, while the Board has not adopted a formal policy regarding tax deductibility of compensation paid to our named executive officers, the Board intends to consider tax deductibility under Code Section 162(m) as a factor in compensation decisions.

Summary Compensation Table

The following table presents information concerning the total compensation of our named executive officers, or Named Executive Officers, for services rendered to us in all capacities during 2008:

 

Name and Principal Position

   Year    Salary    Option
Awards (1)
   Non-Equity
Incentive Plan
Compensation (2)
   Total

Ihab Abu-Hakima

   2008    $350,000    $27,377    $24,330    $401,707

President and Chief Executive Officer

              

Dr. Vaduvur Bharghavan

   2008    $300,000    $19,223    $25,546