424B4 1 d648720d424b4.htm 424B4 424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-193939

7,500,000 Shares

 

LOGO

Aerohive Networks, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Aerohive Networks, Inc.

Prior to this offering, there has been no public market for our common stock. The initial public offering price per share is $10.00. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “HIVE”.

We are an “emerging growth company”, as defined under the federal securities laws and are subject to reduced public company reporting requirements.

See “Risk Factors” on page 13 to read about factors you should consider before buying shares of our common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $ 10.00       $ 75,000,000   

Underwriting discount(1)

   $ 0.70       $ 5,250,000   

Proceeds, before expenses, to us

   $ 9.30       $ 69,750,000   

 

(1) See “Underwriting” for a description of the compensation payable to the underwriters.

The underwriters have the option to purchase up to an additional 1,125,000 shares from us at the initial public offering price, less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on April 2, 2014.

 

 

 

Goldman, Sachs & Co.   BofA Merrill Lynch

 

Piper Jaffray   William Blair   JMP Securities   Stephens Inc.

Prospectus dated March 27, 2014.


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     47   

Market and Industry Data

     48   

Use of Proceeds

     49   

Dividend Policy

     50   

Capitalization

     51   

Dilution

     53   

Selected Consolidated Financial Data

     55   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     59   

Business

     95   

Management

     114   

Executive Compensation

     124   

Certain Relationships and Related Party Transactions

     141   

Principal Stockholders

     145   

Description of Capital Stock

     149   

Shares Eligible for Future Sale

     154   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     157   

Underwriting

     161   

Legal Matters

     167   

Experts

     167   

Additional Information

     167   

Index To Consolidated Financial Statements

     F-1   

 

 

Through and including April 21, 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether 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 an unsold allotment or subscription.

 

 

Neither we nor the underwriters have authorized anyone to provide any information or make any representations other than those contained in this prospectus or in any free-writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. 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. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of the common stock.

For investors outside of the United States: Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

 


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including “Risk Factors,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and our consolidated financial statements and related notes before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, the terms “Aerohive Networks,” “Aerohive,” “Company,” “we,” “us,” and “our” in this prospectus refer to Aerohive Networks, Inc. and our subsidiaries.

AEROHIVE NETWORKS, INC.

Overview

Aerohive has designed and developed a leading cloud-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge. The point at which devices access the enterprise network is commonly referred to as the network edge. Managing the network edge is becoming more complex because of the proliferation of mobile devices and the ways in which such devices are used in business. Increasingly, employees and clients are using Wi-Fi-enabled smartphones, tablets, laptops and other mobile devices instead of desktop computers for mission-critical business applications. As the difficulty and complexity of managing the network edge expands, our platform offers cost-efficiency, scalability, reliability, manageability and ease of deployment and ease of use. Additionally, our platform gives end-customers context-based visibility and policy enforcement, providing a high level of intelligence to the network. Our hardware products include intelligent access points, routers, gateways and switches. These products are managed by our Cloud Services Platform, which delivers cloud-based network management and mobility applications giving end-customers a single, unified and contextual view of the entire network edge.

As of December 31, 2013, we had approximately 13,100 end-customers worldwide. We define end-customers as holding or having held licenses to our products and software subscriptions and services. We sell through a network of certified resellers and distributors to a wide variety of industry verticals. Our efforts to date have focused on distributed enterprises, K-12 and higher education. Within distributed enterprises, we have operated with vertical market-specific focus on the healthcare and retail industries and state and local government, and we have operated with a general approach to other markets, including manufacturing, utilities, transportation, finance and other professional services.

Our revenue increased from $34.0 million in 2011 to $71.2 million in 2012 and to $107.1 million in 2013, representing a compound annual growth rate of 77%. Our net loss increased from $14.8 million in 2011 to $24.7 million in 2012 and to $33.2 million in 2013.

Our Industry

Trends in enterprise mobility, including the proliferation of mobile devices, increased bring your own device, or BYOD, utilization, enterprise adoption of cloud and the adoption of mobile-first applications are significantly increasing the importance of wireless inside the enterprise. Users expect ubiquitous and all high-quality connectivity to support their wireless devices, even while using high-bandwidth, latency-sensitive applications. Wi-Fi has become the standard for wireless access in the enterprise and is increasingly replacing wired Ethernet as the standard access technology. Enterprises

 

 

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want to deploy secure and reliable Wi-Fi ubiquitously across their distributed locations, from the corporate headquarters down to the smallest branch offices.

The network edge provides device connectivity and we believe is the ideal point to provide advanced functions, such as authentication, security, quality of service, intelligence and client management. These functions can be provided at the edge using fewer networking resources than had they been applied at the core. For example, fewer processing resources are required to apply functions on the relatively small bandwidth at the network edge as compared to applying such functions at the network’s core. Moreover, security, including firewalls, can be applied at the edge, blocking unwanted traffic before it reaches the core, reducing bandwidth used within the network. Similarly, quality of service management, such as bandwidth limiting and resource prioritization, can be applied at the edge, either reducing bandwidth consumption further into the network, or prioritizing traffic to clients to more efficiently utilize scarce wireless spectrum, leading to improved performance. Historically, the network edge has been wired-centric, where wireless networks were deployed as an overlay network, added on top of existing wired networks, to support a small number of mobile devices. The mobile device explosion is changing the primary form of network access from wired to wireless. In addition, the increasing number of connected devices, the variety of individual users’ device types and ownership and the wide array of applications accessed by these devices are all creating the need for increased intelligence at the network edge.

As a result, enterprise networks need to transition from their existing wired-centric network edge to a mobile-centric network edge. This mobile-centric network edge provides a new level of mobile intelligence for the enterprise. It can also unify wireless and wired networks with integrated network and policy management.

Legacy networking products suffer from a number of key limitations, including high cost, difficulty of scaling, complexity of deployment, lack of context, limited security enforcement and lack of unification. In response to these limitations, many vendors are attempting to adapt their existing products or add new alternative products. This leads to massive complexity with multiple approaches driven by customer size, scale and deployment plan.

As a result, enterprises are seeking a unified, intelligent and simplified mobile network that can be cost-effectively deployed across the enterprise. Enterprises already invest significantly in expanding their wireless networks as they become the primary form of access at the network edge. According to Dell’Oro Group, a market research firm, the Enterprise WLAN market, which includes enterprise-class access points, controllers and access management software, is projected to grow from $3.9 billion in 2013 to $6.5 billion by 2018, representing an 10.5% compounded annual growth rate. In order to deliver a fully unified mobile-centric network edge, a new networking platform would also need to address the Ethernet Edge Switch market, which has been estimated by Dell’Oro Group to be $10.1 billion in size in 2013, and the Branch Router market, which has been estimated by Infonetics, an international marketing research and consulting firm, to be $1.6 billion in size in 2013.

Our Platform

Our leading cloud-managed mobile networking platform enables enterprises to deploy a mobile-centric network edge. Our platform leverages the power of the cloud and of our distributed, controller-less architecture to deliver unified, intelligent, simplified networks that can be cost-effectively deployed. Our scalable and flexible platform makes enterprise-class wireless available to enterprises regardless of their level of IT resources and enables a consistent network architecture to be deployed across enterprises of all sizes.

 

 

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Our platform delivers the following key benefits to customers:

 

  Ÿ  

Simplicity of one architecture.    Our platform provides a single architecture across our entire wired and wireless portfolio that scales to support all deployment scenarios.

 

  Ÿ  

Lower cost to deploy.    Our distributed, controller-less architecture eliminates the need for costly controllers and delivers significant capital and operating expense cost savings.

 

  Ÿ  

Scalability.    Our platform is highly scalable. By eliminating the controller and its resulting requirement to purchase capacity in fixed units and by leveraging our cloud management capabilities, our end-customers can scale deployments linearly as their needs grow.

 

  Ÿ  

Ease of deployment and management by leveraging the cloud.    Our platform eases the deployment of the services and applications that deliver the mobile-centric network edge by leveraging the cloud.

 

  Ÿ  

Context-based visibility and control.    Our platform gives customers the ability to see network usage and apply network policy based on granular, data-rich context, providing a high level of intelligence to the network.

 

  Ÿ  

Robust security enforcement at the edge.    Our platform enforces robust security policy at the network edge instead of at a centralized controller, which eliminates the need for customers to choose between security, performance and cost effectiveness. Our platform provides this security capability without additional costly licenses.

 

  Ÿ  

Unification of wired and wireless networks.    Our platform unifies management across wired, wireless and client devices allowing consistent context-based policy to be applied across the infrastructure and providing a unified and contextual view of the mobile-centric network edge.

 

  Ÿ  

Reduced operating cost and complexity.    The unification and simplification provided by our software eases administration and ongoing operating cost.

Our Strategy

Our objective is to maintain a leadership position in the enterprise wireless market while continuing to increase the penetration of our mobile-centric network edge solution. The key elements of our strategy to achieve this objective are:

 

  Ÿ  

Continue to innovate and maintain a market leadership position.    We intend to capitalize on and extend our substantial investment in developing, evangelizing and selling our controller-less wireless networks and cloud-managed networks as the industry increasingly embraces these approaches.

 

  Ÿ  

Rapid customer acquisition.    We intend to continue to rapidly acquire new customers through our high-velocity, low-friction go-to-market strategy.

 

  Ÿ  

Expand within our existing end-customer base.    We intend to continue to sell additional products and software subscriptions and service to our existing customer base as they scale their deployments.

 

  Ÿ  

Leverage our vertical integration expertise.    We intend to leverage our growing experience with end-customers in specific verticals to increase market penetration.

 

  Ÿ  

Further develop our channel relationships.    We intend to further invest in our channel relationships to increase our sales reach in new markets.

 

 

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Risks Affecting Us

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary. These risks include the following:

 

  Ÿ  

We have a history of losses, our losses have been increasing year over year and we may not achieve profitability in the future.

 

  Ÿ  

We have a limited operating history, which makes it difficult to evaluate our prospects and future financial results and may increase the risk that we will not be successful.

 

  Ÿ  

Our operating results may fluctuate significantly, from quarter to quarter and year to year, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations of investors or analysts.

 

  Ÿ  

The seasonality of our business creates significant variance in our quarterly revenue, which makes it difficult to compare our financial results on a quarter-by-quarter basis.

 

  Ÿ  

The market and demand for our products and services may not develop as we expect.

 

  Ÿ  

A significant portion of our sales are concentrated in the education and healthcare industries, which may cause us to have longer sales cycles and be subject to program funding constraints.

 

  Ÿ  

Our sales cycles often require significant time, effort and investment and are subject to risks beyond our control.

 

  Ÿ  

We need to develop new products and continue to make enhancements to our existing products to remain competitive in a rapidly changing market.

 

  Ÿ  

Our gross margin will vary over time and may decline in the future.

 

  Ÿ  

We and our independent registered public accounting firm have identified a material weakness in our internal control over financial reporting, and if we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results in a timely manner.

 

  Ÿ  

Our products utilize cloud-managed solutions, and our future growth relies in significant part on continued demand for cloud-managed solutions and our ability to deliver such solutions.

 

  Ÿ  

We plan to target new industry verticals and geographies to diversify our customer base and expand our channel relationships, which could result in higher research and development and sales and marketing expenses, and if unsuccessful could reduce our operating margin.

 

  Ÿ  

We base our inventory purchasing decisions on our forecasts of customers’ demand, and if these forecasts are inaccurate our revenue, gross margin and liquidity could be harmed.

Corporate Information

In March 2006, we incorporated our business in the State of Delaware. Our principal executive offices are located at 330 Gibraltar Drive, Sunnyvale, CA 94089. Our telephone number at that location is (408) 510-6100. Our website address is www.aerohive.com. Information on our website is not part of this prospectus and should not be relied upon in determining whether to invest in our common stock.

The Aerohive Networks design logo and the marks “Aerohive®,” “HiveManager®” and “HiveOS®” are the property of Aerohive Networks, Inc. This prospectus contains additional trade names,

 

 

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trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of, us by any of these companies.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise applicable generally to public companies. These provisions include:

 

  Ÿ  

a requirement to have only two years of audited financial statements and only two years of related management’s discussion and analysis;

 

  Ÿ  

an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting;

 

  Ÿ  

an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

 

  Ÿ  

reduced disclosure about our executive compensation arrangements; and

 

  Ÿ  

exemptions from the requirements to obtain a non-binding advisory vote on executive compensation or a shareholder approval of any golden parachute arrangements.

We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; and the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

We may choose to take advantage of some, but not all, of the available benefits under the JOBS Act. We are choosing to irrevocably “opt out” of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards, but we intend to take advantage of the other exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 

 

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THE OFFERING

 

Common stock offered by us

  

7,500,000 shares

Option to purchase additional shares

   We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to 1,125,000 additional shares from us.

Common stock to be outstanding after this offering

  

43,606,580 shares (or 44,731,580 shares, if the underwriters exercise their option to purchase additional shares in full).

Use of proceeds

  

We expect the net proceeds to us from this offering to be approximately $64.8 million, based on the initial public offering price of $10.00 per share after deducting our estimate of the underwriting discounts and commissions and offering expenses payable by us.

   We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. In addition, we may also use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, services, or technologies that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. We also may use a portion of the net proceeds to pay down certain existing debt obligations, although we have no current intent to do so. See “Use of Proceeds.”

Concentration of ownership

   Upon completion of this offering, the executive officers, directors and 5% stockholders of our company and their affiliates will beneficially own, in the aggregate, approximately 70.5% of our outstanding capital stock.

NYSE trading symbol

  

“HIVE”

 

 

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The number of shares of our common stock to be outstanding after this offering is based on 36,106,580 shares of our common stock outstanding (including 140,500 unvested shares subject to repurchase and 80,232 shares issued pursuant to a non-recourse promissory note), assuming the conversion of the convertible preferred stock outstanding as of December 31, 2013, and excludes:

 

  Ÿ  

8,198,074 shares of our common stock issuable upon the exercise of options outstanding as of December 31, 2013, with a weighted-average exercise price of $5.11 per share;

 

  Ÿ  

445,599 shares of our common stock issuable upon the exercise of outstanding options granted after December 31, 2013 through March 13, 2014, with a weighted-average exercise price of $10.29 per share;

 

  Ÿ  

477,050 shares of our common stock issuable upon the exercise of convertible preferred stock warrants outstanding as of December 31, 2013, with a weighted-average exercise price of $3.30 per share, of which (i) 366,519 shares were issued upon the exercise of such warrants after December 31, 2013, and (ii) 2,655 shares were cancelled in connection with a net exercise of a portion of such warrants after December 31, 2013;

 

  Ÿ  

45,324 shares of our common stock reserved in connection with our convertible preferred stock warrant to be issued upon the draw-down of the remainder of the term loan credit facility we entered into in August 2013, with an exercise price of $11.03 per share; and

 

  Ÿ  

5,341,190 shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 4,541,190 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan (which amount gives effect to the adjustments effective as of the effective date of the registration statement of which this prospectus is a part, as described in “Executive Compensation—Employee Benefit and Stock Plans”), subject to further adjustment as described in “Executive Compensation—Employee Benefit and Stock Plans,” (ii) 800,000 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan (which amount gives effect to the adjustments described in “Executive Compensation—Employee Benefit and Stock Plans”) and (iii) shares that become available under our 2014 Equity Incentive Plan and 2014 Employee Stock Purchase Plan, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

  Ÿ  

a 1-for-2.5 reverse stock split of our common stock and convertible preferred stock, effected in March 2014;

 

  Ÿ  

the effectiveness of our amended and restated certificate of incorporation in connection with the completion of this offering;

 

  Ÿ  

the automatic conversion of all outstanding shares of our convertible preferred stock as of December 31, 2013 into an aggregate of 28,466,379 shares of common stock immediately prior to the completion of this offering;

 

  Ÿ  

the automatic conversion of all outstanding convertible preferred stock warrants into warrants to purchase shares of our common stock immediately prior to the completion of this offering;

 

  Ÿ  

no exercise of outstanding options or warrants subsequent to December 31, 2013; and

 

  Ÿ  

no exercise by the underwriters of their option to purchase up to an additional 1,125,000 shares of common stock from us in this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our historical consolidated financial data. We have derived the summary consolidated statement of operations data for the three years ended December 31, 2011, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated balance sheet data as of December 31, 2013 has been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our historical results do not necessarily indicate the results that may be expected in the future. You should read the following summary consolidated financial data in conjunction with the sections titled “Use of Proceeds,” “Capitalization,” “Selected Consolidated Financial Data,” “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.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands, except share and
per share data)
 

Consolidated Statement of Operations Data:

      

Revenue:

      

Product

   $ 31,846      $ 66,631      $ 97,564   

Software subscriptions and service

     2,110        4,584        9,571   
  

 

 

   

 

 

   

 

 

 

Total revenue

     33,956        71,215        107,135   

Cost of revenue(1):

      

Product

     12,049        24,203        31,431   

Software subscriptions and service

     1,544        1,797        4,250   
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     13,593        26,000        35,681   
  

 

 

   

 

 

   

 

 

 

Gross profit

     20,363        45,215        71,454   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development(1)

     9,595        16,081        25,742   

Sales and marketing(1)

     22,396        42,765        57,773   

General and administrative(1)

     2,953        8,521        17,689   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     34,944        67,367        101,204   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (14,581     (22,152     (29,750

Interest income

     17        10        15   

Interest expense

     (260     (221     (604

Other income (expense), net

     87        (2,036     (2,462
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (14,737     (24,399     (32,801

Provision for income taxes

     (64     (339     (426
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (14,801   $ (24,738   $ (33,227
  

 

 

   

 

 

   

 

 

 

Net loss per share allocable to common stockholders, basic and diluted(2)

   $ (2.87   $ (4.20   $ (4.84
  

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share allocable to common stockholders, basic and diluted(2)

     5,153,514        5,884,751        6,866,839   
  

 

 

   

 

 

   

 

 

 

Pro forma net loss per share allocable to common stockholders, basic and diluted(2)

       $ (0.89
      

 

 

 

Weighted-average shares used in computing pro forma net loss per share allocable to common stockholders, basic and diluted(2)

         34,731,530   
      

 

 

 

 

 

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(1) 

Includes stock-based compensation as follows:

 

     Year Ended December 31,  
       2011          2012          2013    
     (In thousands)  

Cost of revenue

   $ 29       $ 13       $ 64   

Research and development

     123         264         929   

Sales and marketing

     200         483         1,573   

General and administrative

     155         346         1,721   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 507       $ 1,106       $ 4,287   
  

 

 

    

 

 

    

 

 

 

 

(2) 

See Note 12 to our audited consolidated financial statements for an explanation of the method used to calculate our actual and pro forma basic and diluted net loss per share allocable to common stockholders, and for the weighted-average number of shares used in the computation of the per share amounts.

 

     As of December 31, 2013  
     Actual     Pro
Forma(1)
     Pro
Forma As
Adjusted(2)
 
     (In thousands)  

Consolidated Balance Sheet Data:

  

Cash and cash equivalents

   $ 35,023      $ 35,023       $ 101,181   

Working capital

     21,516        21,516         86,266   

Total assets

     69,857        69,857         134,607   

Total deferred revenue

     30,570        30,570         30,570   

Total debt

     19,624        19,624         19,624   

Convertible preferred stock warrant liability

     3,903                  

Total stockholders’ (deficit) equity

     (3,345     558         65,308   

 

(1) 

The pro forma basis column reflects the automatic conversion of all outstanding shares of our convertible preferred stock into 28,466,379 shares of common stock, the related reclassification of the convertible preferred stock warrant liability to additional paid-in capital and the effectiveness of our amended and restated certificate of incorporation as of immediately prior to the completion of this offering, as if such conversion had occurred and our amended and restated certificate of incorporation had become effective on December 31, 2013.

(2) 

The pro forma as adjusted column reflects the pro forma adjustments and the sale of shares of common stock by us in this offering at the initial public offering price of $10.00 per share, after deducting our estimate of the underwriting discounts and commissions and offering expenses payable by us.

 

 

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     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Key Financial Metrics:

      

Total revenue

   $ 33,956      $ 71,215      $ 107,135   

Total deferred revenue at period end(1)

     4,237        16,704        30,570   

Cash used in operating activities

     (12,820     (15,629     (12,380

Adjusted Gross Profit Percentage (non-GAAP)(2)

     60.1     63.8     66.9

Adjusted Operating Loss (non-GAAP)(2)

     (14,060     (20,884     (25,301

Adjusted Operating Loss Percentage (non-GAAP)(2)

     (41.4 )%      (29.3 )%      (23.6 )% 

Adjusted Net Loss (non-GAAP)(2)

     (14,362     (21,608     (26,553

 

(1) 

Our deferred revenue consists of amounts that have either been invoiced or prepaid but have not yet been recognized as revenue as of the period end. The majority of our deferred revenue consists of the unrecognized portion of revenue from sales of our post-contract customer support, or PCS contracts, and sales of our cloud-managed software delivered as a service, or SaaS. In addition, a portion of our deferred revenue is related to product sales that have not yet been shipped to the end-customer. We monitor our deferred revenue balance because it represents a significant portion of revenue to be recognized in future periods.

(2) 

Our Adjusted Key Financial Metrics (Non-GAAP) have been adjusted to remove certain non-cash items. See “—Non-GAAP Financial Measures” below for more information on the uses and limitations of our non-GAAP financial measures and a reconciliation of Adjusted Gross Profit to gross profit, Adjusted Operating Loss to operating loss and Adjusted Net Loss to net loss, the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States, or GAAP.

Non-GAAP Financial Measures

We regularly review Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss, which are non-GAAP financial measures, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Adjusted Gross Profit Percentage

To provide investors with additional information regarding our financial results, we have disclosed Adjusted Gross Profit Percentage in the key financial metrics table above and within this prospectus. Adjusted Gross Profit Percentage is a non-GAAP financial measure. We calculate Adjusted Gross Profit Percentage as Adjusted Gross Profit divided by total revenue. We define Adjusted Gross Profit as our gross profit adjusted to exclude stock-based compensation and the amortization of acquired intangible assets. We have provided a reconciliation below of Adjusted Gross Profit to gross profit, the most directly comparable GAAP financial measure.

 

     Year Ended December 31,  
     2011      2012      2013  
     (In thousands)  

Gross profit

   $ 20,363       $ 45,215       $ 71,454   

Stock-based compensation

     29         13         64   

Amortization of acquired intangible assets

     14         162         162   
  

 

 

    

 

 

    

 

 

 

Adjusted Gross Profit

   $ 20,406       $ 45,390       $ 71,680   
  

 

 

    

 

 

    

 

 

 

 

 

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Adjusted Operating Loss and Adjusted Operating Loss Percentage

To provide investors with additional information regarding our financial results, we have disclosed Adjusted Operating Loss in the key financial metrics table above and within this prospectus. Adjusted Operating Loss is a non-GAAP financial measure. We define Adjusted Operating Loss as our operating loss adjusted to exclude stock-based compensation and the amortization of acquired intangible assets. We calculate Adjusted Operating Loss Percentage as Adjusted Operating Loss divided by total revenue. We have provided a reconciliation below of Adjusted Operating Loss to operating loss, the most directly comparable GAAP financial measure.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Operating loss

   $ (14,581   $ (22,152   $ (29,750

Stock-based compensation

     507        1,106        4,287   

Amortization of acquired intangible assets

     14        162        162   
  

 

 

   

 

 

   

 

 

 

Adjusted Operating Loss

   $ (14,060   $ (20,884   $ (25,301
  

 

 

   

 

 

   

 

 

 

Adjusted Net Loss

To provide investors with additional information regarding our financial results, we have disclosed Adjusted Net Loss in the key financial metrics table above and within this prospectus. Adjusted Net Loss is a non-GAAP financial measure. We define Adjusted Net Loss as our net loss adjusted to exclude stock-based compensation, the amortization of acquired intangible assets and the periodic fair value remeasurements related to our convertible preferred stock warrants. We have provided a reconciliation below of Adjusted Net Loss to net loss, the most directly comparable GAAP financial measure.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Net loss

   $ (14,801   $ (24,738   $ (33,227

Stock-based compensation

     507        1,106        4,287   

Amortization of acquired intangible assets

     14        162        162   

Periodic remeasurement of convertible preferred stock warrants

     (82     1,862        2,225   
  

 

 

   

 

 

   

 

 

 

Adjusted Net Loss

   $ (14,362   $ (21,608   $ (26,553
  

 

 

   

 

 

   

 

 

 

We have included Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss in this prospectus, because they are key measures used by our management and Board to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operating plans. In particular, the exclusion of stock-based compensation, amortization of intangible assets acquired as part of any acquisition, and the periodic fair value remeasurements related to our convertible preferred stock warrants, can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted Operating Loss and Adjusted Net Loss provide useful information to investors and others in understanding and evaluating our operating results in the same manner as does our management and our Board.

Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss have limitations as analytical tools, and you should not consider

 

 

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them in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. As non-GAAP measures, Adjusted Gross Profit, Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Some of these limitations are:

 

  Ÿ  

the non-GAAP measures do not consider the dilutive impact of stock-based compensation, which is an ongoing expense for us;

 

  Ÿ  

although amortization is a non-cash charge, the assets being amortized often will have to be replaced in the future, and Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss do not reflect any cash requirement for such replacements;

 

  Ÿ  

Adjusted Net Loss does not reflect the periodic fair value remeasurements related to our convertible preferred stock warrants; and

 

  Ÿ  

other companies, including companies in our industry, may calculate these non-GAAP measures differently, which reduces their usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss only together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this prospectus, including our financial statements and related notes, before making a decision to invest in our common stock. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment.

Risks Related to Our Business

We have a history of losses, our losses have been increasing year over year and we may not achieve profitability in the future.

We have a history of losses, our losses have been increasing year over year, and we have never achieved profitability on a quarterly or annual basis. We anticipate that we will continue to incur net losses for at least the foreseeable future. We experienced net losses of $24.7 million and $33.2 million for fiscal 2012 and 2013, respectively. As of December 31, 2013, our accumulated deficit was $120.3 million. 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, including personnel relating to sales and marketing, technology development and support. If we fail to increase our revenue and manage our cost structure, we may not achieve or sustain profitability in the future. As a result, our business and prospects would be harmed.

We have a limited operating history, which makes it difficult to evaluate our prospects and future financial results and may increase the risk that we will not be successful.

We incorporated our business in 2006 and began commercial shipments of our products in 2007. As a result of our limited operating history, it is difficult for us to forecast our future operating results. Our prospects should be considered and evaluated in light of the risks and uncertainties frequently encountered by companies with only limited operating histories. These risks and difficulties include challenges in accurate financial planning as a result of limited historical data and 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.

Our operating results may fluctuate significantly from quarter to quarter and year to year, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations of investors or analysts.

Our quarterly and annual operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future. In particular, the timing and size of sales of our products and services are highly variable and difficult to predict and can result in significant fluctuations in our revenue from period to period. Other participants in our industry have also experienced these fluctuations. As a result, our future results may be difficult for us, our investors and analysts to predict.

In addition, our planned expense levels depend in part on our expectations of future revenue. Because any substantial adjustment to expenses to account for lower levels of revenue may be difficult and may take time to implement, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenue, and even a small shortfall in revenue could disproportionately and adversely affect our operating margin and operating results for a given quarter.

Our operating results may also fluctuate due to a variety of other factors, many of which are outside of our control, and which we may not foresee including the changing and volatile domestic and

 

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international economic environments, and demand for our products, and any of which may cause our stock price to fluctuate. In addition to other risks listed in this “Risk Factors” section, factors that may affect our operating results include:

 

  Ÿ  

fluctuations in demand for our products and services, including seasonal variations, especially in the education vertical where purchasing is strongest in the second quarter and weakest in the fourth quarter and where purchasing at any time may depend on the availability of funding;

 

  Ÿ  

the complexity, length and associated unpredictability of our sales cycles for our products and services;

 

  Ÿ  

changes in end-customers’ budgets for technology purchases and delays in their purchasing cycles;

 

  Ÿ  

technical challenges in end-customer networks, unrelated to our products, which could delay adoption and installation of our products and purchases of our services;

 

  Ÿ  

changing market conditions;

 

  Ÿ  

changes in the competitive dynamics of our target markets, including new entrants, further consolidation and pricing trends;

 

  Ÿ  

variation in sales channels, product costs, prices or the mix of products we sell;

 

  Ÿ  

our contract manufacturers’ and component suppliers’ ability to meet our product demand forecasts on time, at acceptable prices, or at all;

 

  Ÿ  

our channel partners’ ability to effectively distribute our products;

 

  Ÿ  

the timing of our product releases or upgrades by us or by our competitors;

 

  Ÿ  

our ability to develop, introduce and ship in a timely manner new products and product enhancements, and to anticipate future market demands that meet our end-customers’ and channel partners’ requirements;

 

  Ÿ  

our ability to successfully expand the suite of products we sell and services we offer to existing end-customers and channel partners, to manage the transition of our end-customers to these new products and services and to limit disruption to our end-customers’ ordering practices and the pricing environment for our legacy products and services;

 

  Ÿ  

the potential need to record additional inventory reserves for products that may become obsolete or slow moving due to our new product introductions, change in end-customer requirements or new competitive product or service offerings;

 

  Ÿ  

our ability to control costs, including our operating expenses and the costs of the components we purchase while also continuing to invest in sales, marketing, engineering and other activities;

 

  Ÿ  

any decision we might make to increase or decrease operating expenses in response to changes in the marketplace or perceived marketplace opportunities;

 

  Ÿ  

growth in our headcount, including hiring related to our status as a public company, and hiring to support any future growth in our business;

 

  Ÿ  

volatility in our stock price, which may lead to higher stock compensation expenses;

 

  Ÿ  

our ability to derive benefits from our investments in sales, marketing, engineering or other activities;

 

  Ÿ  

our ability to achieve over time a level of financial performance consistent with the expectations of our investors and industry analysts; and

 

  Ÿ  

general economic or political conditions in our domestic and international markets.

 

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The effects of these factors individually or in combination could result in unpredictability in our quarterly and annual operating results and our ability to forecast those results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of our investors or financial analysts for any period. If our revenue or operating results fall below the expectations of our investors or financial analysts, or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any publicly stated revenue or earnings forecasts.

The seasonality of our business creates significant variance in our quarterly revenue, which makes it difficult to compare or forecast our financial results on a quarter-by-quarter basis.

Our revenue fluctuates on a seasonal basis, which affects the comparability of our results between periods. For example, our total revenue has historically increased significantly in the second quarter compared to the first quarter, primarily due to the impact of increased seasonal demand by end-customers in the education vertical, which has historically carried over into our third quarter. We also historically have seen a sequential increase in our fourth quarter total revenue due to end of year spending by enterprise customers. Our total revenue has historically decreased from our fourth quarter to the first quarter of our next fiscal year, also due to seasonal buying patterns and budget cycles within both our education vertical and general enterprise end-customers. Demand in the education vertical tends to be weakest in the fourth quarter. We also historically have seen a sequential increase in end-of-year purchases by enterprise customers in our fourth quarter, which we believe is mainly due to an expectation to complete purchases within their calendar year budget cycle. These seasonal variations are difficult to predict accurately and at times may be entirely unpredictable, which introduce additional risk into our business as we rely upon forecasts of end-customer demand to build inventory in advance of anticipated sales. In addition, we believe our past growth has, in part, made our seasonal patterns more difficult to discern, making it more difficult to predict future seasonal patterns. Moreover, part of our strategy is to increase our sales in non-education verticals, and if our sales mix changes the seasonal nature of our revenue may change in an unpredictable way, which could increase the volatility of both our financial results and stock price. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quarterly Results of Operations.”

The market and demand for our products and services may not develop as we expect.

The general demand for wireless networking in the industry verticals that we target, or demand for our products in particular, may grow at a slower rate than we anticipate, or not at all. For example, enterprises may rely more heavily upon cellular connectivity, whose speed and convenience may grow rapidly in coming years, while costs decline. The wireless networking radio spectrum may become more crowded, reducing performance of wireless networking devices.

Part of our strategy depends upon expanding sales of our cloud-managed wireless networking, switching and routing products to medium and large enterprise headquarters, branch offices and teleworkers. Sales to these enterprise end-customers are characterized by long sales cycles and price sensitivity. Moreover, many potential end-customers in the enterprise market have substantial network expertise and experience, which may require a more costly and sophisticated marketing and sales strategy.

If service providers or enterprises find another technology superior to our cloud-managed platform, it would have a material adverse effect on our business, operating results and financial condition. Our target end-customers could discontinue use of wireless networking technology, the use of wireless networking-enabled mobile devices could decrease or wireless networking could cease to

 

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be the preferred connectivity option for our target markets. As a result, demand for our products may not continue to develop as we anticipate, or at all, and the value of our stock could decline.

A significant portion of our sales is concentrated in the education and healthcare industry verticals, which may cause us to have longer sales cycles, and be subject to program funding constraints.

A significant portion of our revenue is concentrated in the education and, to a lesser extent, the healthcare industry verticals. The majority of our sales in education is concentrated in both public and private K-12 institutions. These industry verticals are characterized by long sales cycles, and often require additional sales efforts. In addition, these industry verticals typically operate on limited budgets, and depend on annual budget approvals, which add additional uncertainty to the sales cycle. These factors each add additional uncertainty to our future revenue from our education end-customers.

Our sales cycles often require significant time, effort and investment and are subject to risks beyond our control.

Our sales efforts can take several quarters, and involve educating our potential customers about the applications and benefits of our products, including the technical capabilities of our products. Sales to the education vertical are an important sales channel for us, and can involve an extended sales cycle. In addition, sales to our enterprise customers may involve an extended sales cycle, and often initial purchases are small. Purchases of our products are also frequently subject to our end-customers’ budget constraints, multiple approvals, unplanned administrative processing and other risks and delays. Moreover, the evolving nature of the market may lead prospective end-customers to postpone their purchasing decisions pending resolution of wireless networking or other standards, or adoption of technology developed by others. In addition, we pay our sales staff commissions upon receiving orders; however, we typically recognize revenue on products only after the products are shipped to end-customers, or until certain other terms of sales are satisfied. As a result, the cost of obtaining sales, including paying sales commissions, may occur in a fiscal period prior to the fiscal period in which we may recognize revenue from a sale, which may cause additional fluctuations in our operating results from quarter to quarter.

We need to develop new products and continue to make enhancements to our existing products to remain competitive in a rapidly changing market.

The technology and end-customer demands in the wireless networking market change rapidly, which require us to continuously develop and release new products and product features. We must continuously anticipate and adapt to our end-customers’ needs and market trends, and continue to develop or acquire new products and features that meet market demands, technology trends and regulatory requirements. If our competitors introduce new products and services that compete with ours, we may be required to reposition our product offerings or introduce new products in response to such competitive pressure. If we fail to develop new products or product enhancements or fail to effectively manage the transition of our end-customers to these new products and enhancements, or our end-customers or potential end-customers do not perceive our products to have compelling technical advantages, our business and prospects could be adversely affected, particularly if our competitors are able to introduce solutions with increased functionality.

Developing our products is challenging and involves substantial commitment of resources and significant development risk. Each phase in our product development presents serious risks of failure, rework or delay, any one of which could impact the timing and cost-effective development of products, and each of which could affect our ability to take advantage of a business opportunity or could jeopardize end-customer acceptance of the product. We have experienced in the past and may in the

 

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future experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new products and enhancements. In addition, the introduction of new or enhanced products requires that we carefully manage the transition from older products to minimize disruption in customer ordering practices, ensure that new products can be timely delivered to meet our end-customers’ demand and to limit inventory obsolescence. For example, if we do not carefully manage the timing of our new products or product feature releases, we could interfere with our end-customers’ continued purchases of our legacy product offerings and disrupt the pricing environment for our new and legacy products, which could drive down our revenues and operating margins. As a result, we may not be successful in modifying our current products or introducing new products in a timely or appropriately responsive manner, or at all. If we fail to address these changes successfully, our business and operating results and prospects would be materially harmed. In addition, a substantial portion of our research and development efforts is located in Hangzhou, China, subjecting us to risks associated with international development efforts, including increased difficulty overseeing such operations, local, national and international instability, differing labor laws and our ability to protect and prevent competitive misuse of product development efforts, including intellectual property critical to our business.

Our gross margin will vary over time and may decline in the future.

Our gross margin will vary over time, may be difficult to predict and may decline in future periods. Our gross margins also vary across our product lines and, therefore, a change in the mix of products our end-customers purchase would likely have a significant impact on our gross margins. For example, certain of our lower-end products currently have higher margins than our higher-end products. We may face additional competition for these products, either by introduction of new products by new or existing competitors, or by our end-customers using lower priced products, including our own, which are becoming increasingly more sophisticated.

In addition, the market for wireless networking products is characterized by rapid innovation and declining average sales prices as products mature in the market place. Even if we are successful in launching new products, competition may continue to increase in the market segments in which we compete, which would likely result in increased pricing competition. To retain our average margins, we are required to continuously update our products and introduce new products and reduce our manufacturing and sales-related costs and expenses, and we could fail to accomplish this. In addition, the sales prices for our products and services may decline for a variety of reasons, including sales strategy, competitive pricing pressures, customer demand, discounts, a change in our mix of products and services, including seasonal changes in our end-customers’ ordering practices, anticipation of the introduction of new products or services and decisions by end-customers to defer purchases, or promotional programs. For example, we may introduce new products or offerings at lower price points than competitive offerings or our own legacy offerings to help drive the adoption of our new products and this may adversely affect our revenues and operating margins. Larger competitors with more diverse product and service offerings may reduce the price of products or services that compete with ours or may bundle them with other products and services. If we do not similarly reduce our product manufacturing costs, our margins will decline. Any decline in our gross margins could have an adverse impact on the value of our common stock.

 

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We and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2012 and significant deficiencies in our internal control over financial reporting as of December 31, 2013. If we fail to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in our company.

In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2012, our management and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2012, as defined in the standards established by the Public Company Accounting Oversight Board of the U.S. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness was identified as a result of certain post-closing adjustments with respect to the lack of precision of certain accrued expenses and assessment of our warranty, allowance for bad debt and sales return reserves, and relates to our lack of sufficient personnel in our accounting and financial reporting functions with sufficient experience and expertise with respect to the application of U.S. GAAP and related financial reporting. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting” for information regarding our remediation efforts. Our management and independent registered public accounting firm did not and were not required to perform an evaluation of our internal control over financial reporting as of and for the years ended December 31, 2012 and 2013 in accordance with the provisions of the Sarbanes-Oxley Act. Had we performed such an evaluation, additional control deficiencies may have been identified by management, and those control deficiencies could have also represented one or more material weaknesses.

While we believe that we have remediated the material weakness described above in fiscal 2013, in connection with the audit of our financial statements as of and for the year ended December 31, 2013, we and our independent registered public accounting firm identified two significant deficiencies in our internal control over financial reporting as of December 31, 2013. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting. The significant deficiencies relate to our reliance on incomplete financial information received from one of our distributors and the lack of sufficient precision with respect to certain review-type controls in the financial close and reporting process.

We cannot be certain that any measures we undertake will successfully remediate these two significant deficiencies or that other material weaknesses and control deficiencies will not be discovered in the future. If our remediation efforts are not successful or other material weaknesses or control deficiencies occur in the future, we may be unable to report our financial results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and cause the trading price of our common stock to decline.

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal control over financial reporting and, for the first fiscal year beginning after the effective date of this offering, provide a management report on our internal control over financial reporting. This report must be attested to by our independent registered public accounting firm to the extent we are no longer an “emerging growth company,” as defined by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

 

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Our products utilize cloud-managed solutions, and our future growth relies in significant part in continued demand for cloud-managed solutions and our ability to develop and deliver such services.

Most of our end-customers utilize our cloud-managed networking platform to access our applications through the Internet, rather than access our application through a physical device that our end-customers host on their premises. As our business grows, we must increase the capacity of our cloud-managed solutions and continue to develop new and innovative solutions that meet the needs of our end-customers. Demand for our cloud-managed solutions could decline if we are not able to offer sufficient capacity, or if confidence in the security of cloud-managed solutions in general, or our platform in particular were to decline. Regulatory changes relating to the use of end-customer data, including privacy requirements, could also affect market demand for our platform. Moreover, although our end-customers do not immediately lose functionality if cloud-connectivity fails, if our ability to deliver services through the cloud were interrupted for an extended period, our reputation could be damaged and confidence in our platform would likely decline, causing our revenue to decline.

We plan to target new industry verticals and geographies to diversify our end-customer base and expand our channel relationships, which could result in higher research and development and sales and marketing expenses, and if unsuccessful could reduce our operating margin.

Currently, we focus a significant portion of our business on the education and healthcare verticals. Part of our strategy is to target new industry verticals and geographies, which may depend on developing new products targeted to such sectors. In addition, we also plan to continue to expand to additional countries beyond those in which we currently operate. We also intend to develop new channel relationships to reach additional end-customers to further diversify our revenue base. Targeting new industry verticals and geographies and developing customized products targeted to these industry verticals and geographies may be expensive, and increase our research and development costs, as well as our sales and marketing expenditures. We do not know if we will be successful in any of these efforts, or whether the level of success we achieve will justify the additional spending required. Our operating margin would be harmed if our strategy is unsuccessful, which could adversely affect the value of our common stock.

We base our inventory purchasing decisions on our forecasts of customers’ demand, and if these forecasts are inaccurate our revenue, gross margin and liquidity could be harmed.

We place orders with our manufacturers based on our forecasts of our end-customers’ and channel partners’ demand. Our forecasts are based on multiple assumptions, including sales forecasts, each of which may cause our estimates to be inaccurate, affecting our ability to fulfill demand for our products. When demand for our products increases significantly, we may not be able to meet demand on a timely basis, or we may incur additional costs. If we underestimate demand, we may forego revenue opportunities, lose market share and damage our reputation and our relationship with our channel partners and our end-customer relationships. Conversely, if we overestimate demand, we may purchase more inventory than we are able to sell at any given time, or at all.

Our value-added distributors stock inventory of our products, and are entitled to limited stock rotation rights, which could cause us to accept the return of products and expose us to the risks of higher costs.

We grant our value-added distributors, or VADs, limited stock rotation rights. These stock rotation rights require us to accept stock back from a VAD’s inventory. Typically, a VAD may return discontinued products purchased within the past 90 days, while the VAD’s right to return non-discontinued products is limited to a percentage of products sold to a VAD within the past 90 days. In

 

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each case, the VAD is required to purchase replacement product equal to the price of the returned product. Although we only recognize revenue upon shipment to the end-customer, if we are required to accept returns of obsolete or slower moving inventory, our costs would increase and our operating results could be harmed. If our forecasts were inaccurate we could have higher costs, lower revenue or otherwise suffer adverse financial consequences, including holding obsolete or slower moving inventory.

We outsource the manufacturing of our products to third parties, and we therefore do not have the ability to completely control quality over the manufacturing process. In addition, if our contract manufacturers refuse or are unable to manufacturer our products, we may be unable to qualify new manufacturers in a timely manner, which would result in our being unable to sell our products.

We outsource the manufacturing of our products to third-party manufacturers located in China and Taiwan. Finished products are then shipped to a warehousing and delivery logistics center in California, where we perform quality inspection, conduct reliability testing and manage our inventory. We operate this logistics center for all end-customer shipments, whether destined to locations in North, South and Central America, or the Americas, Europe, the Middle East and Africa, or EMEA, or Asia Pacific and Japan, or APAC.

Our reliance on these third-party manufacturers reduces our control over the manufacturing process and exposes us to risks, including reduced control over quality assurance, product costs, product supply and timing. Any manufacturing or shipping disruption by these third parties could severely impair our ability to fulfill orders. For example, in October 2012, we were not able to fulfill orders for one of our main hardware access point product offerings due to an unforeseen change in a component version supplied to one of our third-party manufacturers. We believe that the lack of availability of this product impacted our sales cycle by stalling potential end-customer evaluations and distracting sales personnel. If we are unable to manage our relationships with these third parties effectively, or if these third parties suffer delays or disruptions for any reason, experience increased manufacturing lead-times, capacity constraints or quality control problems in their manufacturing operations, or fail to meet our future requirements for timely delivery, our ability to ship products to our end-customers would be severely impaired and our reputation and our relationship with our VADs and end-customers would be seriously harmed. Any natural disaster, political instability or foreign relationship crisis could also disrupt these relationships.

We do not have long-term agreements with certain of our original design manufacturers. These manufacturers typically fulfill our supply requirements on the basis of individual orders. We do not have long-term contracts with our third-party manufacturers that guarantee capacity, the continuation of particular pricing terms or the extension of credit limits. Accordingly, our third-party manufacturers are not obligated to continue to fulfill our supply requirements, which could result on short notice to us of supply shortages and increases in the prices we are charged for manufacturing services. In addition, as a result of global financial market conditions, natural disasters or other causes, it is possible that any of our manufacturers could experience interruptions in production, cease operations or alter our current arrangements. If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes, we will be required to identify one or more acceptable alternative manufacturers.

It is time-consuming and costly, and could be impractical, to begin to use new manufacturers, and changes in our third-party manufacturers may cause significant interruptions in supply if the new manufacturers have difficulty manufacturing products to our specification. We currently are consolidating our manufacturing with our key manufacturers, and re-negotiating key contractual relationships. As a result, our ability to meet our scheduled product deliveries to our end-customers

 

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could be adversely affected, which could cause the loss of sales to existing or potential end-customers, delayed revenue or an increase in our costs. Any production interruptions for any reason, such as a natural disaster, epidemic, capacity shortages or quality problems, at one of our manufacturers would negatively affect sales of our product lines manufactured by that manufacturer and adversely affect our business and operating results.

Our manufacturing partners purchase component parts for our products based on estimates we provide, which may not be accurate. In addition, our manufacturing partners purchase some of the components and technologies used in our products from a single source or a limited number of sources. If our estimates were to be inaccurate, or if our manufacturing partners were to lose any of these sources as suppliers, we might incur additional transition costs, resulting in delays in the manufacturing and delivery of our products, excess or obsolete inventory, or the need to redesign our products.

Our manufacturing partners procure components and assemble our products based on our demand forecasts, which represent our estimates of future demand for our products. We base these estimates upon historical trends and the assessment of our sales and product management functions of end-customer demand and overall market conditions. Our manufacturing partners source the component parts within our products. We do not contract directly and do not have any long-term manufacturing contracts that guarantee us any fixed access to such component parts, or at specific pricing. This absence of direct and long-term component supply contracts may increase our exposure to shortages of component availability and to price fluctuations related to the raw material inputs for such components.

Moreover, we currently depend on a single source or limited number of sources for several components for our products. For example, each of our products typically incorporates third-party components that have no more than two suppliers, and if our manufacturing partners were unable to obtain such components for any reason, they would be unable to manufacture such product. We have also entered into license agreements with some of our suppliers for technologies used in our products, and the termination of these agreements, which can generally be done on relatively short notice, could have a material adverse effect on our business. If any of those manufacturing agreements were terminated, we would be required to redesign some of our products in order to incorporate technology from alternative sources, and any such termination of the agreement and redesign of certain of our products could materially and adversely affect our business and operating results.

Because there are no other sources currently identified and qualified for certain of our components, if we lost any of these suppliers or licenses, we could be required to transition to a new supplier or licensor, 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. Additionally, poor quality in any of the sole-sourced components in our products could result in lost sales or lost sales opportunities. If the quality of the components does not meet our or our end-customers’ requirements, if we are unable to obtain components from our existing suppliers on commercially reasonable terms, or if any of our sole-source component suppliers ceases to remain in business or to continue to manufacture such components, we could be required to redesign our products in order to incorporate components or technologies from alternative sources. The resulting stoppage or delay in selling our products and the expense of redesigning our products could result in lost sales opportunities and damage to customer relationships, which would adversely affect our reputation, business and operating results.

We rely upon third parties for the warehousing and delivery of our products, and we therefore have less control over these functions than we otherwise would.

We outsource the warehousing and delivery of all of our products to a third-party logistics provider for worldwide fulfillment. As a result of relying on a third party, we have reduced control over

 

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shipping and logistics, and may be subject to shipping disruptions. If we are unable to have our products shipped in a timely manner, we may suffer reputational harm, and lose revenue.

We rely significantly on channel partners to sell and support our products, and the failure of this channel to be effective could materially reduce our revenue.

As of December 31, 2013, we had over 600 channel partners under contract with which we have direct relationships, through which we make virtually all of our sales. These channel partners consist of VADs, and value-added resellers, or VARs. We believe that establishing and maintaining successful relationships with these channel partners is, and will continue to be, important to our financial success. Recruiting and retaining qualified channel partners and training them in our technology and product offerings require significant time and resources. To develop and expand our channel, we must continue to scale and improve our processes and procedures that support our channel partners, including investment in systems and training.

Existing and future channel partners will only work with us if we are able to provide them with competitive products on terms that are attractive to them. If we fail to maintain the quality of our products or to update and enhance them, and at reasonable pricing, existing and future channel partners may elect to work instead with one or more of our competitors.

We sell to our channel partners typically under a contract with an initial term of one year, with one-year renewal terms based on compliance with our program requirements. Our contracts generally require payment by the channel partner to us within 30 to 45 calendar days of the date we issue an invoice for such sales. We typically do not have minimum purchase commitments with our channel partners, and our contracts with channel partners do not prohibit them from offering products or services that compete with ours, including products they currently offer or may develop in the future and incorporate into their own systems. Some of our competitors may have stronger relationships with our channel partners than we do and we have limited control, if any, as to whether those partners use our products, rather than our competitors’ products, or whether they devote resources to market and support our competitors’ products, rather than our offerings.

The reduction in or loss by these channel partners of sales of our products could materially reduce our revenue. If we fail to maintain relationships with our channel partners, fail to develop new relationships with other channel partners, including in new markets, fail to manage, train or incentivize existing channel partners effectively, fail to provide channel partners with competitive products on attractive terms, or if these channel partners are not successful in their sales efforts, our revenue may decrease and our operating results could suffer.

We may not successfully sell our products in new geographic regions or develop and manage new sales channels in accordance with our business plan.

We expect to continue to sell our products in new geographic markets where we do not have significant current business as well as to a broader customer base. To succeed in certain of these markets, we believe we will need to develop and manage new sales channels and distribution arrangements. Because we have limited experience in developing and managing such channels, we may not be successful in further penetrating certain geographic regions or reaching a broader customer base. Failure to develop or manage additional sales channels effectively would limit our ability to succeed in these markets and could adversely affect our ability to grow our business.

 

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Our products are subject to U.S. export controls; where we fail to comply with these laws, we could suffer monetary or other penalties.

Our products are subject to U.S. export controls, specifically the Export Administration Regulations, and economic sanctions enforced by the Office of Foreign Assets Control. We incorporate standard encryption algorithms into our products, which, along with the underlying technology, may be exported outside of the U.S. only with the required export authorizations, including by license, license exception or other appropriate government authorizations. Each of these authorizations may require the filing of an encryption registration and classification request. Furthermore, U.S. export control laws and economic sanctions prohibit the shipment of certain products and services to countries, governments and persons targeted by U.S. sanctions. We take precautions to prevent our products and services from being exported in violation of these laws. However, in certain instances, we shipped encryption products prior to obtaining the required export authorizations and/or submitting the required requests, including a classification request and request for an encryption registration number. As a result, we have filed a Voluntary Self Disclosure with the U.S. Department of Commerce’s Bureau of Industry and Security concerning these violations. These past instances could result in monetary penalties or other penalties assessed against us. Additionally, even though we take precautions to ensure that our channel partners comply with all relevant regulations, any failure by our channel partners to comply with such regulations could have negative consequences for us, including reputational harm, government investigations and penalties. See “Business—Legal Proceedings—Export Compliance.”

Furthermore, various countries regulate the import of certain encryption technology, including through import permitting and licensing requirements, and have enacted laws that could limit our ability to distribute our products, could limit our end-customers’ ability to implement our products in those countries, or could impose additional expense on us to meet these requirements as a condition to distribute our products. Encryption products and the underlying technology may also be subject to export control restrictions. Governmental regulation of encryption technology and regulation of imports or exports of encryption products, or our failure to obtain required import or export approval for our products when applicable, could harm our international sales and adversely affect our revenue. Compliance with applicable regulatory laws and regulations regarding the export of our products, including with respect to new releases of our products, may create delays in the introduction of our products in international markets, prevent our end-customers with international operations from deploying our products throughout their globally distributed systems or, in some cases, prevent the export of our products to some countries altogether.

In addition, because our sales are made through channel partners, if these channel partners fail to obtain appropriate import, export or re-export licenses or authorizations, we may also be adversely affected. Obtaining the necessary authorizations, including any required license, for a particular sale may be time-consuming, is not guaranteed and may result in the delay or loss of sales opportunities. Changes in our products or changes in applicable export or import laws and regulations may also create delays in the introduction and sale of our products in international markets, prevent our end-customers with international operations from deploying our products or, in some cases, prevent the export or import of our products to certain countries, governments or persons altogether. Any change in export or import laws and regulations, shift in the enforcement or scope of existing laws and regulations, or change in the countries, governments, persons or technologies targeted by such laws and regulations, could also result in decreased use of our products, or in our decreased ability to export or sell our products to existing or potential end-customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products could adversely affect our business, financial condition and results of our operations.

U.S. export control laws and economic sanctions programs also prohibit the shipment of certain products and services to countries, governments and persons that are subject to U.S. economic

 

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embargoes and trade sanctions. If products are shipped to those targets or provided by third-parties to these targets, we could be subject to government investigations, penalties and reputational harm. Furthermore, any new embargo or sanctions program, or any change in the countries, governments, persons or activities targeted by such programs, could result in decreased use of our products, or in our decreased ability to export or sell our products to existing or potential end-customers, which could adversely affect our business and our financial condition.

Regulations related to conflict minerals may cause us to incur additional expenses and could limit the supply and increase the costs of certain metals used in the manufacturing of our products.

As a public company, we are subject to the requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, that require us to diligence, disclose and report whether our products contain conflict minerals. The implementation of these requirements could adversely affect the sourcing, availability and pricing of the materials used in the manufacture of components used in our products. In addition, we will incur additional costs to comply with the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used in or necessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of such verification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to alter our products, processes or sources of supply to avoid use of such materials.

Our products incorporate complex technology and may contain defects or errors. We may become subject to warranty claims, product returns, product liability and product recalls as a result, any of which could cause harm to our reputation and adversely affect our business.

Our products incorporate complex technology and must support a wide variety of devices and new and complex applications in a variety of environments that use different wireless networking communication industry standards. Our products have contained, and may contain in the future, undetected defects or errors. Some errors in our products have been and may in the future only be discovered after a product has been installed and used by end-customers. These issues are most prevalent when new products are introduced into the market. Defects or errors have delayed and may in the future delay the introduction of our new products. Since our products contain components that we purchase from third parties, we also expect our products to contain latent defects and errors from time to time related to those third-party components.

Additionally, defects and errors may cause our products to be vulnerable to security attacks. Because the techniques used by computer hackers to access or sabotage networks are becoming increasingly sophisticated, change frequently, and generally are not recognized until after they have been launched against a target, our products and third-party security products may be unable to anticipate these techniques or provide a solution in time to protect our end-customers’ networks. In addition, defects or errors in the mechanism by which we provide software updates for our products could result in an inability to update end-customers’ hardware products and thereby leave our end-customers vulnerable to attacks. Finally, if our employees, or others who have access to end customer data, were to misuse this information, our reputation would be harmed and we could be subject to claims for damages.

Real or perceived defects or errors in our products could result in claims to return product or that we reimburse losses that our end-customers sustain and we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem, including warranty and repair costs, process management costs and costs associated with

 

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remanufacturing our inventory. We typically offer a limited warranty on our access points for a period of five years from the date we discontinue sale of the product. We typically offer a limited warranty on our other hardware products for a one-year period. We also provide certain service commitment guarantees for our cloud-managed platform, pursuant to which our end-customers may receive service credits in connection with service outages. Liability limitations in our standard terms and conditions of sale may not be enforceable under some circumstances or may not fully or effectively protect us from claims and related liabilities and costs. In addition, regardless of the party at fault, errors of these kinds divert the attention of our engineering personnel from our product development efforts, damage our reputation and the reputation of our products, cause significant customer relations problems and can result in product liability claims. We do not maintain insurance which would adequately protect against certain of these types of claims associated with the use of our products. Even where claims ultimately are unsuccessful we may have to expend funds in connection with litigation and divert management’s time and other resources. We also may incur costs and expenses relating to a recall of one or more of our products. The process of identifying and recalling recalled products that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our end-customers and channel partners and significant harm to our reputation. The occurrence of any of these problems could result in the delay or loss of market acceptance of our products and could adversely impact our business, operating results and financial condition.

The loss of key personnel or an inability to attract, retain and motivate qualified personnel may impair our ability to expand our business.

Our success is substantially dependent upon the continued service and performance of our senior management team and other key personnel, including David K. Flynn, who is our Chief Executive Officer, Gordon C. Brooks, who is our Senior Vice President, Chief Financial Officer, Dean Hickman-Smith, who is our Senior Vice President, Worldwide Field Operations, and David Greene, who is our Senior Vice President, Chief Marketing Officer. Our employees, including our senior management team, are at-will employees, and therefore may terminate employment with us at any time with no advance notice. The replacement of any members of our senior management team or other key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives.

Our future success also depends on our ability to continue to attract, integrate and retain highly skilled personnel, especially skilled sales and engineering employees. Competition for highly skilled personnel is frequently intense, especially in the San Francisco Bay Area, where we have a substantial presence and need for highly skilled personnel. Volatility or lack of performance in our stock price may also affect our ability to attract and retain our key employees. Many of our employees have become, or will soon become, vested in a substantial amount of stock or number of stock options. Our employees may be more likely to leave us if the shares they own or the shares underlying their vested options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. Further, our employees’ ability to exercise those options and sell their stock in a public market after the closing of this offering may result in a higher than normal turnover rate. Any failure to successfully attract, integrate or retain qualified personnel to fulfill our current or future needs may negatively impact our growth. Also, to the extent we hire personnel from our competitors, we may be subject to allegations that these new hires have been improperly solicited, or that they have divulged to us proprietary or other confidential information of their former employers, or that their former employers own their inventions or other work product.

 

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We have recently hired new members of our management team, and the failure to integrate these executives quickly and effectively could harm our operating results.

Several members of our management team have recently joined us, including our Chief Marketing Officer, in September 2013, our Chief Financial Officer, in January 2013, our Vice President, General Counsel and Secretary, in December 2012, and our Senior Vice President, Worldwide Field Operations, in October 2012. Each member of our management team provides services that are important for our long-term growth. Moreover, almost all of the members of our finance team joined us in 2013, as did key members of our sales team. Although our sales grew following this transitional period, we believe that our sales were adversely impacted during the transition. Integrating new employees requires dedication of financial and other resources, and transitions in senior management can cause disruption to our operations. We do not know whether these management members will work together well as a cohesive team. In the event we are required to identify new management team members, or hire new key employees, either as a result of the departure of current members, or to facilitate future anticipated growth, we may be required to dedicate substantial resources and our financial results may be harmed.

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

Once our products are deployed, our end-customers depend on our support organization and support provided by our channel partners to resolve any issues relating to our products. Our support delivery organization is comprised of employees in various geographic locations and an outside service provider, which provides more general support delivery. A high level of support is important for the successful marketing and sale of our products. If we do not effectively help our end-customers quickly resolve issues or provide effective ongoing support, it would adversely affect our ability to sell our products to existing end-customers and could harm our reputation with potential end-customers.

If our products do not interoperate with cellular networks and mobile devices, future sales of our products could be negatively affected.

Our products are designed to interoperate with cellular networks and mobile devices using wireless networking technology. These networks and devices have varied and complex specifications. To meet these requirements, we must continue to undertake development and testing efforts that require significant capital and employee resources. We may not accomplish these development efforts quickly or cost-effectively, or at all. If our products do not interoperate effectively, orders for our products could be delayed or cancelled, which would harm our revenue, gross margins and our reputation, potentially resulting in the loss of existing and potential end-customers. The failure of our products to interoperate effectively with cellular networks or mobile devices may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer and end-customer relations problems. In addition, our end-customers may require our products to comply with new and rapidly evolving security or other certifications and standards. If our products are late in achieving or fail to achieve compliance with these certifications and standards, or our competitors achieve compliance with these certifications and standards, such end-customers may not choose to purchase our products, which would harm our business, operating results and financial condition.

Laws governing the collection of or our failure to adequately protect information could have a material adverse effect on our business.

A wide variety of provincial, state, national and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of data including personal

 

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data. Foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States. These data protection and privacy-related laws and regulations are evolving, can be subject to significant change and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. Our failure to comply with applicable laws and regulations, could result in enforcement actions against us, including fines, imprisonment of company officials and public censure, claims for damages by end-customers and other affected individuals, fines or demands that we modify or cease existing practices, damage to our reputation and loss of goodwill (both in relation to existing and prospective end-customers), any of which could have a material adverse effect on our operations, financial performance and business. Such actions against our partners, including third-party providers of data analytics services, could also affect our operating performance, including demand for our products and cloud-managed solutions. Evolving and changing privacy laws and regulations, including evolving and changing definitions of personal data and personal information, within the European Union, the United States and elsewhere, especially relating to classification of IP addresses, MAC addresses, machine identification, location data and other information, may limit or inhibit our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of data. Even the perception of privacy concerns, whether or not valid, may harm our reputation and inhibit adoption of our products by current and future end-customers.

Our international operations expose us to additional business risks and failure to manage these risks may adversely affect our international revenue.

We derive a significant portion of our revenue from end-customers and channel partners outside the United States. For the year ended December 31, 2013, we attributed 39% of our revenue to our international end-customers and channel partners, and in the year ended December 31, 2012, we attributed 35% of our revenue to our international end-customers and channel partners. As of December 31, 2013, approximately 44% of our full-time employees were located outside of North America, with 32% located in China. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue opportunities in international markets, which will require significant management attention and financial resources. Therefore, we are subject to risks associated with having significant worldwide operations, such as compliance with anticorruption laws.

International operations are subject to other inherent risks and our future results could be adversely affected by a number of factors, including:

 

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

 

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requirements or preferences for domestic products, which could reduce demand for our products;

 

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differing technical standards, existing or future regulatory and certification requirements and required product features and functionality;

 

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management communication and integration problems related to entering new markets with different languages, cultures and political systems;

 

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

 

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heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements;

 

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difficulties and costs of staffing and managing foreign operations;

 

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  Ÿ  

differing labor standards;

 

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the uncertainty of protection for our intellectual property rights and the enforceability of our rights and third-party rights in some countries;

 

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potentially adverse tax consequences, including regulatory requirements regarding our ability to repatriate profits to the United States;

 

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added legal compliance obligations and complexity, including complying with varying requirements regarding data privacy;

 

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the increased cost of terminating employees in some countries; and

 

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political and economic instability and terrorism.

One such applicable anticorruption law is the U.S. Foreign Corrupt Practices Act, or FCPA, which generally prohibits U.S. companies and their employees and intermediaries from making corrupt payments to foreign officials for the purpose of directing, obtaining or keeping business, and requires companies to maintain accurate books and records and a system of internal accounting controls. Under the FCPA, U.S. companies may be held liable for the corrupt actions taken by employees, strategic or local partners, or other representatives. As such, if we or our intermediaries fail to comply with the requirements of the FCPA or similar legislation, governmental authorities in the U.S. and elsewhere could seek to impose civil or criminal fines and penalties, which could have a material adverse effect on our business, operating results and financial conditions. While our employee handbook prohibits our employees from engaging in corrupt conduct, we are in the process of enhancing our compliance measures to require both our employees and our third-party intermediaries to comply with the FCPA and similar anticorruption laws.

To the extent we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and manage effectively 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.

Our operations in certain emerging markets expose us to political, economic and regulatory risks.

Our growth strategy depends in part on our ability to expand our operations in emerging markets, including China, Russia, the Middle East and Africa, and Latin America. However, some emerging markets have greater political, economic and currency volatility and greater vulnerability to infrastructure and labor disruptions than more established markets. In many countries outside of the United States, particularly those with emerging economies, it may be common for others to engage in business practices prohibited by laws and regulations with extraterritorial reach, such as the FCPA and the U.K. Bribery Act, or local anti-bribery laws. These laws generally prohibit companies and their employees, contractors or agents from making improper payments to government officials, including in connection with obtaining permits or engaging in other actions necessary to do business. Failure to comply with these laws could subject us to civil and criminal penalties that could materially and adversely affect our reputation, financial condition and results of operations.

Establishing operations and distribution partners in these emerging markets may require complex legal arrangements and operations to deliver services on global contracts for our end-customers. Because of our limited experience with international operations and developing and managing sales and distribution channels in international markets, our international expansion efforts may not be successful. Additionally, we have established operations in locations remote from our more developed

 

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business centers. As a result, we are subject to heightened risks inherent in conducting business internationally, including the following:

 

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failure to comply with local regulations or restrictions;

 

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enactment of legislation, regulation or restriction, whether by the United States or in the foreign countries, including unfavorable labor regulations, tax policies or economic sanctions (such as potential economic sanctions arising from political disputes), and currency controls or restrictions on the transfer of funds;

 

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enforcement of legal rights or recognition of commercial procedures by regulatory or judicial authorities in a manner in which we are accustomed or would reasonably expect;

 

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differing technical and environmental standards, data privacy and telecommunications regulations and certification requirements;

 

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difficulties and costs associated with staffing and managing foreign operations;

 

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potentially greater difficulty collecting accounts receivable and longer payment cycles;

 

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the need to adapt and localize our services for specific countries, including conducting business and providing services in local languages;

 

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reliance on third parties over which we have limited control, such as our VADs, for marketing and reselling our services;

 

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availability of reliable broadband connectivity and wide area networks in targeted areas for expansion;

 

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difficulties in understanding and complying with local laws, regulations, and customs in foreign jurisdictions or unanticipated changes in such laws;

 

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application of or changes in anti-bribery laws, such as the FCPA and UK Bribery Act, which may disrupt our staffing or ability to manage our foreign operations;

 

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changes in political and economic conditions leading to changes in the business environment in which we operate, as well as changes in foreign currency exchange rates; and

 

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natural disasters, pandemics or international conflict, including terrorist acts or political disputes, which could interrupt our operations or endanger our personnel.

In addition, our competitors may also expand their operations in these markets or others we may also target, and low-cost local manufacturers may also expand and improve their production capacities, thus increasing competition in these emerging markets. Our success in emerging markets is important to our growth strategy. If we cannot successfully increase our business in emerging markets and manage associated political, economic and currency volatility, our product sales, financial condition and results of operations could be materially and adversely affected.

We could be subject to additional income tax liabilities.

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our worldwide provision for income taxes, which could be adversely affected by several factors, many of which are outside our control. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than we anticipate in countries that have lower statutory rates and higher than we anticipate in countries that have higher statutory rates, by changes in foreign currency exchange rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in the relevant tax, accounting and other laws, regulations, principles and

 

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interpretations, including possible changes to the U.S. taxation of earnings of our foreign subsidiaries, the deductability of expenses attributable to foreign income or the foreign tax credit rules. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income tax against us as well as penalties and fines. As we operate in multiple taxing jurisdictions, the application of tax laws can be subject to diverging and sometimes conflicting interpretations by tax authorities of these jurisdictions. The time and expense necessary to defend and resolve an audit may be significant. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our operating results or cash flows in the period or periods for which that determination is made.

Our international operations and corporate structure subject us to potential adverse tax consequences.

We generally conduct our international operations through wholly owned subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships are subject to complex transfer pricing regulations administered by taxing authorities in various jurisdictions. The relevant taxing authorities may disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows and lower overall profitability of our operations. Our financial statements could fail to reflect adequate reserves to cover such a contingency.

In the future, we may reorganize our corporate structure or intercompany relationships, which would likely require us to incur expenses in the near term for which we may not realize related benefits. Changes in domestic and international tax laws may negatively impact our ability to effectively restructure, including proposed legislation to reform U.S. taxation of international business activities. Any such restructuring would likely involve sophisticated analysis, including analysis of U.S. and international tax regimes. Compliance with such laws and regulations may be difficult and subject our business to additional risks and uncertainties.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations; in addition, we may be unable to use a substantial part of our net operating losses if we don’t attain profitability in an amount necessary to offset such losses.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, 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 public offering, our ability to utilize NOLs could be further limited by Section 382. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382. Furthermore, we may be unable to use a substantial part of our NOLs due to regulatory changes, such as suspensions of the use of NOLs, or if we do not attain profitability in an amount sufficient to offset such losses. For example, our state NOL carryforwards of $65.2 million as of December 31, 2013 begin to expire in 2016. For these reasons, we may not be able to utilize a material portion of the NOLs reflected on our balance sheet, even if we attain profitability at a later date.

 

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Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

We do not collect sales and use, value added or similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Sales and use, value added and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may adversely affect the results of our operations.

If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed and our reputation may be damaged.

We have expanded our operations significantly since inception and anticipate that we will require further significant expansion to achieve our business objectives. For example, our revenue for fiscal years 2011, 2012 and 2013 was $34.0 million, $71.2 million and $107.1 million, respectively and our global headcount as of the end of fiscal years 2011, 2012 and 2013, was approximately 230, 460 and 520 employees, respectively. The growth and expansion of our business and product offerings places a continuous and significant strain on our management, operational and financial resources. Any such future growth would also add complexity to and require effective coordination throughout our organization.

We must improve our infrastructure to manage our growth, which could involve significant costs and could, if not properly managed, harm our operating results.

To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, our operating and administrative systems and controls and our ability to manage headcount, capital and processes in an efficient manner. For example, we are currently evaluating upgrades to our information infrastructure in several ways, including a potential change in our enterprise resource planning system, or our ERP system. 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 operating results may be negatively impacted. If we are unable to manage future expansion, our ability to provide high quality products and services could be harmed, which could damage our reputation and brand, and any of which may have a material adverse effect on our business, operating results and financial condition.

Our business and operating results could be adversely affected by unfavorable economic and market conditions.

Our business depends on the overall demand for wireless network technology and on the economic health and general willingness of our current and prospective end-customers to purchase our products. If the conditions in the U.S. and global economies are volatile and if they deteriorate, our business, operating results and financial condition may be harmed. In particular, we do not know whether spending on wireless network technology will increase or decrease in the future, or at what rate.

Investments in technology by educational institutions and healthcare in particular could be related to budgetary constraints unrelated to overall economic conditions, or may be magnified by unfavorable economic conditions. The purchase of our products or willingness to replace existing infrastructure is discretionary and highly dependent on a perception of continued rapid growth in consumer usage of mobile

 

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devices and in many cases involve a significant commitment of capital and other resources. In addition, our small and medium enterprise end-customers may also be more sensitive to adverse economic conditions than other potential customers, which could amplify the adverse impact of a deterioration of economic conditions. Therefore, weak economic conditions or a reduction in capital spending would likely adversely impact our business, operating results and financial condition. A reduction in spending on wireless network technology could occur or persist even if economic conditions improve.

In addition, if interest rates rise or foreign exchange rates weaken for the U.S. dollar for our international end-customers and channel partners, overall demand for our products and services could decline and related capital spending may be reduced. Furthermore, any increase in worldwide commodity prices may result in higher component prices for us and increased shipping costs, both of which may negatively impact our financial results.

U.S. and global political, credit and financial market conditions may negatively impact or impair the value of our current portfolio of cash and cash equivalents, including U.S. Treasury securities and U.S.-backed investment vehicles.

Our cash and cash equivalents were $35.0 million as of December 31, 2013, and are primarily held as cash held in a variety of interest-bearing instruments, primarily in money market securities. As a result of the uncertain domestic and global political, credit and financial market conditions, investments in these types of financial instruments pose risks arising from liquidity and credit concerns. Any deterioration in the U.S. and global credit and financial markets is a possibility, which could cause losses or significant deterioration in the value of our cash, cash equivalents or possible investments. If any such losses or significant deteriorations occur, it may negatively impact or impair our current portfolio of cash, cash equivalents and possible investments, which may affect our ability to fund future obligations. Further, unless and until the current U.S. and global political, credit and financial market crisis has been sufficiently resolved, it may be difficult for us to liquidate our investments prior to their maturity without incurring a loss, which would have a material adverse effect on our business, operating results and financial condition.

System security risks, data protection breaches and cyber-attacks could compromise our or our end-customer’s information including proprietary information and end-customer information and disrupt our internal operations, which could cause our business and reputation to suffer and adversely affect our stock price.

In the ordinary course of business, we store sensitive data, as well as our proprietary business information and that of our end-customers, suppliers and business partners. The secure maintenance of this information is critical to our operations and business strategy. Increasingly, companies are subject to a wide variety of attacks on their networks on an ongoing basis. Our information technology and infrastructure may be vulnerable to penetration or attacks by computer programmers and hackers, software bugs or other technical malfunctions, or other disruptions. In addition, our employees could breach the security of our infrastructure and misuse such data or other information, whether through error or misconduct. Any such breach could compromise our networks, including our cloud-managed platform, creating system disruptions or slowdowns and exploiting security vulnerabilities of our products, and the information stored on our networks could be improperly accessed, publicly disclosed, lost or stolen, which could subject us to liability to our end-customers, suppliers, channel and business partners and others, and cause us reputational and financial harm. In addition, the affected end-customers or government authorities could initiate legal or regulatory action against us in connection with such incidents, which could cause us to incur significant expenses and liability or could result in orders or consent decrees forcing us to modify our business practices. Because the techniques used by computer programmers and hackers, many of whom are highly sophisticated and well-funded, to access or sabotage networks change frequently and generally are not recognized until after they are

 

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used, we may be unable to anticipate or immediately detect these techniques. This could delay our response or the effectiveness of our response and impede our sales, manufacturing, distribution or other critical functions. In addition, the economic costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software systems and security vulnerabilities could be significant and may be difficult to anticipate or measure because the damage may differ based on the identity and motive of the programmer or hacker, which are often difficult to identify.

Undetected software errors or flaws in our cloud platform could harm our reputation or decrease market acceptance of our solution, which would harm our operating results.

Our platform may contain undetected errors or defects when introduced or as we release new versions. We have experienced these errors or defects in the past in connection with new releases and solution upgrades, and we expect that errors or defects will be found from time to time in future releases after their commercial release. Since our end-customers use our platform for security and compliance reasons, any errors, defects, disruptions in service or other performance problems may damage our end-customers’ business and could hurt our reputation. If that occurs, we may incur significant costs, the attention of our key personnel could be diverted, our end-customers may delay or withhold payment to us or elect not to continue to use our solution or renew our service, or other significant customer relations problems may arise. We may also be subject to liability claims for damages related to errors or defects in our platform.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and interruptions by man-made problems, such as network security breaches, computer viruses or terrorism.

Our corporate headquarters are located in the San Francisco Bay Area, and substantially all of our contract manufacturers are located in eastern Asia, both regions known for seismic activity. A significant natural disaster, such as an earthquake, a fire or a flood, occurring near our headquarters, or near the facilities of our contract manufacturers, could have a material adverse impact on our business, operating results and financial condition. Despite the implementation of network security measures, our networks also may be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our products. In addition, natural disasters, acts of terrorism or war could cause disruptions in our or our end-customers’ or channel partners’ businesses, our suppliers’ and manufacturers’ operations or the economy as a whole. We also rely on information technology systems to communicate among our workforce and with third parties. Any disruption to our communications, whether caused by a natural disaster or by manmade problems, such as power disruptions, could adversely affect our business. We do not have a formal disaster recovery plan or policy in place and do not currently require that our manufacturing partners have such plans or policies in place. To the extent that any such disruptions result in delays or cancellations of orders or impede our suppliers’ and/or our manufacturers’ ability to timely deliver our products and product components, or the deployment of our products, our business, operating results and financial condition would be adversely affected. We do maintain what we believe are commercially reasonable levels of business interruption insurance. However, we cannot assure you that such insurance would adequately cover our losses in the event of a significant disruption in our business.

We may acquire other businesses that could require significant management attention, disrupt our business and dilute stockholder value.

We may make investments in complementary companies, products or technologies. We have limited experience identifying, purchasing and integrating third-party companies, technologies or other assets that could be complementary to our business or help advance our strategy, and as a result, our ability as an organization to acquire and integrate other companies, technologies or other assets in a

 

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successful manner is unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, and any acquisitions we complete could be viewed negatively by our end-customers, investors and financial analysts. In addition, if we are unsuccessful at integrating such acquisitions, or the technologies associated with such acquisitions, the business prospects operating results and financials of the combined company could be adversely affected. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or utilize the acquired technology or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may have to pay cash, incur debt or issue equity securities to pay for any such acquisition, each of which could adversely affect our financial condition or the value of our common stock. The sale of equity or issuance of debt to finance any such acquisitions could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

Our future capital needs are uncertain, and we may need to raise additional funds in the future. If we require additional funds in the future, those funds may not be available on acceptable terms, or at all.

We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs for at least the next 12 months. We may, however, need to raise substantial additional capital in the future to:

 

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fund our operations;

 

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continue our research and development;

 

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develop and commercialize new products;

 

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acquire companies, in-licensed products or intellectual property; or

 

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expand sales and marketing activities.

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

 

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market acceptance of our products and services;

 

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the cost of our research and development activities;

 

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

 

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

 

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the cost and timing of establishing additional technical support capabilities;

 

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the effect of competing technological and market developments; and

 

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the market for different types of funding and overall economic conditions.

We may require additional funds in the future, and we may not be able to obtain those 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. Upon any liquidation, our debt lenders and other creditors would be repaid all interest and principal then-outstanding prior to the holders of our common stock receiving any distribution. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders.

 

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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 to 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 actions could harm our operating results.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified members of our board of directors.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs and accept higher retentions to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, or our Board, particularly to serve on our audit committee and compensation committee and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which might result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.

Our debt obligations contain restrictions that impact our business and expose us to risks that could adversely affect our liquidity and financial conditions.

On June 21, 2012, we entered into a revolving credit facility with Silicon Valley Bank, which we refer to, as amended, as our revolving credit facility. As last amended on August 23, 2013, the credit facility provides for a revolving facility of up to $10.0 million, with a sublimit of $3.0 million for borrowings guaranteed by the Export-Import Bank of the United States. As of December 31, 2013, we have drawn $10.0 million under this revolving credit facility.

On August 23, 2013, we entered into a credit facility with TriplePoint Capital, which we refer to as our term loan credit facility. The credit facility provides for term loans of up to $20.0 million. As of December 31, 2013, we have drawn $10.0 million under this term loan credit facility.

All of our obligations under the credit facilities are secured by substantially all of our property, other than our intellectual property. Both credit facilities contain customary negative covenants that limit our ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets or engage in merger and acquisition activity, including

 

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merge or consolidate with a third party. Our Silicon Valley Bank credit facility also requires us to maintain a liquidity ratio of not less than 1.25 to 1.00. Our credit facilities contain customary affirmative covenants, including requirements to, among other things, deliver audited financial statements. Both credit facilities contain customary events of default, subject to customary cure periods for certain defaults, that include, among other things, non-payment defaults, covenant defaults, material judgment defaults, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness, and inaccuracy of representation and warranties. Our Silicon Valley Bank credit facility includes a default upon the occurrence of a material adverse change to our business.

If we experience a decline in cash flow due to any of the factors described in this “Risk Factors” section or otherwise, if we breach covenants under our credit facilities or if there occurs a material adverse change in our business, we could be prohibited from further borrowing under the credit facilities, our interest rates on the outstanding borrowings could increase and our obligation to repay principal amounts could be accelerated. Our failure to pay interest and principal amounts when due or comply with covenants could cause a default under the credit facilities. Any such default could have a material adverse effect on our liquidity and financial condition. In the event of a liquidation of our Company, these lenders would be repaid all outstanding principal and interest prior to distribution of assets to other unsecured creditors. Our holders of common stock would receive a portion of any liquidation proceeds only if all of our creditors were first repaid in full.

Risks Related to Our Industry

We compete in highly competitive markets, and competitive pressures from existing and new companies may harm our business, revenue, growth rates and prospects. In addition, many of our current or potential competitors have longer operating histories, greater brand recognition, larger customer bases and significantly greater resources than we do, and we may lack sufficient financial or other resources to maintain or improve our competitive position.

The markets in which we compete are highly competitive, and we expect competition to increase in the future from established competitors and new market entrants. The markets are influenced by, among others, the following competitive factors:

 

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brand awareness and reputation;

 

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price and total cost of ownership;

 

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strength and scale of sales and marketing efforts, professional services and customer support;

 

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product features, reliability and performance;

 

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incumbency of the current provider, either for wireless networking products or other products;

 

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scalability of products;

 

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ability to integrate with other technology infrastructures; and

 

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breadth of product offerings.

Our main competitors include general networking vendors, such as Cisco, Hewlett-Packard and Juniper Networks, whose portfolios include enterprise mobility solutions; enterprise mobility companies, such as Aruba Networks, that have a broad networking portfolio and are primarily focused on enterprise mobility; and independent Wi-Fi vendors, such as Ruckus Wireless and Meru Networks, which are primarily focused on wireless access products. 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, our market share, any of which would likely seriously harm our business, operating results or

 

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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, revenue 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. Our competitors may be better able to anticipate, influence or 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 can. In addition, certain of our competitors may be able to leverage their relationships with customers based on other products or incorporate functionality into existing products to gain business in a manner that discourages customers from purchasing our products, including through selling at zero or negative margins, product bundling, or closed technology platforms. Potential end-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 from our current competitors, as well as other established and emerging companies, to the extent our markets continue to develop and expand. Conditions in our markets could change rapidly and significantly as a result of technological advancements or other factors. These pressures could materially adversely affect our business, operating results and financial condition.

Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend toward industry consolidation in our markets for several years as companies attempt to strengthen or hold their market positions in an evolving industry, and as companies are acquired or are unable to continue operations. Some of our competitors have made acquisitions or entered into partnerships or other strategic relationships to offer a more comprehensive solution than they individually had offered. For example, in November 2012, Cisco Systems acquired Meraki Networks, a competitor of ours. This trend may continue in the future. The companies resulting from these possible consolidations may create more compelling or bundled product offerings and be able to offer greater pricing flexibility, making it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or product functionality. Continued industry consolidation may adversely impact customers’ perceptions of the viability of smaller and even medium-sized technology companies such as ourselves and, consequently, customers’ willingness to purchase from such companies. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for our end-customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition. Furthermore, particularly in the service provider market, rapid consolidation will lead to fewer customers, with the effect that the loss of a major customer could have a material impact on results not anticipated in a customer marketplace composed of more numerous participants.

Demand for our products and services depends in part on the continued growth of the industries in which we participate, and the failure of these industries to expand could harm our operating results.

We currently target K-12 and higher education, healthcare, retail and distributed enterprise end-customers. We sell into verticals such as finance, manufacturing, utilities, telecom, state and local government, transportation, legal, accounting, architecture, engineering and construction. In the event any of the specific sectors we target fails to expend on wireless networking, our operating results could

 

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be harmed. For example, the education sector is faced with limited resources to spend on technology purchases. If this sector does not continue to expand expenditures on technology in general, and wireless networking in particular, our business could be harmed. More generally, for our enterprise sales, we rely upon the continued expansion of the creation of small and branch offices, and the acceptance of teleworking. If remote access to corporate resources and the demand for high-speed wireless networks ceases to expand, or diminish, our business would be harmed.

If functionality similar to that offered by our products is incorporated into existing network infrastructure products, enterprises may decide against adding our products to their network, which would have an adverse effect on our business.

Large, well-established providers of networking equipment may continue to introduce features that compete with our products, either in stand-alone products or as additional features in their network platforms. The inclusion of, or the announcement of an intent to include, functionality perceived to be similar to that offered by our platform may have an adverse effect on our ability to market and sell our products. Furthermore, even if the functionality offered by these providers is more limited or less cost effective than our platform, end-customers may elect to accept such products in lieu of adding platforms from an additional vendor such as us. Many enterprises have invested substantial personnel and financial resources to design and operate their networks and have established deep relationships with other providers of networking products, which may make them reluctant to add new components to their networks, particularly from other vendors such as us. In addition, an enterprise’s existing vendors or new vendors with a broad product offering may be able to offer concessions that we are not able to match. If enterprises are reluctant to add new vendors or otherwise decide to work with their existing vendors, our ability to increase our market share and improve our financial condition and operating results will be adversely affected.

We rely on revenue from subscription and services that may decline. Because we recognize revenue from subscriptions and services over the term of the relevant service period, downturns or upturns in sales are not immediately reflected in full in our operating results.

Software subscriptions and service revenue, consisting of sales of new or renewal subscription and support and maintenance contracts accounts for a significant portion of our revenue, comprising 6.4% of total revenue for the year ended December 31, 2012 and 8.9% of total revenue for the year ended December 31, 2013. Service revenue might decline and fluctuate as a result of a number of factors, including end-customers’ level of satisfaction with our offerings, the prices of our offerings, the prices of products and services offered by our competitors and reductions in our end-customers’ spending levels. If our sales of new or renewal subscription and support and maintenance contracts decline, our revenue and revenue growth may decline and our business will suffer. In addition, we recognize service revenue ratably over the term of the relevant service period, which is typically one, three or five years. As a result, much of the service revenue we report each fiscal quarter is the recognition of deferred revenue from service contracts entered into during previous fiscal quarters. Consequently, a decline in new or renewed subscription or support and maintenance contracts in any one fiscal quarter will not be fully reflected in revenue in that fiscal quarter but will negatively affect our revenue in future fiscal quarters. Accordingly, the effect of significant downturns in new or renewed sales of our subscriptions or support and maintenance is not reflected in full in our operating results until future periods. Also, it is difficult for us to rapidly increase our services revenue through additional service sales in any period, as revenue from new and renewal service contracts must be recognized over the applicable service period. Furthermore, any increase in the average term of services contracts would result in revenue for services contracts being recognized over longer periods of time.

 

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New regulations or standards or changes in existing regulations or standards in the United States or internationally related to our products may result in unanticipated costs or liabilities, which could have a material 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. In order to achieve and maintain market acceptance, our products must continue to comply with these regulations as well as a significant number of industry standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission, or FCC, Underwriters Laboratories and others. We must also comply with similar international regulations in order for our products to be certified for use in such countries. For example, our wireless communication products operate through the transmission of radio signals and radio emissions are subject to regulation in the United States and in other countries in which we do business. In the United States, various federal agencies, including the Center for Devices and Radiological Health of the Food and Drug Administration, the FCC, 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 and individual countries in the Asia Pacific region have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions and chemical substances and use standards.

As these regulations and standards evolve, and if new regulations or standards are implemented, we will be required to modify our products or develop and support new versions of our products, and our compliance with these regulations and standards may become more burdensome. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business. End-customer uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, channel partners or end-customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes may have a material adverse effect on our business, operating results and financial condition.

Risks Related to Our Intellectual Property

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 protect our proprietary information and technology through licensing agreements, third-party nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the United States and similar laws in other countries. We do not know whether these protections will be available in all cases or will be adequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. The laws of some foreign countries, including countries in which our products are sold or manufactured, are in many cases not as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. 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. We have focused patent, trademark, copyright and trade secret protection primarily in the United States. As a result, we may not have sufficient protection of our intellectual property in all countries where infringement may occur. 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 and/or misappropriation of our proprietary rights against third

 

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parties. Any such action could result in significant costs and diversion of our resources and management’s attention, and we could fail to be successful in any 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 do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Claims by others that we infringe their intellectual property rights could harm our business.

Companies that sell products in the wireless networking industry are often aggressive in protecting intellectual property rights and perceived rights, which has resulted in protracted and expensive litigation for some companies. We currently are subject to claims and litigation by third parties that we infringe their intellectual property rights and we expect claims and litigation with respect to infringement will continue to occur in the future. We are currently in litigation with AirTight Networks and Linex Technologies, each of which alleges that we are infringing their intellectual property. See “Business—Legal Proceedings.”

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. Any claims or proceedings against us, whether or not meritorious, could be time-consuming, result in costly litigation, require significant amounts of management time or result in the diversion of significant operational resources, any of which could materially and adversely affect our business and operating results.

Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. In addition, we currently have a limited portfolio of issued patents compared to our larger competitors, and therefore may not be able to effectively utilize our intellectual property portfolio to assert defenses or counterclaims in response to patent infringement claims or litigation brought against us by third parties. Further, litigation may involve patent holding companies or other adverse patent owners who have no relevant products or revenue and against whom our potential patents provide no deterrence or competitive risk, and many other potential litigants have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims than we could against them. 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. We might also be required to seek a license and pay royalties 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 successful.

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

Our products utilize software modules licensed to us by third-party authors under open source licenses, including as incorporated into software we receive from third party commercial software vendors. 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 support, updates, 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 that we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release portions of 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.

 

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As a result of our use of open source software, our products may be subject to conditions we do not intend. Furthermore, the terms of many open source licenses have not been interpreted by U.S. courts, and these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our ability to commercialize our products. Moreover, our efforts to monitor our use of open source software in our business may not be entirely effective. If we are held to have breached or otherwise failed to comply with the terms of an open source software license, we could be required to pay damages as a result of infringement claims, seek licenses from third parties to continue offering our products, re-engineer our products, discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, or make generally available, in source code form, our proprietary code, any of which could adversely affect our business and operating results.

We rely on the availability of third-party licenses. If these licenses are available to us only on less favorable terms or not at all in the future, our business and operating results would be harmed.

We have incorporated third-party licensed technology and intellectual property rights into our products. It may be necessary in the future to renew licenses relating to various aspects of these products or to seek additional licenses for existing or new products. These necessary licenses could be unavailable to us on acceptable terms or at all. The inability to obtain certain licenses or other rights, or to obtain those licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could result in delays in product releases until such time, if ever, as equivalent technology could be identified, licensed or developed and integrated into our products, which might have a material adverse effect on our business, operating results and financial condition. Moreover, the inclusion in our products of intellectual property licensed from third parties on a nonexclusive basis could limit our ability to protect our proprietary rights in our products.

Risks Related to this Offering and Ownership of Our Common Stock

The price of our common stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock following this offering may fluctuate substantially and may be lower than the initial public offering price. The trading price of our common stock following this offering will depend on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock, since you might not be able to sell your shares at or above the price you paid in this offering.

Factors that could cause fluctuations in the trading price of our common stock include the following:

 

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price and volume fluctuations in the overall stock market from time to time;

 

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volatility in the market prices and trading volumes of high technology stocks;

 

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changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

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sales of shares of our common stock by us or our stockholders;

 

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failure of financial analysts to maintain coverage of us, changes in financial estimates by any analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

  Ÿ  

the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;

 

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  Ÿ  

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

 

  Ÿ  

public analyst or investor reaction to our press releases, other public announcements and filings with the Securities and Exchange Commission;

 

  Ÿ  

rumors and market speculation involving us or other companies in our industry;

 

  Ÿ  

actual or anticipated changes in our results of operations or fluctuations in our operating results;

 

  Ÿ  

actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;

 

  Ÿ  

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

  Ÿ  

developments or disputes concerning our intellectual property or our products, or third-party proprietary rights;

 

  Ÿ  

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

 

  Ÿ  

new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

  Ÿ  

changes in accounting standards, policies, guidelines, interpretations or principles;

 

  Ÿ  

any major changes in our management or our Board;

 

  Ÿ  

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

 

  Ÿ  

other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock market in general, and the market for technology companies in particular, have 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. In addition, in the past, following periods of volatility in the overall market and the market prices of particular companies’ securities, securities class action litigations have often been instituted against these companies. Litigation of this type, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Sales of substantial amounts of our common stock in the public markets, or the perception that they might occur, could reduce the price that our common stock might otherwise attain and may dilute your voting power and your ownership interest in us.

Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. Based on the total number of outstanding shares of our common stock as of December 31, 2013, upon completion of this offering, we will have 43,606,580 shares of common stock outstanding (including 140,500 unvested shares subject to repurchase and 80,232 shares issued pursuant to a non-recourse promissory note), assuming no exercise of our outstanding options after December 31, 2013.

All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, or the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act.

 

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Our executive officers, directors and substantially all of our equity holders have entered into market standoff agreements with us or lock-up agreements with the underwriters under which they have agreed not to sell any of our stock for 180 days following the date of this prospectus. When the lock-up period expires, we and our locked-up security holders will be able to sell shares of our common stock in the public market, as described in the section of this prospectus captioned “Shares Eligible for Future Sale.” In addition, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated may, in their sole discretion, release all or some portion of the shares subject to the lock-up agreements prior to the expiration of the lock-up period. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, or the perception that such sales may occur, or early release of these agreements, could cause our share price to fall or make it more difficult for you to sell your common stock at a time and price that you deem appropriate.

We may issue our shares of common stock or securities convertible into shares of our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

In addition, holders of up to approximately 28,943,429 shares of our common stock (which includes 477,050 shares of our common stock issuable upon the exercise of our outstanding convertible preferred stock warrants but does not include up to an aggregate of 45,324 shares of our convertible preferred stock, which may be issued pursuant to an outstanding warrant in the event of a draw-down of the remainder of our term loan facility), or 80.2% of our total outstanding common stock, based on shares outstanding as of December 31, 2013, will be entitled to rights with respect to registration of these shares under the Securities Act pursuant to our Fourth Amended and Restated Investors’ Rights Agreement, which we refer to as our Investors’ Rights Agreement. If these holders of our common stock, by exercising their registration rights, sell a large number of shares, they could adversely affect the market price for our common stock. If we file a registration statement for the purpose of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired. We also intend to register the offer and sale of all shares of common stock that we may issue under our equity compensation plans. Sales of substantial amounts of our common stock in the public market following the release of the lock-up or otherwise, or the perception that these sales could occur, could cause the market price of our common stock to decline.

Insiders will continue to have substantial control over us after this offering and will be able to influence corporate matters.

Upon completion of this offering, our directors and executive officers and stockholders holding more than 5% of our capital stock and their affiliates will beneficially own, in the aggregate, approximately 70.5% of our outstanding common 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 your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see “Principal Stockholders.”

 

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Certain provisions in our charter documents and under Delaware law could limit attempts by our stockholders to replace or remove members of our Board or current management and may adversely affect the market price of our common stock.

Provisions in our certificate of incorporation and bylaws, each as will be effective upon completion of this offering, may have the effect of delaying or preventing a change of control or changes in our Board or management. These provisions include the following:

 

  Ÿ  

our Board has the right to elect directors to fill a vacancy created by the expansion of the Board or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our Board;

 

  Ÿ  

our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or special stockholders’ meetings called by the Board, the chair of the Board, the chief executive officer or the president;

 

  Ÿ  

our directors may only be removed for cause, which would delay the replacement of a majority of our Board;

 

  Ÿ  

our Board is staggered in three tiers, with directors serving for three years, which could impede an acquiror from rapidly replacing our existing directors with its own slate of directors;

 

  Ÿ  

our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

  Ÿ  

stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to our Board or to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company; and

 

  Ÿ  

our Board may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated preferred stock makes it possible for our Board to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the Board has approved the transaction. Our Board could rely on Delaware law to prevent or delay an acquisition of us. See “Description of Capital Stock-Anti-Takeover Effect of Delaware Law and Our Certificate of Incorporation and Bylaws.”

Our directors are entitled to accelerated vesting of their stock options pursuant to the terms of their employment arrangements or option grants upon a change of control of our Company, and our executive officers in the event their employment is actually or constructively terminated in the context of a change of control. In addition to the arrangements currently in place with some of our executive officers, we may enter into similar arrangements in the future with other officers. Such arrangements could delay or discourage a potential acquisition of our Company.

No public market for our common stock currently exists, and an active public trading market may not develop or be sustained following this offering.

Prior to this offering, there has been no public market or active private market for our common stock. Although our common stock has been approved for listing on the New York Stock Exchange, an active

 

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trading market may not develop following the completion of this offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the market price of your shares of common stock. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

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

The trading market for our common stock will be influenced by the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts or the content and opinions included in their reports. As a new public company, we may be slow to attract research coverage and the analysts who publish information about our common stock will have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. In the event we obtain industry or financial analyst coverage, if any of the analysts who cover us issue an adverse or misleading opinion regarding our stock price, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Because the initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our outstanding common stock following this offering, new investors will experience immediate and substantial dilution.

The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock immediately following this offering, based on the total value of our tangible assets less our total liabilities. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate dilution of $8.51 per share, the difference between the price per share you pay for our common stock and its pro forma net tangible book value per share of $1.49 after giving effect to the issuance of shares of our common stock in this offering at the initial public offering price of $10.00 per share. See “Dilution” for more information.

We believe our long-term value as a company will be greater if we focus on growth instead of profitability.

Part of our business strategy is to focus on our long-term growth, and in the near term to focus on such growth instead of focusing on profitability. As a result, our profitability may be lower in the near term than it would be if our strategy was to maximize short-term profitability. Expenditures on expanding our research and development efforts, sales and market efforts, infrastructure and other such investments may not ultimately grow our business or cause long-term profitability. If we are ultimately unable to achieve profitability at the level anticipated by analysts and our stockholders, our stock price may decline.

We have broad discretion to determine how to use the funds raised in this offering, and may use them in ways that may not enhance our operating results or the price of our common stock.

We intend to use a significant portion of the net proceeds from this offering for general corporate purposes, which may include expansion of our sales and marketing and research and development efforts, working capital, capital expenditures and potential acquisitions of, or investments in, complementary businesses, products and technologies. However, we do not have more specific plans for the net proceeds

 

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from this offering and will have broad discretion in how we use the net proceeds of this offering. We could spend the proceeds from this offering in ways our stockholders may not agree with or that do not yield a favorable return. If we do not invest or apply the proceeds of this offering in ways that improve our operating results, we may fail to achieve expected financial results, which could cause our stock price to decline.

We do not intend to pay dividends and under our loan agreements with our lenders we are not permitted to pay dividends. As a result, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

Pursuant to our revolving and term loan credit facilities, we are restricted from paying dividends while these facilities are in place. Moreover, we have never declared or paid any cash dividends on our common stock and do not intend to pay any cash dividends in the foreseeable future. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our Board. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

We are an “Emerging Growth Company,” and any decision on our part to comply only with certain reduced disclosure requirements applicable to Emerging Growth Companies could make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting or compliance requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years after the completion of this offering, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have total annual gross revenue of $1 billion or more during any fiscal year before that time, we would cease to be an “emerging growth company” as of the end of that fiscal year. If we issue more than $1 billion in non-convertible debt in a three-year period we would cease to be an “emerging growth company” immediately. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan” “expect,” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements.

These forward-looking statements include, but are not limited to, statements concerning the following:

 

  Ÿ  

our ability to maintain an adequate rate of revenue growth;

 

  Ÿ  

our expectations that our operating results may continue to fluctuate significantly in the future;

 

  Ÿ  

our ability to maintain our existing channel relationships and develop new relationships;

 

  Ÿ  

our ability to consolidate and re-negotiate our manufacturing relationships;

 

  Ÿ  

our business plan and our ability to effectively manage our growth;

 

  Ÿ  

costs associated with defending intellectual property infringement and other claims, such as those claims discussed in “Business—Legal Proceedings”;

 

  Ÿ  

our ability to attract and retain end-customers;

 

  Ÿ  

our ability to further penetrate our existing customer base;

 

  Ÿ  

our ability to timely and effectively scale and adapt our existing technology;

 

  Ÿ  

our ability to innovate new products and solutions, bring them to market in a timely manner, manage the transition of our end-customers to these new products and services and to our cloud platform and our ability to limit disruption to our end-customers’ ordering practices and the pricing environment for our legacy products and services;

 

  Ÿ  

our ability to expand internationally;

 

  Ÿ  

the effects of increased competition in our market and our ability to compete effectively;

 

  Ÿ  

the effects of seasonal trends on our results of operations;

 

  Ÿ  

our expectations concerning relationships with third parties;

 

  Ÿ  

our intentions to use the net proceeds received from the offering primarily for general corporate purposes;

 

  Ÿ  

our expectations to dedicate significant resources to research and development efforts;

 

  Ÿ  

the attraction and retention of qualified employees and key personnel;

 

  Ÿ  

our ability to maintain, protect and enhance our brand and intellectual property; and

 

  Ÿ  

future acquisitions of or investments in complementary companies, products, services or technologies.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. 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.

 

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You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.

You should read this prospectus, and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

MARKET AND INDUSTRY DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, including Dell’Oro Group and Infonetics, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our products and services. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our sale of 7,500,000 shares of common stock in this offering will be approximately $64.8 million, or $75.2 million if the underwriters’ option to purchase additional shares is exercised in full.

The principal purposes of this offering are to obtain additional capital, increase our capitalization and financial flexibility and create a public market for our stock. We currently intend to use the net proceeds we receive from this offering primarily for general corporate purposes, including working capital, sales and marketing activities, research and development activities, general and administrative matters and capital expenditures, although we do not currently have any specific or preliminary plans with respect to the use of proceeds for such purposes. In addition, we may also use a portion of the net proceeds for the acquisition of, or investment in, businesses, products, services, or technologies that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. We also may use a portion of the net proceeds to pay down certain existing debt obligations, although we have no current intent to do so.

We will have broad discretion over the uses of the net proceeds of this offering. Pending these uses, we intend to invest the net proceeds we receive from this offering in short-term, investment-grade, interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government. We cannot predict whether the invested proceeds will yield a favorable return.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. Our various credit facilities currently restrict our ability to pay dividends while these facilities remain outstanding. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our Board in accordance with applicable law and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our Board may deem relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization each as of December 31, 2013 on:

 

  Ÿ  

an actual basis;

 

  Ÿ  

a pro forma basis, which reflects the automatic conversion of all outstanding shares of our convertible preferred stock into 28,466,379 shares of common stock, the related reclassification of the convertible preferred stock warrant liability to additional paid-in capital and the effectiveness of our amended and restated certificate of incorporation as of immediately prior to the completion of this offering, as if such conversion had occurred and our amended and restated certificate of incorporation had become effective on December 31, 2013; and

 

  Ÿ  

a pro forma as adjusted basis, which reflects the pro forma adjustments and the sale of shares of common stock by us in this offering at the initial public offering price of $10.00 per share, after deducting our estimate of the underwriting discounts and commissions and offering expenses payable by us.

You should read this table in conjunction with the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Capital Stock” and our consolidated financial statements and related notes thereto included elsewhere in this prospectus.

 

     As of December 31, 2013  
     Actual      Pro Forma      Pro Forma
As
Adjusted(1)
 
     (In thousands, except share and per share data)  

Cash and cash equivalents

   $ 35,023       $ 35,023       $ 101,181   
  

 

 

    

 

 

    

 

 

 

Total debt

     19,624         19,624         19,624   

Convertible preferred stock warrant liability

     3,903                   

Stockholders’ equity (deficit):

        

Convertible preferred stock, par value of $0.001 per share, 29,536,358 shares authorized, 27,861,009 shares issued and outstanding (actual); zero shares issued or outstanding (pro forma and pro forma as adjusted)

     69                   

Common stock, par value of $0.001 per share, 52,800,000 shares authorized, 7,419,469 shares issued and outstanding (actual); 35,885,848 shares issued and outstanding (pro forma); and shares authorized, 43,385,848 shares issued and outstanding (pro forma as adjusted)

     18         89         97   

Additional paid-in capital

     116,902         120,803         185,545   

Accumulated deficit

     (120,334      (120,334      (120,334
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity (deficit)

     (3,345      558         65,308   
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 20,182       $ 20,182       $ 84,932   
  

 

 

    

 

 

    

 

 

 

 

(1) 

If the underwriters’ option to purchase additional shares is exercised in full, the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization would increase (decrease) by $8.0 million, after deducting our estimate of the underwriting discounts and commissions and offering

 

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expenses payable by us, and we would have 44,510,848 shares of our common stock issued and outstanding, pro forma as adjusted.

The table above excludes the following shares:

 

  Ÿ  

8,198,074 shares of our common stock issuable upon the exercise of options outstanding as of December 31, 2013, with a weighted-average exercise price of $5.11 per share;

 

  Ÿ  

445,599 shares of our common stock issuable upon the exercise of options granted after December 31, 2013 through March 13, 2014 with a weighted-average exercise price of $10.29 per share;

 

  Ÿ  

477,050 shares of our common stock issuable upon the exercise of convertible preferred stock warrants outstanding as of December 31, 2013, with a weighted-average exercise price of $3.30 per share, of which (i) 366,519 shares were issued upon the exercise of such warrants after December 31, 2013, and (ii) 2,655 shares were cancelled in connection with a net exercise of a portion such warrants after December 31, 2013;

 

  Ÿ  

45,324 shares of our common stock reserved in connection with our convertible preferred stock warrant to be issued upon the draw-down of the remainder of the term loan credit facility we entered into in August 2013, with an exercise price of $11.03 per share;

 

  Ÿ  

140,500 unvested shares subject to repurchase;

 

  Ÿ  

80,232 shares issued pursuant to a non-recourse promissory note; and

 

  Ÿ  

5,341,190 shares of our common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 4,541,190 shares of common stock reserved for future issuance under our 2014 Equity Incentive Plan (which amount gives effect to the adjustments effective as of the effective date of the registration statement of which this prospectus is a part, as described in “Executive Compensation—Employee Benefit and Stock Plans”), subject to further adjustment as described in “Executive Compensation—Employee Benefit and Stock Plans,” (ii) 800,000 shares of common stock reserved for future issuance under our 2014 Employee Stock Purchase Plan (which amount gives effect to the adjustments described in “Executive Compensation—Employee Benefit and Stock Plans”) and (iii) shares that become available under our 2014 Equity Incentive Plan and 2014 Employee Stock Purchase Plan, pursuant to provisions thereof that automatically increase the share reserves under the plans each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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DILUTION

If you invest in our common stock, 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 (deficit) per share of our common stock immediately after this offering.

Our pro forma net tangible book value (deficit) as of December 31, 2013 was $(0.1) million, or $0.00 per share of common stock. Our pro forma net tangible book value (deficit) per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of December 31, 2013, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into common stock and the related reclassification of the convertible preferred stock warrant liability to additional paid-in capital immediately prior to the closing of this offering.

After giving effect to the sale of 7,500,000 shares of common stock in this offering at the initial public offering price of $10.00 per share, and after deducting our estimate of the underwriting discounts and commissions and offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been $64.6 million, or $1.49 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.49 per share to our existing stockholders, and an immediate dilution of $8.51 per share to investors purchasing shares in this offering.

The following table illustrates this per share dilution.

 

Initial offering price per share

      $ 10.00   

Pro forma net tangible book value (deficit) per share as of December 31, 2013

   $ 0.00      

Increase in pro forma net tangible book value per share allocable to investors purchasing shares in this offering

     1.49      
  

 

 

    

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

        1.49   
     

 

 

 

Dilution in pro forma net tangible book value per share to investors in this offering

      $ 8.51   

If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share after giving effect to our initial public offering would be $1.69 per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $8.31 per share.

 

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The following table summarizes, as of December 31, 2013, the differences between the number of shares of our common stock purchased from us, after giving effect to the conversion of our convertible preferred stock into common stock, the total cash consideration paid and the average price per share paid by our existing stockholders and by our new investors purchasing shares in this offering at the initial public offering price of $10.00 per share before deducting our estimate of the underwriting discounts and commissions and offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    
                  (In thousands)               

Existing stockholders

     36,106,580         82.8   $ 108,771         59.2   $ 3.01   

New investors

     7,500,000         17.2      $ 75,000         40.8        10.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     43,606,580         100.0   $ 183,771         100.0     4.21   
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters exercise their option to purchase additional shares in full, our existing stockholders would own 80.7% and our new investors would own 19.3% of the total number of shares of our common stock outstanding after our initial public offering.

The above table and discussions are based on 36,106,580 shares of our common stock outstanding as of December 31, 2013 (including 140,500 unvested shares subject to repurchase and 80,232 shares issued pursuant to a non-recourse promissory note), and exclude the following shares:

 

  Ÿ  

8,198,074 shares of common stock issuable upon the exercise of options outstanding as of December 31, 2013, with a weighted-average exercise price of $5.11 per share;

 

  Ÿ  

445,599 shares of common stock issuable upon the exercise of options granted after December 31, 2013 through March 13, 2014 with a weighted-average exercise price of $10.29 per share;

 

  Ÿ  

477,050 shares of common stock issuable upon the exercise of convertible preferred stock warrants outstanding as of December 31, 2013, with a weighted-average exercise price of $3.30 per share, of which (i) 366,519 shares were issued upon the exercise of such warrants after December 31, 2013 and (ii) 2,655 shares were cancelled in connection with a net exercise of a portion such warrants after December 31, 2013;

 

  Ÿ  

45,324 shares of our common stock reserved in connection with our convertible preferred stock warrant to be issued upon the draw-down of the remainder of the term loan credit facility we entered into in August 2013, with an exercise price of $11.03 per share; and

 

  Ÿ  

5,341,190 shares of our common stock which are reserved for future issuance under our equity compensation plans, subject to adjustment as described in “Executive Compensation—Employee Benefit and Stock Plans.”

To the extent that any outstanding options or warrants are exercised, new investors will experience further dilution.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013, and the consolidated balance sheet data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2011 have been derived from audited financial statements, which are not included in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected consolidated financial data below in conjunction with the sections titled “Use of Proceeds,” “Capitalization” 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.

 

    Year Ended December 31,  
    2011     2012     2013  
    (In thousands, except share and
per share data)
 

Consolidated Statement of Operations Data:

 

Revenue:

     

Product

  $ 31,846      $ 66,631        97,564   

Software subscriptions and service

    2,110        4,584        9,571   
 

 

 

   

 

 

   

 

 

 

Total revenue

    33,956        71,215        107,135   

Cost of revenue(1):

     

Product

    12,049        24,203        31,431   

Software subscriptions and service

    1,544        1,797        4,250   
 

 

 

   

 

 

   

 

 

 

Total cost of revenue

    13,593        26,000        35,681   
 

 

 

   

 

 

   

 

 

 

Gross profit

    20,363        45,215        71,454   
 

 

 

   

 

 

   

 

 

 

Operating expenses:

     

Research and development(1)

    9,595        16,081        25,742   

Sales and marketing(1)

    22,396        42,765        57,773   

General and administrative(1)

    2,953        8,521        17,689   
 

 

 

   

 

 

   

 

 

 

Total operating expenses

    34,944        67,367        101,204   
 

 

 

   

 

 

   

 

 

 

Operating loss

    (14,581     (22,152     (29,750

Interest income

    17        10        15   

Interest expense

    (260     (221     (604

Other income (expense), net

    87        (2,036     (2,462
 

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (14,737     (24,399     (32,801

Provision for income taxes

    (64     (339     (426
 

 

 

   

 

 

   

 

 

 

Net loss

  $ (14,801   $ (24,738     (33,227
 

 

 

   

 

 

   

 

 

 

Net loss per share allocable to common stockholders, basic and diluted(2)

  $ (2.87   $ (4.20   $ (4.84
 

 

 

   

 

 

   

 

 

 

Weighted-average shares used in computing net loss per share allocable to common stockholders, basic and diluted(2)

    5,153,514        5,884,751        6,866,839   
 

 

 

   

 

 

   

 

 

 

Pro forma net loss per share allocable to common stockholders, basic and diluted(2)

      $ (0.89
     

 

 

 

Weighted-average shares used in computing pro forma net loss per share allocable to common stockholders, basic and diluted(2)

        34,731,530   
     

 

 

 

 

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(1) Includes stock-based compensation as follows:

 

     Year Ended December 31,  
       2011          2012          2013    
     (In thousands)  

Cost of revenue

   $ 29       $ 13       $ 64   

Research and development

     123         264         929   

Sales and marketing

     200         483         1,573   

General and administrative

     155         346         1,721   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 507       $ 1,106       $ 4,287   
  

 

 

    

 

 

    

 

 

 

 

(2) See Note 12 to our audited consolidated financial statements for an explanation of the method used to calculate our actual and pro forma basic and diluted net loss per share allocable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

The following table sets forth our selected consolidated balance sheet data:

 

     As of December 31,  
     2011      2012      2013  
     (In thousands)  

Cash and cash equivalents

   $ 14,540       $ 29,585       $ 35,023   

Working capital

     13,836         29,774         21,516   

Total assets

     27,215         54,873         69,857   

Total deferred revenue

     4,237         16,704         30,570   

Total debt

     799         10,000         19,624   

Convertible preferred stock warrant liability

     1,490         3,352         3,903   

Total stockholders’ equity (deficit)

     12,333         11,555         (3,345

 

    Year Ended December 31,  
    2011     2012     2013  
    (In thousands)  

Key Financial Metrics:

     

Total revenue

  $ 33,956      $ 71,215      $ 107,135   

Total deferred revenue at period end(1)

    4,237        16,704        30,570   

Cash used in operating activities

    (12,820     (15,629     (12,380

Adjusted Gross Profit Percentage (non-GAAP)(2)

    60.1     63.8     66.9

Adjusted Operating Loss (non-GAAP)(2)

    (14,060     (20,884     (25,301

Adjusted Operating Loss Percentage (non-GAAP)(2)

    (41.4 )%      (29.3 )%      (23.6 )% 

Adjusted Net Loss (non-GAAP)(2)

    (14,362     (21,608     (26,553

 

(1) Our deferred revenue consists of amounts that have either been invoiced or prepaid but that have not yet been recognized as revenue as of the period end. The vast majority of our deferred revenue consists of the unrecognized portion of revenue from sales of our post-contract customer support, or PCS, contracts and sales of our software delivered as a service, or SaaS. Further, a portion of our deferred revenue is related to product sales that have not yet been shipped to the end customer.
(2) Our Adjusted Key Financial Metrics (Non-GAAP) have been adjusted to remove certain non-cash items. See “—Non-GAAP Financial Measures” below for more information on the uses and limitations of our non-GAAP financial measures and a reconciliation of Adjusted Gross Profit to gross profit, Adjusted Operating Loss to operating loss and Adjusted Net Loss to net loss, the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States, or GAAP.

 

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Non-GAAP Financial Measures

We regularly review Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss, which are non-GAAP financial metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions.

Adjusted Gross Profit Percentage

To provide investors with additional information regarding our financial results, we have disclosed Adjusted Gross Profit Percentage in the key financial metrics table above and within this prospectus. Adjusted Gross Profit Percentage is a non-GAAP financial measure. We calculate Adjusted Gross Profit Percentage as Adjusted Gross Profit divided by total revenue. We define Adjusted Gross Profit as our gross profit adjusted to exclude stock-based compensation and the amortization of acquired intangible assets. We have provided a reconciliation below of Adjusted Gross Profit to gross profit, the most directly comparable GAAP financial measure.

 

     Year Ended December 31,  
     2011      2012      2013  
     (In thousands)  

Gross profit

   $ 20,363       $ 45,215       $ 71,454   

Stock-based compensation

     29         13         64   

Amortization of acquired intangible assets

     14         162         162   
  

 

 

    

 

 

    

 

 

 

Adjusted Gross Profit

   $ 20,406       $ 45,390       $ 71,680   
  

 

 

    

 

 

    

 

 

 

Adjusted Operating Loss and Adjusted Operating Loss Percentage

To provide investors with additional information regarding our financial results, we have disclosed Adjusted Operating Loss in the key financial metrics table above and within this prospectus. Adjusted Operating Loss is a non-GAAP financial measure. We define Adjusted Operating Loss as our operating loss adjusted to exclude stock-based compensation and the amortization of acquired intangible assets. We calculate Adjusted Operating Loss Percentage as Adjusted Operating Loss divided by total revenue. We have provided a reconciliation below of Adjusted Operating Loss to operating loss, the most directly comparable GAAP financial measure.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Operating loss

   $ (14,581   $ (22,152   $ (29,750

Stock-based compensation

     507        1,106        4,287   

Amortization of acquired intangible assets

     14        162        162   
  

 

 

   

 

 

   

 

 

 

Adjusted Operating Loss

   $ (14,060   $ (20,884   $ (25,301
  

 

 

   

 

 

   

 

 

 

Adjusted Net Loss

To provide investors with additional information regarding our financial results, we have disclosed Adjusted Net Loss in the key financial metrics table above and within this prospectus. Adjusted Net Loss is a non-GAAP financial measure. We define Adjusted Net Loss as our net loss adjusted to exclude stock-based compensation, the amortization of acquired intangible assets and the periodic fair value remeasurements related to our convertible preferred stock warrants. We have provided a

 

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reconciliation below of Adjusted Net Loss to net loss, the most directly comparable GAAP financial measure.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Net loss

   $ (14,801   $ (24,738   $ (33,227

Stock-based compensation

     507        1,106        4,287   

Amortization of acquired intangible assets

     14        162        162   

Periodic remeasurement of convertible preferred stock warrants

     (82     1,862        2,225   
  

 

 

   

 

 

   

 

 

 

Adjusted Net Loss

   $ (14,362   $ (21,608   $ (26,553
  

 

 

   

 

 

   

 

 

 

We have included Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss in this prospectus, because they are key measures used by our management and Board to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operating plans. In particular, the exclusion of stock-based compensation, amortization of intangible assets acquired as part of any acquisition, and the periodic fair value remeasurements related to our convertible preferred stock warrants, can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted Operating Loss and Adjusted Net Loss provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and our Board.

Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. As non-GAAP measures, Adjusted Gross Profit, Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss have limitations in that they do not reflect all of the amounts associated with our results of operations as determined in accordance with GAAP. Some of these limitations are:

 

  Ÿ  

the non-GAAP measures do not consider the dilutive impact of stock-based compensation, which is an ongoing expense for us;

 

  Ÿ  

although amortization is a non-cash charge, the assets being amortized often will have to be replaced in the future, and Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss do not reflect any cash requirement for such replacements;

 

  Ÿ  

Adjusted Net Loss does not reflect the periodic fair value remeasurements related to our convertible preferred stock warrants; and

 

  Ÿ  

other companies, including companies in our industry, may calculate these non-GAAP measures differently, which reduces their usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss only together with other financial performance measures, including various cash flow metrics, net loss and our other GAAP results.

 

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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 the section titled “Selected Consolidated Financial Data” and our consolidated financial statements and related notes thereto 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 titled “Risk Factors” included elsewhere in this prospectus.

Company Overview

We have designed and developed a leading cloud-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge. The network edge is the point at which devices access the enterprise network. Managing the network edge is becoming more complex because of the proliferation of mobile devices and the ways in which such devices are used in business. Increasingly, employees and clients are using Wi-Fi-enabled smartphones, tablets, laptops and other mobile devices instead of desktop computers for mission-critical business applications. As the difficulty and complexity of managing the network edge expands, our platform offers cost-efficiency, scalability, reliability, manageability and ease-of-deployment and use. Additionally, our platform gives end-customers context-based visibility and policy enforcement, providing a high level of intelligence to the network. Our hardware products include intelligent access points, routers and switches. These products are managed by our Cloud Services Platform which delivers cloud-based network management and mobility applications giving end-customers a single, unified and contextual view of the entire network edge.

We derive revenue by selling our hardware products and related software licenses or software subscriptions and services, which together comprise our cloud-managed networking platform. Our product revenue consists of revenue from sales of our hardware products, which includes wireless access points, branch routers and switches, all of which are embedded with our proprietary operating system, HiveOS, and perpetual licenses of our unified network management system, HiveManager, and other software applications, as well as related accessories. Our software subscriptions and service revenue consists of revenue from sales of our service offerings that are delivered over a specified term. These offerings primarily include post-contract customer support, or PCS, related to our perpetual software licenses and subscriptions to HiveManager and other software applications delivered as a service, or SaaS, including related customer support.

We sell our products and software subscriptions and services to the licensees of our products and software subscriptions and services. We define end-customers as holding or having held licenses to our products and software subscriptions and services. When our end-customers purchase new hardware products, they are generally required to purchase a software license for every hardware unit, either as a perpetual license with PCS or as a SaaS license with a one-, three- or five-year term. Both our PCS and SaaS offerings include updates and upgrades of our software applications and our HiveOS operating system that is embedded in our hardware.

We maintain a field sales force that works to develop sales with our channel partners, which include value-added distributors, or VADs, and value-added resellers, or VARs. Our channel partners purchase our products and services from us at a discount to our list prices and then resell them to our end-customers. Substantially all of our sales within North America are made through VARs. Under this model, we sell our products and services to our VARs, which in turn sell our products and services to our end-

 

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customers. We sell to VARs upon identification of a specified end-customer. All of our sales outside of North America, as well as a portion of our sales within North America, are made through VADs. Under this model, we sell our products and services to our VADs, which in turn sell our products and services to either VARs, which then sell our products and services to our end-customers, or directly to end-customers. We typically sell to VADs upon identification of a specified end-customer. In some cases, however, our VADs purchase inventory from us for stocking and subsequently receive an order from an end-customer. Our agreements with our VADs allow for stocking of our products in their inventory, and for certain of our VADs provide related price protection or rebates, as well as limited rights of return for stock rotation.

We had approximately 13,100 end-customers in over 40 countries as of December 31, 2013. Our end-customers represent a broad range of industry verticals, including K-12 and higher education, healthcare, retail and distributed enterprises. For the year ended December 31, 2013, 65% of our total revenue was generated from the Americas, 26% from the EMEA, and 9% from APAC.

We outsource the manufacturing of all of our products to contract manufacturers. We outsource the warehousing and delivery of our products to a third-party logistics provider for worldwide fulfillment. We perform quality assurance and testing at our Sunnyvale, California facilities.

We have experienced rapid revenue growth in recent periods. In 2011, 2012 and 2013, our total revenue was $34.0 million, $71.2 million and $107.1 million, respectively, representing year-over-year growth of 110% for 2012 and 50% for 2013. In 2011, 2012 and 2013, our net losses were $14.8 million, $24.7 million and $33.2 million, respectively. We increased the number of our employees from approximately 230 as of December 31, 2011, to approximately 460 as of December 31, 2012 and to approximately 520 as of December 31, 2013. We expect to continue rapidly growing our organization to meet the needs of our customers and to pursue opportunities in new and existing markets. We intend to continue to invest in the development of our innovative technologies and new product offerings to the marketplace, acquire new end-customers in new and existing geographies, and increase penetration within our existing end-customer base. Due to our continuing investments to grow our business, including internationally, in advance of and in preparation for, our expected increase in sales and expansion of our customer base, we are continuing to incur expenses in the near term from which we may not realize any long-term benefit. As a result, we have never achieved profitability and we do not expect to be profitable for the foreseeable future. However, we believe that over the long term, we will be able to leverage these investments in the form of a higher revenue growth rate compared to the growth rate of our operating expenses.

Opportunities and Challenges

We believe that the growth of our business and our future success are dependent upon many factors, including our ability to continue to develop innovative technologies and provide new product offerings to the marketplace; acquire new end-customers, both in the geographies in which we currently operate as well as in new geographies; and increase penetration within our existing end-customer base.

We operate in the highly competitive wired and wireless network access products market. This market continues to evolve and is characterized by rapid technological innovation. We will need to continue to innovate in order to continue to achieve market adoption of our products and services. For example, we have recently introduced our new product family of hardware switches, which we believe rounds out our portfolio of network access hardware offerings. In addition, our market is currently in the midst of an evolution in related wireless technology standards and protocols. For example, the market is currently initiating a transition in wireless standards from 802.11n to the new 802.11ac standard, which uses new radio hardware to deliver substantially higher wireless performance. As these standards were being developed and finalized, we performed hardware and software development,

 

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both internally and with our original design manufacturers, or ODMs, to incorporate these standards into our product offerings. We also continue to develop new functionality in our product offerings to take advantage of the changes that these industry standards incorporated. When we introduce such new product offerings, we must effectively manage the timing of such releases to minimize the disruption to our existing product offerings and revenue streams and manage the orderly transition of our end-customers to these new products and services to reduce the amount of inventory for products that may become obsolete or slow moving due to our new product introductions and to limit the disruption to our end-customers’ ordering practices and the pricing environment for our legacy products and services. We will need to continue to react and respond to these changes through innovation in order for our business to succeed, and we will incur related research and development expenses as we do that.

We intend to target new end-customers within the industry verticals and geographies in which we currently operate, as well as through expansion into new verticals and geographies. For example, we recently announced new channel partnerships in both China and Japan to further our penetration in the APAC region. Additionally, we have partnered with software application providers to tailor our product offerings for specific verticals such as retail and healthcare, and we intend to continue to pursue such opportunities in other applicable industry verticals. In addition, our ability to successfully expand our end-customer base in new industry verticals and geographies of new end-customers is critical to creating a larger and more diverse end-customer base to which we can offer our current and future products and services.

Our sales efforts take several quarters, and involve educating our potential end-customers about the applications and benefits of our products, including the technical capabilities of our products. Sales to the education industry vertical are an important sales channel for us and can involve an extended sales cycle. In addition, sales to our enterprise customers may involve an extended sales cycle and often initial purchases are small. We attempt to manage these sales cycles through continued diversification of our end-customer base by industry vertical and related purchasing seasonality, deployment maturity and visibility, and the ratio of business from new and existing end-customers.

After the initial sale to a new end-customer, we focus on expanding our relationship with the end-customer. In order for us to continue to grow our total revenue, our end-customers must make additional purchases of our products and services. Additional sales to our existing end-customer base can take the form of incremental sales of products and services, either to complete deployments already started or to deploy additional products into other areas of their business. Our opportunity to expand our end-customer relationships through follow-on sales will increase as we add new end-customers, broaden our product portfolio and enhance product performance and functionality. Follow-on sales lead to increased revenue over the lifecycle of an end-customer relationship and can significantly increase our return on our sales and marketing investments.

Our growth strategy also contemplates increased sales and marketing investments internationally. Newly hired sales and marketing personnel require several months to establish new relationships and become productive. In addition, sales teams in international regions will attempt to sell into industry verticals and to end-customers that may not be familiar with our products and services. All of these factors will affect sales productivity. We attempt to manage our overall sales productivity through the timing of the introduction of new territories or the splitting of existing territories, the number and timing of new vertical penetration and the allocation of related headcount and go-to-market resources.

Lastly, we expect to continue to derive the majority of our sales through our channel partners. Our channel partners will play a significant role in our future growth as they identify new end-customers and expand our sales to existing end-customers. We plan to continue to invest in our network of

 

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channel partners to increase sales to existing end-customers, enable our channel partners to reach new end-customers and provide services and support effectively. All of these efforts will require us to continue to make significant sales and marketing investments.

Key Financial Metrics

We regularly review the following key financial metrics to evaluate growth trends in our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Our key financial metrics include non-GAAP financial metrics. Please refer to “Selected Consolidated Financial Data—Non-GAAP Financial Measures” in this prospectus for a discussion of the limitations of Adjusted Gross Profit Percentage, Adjusted Operating Loss, Adjusted Operating Loss Percentage and Adjusted Net Loss.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Total revenue

   $ 33,956      $ 71,215      $ 107,135   

Total deferred revenue at period end

     4,237        16,704        30,570   

Cash used in operating activities

     (12,820     (15,629     (12,380

Adjusted Gross Profit Percentage (non-GAAP)

     60.1     63.8     66.9

Adjusted Operating Loss (non-GAAP)

     (14,060     (20,884     (25,301

Adjusted Operating Loss Percentage (non-GAAP)

     (41.4 )%      (29.3 )%      (23.6 )% 

Adjusted Net Loss (non-GAAP)

     (14,362     (21,608     (26,553

Deferred Revenue.    Our deferred revenue consists of amounts that have either been invoiced or prepaid but that have not yet been recognized as revenue as of the period end. We consider deferred revenue to be a key financial metric, because it represents a significant portion of the revenue that we expect to recognize in future periods. In addition, we monitor the change in our deferred revenue balance, which, taken together with revenue, is an indication of sales activity in a given period. The vast majority of our deferred revenue comprises future software subscriptions and service revenue, primarily for PCS and SaaS, which we recognize ratably over the service term. Of our deferred product revenue, the majority comprises hardware products that we have shipped to our VADs in advance of shipment to our end-customers. We have provided a tabular reconciliation below of current and non-current deferred revenue:

 

     As of December 31,  
     2011      2012      2013  
     (In thousands)  

Product

   $ 333       $ 3,788       $ 5,095   

Software Subscriptions and Service

     3,904         12,916         25,475   
  

 

 

    

 

 

    

 

 

 

Total deferred revenue

     4,237         16,704         30,570   
  

 

 

    

 

 

    

 

 

 

Less: current portion of deferred revenue

     2,424         9,204         15,915   
  

 

 

    

 

 

    

 

 

 

Non-current portion of deferred revenue

   $ 1,813       $ 7,500       $ 14,655   
  

 

 

    

 

 

    

 

 

 

Components of Consolidated Statements of Operations

Revenue

We generate revenue from the sales of our products and services. As discussed further in “Critical Accounting Policies and Estimates—Revenue Recognition” below, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.

 

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Our total revenue comprises the following:

Product Revenue.    Our product revenue consists of revenue from sales of our hardware products, which include wireless access points, branch routers, and switches, all of which are embedded with our proprietary operating system, HiveOS, and perpetual licenses of our unified network management system, HiveManager, and other software applications, as well as related accessories. We recognize product revenue at the time of shipment, provided that all other revenue recognition criteria have been met. For our VAD arrangements in which our VADs stock inventory, we recognize revenue when our VADs have shipped the products to our end-customers (or to VARs that have identified end-customers), provided that all other revenue recognition criteria have been met.

Software Subscriptions and Service Revenue.    Our software subscriptions and service revenue consists of revenue from sales of our software subscriptions and service offerings that we deliver over a specified term. These offerings primarily include PCS related to our perpetual software licenses and subscriptions to HiveManager and other software applications delivered as SaaS, including related customer support, and from subsequent renewals of those contracts. Our PCS includes tiered maintenance and support services under renewable, fee-based maintenance and support contracts, which include technical support, bug fixes, access to priority hardware replacement service and unspecified upgrades on a when-and-if available basis. Our SaaS subscriptions include comparable maintenance and support services. The higher the percentage of our end-customers that purchase SaaS subscriptions as opposed to HiveManager and PCS, the higher our software subscriptions and service revenue will be as a percentage of our total revenue. We recognize software subscriptions and service revenue ratably over the term of the contract, which is typically one, three or five years. As a result, our recognition of software subscriptions and service revenue lags our recognition of related product revenue.

Our business has historically experienced seasonality. As a result, our total revenue typically fluctuates from quarter to quarter, which often affects the comparability of our results between periods. Our total revenue has historically increased significantly in the second quarter compared to the first quarter, primarily due to the impact of increased seasonal demand by end-customers in the education vertical, which has historically carried over to our third quarter. Demand in the education vertical tends to be weakest in the fourth quarter. We also historically have seen an increase in end-of-year purchases by enterprise customers in our fourth quarter, which we believe is mainly due to a desire to complete purchases within their calendar year budget cycle. Our total revenue decreased from our fourth quarter of 2012 to the first quarter of 2013 due to seasonal buying patterns and budget cycles within both our education vertical and general enterprise end-customers. While we believe that these seasonal trends have affected and will continue to affect our quarterly results, our rapid growth has largely masked these seasonal trends to date. We believe that our business may become more seasonal in the future. Historical patterns in our business may not be a reliable indicator of our future sales activity or performance.

Cost of Revenue

Our cost of revenue includes the following:

Cost of Product Revenue.    Our cost of product revenue primarily includes manufacturing costs of our products payable to third-party manufacturers. Our cost of product revenue also includes personnel costs, including stock-based compensation, shipping costs, third-party logistics costs, provisions for excess and obsolete inventory, warranty and replacement costs, the depreciation and amortization of testing and imaging equipment, inbound license fees, certain allocated facilities and information technology infrastructure costs, and other expenses associated with logistics and quality control.

 

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Cost of Software Subscriptions and Service Revenue.    Our cost of software subscriptions and service revenue primarily includes personnel costs, including stock-based compensation, certain allocated facilities information technology infrastructure costs and costs associated with our provision of PCS and SaaS. Our cost of software subscriptions and service revenue also includes datacenter costs.

Gross Profit

Our gross profit has been and will continue to be affected by a variety of factors, including product shipment volumes, average sales prices of our products, the mix of revenue between products and software subscriptions and service, and the mix of hardware products sold, because our hardware products have varying gross margins depending on the product offering and the lifecycle of the product. Historically, our software subscriptions and service gross margin has been lower than our product gross margin; however, we expect our software subscriptions and service gross margin to increase over the long term because we expect our software subscriptions and service revenue to increase more quickly than our cost of software subscriptions and service revenue. We expect our gross margin to increase modestly over the long term, but it may decrease over time in the event we experience additional competitive pricing pressure. We also expect that our gross margin will fluctuate from period to period depending on the factors described above.

Operating Expenses

Our operating expenses include the following:

Research and Development.    Our research and development expenses consist primarily of personnel costs, including bonuses, stock-based compensation and travel expenses for employees engaged in research, design and development activities. Research and development expenses also include costs for prototype-related expenses, product certification, consulting services, depreciation and certain allocated facilities and information technology infrastructure costs. We believe that continued investment in research and development is important to attaining our strategic objectives.

We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in the development of our products and services. However, we expect our research and development expenses to decrease modestly as a percentage of our total revenue over the long term, although our research and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our research and development expenses.

Sales and Marketing.    Our sales and marketing expenses consist primarily of personnel costs, including commission costs, stock-based compensation, recruiting fees and travel expenses for employees engaged in sales and marketing activities. Commission expenses in any given period are based on completed contracts, which may not result in revenue in the period in which they are incurred. Sales and marketing expenses also include the cost of trade shows, marketing programs, promotional materials, demonstration equipment, consulting services, depreciation and certain allocated facilities and information technology infrastructure costs. We expect our sales and marketing expenses to continue to increase in absolute dollars as we increase the size of our sales and marketing organization and expand into new markets. However, we expect our sales and marketing expenses to decrease modestly as a percentage of our total revenue over the long term, although our sales and marketing expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our sales and marketing expenses.

 

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General and Administrative.    Our general and administrative expenses consist primarily of personnel costs, including bonuses, stock-based compensation and travel expenses for our executive, finance, human resources, legal and operations employees, as well as compensation for our Board. General and administrative expenses also include fees for outside consulting, legal, audit and accounting service and insurance, as well as depreciation and certain allocated facilities and information technology infrastructure costs. We expect our general and administrative expenses to increase in absolute dollars following the completion of this offering due to the additional legal, accounting, insurance, investor relations and other costs that we will incur as a public company, as well as other costs associated with growing our business. However, we expect our general and administrative expenses to decrease modestly as a percentage of our total revenue over the long term, although our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.

Interest Expense

Our interest expense consists primarily of interest on our indebtedness. See Note 6 of our consolidated financial statements included elsewhere in this prospectus for more information about our debt.

Other Income (Expense), Net

Our other income (expense), net consists primarily of the impact of fair value adjustments for our convertible preferred stock warrants and gains and losses from foreign currency exchange transactions. We will continue to record adjustments to the fair value of the warrants until they are exercised, converted into warrants to purchase common stock or expire, at which time the warrants will no longer be remeasured at each balance sheet date. As a result, for periods prior to the completion of this offering we expect our other income (expense) net to increase. However, at the closing of this offering, we will reclassify the then-current aggregate fair value of these warrants from liabilities to additional paid-in capital and we will cease to record any related fair value adjustments.

Provision for Income Taxes

Our provision for income taxes consists primarily of foreign tax expense due to our cost-plus agreements with our foreign entities, which guarantee foreign entities a profit, and to a lesser extent federal and state income tax expense. As of December 31, 2012 and 2013, respectively, we maintained a full valuation allowance against our domestic deferred tax assets, including net operating loss carryforwards and research and development and other tax credits. We expect our provision for income taxes to increase in absolute dollars in future periods.

 

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Results of Operations

The following table sets forth our results of operations for the periods presented in dollars:

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Revenue:

      

Product

   $ 31,846      $ 66,631      $ 97,564   

Software subscriptions and service

     2,110        4,584        9,571   
  

 

 

   

 

 

   

 

 

 

Total revenue

     33,956        71,215        107,135   

Cost of revenue(1):

      

Product

     12,049        24,203        31,431   

Software subscriptions and service

     1,544        1,797        4,250   
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     13,593        26,000        35,681   
  

 

 

   

 

 

   

 

 

 

Gross profit

     20,363        45,215        71,454   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development(1)

     9,595        16,081        25,742   

Sales and marketing(1)

     22,396        42,765        57,773   

General and administrative(1)

     2,953        8,521        17,689   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     34,944        67,367        101,204   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (14,581     (22,152     (29,750

Interest income

     17        10        15   

Interest expense

     (260     (221     (604

Other income (expense), net

     87        (2,036     (2,462
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (14,737     (24,399     (32,801

Provision for income taxes

     (64     (339     (426
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (14,801   $ (24,738   $ (33,227
  

 

 

   

 

 

   

 

 

 

 

(1) 

Includes stock-based compensation as follows:

 

     Year Ended December 31,  
     2011      2012      2013  
     (In thousands)  

Cost of revenue

   $ 29       $ 13       $ 64   

Research and development

     123         264         929   

Sales and marketing

     200         483         1,573   

General and administrative

     155         346         1,721   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 507       $ 1,106       $ 4,287   
  

 

 

    

 

 

    

 

 

 

 

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The following table sets forth our results of operations for the periods presented as a percentage of our total revenue:

 

     Year Ended
December 31,
 
       2011         2012         2013    

Revenue:

      

Product

     94     94     91

Software subscriptions and service

     6        6        9   
  

 

 

   

 

 

   

 

 

 

Total revenue

     100        100        100   

Cost of revenue:

      

Product

     35        34        29   

Software subscription and service

     5        3        4   
  

 

 

   

 

 

   

 

 

 

Total cost of revenue

     40        37        33   
  

 

 

   

 

 

   

 

 

 

Gross profit

     60        63        67   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     28        23        24   

Sales and marketing

     66        60        54   

General and administrative

     9        12        17   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     103        95        95   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (43     (32     (28

Interest income

                     

Interest expense

     (1            (1

Other income (expense), net

            (3     (2
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (44     (35     (31

Provision for income taxes

                     
  

 

 

   

 

 

   

 

 

 

Net loss

     (44 )%      (35 )%      (31 )% 
  

 

 

   

 

 

   

 

 

 

Comparison of the Years Ended December 31, 2011, 2012 and 2013

Revenue

 

     Year Ended December 31,      2011 to 2012     2012 to 2013  
     2011      2012      2013      $ Change      % Change     $ Change      % Change  
     (In thousands)  

Product

   $ 31,846       $ 66,631       $ 97,564       $ 34,785         109     30,933         46

Software subscriptions and service

     2,110         4,584         9,571         2,474         117     4,987         109
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total revenue

   $ 33,956       $ 71,215         107,135       $ 37,259         110     35,920         50
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Revenue by geographic location:

                   

Americas

   $ 24,817       $ 48,009       $ 69,796       $ 23,192         93     21,787         45

EMEA

     7,408         18,853         27,864         11,445         154     9,011         48

APAC

     1,731         4,353         9,475         2,622         151     5,122         118
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

Total revenue

   $ 33,956       $ 71,215       $ 107,135       $ 37,259         110   $ 35,920         50
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

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2012 Compared to 2013.    Total revenue increased $35.9 million, or 50%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. The revenue growth reflects the increasing demand for our products and software subscriptions and service offerings.

The increase in product revenue was primarily the result of an aggregate increase in product unit shipments largely driven by sales of our intelligent access points and our unified network management system, HiveManager.

The increase in our software subscriptions and service revenue of $5.0 million was primarily driven by the increase in sales of PCS and SaaS in connection with increased sales of products and an increase in the number of our end-customers, and recognition of deferred revenue. During the year ended December 31, 2013, 70% of our end-customers purchased SaaS as compared to 63% during the year ended December 31, 2012, which also contributed to higher software subscriptions and service revenue.

The Americas and EMEA accounted for the majority of the increase in our total revenue from period to period. Our total revenue increased in these regions during the year ended December 31, 2013, compared to the prior year due to an increase in the size of our sales force, as well as our addition of new channel partners and increased sales by our existing channel partners. Our total number of end-customers increased from approximately 7,500 as of December 31, 2012 to approximately 13,100 as of December 31, 2013.

2011 Compared to 2012.    Total revenue increased $37.2 million, or 110%, for the year ended December 31, 2012, compared to the year ended December 31, 2011. The revenue growth reflects the increasing demand for our products and software subscriptions and service offerings.

The increase in product revenue was primarily the result of an aggregate increase in product unit shipments largely driven by sales of our intelligent access points.

The increase in our software subscriptions and service revenue of $2.5 million was primarily driven by the increase in sales of PCS and SaaS in connection with increased sales of products and an increase in the number of our end-customers, and recognition of deferred revenue. During the year ended December 31, 2012, 63% of our end-customers purchased SaaS as compared to 52% during the year ended December 31, 2011, which also contributed to higher software subscriptions and service revenue.

The Americas and EMEA accounted for the majority of the increase in our total revenue from period to period. Our total revenue increased in these regions during the year ended December 31, 2012, compared to the prior year due to an increase in the size of our sales force, as well as our addition of new channel partners and increased sales by our existing channel partners. Our total number of end-customers increased from approximately 2,900 as of December 31, 2011 to approximately 7,500 as of December 31, 2012.

 

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Cost of Revenue, Gross Profit and Gross Margin

 

    Year Ended December 31,     2011 to 2012     2012 to 2013  
    2011     2012     2013     $ Change     % Change     $ Change     % Change  
    (In thousands)  

Product

  $ 12,049      $ 24,203      $ 31,431      $ 12,154        101   $ 7,228        30

Software subscriptions and service

    1,544        1,797        4,250        253        16     2,453        137
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total cost of revenue

  $ 13,593      $ 26,000        35,681      $ 12,407        91     9,681        37
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Product

  $ 19,797      $ 42,428        66,133      $ 22,631        114   $ 23,705        56

Software subscriptions and service

    566        2,787        5,321        2,221        392     2,534        91
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total gross profit

  $ 20,363      $ 45,215        71,454      $ 24,852        122     26,239        58
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Product

    62     64     68        

Software subscriptions and service

    27     61     56        
 

 

 

   

 

 

   

 

 

         

Total gross margin

    60     63     67        
 

 

 

   

 

 

   

 

 

         

2012 Compared to 2013.    The increase in our cost of product revenue was primarily related to an increase in sales of our products. The increase in our cost of software subscriptions and service revenue was primarily related to an increase in service and support personnel headcount in 2013, and an increase in datacenter costs. Our service and support personnel headcount increased from 19 as of December 31, 2012 to 25 as of December 31, 2013.

The increase in our product gross margin was primarily due to our introduction of newer versions of access points that have higher margins. Our software subscriptions and service gross margin decreased from 61% for the year ended December 31, 2012 to 56% for the year ended December 31, 2013, primarily due to incremental expenses associated with increased service and support personnel headcount and increased datacenter capacity.

2011 Compared to 2012.    The increase in our cost of product revenue was primarily related to an increase in sales of our products. The increase in our cost of software subscriptions and service revenue was primarily related to an increase in service and support personnel headcount in the latter part of 2012, and an increase in datacenter costs. Our service and support personnel headcount increased from eight as of December 31, 2011 to 19 as of December 31, 2012.

The increase in our product gross margin was primarily due to our introduction in the latter part of 2012 of newer versions of access points that have higher margins. The increase in our software subscriptions and service gross margin was primarily due to an increase in total PCS and SaaS revenue, which required a lower number of service and support personnel in 2012 compared to 2011.

Operating Expenses

 

    Year Ended December 31,     2011 to 2012     2012 to 2013  
    2011     2012     2013     $ Change     % Change     $ Change     % Change  
    (In thousands)  

Research and development

  $ 9,595      $ 16,081      $ 25,742      $ 6,486        68   $ 9,661        60

Sales and marketing

    22,396        42,765        57,773        20,369        91     15,008        35

General and administrative

    2,953        8,521        17,689        5,568        189     9,168        108
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total operating expenses

  $ 34,944      $ 67,367        101,204      $ 32,423        93   $ 33,837        50
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

 

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2012 Compared to 2013.     The increase in our research and development expenses was primarily attributable to increases in personnel and related costs and an increase in related allocated costs of facilities and information technology infrastructure. Personnel and related costs increased by $6.9 million, including bonuses and stock-based compensation, as we increased our research and development headcount to support continued investment in our future product and service offerings. The remaining increase was mainly due to higher costs related to prototype-related expenses and consulting services and certain allocated facilities and information technology infrastructure costs. Our research and development headcount increased from 196 as of December 31, 2012 to 216 as of December 31, 2013.

The increase in our sales and marketing expenses was primarily attributable to increases in personnel and related costs of $13.5 million. The increase in personnel and related costs represents the full-year impact of personnel costs for fiscal 2013 resulting from the increase in headcount towards the end of fiscal 2012. The increase also includes increased commission and bonus expenses related to higher business volume during the year. Our sales and marketing expenses also increased due to higher travel costs of $1.1 million due to higher business activity. Our sales and marketing headcount increased from 194 as of December 31, 2012 to 204 as of December 31, 2013.

The increase in our general and administrative expenses was primarily attributable to increases in personnel and related costs of $5.0 million, including bonuses and stock-based compensation. Our general and administrative expenses also increased due to higher professional services costs of $4.5 million, which related to audit fees, increased legal fees and finance and accounting consulting fees, in connection with scaling our organization to support increased business activity. These increases were partially offset by a decrease in certain allocated facilities and information technology infrastructure costs. Our general and administrative headcount increased from 44 as of December 31, 2012 to 70 as of December 31, 2013.

2011 Compared to 2012.    The increase in our research and development expenses was primarily attributable to increases in personnel and related costs and an increase in related allocated costs of facilities and information technology infrastructure. Personnel and related costs increased by $5.8 million, including bonuses and stock-based compensation, as we increased our research and development headcount to support continued investment in our future product and service offerings. Our research and development headcount increased from 111 as of December 31, 2011 to 196 as of December 31, 2012.

The increase in our sales and marketing expenses was primarily attributable to increases in personnel and related costs of $15.1 million, including increased commission expenses and travel expenses, as we increased our sales organization as part of our strategy to expand into new geographies and recruit new channel partners. Our sales and marketing headcount increased from 90 as of December 31, 2011 to 194 as of December 31, 2012. Additionally, marketing expenses increased by $5.2 million related to trade shows and conventions and marketing development programs.

The increase in our general and administrative expenses was primarily attributable to increases in personnel and related costs of $2.9 million, including bonuses and stock-based compensation. Our general and administrative headcount increased from 21 as of December 31, 2011 to 44 as of December 31, 2012. Further, our professional services expenses increased by $2.0 million related to recruiting and other consulting services to support increased business activity.

Interest Expense

 

     Year Ended
December 31,
    2011 to 2012     2012 to 2013  
     2011     2012     2013     $ Change      % Change     $ Change      % Change  
     (In thousands)  

Interest expense

   $ (260   $ (221   $ (604   $ 39         15   $ (383      173

 

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2012 Compared to 2013.    The change in our interest expense was not significant.

2011 Compared to 2012.    The change in our interest expense was not significant.

Other Income (Expense), Net

 

    Year Ended
December 31,
    2011 to 2012     2012 to 2013  
    2011     2012     2013     $ Change     % Change     $ Change     % Change  
    (In thousands)  

Other income (expense), net

  $ 87      $ (2,036   $ (2,462   $ (2,123     (2,440 )%    $ (426     21

2012 Compared to 2013.    Our other income (expense), net increased primarily due to a fair value adjustment of our convertible preferred stock warrants.

2011 Compared to 2012.    Our other income (expense), net decreased primarily due to a fair value adjustment of our convertible preferred stock warrants.

 

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Quarterly Results of Operations

The following unaudited quarterly statements of operations for each of the four quarters in the year ended December 31, 2012, and each of the four quarters in the year ended December 31, 2013 have been prepared on a basis consistent with our audited annual financial statements and include, in our opinion, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future for a full year or any other period. The following quarterly financial data should be read in conjunction with our audited financial statements and the related notes included elsewhere in this prospectus.

The following table sets forth our results of operations for the periods presented in dollars:

 

    Three Months Ended  
    March 31,
2012
    June 30,
2012
    September 30,
2012
    December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
 
    (In thousands)  

Revenue:

               

Product

  $ 11,676      $ 15,256      $ 20,394      $ 19,305      $ 18,037      $ 25,883      $ 26,376      $ 27,268   

Software subscriptions and service

    826        977        1,279        1,502        1,790        2,149        2,628        3,004   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    12,502        16,233        21,673        20,807        19,827        28,032        29,004        30,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

               

Product

    4,076        5,891        7,234        7,002        6,155        8,059        8,652        8,565   

Software subscriptions and service

    338        347        502        610        835        1,010        1,111        1,294   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    4,414        6,238        7,736        7,612        6,990        9,069        9,763        9,859   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    8,088        9,995        13,937        13,195        12,837        18,963        19,241        20,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

    3,160        3,437        4,581        4,903        5,757        6,674        6,510        6,801   

Sales and marketing

    7,742        10,821        11,094        13,108        12,900        14,604        14,507        15,762   

General and administrative

    1,229        1,744        2,089        3,459        3,889        3,926        4,858        5,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (4,043     (6,007     (3,827     (8,275     (9,709     (6,241     (6,634     (7,166

Interest income

    2                      8        4        3        2        6   

Interest expense

    (25     (11     (74     (111     (100     (101     (141     (262

Other expense, net

    (138     (135     (1,355     (408     (383     (485     (1,305     (289
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (4,204     (6,153     (5,256     (8,786     (10,188     (6,824     (8,078     (7,711

Income tax provision

    (73     (37     (39     (190     (130     (155     (58     (83
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (4,277   $ (6,190   $ (5,295   $ (8,976   $ (10,318   $ (6,979     (8,136   $ (7,794
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our results of operations for the periods presented as a percentage of our total revenue:

 

    Three Months Ended
    March 31,
2012
  June 30,
2012
  September 30,
2012
  December 31,
2012
  March 31,
2013
  June 30,
2013
  September 30,
2013
  December 31,
2013
    (In thousands)

Revenue:

                               

Product

      93 %       94 %       94 %       93 %       91 %       92 %       91 %       90 %

Software subscriptions and service

      7         6         6         7         9         8         9         10  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total revenue

      100         100         100         100         100         100         100         100  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Cost of revenue:

                               

Product

      32         36         33         34         31         29         30         29  

Software subscriptions and service

      3         2         3         3         4         3         4         4  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total cost of revenue

      35         38         36         37         35         32         34         33  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Gross profit

      65         62         64         63         65         68         66         67  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Research and development

      25         21         21         24         29         24         22         22  

Sales and marketing

      62         67         51         63         65         52         50         52  

General and administrative

      10         11         10         17         20         14         17         17  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Operating loss

      (32 )       (37 )       (18 )       (40 )       (48 )       (22 )       (23 )       (24 )

Interest income

      0         0         0         0         0         0         0         0  

Interest expense

      0         0         0         (1 )       (1 )       0         0         (1 )

Other expense, net

      (1 )       (1 )       (6 )       (1 )       (2 )       (2 )       (5 )       (1 )
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Loss before income taxes

      (33 )       (38 )       (24 )       (42 )       (51 )       (24 )       (28 )       (26 )

Income tax provision

      (1 )       0         0         (1 )       (1 )       (1 )       0         0  
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Net loss

      (34 )%       (38 )%       (24 )%       (43 )%       (52 )%       (25 )%       (28 )%       (26 )%
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Quarterly Revenue Trends

Our quarterly year-over-year revenue increased for fiscal 2013 compared to fiscal 2012. For the second quarter ended June 30, 2013, the increase in our product revenue was primarily driven by strong seasonal performance in our sales to end-customers in the education vertical, which carried over into our third quarter ended September 30, 2013. For the fourth quarter ended December 31, 2013, the increase in our product revenue was primarily driven by continued strong sales performance in our more established International and North American markets. During this quarter, which is typically a lighter quarter for our sales to the education vertical, we saw continued adoption of our products in the retail and healthcare verticals as well as in the education vertical. Our software subscriptions and service revenue increased for the three months ended June 30, 2013, September 30, 2013 and December 31, 2013, respectively, primarily related to the increase in sales of PCS and SaaS in connection with increased sales of our products and an increase in the number of our end-customers, as well as recognition of deferred revenue. During the year ended December 31, 2013, 70% of our end-customers purchased SaaS as compared to 63% during the year ended December 31, 2012, which also contributed to higher software subscriptions and service revenue.

Comparisons of our quarterly revenue year-over-year are more meaningful than comparisons of our quarterly sequential revenue due to seasonality in the sale of our products and software subscriptions and services. Our total revenue has increased significantly in the second quarter compared to the first quarter, primarily due to the impact of increased seasonal demand by end-customers in the education vertical, which has carried over into our third quarter. For the periods

 

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presented, our total revenue has decreased from our fourth quarter to the first quarter of our next fiscal year, also due to seasonal buying patterns and budget cycles within both our education vertical and general enterprise end-customers. Demand in the education vertical tends to be weakest in the fourth quarter. While we believe that these seasonal trends have affected and will continue to affect our quarterly results, our rapid growth has largely masked these seasonal trends to date. We believe that our business may become more seasonal in the future. Historical patterns in our business may not be a reliable indicator of our future sales activity or financial performance.

During the three months ended December 31, 2012, we witnessed a non-seasonal decrease in our total revenue. We believe this decrease was the result of several factors. In the first month of the quarter, we were not able to fulfill orders for one of our main hardware access point product offerings due to an unforeseen component change by a supplier to one of our third-party manufacturers that affected our software. We believe that the lack of availability of this product impacted our sales cycle by stalling potential end-customer evaluations and distracting sales personnel. In addition, we experienced disruption in our sales force due to both the hiring of our Senior Vice President, World-wide Field Operations, who has responsibility for global sales, as well as the rapid hiring of additional sales personnel. We believe that the organizational changes initiated by new leadership, as well as significant territory assignment issues we experienced by onboarding the volume of new sales personnel, also negatively impacted our sales for the quarter.

Quarterly Gross Margin Trends

Our total gross margin ranged from 61.6% to 67.6% during the periods presented and fluctuations are primarily due to the introduction of new versions of access points that had higher margins.

Quarterly Operating Expense Trends

Our operating expenses increased sequentially in all quarters presented as we invested in our research and development, sales and marketing and general and administrative functions to support the growth of our business. Increases in operating expenses have been largely attributed to adding headcount in all areas.

Internal Control Over Financial Reporting

Prior to this offering we were a private company and have had limited accounting and financial reporting personnel and other resources with which to address our internal controls and procedures. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2012, our management and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2012, as defined in the standards established by the Public Company Accounting Oversight Board of the U.S. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. The material weakness was identified as a result of certain post-closing adjustments with respect to the lack of precision in calculating certain accrued expenses and assessment of our warranty, allowance for bad debt and sales return reserves, and relates to our lack of sufficient personnel in our accounting and financial reporting functions with sufficient experience and expertise with respect to the application of U.S. GAAP and related financial reporting.

 

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In fiscal 2013, we took steps to remedy this material weakness by hiring additional finance and accounting personnel, including a Chief Financial Officer, Corporate Controller, Director of Revenue and related staff, Senior Manager of External Reporting and Technical Accounting, and Stock Plan Administrator, each with public company experience.

While we believe that we have remediated the material weakness described above in fiscal 2013, in connection with the audit of our financial statements as of and for the year ended December 31, 2013, we and our independent registered public accounting firm identified two significant deficiencies in our internal control over financial reporting as of December 31, 2013. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting. The significant deficiencies relate to our reliance on incomplete financial information received from one of our distributors and the lack of sufficient precision with respect to certain review-type controls in the financial close and reporting process.

We intend to continue to evaluate whether we need to hire additional finance and accounting personnel as we continue to build our financial reporting infrastructure and further develop and document our accounting policies and financial reporting procedures. We cannot assure you that the remediation measures that we have implemented and the further measures that we intend to implement will be sufficient to remediate our two existing significant deficiencies or prevent additional material weaknesses or significant deficiencies. We also cannot assure you that we have identified all of our existing material weaknesses or significant deficiencies or that we will not in the future have additional material weaknesses or significant deficiencies. See “Risk Factors—Risks Related to Our Business—We and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting as of December 31, 2012 and significant deficiencies in our internal control over financial reporting as of December 31, 2013. If we fail to develop and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results in a timely manner, which may adversely affect investor confidence in our company.”

Liquidity and Capital Resources

Capital Resources

As of December 31, 2013, we had $35.0 million of cash and cash equivalents, $34.4 million of which was held within the United States.

Our cash and cash equivalents have increased $15.0 million in 2012 and increased $5.4 million in 2013 due primarily to cash provided by financing activities offset by our losses from operations as we funded our growth, including funding the development of future products and product enhancements, increasing our sales force and expanding into new geographies.

We believe that our existing cash and cash equivalents will be sufficient to meet our anticipated working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of our spending to support our research and development efforts, the expansion of our sales and marketing activities, the introduction of new and enhanced product and service offerings, the costs to ensure access to adequate manufacturing capacity, and the level of market acceptance of our products.

In June 2013, we raised gross proceeds of $10.0 million through the sale of 906,494 shares of Series E convertible preferred stock.

In August 2013, we received $0.7 million in cash proceeds from the exercise of warrants to purchase 250,341 shares of Series C convertible preferred stock.

 

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In August 2013, we entered into a term loan credit facility with TriplePoint Capital that allows us, subject to certain funding conditions, including compliance with certain covenants and the absence of certain events or conditions that could be deemed to have a material adverse effect on our business, to borrow term loans in an aggregate principal amount of up to $20.0 million. We may request draws under the term loan credit facility within the 15-month period following the agreement execution date. The draw period is subject to extension. In December 2013, we drew $10.0 million under this credit facility, which remained outstanding at December 31, 2013. We were in compliance with all covenants under the agreement as of December 31, 2013.

As of December 31, 2013, we had $10.0 million of outstanding debt on our revolving line of credit under our revolving credit facility with Silicon Valley Bank. As of December 31, 2013, we did not have any additional borrowing capacity available under this credit facility. We were in compliance with all covenants under the agreement as of each of December 31, 2012 and December 31, 2013.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Cash used in operating activities

   $ (12,820   $ (15,629   $ (12,380

Cash used in investing activities

     (1,696     (1,488     (2,910

Cash provided by financing activities

     23,301        32,162        20,728   

Operating Activities

We have historically experienced negative cash flows from operating activities as we continue to expand our business. Our largest uses of cash from operating activities are for employee-related expenditures and purchases of products from our contract manufacturers. Our primary source of cash flows from operating activities is cash receipts from our channel partners. Our cash flows from operating activities will continue to be affected principally by the extent to which we grow our total revenue and increase our headcount, primarily in our sales and marketing and research and development functions, in order to grow our business.

For fiscal 2013, operating activities used $12.4 million of cash as a result of our net loss of $33.2 million, partially offset by non-cash charges of $8.2 million and a net change of $12.6 million in our net operating assets and liabilities. Non-cash charges consisted primarily of $4.3 million in stock-based compensation which increased due to new stock options granted combined with the increase in the fair value of our common stock. Non-cash charges also consisted of $2.2 million in the remeasurement of the fair value of our convertible preferred stock warrants. The net change in our net operating assets and liabilities was primarily due to a $13.9 million increase in deferred revenue as a result of an increase in sales of PCS and SaaS, an increase of $2.5 million in accrued liabilities, partially offset by an increase of $4.9 million in accounts receivable. Our days sales outstanding, or DSO, which we define as the number of days it takes us to collect revenue after a sale has been made, based on a 90-day average, was 50 days as of December 31, 2013. Higher shipments and billings in the later part of the quarter ended December 31, 2013, as compared to quarter ended December 31, 2012, resulted in an increase in the DSO as compared to December 31, 2012.

For fiscal 2012, operating activities used $15.6 million of cash as a result of our net loss of $24.7 million, partially offset by non-cash charges of $3.8 million and a net change of $5.3 million in our net operating assets and liabilities. Non-cash charges consisted primarily of $1.9 million in the remeasurement of the fair value of our convertible preferred stock warrants and $1.1 million in stock-based compensation, which increased due in part to our making significant stock option grants in 2012

 

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combined with the increase in the fair value of our common stock. The net change in our net operating assets and liabilities was primarily due to a $12.5 million increase in deferred revenue as a result of an increase in sales of PCS and SaaS, partially offset by a $8.1 million increase in accounts receivable and a $1.7 million increase in prepaid expenses and other assets. Our DSO was 47 days as of December 31, 2012. Higher shipments and billings in the later part of the quarter ended December 31, 2012, as compared to quarter ended December 31, 2011, resulted in an increase in the DSO as compared to December 31, 2011.

For fiscal 2011, operating activities used $12.8 million of cash, primarily as a result of our net loss of $14.8 million, partially offset by non-cash charges of $0.8 million and a net change of $1.2 million in our net operating assets and liabilities. The net change in our operating assets and liabilities was primarily the result of a $2.3 million increase in deferred revenue as a result of an increase in sales of PCS and SaaS and a $3.1 million increase in accounts payable. These increases were partially offset by a $2.1 million increase in accounts receivable and a $3.6 million increase in inventory as a result of growth in our business. Our DSO was 36 days as of December 31, 2011.

Investing Activities

Our investing activities have primarily consisted of purchases of property and equipment.

For fiscal 2013, cash used in investing activities was $2.9 million and was attributable to capital expenditures relating primarily to computer and other infrastructure equipment, testing and imaging equipment, and research and development lab equipment.

For fiscal 2012, cash used in investing activities was $1.5 million and was attributable to capital expenditures relating primarily to computer and other infrastructure equipment, testing and imaging equipment, and research and development lab equipment.

For fiscal 2011, cash used in investing activities was $1.7 million and was attributable to $1.0 million for a business acquisition to help us expand our platform architecture and $0.7 million in capital expenditures primarily related to computer and other infrastructure equipment, testing and imaging equipment, and research and development lab equipment.

Financing Activities

Our financing activities have primarily consisted of proceeds from the sale of our convertible preferred stock and, to a lesser extent, from the issuance of debt and proceeds from the exercises of stock options.

For fiscal 2013, financing activities provided $20.7 million of cash, primarily as a result of net proceeds of $9.9 million from the sale of our Series E convertible preferred stock and our draw-down of $10.0 million under our term loan credit facility with TriplePoint Capital.

For fiscal 2012, financing activities provided $32.2 million of cash, primarily as a result of net proceeds of $22.4 million from the sale of our Series E convertible preferred stock and our drawing down $10.0 million on our revolving line of credit under our revolving credit facility. In 2012, we also fully repaid our outstanding borrowings of $0.8 million under our prior loan and security agreement.

For fiscal 2011, financing activities provided $23.3 million of cash, primarily as a result of net proceeds of $24.9 million from the sale of our Series D convertible preferred stock, partially offset by $1.8 million in principal repayments under our loan and security agreement.

 

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Debt Obligations

In June 2012, we entered into a revolving credit facility with Silicon Valley Bank for an aggregate principal amount of up to $10.0 million, with a sublimit of $3.0 million for borrowings guaranteed by the Export-Import Bank of the United States. Our revolving credit facility is collateralized by substantially all of our property, other than our intellectual property. Our revolving credit facility bears monthly interest at a floating rate equal to the greater of (1) 4.00% or (2) prime rate plus 0.75%. The revolving loans may be borrowed, repaid and reborrowed until June 30, 2014, when all outstanding amounts must be repaid. As of December 31, 2013, we have drawn $10.0 million under our revolving credit facility.

In August 2013, we entered into an amendment to our revolving credit facility to permit us, among other things, to enter into a term loan credit facility and to conform certain terms of our revolving credit facility to corresponding terms of the term loan credit facility.

In August 2013, we entered into a term loan credit facility with TriplePoint Capital that allows us, subject to certain funding conditions, including compliance with certain covenants and the absence of certain events or conditions that could be deemed to have a material adverse effect on our business, to borrow term loans in an aggregate principal amount of up to $20.0 million. We may request draws under the term loan credit facility within the 15-month period following the agreement execution date. The draw period is subject to extension.

Our term loan credit facility is collateralized by substantially all of our property, other than our intellectual property. For each draw under our term loan credit facility, we may choose one of four options: (1) a 24-month, interest-only loan bearing interest at the greater of prime rate or 3.25%, plus a margin of 6.5%, along with a final payment that will vary from 4.5% to 7.25% depending on the amount of the credit facility that we utilize; (2) a 48-month loan that is interest-only for the first 24 months and fully amortizes in 24 equal payments thereafter, and which bears interest at the greater of prime rate or 3.25%, plus a margin of 7.5%, along with a final payment that will vary from 6.75% to 9.25% depending on the amount of the credit facility that we utilize; (3) a 36-month, interest-only loan bearing interest at the greater of prime rate or 3.25%, plus a margin of 8.25%, along with a final payment that will vary from 8.5% to 10.25% depending on the amount of the credit facility that we utilize; or (4) a 48-month, interest-only loan bearing interest at the greater of prime rate or 3.25%, plus a margin of 8.75%, along with a final payment that will vary from 10% to 12% depending on the amount of the credit facility that we utilize. Under certain circumstances, our interest rate may be reduced or increased by 0.5% on January 1, 2015. We may prepay loans under this term loan credit facility in whole at any time, but may be subject to early repayment fees. We may not re-borrow amounts we prepay under this term loan credit facility.

In December 2013, we drew $10.0 million under this term loan credit facility, which remained outstanding as of December 31, 2013.

We intend to use loans drawn under our revolving and term loan credit facilities for working capital and general corporate purposes. Both credit facilities contain customary affirmative and negative covenants that limit our ability to, among other things, incur additional indebtedness, grant liens, make investments, repurchase stock, pay dividends, transfer assets and merge or consolidate. Our revolving credit facility also requires us to maintain a liquidity ratio of not less than 1.25 to 1.00. Both of our credit facilities contain customary affirmative covenants, including requirements to deliver audited financial statements. Both of our credit facilities contain customary events of default, including non-payment defaults, covenant defaults, material judgment defaults, bankruptcy and insolvency defaults, cross-defaults to certain other material indebtedness and inaccuracy of representations and warranties. Our revolving credit facility includes a default upon the occurrence of a material adverse change to our business. Upon an event of default, the lenders may declare all or a portion of our outstanding obligations payable to be immediately due and payable and exercise other rights and

 

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remedies provided for under the credit agreement. During the existence of an event of default, interest on the obligations under both of our credit facilities could be increased by 5.0%.

We were in compliance with all covenants under our revolving credit facility and term loan credit facility as of December 31, 2013.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations as of December 31, 2013:

 

     Payments Due by Period  
     Less Than
1 Year
     1 to 3
Years
     3 to 5
Years
     More Than
5 Years
     Total  
     (In thousands)  

Contractual Obligations:

  

Short-term debt obligations(1)

   $