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Table of Contents
Index to Consolidated Financial Statements
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2012 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission file number: 001-34659
Meru Networks, Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) | 26-0049840 (I.R.S. Employer Identification No.) |
894 Ross Drive
Sunnyvale, California 94089
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:(408)215-5300
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
|---|---|---|
| Common stock, $0.0005 par value | The NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229 .405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer o | Accelerated Filer o | Non-accelerated Filer ý (Do not check if a smaller reporting company) | Smaller reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012 (the last business day of the registrant's most recently completed second fiscal quarter), based upon the closing price of the common stock reported by the NASDAQ Global Market on such date, was approximately $22,331,000. Shares of common stock held by each executive officer and director of the registrant and by each person who owns 10% or more of the registrant's outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Number of shares outstanding of the registrant's Common Stock, $0.0005 par value, as of March 15, 2013: 22,062,000.
Documents Incorporated By Reference:
Portions of the registrant's definitive Proxy Statement related to its 2013 Annual Stockholders' Meeting to be filed pursuant to Regulation 14A within 120 days after registrant's fiscal year ended December 31, 2012 are incorporated by reference into Part III of this Annual Report on Form 10-K.
| | | Page No. | ||||
|---|---|---|---|---|---|---|
PART I | ||||||
Item 1. | Business | 3 | ||||
Item 1A. | Risk Factors | 17 | ||||
Item 1B. | Unresolved Staff Comments | 42 | ||||
Item 2. | Properties | 42 | ||||
Item 3. | Legal Proceedings | 42 | ||||
Item 4. | Mine Safety Disclosures | 43 | ||||
PART II | ||||||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 44 | ||||
Item 6. | Selected Financial Data | 47 | ||||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 49 | ||||
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 69 | ||||
Item 8. | Financial Statements and Supplementary Data | 70 | ||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 114 | ||||
Item 9A. | Controls and Procedures | 114 | ||||
Item 9B. | Other Information | 114 | ||||
PART III | ||||||
Item 10. | Directors, Executive Officers and Corporate Governance | 115 | ||||
Item 11. | Executive Compensation | 115 | ||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 115 | ||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 115 | ||||
Item 14. | Principal Accounting Fees and Services | 115 | ||||
PART IV | ||||||
Item 15. | Exhibits, Financial Statement Schedules | 116 | ||||
Signatures | 117 | |||||
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Unless the context suggests otherwise, references to "Meru", "us", "our", or "we" are reference to Meru Networks, Inc. and its subsidiaries, taken as a whole.
Meru Networks is a registered trademark and the Meru Networks logo,AirFirewall, patentedSystem Director,Virtual Cell, Virtual Port, MeruAssure and E(z)RF are trademarks of Meru Networks, Inc.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this Form 10-K, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. The words "believe," "may," "should," "plan," "potential," "project," "will," "estimate," "continue," "anticipate," "design," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors." In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-K may not occur, and actual results and the timing of certain events could differ materially and adversely from those anticipated or implied in the forward-looking statements as a result of many factors.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We disclaim any duty to update any of these forward-looking statements after the date of this Form 10-K to confirm these statements to actual results or revised expectations.
Overview
We serve customers around the world by providing innovative Wi-Fi solutions that are designed to deliver an extraordinary mobility experience. Our best-of-breed mobile access and virtualized Wi-Fi solutions are easy to deploy, operate and expand for our customers' ever-changing mobility requirements. We enable enterprises to migrate their business-critical applications from wired networks to wireless networks, and become what we refer to as All-Wireless Enterprises.
The escalating device access demands brought on by the bring your own device, or BYOD, phenomenon and adoption of bandwidth hungry applications require a bolder, more flexible and scalable solution approach for Wi-Fi solutions to keep business mobile. We offer a wireless architecture designed to manage enterprise access networks for maximum flexibility and mobility. Our open architecture offers flexibility at each layer—policy, management, control and access—to help enterprises scale their mobile access network.
We were founded with the vision of enabling organizations to become All-Wireless Enterprises. We began commercial shipments of our products in 2003. Our products are sold worldwide primarily
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through value-added resellers, or VARs, and distributors, and have been deployed by approximately 7,400 customers in 56 countries.
Our Strategy
Our goal is to become the leading provider of mobile access networking solutions for the enterprise. Key elements of our strategy include:
Our Solution
Our BYOD and virtualized wireless LAN solutions are designed to cost-effectively meet the increasing demands of users and enterprises for a mobile access network that delivers the performance, reliability, predictability and operational simplicity of a wired network, with the advantages of mobility. Our solution represents an innovative approach to wireless networking that utilizes virtualization technology to create a wireless network that is unimpeded by the architectural deficiencies of other wireless networking solutions. We have developed a wireless networking solution that enables enterprises to migrate their business-critical applications to a wireless network, and to become All-Wireless Enterprises.
Our BYOD and policy management solution automates secure guest access, BYOD on-boarding and mobile access policy enforcement for any client on any vendor's network. Optimized for ease-of-use, our solution dramatically reduces IT workload and delivers a trouble-free end-user experience. Our BYOD solutions can be deployed on a VMware-based virtual appliance or on a Meru services appliance.
Our network management and security solutions provide single-console visibility and control over a Meru wireless LAN. This highly integrated, powerful wireless network management suite helps our customers proactively identify and prevent potential issues before they cause problems for users. It delivers a unified view of applications, devices and users, streamlining management with superior ease
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of use. We believe our solution can assure the highest level of application performance and excellent overall end-user experience by focusing on prediction rather than remediation. Our network management applications can be deployed on a VMware-based virtual appliance or on a Meru services appliance.
Our wireless LAN solution combines wireless resources into one virtual, seamless pool and partitions this virtual pool to match device and application requirements. Our use of virtualization technology for wireless networking has enabled us to deliver a solution that is designed to cost-effectively optimize the enterprise network. OurSystem Director Operating System limits the ability of the wireless device to select which physical access point to use, and instead shifts control of network connections to the wireless network infrastructure. When a wireless device enters the enterprise and attempts to connect with the wireless network, it is presented with a unique virtual connection point.
Further, our virtualized wireless LAN solution enables the network to monitor itself and provide predictive and proactive diagnosis of issues affecting network service. Our solution also provides comprehensive and centralized wireless management. It represents a new approach to wireless network management, using continuous recording of key network events, as well as data collection and analysis to reduce the time spent by IT personnel troubleshooting user issues and minimize user downtime. Our solution offers access to real-time and cumulative performance metrics for both individual wireless user devices and access points, as well as the network as a whole. From a single interface, which can be accessed remotely, IT personnel can engage in focused and deep analysis of the entire wireless network and view activity details at each level of the infrastructure: controllers, access points and individual wireless user devices.
Our solution is based on ourSystem Director, embedded withVirtual Cell andVirtual Port technologies. OurSystem Director coordinates all of the components of our solution, including our access points and controllers. Our software, controllers and access points are designed to be easily deployed and integrated into existing IT infrastructure. Our solution is designed to be easily managed and scalable across enterprises of all sizes. In addition, it provides comprehensive security capabilities to ensure that the wireless network is at least as secure as a wired network. It has been deployed by enterprises in many markets, such as education, healthcare, hospitality, manufacturing, retail, technology, finance, government, telecom, transportation and utilities. We have achieved significant success among enterprises in these markets, which have been at the forefront of the transition from using wireless networks for casual use to using wireless networks for strategic advantages.
Our solution is designed to optimize the wireless enterprise network to cost-effectively deliver the performance, reliability, predictability and operational simplicity of a wired network.
Our virtualized wireless LAN solution is designed to deliver the following benefits to users:
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Further, enterprises can realize the following benefits by deploying our solution:
Technology
We offer wireless architecture designed to manage enterprise-access networks for maximum flexibility and mobility. Our open architecture offers flexibility at each layer—policy, management, control and access—to help enterprises scale their mobile access network.
At the network access layer, our comprehensive access point/controller offerings are designed to deliver superior coverage: on campus, in remote locations, in-room, outdoors and in very client-dense environments. Unlike other vendors who offer only a single wireless deployment mode, our virtualized RF approach gives IT departments multiple wireless deployment options designed to optimize performance, mobility and the end-user experience, based on a variety of use cases. Virtualization also enables our single-channel architecture, or SCA, which we believe will be critical in realizing the full benefit of an 802.11ac deployment because of the reduced number of available RF channels.
Similarly, at the control-plane layer, we leverage virtualization to give enterprises a choice: the simplicity of an on-premise controller appliance, the on-demand scalability of a VMware version of controller software or WAN optimization of distributed mode deployment for remote locations.
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It is, however, at the "policy" layer that we have one of the industry's most widely-deployed integrated BYOD/guest management solutions. Our Identity Manager solution can be integrated with any vendor's wired or wireless infrastructure to help IT departments define and enforce BYOD and guest access policies. It enforces policies such as restricting users to limited domains within the intranet from their tablet, or restricting smartphones to internet and email access only. Staying true to our commitment to virtualization, we make all the policy and management solutions available on the VMWare platform. Identity Manager also allows us to address customers that have previously deployed competitors' hardware, which we believe will give us an advantage to compete against the hardware incumbent in the upcoming 802.11ac upgrade cycle.
At the application layer, our architecture is a platform that provides services to support industry-specific and broad enterprise mobility solutions. The real value of a WLAN has always been the business value of the applications that the employee interacts with to accomplish their job.
In order to achieve wired-like performance, reliability, predictability and operational simplicity in a wireless network, ourSystem Director Operating System integrates two key technologies:Virtual Cell andVirtual Port.
Virtual Cell—AVirtual Cell is created when wireless resources from multiple physical access points are pooled together to provide the abstraction of a single access point to a wireless device, with each physical access point operating on the same radio channel and offering identical services. This pooling completely masks the identities of individual access points from the perspective of users and their wireless devices. The physical access points become indistinguishable to wireless devices which only see one common network connection. The entireVirtual Cell has one common identity, and the wireless device effectively connects to theVirtual Cell and not to individual access points. As a wireless device moves, ourSystem Director determines the best physical access point to serve the device and seamlessly migrates the wireless device to the appropriate access point.
The use ofVirtual Cell technology can provide a number of key advantages over legacy wireless network architectures:
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believe this approach results in more robust wireless coverage and also can reduce the number of access points required in the network.
Virtual Port—Within theVirtual Cell, our patentedSystem Director assigns each wireless device a unique identifier and a dedicated virtual link to the network, which we refer to as aVirtual Port. TheVirtual Port allows ourSystem Director to allocate resources to each individual device taking into account that particular device's unique network needs and the applications running on that device. TheVirtual Port remains with each wireless device for the life of its connection to the network, even as the wireless device moves. This allows the wireless network to deliver a dedicated and customized wireless service for each device. At the same time, ourSystem Director continues to optimize the overall performance and reliability of the network.
Generating a uniqueVirtual Port for each wireless device can provide a number of key benefits:
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Products
We provide a virtualized wireless LAN solution that is built around ourSystem Director Operating System, which runs on our controllers and access points. We offer additional products designed to deliver centralized network management, predictive and proactive diagnostics, as well as enhanced security. Our products allow enterprises to leverage their investments in their existing IT infrastructures.
Meru System Director Operating System
Our patentedSystem Director Operating System forms the core of our virtualized wireless LAN solution and is the common software foundation that runs on our scalable range of controllers and our line of Wi-Fi-certified wireless access points. It provides centralized coordination and control of all the access points on the network and delivers a set of services for application-aware optimization of the network, comprehensive security, high availability, flexible deployment and simple operations.
Meru Controllers
We provide a family of scalable controllers that run ourSystem Director and work in conjunction with our access points to provide high performance and reliable network service to wireless devices. Our controllers synchronize access points to optimize the user experience and manage all traffic on the network.
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Our family of controllers, summarized in the following table, is designed to meet the scale and performance needs of different sized networks from small branch offices or small enterprises to large campus environments or enterprise headquarters. All of the controller platforms run ourSystem Director Operating System and each controller delivers a common set of capabilities independent of the size of the network.
| | MC6000 | MC4200 | MC3200 | MC1550 | ||||
|---|---|---|---|---|---|---|---|---|
Maximum Number of Access Points | 5,000 | 500 | 200 | 50 | ||||
Typical Deployment | Large Enterprise | Large Enterprise | Mid-sized Enterprise | Small Enterprise |
Meru Access Points
Our 802.11a/b/g/n industry-standard, Wi-Fi-certified access points provide network connectivity for wireless devices. They are typically deployed in ceilings within buildings and automatically discover and connect to our controllers, providing wireless service to users based on the centralized policies configured for the network. Our access points also monitor the network and gather information that is used to provide enhanced security, centralized network management and proactive and predictive diagnostic capabilities.
We provide a comprehensive line of 802.11a/b/g/n industry-standard access points that can be combined with a set of external antennae to support different coverage needs. We have access point models for deployment indoors and outdoors.
| | AP110 | AP1014 | AP1010 & AP1020 | AP320, AP332 & AP433 | OAP380 & OAP433e | |||||
|---|---|---|---|---|---|---|---|---|---|---|
Deployment Scenarios | Home Office and Small Branch | In-room Access for Hotels and Dormitories; Small Branch Offices | Classrooms, Dormitory Common Areas, Moderate Density Enterprise | Conference Rooms, Lecture Halls, Hospitals, Stadiums | Parking Lots, Courtyards, University Grounds |
Guest Access and BYOD
Our BYOD and policy management solutions are designed to automate secure guest access, BYOD on-boarding and mobile access policy enforcement for any client on any vendor's network. With our focus on optimizing for ease-of-use, our solution is designed to dramatically reduce IT department workload while delivering a trouble-free end-user experience.
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Meru E(z)RF Application Suite
The Meru Networks E(z)RF Application Suite enables enterprises to configure, monitor, troubleshoot, secure and operate our virtualized wireless LAN solution. Each of the following software applications can be purchased separately:
Wireless LAN Appliances
Appliance | Application | Scalability | ||
|---|---|---|---|---|
SA200 | Small enterprises | Supports up to 10 controllers. | ||
SA2000 | Medium to large enterprises | Supports up to 250 controllers. |
Security and Management Applications
Our SA200 and SA2000 Services Appliances provide the hardware platform for Meru applications focused on WLAN management and security. The SA200 is designed for small enterprises, and the
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SA2000 is designed for medium to large enterprises. The services appliances support the following applications:
Application | Designed To | |
|---|---|---|
E(z)RF® Network Manager | Provides wireless performance dashboards, RF visualization, centralized monitoring, configuration, fault management, visibility over long-term trends and centralized reporting. | |
Service Assurance Manager | Designed to deliver end-to-end service assurance for the network and its applications. | |
Spectrum Manager | Designed to detect and identify both Wi-Fi and non-Wi-Fi interference on all channels all the time. | |
Identity Manager | Designed to simplify secure guest access and device provisioning for any client on any vendor's network (requires separate services appliance). | |
Wireless Intrusion prevention System | Detects wireless intrusions with predefined and custom signatures on an integrated platform with other WLAN management applications (SA2000 only). | |
PCI Compliance Manager | Audits and verifies WLAN security to ensure Payment Card Industry, or PCI, compliance (SA2000 only). |
Support and Services
We offer customer support and services based on the deployment needs of our customers. We offer support service contracts in varying lengths of up to five years.
MeruAssure, our customer support offering, maximizes and protects our customers' wireless LAN investment with comprehensive services and support. By helping to keep network operations running efficiently,MeruAssure is designed to minimize disruption to business operations, combining incident detection, investigation and diagnosis with the monitoring, recovery and resolution needed to support business-critical network resources. Our customer support offering provides our customers with software upgrades, online access to our knowledge database of technical information related to our virtualized wireless LAN solution and access to our customer service personnel. In order to better serve our customers, we have support centers in Sunnyvale, California and Bangalore, India and a separate outsourced support center in India available to respond live 24 hours a day, every day. Our customers also receive first level support through our VARs.
In addition, we may provide professional services to our customers. Our professional service offerings help our customers extract additional strategic value from our virtualized wireless LAN solution. With a team of experienced engineers and consultants, our professional services organization assists enterprises in deploying and operating our solution. We offer a variety of professional service engagements to meet the varying needs of our customers.
We also train our VARs and offer training to our customers. Our training department conducts basic and advanced courses online, onsite at customer locations and at our training facility in Sunnyvale, California. In addition to our standard training programs, we offer different levels of Meru certification programs, which certify participants upon successful completion of the program covering our products and wireless technologies.
Customers
Our virtualized wireless LAN solution has been deployed by approximately 7,400 customers in 56 countries worldwide in many markets, including education, healthcare, hospitality, manufacturing, retail, technology, finance, government, telecom, transportation and utilities. Our solution is deployed in a wide range of enterprises, from smaller enterprises with single locations to large global enterprises.
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We derived 52%, 55% and 64% of our revenues from sales to customers located in the United States in the years ended December 31, 2012, 2011 and 2010, respectively, and 48%, 45% and 36% of our revenues from international sales in the years ended December 31, 2012, 2011 and 2010, respectively. See the discussion of international sales and operations under "Our international sales and operations subject us to additional risks that may materially and adversely affect our business and operating results" in Item 1A. "Risk Factors".
The table below lists our channel partners, sales to whom represent 10% or more of our consolidated revenues (in percentages):
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Major Channel Partners | 2012 | 2011 | 2010 | |||||||
Westcon Group, Inc. | 25 | % | 29 | % | 34 | % | ||||
Siracom, Inc. | 19 | 11 | * | |||||||
Catalyst Telecom, Inc. | 13 | 13 | 12 | |||||||
Ingram Micro Inc. | 11 | * | * | |||||||
Revenues from external customers, measures of profit and loss and total asset information are included in our consolidated financial statements included in this report under Item 8 "Financial Statements and Supplementary Data."
Sales and Marketing
We sell our products and support worldwide primarily through VARs and distributors. These channel partners help market and sell our products and services to a broad array of enterprises and allow us to leverage our sales force. In some cases, we support our VARs' market development efforts through contributions to their marketing spending. In accordance with our distribution agreements and industry practice, certain distributors have agreements with us which allow for price protection and stock return privileges on certain inventory.
Our sales force manages sales within each of our geographic territories. As of December 31, 2012, we had sales personnel located in the Americas, Europe, Middle East and Africa (EMEA) and the Asia Pacific regions. We operate in one reportable segment. Our marketing activities consist primarily of demand generation, product marketing, website operations, technology conferences, trade shows, seminars and events, advertising, promotions and public relations. In early 2011, we substantially expanded our field sales organization to provide improved coverage of the growing number of business opportunities in our target markets, approximately doubling our sales headcount by early 2012. In addition, in late 2011 and early 2012, we made a variety of investments in marketing programs to complement the expansion of our field sales headcount. However, beginning in the second quarter of 2012, we took steps to bring our sales and marketing expenses in line with our revenue expectations. Market awareness of our capabilities and products is essential to our continued growth and our success in all of our markets.
We believe that there can be significant seasonal factors that may cause the first and third quarters of our fiscal year to have relatively weaker products revenues than the second and fourth fiscal quarters. See the discussion of seasonality under "Overview" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more complete description of the factors contributing to seasonal variation in our business.
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Research and Development
Our continued investment in research and development is critical to our business. We have assembled a team of engineers with expertise in various fields, including networking technologies, applications, wireless communications and network and systems management. Our research and development team is based in Sunnyvale, California and Bangalore, India. We staff our development projects with engineers in both locations and operate our research and development team as an integrated unit. We have invested significant time and financial resources into the development of ourSystem Director Operating System and related software and hardware products. We plan to expand our product offerings and solutions capabilities in the future and plan to dedicate significant resources to these continued research and development efforts. In the years ended December 31, 2012, 2011 and 2010, our research and development operating expenses were $15.1 million, $14.0 million and $12.4 million.
Manufacturing
We outsource manufacturing of our hardware products to original design manufactures, or ODMs, and contract manufacturers, or CMs. Our ODMs and CMs are responsible for sourcing all the components included in our hardware products. These components and the raw materials required to manufacture them are generally available but the chipsets that we use in our products are currently available only from a limited number of sources, with whom neither we nor our manufacturers have entered into supply agreements. We perform rigorous in-house quality control testing to ensure the reliability of our products. We outsource the warehousing and delivery of our products to a third-party logistics provider in the U.S. for worldwide fulfillment.
Competition
The wireless networking market is highly competitive and continually evolving. We believe that we compete primarily on the basis of providing a comprehensive solution that delivers high-performing, reliable and predictable wireless networking solutions in a cost-effective manner. We believe other principal competitive factors in our market include the ability to provide quality customer service and support, the ease with which a wireless network can be initially deployed and scaled to meet an enterprise's needs, the interoperability of a wireless network with a wide range of devices, the ability to provide appropriate levels of security and the ability to bundle wireless products with other networking offerings. We generally compete favorably with our competitors; however, many of our actual and potential competitors enjoy substantial competitive advantages over us, such as greater name recognition, more products and services and substantially greater financial, technical and other resources.
Our primary competitors include Cisco Systems, through its wireless networking business unit and its cloud business unit through its acquisition of Meraki in 2012, Aruba Networks, Ruckus Wireless, Motorola through its acquisition of Symbol Technologies, Hewlett-Packard through its acquisition of Colubris Networks and Juniper Networks through its acquisition of Trapeze Networks. We also face competition from a number of smaller companies.
Intellectual Property
Our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections.
Patents and Patent Applications. We have been granted 18 U.S. patents, which will expire beginning 2025 through 2029. We have 26 non-provisional patent applications pending in the U.S. Patent and Trademark Office. We expect to file additional patent applications from time to time. We
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do not know whether any of our outstanding patent applications will result in the issuance of a patent, and even if additional patents are ultimately issued, the examination process may require us to narrow our claims. Our issued patents are intended to protect certain of our core technologies, but these patents may be contested, circumvented, found unenforceable or invalidated, and we may not be able to prevent third parties from infringing them. Therefore, the exact effect of having a patent cannot be predicted with certainty.
Qualcomm Atheros License Agreement. We are party to a non-exclusive license agreement with Qualcomm Atheros, Inc. or Atheros, whereby we license certain technology that we incorporate into our access points. Atheros is the only supplier of this technology in several of our access points. In the event that our license agreement with Atheros is 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 license agreement and redesign of certain of our products could materially and adversely affect our business. The initial term of the license agreement with Atheros began on August 7, 2009, with a one year term, and automatically renews for successive one-year periods, unless the agreement is terminated prior to the end of the then-current term.
Our registered trademark in the U.S. is Meru Networks. In addition, we rely on a combination of trade secrets and trademark laws to maintain and develop our competitive position with respect to intellectual property. We generally control access to and use of our proprietary software and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners, and our software is protected by U.S. and international copyright laws. We also incorporate certain generally available software programs into our products pursuant to license agreements with third parties.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. Although we believe that our product offerings do not infringe the intellectual property rights of any third party, we cannot be certain that we will prevail in any intellectual property dispute. If we do not prevail in these disputes, we may lose some or all of our intellectual property protection, be enjoined from further sales of our products that are determined to infringe the rights of others and/or be forced to pay substantial royalties to a third party, any of which would adversely affect our business, financial condition and results of operations.
On April 13, 2012, we entered into a settlement, license and release agreement with Extricom Ltd., or Extricom. Pursuant to the agreement with Extricom, we and Extricom each agreed to:
As part of the agreement with Extricom, we paid Extricom $2.4 million and expensed the full amount in 2012.
On June 13, 2011, we entered into a Patent Cross License Agreement (the "Motorola License Agreement") with Motorola Solutions, Inc., a Delaware corporation, and its affiliates, including Symbol Technologies, Inc., Wireless Valley Communications, Inc. and AirDefense, Inc. (collectively "Motorola"). Pursuant to the Motorola License Agreement, we and Motorola each agreed to:
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As part of the Motorola License Agreement we agreed to pay Motorola $7.3 million and expensed the full amount in 2011.
Employees
As of December 31, 2012, we had 391 employees in offices across the Americas, EMEA and Asia Pacific regions, of which 177 employees are located outside the United States. As of December 31, 2011, we had 403 employees in offices across the Americas, EMEA and Asia Pacific regions, of which 166 employees are located outside the United States. None of our employees were represented by a union or covered by a collective bargaining agreement as of December 31, 2012. We consider our employee relations to be good and have never experienced a work stoppage.
Effective May 12, 2011, Dr. Vaduvur Bharghavan, our Chief Technology Officer, notified us of his intention to transition from his day to day role as our Chief Technology Officer. On October 3, 2011, we announced that Ihab Abu-Hakima had informed us of his determination to resign as Chief Executive Officer and he subsequently left Meru Networks in March 2012. In March 2012, our board of directors appointed Dr. Bami Bastani, who previously served as the president, chief executive officer and board member of companies in the mobility, consumer and broadband markets, as our president and chief executive officer, or CEO, and a member of our board of directors.
Environmental Laws
Certain aspects of our products and operations are regulated under various environmental laws in the U.S., Europe and other parts of the world. These environmental laws are broad in scope and regulate numerous activities including the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our products and the recycling and treatment and disposal of our products. Environmental laws may limit the use of certain substances in our products, or may require us to provide product safety information to our customers if certain substances are present in our products in sufficient quantities. Compliance with environmental laws and regulations across multiple jurisdictions is complex and could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We did not incur any material capital expenditures for environmental control facilities in fiscal year 2012, and none are planned for fiscal year 2013.
Corporate Information
We were incorporated in Delaware in January 2002. Our principal executive offices are located at 894 Ross Drive, Sunnyvale, California, 94089, U.S.A., and our telephone number is 1-408-215-5300. Our website address is www.merunetworks.com. The information on or accessible through our website is not part of this Annual Report on Form 10-K.
On August 31, 2011, we acquired all of the outstanding stock of Identity Networks, or Identity, a privately-owned provider of complete guest and device access management solutions located in the United Kingdom.
Additional Information
We make available, free of charges, through a link at our investor relations website located at investors.merunetworks.com, access to our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934, as amended, or the
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Exchange Act, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or SEC. Our SEC reports can be accessed through the Investor Relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC. A copy of our Annual Report on Form 10-K is available without charge to stockholders upon written request to: Investor Relations, Meru Networks, Inc., 894 Ross Drive, Sunnyvale, California 94089. Further, a copy of this Annual Report on Form 10-K is located at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.
Risks Related to Our Business and Industry
Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations and the market value of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial performance. Because of the risks and uncertainties discussed below, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods.
We expect to incur operating losses throughout 2013 that, absent additional financing, would result in lower cash balances on hand by the end of 2013.
We expect to incur operating losses and continued cash usage in 2013 as a result of expenses associated with the continued development and expansion of our business. As of December 31, 2012, we had cash and cash equivalents balances of $22.9 million.
While we believe our cash and cash equivalents will be sufficient to meet our anticipated cash needs for the next 12 months from the date of this report, if we do not raise additional financing, our cash balances will be reduced to comparatively lower levels over the next twelve months. Should these lower cash balances materialize, it could make it more difficult to obtain new customers and retain existing customers. In addition, we could see increased employee attrition and difficulty attracting new employees. These developments could materially and adversely impact our business and operating results.
Our future capital needs are uncertain and we may need to raise additional funds in the future, and if we require additional funds in the future, such funds may not be available on acceptable terms, or at all.
We believe that our existing cash and cash equivalents and short-term investments will be sufficient to meet our anticipated cash requirements for the next 12 months. We may, however, need to raise substantial additional capital due to changes in business conditions or other future developments or in order to:
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Our future funding requirements will depend on many factors, including:
We may require additional funds in the future and we may not be able to obtain such funds on acceptable terms, or at all. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. The holders of new equity securities may also receive rights, preferences or privileges that are senior to those of existing holders of our common stock. Debt financing, if available, may involve covenants restricting our operations or our ability to incur additional debt. Any debt or additional equity financing that we raise may contain terms that are not favorable to us or our stockholders. If we do not have, or are not able to obtain, sufficient funds, we would be required to modify our growth and operating plans to the extent of available funding, which would harm our ability to grow our business. We may also have to delay development or commercialization of our products or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets, or delay, reduce the scope of or eliminate some or all of our development programs. We also may have to reduce sales, marketing, customer support or other resources devoted to our products or cease operations. Any of these factors could harm our operating results.
Our operating results may fluctuate significantly, which makes our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly and annual operating results have varied significantly in the past and could vary significantly in the future, which makes it difficult for us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of our control, including the changing and volatile U.S., European and global economic environment, and any of which may cause our stock price to fluctuate. 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
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of our future performance. A significant portion of our quarterly sales typically occurs during the last month of the quarter, often within the last few weeks or days of the quarter. As a result, our quarterly operating results are difficult to predict even in the near term and a delay in an anticipated sale past the end of a particular quarter may negatively impact our results of operations for that quarter, or in some cases, that year. A delay in the recognition of revenue, even from just one account, may have a significant negative impact on our results of operations for a given period. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, as has occurred recently and at other times in the past, or if the guidance we provide to the market falls below the expectations of investors or securities analysts, as has occurred recently and at other times in the past, the price of our common stock could decline substantially. Such a stock price decline could occur, and has occurred in the past, even when we have met our publicly stated revenue and/or earnings guidance.
In addition to other risks listed in this "Risk Factors" section, factors that may affect our operating results include, but are not limited to:
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Furthermore, many of our target customers have not purchased products similar to these and might not have a specific budget for the purchase of these products;
We have a limited operating history, which makes it difficult to predict our future operating results.
We were incorporated in January 2002 and began commercial shipments of our products in December 2003. As a result of our limited operating history, it is very difficult to forecast our future operating results. We face challenges in our business and financial planning as a result of the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to more mature companies with longer operating histories. These uncertainties make it difficult to predict our future operating results. If the assumptions we use to plan our business are incorrect or change in reaction to a change in our markets, our financial results could suffer.
We have incurred significant losses since inception, and could continue to incur losses in the future.
We have incurred significant losses since our inception, including net losses of $31.1 million, $26.7 million and $36.6 million during the years ended December 31, 2012, 2011 and 2010, respectively. As of December 31, 2012, we had an accumulated deficit of $253.0 million. These losses have resulted principally from costs incurred in our research and development programs and sales and marketing programs. We expect to incur operating losses in the future as a result of the expenses associated with the continued development and expansion of our business. Additionally, our general and administrative expenses have increased due to the additional operational and reporting costs associated with being a public company. We may also increase our research and development expenses. Our ability to attain profitability in the future will be affected by, among other things, our ability to execute on our business strategy, the continued acceptance of our products, the timing and size of orders, the average selling prices of our products, the costs of our products, and the extent that we invest in our sales and marketing, research and development, and general and administrative resources. Even if we do achieve profitability, we may not be able to sustain or increase our profitability. As a result, our business could be harmed and our stock price could decline.
Fluctuations in our revenues and operating results could cause the market price of our common stock to decline.
Our revenues and operating results are difficult to predict, even in the near term. Our historical operating results have in the past fluctuated significantly, and may continue to fluctuate in the future,
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as a result of a variety of factors, many of which are outside of our control. As a result, comparing our revenues and operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. We may not be able to accurately predict our future revenues or results of operations. We base our current and future expense levels on our operating plans and sales forecasts, and our operating costs are relatively fixed in the short-term. As a result, we may not be able to reduce our costs sufficiently to compensate for an unexpected shortfall in revenues, and even a small shortfall in revenues could disproportionately and adversely affect financial results for that quarter. It is possible that our operating results in some periods may be below market expectations. This would likely cause the market price of our common stock to decline. In addition to the other risk factors listed in this section, our operating results are affected by a number of factors, including:
Further, as a result of customer buying patterns, historically we have received a substantial portion of a quarter's sales orders and generated a substantial portion of a quarter's revenues during the last two weeks of the quarter. If expected revenues at the end of any quarter are delayed for any reason, including the failure of anticipated purchase orders to materialize, our inability to deliver products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our failure to manage inventory properly in a way to meet demand, or our inability to release new products on schedule, our revenues for that quarter could be materially and adversely affected and could fall below market expectations.
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As a result of the above factors, or other factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.
We compete in a rapidly evolving market, and the failure to respond quickly and effectively to changing market requirements could cause our business and operating results to decline.
The wireless networking market is characterized by rapidly changing technology, changing customer needs, evolving industry standards and frequent introductions of new products and services. In order to deliver a competitive wireless LAN, our virtualized wireless LAN solution must be capable of operating with an ever increasing array of wireless devices and an increasingly complex network environment. In addition, our products are designed to be compatible with industry standards for communications over wireless networks. As new wireless devices are introduced and standards in the wireless networking market evolve, we may be required to modify our products and services to make them compatible with these new products and standards. Likewise, if our competitors introduce new products and services that compete with ours, we may be required to reposition our product and service offerings or introduce new products and services in response to such competitive pressure. For example, the Institute of Electrical and Electronics Engineers, or IEEE, is expected to approve a new standard, IEEE 802.11ac, in 2013. This is a major upgrade of IEEE 802.11 technologies that is designed to enable very high throughput operation for stations in Wi-Fi networks. We are actively working on developing IEEE 802.11ac solutions with our silicon partners. We may not be successful in modifying our current products or introducing new ones in a timely or appropriately responsive manner, or at all. If we fail to address these changes successfully, our business and operating results could be materially harmed.
We must increase market awareness of our brand and our solution and develop and expand our sales channels, and if we are unsuccessful, our business, financial condition and operating results could be adversely affected.
We must improve the market awareness of our brand and solution and expand our relationships with our channel partners in order to increase our revenues. Further, we believe that we must continue to develop our relationships with new and existing channel partners to effectively and efficiently extend our geographic reach and market penetration. Our efforts to improve sales of our solution could result in a material increase in our sales and marketing expense and general and administrative expense, and there can be no assurance that such efforts will be successful. If we are unable to significantly increase the awareness of our brand and solution, expand our relationships with channel partners, or effectively manage the costs associated with these efforts, our business, financial condition and results of operations could be materially and adversely affected.
We compete in highly competitive markets, and competitive pressures from existing and new companies may harm our business and operating results.
The markets in which we compete are highly competitive and influenced by the following competitive factors:
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We expect competition to intensify in the future as other companies introduce new products into our markets. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results or financial condition. If we do not keep pace with product and technology advances, there could be a material and adverse effect on our competitive position, revenues and prospects for growth.
A number of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales, marketing and other resources than we. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the promotion and sale of their products and services, initiate or withstand substantial price competition, take advantage of acquisitions or other opportunities more readily and develop and expand their product and service offerings more quickly than we. Our competitors with larger volumes of orders and more diverse product offerings may require our VARs and distributors to stop selling our products, or to reduce their efforts to sell our products, which could harm our business and results of operations. In addition, certain of our competitors offer, or may in the future offer, more diverse product offerings and may be able to bundle wireless products with other networking offerings. Potential customers may prefer to purchase all of their equipment from a single provider, or may prefer to purchase wireless networking products from an existing supplier rather than a new supplier, regardless of product performance or features.
We expect increased competition if our market continues to expand. Conditions in our markets could change rapidly and significantly as a result of technological advancements or other factors. In addition, current or potential competitors may be acquired by third parties with greater available resources, such as Cisco's acquisition of Meraki, Motorola's acquisition of Symbol Technologies, Hewlett-Packard's acquisition of Colubris Networks and Juniper Networks' acquisition of Trapeze Networks. As a result of such acquisitions, our current or potential competitors might take advantage of the greater resources of the larger organization to compete with us. Continued industry consolidation may adversely impact customers' perceptions of the viability of smaller and even medium-sized wireless networking companies and, consequently, customers' willingness to purchase from such companies.
If we are unable to hire, integrate and retain qualified personnel, our business will suffer.
Our success is substantially dependent upon the continued service and performance of our senior management team. All of executive officers are at-will employees, and therefore may terminate employment with us at any time. The loss of the services of any members of our management team or key employees may significantly delay or prevent the achievement of our product development and other business objectives and could harm our business.
Our future success depends, in part, on our ability to continue to attract, integrate and retain highly skilled personnel. Our inability to attract, integrate or retain qualified personnel, or delays in hiring required personnel, particularly in engineering and sales, may seriously harm our business, financial condition and results of operations. Competition for highly skilled personnel is frequently intense, especially in the locations where we have a substantial presence and need for highly-skilled personnel, including the San Francisco Bay Area and India. We may not be successful in attracting qualified personnel to fulfill our current or future needs.
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Often, significant amounts of time and resources are required to train technical, sales and other personnel. Qualified individuals are in high demand. We have no assurance that our field sales personnel will become fully productive in the time periods anticipated. We may incur significant costs to attract and retain them, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, and we may be required to pay increased compensation in order to do so. If we are unable to attract and retain the qualified personnel we need to succeed, our business would suffer.
Further, fluctuations or a sustained decrease in the price of our stock could affect our ability to attract and retain such personnel. When our stock price declines, our equity incentive awards may lose retention value, which may negatively affect our ability to attract and retain key personnel. We may not be successful in attracting and retaining key personnel on a timely basis, on competitive terms, or at all. The loss of, or the inability to recruit, key employees could have a material adverse effect on our business.
Our strategy to invest in sales and marketing programs and personnel may not generate the revenue increases anticipated or such revenue increases may only be realized over a longer period than currently expected.
In early 2011, we substantially expanded our field sales organization to provide improved coverage of the growing number of business opportunities in our target markets, approximately doubling our sales headcount by early 2012. In addition, in late 2011 and early 2012, we made a variety of investments in marketing programs to complement the expansion of our field sales headcount. However, beginning in the second quarter of 2012, we took steps to bring our sales and marketing expenses in line with our revenue expectations. Market awareness of our capabilities and products is essential to our continued growth and our success in all of our markets. If our marketing programs are not successful in creating market awareness of our company and products or the timing and degree of increased revenues resulting from our increased sales and marketing efforts does not meet our expectations, our business, financial condition and results of operations may suffer materially, and we will not be able to achieve sustained growth.
Claims by others that we infringe their proprietary technology could harm our business.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. Third parties, including some of our competitors, have asserted and may in the future assert claims of infringement of intellectual property rights against us or against our customers or channel partners for which we may be liable. Any claims or proceedings against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, result in the diversion of significant operational resources, require us to enter into royalty or licensing agreements, or require expensive changes to our products. As a result, these claims could materially and adversely affect our business, results of operations, cash flows and financial position. For example:
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agreed to a one-time payment of approximately $2.4 million to Extricom Ltd., and we and Extricom Ltd. each agreed to a cross-license of each other's patents in exchange for a full release and settlement of the litigation.
In addition, the following lawsuits claiming patent infringement currently are pending, and for which we are unable to determine the outcome. Accordingly, we cannot estimate the potential financial impact these actions could have on our business, results of operations, cash flows and financial position.
On April 2, 2012, Linex filed a motion to terminate the Investigation based on the withdrawal of its complaint. On April 3, 2012, Administrative Law Judge Thomas B. Pender granted Linex's motion and as a result, the Investigation has been terminated in its entirety. After the termination of the Investigation, Linex restarted the Delaware case, and added U.S. Patent No. RE43,812. On October 15, 2012, the defendants filed a motion to transfer the case to the Northern District of California, which was granted on January 7, 2013. The case is now pending before the Honorable Claudia Wilken in the Northern District of California, and a case management conference has been scheduled for May 1, 2013, but no case schedule has been set. The Linex Second Amended Complaint seeks unspecified monetary damages and injunctive relief.
As our business expands and the number of products and competitors in our market increases and overlaps occur, we expect that infringement claims may increase in number and significance. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves
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against intellectual property claims. In addition, because we currently have a limited portfolio of issued patents compared to our major competitors, we 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 product revenues and against whom our potential patents may provide little or no deterrence. Many of these potential litigants have the capability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. 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 may 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.
In addition, much of our business relies on, and many of our products incorporate, proprietary technologies of third parties. We may not be able to obtain, or continue to obtain, licenses from such third parties on reasonable terms, and such licensing may increase our exposure to claims of infringement by other third parties.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
We depend on our ability to protect our proprietary technology. We protect our proprietary information and technology through licensing agreements, nondisclosure agreements and other contractual provisions, as well as through patent, trademark, copyright and trade secret laws in the U.S. and similar laws in other countries. These protections may not be available in all cases or may be inadequate to prevent our competitors from copying, reverse engineering or otherwise obtaining and using our technology, proprietary rights or products. The laws of some foreign countries may not be as protective of intellectual property rights as those in the United States, and mechanisms for enforcement of intellectual property rights may be inadequate. For example, the laws of India, where we conduct significant research and development activities, do not protect our proprietary rights to the same extent as the laws of the U.S. In addition, third parties may seek to challenge, invalidate or circumvent our patents, trademarks, copyrights and trade secrets, or applications for any of the foregoing. Our competitors may independently develop technologies that are substantially equivalent, or superior, to our technology or design around our proprietary rights. In each case, our ability to compete could be significantly impaired.
To prevent substantial unauthorized use of our intellectual property rights, it may be necessary to prosecute actions for infringement or misappropriation of our proprietary rights against third parties. Any such action could result in significant costs and diversion of our resources and management's attention, and there can be no assurance that we will be successful in such action. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing or misappropriating our intellectual property.
We have a limited patent portfolio. To date, we have not applied for patent protection outside of the U.S. While we plan to protect our intellectual property with, among other things, patent protection, there can be no assurance that:
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The failure to obtain patents with claims of a scope necessary to cover our technology, or the invalidation or our patents, or our inability to protect any of our intellectual property, may weaken our competitive position and may materially and adversely affect our business and results of operations.
We might be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may adversely affect our business, operating results and financial condition.
If the demand for wireless networks does not continue to develop as we anticipate, demand for our virtualized wireless LAN solution may not grow as we expect.
The success of our business depends on enterprises continuing to adopt wireless networks for use with their business-critical applications. The market for enterprise-wide wireless networks has only developed in recent years as enterprises have deployed wireless networks to take advantage of the convenient access to the network that they provide. As businesses seek to run their business-critical applications on these wireless networks, they recognize the limitations of other wireless solutions and the need for our virtualized wireless LAN solution. Ultimately, however, enterprises may not elect to deploy wireless networks and may not elect to run their business-critical applications on a wireless network. Accordingly, demand for our solution may not continue to develop as we anticipate, or at all.
Our sales cycles can be long and unpredictable. As a result, our sales are difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly.
The timing of our sales is difficult to predict. Our sales efforts involve educating our customers about the use and benefits of our virtualized wireless LAN solution, including the technical capabilities of our products and the potential cost savings achievable by organizations deploying our solution. Customers typically undertake a significant evaluation process, which frequently involves not only our products but also those of our competitors and can result in a lengthy sales cycle. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. In addition, purchases of our virtualized wireless LAN solution are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. If sales expected from a specific customer for a particular quarter are not realized in that quarter or at all, our operating results could be materially and adversely affected.
Our revenues may decline as a result of changes in public funding of educational institutions.
We have historically generated a substantial portion of our revenues from sales to educational institutions. Public schools receive funding from local tax revenue, and from state and federal governments through a variety of programs, many of which seek to assist schools located in underprivileged or rural areas. We believe that the funding for a substantial portion of our sales to educational institutions comes from federal funding, in particular the E-Rate program. E-Rate is a program of the Federal Communications Commission that subsidizes the purchase of approved telecommunications, Internet access, and internal connections costs for eligible public educational
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institutions. In the event that the federal government reduces the amounts dedicated to the E-Rate program in future periods, or eliminates the program completely, our sales to educational institutions may be reduced. Furthermore, if state or local funding of public education is significantly reduced because of legislative changes or by fluctuations in tax revenues due to changing economic conditions, our sales to educational institutions may be negatively impacted. Any reduction in spending on information technology systems by educational institutions would likely materially and adversely affect our business and results of operations.
Seasonality may cause fluctuations in our operating results.
We believe that there can be significant seasonal factors that may cause the first and third quarters of our fiscal year to have relatively weaker products revenues than the second and fourth fiscal quarters. We believe that this seasonality results from a number of factors, including:
We believe that our historical growth, variations in the amount of orders booked in a prior quarter but not shipped until a later quarter and other variations in the amount of deferred revenues may have overshadowed the nature or magnitude of seasonal or cyclical factors that might have influenced our business to date. In addition, the timing of one or more large transactions may overshadow seasonal factors in any particular quarterly period. Seasonal or cyclical variations in our operations may become more pronounced over time and may materially affect our results of operations in the future.
The average sales prices of our products may decrease.
The average sales prices for our products may decline for a variety of reasons, including competitive pricing pressures, a change in our mix of products, anticipation of the introduction of new products or promotional programs. The markets in which we compete are highly competitive and we expect this competition to increase in the future, thereby leading to increased pricing pressures. Larger competitors with more diverse product offerings may reduce the price of products that compete with ours in order to promote the sale of other products or may bundle them with other products. For example, some of our large competitors who provide network switching equipment may offer a wireless overlay network at very low prices or on a bundled basis. Furthermore, average sales prices for our products have typically decreased over product life cycles. A decline in our average selling prices in excess of our expectations may harm our operating results.
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We expect our gross margin to vary over time, and our level of gross margin may not be sustainable.
Our level of gross margin may not be sustainable and may be adversely affected by numerous factors, including:
As a result of any of these factors, or other factors, our gross margin may be adversely affected, which in turn would harm our operating results.
We rely on channel partners to generate a substantial majority of our revenues. If our partners fail to perform, our operating results could be materially and adversely affected.
A substantial majority of our revenues is generated through sales by our channel partners, which are distributors and VARs. Sales through our channel partners accounted for 94%, 92% and 88% of our total net revenues during the year ended December 31, 2012, 2011 and 2010, respectively. To the extent our channel partners are unsuccessful in selling our products, or we are unable to obtain and retain a sufficient number of high-quality channel partners, our operating results could be materially and adversely affected.
Westcon Group, Catalyst Telecom and SiraCom distribute a significant amount of our products worldwide. Resale of product through Westcon Group, Catalyst Telecom and SiraCom accounted for 57%, 53% and 51%, of our worldwide net revenues in 2012, 2011 and 2010, respectively. Resale of product through Ingram Micro, although less than 10% in 2011 and 2010, accounted for 11% of our worldwide net revenues in 2012.
Our channel partners may be unsuccessful in marketing, selling and supporting our products and services. They may also market, sell and support products and services that are competitive with ours, and may devote more resources to the marketing, sales and support of such products. They may have incentives to promote our competitors' products in lieu of our products, particularly for our competitors with larger volumes of orders, more diverse product offerings and a longer relationship with our VARs or distributors. In these cases, our channel partners may stop selling our products completely. New sales channel partners may take several months or more to achieve significant sales. Our channel partner sales structure could subject us to lawsuits, potential liability and reputational harm if, for example, any of our channel partners misrepresents the functionality of our products or services to customers, violate laws or our corporate policies. If we fail to effectively manage our existing or future sales channel partners, our business would be seriously harmed.
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We base our inventory purchase decisions on our forecasts of customers' demand, and if our forecasts are inaccurate, our operating results could be materially harmed.
We place orders with our manufacturers based on our forecasts of our customers' demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates affecting our ability to service our customers. When demand for our products increases significantly, we may not be able to meet demand on a timely basis, and we may need to expend a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations, or we may incur additional costs in order to rush the manufacture and delivery of additional inventory. If we underestimate customer demand, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, we may purchase more inventory than we are able to sell when we expect to or at all. As a result, we could have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our costs of revenues and reduce our liquidity. Our failure to accurately manage inventory against demand would adversely affect our operating results.
Our virtualized wireless LAN solution incorporates complex technology and may contain defects or errors, which could cause harm to our reputation and adversely affect our business.
Our virtualized wireless LAN solution incorporates complex technology and must operate with a significant number and types of wireless devices, which attempt to run new and complex applications in a variety of environments that utilize different wireless communication industry standards. Our products have contained and may in the future contain defects or errors. In some cases, these defects or errors have delayed the introduction of our new products. Some errors in our products may only be discovered after a product has been installed and used by customers. These issues are most prevalent when new products are introduced into the market. Any errors or defects discovered in our products, after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers, damage to our brand and reputation, and increased service and warranty cost, any of which could materially and adversely affect our business and operating results.
We could face claims for product liability, tort or breach of warranty, including claims relating to changes to our products made by our channel partners. Our contracts with customers contain provisions relating to warranty disclaimers and liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention and adversely affect the market's perception of us and our products.
If we fail to develop new products and enhancements to our virtualized wireless LAN solution, we may not be able to remain competitive.
We must develop new products and continue to enhance our virtualized wireless LAN solution to meet rapidly evolving customer requirements. If we fail to develop new products or enhancements to our existing products, our business could be adversely affected, especially if our competitors are able to introduce products with enhanced functionality. In addition, as new mobile applications are introduced, our success may depend on our ability to provide a solution that supports these applications.
We are subject to a number of industry standards established by various standards bodies, such as the IEEE, and we design our products to comply with these standards. As new industry standards emerge, we could be required to invest a substantial amount of resources to develop new products that comply with these standards. For example, we devoted a substantial amount of our research and development resources to design a virtualized wireless LAN solution that could optimize the performance allowed by the 802.11n standard. In addition, the IEEE is expected to approve a new standard, IEEE 802.11ac, in 2013. This is a major upgrade of IEEE 802.11 technologies that is designed to enable very high throughput operation for stations in Wi-Fi networks. We are actively
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working on developing IEEE 802.11ac solutions with our silicon partners. If we are not able to adapt to new or changing standards that are ratified by the IEEE or other standards bodies, our ability to sell our products may be adversely affected and we may not realize the benefits of our research and development efforts.
Our research and development efforts relating to new products and technologies are time-consuming, costly and complex. If we expend a significant amount of resources on research and development and our efforts do not lead to the successful introduction of products that are competitive in the marketplace, this could materially and adversely affect our business and operating results.
Although certain technical problems experienced by users may not be caused by our virtualized wireless LAN solution, our business and reputation may be harmed if users perceive our solution as the cause of a slow or unreliable network connection.
Our solution has been deployed in many different environments and is capable of providing wireless access to many different types of wireless devices operating a variety of applications. The ability of our virtualized wireless LAN solution to operate effectively can be negatively impacted by many different elements unrelated to our products. For example, a user's experience may suffer from an incorrect setting in a wireless device, which is not a problem caused by the network. Although certain technical problems experienced by users may not be caused by our solution, users often perceive the underlying cause to be a result of poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation.
Our international sales and operations subject us to additional risks that may materially and adversely affect our business and operating results.
We derive a significant portion of our revenues from customers outside the U.S. During the years ended December 31, 2012, 2011 and 2010, 48%, 45% and 36% of our revenues were derived from customers outside of the U.S. While our international sales have typically been denominated in U.S. dollars, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country.
In addition, we have a research and development facility located in India, and we expect to expand our offshore development efforts and general and administrative functions within India and possibly in other countries. We have sales and support personnel in numerous countries worldwide.
Our international operations subject us to a variety of risks, including:
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As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
Another significant risk resulting from our international operations is compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery laws applicable to our operations. In many foreign countries, particularly in those with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S. and foreign laws and regulations applicable to us. Although we have implemented procedures designed to ensure compliance with the FCPA and similar laws, there can be no assurance that all of our employees, agents and other channel partners, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies. Any such violation could have a material and adverse effect on our business.
Our product and service sales may be subject to foreign governmental regulations, which vary substantially from country to country and change from time to time. Failure to comply with these regulations could adversely affect our business. Further, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. Although we implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, channel partners and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners or agents could result in delays in revenue recognition, financial reporting misstatements, fines, penalties or the prohibition of the importation or exportation of our products and services and could have a material adverse effect on our business and results of operations.
Our use of and reliance on research and development resources in India may expose us to unanticipated costs or events.
We have a significant research and development center in Bangalore, India and, in recent years, have increased headcount and development activity at this facility. There is no assurance that our reliance upon research and development resources in India will enable us to achieve meaningful cost reductions or greater resource efficiency. Further, our research and development efforts and other operations in India involve significant risks, including:
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Difficulties resulting from the factors above and other risks related to our operations in India could expose us to increased expense, impair our development efforts and harm our competitive position.
We rely on third parties to manufacture our products, and depend on them for the supply and quality of our products.
We outsource the manufacturing of our products, and are therefore subject to the risk that our third-party manufacturers do not provide our customers with the quality and performance that they expect from our products. Our orders may represent a relatively small percentage of the overall orders received by our manufacturers from their customers. As a result, fulfilling our orders may not be considered a priority in the event our manufacturers are constrained in their ability to fulfill all of their customer obligations in a timely manner. We must also accurately predict the number of products that we will require. If we overestimate our requirements, our manufacturers may assess charges, or we may incur liabilities for excess inventory, each of which could negatively affect our gross margins. Conversely, if we underestimate our requirements, our manufacturers may have inadequate materials and components required to produce our products. This could result in an interruption of the manufacturing of our products, delays in shipments and deferral or loss of revenues. Quality or performance failures of our products or changes in our manufacturers' financial or business condition could disrupt our ability to supply quality products to our customers and thereby have a material and adverse effect on our business and operating results.
Some of the components and technologies used in our products are purchased and licensed from a single source or a limited number of sources. The loss of any of these suppliers may cause us to incur additional transition costs, result in delays in the manufacturing and delivery of our products, or cause us to carry excess or obsolete inventory and could cause us to redesign our products.
While supplies of our components are generally available from a variety of sources, we currently depend on a single source or limited number of sources for several components for our products. For example, the chipsets that we use in our products are currently available only from a limited number of sources, with whom neither we nor our manufacturers have entered into supply agreements. We have also entered into license agreements with some of our suppliers for technologies that are used in our products, and the termination of these licenses, which can generally be done on relatively short notice, could have a material adverse effect on our business. For example, our access points incorporate certain technology that we license from Atheros. We have entered into a license agreement with Atheros, and such license agreement automatically renews for successive one-year periods unless the agreement is terminated prior to the end of the then-current term. In the event our license agreement with Atheros is 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 license agreement and redesign of certain of our products could require additional licenses and materially and adversely affect our business.
As there are no other sources identical to these components and technologies, if we lost any of these suppliers, we could be required to transition to a new supplier, which could increase our costs, result in delays in the manufacturing and delivery of our products or cause us to carry excess or obsolete inventory, and we could be required to redesign our hardware and software in order to incorporate components or technologies from alternative sources.
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In addition, for certain components for which there are multiple sources, we are still subject to potential price increases and limited availability due to market demand for such components. In the past, unexpected demand for communication products caused worldwide shortages of certain electronic parts. If such shortages occur in the future, our business would be adversely affected. We carry very little inventory of our products, and we and our manufacturers rely on our suppliers to deliver necessary components in a timely manner. We and our manufacturers rely on purchase orders rather than long-term contracts with these suppliers, and as a result, even if available, we or our manufacturers may not be able to secure sufficient components at reasonable prices or of acceptable quality to build products in a timely manner and, therefore, may not be able to meet customer demands for our products, which would have a material and adverse effect on our business, operating results and financial condition.
We rely on a third party for the fulfillment of our customer orders, and the failure of this third party to perform could have an adverse effect upon our reputation and our ability to distribute our products, which could cause a material reduction in our revenues.
We use a third party to hold our inventory and fulfill our customer orders. If our third-party fulfillment agent fails to perform, our ability to deliver our products and to generate revenues would be adversely affected. The failure of our third-party logistics provider to deliver products in a timely manner could lead to the dissatisfaction of our channel partners and customers and damage our reputation, which may cause our channel partners or customers to cancel existing agreements with us and to stop doing business with us. In addition, this reliance on a third-party logistics provider also may impact the timing of our revenue recognition if our logistics provider fails to deliver orders during the prescribed time period. Although we believe that alternative logistics providers are readily available in the market, in the event we are unexpectedly forced to change providers we could experience short-term disruptions in our delivery and fulfillment process that could adversely affect our business.
Our ability to sell our products is highly dependent on the quality of our support and services offerings, and our failure to offer high-quality support and services could have a material and adverse effect on our business and results of operations.
Once our products are deployed within our customers' networks, they depend on our support organization to resolve any issues relating to our products. High-quality support is critical for the continued successful marketing and sale of our products. If we or our channel partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, or provide effective ongoing support, it could adversely affect our ability to sell our products to existing customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality support and services could have a material and adverse effect on our business and operating results.
We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our business, operating results and financial condition.
We completed our first acquisition, that of Identity Networks, in 2011. In the future we may acquire other businesses, products or technologies. If we do complete acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, or such acquisitions may be viewed negatively by customers, financial markets or investors. We may also face additional challenges, because acquisitions entail numerous risks, including:
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Competition within our industry for acquisitions of businesses, technologies, assets and product lines has been, and may in the future continue to be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commercially reasonable terms or because the target is acquired by another company. Furthermore, in the event that we are able to identify and consummate any future acquisitions, we could:
Our reported financial results may be adversely affected by changes in accounting principles applicable to us.
Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, or FASB, the Securities and Exchange Commission, or SEC, and other various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. Any difficulties in the implementation of these pronouncements could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline.
If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, or if we are required to make revisions to our financial statements as a result of periodic regulatory review, which could cause our operating results to fall below market expectations, resulting in a decline in our stock price. Management estimates include implicit service periods for revenue
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recognition, litigation and settlement costs, other loss contingencies, sales returns and allowances, allowance for doubtful accounts, inventory valuation, reserve for warranty costs, valuation of deferred tax assets, loss contingency estimates, fair value of common stock, stock-based compensation expense, fair value of warrants and fair value of earn-out consideration.
We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.
Our products incorporate encryption technology and are subject to United States export controls, and may be exported outside the U.S. only with the required level of export license or through an export license exception. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers' ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations.
In addition, we have implemented limited procedures to ensure our compliance with export regulations, and if our export compliance procedures are not effective, we could be subject to civil or criminal penalties, which could lead to a material fine or sanction that could have an adverse effect on our business and results of operations.
Our use of open source software could impose limitations on our ability to commercialize our products.
Our products contain software modules licensed for use from third-party authors under open source licenses, including the GNU Public License, the GNU Lesser Public License, the Apache License and others. Use and distribution of open source software may entail greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software in a certain manner, we could, under certain of the open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and time and ultimately could result in a loss of product sales for us.
Although we monitor our use of open source closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business and operating results.
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If we do not appropriately manage any future growth, or are unable to improve our systems and processes, our operating results could be negatively affected.
Our future growth, if it occurs, could place significant demands on our management, infrastructure and other resources. We may need to increasingly rely on IT systems, some of which we do not currently have significant experience in operating, to help manage critical functions. To manage any future growth effectively, we must continue to improve and expand our information technology and financial infrastructure, operating and administrative systems and controls, and continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to these systems and processes in a timely or efficient manner, which could result in additional operating inefficiencies and could cause our costs to increase more than planned. If we do increase our operating expenses in anticipation of the growth of our business and this growth does not meet our expectations, our financial results may be negatively impacted. In addition, our systems and processes may not prevent or detect all errors, omissions or fraud. Our failure to improve our systems and processes, or their failure to operate in the intended manner, may result in our inability to manage the growth of our business and to accurately forecast our revenues, expenses and earnings, or to prevent certain losses. Any future growth would add complexity to our organization and require effective coordination within our organization. Failure to manage any future growth effectively could result in increased costs and harm our business.
Our business, operating results and growth rates may be adversely affected by unfavorable economic or market conditions.
Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. Our current business and operating plan assumes that economic activity in general, and IT spending in particular, will at least remain at close to current levels. We cannot be assured of the level of IT spending, however, the deterioration of which could have a material adverse effect on our results of operations and growth rates. The purchase of our products involves a significant commitment of capital and other resources, therefore, weak economic conditions, or a reduction in IT spending, even if economic conditions improve, would likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products and services, and reduced unit sales. For example, we believe that the recent economic downturns in the U.S. and international markets adversely affected our business as customers and potential customers reduced costs by reducing or delaying purchasing decisions. Any unfavorable economic or market conditions could materially and adversely affect our results of operations.
We are exposed to the credit risk of our VARs, distributors and customers, which could result in material losses and negatively impact our operating results.
Most of our sales are on an open credit basis, with typical payment terms of net 30 days in the U.S. and, because of local customs or conditions, longer in some markets outside the U.S. If any of our VARs, distributors or customers becomes insolvent or suffers a deterioration in its financial or business condition and is unable to pay for our products, our results of operations could be harmed.
Our ability to use net operating losses to offset future taxable income is subject to certain limitations.
In general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. Our existing NOLs are subject to limitations arising from previous ownership changes, and if we undergo an ownership change in the future, our ability to utilize NOLs could be further limited by Section 382 of the Internal Revenue Code. Future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Section 382 of the Internal Revenue Code. Our net operating losses may also be impaired under state
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law. We may not be able to utilize a material portion of the NOLs. At December 31, 2012, we had federal and state net operating loss carryforwards of approximately $147.5 million and $141.1 million, respectively, which begin to expire in 2022 and 2012, respectively.
Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
Our provision for income taxes is subject to volatility and could be adversely affected by the following:
Significant judgment is required to determine the recognition and measurement attributes prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for uncertainty in income taxes applies to all income tax positions, including the potential recovery of previously paid taxes, which if settled unfavorably could adversely impact our provision for income taxes or additional paid-in capital. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. The outcomes from these examinations may have a material and adverse effect on our operating results and financial condition.
New regulations or changes in existing regulations related to our products may result in unanticipated costs or liabilities, which could have a material and adverse effect on our business, results of operations and future sales, and could place additional burdens on the operations of our business.
Our products are subject to governmental regulations in a variety of jurisdictions. If any of our products becomes subject to new regulations or if any of our products becomes specifically regulated by additional government entities, compliance with such regulations could become more burdensome, and there could be a material adverse effect on our business and results of operations. For example, radio emissions are subject to regulation in the U.S. and in other countries in which we do business. In the U.S., various federal agencies including the Center for Devices and Radiological Health of the Food and Drug Administration, the Federal Communications Commission, the Occupational Safety and Health Administration and various state agencies have promulgated regulations that concern the use of radio/electromagnetic emissions standards. Member countries of the European Union have enacted similar standards concerning electrical safety and electromagnetic compatibility and emissions standards.
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In addition, our wireless communication products operate through the transmission of radio signals. Currently, operation of these products in specified frequency bands does not require licensing by regulatory authorities. Regulatory changes restricting the use of frequency bands or allocating available frequencies could become more burdensome and could have a material and adverse effect on our business and results of operations.
Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as power disruptions or terrorism.
Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. We also have significant research and development activities in India and facilities in Japan, regions known for typhoons, floods and other natural disasters. A significant natural disaster, such as an earthquake, fire or a flood, occurring at our headquarters, our other facilities or where our ODMs and channel partners are located, could have a material adverse impact on our business, operating results and financial condition. In addition, acts of terrorism could cause disruptions in our or our customers' businesses or the economy as a whole. We also rely on information technology systems to communicate among our workforce located worldwide, and in particular, our research and development activities that are coordinated between our corporate headquarters in the San Francisco Bay Area and our facility in India. Any disruption to our internal communications, whether caused by a natural disaster or by manmade problems, such as power disruptions, could delay our research and development efforts. To the extent that such disruptions result in delays or cancellations of customer orders, our research and development efforts or the deployment of our products, our business and operating results would be materially and adversely affected.
If we fail to maintain an effective system of internal controls, our ability to produce accurate financial statements or comply with applicable regulations could be impaired.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of The NASDAQ Stock Market. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and place undue strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC's rules and forms.
Our current controls and any new controls that we develop may become inadequate because of changes in conditions, and the degree of compliance with the policies or procedures may deteriorate. Further, weaknesses in our internal controls may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our prior period financial statements. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports filed with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
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In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources and provide significant management oversight, which involve substantial accounting-related costs. Any failure to maintain the adequacy of our internal controls, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to continue to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on The NASDAQ Global Market.
We have not yet implemented a complete disaster recovery plan or business continuity plan for our accounting and related information technology systems. Any disaster could therefore materially impair our ability to maintain timely accounting and reporting.
Risks Related to Our Common Stock
Our stock price may be volatile. Further, you may not be able to resell shares of our common stock at or above the price you paid.
The trading price of our common stock has been highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:
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In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company's securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management's attention and resources.
If securities or industry analysts issue an adverse or misleading opinion regarding our stock or do not publish research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts or the content and opinions included in their reports. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. Further, securities analysts may elect not to provide research coverage of our common stock and such lack of research coverage may adversely affect the market price of our common stock.
Future sales of shares by existing stockholders could cause our stock price to decline.
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline. As of December 31, 2012, approximately 18.5 million shares of common stock were issued and outstanding. At that date, we had approximately 4.5 million shares of our common stock that will become eligible for sale in the public market to the extent exercised and permitted by the provisions of various stock plans and vesting agreements outstanding as of December 31, 2012. The weighted-average exercise price for options was $5.07 per share as of December 31, 2012. Warrants to purchase 3.2 million shares of common stock at a weighted average exercise price of $9.48 per share had not been exercised and were still outstanding as of December 31, 2012. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have paid no cash dividends on any of our classes of capital stock to date, have contractual restrictions against paying cash dividends and currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future.
Certain provisions of our certificate of incorporation and bylaws and of Delaware law may make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.
Certain provisions of our certificate of incorporation and bylaws and of Delaware law may have the effect of delaying or preventing changes in control if our board of directors determines that such
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changes in control are not in the best interests of us and our stockholders. The provisions in our certificate or incorporation and bylaws include, among other things, the following:
While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable the board of directors to hinder or frustrate a transaction that some, or a majority, of the stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. We are also subject to Delaware laws that could have similar effects. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
Our principal administrative, research and development, sales and marketing, and customer support office space is located in approximately 44,000 square feet leased facility in Sunnyvale, California. This lease expires in March 2015. We also lease approximately 35,000 square feet for a research and development facility in Bangalore, India pursuant to a lease that expires in November 2016, which is non-cancellable prior to 2014. We have the option to renew the Bangalore lease for an additional five years. In addition, we lease office space for sales offices at various locations throughout the world under operating leases. These leases expire at various dates. We believe our facilities are either adequate for our needs for at least the next 12 months or that suitable additional or alternative space will be reasonably available to accommodate foreseeable expansion of our operations.
We are subject to various claims arising in the ordinary course of business. Although no assurance may be given, we believe that we are not presently a party to any litigation of which the outcome, if determined adversely, would individually or in the aggregate be reasonably expected to have a material and adverse effect on our business, operating results, cash flows or financial position.
In May 2010, Extricom Ltd., filed suit against us in the Federal District Court of Delaware asserting infringement of U.S. Patent No. 7,697,549. The litigation was dismissed after the parties entered into a settlement, license and release agreement on April 13, 2012, in which we agreed to a one-time payment of approximately $2.4 million to Extricom Ltd., and we and Extricom Ltd. each agreed to a cross-license of each other's patents in exchange for a full release and settlement of the litigation.
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In October 2010, a complaint was filed by EON Corp. IP Holdings LLC against us as well as numerous other defendants, in the United States District Court for the Eastern District of Texas, Marshall Division. The complaint alleges infringement by the defendants of U.S. Patent 5,592,491. Our initial attempts at informally resolving the action were unsuccessful. The defendants filed a joint motion to transfer the case to the Northern District of California, and on January 9, 2012, the Texas court transferred the case to the United States District Court for the Northern District of California. On August 13, 2012, we answered EON's second amended complaint, denying the allegations, and asserting that the EON patent is not infringed and is invalid. The case is currently pending before the Honorable Jon S. Tigar, and is in the fact discovery stage. At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, results of operations, cash flows and financial position.
In May 2011, Linex Technologies, Inc. filed suit against us and Hewlett-Packard, Apple, Aruba Networks, and Ruckus Wireless in the United States District Court for the District of Delaware, asserting infringement of U.S. Patents 6,757,322 ("'322 patent") and RE42,219 ("'219 patent"). On June 2, 2011, the United States International Trade Commission ("ITC") instituted a Section 337 Investigation, based on allegations that Linex's '322 and '219 patents are infringed by 802.11n products imported and sold by us—as well as by Hewlett-Packard, Apple, Aruba Networks, and Ruckus Wireless. The case in Delaware was stayed due to the pending ITC Investigation. After Linex voluntarily terminated the Investigation, Linex restarted the litigation in Delaware. The defendants filed a motion to transfer the case to the Northern District of California, which was granted on January 7, 2013. The case is now pending before the Honorable Claudia Wilken. At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position.
On August 15, 2012, ReefEdge Networks, LLC ("ReefEdge") filed separate suits against us and various other defendants, including, Cisco Systems, Aruba Networks, Dell Computers, and Ruckus Wireless in the United States District Court of Delaware, asserting infringement of U.S. Patent No. 6,633,761; U.S. Patent No. 6,975,864; and U.S. Patent No. 7,197,308. We filed our answer to the complaint on October 8, 2012. No case schedule has been set for this action. At this time, we are unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on our business, operating results, cash flows or financial position.
Third parties have from time to time claimed, and others may claim in the future, that we have infringed their past, current or future intellectual property rights. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, require expensive changes to our products or could require us to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm our business, results of operations, cash flows and financial position.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Our Common Stock
Our common stock is traded on the NASDAQ Global Market under the symbol "MERU" since it began trading on March 31, 2010. At December 31, 2012, there were 113 stockholders of record of our common stock.
The following table sets forth the high and low closing prices by quarter for fiscal years 2012 and 2011:
| | High | Low | |||||
|---|---|---|---|---|---|---|---|
Fiscal Year 2012 | |||||||
First Quarter | $ | 5.30 | $ | 3.65 | |||
Second Quarter | $ | 4.21 | $ | 1.47 | |||
Third Quarter | $ | 3.49 | $ | 1.60 | |||
Fourth Quarter | $ | 3.48 | $ | 2.17 | |||
Fiscal Year 2011 | |||||||
First Quarter | $ | 25.50 | $ | 15.82 | |||
Second Quarter | $ | 20.56 | $ | 12.01 | |||
Third Quarter | $ | 12.20 | $ | 7.36 | |||
Fourth Quarter | $ | 8.48 | $ | 3.17 | |||
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Stock Performance Graph and Cumulative Total Return
The following graph shows a comparison from March 31, 2010 through December 31, 2012 of the cumulative total return on our common stock, the NASDAQ Composite Index and the NASDAQ Computer Index. The graph and table assume that $100 was invested on March 31, 2010 in Meru Networks, Inc. common stock, the NASDAQ Composite Index and the NASDAQ Computer Index with the reinvestment of all dividends, if any. Such returns are based on historical results and are not intended to suggest future performance.
Comparison of 33 Month Cumulative Total Return*
Among Meru Networks, Inc. the NASDAQ Composite Index, and
the NASDAQ Computer Index
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, and do not anticipate paying any cash dividends in the foreseeable future. In addition, our debt agreements contain certain affirmative and negative covenants, including restrictions with respect to payment of cash dividends. Any further determination to pay dividends on our capital stock will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers relevant.
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Equity Compensation Plan Information
The following table summarizes information about our equity compensation plans as of December 31, 2012. All outstanding awards relate to our common stock.
| | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, Purchase Rights under Employee Stock Purchase Plan and Vesting of Restricted Stock(1) | Weighted Average Exercise Price | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plan | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders | 3,818,964 | $ | 5.17 | 2,195,517 | ||||||
Equity compensation plans not approved by security holders | 680,000 | $ | 4.62 | — | ||||||
Total equity compensation plans | 4,498,964 | $ | 5.07 | 2,195,517 | ||||||
Under the 2010 Plan we may issue stock awards, including but not limited to restricted stock awards, restricted stock units, stock bonus awards, stock appreciation rights and performance share awards. The 2010 Plan contains a provision that the number of shares available for grant and issuance will be increased on January 1 of each year from 2011 through 2020 by an amount equal to the lesser of 4% of our shares outstanding on the immediately preceding December 31 or the number of shares determined by our board of directors.
Under the ESPP, we may grant options for the purchase of our common stock. The ESPP contains a provision that the number of shares available for grant and issuance will be increased on January 1 of each of 2011 through 2020, by an amount equal to the lesser of 1% of our shares outstanding on the immediately preceding December 31 or the number of shares determined by our board of directors.
During the first quarter of our fiscal year 2012, we granted to Dr. Bami Bastani, CEO, options to purchase 600,000 shares of common stock under an Inducement Stock Option Plan and Agreement, 50,000 shares of restricted stock units under a Service-Based Restricted Stock Unit Plan and Agreement and 50,000 shares of restricted stock units under a Performance-Based Restricted Stock Unit Plan and Agreement, each of which are separate from the 2010 Plan, as a material inducement to Dr. Bastani's acceptance of employment with us. The grants were approved by our compensation committee of the board of directors, as specified under the Listing Rules of the Nasdaq Stock Market.
Recent Sales of Unregistered Securities
For the quarter ended December 31, 2012, we did not sell any unregistered securities.
Use of Proceeds from Initial Public Offering
On March 30, 2010, the registration statement (No. 333-163859) on Form S-1 for our IPO of our common stock was declared effective by the SEC, and the offering commenced. The managing underwriters were Bank of America Merrill Lynch, Baird, Cowen and Company, JMP Securities and ThinkEquity LLC.
As the result of the IPO, we sold 4,233,017 shares of our common stock and received $57.1 million in proceeds, net of underwriting discount and net of commission of $4.4 million and offering related
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expenses of $2.0 million, on April 6, 2010, which was the closing date of the offering. As of December 31, 2012, we have used all of the proceeds of our initial public offering to fund operations.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not make any repurchases of our common stock and no purchases of common stock were made on our behalf during the fourth quarter and the fiscal year 2012.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Data", and related notes, schedules and information included in this
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Annual Report on Form 10-K. The selected consolidated financial data in this section is not necessarily indicative of the results of future operations.
| | Years Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
| | (in thousands, except for share and per share amounts) | |||||||||||||||
Consolidated Statement of Operations Data | ||||||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 80,770 | $ | 74,279 | $ | 63,197 | $ | 45,196 | $ | 29,532 | ||||||
Support and services | 16,561 | 12,957 | 10,479 | 5,866 | 1,300 | |||||||||||
Ratable products and services | 179 | 3,235 | 11,328 | 18,432 | 23,820 | |||||||||||
Total revenues | 97,510 | 90,471 | 85,004 | 69,494 | 54,652 | |||||||||||
Costs of revenues: | ||||||||||||||||
Products | 28,879 | 26,415 | 22,060 | 17,332 | 15,318 | |||||||||||
Support and services | 6,463 | 4,581 | 2,297 | 876 | 123 | |||||||||||
Ratable products and services | 103 | 1,863 | 6,021 | 9,571 | 13,376 | |||||||||||
Total costs of revenues* | 35,445 | 32,859 | 30,378 | 27,779 | 28,817 | |||||||||||
Gross margin | 62,065 | 57,612 | 54,626 | 41,715 | 25,835 | |||||||||||
Operating expenses | ||||||||||||||||
Research and development* | 15,053 | 13,966 | 12,399 | 10,018 | 12,527 | |||||||||||
Sales and marketing* | 58,759 | 47,688 | 33,483 | 25,762 | 30,209 | |||||||||||
General and administrative* | 14,844 | 14,779 | 10,462 | 6,858 | 7,386 | |||||||||||
Litigation reserve | 2,350 | 7,250 | — | — | — | |||||||||||
Total operating expenses | 91,006 | 83,683 | 56,344 | 42,638 | 50,122 | |||||||||||
Loss from operations | (28,941 | ) | (26,071 | ) | (1,718 | ) | (923 | ) | (24,287 | ) | ||||||
Interest expense, net | (1,656 | ) | (253 | ) | (813 | ) | (1,825 | ) | (2,365 | ) | ||||||
Other income (expense), net | 58 | 41 | (33,821 | ) | (14,447 | ) | 108 | |||||||||
Loss before provision for income taxes | (30,539 | ) | (26,283 | ) | (36,352 | ) | (17,195 | ) | (26,544 | ) | ||||||
Provision for income taxes | 549 | 411 | 254 | 191 | 209 | |||||||||||
Net loss | (31,088 | ) | (26,694 | ) | (36,606 | ) | (17,386 | ) | (26,753 | ) | ||||||
Accretion on convertible preferred stock | — | — | — | 221 | (68 | ) | ||||||||||
Net loss attributable to common stockholders | $ | (31,088 | ) | $ | (26,694 | ) | $ | (36,606 | ) | $ | (17,165 | ) | $ | (26,821 | ) | |
Net loss per share of common stock: | ||||||||||||||||
Basic and diluted | $ | (1.73 | ) | $ | (1.54 | ) | $ | (3.06 | ) | $ | (45.15 | ) | $ | (80.31 | ) | |
Shares used in computing net loss per share of common stock: | ||||||||||||||||
Basic and diluted | 17,968,034 | 17,377,503 | 11,981,170 | 380,179 | 333,989 | |||||||||||
| | Years Ended December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
| | (in thousands) | |||||||||||||||
Costs of revenues | $ | 320 | $ | 346 | $ | 197 | $ | 71 | $ | 62 | ||||||
Research and development | 1,126 | 1,131 | 767 | 187 | 92 | |||||||||||
Sales and marketing | 2,714 | 2,217 | 985 | 312 | 365 | |||||||||||
General and administrative | 3,389 | 2,480 | 1,896 | 297 | 199 | |||||||||||
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| | As of December 31, | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||
| | (in thousands) | |||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||
Cash and cash equivalents and short-term investments | $ | 22,855 | $ | 40,259 | $ | 67,269 | $ | 21,283 | $ | 5,172 | ||||||
Working capital (deficit) | 16,171 | 30,952 | 52,642 | (23,537 | ) | (28,677 | ) | |||||||||
Total assets | 54,189 | 66,843 | 84,368 | 38,412 | 30,812 | |||||||||||
Convertible promissory notes | — | — | — | — | 11,450 | |||||||||||
Warrant liability | — | — | — | 18,939 | 505 | |||||||||||
Total debt, excluding convertible promissory notes | 9,696 | — | 2,808 | 14,255 | 16,101 | |||||||||||
Convertible preferred stock | — | — | — | 125,255 | 94,157 | |||||||||||
Total stockholders' equity (deficit) | 9,593 | 32,471 | 49,918 | (155,448 | ) | (139,359 | ) | |||||||||
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled "Risk Factors" included elsewhere in this Form 10-K.
Overview
We provide a virtualized wireless LAN solution that is designed to cost-effectively optimize the enterprise network to deliver the performance, reliability, predictability and operational simplicity of a wired network, with the advantages of mobility. Our solution represents an innovative approach to wireless networking that utilizes virtualization technology to create an intelligent and self-monitoring wireless network. We sell a virtualized wireless LAN solution built around ourSystem Director Operating System, which runs on our controllers and access points. We also offer additional products designed to deliver centralized network management, predictive and proactive diagnostics and enhanced security.
We were founded in January 2002 with the vision of developing a virtualized wireless LAN solution that enables enterprises to deliver business-critical applications over wireless networks, and become what we refer to as All-Wireless Enterprises. From our inception through 2003, we were principally engaged in the design and development of our virtualized wireless LAN solution. We focused on developing technology that could reliably and predictably deliver business-critical applications using voice, video and data over wireless networks in dense environments. We began commercial shipments of our products in December 2003, and initially targeted markets where the wireless delivery of applications in dense environments is critical, such as healthcare and education. Since that time, we have broadened our focus to include organizations in more markets, and have significantly expanded our geographic reach. To date, our products have been deployed by approximately 7,400 customers worldwide in many markets, including education, healthcare, hospitality, manufacturing, retail, technology, finance, government, telecom, transportation and utilities.
We outsource the manufacturing of our hardware products, including all of our access points and controllers, to original design manufacturers and contract manufacturers. We also outsource the warehousing and delivery of our products to a third-party logistics provider in the United States for worldwide fulfillment.
Our products and support services are sold worldwide, primarily through value-added resellers, or VARs, and distributors, which serve as our channel partners. We employ a sales force that is
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responsible for managing sales within each geographic territory in which we market and sell our products.
Since inception, we have expended significant resources on our research and development operations. Our research and development activities were primarily conducted at our headquarters in Sunnyvale, California until 2005, when we significantly expanded our research and development operations in Bangalore, India. In 2006, we began developing products specifically to leverage the capabilities of a new wireless communication standard promulgated by the Institute of Electrical and Electronics Engineers, or IEEE, the 802.11n standard, and began commercial shipments of our 802.11n products in the second half of 2007.
We believe several emerging trends and developments will be integral to the future growth of our business. The growing number of wireless devices and the increased expectations of the users of these devices are driving demand for better performing wireless networks. Enterprises increasingly view wireless networks as a means to deliver better service to their customers and increase the productivity of their workforce, and as a result, they are shifting from the casual use of wireless networks to the strategic use of wireless networks for business-critical applications. Further, enterprises are increasingly realizing that wireless networks designed to optimize the 802.11n standard and the planned 802.11ac standard can deliver the capacity and performance to support their business-critical applications.
Our ability to capitalize on emerging trends and developments will depend, in part, on our ability to execute our growth strategy of increasing the recognition of our brand and the effectiveness of our solution, expanding the adoption of our solution across markets, and expanding and leveraging our relationships with the channel partners. We continue to evolve our entire organization to further capitalize on growth opportunities.
On March 18, 2012, our board of directors appointed Dr. Bami Bastani, who previously served as the president, chief executive officer, and board member of companies in the mobility, consumer, and broadband markets, as our president and CEO, and a member of our board of directors. Our ability to achieve and maintain profitability as well as our other goals in the future will be affected by, among other things, the continued acceptance of our products, the timing and size of our orders, the average selling prices for our products and services, the costs of our products, and the extent to which we invest in our sales and marketing, research and development, and general and administrative resources.
Our revenues have grown from $1.1 million in 2005 to $97.5 million in 2012. It is difficult to predict our revenues in the near term. Our revenues have in the past fluctuated significantly, and may continue to fluctuate in the future. Further, our revenues during any given quarter depend on multiple factors, including, but not limited to, the amount of orders booked in a prior quarter but not shipped until the given quarter, new orders received and shipped in the given quarter, the amount of deferred revenue recognized in the given quarter and the amount of revenues that meet the accounting standards for revenue recognition. These factors could impact our revenues significantly in any given quarter.
In addition, we believe that there can be significant seasonal factors that may cause the first and third quarters of our fiscal year to have relatively weaker products revenues than the second and fourth fiscal quarters. We believe that this seasonality results from a number of factors, including:
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We believe that our historical growth, variations in the number of orders booked in a prior quarter but not shipped until a later quarter and other variations in the amount of deferred revenues may have overshadowed the nature or magnitude of seasonal or cyclical factors that might have influenced our business to date. In addition, the timing of one or more large transactions may overshadow seasonal factors in any particular quarterly period. Seasonal or cyclical variations in our operations may become more pronounced over time and may materially affect our results of operations in the future.
We have incurred losses since inception as we grew our business and invested in research and development, sales and marketing, and administrative functions. As of December 31, 2012, we had an accumulated deficit of $253.0 million.
In April 2012, we entered into a settlement, license and release agreement with Extricom. As part of this agreement, we paid Extricom $2.4 million in 2012. In June 2011, we entered into a license agreement with Motorola and, as part of which, we paid Motorola $7.3 million in 2011.
Vendor Specific Objective Evidence
Our recognition of revenues in a particular period depends on the satisfaction of specific revenue recognition criteria, which we describe in more detail below. We adopted two new accounting standards for certain revenue arrangements at the beginning of fiscal year 2011 that include software elements and multiple deliverable revenue arrangements. The manner in which we recognize our revenues has changed significantly over time, particularly in 2008 and 2009, when we established vendor specific objective evidence of fair value, or VSOE, for our support services. These changes have had a significant impact on the timing of when we recognize revenues from sales of our products and services. Generally, upon establishing VSOE for support services for a customer or class of customers, our total recognized revenues from sales to these customers increased in subsequent periods because we were able to recognize all of the products revenues from these sales in these periods once all revenue recognition criteria were satisfied, and we were no longer required to defer the recognition of products revenues over the support period. We also continued to recognize ratable products and services revenues from sales to customers made prior to establishing VSOE for support services. This impact will decrease over time as our deferred revenue balance declines from the time we established VSOE for support services. We recognize the costs of revenues in the same period in which we recognize the associated revenues. When reviewing our financial performance and making period-to-period comparisons, you should consider the impact that the timing of the adoption of the two new accounting standards and the establishment of VSOE had on our financial results, including the amount of our revenues and costs of revenues.
Key Metrics
We monitor the key financial metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss product revenues, support and services revenues and the components of operating income below under "Components of Revenues, Cost of Revenues and Operating Expenses"
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and we discuss our cash and cash equivalents and short-term investments under "Liquidity and Capital Resources."
| | Fiscal Years or as of Fiscal Years Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
| | (dollars in thousands) | |||||||||
Products revenues | $ | 80,770 | $ | 74,279 | $ | 63,197 | ||||
Support and services revenues | 16,561 | 12,957 | 10,479 | |||||||
Gross margin-products and support and services | 64 | % | 64 | % | 67 | % | ||||
Loss from operations(1) | $ | (28,941 | ) | $ | (26,071 | ) | $ | (1,718 | ) | |
Cash and cash equivalents and short-term investments | 22,855 | 40,259 | 67,269 | |||||||
Net cash used in operating activities | (25,370 | ) | (22,402 | ) | (2,119 | ) | ||||
(1) Includes stock-based compensation expense of: | $ | 7,549 | $ | 6,174 | $ | 3,845 |
Gross margin-products and support and services. We monitor gross margin to measure our cost efficiencies, including primarily whether our manufacturing costs and component costs are in line with our product revenues and our personnel costs associated with our technical support, professional services and training teams are in line with our support and services revenues.
Net cash used in operating activities. We monitor cash flow from operations as a measure of our overall business performance. Our primary uses of cash from operating activities are for personnel-related expenditures, purchases of inventory, costs related to our facilities and litigation reserve expense. Monitoring cash flow from operations enables us to analyze our financial performance without the non-cash effects of certain items such as depreciation and amortization, stock-based compensation expenses, accrued interest on long-term debt, amortization of issuance costs and warrant expense, thereby allowing us to better understand and manage the cash needs of our business.
Components of Revenues, Costs of Revenues and Operating Expenses
Revenues. We derive our revenues from sales of our products, and support and services. Our total revenues are comprised of the following:
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Deferred Revenue. Prior to establishing VSOE for our support services provided to VARs, distributors and customers, we recognized the revenues from such sales over either the economic life of the related products or the contractual support period, depending on the party and the time at which the sale occurred. As such, prior to establishing VSOE for support services sold to VARs, distributors and customers, only a small amount of our invoiced products and services within a quarter were recognized as revenues in such quarter, with the majority recorded as deferred revenue. We established VSOE for support services sold to our channel partners, including VARs, distributors and customers, at different times during 2007, 2008 and 2009. The decreases in deferred revenue due to the related recognition of ratable revenue are partially offset by the sale of support services that will be recognized over the term of the support agreements. The total deferred revenue as of December 31, 2012 and 2011 were $18.3 million and $16.2 million, respectively.
Costs of Revenues. Our total costs of revenues is comprised of the following:
Operating Expenses. Our operating expenses consist of research and development, sales and marketing, general and administrative expenses and litigation reserve expense. The largest component of our operating expenses is personnel costs. Personnel costs consist of salaries, commissions, bonuses and benefits for our employees. We grant our employees and members of our board of directors equity awards and recognize stock-based compensation cost as part of operating expenses. We expect to continue to incur significant stock-based compensation expense as our employee base grows.
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license and release agreement with Extricom. As part of this agreement, we paid Extricom $2.4 million and expensed the full amount in 2012. In 2011, we entered into a license agreement with Motorola and, as part of which, we agreed to pay Motorola $7.3 million and expensed the full amount in 2011. We record litigation accruals for legal matters which are both probable and estimable. For potential losses for which there is a reasonable possibility (meaning the likelihood is more than remote but less than probable) that a loss exists, we will disclose an estimate of the potential loss or range of such potential loss or include a statement that an estimate of the potential loss cannot be made.
Interest Expense, Net. For 2012, interest expense, net consists primarily of interest expense on debt and customer prompt payment discounts. For 2011 and 2010, interest expense, net consists primarily of interest expense on debt, prompt payment discounts and interest income on cash, cash equivalents and short-term investments balances. As of December 31, 2012, we had $10.1 million of outstanding debt before debt discounts.
Other Income (Expense), Net. In 2012 and 2011, other income (expense), net consists primarily of gains and losses on foreign currency transactions. In 2010, other income (expense), net consists primarily of charges to record fair value adjustments for our warrants to purchase convertible preferred stock and warrants to purchase common stock. Until the closing of our initial public offering on April 6, 2010, our outstanding warrants were classified as a liability on our consolidated balance sheets and any changes in fair value were recognized as a component of other income (expense), net.
Major Channel Partners
We sell products and services directly to our channel partners, including VARs and distributors. The following table sets forth our channel partners representing greater than 10% of revenues in the periods presented (in percentages):
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Major Channel Partners | 2012 | 2011 | 2010 | |||||||
Westcon Group, Inc. | 25 | % | 29 | % | 34 | % | ||||
Siracom, Inc. | 19 | 11 | * | |||||||
Catalyst Telecom, Inc. | 13 | 13 | 12 | |||||||
Ingram Micro Inc. | 11 | * | * | |||||||
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates.
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Revenue Recognition
Our revenues are derived primarily from hardware and software products and related support and services. We often enter into multiple deliverable arrangements and as such the elements of these arrangements are separated and valued based on their relative fair value. The majority of our products are networking communications hardware with embedded software components such that the software functions together with the hardware to provide the essential functionality of the product. Therefore, our hardware deliverables are considered to be non-software elements and are excluded from the scope of industry-specific software revenue recognition guidance. Our products revenues also include revenues from the sale of stand-alone software products. Stand-alone software products may operate on our networking communications hardware, but are not considered essential to the functionality of the hardware. Sales of stand-alone software generally include a perpetual license to our software. Sales of stand-alone software continue to be subject to the industry-specific software revenue recognition guidance. Product support typically includes software updates on a when and if available basis, telephone and internet access to our technical support personnel and hardware support. Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period.
Certain arrangements with multiple deliverables continued to have stand-alone software elements that are subject to the existing software revenue recognition guidance along with non-software elements that are subject to the amended revenue accounting guidance. The revenue for these multiple deliverable arrangements is allocated to the stand-alone software elements as a group and the non-software elements based on the relative selling prices of all of the elements in the arrangement using the fair value hierarchy in the amended revenue accounting guidance.
For sales of stand-alone software after December 31, 2010 and for all transactions entered into prior to January 1, 2011, we recognize revenue based on software revenue recognition guidance. Under the software revenue recognition guidance, we use the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and VSOE of all undelivered elements exists. We establish VSOE for these arrangements based on sales of multi-year support services arrangements on a stand-alone basis. The normal pricing for multi-year support services arrangements was based on the normal price of a one year support services arrangement multiplied by the number of years of support services which was then adjusted for the time value of money and the decreased sales and fulfillment effort for support service periods of longer than one year. In the majority of our contracts, the only element that remains undelivered at the time of delivery of the product is support services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as products revenues. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established. When the undelivered element for which we do not have VSOE is support, revenue for the entire arrangement is bundled and recognized ratably over the support period.
VSOE for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, we require that a substantial majority of the selling prices for an element falls within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, we consider major service groups, geographies, customer classifications, and other variables in determining VSOE.
Third-party evidence of selling price, or TPE, is determined based on competitor prices for similar deliverables when sold separately. We establish estimated selling prices, or ESP, for support services based on our normal pricing and discounting practices for support services. This ESP analysis requires that a substantial majority of the support services selling prices fall within a reasonably narrow pricing
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range, which is typically broader than the range used to evidence VSOE. We believe that this is the price that we would sell support services if support services were regularly sold on a stand-alone basis. However, we are typically not able to determine TPE for our products or services. Generally, our go-to-market strategy differs from that of its peers and our offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, we are unable to reliably determine what similar competitor products' selling prices are on a stand-alone basis.
When we are unable to establish the selling price of our non-software elements using VSOE or TPE, we use ESP in the allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We determine ESP for a product or service by considering multiple factors including, but not limited to, pricing policies, internal costs, gross margin objectives, competitive landscapes, geographies, customer classes and distribution channels.
We regularly review VSOE and ESP and maintain internal controls over the establishment and updates of these estimates. There was not a material impact during the year, nor do we currently expect a material impact in the near term, from changes in VSOE or ESP.
We recognize revenues when all of the following have occurred: (1) we have entered into a legally binding arrangement with a customer; (2) delivery has occurred; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable. The sales prices for our products are typically considered to be fixed or determinable at the inception of an arrangement. Delivery is considered to have occurred when product title has transferred to the customer, when the service or training has been provided, when software is delivered, or when the support period has lapsed. To the extent that agreements contain rights of return or acceptance provisions, revenues are deferred until the acceptance provisions or rights of return lapse.
The majority of our sales are generated through distributors. Revenues from distributors with return rights are recognized when the distributor reports that the product has been sold through, provided that all other revenue recognition criteria have been met. We obtain sell-through information from these distributors. For transactions with all other distributors, we do not provide for rights of return and recognize products revenues at the time of shipment, assuming all other revenue recognition criteria have been met.
Prior to April 1, 2008, we allowed some customers to receive support services outside of the contractual terms. Accordingly, we deferred and recognized revenues on all transactions, except for transactions with one customer, ratably over the economic life of the products sold as we determined that this was the best estimate of the period of time over which we provided these support services. The one exception relates to a customer for which we established VSOE for the related support contracts during the year ended December 31, 2007. Accordingly, we began to account for these support contracts as separate elements from the hardware sales.
We estimated the economic life of the hardware to be three and a half years based on several factors such as: (1) the history of technology development of related products; (2) a Company-specific evaluation of product life cycles from both a sales and product development perspective; and (3) information on customer usage of our products.
On April 1, 2008, we ceased providing support services outside of the contractual terms. As a result, we began recognizing ratable revenues from sales in which VSOE for the related support services had not been established over the contractual support period and not the three and a half year economic life of the product. Also on April 1, 2008, we established VSOE for support services to distributors. Accordingly, we recognized revenues from sales to distributors after this date and prior to January 1, 2011 using the residual method, assuming all revenue recognition criteria were met.
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On January 1, 2009, we established VSOE for all remaining support services. Accordingly, we recognized revenues for other than support services for all sales made on and after January 1, 2009 and prior to January 1, 2011 using the residual method, assuming all revenue recognition criteria were met.
Revenues for support services are recognized on a straight-line basis over the support period, which typically ranges from one year to five years.
Shipping charges billed to customers are included in products revenues and the related shipping costs are included in costs of products revenues.
Stock-Based Compensation
We recognize stock-based compensation for equity awards on a straight-line basis over the requisite service period, usually the vesting period, based on the grant date fair value. We use the Black-Scholes option-pricing model to estimate the fair value of our stock options and shares under our employee stock purchase plan. The determination of the fair value of these awards on the date of grant using the Black-Scholes option-pricing model is affected by our stock price, the expected holding period of the awards, the risk-free interest rate and the expected stock price volatility. Further, the forfeiture rate also affects the amount of aggregate compensation that we are required to record as an expense. These inputs are subjective and generally require significant judgment. If any of the assumptions used in the Black-Scholes option-pricing model change significantly, stock-based compensation for future awards may differ materially from the awards granted previously.
We account for stock options issued to non-employees based on their estimated fair value determined using the Black-Scholes option-pricing model. However, the fair value of the equity awards granted to non-employees is remeasured as the awards vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.
Fair Value of Financial Instruments
Prior to our IPO, freestanding warrants to purchase shares of our convertible preferred stock and some of our warrants to purchase common stock were classified as a liability on our consolidated balance sheets at fair value because the warrants may have conditionally obligated us to transfer assets at some point in the future. The warrants were subject to remeasurement at each balance sheet date, and any changes in fair value were recognized as a component of other income (expense), net in the consolidated statements of operations. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option-pricing model which includes a number of highly judgmental inputs such as the fair value and expected volatility of our common stock.
During the year ended December 31, 2010, we recorded expense of $33.6 million due to the change in fair value of the warrant liability. Upon the closing of our IPO and amending the common stock warrants, the warrants were no longer considered a liability and the warrant liability was reclassified to additional paid-in capital.
We measure the fair value of financial instruments using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level I—Inputs used to measure fair value are observable inputs such as quoted prices in active markets.
Level II—Pricing is provided by inputs other than the quoted prices in active markets that are observable either directly or indirectly. We consider the most reliable information available for the valuation of our Level II securities, which includes pricing data from our investment advisors and other independent sources.
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Level III—Unobservable inputs in which there is little or no market data that requires us to develop our own assumptions. The determination of fair value for Level III investments and other financial instruments involves the most management judgment and subjectivity.
Inventory Valuation
Inventory consists of hardware and related component parts and is stated at the lower of cost or fair market value. We record inventory write-downs for potentially excess inventory based on forecasted demand, economic trends and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in costs of product revenues in the period the revision is made. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If actual demand and market conditions are less favorable than anticipated, additional inventory adjustments could be required in future periods.
Allowances for Doubtful Accounts
We record a provision for doubtful accounts based on historical experience and a detailed assessment of the collectibility of our accounts receivable. To assist with the estimate, our management considers, among other factors, (1) the aging of the accounts receivable, including trends within the age of the accounts receivable, (2) our historical write-offs, (3) the credit-worthiness of each purchaser, (4) the economic conditions of the purchaser's industry, and (5) general economic conditions. In cases where we are aware of circumstances that may impair a specific purchaser's ability to meet their financial obligations to us, we record a specific allowance against amounts due from the customer, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. There is significant judgment involved in estimating the allowance for doubtful accounts.
During the years ended December 31, 2012 and 2011, we recorded bad debt expense of $44,000 and $143,000. There was no bad debt expense during the year ended December 31, 2010. We collected previously written-off bad debt expense of $54,000 and $61,000 during the years ended December 31, 2012 and 2010. Write-offs of previously reserved bad debts were approximately $110,000, $375,000 and $3,000 during the years ended December 31, 2012, 2011 and 2010.
Income Taxes
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. As of December 31, 2012 and 2011, we have recorded a full valuation allowance on our net deferred tax assets due to uncertainties related to our ability to utilize our deferred tax assets in the foreseeable future. These deferred tax assets primarily consist of certain net operating loss carryforwards and research and development tax credits. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.
Since inception, we have incurred operating losses, and, accordingly, we have not recorded a provision for income taxes for any of the periods presented other than foreign and state provisions for income tax. Accordingly, there have not been significant changes to our provision for income taxes during the years ended December 31, 2012, 2011 or 2010, and we do not expect any significant changes until we are no longer incurring losses.
As of December 31, 2012, we had federal net operating loss carryforwards of $147.5 million and state net operating loss carryforwards of $141.1 million. We also had federal and state research credit
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carryforwards of $3.7 million and $4.0 million and foreign tax credits of $0.6 million. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. If not utilized, the federal net operating loss and tax credit carryforwards will expire beginning in 2022 and the state net operating losses began expiring in certain jurisdictions in 2009. Utilization of these net operating losses and credit carryforwards is subject to an annual limitation due to applicable provisions of the Internal Revenue Code of 1986, as amended, and state and local tax laws if we have experienced an "ownership change" in the past, or if an ownership change occurs in the future, including, for example, as a result of the shares issued in our initial public offering aggregated with certain other sales of our stock before or after the offering.
Significant judgment is also required in evaluating our uncertain tax positions. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with applicable tax laws. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation, or the change of an estimate based on new information. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
Loss/Contingencies
We are or have been subject to proceedings, lawsuits and other claims arising in the ordinary course of business. We evaluate contingent liabilities, including threatened or pending litigation, for potential losses. If the potential loss from any claim or legal proceedings is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based upon the best information available. For potential losses for which there is a reasonable possibility (meaning the likelihood is more than remote but less than probable) that a loss exists, we will disclose an estimate of the potential loss or range of such potential loss or include a statement that an estimate of the potential loss cannot be made. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise its estimates, which could materially impact our results of operations, financial position and cash flows.
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Results of Operations
Year ended December 31, 2012 compared to the year ended December 31, 2011
The following table presents our historical operating results in dollars (in thousands) and as a percentage of revenues for the periods presented:
| | Years Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | |||||||||||
REVENUES: | |||||||||||||
Products | $ | 80,770 | 82.8 | % | $ | 74,279 | 82.1 | % | |||||
Support and services | 16,561 | 17.0 | 12,957 | 14.3 | |||||||||
Ratable products and services | 179 | 0.2 | 3,235 | 3.6 | |||||||||
Total revenues | 97,510 | 100.0 | 90,471 | 100.0 | |||||||||
COSTS OF REVENUES: | |||||||||||||
Products | 28,879 | 29.6 | 26,415 | 29.2 | |||||||||
Support and services | 6,463 | 6.7 | 4,581 | 5.1 | |||||||||
Ratable products and services | 103 | 0.1 | 1,863 | 2.0 | |||||||||
Total costs of revenues* | 35,445 | 36.4 | 32,859 | 36.3 | |||||||||
Gross margin | 62,065 | 63.6 | 57,612 | 63.7 | |||||||||
OPERATING EXPENSES: | |||||||||||||
Research and development* | 15,053 | 15.4 | 13,966 | 15.5 | |||||||||
Sales and marketing* | 58,759 | 60.3 | 47,688 | 52.7 | |||||||||
General and administrative* | 14,844 | 15.2 | 14,779 | 16.3 | |||||||||
Litigation reserve | 2,350 | 2.4 | 7,250 | 8.0 | |||||||||
Total operating expenses | 91,006 | 93.3 | 83,683 | 92.5 | |||||||||
Loss from operations | (28,941 | ) | (29.7 | ) | (26,071 | ) | (28.8 | ) | |||||
Interest expense, net | (1,656 | ) | (1.7 | ) | (253 | ) | (0.3 | ) | |||||
Other income (expense), net | 58 | 0.1 | 41 | 0.0 | |||||||||
Loss before provision for income taxes | (30,539 | ) | (31.3 | ) | (26,283 | ) | (29.1 | ) | |||||
Provision for income taxes | 549 | 0.6 | 411 | 0.4 | |||||||||
Net loss | $ | (31,088 | ) | (31.9 | )% | $ | (26,694 | ) | (29.5 | )% | |||
| | Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | |||||
Costs of revenues | $ | 320 | $ | 346 | |||
Research and development | 1,126 | 1,131 | |||||
Sales and marketing | 2,714 | 2,217 | |||||
General and administrative | 3,389 | 2,480 | |||||
Revenues
Our total revenues increased by $7.0 million, or 7.8%, to $97.5 million in 2012, from $90.5 million in 2011. Our products and support and services revenues, or total revenues excluding ratable revenues, increased by $10.1 million, or 11.6%, to $97.3 million in 2012, from $87.2 million in 2011. This increase
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was primarily the result of increased demand for our products, particularly in the United Kingdom and Asia Pacific regions.
Products revenues. Products revenues increased by $6.5 million, or 8.7%, to $80.8 million in 2012, from $74.3 million in 2011. The increase was primarily a result of an increase in unit shipments particularly in the United Kingdom and the Asia Pacific regions in 2012.
Support and services revenues. Support and services revenues increased by $3.6 million, or 27.8%, to $16.6 million in 2012, from $13.0 million in 2011. The increase in support and services revenues is a result of increased product sales, particularly in the United Kingdom and Asia Pacific regions, resulting in first-year support sales, and the renewal of support contracts by existing customers. As our customer base grows over time, we expect our support revenues to increase.
Ratable products and services revenues. Ratable products and services revenues decreased by $3.1 million, or 94.5%, to $0.2 million in 2012, from $3.2 million in 2011. This ratable revenue is being amortized from transactions initiated prior to 2009 and is expected to continue to decline over time as the related deferred revenue balance is depleted through 2013.
Costs of Revenue and Gross Margin
Total costs of revenues increased by $2.6 million, or 7.9%, to $35.4 million in 2012 from $32.9 million in 2011. Overall gross margins, as a percentage of total revenues, decreased to 63.6% in 2012 from 63.7% in 2011. Our product gross margins, as a percentage of product revenues, decreased to 64.2% in 2012 from 64.4% in 2011. Our support and services gross margins, as a percentage of support and services revenues, decreased to 61.0% in 2012 from 64.6% in 2011. These decreases were primarily the result of our increased headcount related to customer support and professional services and a reduction in the amount of support costs allocated to ratable revenues. Our ratable gross margins, as a percentage of ratable revenues, increased to 42.5% in 2012 from 42.4% in 2011.
Operating Expenses
Our operating expenses increased by $7.3 million, or 8.8%, to $91.0 million in 2012 from $83.7 million in 2011. Our operating expenses increased as a percentage of revenue from 92.5% in 2011 to 93.3% in 2012. This increase is primarily the result of an increase of $10.6 million in personnel costs as a result of increased headcount, an increase of $1.4 million in stock-based compensation expense, an increase of $0.8 million in facility expenses and an increase of $0.3 million in depreciation expenses related to our expansion, an increase of $0.5 million in sales and marketing program expenses, an increase of $0.4 million in travel expenses offset partially by a decrease of $4.9 million in litigation reserve expense, a decrease of $0.9 million in legal fees related to the settlement of certain litigation matters and a decrease of $0.7 million in other related engineering expenses as compared to 2011.
Research and Development Expenses
Research and development expenses increased by $1.1 million, or 7.8%, to $15.1 million in 2012 from $14.0 million in 2011. This increase is primarily the result of an increase of $1.1 million in research and development personnel costs, an increase of $0.5 million in facility expenses and an increase of $0.2 million in depreciation expenses related to our expansion in India partially offset by a decrease of $0.7 million in other related engineering expenses as compared to 2011.
Sales and Marketing Expenses
Sales and marketing expenses increased by $11.1 million, or 23.2%, to $58.8 million in 2012 from $47.7 million in 2011. This increase is primarily the result of an increase of $9.2 million in sales and marketing personnel costs as a result of increased headcount, an increase of $0.5 million in stock-based
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compensation expense, an increase of $0.5 million in sales and marketing program expenses, an increase of $0.4 million in travel expenses and an increase of $0.4 million in facility expense related to our expansion in the U.S. as compared to 2011.
General and Administrative Expenses
General and administrative expenses remained flat at $14.8 million in 2012 as compared to 2011. During the year ended December 31, 2012, there was an increase of $0.9 million in stock-based compensation expense and an increase of $0.2 million in personnel costs as a result of increased headcount were offset by a decrease of $0.9 million in legal fees related to the settlement of certain litigation matters and a decrease of $0.2 million in costs related to our former CEO's transitional employment agreement and the executive search fees for the current CEO as compared to 2011.
Litigation Reserve Expense
Our litigation reserve expense decreased by $4.9 million, or 67.6%, from approximately $7.3 million 2011 to approximately $2.4 million in 2012. We entered into a settlement, license and release agreement with Extricom in 2012 and recorded $2.4 million as expense as we do not believe the agreement provides any future value. We entered into a license agreement with Motorola in 2011. As part of the Motorola License Agreement, we agreed to pay Motorola $7.3 million and expensed the full amount in 2011.
Interest Expense, Net
Interest expense, net increased by $1.4 million, or 554.5%, to $1.7 million in 2012, from $0.3 million in 2011. This increase is primarily due to a result of an increase in interest expense related to the $12.0 million loan agreement entered into with Venture Lending and Leasing VI, Inc., or VLL, in June 2012. See the discussion of the arrangements with VLL under "Liquidity and Capital Resources."
Provision for Income Taxes
Our income taxes increased by $0.1 million, or 33.6%, to $0.5 million in 2012 from $0.4 million in 2011. This increase in the provision for income taxes was due to the growth of our international entities.
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Year ended December 31, 2011 compared to the year ended December 31, 2010
The following table presents our historical operating results in dollars (in thousands) and as a percentage of revenues for the periods presented:
| | Years Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | |||||||||||
REVENUES: | |||||||||||||
Products | $ | 74,279 | 82.1 | % | $ | 63,197 | 74.4 | % | |||||
Support and services | 12,957 | 14.3 | 10,479 | 12.3 | |||||||||
Ratable products and services | 3,235 | 3.6 | 11,328 | 13.3 | |||||||||
Total revenues | 90,471 | 100.0 | 85,004 | 100.0 | |||||||||
COSTS OF REVENUES: | |||||||||||||
Products | 26,415 | 29.2 | 22,060 | 25.9 | |||||||||
Support and services | 4,581 | 5.1 | 2,297 | 2.7 | |||||||||
Ratable products and services | 1,863 | 2.0 | 6,021 | 7.1 | |||||||||
Total costs of revenues* | 32,859 | 36.3 | 30,378 | 35.7 | |||||||||
Gross margin | 57,612 | 63.7 | 54,626 | 64.3 | |||||||||
OPERATING EXPENSES: | |||||||||||||
Research and development* | 13,966 | 15.5 | 12,399 | 14.6 | |||||||||
Sales and marketing* | 47,688 | 52.7 | 33,483 | 39.4 | |||||||||
General and administrative* | 14,779 | 16.3 | 10,462 | 12.3 | |||||||||
Litigation reserve | 7,250 | 8.0 | — | — | |||||||||
Total operating expenses | 83,683 | 92.5 | 56,344 | 66.3 | |||||||||
Loss from operations | (26,071 | ) | (28.8 | ) | (1,718 | ) | (2.0 | ) | |||||
Interest expense, net | (253 | ) | (0.3 | ) | (813 | ) | (1.0 | ) | |||||
Other income (expense), net | 41 | 0.0 | (33,821 | ) | (39.8 | ) | |||||||
Loss before provision for income taxes | (26,283 | ) | (29.1 | ) | (36,352 | ) | (42.8 | ) | |||||
Provision for income taxes | 411 | 0.4 | 254 | 0.3 | |||||||||
Net loss | $ | (26,694 | ) | (29.5 | )% | $ | (36,606 | ) | (43.1 | )% | |||
| | Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2011 | 2010 | |||||
Costs of revenues | $ | 346 | $ | 197 | |||
Research and development | 1,131 | 767 | |||||
Sales and marketing | 2,217 | 985 | |||||
General and administrative | 2,480 | 1,896 | |||||
Revenues
Our total revenues increased by $5.5 million, or 6.4%, to $90.5 million in 2011, from $85.0 million in 2010. Our products and support and services revenues, or total revenues excluding ratable revenues, increased by $13.6 million, or 18.4%, to $87.2 million in 2011, from $73.7 million in 2010. This increase
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was primarily the result of increased demand for our products, particularly in the EMEA and Asia Pacific regions
Products revenues. Products revenues increased by $11.1 million, or 17.5%, to $74.3 million in 2011, from $63.2 million in 2010. The increase was primarily a result of an increase in unit shipments particularly in the EMEA and the Asia Pacific regions in 2011.
Support and services revenues. Support and services revenues increased by $2.5 million, or 23.6%, to $13.0 million in 2011, from $10.5 million in 2010. The increase in support and services revenues is a result of increased product sales, particularly in the EMEA and Asia Pacific regions, resulting in first-year support sales, and the renewal of support contracts by existing customers. As our customer base grows over time, we expect our support revenues to increase.
Ratable products and services revenues. Ratable products and services revenues decreased by $8.1 million, or 71.4%, to $3.2 million in 2011, from $11.3 million in 2010. This ratable revenue is being amortized from transactions initiated prior to 2009 and is expected to continue to decline over time as the related deferred revenue balance is depleted through 2013.
Costs of Revenue and Gross Margin
Total costs of revenues increased by $2.5 million, or 8.2%, to $32.9 million in 2011 from $30.4 million in 2010. Overall gross margins, as a percentage of total revenues, decreased to 63.7% in 2011 from 64.3% in 2010. Our product gross margins, as a percentage of product revenues, decreased to 64.4% in 2011 from 65.1% in 2010. This decrease was primarily the result of a geographic mix. Our support and services gross margins, as a percentage of support and services revenues, decreased to 64.6% in 2011 from 78.1% in 2010. This decrease was primarily the result of our increased headcount related to customer support and professional services and a reduction in the amount of support costs allocated to ratable revenues. Our ratable gross margins, as a percentage of ratable revenues, decreased to 42.4% in 2011 from 46.8% in 2010.
Operating Expenses
Our operating expenses increased by $27.3 million, or 48.5%, to $83.7 million in 2011 from $56.3 million in 2010. Our operating expenses increased as a percentage of revenue from 66.3% in 2010 to 92.5% in 2011. The increase was primarily due to an increase of $8.7 million in personnel costs related to increased headcount, a litigation reserve expense of $7.3 million related to the Motorola settlement, an increase of $2.2 million in stock-based compensation expense, an increase of $1.8 million in travel expenses, an increase of $1.8 million in sales and marketing program expenses, an increase of $1.4 million in legal fees related to the acquisition of Identity Networks and our ongoing litigation matters, an increase of $0.6 million in facility expense as well as an increase of $0.5 million in research and development project costs in 2011 as compared to the prior year.
Research and Development Expenses
Research and development expenses increased by $1.6 million, or 12.6%, to $14.0 million in 2011 from $12.4 million in 2010. This increase is primarily the result of an increase of $0.2 million in research and development personnel costs, an increase of $0.5 million in project costs to support continued enhancements to existing products and the development of new products, an increase of $0.4 million in stock-based compensation expense and an increase of $0.2 million in facility expense in 2011 as compared to the prior year.
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Sales and Marketing Expenses
Sales and marketing expenses increased by $14.2 million, or 42.4%, to $47.7 million in 2011 from $33.5 million in 2010. This increase is primarily the result of an increase of $7.7 million in sales and marketing personnel costs as a result of increased headcount, an increase of $1.8 million in travel expenses, an increase of $1.1 million in sales and marketing program expenses, an increase of $1.2 million in stock-based compensation expense and an increase of $0.2 million in facility expense in 2011 as compared to the prior year.
General and Administrative Expenses
General and administrative expenses increased by $4.3 million, or 41.3%, to $14.8 million in 2011 from $10.5 million in 2010. This increase is primarily the result of $1.1 million transition costs related to our Chief Executive Officer's transitional employment agreement, an increase of $0.8 million in general and administrative personnel costs, an increase of $1.4 million in legal expense related to the acquisition of Identity Networks and ongoing litigation and $0.6 million in stock-based compensation expense. We have incurred additional accounting and legal costs related to compliance with the rules and regulations that govern us as a public company, including the additional costs of Section 404 of the Sarbanes-Oxley Act compliance, as well as additional insurance, investor relations and other costs associated with being a public company.
Litigation Reserve Expense
In 2011, we entered into a license agreement with Motorola. As part of the Motorola License Agreement, we agreed to pay Motorola $7.3 million and expensed the full amount during the quarter ended June 30, 2011.
Interest Expense, Net
Interest expense, net decreased by $0.6 million, or 68.9%, to $0.3 million in 2011 from $0.8 million in 2010. This decrease is primarily due to the paydown of the principal balances on our long-term debt.
Other Income (Expense), Net
Other income (expense), net changed from a net expense of $33.8 million in 2010 to a net income of $41,000 in 2011. This change is primarily due to the increase in the fair value of our warrants to purchase convertible preferred stock and common stock and the related adjustment to the warrant liability in the amount of $33.6 million in 2010. Upon the closing of our initial public offering on April 6, 2010, we remeasured the warrants and reclassified the related fair value to additional paid-in capital. Accordingly, we no longer recognize gains and losses as a result of changes in the fair value of these warrants and incurred no such expense in 2011.
Provision for Income Taxes
Our income taxes increased by $0.2 million, or 61.8%, to $0.4 million in 2011 from $0.3 million in 2010. Our tax expense was mainly driven by income earned by certain of our oversee entities. This increase in the provision for income taxes was due to the growth of our international entities.
Liquidity and Capital Resources
Since inception, we have funded our operations primarily with proceeds from issuances of convertible preferred stock, common stock, long-term debt and our credit facility. From 2007 through 2009, we raised an aggregate of $62.3 million from the sale of our convertible preferred stock, including amounts received through the conversion of promissory notes. We also funded purchases of equipment
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and other general corporate services with proceeds from long-term debt in the amount of $16.5 million during that period. In 2010, we received $57.1 million from our initial public offering, representing the net proceeds of the offering after deducting underwriters' commissions and discounts and other issuance costs.
In 2012, the average daily outstanding balance on our line of credit was approximately $0.6 million. We paid off our outstanding line of credit in May 2012. Accordingly, as of December 31, 2012, the total amount outstanding under the line of credit was zero. On July 31, 2012, we renewed the line of credit for twelve months. The debt is collateralized by substantially all of our assets and intellectual property, with first priority liens relative to the VLL Term Loan Agreement described in the next paragraph, on accounts receivable, loan proceeds and our cash. The maximum amount available under this line of credit is based on eligible accounts receivable up to a maximum of $7.0 million, subject to an overall aggregate total outstanding borrowing limit under the VLL Term Loan Agreement of $20.0 million. The VLL Term Loan Agreement also provides that we are limited to borrowings under the line of credit for a period of no more than three business days before and after the end of the quarter, until we are able to achieve two consecutive quarters of increasing profitability of at least $1.0 million per quarter (based on non-GAAP income, excluding stock based compensation and other non-cash items), so long as we maintain such profitability and subject to the overall aggregate borrowing limit of $20.0 million.
During June 2012, we entered into a term loan and security agreement with VLL, pursuant to which we borrowed an aggregate principal amount of $11.7 million before debt discounts. We repay the term loan in 39 monthly installments of principal plus accrued interest beginning on June 6, 2012 and ending on August 1, 2015. Amounts borrowed under the loan agreement bear interest per annum at a fixed rate equal to 12.0%. We may voluntarily prepay the term loan in full by tendering a cash payment equal to the sum of: (i) the accrued and unpaid interest on the term loan as of the date of the prepayment; (ii) the unpaid principal balance of the term loan as of the date of the prepayment, and (iii) the interest that would have accrued and been payable from the date of the prepayment through the stated date of maturity of such term loan had it remained outstanding and been paid in accordance with the terms of the related note (multiplied by 0.80 in the case of repayment after January 1, 2014). We will also be required to make a payment in an amount equal to $2.0 million at the earlier of (i) a change of control and (ii) September 1, 2015. As security for amounts outstanding under the loan agreement, we have granted VLL a security interest in substantially all of our assets.
The loan agreement contains customary affirmative and negative covenants. Pursuant to the terms of the loan agreement, and subject to certain exceptions, we are not permitted, without VLL's prior written consent, among other things, to:
Amounts outstanding under the term loan agreement may become due and payable on demand upon the occurrence of certain customary events of default, including our failure to make payments
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when due, failure to observe the covenants in the loan agreement (subject to a designated grace period in certain cases), our bankruptcy and certain adverse judgments or adverse regulatory actions or determinations against us. A default interest rate equal to 5.0% plus the otherwise applicable interest rate applies from and after the occurrence of any event of default. As of December 31, 2012, we had debt outstanding under the loan in the amount of $10.1 million, before debt discounts, that bears a fixed interest rate of 12% per year.
As of December 31, 2012, we had cash and cash equivalents of $22.9 million as compared to a combined cash and cash-equivalents and short-term investments balance of $40.3 million as of December 31, 2011.
Cash Flows from Operating Activities
Our primary use of cash from operating activities have been related to personnel-related and other operating expenditures as well as increased inventory, increased accounts receivable and accounts payable due to the growth and expansion of our business. Our cash flows from operating activities will continue to be impacted by working capital requirements as well as the level of operating expenses and revenues. Total cash used in operating activities was $25.4 million, $22.4 million and $2.1 million in fiscal years 2012, 2011 and 2010, respectively.
Cash used in operating activities of $25.4 million in 2012 reflected a net loss of $31.1 million and changes in our net operating assets and liabilities of $3.8 million, partially offset by non-cash charges of $9.6 million. The non-cash charges were mainly comprised of $7.5 million in stock-based compensation, $1.2 million in depreciation and amortization and $0.6 million in accrued interest on long-term debt. The changes in our net operating assets and liabilities were comprised of an increase of $2.3 million in inventory, a net decrease of $1.8 million in accounts payable and accrued liabilities and an increase of $2.0 million in accounts receivable, net that was partially offset by an increase of $2.0 million in deferred revenues.
Cash used in operating activities of $22.4 million in 2011 reflected a net loss of $26.7 million and changes in our net operating assets and liabilities of $2.8 million, partially offset by non-cash charges of $7.1 million, $6.2 million of which relates to stock-based compensation in 2011. The change in our net operating assets and liabilities was comprised of an increase of $4.3 million in accounts receivable, net due to larger than usual concentration of sales in December 2011 and an increase of $1.9 million in inventory that was partially offset by a net increase of $2.9 million in accounts payable and accrued liabilities and a decrease of $1.2 million in deferred inventory costs.
Cash used by operating activities of $2.1 million in 2010 reflected a net loss of $36.6 million, offset by non-cash charges of $38.1 million, $33.6 million of which relates to the increase in the fair value of the common stock underlying our warrants and $3.8 million of which relates to stock-based compensation. Cash from our net operating assets and liabilities decreased by $3.6 million in 2010. A decrease of $8.5 million in deferred revenue, an increase of $2.8 million in accounts receivable and an increase of $1.8 million in inventory was partially offset by a decrease of $4.6 million in deferred inventory costs and an increase of $4.4 million in accrued liabilities.
Cash Flows from Investing Activities
Our investing activities in 2012 consisted of our short-term investments, capital expenditures and the payment of remaining earnouts from our Identity Networks acquisition. The cash provided by investing activities of $2.8 million in 2012 reflected $5.0 million in proceeds from the maturities of short-term investments that was partially offset by $1.9 million of capital expenditures.
In 2011, our investing activities consisted of our short-term investments, our Identity Networks acquisition, investment in non-marketable securities, and capital expenditures. The purchase of
67
$10.0 million of short-term investments was offset by the maturity of $10.0 million of short-term investments. We used $1.4 million for capital expenditures. In addition, we acquired Identity Networks for a purchase price of $2.5 million, of which $2.2 million was paid in 2011 and the remaining $0.3 million was paid in 2012. Further, we invested $1.3 million in a non-public company.
The cash used in investing activities of $5.7 million in 2010 reflected a purchase of $5.0 million of short-term investments and $0.7 million of capital expenditures.
Cash Flows from Financing Activities
To date, we have financed our operations primarily with proceeds from the sale of our common stock in our initial public offering, issuance of common stock in conjunction with the exercises options to purchase our stock, the sale of convertible preferred stock, the incurrence of debt and the use of a line of credit facility. As of December 31, 2012, we had outstanding debt in the amount of $10.1 million before debt discounts.
Cash provided by financing activities was $10.3 million in 2012 primarily as a result of net proceeds of $11.5 million from our debt financing in June 2012 and proceeds from the exercise of stock options and the purchases under the employee stock purchase plan in the amount of $0.4 million, which were partially offset by payments on our long-term debt of $1.6 million.
Cash provided by financing activities was $0.4 million in 2011 primarily as a result of the proceeds from the exercise of stock options and the purchases under the employee stock purchase plan in the amount of $3.2 million offset by the principal payments on our long-term debt of $2.9 million.
Cash provided by financing activities was $48.8 million in 2010 primarily as a result of the net proceeds from our initial public offering in the amount of $57.1 million and proceeds from the exercise of warrants on convertible preferred stock, from employee stock purchase plan and from the exercise of stock options in the amount of $3.3 million, partially offset by net payments on our long-term debt of $11.6 million.
Capital Resources
We believe our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including, among other things, market acceptance of our products, the cost of our research and development activities and overall economic conditions.
If our cash sources are insufficient to satisfy our cash requirements, we may be required to sell debt or equity securities to raise additional capital or to borrow or increase the amount available to us for borrowing under our credit facility. We may be unable to raise additional capital through the sale of securities, or to do so on terms that are favorable to us, particularly if capital market and overall economic conditions change adversely. Any sale of convertible debt securities or additional equity securities could result in substantial dilution to our stockholders. Additionally, the terms of our existing term loan and line of credit may prevent us borrow under or increase the size of our credit facility, or to do so on terms that are acceptable to us, particularly if credit market conditions change adversely.
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Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2012:
| | Payments Due by Period | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations: | Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | Total | |||||||||
| | (in thousands) | ||||||||||||
Principal and interest and other payments on debt(1) | $ | 4,433 | $ | 9,388 | $ | — | $ | 13,821 | |||||
Operating lease obligations | 1,446 | 1,253 | — | 2,699 | |||||||||
Purchase commitments | 6,775 | — | — | 6,775 | |||||||||
Total | $ | 12,654 | $ | 10,641 | $ | — | $ | 23,295 | |||||
Off-Balance Sheet Arrangements
As of December 31, 2012, we did not have any off balance sheet arrangements as defined in Item 303(a)(4) of the SEC's Regulation S-K.
Debt and Interest
As of December 31, 2012 and 2011, the principal amount of our long-term debt before debt discounts was $10.1 million and zero, respectively. During 2012, a 10% appreciation or depreciation in the prime rate would not have a material impact on our interest expense.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board issued an update forIntangibles—Goodwill and Other Testing Indefinite-Lived Intangible Assets for Impairment. The update simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is "more likely than not" that the asset is impaired. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. We will adopt this standard in the first quarter of 2013 and do not expect the adoption to have a material impact on our consolidated financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign currency exchange rates and interest rates. We do not hold financial instruments for trading purposes.
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Foreign Currency Risk
Our sales are denominated in U.S. dollars, and therefore, our revenues are not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Indian rupee, Euro, British pound sterling and Japanese yen relative to the U.S. dollar. To date, we have not entered into any hedging contracts. During 2012, a 10% appreciation or depreciation in the value of the U.S. dollar relative to the other currencies in which our expenses are denominated would not have had a material impact on our earnings, fair values, or cash flows.
Interest Rate Sensitivity
We had cash, cash equivalents and short-term investments of $22.9 million and $40.3 million as of December 31, 2012 and 2011, respectively. These amounts were held primarily in cash deposits, money market funds and U.S. government securities. Cash and cash equivalents are held for working capital purposes. We do not use derivative financial instruments to hedge the risk of interest rate volatility. Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income. During 2012, a 10% appreciation or depreciation in overall interest rates would not have had a material impact on our earnings, fair values, or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated statements of operations data for each of the four quarters in the years ended December 31, 2012 and 2011. In management's opinion, the data below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this Form 10-K, and reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.
| | Quarters Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year 2012 | December 31, 2012 | September, 30 2012 | June, 30 2012 | March 31, 2012 | |||||||||
| | Unaudited | ||||||||||||
| | (in thousands, except share and per share data) | ||||||||||||
Net revenues | $ | 28,214 | $ | 25,386 | $ | 24,499 | $ | 19,411 | |||||
Gross margin | $ | 17,376 | $ | 16,407 | $ | 15,811 | $ | 12,471 | |||||
Loss before income taxes | $ | (4,194 | ) | $ | (5,677 | ) | $ | (6,310 | ) | $ | (14,358 | ) | |
Net loss | $ | (4,333 | ) | $ | (5,796 | ) | $ | (6,472 | ) | $ | (14,487 | ) | |
Net loss per share of common stock: | |||||||||||||
Basic and diluted | $ | (0.24 | ) | $ | (0.32 | ) | $ | (0.36 | ) | $ | (0.82 | ) | |
Shares used in per share calculations: | |||||||||||||
Basic and diluted | 18,307,063 | 18,014,335 | 17,845,376 | 17,701,126 | |||||||||
On April 13, 2012, we entered into a settlement, license and release agreement with Extricom. As part of the agreement with Extricom, we paid Extricom $2.4 million in April 2012. The Extricom
70
Agreement released and avoided certain litigation for us, but provided no other future benefits to us. Therefore, we expensed the full $2.4 million in the quarter ended March 31, 2012.
| | Quarters Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year 2011 | December 31, 2011 | September, 30 2011 | June, 30 2011 | March 31, 2011 | |||||||||
| | Unaudited | ||||||||||||
| | (in thousands, except share and per share data) | ||||||||||||
Net revenues | $ | 23,333 | $ | 23,758 | $ | 23,229 | $ | 20,151 | |||||
Gross margin | $ | 15,043 | $ | 14,995 | $ | 14,883 | $ | 12,691 | |||||
Loss before income taxes | $ | (8,031 | ) | $ | (5,274 | ) | $ | (9,680 | ) | $ | (3,298 | ) | |
Net loss | $ | (8,181 | ) | $ | (5,372 | ) | $ | (9,766 | ) | $ | (3,375 | ) | |
Net loss per share of common stock: | |||||||||||||
Basic and diluted | $ | (0.46 | ) | $ | (0.31 | ) | $ | (0.56 | ) | $ | (0.20 | ) | |
Shares used in per share calculations: | |||||||||||||
Basic and diluted | 17,616,664 | 17,519,217 | 17,393,322 | 16,972,165 | |||||||||
During the quarter ended June 30, 2011, we entered into a Patent Cross License Agreement with Motorola and agreed to pay Motorola $7.3 million. Since we will not receive any future benefits from this agreement, we expensed the entire $7.3 million in the quarter ended June 30, 2011.
Our operating results may fluctuate due to a variety of factors, many of which are outside our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.
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Index to Consolidated Financial Statements
| | Page No. | |||
|---|---|---|---|---|
Report of Independent Registered Public Accounting Firm | 73 | |||
Consolidated Balance Sheets | 74 | |||
Consolidated Statements of Operations | 75 | |||
Consolidated Statements of Comprehensive Loss | 76 | |||
Consolidated Statements of Convertible Preferred Stock and of Stockholders' Equity (Deficit) | 77 | |||
Consolidated Statements of Cash Flows | 78 | |||
Notes to Consolidated Financial Statements | 79 | |||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Meru Networks, Inc.
We have audited the accompanying consolidated balance sheets of Meru Networks, Inc. and its subsidiaries (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive loss, convertible preferred stock and of stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the related financial statement schedule listed in Item 15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Meru Networks, Inc. and its subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Burr Pilger Mayer, Inc.
San Jose, California
March 20, 2013
73
MERU NETWORKS, INC.
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
| | December 31, 2012 | December 31, 2011 | |||||
|---|---|---|---|---|---|---|---|
ASSETS | |||||||
CURRENT ASSETS: | |||||||
Cash and cash equivalents | $ | 22,855 | $ | 35,259 | |||
Short-term investments | — | 5,000 | |||||
Accounts receivable, net of allowance for doubtful accounts of $14 and $134 as of December 31, 2012 and 2011 | 15,040 | 13,038 | |||||
Inventory | 8,852 | 6,548 | |||||
Deferred inventory costs, current portion | 55 | 86 | |||||
Prepaid expenses and other current assets | 829 | 912 | |||||
Total current assets | 47,631 | 60,843 | |||||
Property and equipment, net | 2,473 | 1,476 | |||||
Goodwill | 1,658 | 1,658 | |||||
Intangible assets, net | 403 | 693 | |||||
Deferred inventory costs, net of current portion | — | 26 | |||||
Other assets | 2,024 | 2,147 | |||||
TOTAL ASSETS | $ | 54,189 | $ | 66,843 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
CURRENT LIABILITIES: | |||||||
Accounts payable | $ | 3,027 | $ | 5,733 | |||
Accrued liabilities | 13,053 | 12,394 | |||||
Long-term debt, current portion | 3,197 | — | |||||
Deferred revenue, current portion | 12,183 | 11,764 | |||||
Total current liabilities | 31,460 | 29,891 | |||||
Long-term debt, net of current portion | 6,499 | — | |||||
Deferred revenue, net of current portion | 6,107 | 4,481 | |||||
Other liabilities | 530 | — | |||||
Total liabilities | 44,596 | 34,372 | |||||
Commitments and contingencies (Note 12) | |||||||
STOCKHOLDERS' EQUITY: | |||||||
Preferred stock, $0.0005 par value—5,000,000 authorized as of of December 31, 2012 and December 31, 2011; no shares issued and outstanding as of December 31, 2012 and December 31, 2011 | — | — | |||||
Common stock, $0.0005 par value—150,000,000 shares authorized as of December 31, 2012 and December 31, 2011; 18,463,968 and 17,674,552 shares issued and outstanding as of December 31, 2012 and December 31, 2011 | 9 | 9 | |||||
Additional paid-in capital | 262,887 | 254,576 | |||||
Accumulated other comprehensive loss | (298 | ) | (197 | ) | |||
Accumulated deficit | (253,005 | ) | (221,917 | ) | |||
Total stockholders' equity | 9,593 | 32,471 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 54,189 | $ | 66,843 | |||
See notes to consolidated financial statements.
74
MERU NETWORKS, INC.
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
| | For the Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
REVENUES: | ||||||||||
Products | $ | 80,770 | $ | 74,279 | $ | 63,197 | ||||
Support and services | 16,561 | 12,957 | 10,479 | |||||||
Ratable products and services | 179 | 3,235 | 11,328 | |||||||
Total revenues | 97,510 | 90,471 | 85,004 | |||||||
COSTS OF REVENUES: | ||||||||||
Products | 28,879 | 26,415 | 22,060 | |||||||
Support and services | 6,463 | 4,581 | 2,297 | |||||||
Ratable products and services | 103 | 1,863 | 6,021 | |||||||
Total costs of revenues* | 35,445 | 32,859 | 30,378 | |||||||
Gross margin | 62,065 | 57,612 | 54,626 | |||||||
OPERATING EXPENSES: | ||||||||||
Research and development* | 15,053 | 13,966 | 12,399 | |||||||
Sales and marketing* | 58,759 | 47,688 | 33,483 | |||||||
General and administrative* | 14,844 | 14,779 | 10,462 | |||||||
Litigation reserve | 2,350 | 7,250 | — | |||||||
Total operating expenses | 91,006 | 83,683 | 56,344 | |||||||
Loss from operations | (28,941 | ) | (26,071 | ) | (1,718 | ) | ||||
Interest expense, net | (1,656 | ) | (253 | ) | (813 | ) | ||||
Other income (expense), net | 58 | 41 | (33,821 | ) | ||||||
Loss before provision for income taxes | (30,539 | ) | (26,283 | ) | (36,352 | ) | ||||
Provision for income taxes | 549 | 411 | 254 | |||||||
Net loss | $ | (31,088 | ) | $ | (26,694 | ) | $ | (36,606 | ) | |
Net loss per share of common stock: | ||||||||||
Basic and diluted | $ | (1.73 | ) | $ | (1.54 | ) | $ | (3.06 | ) | |
Shares used in computing net loss per share of common stock: | ||||||||||
Basic and diluted | 17,968,034 | 17,377,503 | 11,981,170 | |||||||
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Costs of revenues | $ | 320 | $ | 346 | $ | 197 | ||||
Research and development | 1,126 | 1,131 | 767 | |||||||
Sales and marketing | 2,714 | 2,217 | 985 | |||||||
General and administrative | 3,389 | 2,480 | 1,896 | |||||||
See notes to consolidated financial statements.
75
MERU NETWORKS, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Net loss | $ | (31,088 | ) | $ | (26,694 | ) | $ | (36,606 | ) | |
Other comprehensive income (loss), net of tax: | ||||||||||
Foreign currency translation adjustment | (101 | ) | (170 | ) | 15 | |||||
Change in net unrealized gain on available-for-sale securities | — | — | 1 | |||||||
Other comprehensive income (loss), net of tax | (101 | ) | (170 | ) | 16 | |||||
Comprehensive loss | $ | (31,189 | ) | $ | (26,864 | ) | $ | (36,590 | ) | |
See notes to consolidated financial statements
76
MERU NETWORKS, INC.
Consolidated Statements of Convertible Preferred Stock and of Stockholders' Equity (Deficit)
(in thousands, except for share amounts)
| | Convertible Preferred Stock | | | | | | | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Common Stock | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity (Deficit) | ||||||||||||||||||||
| | Additional Paid-in Capital | Accumulated Deficit | |||||||||||||||||||||||
| | Shares | Amount | Shares | Amount | |||||||||||||||||||||
BALANCE—January 1, 2010 | 110,032,788 | $ | 125,255 | 414,118 | $ | 1 | $ | 3,211 | $ | (43 | ) | $ | (158,617 | ) | $ | (155,448 | ) | ||||||||
Exercise of Series E warrants into convertible preferred stock | 3,084,368 | 5,001 | — | — | — | — | — | — | |||||||||||||||||
Proceeds from initial public offering, net of issuance costs of $6,436 | — | — | 4,233,017 | 2 | 57,057 | — | — | 57,059 | |||||||||||||||||
Conversion of convertible preferred stock into common stock in connection with initial public offering | (113,117,156 | ) | (130,256 | ) | 11,185,891 | 5 | 130,251 | — | — | 130,256 | |||||||||||||||
Reclassification of warrant liability to additional paid-in capital upon initial public offering | — | — | — | — | 48,274 | — | — | 48,274 | |||||||||||||||||
Issuance of common stock upon cashless exercises of warrants | — | — | 60,421 | — | — | — | — | — | |||||||||||||||||
Issuance of common stock under the employee stock purchase plan | — | — | 93,307 | 1,100 | — | — | 1,100 | ||||||||||||||||||
Issuance of common stock upon exercise of vested stock options and vesting of restricted stock | — | — | 351,050 | — | 1,422 | — | — | 1,422 | |||||||||||||||||
Stock-based compensation | — | — | — | — | 3,845 | — | — | 3,845 | |||||||||||||||||
Net loss | — | — | — | — | — | — | (36,606 | ) | (36,606 | ) | |||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 15 | — | 15 | |||||||||||||||||
Unrealized gain on short-term investments | — | — | — | — | — | 1 | — | 1 | |||||||||||||||||
BALANCE—December 31, 2010 | — | — | 16,337,804 | 8 | 245,160 | (27 | ) | (195,223 | ) | 49,918 | |||||||||||||||
Issuance of common stock upon cashless exercises of warrants | — | — | 574,645 | — | — | — | — | — | |||||||||||||||||
Issuance of common stock under the employee stock purchase plan | — | — | 178,150 | — | 1,306 | — | — | 1,306 | |||||||||||||||||
Issuance of common stock upon exercise of vested stock options and vesting of restricted stock, net of shares withheld for employee taxes | — | — | 583,953 | 1 | 1,936 | — | — | 1,937 | |||||||||||||||||
Stock-based compensation | — | — | — | — | 6,174 | — | — | 6,174 | |||||||||||||||||
Net loss | — | — | — | — | — | — | (26,694 | ) | (26,694 | ) | |||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (170 | ) | — | (170 | ) | |||||||||||||||
BALANCE—December 31, 2011 | — | — | 17,674,552 | 9 | 254,576 | (197 | ) | (221,917 | ) | 32,471 | |||||||||||||||
Issuance of common stock warrants | — | — | �� | — | — | 384 | — | — | 384 | ||||||||||||||||
Issuance of common stock under the employee stock purchase plan | — | — | 356,388 | — | 566 | — | — | 566 | |||||||||||||||||
Issuance of common stock upon exercise of vested stock options and vesting of restricted stock, net of shares withheld for employee taxes | — | — | 433,028 | — | (188 | ) | — | — | (188 | ) | |||||||||||||||
Stock-based compensation | — | — | — | — | 7,549 | — | — | 7,549 | |||||||||||||||||
Net loss | — | — | — | — | — | — | (31,088 | ) | (31,088 | ) | |||||||||||||||
Other comprehensive loss: | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (101 | ) | — | (101 | ) | |||||||||||||||
BALANCE—December 31, 2012 | — | $ | — | 18,463,968 | $ | 9 | $ | 262,887 | $ | (298 | ) | $ | (253,005 | ) | $ | 9,593 | |||||||||
See notes to consolidated financial statements.
77
MERU NETWORKS, INC.
Consolidated Statements of Cash Flows
(in thousands)
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net loss: | $ | (31,088 | ) | $ | (26,694 | ) | $ | (36,606 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||
Depreciation and amortization | 1,211 | 724 | 615 | |||||||
Stock-based compensation | 7,549 | 6,174 | 3,845 | |||||||
Adjustment of fair value of warrant liability | — | — | 33,620 | |||||||
Accrued interest on long-term debt | 631 | — | — | |||||||
Amortization of debt issuance costs | 169 | 44 | 107 | |||||||
Net provision for (recovery of) bad debt | (10 | ) | 143 | (61 | ) | |||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable, net | (1,991 | ) | (4,292 | ) | (2,768 | ) | ||||
Inventory | (2,304 | ) | (1,912 | ) | (1,803 | ) | ||||
Deferred inventory costs | 57 | 1,238 | 4,616 | |||||||
Prepaid expenses and other assets | 163 | (325 | ) | (560 | ) | |||||
Accounts payable | (2,706 | ) | 1,431 | 992 | ||||||
Accrued liabilities | 903 | 1,483 | 4,350 | |||||||
Deferred revenue | 2,045 | (416 | ) | (8,466 | ) | |||||
Net cash used in operating activities | (25,371 | ) | (22,402 | ) | (2,119 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Purchase of property and equipment | (1,942 | ) | (1,360 | ) | (680 | ) | ||||
Purchase of short-term investments | — | (9,996 | ) | (4,998 | ) | |||||
Proceeds from maturities of short-term investments | 5,000 | 10,000 | — | |||||||
Investment in non-marketable securities | — | (1,250 | ) | — | ||||||
Net cash paid in purchase of business | (300 | ) | (2,217 | ) | — | |||||
Net cash provided by (used in) investing activities | 2,758 | (4,823 | ) | (5,678 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Proceeds from initial public offering, net | — | — | 57,059 | |||||||
Proceeds from exercise of stock options | 74 | 2,078 | 1,439 | |||||||
Taxes paid related to net share settlement of equity awards | (262 | ) | (151 | ) | — | |||||
Proceeds from employee stock purchase plan | 566 | 1,306 | 1,100 | |||||||
Proceeds from exercise of convertible preferred stock warrants | — | — | 716 | |||||||
Proceeds from long-term debt, net of issuance costs | 11,489 | — | 4,986 | |||||||
Repayment of long-term debt | (1,578 | ) | (2,852 | ) | (16,540 | ) | ||||
Net cash provided by financing activities | 10,289 | 381 | 48,760 | |||||||
Effect of exchange rate changes on cash and cash equivalents | (80 | ) | (167 | ) | 24 | |||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (12,404 | ) | (27,011 | ) | 40,987 | |||||
CASH AND CASH EQUIVALENTS—Beginning of year | 35,259 | 62,270 | 21,283 | |||||||
CASH AND CASH EQUIVALENTS—End of year | $ | 22,855 | $ | 35,259 | $ | 62,270 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||
Cash paid for interest | $ | 659 | $ | 65 | $ | 691 | ||||
Cash paid for income taxes | $ | 319 | $ | 179 | $ | 282 | ||||
NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||||
Issuance of common stock warrants in connection with debt financing | $ | 384 | $ | — | $ | — | ||||
Assets acquired in business combination for future consideration | $ | — | $ | 269 | $ | — | ||||
Conversion of convertible preferred stock to common stock | $ | — | $ | — | $ | 130,256 | ||||
Reclassification of warrant liability to convertible preferred stock upon exercise of warrants | $ | — | $ | — | $ | 4,285 | ||||
Reclassification of warrant liability to additional paid-in capital upon closing of initial public offering | $ | — | $ | — | $ | 48,274 | ||||
See notes to consolidated financial statements.
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MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Summary of Significant Accounting Policies
Business—Meru Networks, Inc. ("Meru") was incorporated in Delaware in January 2002. Meru and its wholly owned subsidiaries (collectively, the "Company") develop and market a virtualized wireless Local Area Network ("LAN") solution. The Company's solution is built around itsSystem Director Operating System which runs on its controllers and access points. The Company offers additional products designed to deliver network management, diagnostics and security. The Company also offers support services related to its products, professional services, and training. Products and services are sold through value added resellers, and distributors, as well as the Company's sales force.
Reverse Stock Split—In March 2010, the Company's board of directors approved a 13-for-1 reverse stock split of the Company's common stock. All common stock data and stock option information in this report have been adjusted to reflect the reverse split. In addition, any reference to the conversion ratios of the Company's Series A-1, B, C, D and E convertible preferred stock reflect the effect of the reverse split.
Initial Public Offering—On March 30, 2010, the Company sold 3,575,000 shares of common stock at a price of $15.00 per share in an initial public offering ("IPO"). The shares began trading on the NASDAQ Global Market on March 31, 2010. Also on March 31, 2010, the Company's underwriters exercised their overallotment option to purchase another 658,017 shares of common stock. As part of the offering, 811,784 shares of common stock, as converted, were also sold by existing shareholders at $15.00 per share. Included in the amounts sold by the existing shareholders were 795,836 shares of common stock which were converted from 8,770,054 shares of convertible preferred stock immediately prior to the IPO. The $59.1 million in proceeds, net of underwriting discount and commission, from the IPO were received on April 6, 2010, which was the closing date of the offering. Upon the closing of the offering, all outstanding shares of convertible preferred stock converted into common stock at each series of convertible preferred stock's respective conversion rate as adjusted for the 13-for-1 reverse stock split and shares of convertible preferred stock are no longer authorized to be issued. The convertible preferred stock converted into 10,390,055 shares of common stock. Concurrently, the Company increased the number of authorized common stock to 150,000,000 shares and authorized 5,000,000 shares of preferred stock, both with a par value of $0.0005 per share.
Basis of Presentation—These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of Meru and its wholly owned subsidiaries. The Company has wholly owned subsidiaries in India, Japan, Netherlands, Canada, Singapore, United Kingdom, Hong Kong, Germany and Sweden. These subsidiaries use their local currency as their functional currency. All intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
Use of Estimates—The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include implicit service periods for revenue recognition, litigation and settlement costs, other loss contingencies, sales returns and allowances, allowance for doubtful accounts, inventory valuation, reserve for warranty costs, valuation of deferred tax assets, fair value of common stock, stock-based compensation expense, fair value of warrants and fair value of earn-out consideration. The Company bases its estimates on
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MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
historical experience and also on assumptions that it believes are reasonable. The Company assesses these estimates on a regular basis; however, actual results could materially differ from those estimates.
Certain Significant Risks and Uncertainties—The Company is subject to certain risks and uncertainties that could have a material and adverse effect on the Company's future financial position or results of operations, which risks and uncertainties include, among others: it may incur operating losses in the future which would result in lower cash balances on hand, any inability of the Company to raise additional funds, it has a limited operating history, it may experience fluctuations in its revenues and operating results, any inability of the Company to compete in a rapidly evolving market and to respond quickly and effectively to changing market requirements, any inability of the Company to increase market awareness of its brand and products and develop and expand its sales channels, the continued development of demand for wireless networks, its long and unpredictable sales cycle, declining average sales prices for its products, varying gross margins of its products and services, any inability of the Company to forecast customer demand accurately in making purchase decisions, its reliance on channel partners to generate a substantial majority of its revenues and the potential failure of these partners to perform, any inability of the Company to protect its intellectual property rights, claims by others that the Company infringes their proprietary technology, new or modified regulations related to its products, and any inability of the Company to raise additional funds in the future.
Concentration of Supply Risk—The Company relies on third parties to manufacture its products, and depends on them for the supply and quality of its products. Quality or performance failures of the Company's products or changes in its manufacturers' financial or business condition could disrupt the Company's ability to supply quality products to its customers and thereby have a material and adverse effect on its business and operating results. Some of the components and technologies used in the Company's products are purchased and licensed from a single source or a limited number of sources. The loss of any of these suppliers may cause the Company to incur additional transition costs, result in delays in the manufacturing and delivery of its products, or cause it to carry excess or obsolete inventory or redesign its products. The Company relies on a third party for the fulfillment of its customer orders, and the failure of this third party to perform could have an adverse effect upon the Company's reputation and its ability to distribute its products, which could adversely affect the Company's business.
Concentration of Credit Risk—Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company maintains its cash, cash equivalents and short-term investments in fixed-income securities with financial institutions and invests in only high-quality credit instruments. Deposits held with banks may exceed the amount of insurance provided on such deposits.
Credit risk with respect to accounts receivable in general is diversified due to the number of different entities comprising the Company's customer base and their location throughout the world. The Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains reserves for estimated potential credit losses. As of December 31, 2012, three distributor customers accounted for 68% of the Company's net accounts receivable. As of December 31, 2011, one distributor customer accounted for 31% of the Company's net accounts receivable. As of December 31, 2012 and 2011, the allowance for doubtful accounts was $14,000 and $0.1 million, respectively.
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MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
No end customer accounted for more than 10% of the Company's net revenues in the years ended December 31, 2012, 2011 or 2010. The Company's channel partners representing greater than 10% of revenues for the periods presented were as follows (in percentages):
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Major Channel Partners | 2012 | 2011 | 2010 | |||||||
Westcon Group, Inc. | 25 | % | 29 | % | 34 | % | ||||
Siracom, Inc. | 19 | 11 | * | |||||||
Catalyst Telecom, Inc. | 13 | 13 | 12 | |||||||
Ingram Micro Inc. | 11 | * | * | |||||||
Cash Equivalents and Short-Term Investments—The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents may consist of cash on hand, balances with banks, and highly liquid investments in money market funds, commercial paper, government securities, certificates of deposit and corporate debt securities. Short-term investments consist of government securities with original maturities beyond 90 days. Short-term investments are carried at fair value based on quoted market prices with unrealized gains and losses included in accumulated other comprehensive loss in stockholders' equity.
Foreign Currency—The Company's non-U.S. subsidiaries in India, Japan, Netherlands, Canada, Singapore, United Kingdom, Hong Kong, Germany and Sweden use the local currency as their functional currency. The assets and liabilities of the non-U.S. subsidiaries are, therefore, translated into U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments recorded to a separate component of accumulated other comprehensive loss within stockholders' equity. Income and expense accounts are translated at average exchange rates during the year. Transaction gains and losses were not material during the years ended December 31, 2012, 2011 and 2010.
Inventory—Inventory is stated at the lower of cost or market value. Inventory is determined to be salable based on a demand forecast within a specific time horizon, generally eighteen months or less. Inventory in excess of salable amounts and inventory which is considered obsolete based upon changes in existing technology is written off. At the point of loss recognition, a new lower cost basis for that inventory is established and subsequent changes in facts and circumstances do not result in the restoration or increase in that new cost basis.
Channel Inventory—Products shipped to distributors are considered channel inventory until acceptance provisions are met and return rights lapse. The Company includes channel inventory within inventory on the consolidated balance sheets.
Advertising Costs—The Company expenses advertising costs as incurred. The Company incurred advertising costs of $0.7 million, $28,000, and $22,000 during the years ended December 31, 2012, 2011 and 2010, which is included within sales and marketing expense on the consolidated statements of operations.
81
MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
Property and Equipment—Property and equipment, including leasehold improvements, is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three to five years. Internal test units are transferred from inventory at the stated cost and are amortized over the estimated service life of one year from the date of transfer. Leasehold improvements are amortized over the shorter of the estimated useful life of the improvements or the lease term.
Accounting for Internal-Use Computer Software—The Company capitalizes certain external and internal costs, including internal payroll costs, incurred in the connection with the development or acquisition of software for internal use. These costs are capitalized when the Company has entered the application development stage and ceases when the software is substantially complete and is ready for its intended use. The Company purchased and capitalized costs of $19,000, $24,000 and $94,000 during the years ended December 31, 2012, 2011 and 2010. Software is amortized using the straight-line method over the estimated useful life of three years.
Revenue Recognition—The Company's revenues are derived primarily from hardware and software products and related support and services. The Company often enters into multiple deliverable arrangements and, as such, the elements of these arrangements are separated and valued based on their relative fair value. The majority of the Company's products are networking communications hardware with embedded software components such that the software functions together with the hardware to provide the essential functionality of the product. Therefore, the Company's hardware deliverables are considered to be non-software elements and are excluded from the scope of industry-specific software revenue recognition guidance. The Company's products revenues also include revenues from the sale of stand-alone software products. Stand-alone software products may operate on the Company's networking communications hardware, but are not considered essential to the functionality of the hardware. Sales of stand-alone software generally include a perpetual license to the Company's software. Sales of stand-alone software continue to be subject to the industry-specific software revenue recognition guidance. Product support typically includes software updates on a when and if available basis, telephone and internet access to the Company's technical support personnel and hardware support. Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period.
Certain arrangements with multiple deliverables continued to have stand-alone software elements that are subject to the existing software revenue recognition guidance along with non-software elements that are subject to the amended revenue accounting guidance. The revenue for these multiple deliverable arrangements is allocated to the stand-alone software elements as a group and the non-software elements based on the relative selling prices of all of the elements in the arrangement using the fair value hierarchy in the amended revenue accounting guidance.
For sales of stand-alone software after December 31, 2010 and for all transactions entered into prior to January 1, 2011, the Company recognizes revenue based on software revenue recognition guidance. Under the software revenue recognition guidance, the Company uses the residual method to recognize revenue when a product agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence ("VSOE") of the fair value of all undelivered elements exists. The Company establishes VSOE for these arrangements based on sales of multi-year support services arrangements on a stand-alone basis. The normal pricing for multi-year support services arrangements was based on the normal price of a one year support services arrangement
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
multiplied by the number of years of support services which was then adjusted for the time value of money and the decreased sales and fulfillment effort for support service periods of longer than one year. In the majority of the Company's contracts, the only element that remains undelivered at the time of delivery of the product is support services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the contract fee is recognized as products revenues. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is generally deferred and recognized when delivery of those elements occurs or when fair value can be established. When the undelivered element for which the Company does not have VSOE is support, revenue for the entire arrangement is bundled and recognized ratably over the support period.
VSOE for elements of an arrangement is based upon the normal pricing and discounting practices for those services when sold separately. In determining VSOE, the Company requires that a substantial majority of the selling prices for an element falls within a reasonably narrow pricing range, generally evidenced by a substantial majority of such historical stand-alone transactions falling within a reasonably narrow range of the median rates. In addition, the Company considers major service groups, geographies, customer classifications, and other variables in determining VSOE.
Third-party evidence ("TPE") of selling price is determined based on competitor prices for similar deliverables when sold separately. The Company establishes estimated selling prices ("ESP") for support services based on its normal pricing and discounting practices for support services. This ESP analysis requires that a substantial majority of the support services selling prices fall within a reasonably narrow pricing range, which is typically broader than the range used to evidence VSOE. The Company believes that this is the price that it would sell support services if support services were regularly sold on a stand-alone basis. However, the Company is typically not able to determine TPE for its products or services. Generally, the Company's go-to-market strategy differs from that of its peers and the Company's offerings contain a significant level of differentiation such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company is unable to reliably determine what similar competitor products' selling prices are on a stand-alone basis.
When the Company is unable to establish the selling price of its non-software elements using VSOE or TPE, the Company uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to, pricing policies, internal costs, gross margin objectives, competitive landscapes, geographies, customer classes and distribution channels.
The Company regularly reviews VSOE and ESP and maintains internal controls over the establishment and updates of these estimates. There was not a material impact during 2012, nor does the Company currently expect a material impact in the near term, from changes in VSOE or ESP.
The Company recognizes revenues when all of the following have occurred: (1) the Company has entered into a legally binding arrangement with a customer; (2) delivery has occurred; (3) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties; and (4) collection is probable. The sales prices for the Company's products are typically considered to be fixed or determinable at the inception of an arrangement. Delivery is considered to have occurred when product title has transferred to the customer, when the service or training has been provided, when software is delivered, or when the support period has lapsed. To the extent that agreements contain
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MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
rights of return or acceptance provisions, revenues are deferred until the acceptance provisions or rights of return lapse.
The majority of the Company's sales are generated through its distributors. Revenues from distributors with return rights are recognized when the distributor reports that the product has been sold through, provided that all other revenue recognition criteria have been met. The Company obtains sell-through information from these distributors. For transactions with all other distributors, the Company does not provide for rights of return and recognizes products revenues at the time of shipment, assuming all other revenue recognition criteria have been met.
Prior to April 1, 2008, the Company allowed some customers to receive support services outside of the contractual terms. Accordingly, the Company deferred and recognized revenues on all transactions, except for transactions with one customer, ratably over the economic life of the products sold as the Company determined that this was the best estimate of the period of time over which the Company provided these support services. The one exception related to a customer for which the Company established VSOE for the related support contracts during the year ended December 31, 2007. Accordingly, the Company began to account for these support contracts as separate elements from the hardware sales.
The Company estimated the economic life of the hardware to be three and a half years based on several factors such as: (1) the history of technology development of related products; (2) a Company-specific evaluation of product life cycles from both a sales and product development perspective; and (3) information on customer usage of the Company's products.
On April 1, 2008, the Company ceased providing support services outside of the contractual terms. As a result, the Company began recognizing ratable revenues from sales in which VSOE for the related support services had not been established over the contractual support period and not the three and a half year economic life of the product. Also on April 1, 2008, the Company established VSOE for its support services to distributors. Accordingly, the Company recognized revenues from sales to distributors after this date and prior to January 1, 2011 using the residual method, assuming all revenue recognition criteria were met.
On January 1, 2009, the Company established VSOE for all its remaining support services. Accordingly, the Company recognized revenues for other than support services for all sales made on and after January 1, 2009 and prior to January 1, 2011 using the residual method, assuming all revenue recognition criteria were met.
Revenues for support services are recognized on a straight-line basis over the support period, which typically ranges from one year to five years.
Shipping charges billed to customers are included in products revenues and the related shipping costs are included in costs of products revenues.
Impairment of Long-Lived Assets—The Company evaluates its long-lived assets for indicators of possible impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if the carrying amounts of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would be measured based on the excess carrying value of the asset over the
84
MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
asset's estimated fair value. The Company has not written down any of its long-lived assets as a result of impairment during the years ended December 31, 2012, 2011 or 2010.
Goodwill—Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company reviews goodwill for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. In August 2011, the Financial Accounting Standard Board ("FASB") approved an accounting standards update intended to simplify how an entity tests goodwill for impairment. The Company adopted this accounting standards update in the quarter ended June 30, 2012 for its annual impairment test. The amendment allows entities an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step quantitative goodwill impairment test. If, after assessing the totality of circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is required to perform the two-step impairment test. It does not require an entity to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying value. However, an entity also has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. The Company has determined that it has a single reporting unit for purposes of performing its goodwill impairment test. As the Company uses the market approach to assess impairment, its common stock price is an important component of the fair value calculation. If its stock price continues to experience significant price and volume fluctuations, this will impact the fair value of the reporting unit, which can lead to potential impairment in future periods. The Company performed the annual impairment test in June 2012 and determined that the goodwill was not impaired. As of December 31, 2012, the Company had not identified any factors that indicated there was an impairment of its goodwill and determined that no additional impairment analysis was required.
Fair Value of Financial Instruments—Due to their short-term nature, the carrying amounts of the Company's financial instruments reported in the consolidated financial statements, which include cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of the long-term debt approximates fair value.
Warrant Liability—Prior to the IPO, the Company accounted for its freestanding warrants for shares of the Company's convertible preferred stock and warrants to purchase shares of the Company's common stock as liabilities at fair value on the consolidated balance sheets because some of the warrants were potentially redeemable. The warrants were remeasured at each balance sheet date with any changes in fair value being recognized as a component of other income (expense), net on the consolidated statements of operations. Upon the closing of the IPO in April 2010, these warrants were amended to remove the cash redemption feature and other variable terms, remeasured and the related fair value was reclassified to additional paid-in capital.
Income Taxes—As part of the process of preparing the Company's consolidated financial statements, the Company is required to estimate its taxes in each of the jurisdictions in which it operates. The Company estimates actual current tax exposure together with assessing temporary
85
MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
differences resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in the Company's consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company's consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of the Company's deferred tax assets is dependent on future taxable income against which these deductions, losses, and credits can be utilized.
The Company must assess the likelihood that the Company's deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. Management judgment is required in determining the Company's provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against the net deferred tax assets. The Company recorded a full valuation allowance as of December 31, 2012, 2011 and 2010. Based on the available evidence, the Company believes it is more likely than not that it will not be able to utilize its deferred tax assets in the future. The Company intends to maintain valuation allowances until sufficient evidence exists to support the reversal of the valuation allowances. The Company makes estimates and judgments about its future taxable income that are based on assumptions that are consistent with its plans. Should the actual amounts differ from the Company's estimates, the carrying value of the Company's deferred tax assets could be materially impacted.
The Company recognizes in the financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There are no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date.
Stock-Based Compensation—Compensation costs related to employee stock options that were either granted or modified during the years ended December 31, 2012, 2011 and 2010 are based on the fair value of the awards on the date of grant or modification, net of estimated forfeitures. The Company determines the grant date fair value of the awards using the Black-Scholes option-pricing model. The Company recognizes stock-based compensation expense on a straight-line basis over the vesting period of the respective option grants.
The Company accounts for stock options issued to non-employees based on the fair value of the awards also determined using the Black-Scholes option-pricing model. The fair value of stock options granted to non-employees is remeasured as the stock options vest, and the resulting change in value, if any, is recognized in the Company's consolidated statements of operations during the period the related services are rendered.
Research and Development Costs—Research and development costs are expensed as incurred.
Software Development Costs—The costs to develop software have not been capitalized as the Company believes its current software development process is essentially completed concurrent with the establishment of technological feasibility.
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MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Business and Summary of Significant Accounting Policies (Continued)
Accounts Receivable—Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on the Company's assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer's ability to pay. During the years ended December 31, 2012 and 2011, the Company recorded bad debt expense of $44,000 and $143,000. There was no bad debt expense during the year ended December 31, 2010. The Company collected previously written-off bad debt expense of $54,000 and $61,000 during the years ended December 31, 2012 and 2010. Write-offs of previously reserved bad debts were approximately $110,000, $375,000 and $3,000 during the years ended December 31, 2012, 2011 and 2010.
Comprehensive Loss—Comprehensive loss is comprised of net loss and other comprehensive income (loss). For the Company, other comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains and losses on short-term investments. Total comprehensive loss for all periods presented has been disclosed in the consolidated statements of comprehensive loss.
Warranty—The Company provides a warranty on product sales and estimated warranty costs are recorded during the period of sale. The Company establishes warranty reserves based on estimates of product warranty return rates and expected costs to repair or to replace the products under warranty. The warranty provision is recorded as a component of costs of products revenues in the consolidated statements of operations.
Accrued warranty, which is included in accrued liabilities on the consolidated balance sheets, is summarized for the years ended December 31, 2012, 2011 and 2010 as follows (in thousands):
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Accrued warranty balance—beginning of period | $ | 662 | $ | 417 | $ | 194 | ||||
Warranty costs incurred | (182 | ) | (118 | ) | (125 | ) | ||||
Provision for warranty | 390 | 363 | 348 | |||||||
Accrued warranty balance—end of period | $ | 870 | $ | 662 | $ | 417 | ||||
Loss Contingencies—The Company is or has been subject to proceedings, lawsuits and other claims arising in the ordinary course of business. The Company evaluates contingent liabilities, including threatened or pending litigation, for potential losses. If the potential loss from any claim or legal proceedings is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Because of uncertainties related to these matters, accruals are based upon the best information available. For potential losses for which there is a reasonable possibility (meaning the likelihood is more than remote but less than probable) that a loss exists, the Company will disclose an estimate of the potential loss or range of such potential loss or include a statement that an estimate of the potential loss cannot be made. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation and may revise its estimates, which could materially impact its consolidated financial statements.
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MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Recently Issued Accounting Pronouncements
In July 2012, the FASB issued an update for Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. The update simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is "more likely than not" that the asset is impaired. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company will adopt this standard in the first quarter of 2013 and does not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations or cash flows.
3. Inventory
Inventory as of December 31, 2012 and 2011 is as follows (in thousands):
| | December 31, 2012 | December 31, 2011 | |||||
|---|---|---|---|---|---|---|---|
Finished goods | $ | 8,264 | $ | 5,670 | |||
Channel inventory | 588 | 878 | |||||
Inventory | $ | 8,852 | $ | 6,548 | |||
4. Net Loss Per Share of Common Stock
The Company's basic net loss per share of common stock is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The weighted-average number of shares of common stock used to calculate the Company's basic net loss per share of common stock excludes stock awards prior to vesting and also those shares subject to repurchase related to stock options that were exercised prior to vesting as these shares are not deemed to be issued for accounting purposes until they vest. The diluted net loss per share of common stock is calculated by giving effect to all potential common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of the diluted shares outstanding calculation, convertible preferred stock, stock awards and options to purchase common stock, common stock subject to repurchase, warrants to purchase convertible preferred stock and warrants to purchase common stock are considered to be common stock equivalents. In periods in which the Company has reported a net loss, the common stock equivalents have been excluded from the calculation of diluted net loss per share of common stock as their effect is antidilutive.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Net Loss Per Share of Common Stock (Continued)
The following outstanding shares of common stock and common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Stock awards and stock options to purchase common stock* | 4,498,964 | 3,958,951 | 2,787,933 | |||||||
Common stock subject to repurchase | — | 104 | 2,996 | |||||||
Common stock warrants | 3,192,250 | 2,723,957 | 4,033,452 | |||||||
5. Fair Value of Financial Instruments
As a basis for determining the fair value of certain of the Company's assets and liabilities, the Company established a three-tier value hierarchy which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data that requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company's financial assets that are measured at fair value on a recurring basis consist of cash equivalents and short-term investments. The Company's liability that is measured at fair value on a recurring basis consists of an earn-out consideration in connection with the acquisition of Identity Networks, Inc., described below.
Level I instrument valuations are obtained from quotes for transactions in active exchange markets involving identical assets. Level II instrument valuations are obtained from readily-available pricing sources for comparable instruments. The Company's cash equivalents and short-term investments are valued using market prices on active markets (Level I) and less active markets (Level II). Pricing is provided by third party sources of market information obtained through the Company's investment advisors rather than models. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information it receives from advisors. The Company's Level II securities include cash equivalents and available-for-sale securities, which consisted primarily of certificates of deposit, corporate debt, and government agency and municipal debt securities from issuers with high quality credit ratings. The Company's investment advisors obtain pricing data from independent sources, such as Standard & Poor's, Bloomberg and Interactive Data Corporation, and rely on comparable pricing of other securities because the Level II securities it holds are not actively traded and have fewer observable transactions. The Company considers this the most reliable information available for the valuation of the securities. The Company had no transfers between Level I and Level II during the years ended December 31, 2012 and 2011.
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5. Fair Value of Financial Instruments (Continued)
The Company paid off its earn-out consideration liability during the year ended December 31, 2012. The Company's earn-out consideration liability as of December 31, 2011 was classified within Level III of the fair value hierarchy. Level III assets and liabilities are valued using unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level III assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
As of December 31, 2012, the Company's fair value hierarchy for its financial assets was as follows (in thousands):
| | December 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quoted Prices in Active Markets for Identical Instruments (Level I) | Significant Other Observable (Level II) | Significant Unobservable (Level III) | Total Fair Value | |||||||||
Assets: | |||||||||||||
Money market funds | $ | 15,084 | $ | — | $ | — | $ | 15,084 | |||||
As of December 31, 2011, the Company's fair value hierarchy for its financial assets and liabilities was as follows (in thousands):
| | December 31, 2011 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Quoted Prices in Active Markets for Identical Instruments (Level I) | Significant Other Observable (Level II) | Significant Unobservable (Level III) | Total Fair Value | |||||||||
Assets: | |||||||||||||
Money market funds | $ | 30,027 | $ | — | $ | — | $ | 30,027 | |||||
U.S. government securities | — | 5,000 | — | 5,000 | |||||||||
Liabilities: | |||||||||||||
Earn-out consideration liability | $ | — | $ | — | $ | 300 | $ | 300 | |||||
The following table provides a summary of changes in fair value of the Company's earn-out consideration liability measured at fair value using significant unobservable inputs (Level III) for the years ended December 31, 2012 and 2011 (in thousands):
| | Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | |||||
Fair value-beginning of period | $ | 300 | $ | — | |||
Fair value of earn-out at acqusition date | — | 369 | |||||
Adjustment to fair value | — | 31 | |||||
Earn-out consideration payment | (300 | ) | (100 | ) | |||
Fair value-end of period | $ | — | $ | 300 | |||
The valuation of the earn-out consideration is discussed in Note 6.
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5. Fair Value of Financial Instruments (Continued)
At December 31, 2012 and 2011, the Company had zero and $5.0 million, respectively, of U.S. government securities which mature in less than one year and approximated cost.
6. Acquisition of Identity Networks
On August 31, 2011, the Company acquired all of the outstanding shares of Identity Networks ("Identity"), a privately-owned provider of complete guest and device access management solutions located in the United Kingdom. Under the terms of the share purchase agreement, at closing, the Company paid approximately $2.0 million, net of cash acquired, to Identity shareholders. An additional $0.1 million was paid to Identity shareholders in October 2011 due to a working capital adjustment. In addition, the Company agreed to pay up to $0.4 million to the former shareholders of Identity within six months of the acquisition date as earn-out consideration based on Identity meeting certain contractually agreed-upon development milestones, of which $100,000 was paid in November 2011, $150,000 was paid in January 2012 and the final payment of $150,000 was paid in April 2012. The Company assessed the probability of the earn-out milestones being met and included the estimated fair value of those milestones, as adjusted for the time-value of money, in the acquisition price.
The Company recorded the total acquisition price as follows (in thousands):
Cash | $ | 2,117 | ||
Contingent consideration at estimated fair value on closing date | 369 | |||
Total | $ | 2,486 | ||
The allocation of the acquisition price for net tangible and intangible assets was as follows (in thousands):
Net tangible assets | $ | 38 | ||
Identifiable intangible assets: | ||||
Developed technology | 630 | |||
Customer relationships | 160 | |||
Goodwill | 1,658 | |||
Total | $ | 2,486 | ||
The developed technology asset is attributable to products which have reached technological feasibility. The customer relationships asset is attributable to the Company's ability and intent to sell existing in process and future versions of the acquired products to the existing customers of Identity. The value of the identified intangible assets was determined by discounting the estimated net future cash flows from the acquired products and customer agreements based on valuation technologies accepted in the technology industry. The Company is amortizing the developed technology and customer relationships assets on a straight-line basis over their estimated useful lives of three and two years, respectively.
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets and is not deductible for tax purposes. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and identified intangible assets was the acquisition of an assembled workforce of experienced engineers, synergies in
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6. Acquisition of Identity Networks (Continued)
products, technologies, skill sets, operations, customer base and organizational cultures that can be leveraged to enable the Company to build an enterprise greater than the sum of its parts.
The Company has included the financial results of Identity in the Company's consolidated financial statements commencing at the acquisition date. No pro forma information was presented based on the determination that the acquisition is not significant to the Company's consolidated financial statements.
7. Intangible Assets
Intangible assets acquired are accounted for based on the fair value of assets purchased and are amortized over the period in which economic benefit is estimated to be received. As of December 31, 2012, identifiable intangible assets were as follows (in thousands):
| | As of December 31, 2012 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Estimated Useful Life | Gross Value | Accumulated Amortization | Net Value | ||||||||
Developed technology | 3 years | $ | 630 | $ | (280 | ) | $ | 350 | ||||
Customer relationships | 2 years | 160 | (107 | ) | 53 | |||||||
Total | $ | 790 | $ | (387 | ) | $ | 403 | |||||
As of December 31, 2011, identifiable intangible assets were as follows (in thousands):
| | As of December 31, 2011 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Estimated Useful Life | Gross Value | Accumulated Amortization | Net Value | ||||||||
Developed technology | 3 years | $ | 630 | $ | (70 | ) | $ | 560 | ||||
Customer relationships | 2 years | 160 | (27 | ) | 133 | |||||||
Total | $ | 790 | $ | (97 | ) | $ | 693 | |||||
The Company recorded amortization expense related to these identified intangible assets in the consolidated statements of operations as follows (in thousands):
| | Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | |||||
Costs of products revenues | $ | 210 | $ | 70 | |||
Sales and marketing | 80 | 27 | |||||
Total amortization expense | $ | 290 | $ | 97 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Intangible Assets (Continued)
As of December 31, 2012, the estimated aggregate future amortization expense in future years is as follows (in thousands):
Fiscal Years: | ||||
2013 | $ | 263 | ||
2014 | 140 | |||
Total | $ | 403 | ||
8. Cost Method Investments
During the year ended December 31, 2011, the Company invested $1.3 million in a company which is developing value-added applications that are designed to allow its customers to achieve greater benefit from wireless networks such as those offered by the Company. The investment of $1.3 million is included in other assets. The investee was co-founded by Dr. Vaduvur Bharghavan, a co-founder of the Company and a member of the Company's board of directors prior to the Company's 2012 shareholder meeting. Dr. Bharghavan was not nominated for re-election and is no longer a member of the Company's board of directors as of May 2012.
The Company uses the cost method to account for this investment due to (i) the Company's investment representing approximately 13% equity ownership of the investee (ii) Dr. Bharghavan, who is the co-founder of the investee, transitioned from his day to day role as the Company's Chief Technology Officer during the year ended December 31, 2011, and (iii) Dr. Bharghavan, who was a member of the Company's board of directors, ceased receiving any cash compensation for his role as an executive of the Company as of May 2011. Dr. Vaduvur Bharghavan is no longer a member of the Company's board of directors as of May 2012. The Company does not have the ability to exercise significant influence over the investee's operating and financial policies.
Equity investments, especially equity investments in private companies are inherently risky. Many factors, including technical and product development challenges, market acceptance, competition, additional funding availability and the overall economy, could cause the investment to be impaired. The Company monitors the indicators of impairment. In the event that the fair value of the investment is below its carrying value and the impairment is other-than-temporary, the Company writes down the investment to its fair value. there were no indicators of impairment in 2012 or 2011. The Company has not elected the fair value option for this investment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Property and Equipment, net
Property and equipment, net as of December 31, 2012 and 2011 is as follows (in thousands):
| | December 31, 2012 | December 31, 2011 | |||||
|---|---|---|---|---|---|---|---|
Computer equipment and software | $ | 4,890 | $ | 3,952 | |||
Furniture and fixtures | 133 | 94 | |||||
Leasehold improvements | 1,396 | 500 | |||||
Property and equipment, gross | 6,419 | 4,546 | |||||
Less accumulated depreciation and amortization | (3,946 | ) | (3,070 | ) | |||
Property and equipment, net | $ | 2,473 | $ | 1,476 | |||
Depreciation expense was $0.9 million, $0.6 million and $0.6 million during the years ended December 31, 2012, 2011 and 2010.
10. Accrued Liabilities
Accrued liabilities as of December 31, 2012 and 2011 consist of the following (in thousands):
| | December 31, 2012 | December 31, 2011 | |||||
|---|---|---|---|---|---|---|---|
Accrued compensation and benefits | $ | 4,757 | $ | 4,310 | |||
Accrued commissions | 2,341 | 1,882 | |||||
Accrued inventory | 599 | 163 | |||||
Sales returns reserve | 161 | 125 | |||||
Accrued professional service fees | 66 | 547 | |||||
Reserve for product warranty | 870 | 662 | |||||
Income tax payable | 290 | 478 | |||||
Accrued employee stock purchase plan | 195 | 274 | |||||
Earn-out consideration for Identity Networks | — | 300 | |||||
Other | 3,774 | 3,653 | |||||
| $ | 13,053 | $ | 12,394 | ||||
Accrued compensation and benefits as of December 31, 2011 included approximately $0.8 million related to a transitional employment agreement with the Company's former Chief Executive Officer in 2011.
11. Borrowings
In June 2012, the Company entered into a loan and security agreement (the "VLL Agreement"), with Venture Lending and Leasing VI, Inc. ("VLL"), that provided the Company with a loan for up to $12 million. The Company received proceeds of $11.7 million, less issuance costs paid of $162,000. The VLL Agreement is collateralized by substantially all assets and intellectual property of the Company and contains various covenants that include limitations on the Company's ability to obtain additional debt and acquire, merge or consolidate with other businesses. As of December 31, 2012, the Company was in compliance with all of its loan covenants.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Borrowings (Continued)
The VLL Agreement bears interest at an annual fixed rate of 12%, and is payable in 39 equal installments, including principal and interest, of $369,405 per month. In addition, the Company is required to make a payment of $2.0 million at the earlier occurrence of a change of control or September 1, 2015, which is the maturity date of the VLL Agreement. The Company recorded $0.5 million as additional interest expense during 2012 relating to the $2.0 million payment and will continue to accrue the balance of the $2.0 million cash payment over the remaining term of the loan using the effective interest rate method, unless a change of control occurs, at which time the full amount will become due and payable.
The Company may voluntarily prepay all but not less than the total outstanding loan amount at any time as long as a default has not occurred; however, the loan carries prepayment penalties in the amount of 100% of the remaining scheduled but unpaid interest through the maturity date, if the prepayment occurs before January 1, 2014. On or after January 1, 2014, the prepayment penalty is equal to 80% of the remaining scheduled but unpaid interest through the maturity date.
In connection with the VLL Agreement, the Company issued VLL a warrant to purchase 468,293 shares of the Company's common stock. The warrant was exercisable upon issuance, has an exercise price of $2.05 per share, and expires on June 1, 2017. Upon issuance, the relative fair value of the warrant was recorded as a debt discount on the consolidated balance sheet in the amount of $384,000. See further discussion of the valuation of the warrant in Note 13. In addition, debt issuance costs paid of $162,000 were also recorded as a debt discount. The aggregate total of the debt discounts of $546,000 is being amortized to interest expense over the repayment period for the loan using the effective interest rate method. The Company recorded $169,000 to interest expense, net related to the debt discounts during the year ended December 31, 2012. As of December 31, 2012, the remaining unamortized amount of the debt discounts was $377,000, of which $210,000 was classified as a current debt discount.
The scheduled principal payments for the Company's long-term debt as of December 31, 2012 are as follows (in thousands):
| | Long-term Debt | |||
|---|---|---|---|---|
Fiscal Years: | ||||
2013 | $ | 3,407 | ||
2014 | 3,839 | |||
2015 | 2,827 | |||
Total | 10,073 | |||
Less: unamortized discounts | (377 | ) | ||
Less: current portion | (3,197 | ) | ||
Long-term debt, net of current portion | $ | 6,499 | ||
In January 2007, the Company entered into a debt agreement that provided the Company with up to $6.5 million in debt financing in the form of a loan of $1.5 million and a working capital line of credit of $5.0 million. This debt agreement was later amended to increase the working capital line of credit up to $7.0 million based on eligible accounts receivable. The Company also entered into a term agreement to provide an additional loan of $15.0 million. The Company paid off this debt in 2011. All
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Borrowings (Continued)
of the debt agreements are collateralized by substantially all of the Company's assets. In connection with these loan agreements in November 2007, the Company issued to the lender a warrant to purchase a total of 76,922 shares of the Company's common stock. The warrant was exercisable upon issuance, had an exercise price of $8.32 per share, and was fully exercised utilizing a cashless exercise provision in 2010. Upon issuance, the relative fair value of the warrant was recorded as a debt discount on the consolidated balance sheet in the amount of $456,000. The debt discount was amortized to interest expense over the repayment period for the loan. The amortization expense related to the debt discount for the bank borrowings was $44,000 and $0.1 million during the years ended December 31, 2011 and 2010.
The Company drew $6.9 million on the line of credit in March 2012 and paid off the $6.9 million outstanding under the line of credit in May 2012. On July 31, 2012, the Company renewed the line of credit for twelve months. The debt agreement is collateralized by substantially all of the assets and intellectual property of the Company, with first priority liens relative to the VLL Agreement, on accounts receivable, loan proceeds and the Company's cash. As of December 31, 2012, the working capital line of credit bore interest at the lenders' prime rate. The maximum amount available under this line of credit is based on eligible accounts receivable up to a maximum of $7.0 million, subject to an overall aggregate total outstanding borrowing limit under the VLL Agreement of $20.0 million. The VLL Agreement also provides that the Company is limited to borrowings under the line of credit for a period of no more than three business days before and after the end of the quarter, until the Company is able to achieve two consecutive quarters of increasing profitability of at least $1.0 million per quarter (based on non-GAAP income, excluding stock based compensation and other non-cash items), so long as the Company maintains such profitability and subject to the overall aggregate borrowing limit of $20.0 million. As of December 31, 2012 and 2011, the total amount outstanding under the line of credit was zero. As of December 31, 2012 and 2011, the Company had unused amounts under the line of credit of up to $7.0 million.
12. Commitments and Contingencies
Legal Matters
On April 13, 2012, the Company and Extricom Ltd. ("Extricom") entered into a settlement, license and release agreement (the "Extricom Agreement"). Pursuant to the Extricom Agreement, the Company and Extricom each agreed to:
As part of the Extricom Agreement, the Company paid Extricom $2.4 million in April 2012.
In evaluating the accounting treatment for this transaction, the Company identified the following specific items the Company received from the Extricom Agreement: (1) release of past infringement claims and (2) a license to Extricom technology. The Company does not believe the Extricom license will provide future value as the Company does not plan to utilize the underlying technology in any future product development. In addition, the Extricom Agreement released and avoided certain
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Commitments and Contingencies (Continued)
litigation for the Company, but provided no other future benefits to the Company. Therefore, the Company expensed the full $2.4 million in the first quarter of the year ended December 31, 2012.
On June 13, 2011, the Company entered into a Patent Cross License Agreement (the "Motorola License Agreement") with Motorola Solutions, Inc., a Delaware corporation, and its affiliates, including Symbol Technologies, Inc., Wireless Valley Communications, Inc., and AirDefense, Inc. (collectively "Motorola"). Pursuant to the Motorola License Agreement, the Company and Motorola each agreed to:
As part of the Motorola License Agreement, the Company agreed to pay Motorola $7,250,000 on or before July 1, 2011.
In evaluating the accounting treatment for this transaction, the Company identified the following specific items the Company received from the Motorola License Agreement: (1) release of past infringement claims, (2) covenant by Motorola not to sue, and (3) limited license to certain Motorola technology. The Company does not believe this Motorola License Agreement will provide future value as the Company does not plan to utilize the underlying technology in any future product development or sales. The Motorola License Agreement released and avoided certain potential litigation for the Company, but provided no other future benefits to the Company. Therefore, the Company expensed the full $7.3 million in the second quarter of the year ended December 31, 2011.
Operating Leases—The Company leases approximately 44,000 square feet office space for its headquarters in Sunnyvale, California under a noncancelable operating lease that expires in 2015. In addition, the Company leases approximately 35,000 square feet space for a research and development facility in Bangalore, India pursuant to an operating lease that expires in 2016, which is noncancelable prior to 2014. The Company has the option to renew the lease for an additional five years. The Company also leases office space for sales offices in multiple locations around the world under noncancelable operating leases that expire at various dates.
| | Operating Leases | |||
|---|---|---|---|---|
Fiscal Years: | ||||
2013 | $ | 1,446 | ||
2014 | 1,121 | |||
2015 | 132 | |||
Total | $ | 2,699 | ||
Rent expense related to these noncancelable operating leases was $2.1 million, $1.6 million, and $1.3 million for the years ended December 31, 2012, 2011 and 2010. Rent expense is recognized on a
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12. Commitments and Contingencies (Continued)
straight-line basis over the term of the lease. Other commitments as of December 31, 2012 totaled approximately $6.8 million and consisted of inventory and other non-cancelable purchase obligations, which are due within the next 12 months.
Litigation—The Company is subject to various claims arising in the ordinary course of business. Although no assurance may be given, the Company believes that it is not presently a party to any litigation of which the outcome, if determined adversely, would individually or in the aggregate be reasonably expected to have a material and adverse effect on the business, operating results, cash flows or financial position of the Company.
In May 2010, Extricom Ltd., filed suit against the Company in the Federal District Court of Delaware asserting infringement of U.S. Patent No. 7,697,549. The litigation was dismissed after the parties entered into a settlement, license and release agreement on April 13, 2012, in which the Company agreed to a one-time payment of approximately $2.4 million to Extricom Ltd., and the Company and Extricom Ltd. each agreed to a cross-license of each other's patents in exchange for a full release and settlement of the litigation.
In October 2010, a complaint was filed by EON Corp. IP Holdings LLC against the Company as well as numerous other defendants, in the United States District Court for the Eastern District of Texas, Marshall Division. The complaint alleges infringement by the defendants of U.S. Patent 5,592,491. The Company's initial attempts at informally resolving the action were unsuccessful. The defendants filed a joint motion to transfer the case to the Northern District of California, and on January 9, 2012, the Texas court granted the motion to transfer. On August 13, 2012, the Company answered EON's second amended complaint, denying the allegations, and asserting that the EON patent is not infringed and is invalid. The case is currently pending before the Honorable Jon S. Tigar. At this time, the Company is unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on the Company's business, results of operations, cash flows and financial position.
In May 2011, Linex Technologies, Inc. filed suit against the Company and Hewlett-Packard, Apple, Aruba Networks, and Ruckus Wireless in the United States District Court for the District of Delaware, asserting infringement of U.S. Patents 6,757,322 ("'322 patent") and RE42,219 ("'219 patent"). On June 2, 2011, the United States International Trade Commission ("ITC") instituted a Section 337 Investigation, based on allegations that Linex's '322 and '219 patents are infringed by 802.11n products imported and sold by the Company—as well as by Hewlett-Packard, Apple, Aruba Networks, and Ruckus Wireless. The case in Delaware was stayed due to the pending ITC Investigation. After Linex voluntarily terminated the Investigation, Linex restarted litigation in Delaware. The defendants filed a motion to transfer the case to the Northern District of California, which was granted on January 7, 2013. The case is now pending before the Honorable Claudia Wilken. At this time, the Company is unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on the Company's business, operating results, cash flows or financial position.
On August 15, 2012, ReefEdge Networks, LLC ("ReefEdge") filed separate suits against the Company and various other defendants, including, Cisco Systems, Aruba Networks, Dell Computers, and Ruckus Wireless in the United States District Court of Delaware, asserting infringement of U.S. Patent No. 6,633,761; U.S. Patent No. 6,975,864; and U.S. Patent No. 7,197,308. The Company filed its
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Commitments and Contingencies (Continued)
answer to the complaint on October 8, 2012. No case schedule has been set for this action. At this time, the Company is unable to determine the outcome of this matter and, accordingly, cannot estimate the potential financial impact this action could have on the Company's business, operating results, cash flows or financial position.
Third parties have from time to time claimed, and others may claim in the future that the Company has infringed their past, current or future intellectual property rights. These claims, whether meritorious or not, could be time-consuming, result in costly litigation, require expensive changes in the Company's methods of doing business or could require the Company to enter into costly royalty or licensing agreements, if available. As a result, these claims could harm the Company's business, operating results, cash flows and financial position.
Indemnifications—Under the indemnification provisions of the Company's standard sales contracts, the Company agrees to defend its customers against third-party claims asserting infringement of certain intellectual property rights, which may include patents, copyrights, trademarks, or trade secrets, and to pay any judgments entered on such claims. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customer under the agreement. However, certain agreements include indemnification provisions that could potentially expose the Company to losses in excess of the amount received under the agreement. To date, there have been no material claims under such indemnification provisions.
13. Warrants for Common Stock and Convertible Preferred Stock
Common Stock
As discussed in Note 11, the Company issued a warrant to purchase 468,293 shares of the Company's common stock in connection with the VLL Agreement entered into in June 2012. The warrant was exercisable upon issuance, has an exercise price of $2.05 per share, and expires on June 1, 2017. Upon issuance, the Company determined the fair value using the Black-Scholes option-pricing model with the following assumptions:
| | June 2012 | |||
|---|---|---|---|---|
Dividend rate | 0 | % | ||
Risk-free interest rate | 0.7 | % | ||
Expected life (in years) | 5 | |||
Expected volatility | 59.1 | % | ||
The relative fair value of the warrant was recorded as a debt discount on the consolidated balance sheet in the amount of $384,000. As of December 31, 2012, this warrant has not been exercised and was still outstanding.
In 2009, the Company issued warrants to purchase 4,007,432 shares of common stock. During 2010, the Company issued another warrant to purchase 36,582 shares of common stock as a result of the exercise of a Series E warrant. These common stock warrants are exercisable, have exercise prices ranging from $9.78 to $11.74 and expire in 2014. During the years ended 2011 and 2010, warrants to purchase 1,265,293 and 54,764 shares were exercised utilizing a cashless exercise provision. As a result, the Company issued 548,125 shares and 19,072 shares of common stock. There were no exercises in 2012. As of December 31, 2012, the remaining warrants to purchase 2,723,957 shares of common stock
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13. Warrants for Common Stock and Convertible Preferred Stock (Continued)
at a weighted average exercise price of $10.76 per share have not been exercised and were still outstanding.
Because these common stock warrants were potentially redeemable for cash under certain change in control provisions and included certain variable terms outside of the control of the Company prior to the Company's IPO, these common stock warrants were recorded as a warrant liability at fair value and were subject to remeasurement at each period end with any changes in fair value being recognized in other income (expense), net on the consolidated statements of operations. The Company determined the fair value of these common stock warrants as of April 6, 2010 using the Black-Scholes option-pricing model, with the following assumptions:
| | April 6, 2010 | |||
|---|---|---|---|---|
Dividend rate | 0 | % | ||
Risk-free interest rate | 2.1 | % | ||
Expected life (in years) | 3.9 | |||
Expected volatility | 62.6 | % | ||
These common stock warrants were amended to remove the cash redemption feature and the other variable terms outside of the Company's control effective upon the closing of the Company's IPO which occurred on April 6, 2010. The change in fair value of the warrants resulted in a charge through other income (expense), net in the amount of approximately $30.6 million during the year ended December 31, 2010. Upon the closing of the Company's IPO, these warrants were remeasured and the related fair value was reclassified to additional paid-in capital.
Series E
During 2008 and 2009, the Company issued warrants to purchase 4,510,843 shares of Series E convertible preferred stock. The Series E warrants were exercisable immediately and had an exercise price equal to $0.70 per share. The relative fair value of the Series E warrants in the amount of $1.2 million was recorded in the consolidated balance sheets as a warrant liability upon issuance and, subsequently, the fair value of the warrant liability from the Series E warrants was remeasured at each period end. The change in fair value of the warrants resulted in a charge to other income (expense), net in the amount of $2.7 million during the year ended December 31, 2010.
The Company determined the fair value of the Series E warrants as of their respective exercise dates in April 2010 using the Black-Scholes option-pricing model with the following assumptions:
| | April 2010 | |||
|---|---|---|---|---|
Dividend rate | 0 | % | ||
Risk-free interest rate | 0.2 | % | ||
Expected life (in years) | 0 | |||
Expected volatility | 53.9 | % | ||
Upon the closing of the IPO, these warrants were remeasured and the related fair value was reclassified to additional paid-in capital. During the year ended December 31, 2010, all of the Series E warrants were exercised and are no longer outstanding.
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13. Warrants for Common Stock and Convertible Preferred Stock (Continued)
Series B
In 2005, the Company issued a warrant to purchase 541,346 shares of Series B convertible preferred stock ("Series B warrant"). The Series B warrant was exercisable upon issuance and had an exercise price equal to $0.74 per share. The relative fair value of the Series B warrant of $503,000 was recorded in the consolidated balance sheets as a warrant liability and debt discount. The fair value of the warrant liability for the Series B warrant was remeasured at each period end. As of April 6, 2010, all of the Company's convertible preferred stock converted into shares of common stock upon the closing of the Company's IPO. Following the conversion of the convertible preferred stock, the Series B warrant became a warrant to purchase 44,202 shares of common stock. Prior to the conversion of the convertible preferred stock, the change in fair value of the warrant resulted in a charge through other income (expense), net in the amount of $344,000 during the year ended December 31, 2010.
The Company determined the fair value of the Series B warrant as of April 6, 2010 using the Black-Scholes option-pricing model with the following assumptions:
| | April 6, 2010 | |||
|---|---|---|---|---|
Dividend rate | 0 | % | ||
Risk-free interest rate | 1.3 | % | ||
Expected life (in years) | 2.5 | |||
Expected volatility | 67.1 | % | ||
Upon the closing of the IPO, the Series B warrant was remeasured and the related fair value was reclassified to additional paid-in capital. In 2011, this Series B warrant to purchase 44,202 shares of common stock (after giving effect to the stock split in connection with the IPO) was exercised, in full, utilizing a cashless exercise provision. As a result, the Company issued 26,520 shares of common stock.
14. Equity Incentive Plans
The Company's equity incentive plans are broad-based retention programs. The plans are intended to attract talented employees, directors and non-employee consultants. In March 2010, the Company's board of directors and its stockholders approved the 2010 Stock Incentive Plan (the "2010 Plan"). A total of 1,846,154 shares of common stock plus any shares reserved and not issued or subject to outstanding grants under the Company's 2002 Stock Incentive Plan were reserved for future issuance under the 2010 Plan, which became effective upon the completion of the Company's initial public offering ("IPO") on April 6, 2010. The 2010 Plan provides for the granting of stock options, restricted stock, restricted stock units and stock appreciation rights. The number of shares reserved for issuance under the 2010 Plan will be increased on the first day of each of the Company's fiscal years by the lesser of 4% of the Company's outstanding common stock on the last day of the immediately preceding fiscal year or the number of shares determined by the board of directors. In 2011, shares equal to 4% of the outstanding shares of the Company on December 31, 2010, or 653,512 shares, were registered and reserved for issuance under the 2010 Plan. In addition, an amendment to the Company's 2010 Plan to add an additional 700,000 shares to the number of shares of common stock authorized for issuance under the Company's 2010 Plan was approved at the Company's 2011 shareholder meeting. In 2012, shares equal to 4% of the outstanding shares of the Company on December 31, 2011, or 706,982 shares, were registered and reserved for issuance under the 2010 Plan.
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14. Equity Incentive Plans (Continued)
The Company's stock-based compensation expense was $7.5 million, $6.2 million and $3.8 million during the years ended December 31, 2012, 2011 and 2010. The total stock-based compensation expense consisted of stock-based compensation expense for stock options and awards granted to employees of $7.5 million, $6.2 million and $3.8 million and non-employees of zero, $2,000 and $46,000 for the years ended December 31, 2012, 2011 and 2010.
Determining Fair Value of Stock Options
The fair value of stock options granted during the years ended December 31, 2012, 2011 and 2010 were determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment to determine.
Valuation Method—The Company estimates the fair value of stock options granted using the Black-Scholes option-pricing model.
Expected Term—The expected term represents the period that the Company's stock-based awards are expected to be outstanding. The expected term is derived from historical data on employee exercises and post-vesting employment termination behavior taking into account the contractual life of the award.
Expected Volatility—The expected volatility was based on the historical stock volatilities of the Company's historical data with that of a peer group of publicly listed companies over a period equal to the expected terms of the options as the Company did not have a sufficient trading history to use the volatility of its own common stock.
Fair Value of Common Stock—Prior to the Company's IPO, the fair value of the shares of common stock underlying the stock options was determined by the board of directors because there was no public market for the Company's common stock. The board of directors therefore determined fair value of the common stock at the time of grant of the option by considering a number of objective and subjective factors including valuation of comparable companies, sales of convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of capital stock and general and industry specific economic outlook, amongst other factors. Following the IPO, the fair value of the underlying common stock is based on the list price for the Company's common stock as noted on the NASDAQ on the grant date.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the option's expected term.
Expected Dividend—The Company has never paid dividends and does not expect to pay dividends.
Forfeiture Rate—The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated by the Company, the Company may be required to record adjustments to stock-based compensation expense in future periods.
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14. Equity Incentive Plans (Continued)
Summary of Assumptions—The fair value of each employee stock option was estimated at the date of grant using a Black-Scholes option-pricing model, with the following weighted-average assumptions for grants of options during the years ended December 31, 2012, 2011 and 2010:
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Dividend rate | 0 | % | 0 | % | 0 | % | ||||
Risk-free interest rate | 0.9 | % | 1.3 | % | 2.7 | % | ||||
Expected life (in years) | 4.9 | 5.1 | 5.6 | |||||||
Expected volatility | 61.8 | % | 57.9 | % | 60.5 | % | ||||
The weighted-average grant date fair value of the Company's stock options granted during the years ended December 31, 2012, 2011 and 2010 was $2.88, $4.96 and $7.76 per share. The aggregate grant date fair value of the Company's stock options granted to employees for the years ended December 31, 2012, 2011 and 2010 was $6.8 million, $6.8 million and $6.3 million. The Company recognized stock-based compensation expense in the amount of $3.5 million, $3.4 million and $2.8 million for stock options in the years ended December 31, 2012, 2011 and 2010.
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14. Equity Incentive Plans (Continued)
A summary of the Company's stock option activity for the years ended December 31, 2012, 2011 and 2010 is presented below:
| | Shares Available for Grant | Number of Stock Options Outstanding | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value (in thousands) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding—January 1, 2010 | 196,803 | 2,190,173 | $ | 5.82 | ||||||||||||
Additional options authorized | 2,307,692 | — | ||||||||||||||
Options granted | (844,565 | ) | 844,565 | 11.05 | ||||||||||||
Restricted stock granted | (255,372 | ) | — | — | ||||||||||||
Repurchased | 370 | — | — | |||||||||||||
Forfeited options | 227,241 | (227,241 | ) | 8.80 | ||||||||||||
Forfeited restricted stock | 6,163 | — | — | |||||||||||||
Exercised | — | (346,953 | ) | 4.15 | ||||||||||||
Outstanding—December 31, 2010 | 1,638,332 | 2,460,544 | 7.58 | |||||||||||||
Additional options authorized | 1,353,512 | — | — | |||||||||||||
Options granted | (1,377,825 | ) | 1,377,825 | 9.85 | ||||||||||||
Restricted stock granted | (550,968 | ) | — | — | ||||||||||||
Repurchased | 1,187 | — | — | |||||||||||||
Forfeited options | 193,473 | (193,473 | ) | 9.09 | ||||||||||||
Forfeited restricted stock | 54,318 | — | — | |||||||||||||
Exercised | — | (504,613 | ) | 4.11 | ||||||||||||
Outstanding—December 31, 2011 | 1,312,029 | 3,140,283 | 9.04 | |||||||||||||
Additional options authorized | 706,982 | — | — | |||||||||||||
Options granted* | (1,776,682 | ) | 1,776,682 | 3.09 | ||||||||||||
Inducement option granted | — | 600,000 | 4.62 | |||||||||||||
Restricted stock granted | (620,259 | ) | — | — | ||||||||||||
Cancelled options** | 1,939,838 | (1,939,838 | ) | 9.66 | ||||||||||||
Restricted stock returned | 190,560 | — | — | |||||||||||||
Exercised options | — | (61,175 | ) | 1.21 | ||||||||||||
Outstanding—December 31, 2012 | 1,752,468 | 3,515,952 | $ | 5.07 | 8.2 | $ | 396 | |||||||||
Vested and expected to vest—December 31, 2012 | 2,575,503 | $ | 5.19 | 7.9 | $ | 306 | ||||||||||
Vested—December 31, 2012 | 985,001 | $ | 7.67 | 5.4 | $ | 59 | ||||||||||
During the first quarter of 2012, the Company granted options to purchase 600,000 shares of common stock to Dr. Bami Bastani, chief executive officer ("CEO"), under the Inducement Stock Option Plan and Agreement, which is separate from the 2010 Plan, as a material inducement to the
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14. Equity Incentive Plans (Continued)
acceptance of employment with the Company. The grant was approved by the Company's compensation committee of the board of directors, as specified under the Listing Rules of the Nasdaq Stock Market.
The aggregate intrinsic value of options exercised under the 2010 Plan was $0.1 million, $7.6 million and $3.7 million for the years ended December 31, 2012, 2011 and 2010, determined as of the date of option exercise.
Additional information regarding the Company's stock options outstanding and vested as of December 31, 2012 is summarized below:
| | Options Outstanding | Options Vested and Exercisable | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exercise Prices | Shares | Weighted-Average Remaining Contractual Life (Years) | Weighted- Average Exercise Price per Share | Shares | Weighted- Average Exercise Price per Share | |||||||||||
$0.91 - $2.17 | 393,715 | 9.2 | $ | 1.66 | 50,112 | $ | 1.66 | |||||||||
$2.18 - $4.33 | 1,230,949 | 9.5 | $ | 3.41 | 53,306 | $ | 3.41 | |||||||||
$4.34 - $6.50 | 1,080,400 | 8.4 | $ | 4.92 | 236,144 | $ | 4.92 | |||||||||
$6.51 - $8.67 | 533,213 | 5.1 | $ | 7.86 | 449,989 | $ | 7.86 | |||||||||
$8.68 - $21.68 | 277,675 | 6.0 | $ | 12.52 | 195,450 | $ | 12.89 | |||||||||
| 3,515,952 | 8.2 | $ | 5.07 | 985,001 | $ | 7.67 | ||||||||||
As of December 31, 2012, total compensation cost related to unvested stock-based awards granted to employees, but not yet recognized, was $8.1 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted-average remaining period of 2.6 years and will be adjusted for subsequent changes in estimated forfeitures. Future option grants will increase the amount of compensation expense that will be recorded.
Exchange Offer—On July 26, 2012, the Company commenced an offer to eligible employees to exchange certain options to purchase shares of the Company's common stock outstanding on July 26, 2012, which had an exercise price greater than $2.00 per share (the "Eligible Options"), that were granted under the Company's 2002 Stock Incentive Plan or the 2010 Plan and that do not vest upon the achievement of certain performance criteria for new nonqualified stock options to be granted under the 2010 Plan (the "New Options") following the expiration of the offer. The Company's CEO and its non-employee directors were not eligible to participate in the offer. Eligible Options tendered were exchanged for an equal number of New Options, except that certain eligible officers received a lesser number of New Options, depending on the exercise price of the Eligible Options tendered. Options to purchase 960,443 shares of common stock (the "Exchanged Options") were cancelled and exchanged for options to purchase 692,682 shares of common stock with a new vesting schedule of 25% vest after the first year of service, and ratably monthly over the remaining 36 months contingent upon the employment with the Company on the date of vest. The offer expired on August 22, 2012. The New Options were granted following the expiration of the offer with an exercise price of $3.40 per share, the closing price of the Company's stock as reported by the Nasdaq Global Market on August 23, 2012. This modification resulted in an incremental charge of $0.5 million being amortized over the 4-year service period of the New Options in addition to the unamortized expense related to the Exchanged Options.
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14. Equity Incentive Plans (Continued)
Restricted Stock Awards and Restricted Stock Units—The Company issued restricted stock awards ("RSAs") and restricted stock units ("RSUs") to employees and members of the board of directors. These restricted shares will vest from three months to four years from the date of issuance if the employees or directors, as applicable, remain with the Company for the duration of the vesting period. Some RSUs are performance based awards; therefore, the vesting of these RSUs is subject to the achievement of specific performance metrics in addition to continued service. The Company recognized stock-based compensation in the amount of $3.6 million, $2.2 million and $0.4 million for the RSAs and RSUs in the years ended December 31, 2012, 2011 and 2010.
A summary of the Company's RSA activity for the years ended December 31, 2012, 2011 and 2010 is presented below:
| | Number of Restricted Stock Awards Outstanding | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value (in thousands) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Outstanding—January 1, 2010 | — | $ | — | $ | — | |||||
Restricted stock awards granted | 30,572 | 17.34 | ||||||||
Restricted stock awards released | (564 | ) | 17.70 | |||||||
Restricted stock awards forfeited | (3,713 | ) | 18.69 | |||||||
Outstanding—December 31, 2010 | 26,295 | 17.15 | ||||||||
Restricted stock awards granted | — | — | ||||||||
Restricted stock awards released | (22,695 | ) | 17.69 | |||||||
Restricted stock awards forfeited | — | — | ||||||||
Outstanding—December 31, 2011 | 3,600 | 13.73 | ||||||||
Restricted stock awards granted | — | — | ||||||||
Restricted stock awards released | (1,200 | ) | 13.73 | |||||||
Restricted stock awards forfeited | — | — | ||||||||
Outstanding—December 31, 2012 | 2,400 | $ | 13.73 | $ | 6 | |||||
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14. Equity Incentive Plans (Continued)
A summary of the Company's RSU activity for the years ended December 31, 2012, 2011 and 2010 is presented below:
| | Number of Restricted Stock Units Outstanding | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value (in thousands) | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
Outstanding—January 1, 2010 | — | $ | — | $ | — | |||||
Restricted stock units granted | 224,800 | 15.13 | ||||||||
Restricted stock units released | — | — | ||||||||
Restricted stock units forfeited | (2,450 | ) | 15.13 | |||||||
Outstanding—December 31, 2010 | 222,350 | 15.13 | ||||||||
Restricted stock units granted | 550,968 | 11.76 | ||||||||
Restricted stock units released | (73,315 | ) | 15.86 | |||||||
Restricted stock units forfeited | (54,318 | ) | 15.36 | |||||||
Outstanding—December 31, 2011 | 645,685 | 12.24 | ||||||||
Restricted stock units granted | 720,259 | 3.93 | ||||||||
Restricted stock units released | (448,327 | ) | 7.78 | |||||||
Restricted stock units forfeited | (108,075 | ) | 12.26 | |||||||
Outstanding—December 31, 2012 | 809,542 | $ | 7.32 | $ | 2,145 | |||||
During the first quarter of its fiscal year 2012, the Company granted to Dr. Bami Bastani, CEO, 50,000 shares of restricted stock units under the Service-Based Restricted Stock Unit Plan and Agreement and 50,000 shares of restricted stock units under the Performance-Based Restricted Stock Unit Plan and Agreement, which are separate from the 2010 Plan, as a material inducement to the acceptance of employment with the Company. The grants were approved by the Company's compensation committee of the board of directors, as specified under the Listing Rules of the Nasdaq Stock Market.
The weighted average fair value as of the vesting date of RSUs was $7.78 and $15.86 for 2012 and 2011. The majority of the RSUs that vested in the years ended December 31, 2012 and 2011 were net-share settled such that the Company withheld shares with value equivalent to the employees' minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld were based on the value of the RSUs on their vesting date as determined by the Company's closing stock price. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. For the year ended December 31, 2012, 448,327 shares of restricted stock units vested with an intrinsic value of approximately $1.3 million. The Company withheld 77,778 shares to satisfy approximately $0.3 million of employees' minimum tax obligation on the vested restricted stock units. For the year ended December 31, 2011, 73,315 shares of restricted stock units vested with an intrinsic value of approximately $0.6 million. The Company withheld 18,375 shares to satisfy approximately $0.1 million of employees' minimum tax obligation on the vested restricted stock units.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Equity Incentive Plans (Continued)
Common Stock Subject to Repurchase—Prior to the IPO, the Company allowed employees to exercise options prior to vesting. The Company has the right to repurchase these options at the original purchase price paid by the employee for any unvested (but issued) shares of common stock upon the termination of the employee. The consideration received for an exercise of an option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability on the consolidated balance sheets. The shares and liability are reclassified into equity on a pro rata basis as the options vest. The shares subject to repurchase are not deemed to be issued for accounting purposes until those shares vest.
The shares of common stock subject to repurchase issued pursuant to the exercise of options prior to vesting for the years ended December 31, 2012, 2011 and 2010 are as follows:
| | Shares | |||
|---|---|---|---|---|
Unvested shares—January 1, 2010 | 7,051 | |||
Exercise of options prior to vesting during the period | 3,373 | |||
Vesting of options exercised early during the period | (7,058 | ) | ||
Options repurchased during the period | (370 | ) | ||
Unvested shares—December 31, 2010 | 2,996 | |||
Vesting of options exercised early during the period | (1,705 | ) | ||
Options repurchased during the period | (1,187 | ) | ||
Unvested shares—December 31, 2011 | 104 | |||
Vesting of options exercised early during the period | (104 | ) | ||
Unvested shares—December 31, 2012 | — | |||
Stock Option Activity for Non-employee Consultants—During the years ended December 31, 2011 and 2010, the Company issued options to non-employees for the purchase of 2,000 and 28,653 shares of common stock in exchange for services. The Company did not issue options to purchase common stock to non-employees in 2012. These options were issued with an exercise price of $5.54 per share during the year ended December 31, 2011 and $9.10 per share during the year ended December 31, 2010. These options generally vest monthly over three months to four years. The Company accounts for non-employee consultant options based on the fair value of the awards as they vest. The options were valued using the Black-Scholes option-pricing model using the remaining contractual term as the expected term.
During the year ended December 31, 2010, the remaining unvested shares of a non-employee grant in the amount of 25,072 shares were cancelled in connection with the consultant becoming a director of the Company. In exchange for the cancellation of these options, the director was granted stock options and restricted stock awards with a total grant date fair value of $372,000 which resulted in an incremental value of $112,000. The total fair value of the options and restricted stock awards will be recognized as stock-based compensation over vesting periods of seven months to four years.
Total stock-based compensation related to non-employees amounted to zero, $2,000 and $46,000 for the years ended December 31, 2012, 2011 and 2010.
Employee Stock Purchase Plan—In March 2010, the Company's board of directors approved the 2010 Employee Stock Purchase Plan ("ESPP"). A total of 730,770 shares of common stock were
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14. Equity Incentive Plans (Continued)
reserved for future issuance under the ESPP, which became effective upon the closing of the Company's IPO. The price of the common stock purchased under the ESPP shall be the lower of 85% of the market value of the Company's common stock at the beginning of the offering period or 85% of the market value of the Company's common stock on the last trading day of the applicable offering period. On the first day of each of the Company's fiscal years, beginning on January 1, 2011, shares equal to the lesser of one percent (1%) of the outstanding shares of the Company on such date or a lesser amount determined by the Company's board of directors will be reserved for issuance under the ESPP; provided, however, that no annual increase shall be added more than ten years after March 30, 2010. In 2011, shares equal to one percent (1%) of the outstanding shares of the Company on January 1, 2011, or 163,378 shares, were registered and reserved for issuance under the ESPP. In 2012, shares equal to one percent (1%) of the outstanding shares of the Company on January 1, 2012, or 176,746 shares, were registered and reserved for issuance under the ESPP.
The Company calculated the compensation expense for the ESPP using the Black-Scholes option-pricing model with the following weighted-average assumptions during the years ended December 31, 2012, 2011 and 2010:
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Dividend rate | 0 | % | 0 | % | 0 | % | ||||
Risk-free interest rate | 0.2 | % | 0.1 | % | 0.2 | % | ||||
Expected life (in years) | 0.7 | 0.5 | 0.7 | |||||||
Expected volatility | 89.7 | % | 56.5 | % | 62.0 | % | ||||
The Company recognized compensation expense related to the ESPP in the amount of $0.4 million, $0.6 and $0.6 million for the years ended 2012, 2011 and 2010. The Company issued 356,388 shares of common stock for $0.6 million, 178,150 shares of common stock for $1.3 million and 93,307 shares of common stock for $1.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. The Company had 443,049 shares of its common stock available for future issuance under the ESPP as of December 31, 2012.
15. Income Taxes
The Company's loss before provision for income taxes for the years ended December 31, 2012, 2011 and 2010 is as follows (in thousands):
| | Years ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Domestic | $ | (32,502 | ) | $ | (27,670 | ) | $ | (37,176 | ) | |
International | 1,963 | 1,387 | 824 | |||||||
Loss before provision for income taxes | $ | (30,539 | ) | $ | (26,283 | ) | $ | (36,352 | ) | |
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15. Income Taxes (Continued)
The components of the provision for income taxes for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):
| | Years ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Current | ||||||||||
Federal | $ | — | $ | — | $ | — | ||||
State | 25 | 9 | 14 | |||||||
Foreign | 524 | 402 | 240 | |||||||
Total current | 549 | 411 | 254 | |||||||
Deferred | ||||||||||
Federal | — | — | — | |||||||
State | — | — | — | |||||||
Foreign | — | — | — | |||||||
Total deferred | — | — | — | |||||||
Total provision for income taxes | $ | 549 | $ | 411 | $ | 254 | ||||
Reconciliations of the statutory federal income tax to the Company's effective tax for the years ended December 31, 2012, 2011 and 2010 are as follows (in thousands):
| | Years ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
Tax at statutory federal rate | $ | (10,383 | ) | $ | (8,938 | ) | $ | (12,361 | ) | |
State tax—net of federal benefit | (1,553 | ) | (1,302 | ) | (1,728 | ) | ||||
Nondeductible expenses | 1,279 | 1,201 | 13,630 | |||||||
Foreign income rate differential | (698 | ) | (484 | ) | (289 | ) | ||||
Foreign tax | 486 | 402 | 238 | |||||||
Credits | (347 | ) | (1,190 | ) | (523 | ) | ||||
Other | (596 | ) | 519 | 341 | ||||||
Valuation allowance changes affecting the tax provision | 12,361 | 10,203 | 946 | |||||||
Provision for income taxes | $ | 549 | $ | 411 | $ | 254 | ||||
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15. Income Taxes (Continued)
Net deferred tax assets as of December 31, 2012 and 2011 consist of the following (in thousands):
| | December 31, 2012 | December 31, 2011 | |||||
|---|---|---|---|---|---|---|---|
Deferred tax assets: | |||||||
Depreciation and amortization | $ | 9,948 | $ | 9,733 | |||
Accruals and other | 13,239 | 9,984 | |||||
Research credits | 5,336 | 4,990 | |||||
Net operating loss carryforward | 55,290 | 46,745 | |||||
Gross deferred tax asset | 83,813 | 71,452 | |||||
Valuation allowance | (83,813 | ) | (71,452 | ) | |||
Net deferred tax assets | $ | — | $ | — | |||
A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The Company has established a valuation allowance to offset net deferred tax assets at December 31, 2012 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets.
The valuation allowance increased by $12.4 million, $10.2 million, and $2.8 million during the years ended December 31, 2012, 2011, and 2010.
At December 31, 2012, the Company has federal and state net operating loss carryforwards of approximately $147.5 million and $141.1 million, respectively, beginning to expire in 2022 and 2012, respectively.
As of December 31, 2012 the Company has federal and state research credit carryovers of approximately $3.7 million and $4.0 million, respectively, expiring beginning in 2022 for federal. California credits will carryforward indefinitely. In January 2013, The American Taxpayers Relief Act of 2012 reinstated the research tax credit retroactive to January 1, 2012 and extended the credit through December 31, 2013. As a result of this new legislation, the Company is expected to recognize an increase in its federal tax credit carryforward of $0.2 million during the three months ended March 31, 2013.
As of December 31, 2012, the Company has a foreign tax credit carryover of $0.6 million expiring beginning in 2018.
Internal Revenue Code section 382 places a limitation (the "Section 382 Limitation") on the amount of taxable income can be offset by net operating ("NOL") carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. California has similar rules. The Company's capitalization described herein may have resulted in such a change. Generally, after a control change, a loss corporation cannot deduct NOL carryfowards in excess of the Section 382 Limitation.
The Company has made no provision for U.S. income taxes on undistributed earnings of certain foreign subsidiaries because it is the Company's intention to permanently reinvest such earnings in its foreign subsidiaries. If such earnings were distributed, the Company would be subject to additional U.S. tax expense. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practical.
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15. Income Taxes (Continued)
Uncertain Tax Positions
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company's tax years for 2002 and forward are subject to examination by the U.S. tax authorities and various state tax authorities. These years are open due to net operating losses and tax credits unutilized from such years. The Company's tax years for December 31, 2005 and forward are subject to examination by the major foreign taxing jurisdictions in which the Company is subject to tax.
As of December 31, 2012, the Company had $2.1 million of cumulative unrecognized tax benefits of which $0.2 million has an effect on the Company's effective tax rate.
A reconciliation of the beginning and ending unrecognized tax benefit amounts since adoption is as follows (in thousands):
Balance at January 1, 2010 | $ | 1,466 | ||
Increase related to 2010 tax position | 119 | |||
Balance at December 31, 2010 | 1,585 | |||
Increase related to 2011 tax position | 364 | |||
Balance at December 31, 2011 | 1,949 | |||
Increase related to 2012 tax position | 134 | |||
Balance at December 31, 2012 | $ | 2,083 | ||
16. Employee Benefit Plan
The Company has established a 401(k) tax-deferred savings plan (the "401(k) Plan") which permits participants to make contributions by salary deduction pursuant to Section 401(k) of the Internal Revenue Code. The Company is responsible for administrative costs of the 401(k) Plan and has made no contributions to the 401(k) Plan since inception.
17. Related-Party Transactions
The Company invested in a private company that is a related party. The investee is co-founded by Dr. Vaduvur Bharghavan, who was a member of the Company's board of directors. The total investment in this related party amounted to $1.3 million in 2011. See Note 8 for further discussion of this investment.
The Company has a reseller in Japan that is a related party. This reseller owned shares of the Company's stock during the years ended December 31, 2012, 2011 and 2010. The total revenue from this related party amounted to $0.7 million, $0.9 million and $1.4 million for the years ended December 31, 2012, 2011 and 2010. Accounts receivable from the reseller were $16,000 and $74,000 as of December 31, 2012 and 2011.
The Company has a distributor in Japan who owned shares of the Company's stock during the years ended December 31, 2012, 2011 and 2010. The total revenue from this related party amounted to $1.9 million, $1.0 million and $0.7 million for the years ended December 31, 2012, 2011 and 2010. Accounts receivable from this distributor were zero and $58,000 as of December 31, 2012 and 2011.
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MERU NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Information about Geographic Areas
The Company considers operating segments to be components of the Company in which separate financial information is available that is evaluated regularly by the Company's chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The chief operating decision maker for the Company is the CEO. The CEO reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reporting segment and operating unit structure which is the development and marketing of wireless infrastructure solutions.
Revenues by geography are based on the billing address of the customer. The following table sets forth revenue by geographic area (in thousands):
Revenues
| | Years ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
United States | $ | 50,443 | $ | 49,908 | $ | 54,072 | ||||
United Kingdom | 21,476 | 11,031 | 5,145 | |||||||
Rest of EMEA | 11,077 | 13,051 | 13,281 | |||||||
Rest of Americas | 5,373 | 7,699 | 7,187 | |||||||
Asia Pacific | 9,141 | 8,782 | 5,319 | |||||||
Total | $ | 97,510 | $ | 90,471 | $ | 85,004 | ||||
Long-Lived Assets
The following table sets forth long-lived assets by geographic area (in thousands):
| | December 31, 2012 | December 31, 2011 | |||||
|---|---|---|---|---|---|---|---|
United States | $ | 1,328 | $ | 1,312 | |||
India | 1,131 | 141 | |||||
Japan | 14 | 23 | |||||
Total | $ | 2,473 | $ | 1,476 | |||
19. Subsequent event
On February 27, 2013, the Company entered into an Underwriting Agreement (the "Underwriting Agreement") with William Blair & Company, L.L.C (the "Underwriter"), pursuant to which the Company agreed to offer and sell up to 3,000,000 shares of its common stock, par value $0.0005 per share, at a price of $4.00 per share (the "Offering"). Under the terms of the Underwriting Agreement, the Company granted the Underwriters a 30-day option to purchase an additional 450,000 shares of the Company's common stock to cover overallotments, if any. On March 4, 2013, the Company completed the sale of 3,450,000 shares of its common stock and received $13.8 million in gross proceeds from the offering before underwriting discounts, commissions and offering expenses.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation and supervision of our CEO and our chief financial officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based upon the aforementioned evaluation, our CEO and CFO have concluded that, as of December 31, 2012, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our CEO and our CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012 based on the guidelines established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the results of this evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2012 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. We reviewed the results of management's assessment with the audit committee of our board of directors.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our Proxy Statement for our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2012.
We maintain a Code of Business Conduct and Ethics that incorporates our code of ethics applicable to all employees, including all officers. Our Code of Business Conduct and Ethics is published on the Investor Relations section of our website at investors.merunetworks.com. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on this website within four business days following the date of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Proxy Statement for our 2013 annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2012.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to our Proxy Statement for our 2013 annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2012. For the information required by this item with respect to Item 201(d) of Regulation S-K regarding securities authorized for issuance under equity compensation plans, see "Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Equity Compensation Plan Information."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to our Proxy Statement for our 2013 annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2012.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Proxy Statement for our 2013 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended December 31, 2012.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(1) Financial Statements: the financial statements required by Item 15(a) are filed in Item 8 of this report, and listed on the index to financial statements.
(2) Financial Statement Schedules: the financial statement schedule required by Item 15(a) (Schedule II, Valuation and Qualifying Accounts) is included in this section of Form 10-K.
Schedule II "Valuation and Qualifying Accounts" should be read in conjunction with the Consolidated Financial Statements included in this report.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
| | Years Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | 2010 | |||||||
| | (in thousands) | |||||||||
Allowance for Doubtful Accounts: | ||||||||||
Beginning balance | $ | 134 | $ | 366 | $ | 430 | ||||
Charged to costs and expenses | 44 | 143 | — | |||||||
Recovery of bad debt | (54 | ) | — | (61 | ) | |||||
Bad debt write-offs | (110 | ) | (375 | ) | (3 | ) | ||||
Ending balance | $ | 14 | $ | 134 | $ | 366 | ||||
(3) Exhibits: the exhibits listed on the Exhibit Index are included or incorporated by reference as part of this Annual Report on Form 10-K.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 20, 2013
| MERU NETWORKS, INC. | ||||
By: | /s/ DR. BAMI BASTANI Dr. Bami Bastani President, Chief Executive Officer and Director (Principal Executive Officer) | |||
MERU NETWORKS, INC. | ||||
By: | /s/ BRETT T. WHITE Brett T. White Chief Financial Officer (Principal Financial and Accounting Officer) | |||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dr. Bami Bastani and Brett White, and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934 this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name | Title | Date | ||
|---|---|---|---|---|
| /s/ DR. BAMI BASTANI Dr. Bami Bastani | President, Chief Executive Officer and Director (Principal Executive Officer) | March 20, 2013 | ||
/s/ BRETT WHITE Brett White | Chief Financial Officer (Principal Financial and Accounting Officer) | March 20, 2013 | ||
/s/ HAROLD COPPERMAN Harold Copperman | Director | March 20, 2013 |
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Name | Title | Date | ||
|---|---|---|---|---|
| /s/ CHUCK KISSNER Chuck Kissner | Director | March 20, 2013 | ||
/s/ STANLEY MERESMAN Stanley Meresman | Director | March 20, 2013 | ||
/s/ NICHOLAS MITSAKOS Nicholas Mitsakos | Director | March 20, 2013 | ||
/s/ BARRY NEWMAN Barry Newman | Director | March 20, 2013 | ||
/s/ WILLIAM QUIGLEY William Quigley | Director | March 20, 2013 |
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| Exhibit No | Exhibit Title | Form | File No. | Exhibit | Filing Date | Filed Herewith | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 3.1 | Form of Amended and Restated Certificate of Incorporation of Registrant, and amendments thereto | S-1/A | 333-163859 | 3.1(b) | March 12, 2010 | ||||||||
| 3.2 | Form of Amended and Restated Bylaws of Registrant | S-1/A | 333-163859 | 3.2(b) | March 12, 2010 | ||||||||
| 4.1 | Form of Common Stock Certificate | S-1/A | 333-163859 | 4.1 | March 12, 2010 | ||||||||
| 4.2 | Amended and Restated Registration Rights Agreement between the Registrant and certain investors | S-1/A | 333-163859 | 4.2 | March 12, 2010 | ||||||||
| 4.3 | Form of Warrant to Purchase Common Stock | S-1/A | 333-163859 | 4.3 | March 12, 2010 | ||||||||
| 4.4 | Warrant to Purchase Series B Preferred Stock, as amended, issued to Venture Lending & Leasing IV, LLC (exercisable for common stock) | S-1/A | 333-163859 | 4.4 | March 12, 2010 | ||||||||
| 4.5 | Form of Class A Warrant to purchase Common Stock, as amended | S-1/A | 333-163859 | 4.5 | March 12, 2010 | ||||||||
| 4.6 | Form of Class B Warrant to purchase Common Stock, as amended | S-1/A | 333-163859 | 4.6 | March 12, 2010 | ||||||||
| 4.7 | Class A Warrant to purchase Common Stock, as amended, issued to Vision Opportunity Master Fund, Ltd. | S-1/A | 333-163859 | 4.7 | March 12, 2010 | ||||||||
| 4.8 | Class A Warrant to purchase Common Stock, as amended, issued to Vision Opportunity Master Fund, Ltd | S-1/A | 333-163859 | 4.8 | March 12, 2010 | ||||||||
| 4.9 | Warrant to Purchase Shares of Common Stock of Meru Networks, Inc. issued to Venture Lending & Leasing VI, LLC | 8-K | 001-34659 | 10.3 | June 7, 2012 | ||||||||
| 4.10 | Form of Senior Indenture | S-3/A | 333-183726 | 4.13 | October 12, 2012 | ||||||||
| 4.11 | Form of Subordinated Indenture | S-3/A | 333-183726 | 4.14 | October 12, 2012 | ||||||||
| 10.01 | * | Form of Indemnification Agreement between the Registrant and its officers and directors | S-1/A | 333-163859 | 10.1 | March 12, 2010 | |||||||
| 10.02 | * | Form of Severance and Change of Control Agreement | 10-Q | 001-34659 | 10.5 | November 8, 2011 | |||||||
| 10.03 | * | 2010 Employee Stock Purchase Plan | S-8 | 333-165827 | 99.1 | March 31, 2010 | |||||||
| 10.04 | * | Meru Networks, Inc. 2010 Stock Incentive Plan, as amended | 8-K | 001-34659 | 99.01 | June 10, 2011 | |||||||
| 10.05 | * | Forms of (a) Notice of Stock Option Grant, (b) Stock Option Agreement, (c) Notice of Cash Exercise of Stock Option, (d) Notice of Stock Unit Award, (e) Stock Unit Agreement, (f) Notice of Restricted Stock Award, and (g) Restricted Stock Agreement for 2010 Stock Incentive Plan | S-8 | 333-168631 | 99.1 | August 6, 2010 | |||||||
| 10.06 | * | 2002 Stock Incentive Plan and form of agreements thereunder | S-1 | 333-163859 | 10.2 | December 18, 2009 | |||||||
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| Exhibit No | Exhibit Title | Form | File No. | Exhibit | Filing Date | Filed Herewith | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 10.07 | * | Transitional Employment Agreement | 8-K | 001-34659 | 10.01 | October 6, 2011 | |||||||
| 10.08 | * | Advisory Service Agreement between Ihab Abu-Hakima and Meru Networks, Inc. | 8-K | 001-34659 | 10.02 | March 2, 2012 | |||||||
| 10.09 | * | Employment Offer Letter with Dr. Bami Bastani | 8-K | 001-34659 | 10.01 | March 22, 2012 | |||||||
| 10.10 | * | Amendment No. 1 to March 19, 2012 Offer Letter with Dr. Bami Bastani | 10-Q | 001-34659 | 10.01 | May 4, 2012 | |||||||
| 10.11 | * | Severance and Change of Control Agreement with Dr. Bami Bastani | 8-K | 001-34659 | 10.02 | March 22, 2012 | |||||||
| 10.12 | * | Inducement Stock Option Plan and Agreement | S-8 | 331-180226 | 4.06 | March 22, 2012 | |||||||
| 10.13 | * | Service-based restricted stock unit plan and agreement | S-8 | 331-180226 | 4.07 | March 22, 2012 | |||||||
| 10.14 | * | Performance-based restricted stock unit plan and agreement | S-8 | 331-180226 | 4.08 | March 22, 2012 | |||||||
| 10.15 | * | 2013 Management Bonus Plan | 8-K | 001-34659 | 10.01 | January 29, 2013 | |||||||
| 10.16 | * | 2013 Sales Executive Bonus Plan | 8-K | 001-34659 | 10.02 | January 29, 2013 | |||||||
| 10.17 | * | 2012 Management Bonus Plan | 8-K | 001-34659 | 10.02 | March 2, 2012 | |||||||
| 10.18 | * | Amended 2012 Management Bonus Plan | 8-K | 001-34659 | 10.1 | June 27, 2012 | |||||||
| 10.19 | * | Amended 2012 Sales Executive Bonus Plan | 8-K | 001-34659 | 10.2 | June 27, 2012 | |||||||
| 10.20 | * | Separation Agreement between Carl Gustin and Meru Networks, Inc. | 10-Q | 001-34659 | 10.03 | November 8, 2012 | |||||||
| 10.21 | Loan and Security Agreement, dated as of June 6, 2012, between Meru Networks, Inc. and Venture Lending and Leasing VI, Inc. | 8-K | 001-34659 | 10.1 | June 7, 2012 | ||||||||
| 10.22 | Supplement to the Loan and Security Agreement dated as of June 6, 2012 between Meru Networks, Inc. and Venture Lending & Leasing VI, Inc. | 8-K | 001-34659 | 10.2 | June 7, 2012 | ||||||||
| 10.23 | Intellectual Property Security Agreement, dated as of June 6, 2012 by and between Meru Networks, Inc. and Venture Lending & Leasing VI, Inc. | 8-K | 001-34659 | 10.4 | June 7, 2012 | ||||||||
| 10.24 | Atheros Technology License Agreement by and between Atheros Communications, Inc. and the Registrant effective August 7, 2009 | S-1/A | 333-163859 | 10.8 | January 25, 2010 | ||||||||
| 10.25 | Patent Cross License Agreement | 8-K | 001-34659 | 10.01 | June 16, 2011 | ||||||||
| 10.26 | Lease dated as of June 11, 2010 between Meru Networks, Inc. and Hines VAF No Cal Properties, L.P. | 8-K | 001-34659 | 10.1 | June 17, 2010 | ||||||||
| 10.27 | Loan and Security Agreement by and between Meru Networks, Inc. and Silicon Valley Bank, dated January 29, 2007, as amended | 8-K | 001-34659 | 10.01 | February 27, 2013 | ||||||||
| 21.1 | Subsidiaries of Meru Networks, Inc. | x | |||||||||||
| 23.1 | Consent of Independent Registered Public Accounting Firm | x | |||||||||||
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| Exhibit No | Exhibit Title | Form | File No. | Exhibit | Filing Date | Filed Herewith | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 31.1 | Certification of the President and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | x | |||||||||||
| 31.2 | Certification of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002. | x | |||||||||||
| 32.1 | Certificate of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | x | |||||||||||
| 32.2 | Certificate of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | x | |||||||||||
| 101 INS | XBRL Instance Document | x | |||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | x | |||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | x | |||||||||||
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | x | |||||||||||
| 101.LAB | XBRL Taxonomy Label Linkbase Document | x | |||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | x | |||||||||||
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