We are a Silicon Valley founded, headquartered and operated provider of application optimized high performance and high efficiency server and storage systems. We develop and provide end-to-end green computing solutions to the cloud computing, data center, enterprise, artificial intelligence and machine learning, big data, hyper-converged, OEM, high performance computing ("HPC"), and Internet of Things ("IoT")/embedded markets. Our solutions range from complete server, storage, blade and workstations to full racks, networking devices, server management software and global support and services. We offer our customers a high degree of flexibility and customization by providing a broad array of server configurations from which they can choose the optimal solutions to fit their computing needs. Our server systems, subsystems and accessories are architecturally designed to provide high levels of reliability, quality, configurability and scalability, thereby enabling our customers to benefit from improvements in compute performance, density, thermal management and power efficiency, which lead to lower total cost of ownership.
Risks Related to Our Investigation, Procedures and Analysis, Consolidated Financial Statements, Internal Control Over Financial Reporting and Related Matters
We face risks related to being delinquent in our SEC reporting obligations if we are unable to resume a timely filing schedule.
We have identified material weaknesses in our internal control over financial reporting, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.
The subject matters of the Investigation, Procedures and Analysis and the findings thereof have caused substantial delays in filing this Annual Report on Form 10-K and the Delinquent Reports, which may result in future delays in our SEC reporting.
We have incurred and expect to continue to incur significant expenses related to the Investigation, Procedures and Analysis, the remediation of deficiencies in our internal control over financial reporting and disclosure controls and procedures, and any resulting litigation.
The Investigation, Procedures and Analysis and the findings thereof, have diverted, and continue to divert, management and other human resources from the operation of our business. The absence of timely and accurate financial information has hindered and may in the future hinder our ability to effectively manage our business.
Our failure to file SEC reports timely and the resulting delisting of our common stock could impact our ability to comply with covenants in our debt instruments, which could adversely affect our access to outside financing.
Matters relating to or arising from the restatement and the results of the Investigation, Procedures and Analysis of our internal control over financial reporting, including adverse publicity and potential concerns from our customers, have had and could continue to have an adverse effect on our business and financial condition.
Risks Related to Our Business and Industry
As we increasingly target larger customers and larger sales opportunities, our customer base may become more concentrated, our cost of sales may increase, our margins may be lower and our sales may be less predictable.
We may fail to meet publicly announced financial guidance or other expectations about our business, which would cause our stock to decline in value.
Increases in average selling prices for our server solutions have significantly contributed to our increases in net sales. Such prices are subject to decline if customers do not continue to purchase our latest generation products or additional components, which could harm our results of operations.
Our cost structure and ability to deliver server solutions to customers in a timely manner may be adversely affected by volatility of the market for core components and materials for our products.
We may lose sales or incur unexpected expenses relating to insufficient, excess or obsolete inventory.
We may encounter difficulties with our ERP systems.
Because our products and services may store, process and use data, some of which contains personal information, we are subject to complex and evolving federal, state and foreign laws and regulations regarding privacy, data protection and other matters, which are subject to change.
If we do not successfully manage the expansion of our international manufacturing capacity, our business could be harmed.
We may not be able to successfully manage our planned growth and expansion.
Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by United States federal income tax legislation, which could affect our future operating results, financial condition and cash flows.
If negative publicity arises with respect to us, our employees, our third-party service providers or our partners, our business and operating results could be adversely affected, regardless of whether the negative publicity is true.
The market in which we participate is highly competitive, and if we do not compete effectively, we may not be able to increase our market penetration, grow our net sales or improve our gross margins.
Any failure to adequately expand or retain our sales force will impede our growth.
We must work closely with our suppliers to make timely new product introductions.
Our suppliers’ failure to improve the functionality and performance of materials and core components for our products may impair or delay our ability to deliver innovative products to our customers.
We rely on a limited number of suppliers for certain raw materials used to manufacture our products.
We rely on indirect sales channels for a significant percentage of our revenue and any disruption in these channels could adversely affect our sales.
Our direct sales efforts may create confusion for our end customers and harm our relationships with our distributors and OEMs.
Our research and development expenditures, as a percentage of our net sales, are considerably higher than many of our competitors and our earnings will depend upon maintaining revenues and margins that offset these expenditures.
Our failure to deliver high quality server solutions could damage our reputation and diminish demand for our products.
Conflicts of interest may arise between us and Ablecom and Compuware, and those conflicts may adversely affect our operations.
Our reliance on Ablecom could be subject to risks associated with our reliance on a limited source of contract manufacturing services and inventory warehousing.
Our growth into markets outside the United States exposes us to risks inherent in international business operations.
Our results of operations may be subject to fluctuations based upon our investment in corporate ventures.
The United States could withdraw from or materially modify certain international trade agreements, or change tariff, trade, or tax provisions related to the global manufacturing and sales of our products in ways that we currently cannot predict.
Failure to comply with the U.S. Foreign Corrupt Practices Act, other applicable anti-corruption and anti-bribery laws, and applicable trade control laws could subject us to penalties and other adverse consequences.
Any failure to protect our intellectual property rights, trade secrets and technical know-how could impair our brand and our competitiveness.
Resolution of claims that we have violated or may violate the intellectual property rights of others could require us to indemnify our customers, resellers or vendors, redesign our products, or pay significant royalties to third parties, and materially harm our business.
If we lose Charles Liang, our President, Chief Executive Officer and Chairman, or any other current key employee or are unable to attract additional key employees, we may not be able to implement our business strategy in a timely manner.
If we are unable to attract and integrate additional key employees in a manner that enables us to scale our business and operations effectively, or if we do not maintain competitive compensation policies to retain our employees, our ability to operate effectively and efficiently could be limited.
Backlog does not provide a substantial portion of our net sales in any quarter.
Our business and operations are especially subject to the risks of earthquakes and other natural catastrophic events.
Our operations involve the use of hazardous and toxic materials, and we must comply with environmental laws and regulations, which can be expensive, and may affect our business, results of operations and financial condition.
Risks Related to Owning Our Stock
The trading price of our common stock is likely to be volatile, and you might not be able to sell your shares at or above the price at which you purchased the shares.
Future sales of shares by existing stockholders could cause our stock price to decline.
If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.
The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, as a result, depress the trading price of our common stock.
Our common stock is currently quoted on the OTC Market, which may have an unfavorable impact on our stock price and liquidity.
We do not expect to pay any cash dividends for the foreseeable future.
The year-over-year increase of $259.9 million in our net sales in fiscal year 2017 compared with fiscal year 2016 was primarily due to an increase in sales of our server systems.
The year-over-year increase in server system sales was primarily due to an increase of average selling price per node from $2,902 in fiscal year 2016 to $3,118 in fiscal year 2017. The increase in average selling prices of our server systems was primarily due to higher sales of our complete server systems that offer higher density computing and more memory and hard drive capacity. The year-over-year increase in net sales of our subsystems and accessories in fiscal year 2017 was primarily due to higher sales of server accessories to our distributors.