MERU NETWORKS INC - FORM 10-Q

MERU NETWORKS INC - FORM 10-Q - May 7, 2015

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Attached files

MERU NETWORKS INC Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - MERU NETWORKS INC	Financial_Report.xls
EX-31.1 - EX-31.1 - MERU NETWORKS INC	d900456dex311.htm
EX-32.2 - EX-32.2 - MERU NETWORKS INC	d900456dex322.htm
EX-32.1 - EX-32.1 - MERU NETWORKS INC	d900456dex321.htm
EX-10.01 - EX-10.01 - MERU NETWORKS INC	d900456dex1001.htm
EX-31.2 - EX-31.2 - MERU NETWORKS INC	d900456dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

¨	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

26-0049840

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

894 Ross Drive

Sunnyvale, California 94089

(408) 215-5300

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 x No ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the issuer’s common stock, par value $0.0005, outstanding as of April 29, 2015 was 24,284,329.

MERU NETWORKS INC.

INDEX


	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements		3
Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014 (unaudited)		3
Condensed Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (unaudited)		4
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2015 and 2014 (unaudited)		5
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)		6
Notes to Condensed Consolidated Financial Statements (unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		32
Item 4. Controls and Procedures		33

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		34
Item 1A. Risk Factors		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		60
Item 3. Defaults Upon Senior Securities		60
Item 4. Mine Safety Disclosures		60
Item 5. Other Information		60
Item 6. Exhibits		60
Signatures		62
Exhibit Index		63

Item 1. Condensed Consolidated Financial Statements

MERU NETWORKS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except for share and per share amounts)


	March 31, 2015			December 31, 2014
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,599		$	14,881
Accounts receivable, net		6,761			11,891
Inventory		9,664			8,982
Prepaid expenses and other current assets		1,400			1,502

Total current assets		29,424			37,256
Property and equipment, net		1,633			1,879
Goodwill		—			1,658
Other assets		696			1,937

TOTAL ASSETS	$	31,753		$	42,730

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	5,656		$	7,902
Accrued liabilities		9,573			10,223
Long-term debt, current portion		1,784			2,803
Deferred revenue, current portion		12,348			12,781

Total current liabilities		29,361			33,709
Deferred revenue, net of current portion		6,829			6,886
Other liabilities		28			38

Total liabilities		36,218			40,633

Commitments and contingencies (Note 10)

STOCKHOLDERS’ EQUITY (DEFICIT):
Preferred stock, $0.0005 par value – 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2015 and December 31, 2014		—			—
Common stock, $0.0005 par value – 150,000,000 shares authorized; 24,309,956 and 24,100,160 shares issued and outstanding as of March 31, 2015 and December 31, 2014		12			12
Additional paid-in capital		290,465			289,023
Accumulated other comprehensive loss		(655	)		(688	)
Accumulated deficit		(294,287	)		(286,250	)

Total stockholders’ equity (deficit)		(4,465	)		2,097

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	31,753		$	42,730

See notes to condensed consolidated financial statements.

MERU NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except for share and per share amounts)


	Three Months Ended March 31,
	2015			2014
REVENUES:
Products	$	12,917		$	15,833
Support and services		4,499			4,767

Total revenues		17,416			20,600

COSTS OF REVENUES:
Products		5,514			5,875
Support and services		1,524			1,902

Total costs of revenues*		7,038			7,777

Gross margin		10,378			12,823

OPERATING EXPENSES:
Research and development*		4,294			5,452
Sales and marketing*		9,166			11,629
General and administrative*		2,978			3,298
Impairment of goodwill		1,658			—

Total operating expenses		18,096			20,379

Loss from operations		(7,718	)		(7,556	)
Interest expense, net		(164	)		(378	)
Other expense, net		(52	)		(16	)

Loss before provision for income taxes		(7,934	)		(7,950	)
Provision for income taxes		103			112

Net loss	$	(8,037	)	$	(8,062	)

Net loss per share of common stock:
Basic and diluted	$	(0.33	)	$	(0.35	)

Shares used in computing net loss per share of common stock:
Basic and diluted		24,248,016			23,069,260

*	Includes stock-based compensation expense (1) as follows:


	Three Months Ended March 31,
	2015		2014
Costs of revenues	$	117	$	109
Research and development		445		338
Sales and marketing		1,032		811
General and administrative		542		715

(1)	This table includes $346,000 and $147,000 of stock-based compensation expense related to restructuring in the quarters ended March 31, 2015 and 2014, respectively.

See notes to condensed consolidated financial statements.

MERU NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(in thousands)


	Three Months Ended March 31,
	2015			2014
Net loss	$	(8,037	)	$	(8,062	)

Other comprehensive income, net of tax:
Foreign currency translation adjustment		33			52

Other comprehensive income, net of tax		33			52

Comprehensive loss	$	(8,004	)	$	(8,010	)

See notes to condensed consolidated financial statements.

MERU NETWORKS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)


	Three Months Ended March 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss:	$	(8,037	)	$	(8,062	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		327			416
Stock-based compensation		2,136			1,973
Impairment of goodwill		1,658			—
Accrued interest on long-term debt		103			214
Amortization of debt issuance costs		15			41
Net provision for bad debt		112			35
Changes in operating assets and liabilities:
Accounts receivable, net		5,018			6,825
Inventory		(681	)		(707	)
Prepaid expenses and other assets		105			81
Accounts payable		(2,246	)		(1,783	)
Accrued liabilities		(1,134	)		(2,121	)
Deferred revenue		(490	)		(692	)

Net cash used in operating activities		(3,114	)		(3,780	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(69	)		(333	)
Proceeds from sale of investment		1,250			—

Net cash provided by (used in) investing activities		1,181			(333	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		17			164
Taxes paid related to net share settlement of equity awards		(371	)		(406	)
Repayment of long-term debt		(1,034	)		(918	)

Net cash used in financing activities		(1,388	)		(1,160	)

Effect of exchange rate changes on cash and cash equivalents		39			(1	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,282	)		(5,274	)

CASH AND CASH EQUIVALENTS – Beginning of period		14,881			30,938

CASH AND CASH EQUIVALENTS – End of period	$	11,599		$	25,664

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	75		$	191

Cash paid for income taxes	$	168		$	135

See notes to condensed consolidated financial statements.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Wireless Local Area Network (“WLAN”) solution. The Company’s solution is built around its System Director Operating System which runs on its controllers and access points. The Company offers additional products, including 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.

Basis of Presentation — These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting 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, except for the Netherland’s subsidiary, use their local currency as their functional currency. All intercompany transactions and balances have been eliminated. Certain information and note disclosures normally included in the condensed consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed on February 27, 2015. The condensed consolidated balance sheet as of December 31, 2014, included herein, was derived from the audited consolidated financial statements as of that date.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s statement of financial position as of March 31, 2015 and December 31, 2014, the Company’s results of operations for the three months ended March 31, 2015 and 2014, comprehensive loss for the three months ended March 31, 2015 and 2014, and its cash flows for the three months ended March 31, 2015 and 2014. The results for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015. All references to March 31, 2015 or to the three months ended March 31, 2015 and 2014 in the notes to the condensed consolidated financial statements are unaudited.

Use of Estimates — The preparation of unaudited interim condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Such management estimates include litigation and other loss contingencies, sales returns and allowances, allowance for doubtful accounts, inventory valuation, reserve for warranty costs, valuation of deferred tax assets, stock-based compensation expense and fair value of warrants. The Company bases its estimates on 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.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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. Many of these risks and uncertainties are described in “Risk Factors” in Part II, Item 1A of this Quarterly Report, which risks and uncertainties include, among others: the Company may experience fluctuations in its revenues and operating results, which makes it difficult to predict future results and which may cause its stock price to decline; the Company could continue to incur operating losses in the future; the Company’s announcement of its engagement of Deutsche Bank as its financial advisor to explore strategic options could disrupt its business and create uncertainty about its prospects as a stand-alone entity; fluctuations in operating results could cause the price of the Company’s common stock to decline; the Company may be unable to raise additional funds or to do so on favorable terms; the Company competes in highly competitive markets and is subject to various competitive pressures; the Company may be unable to compete effectively in a rapidly evolving market and to respond quickly and effectively to changing market requirements; the Company must hire, integrate and retain qualified personnel; the Company’s products may contain defects or errors; the Company’s failure to provide high-quality support and services could have a material and adverse effect on its business and results of operations; the Company may be unable to increase market awareness of its brand and products and develop and expand its sales channels; the Company’s international operations subject the Company to additional risks; the Company’s failure to maintain effective systems of internal controls could affect the Company’s ability to produce accurate financial results; gross margins for the Company’s products and services may vary; others may claim that the Company infringes their intellectual property rights; the Company may be unable to protect its intellectual property rights; the continued development of demand for wireless networks is uncertain; the Company’s sales cycle is long and unpredictable and subject to seasonal fluctuation; the Company’s revenues may decline as a result in changes in public funds of educational institutions; the Company may be unable to forecast customer demand accurately in making purchase decisions; average sales prices for the Company’s products may decline; the Company relies on channel partners to generate a substantial majority of its revenues and these partners may fail to perform; the Company relies on third parties to manufacture its products and fulfill customer orders and the failure of these third parties to perform could have an adverse effect on the Company’s reputation and ability to manufacture and distribute products; and, the Company may be required comply with new or modified regulations or standards related to its products.

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 and could cause it to redesign its products. The Company relies on third parties for the fulfillment of its customer orders, and the failure of these third parties 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 and accounts receivable. The Company maintains its cash and cash equivalents 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 March 31, 2015, two distributor customers accounted for 45% of the Company’s net accounts receivable. As of December 31, 2014, three distributor customers accounted for 39% of the Company’s net accounts receivable. The Company usually does not require collateral on accounts receivable. As of March 31, 2015 and December 31, 2014, the allowance for doubtful accounts was $252,000 and $140,000.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 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 to 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, the Company uses the residual method to recognize revenue when an agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence (“VSOE”) of all undelivered elements exists. The Company establishes VSOE for these arrangements based on sales of support services arrangements on a stand-alone basis. The normal pricing for multi-year support services arrangements is based on the normal price of a one year support services arrangement multiplied by the number of years of support services which is 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 software 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 product 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.

Third-party evidence (“TPE”) of selling price is determined based on competitor prices for similar deliverables when sold separately. 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 the selling prices for similar products from competitors on a stand-alone basis. 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 at which it would sell support services if support services were regularly sold on a stand-alone basis.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 the estimated 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 and discount from the list prices.

The Company regularly reviews VSOE and ESP and maintains internal controls over the establishment and updates of these estimates. There was no material impact during 2014, 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 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 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. Sales to certain distributors were made pursuant to price discounts based on certain criteria, the Company accrues the estimated price discount as a reduction to both accounts receivable and net revenues.

Revenues for support services are recognized on a straight-line basis over the support period, which typically ranges from one year to five years.

Revenues for service cloud computing subscriptions are recognized ratably on a straight-line basis over the contractual term of the arrangement.

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 asset’s estimated fair value. The Company has not incurred any impairment expense related to its long-lived assets during the three months ended March 31, 2015 and 2014.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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. The Company first assesses 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. During the quarter ended March 31, 2015, the Company’s stock price declined significantly due to large volume of market sale of the Company’s stock, which resulted in a significant reduction in the Company’s fair value and market capitalization. The stock price dropped from $3.76 as of December 31, 2014 to $1.44 as of March 31, 2015, and subsequently dropped further. Additionally, the Company’s financial net losses continued in the quarter ended March 31, 2015, which resulted in a stockholders’ deficit as of March 31, 2015. As a result, the Company performed an impairment test and determined that its goodwill was impaired based on qualitative factors as the Company’s carrying value was negative. This resulted in a charge of $1.7 million during the quarter ended March 31, 2015.

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 condensed consolidated financial statements.

Warranty — The Company provides a warranty on products 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 Company’s accrual for anticipated warranty costs has declined primarily due to a decline in the historical volume of product returned under the warranty program. The warranty provision is recorded as a component of costs of products revenues in the condensed consolidated statements of operations.

Accrued warranty, which is included in accrued liabilities on the condensed consolidated balance sheets, as of March 31, 2015 is as follows (in thousands):


	March 31, 2015
Accrued warranty balance – January 1, 2015	$	593
Warranty costs incurred		(35	)
Provision for warranty		7

Accrued warranty balance – March 31, 2015	$	565

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. Recently Issued Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued their guidance on simplifying the presentation of debt issuance costs which changes the presentation of debt issuance costs in financial statements. The guidance requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of the guidance on its condensed consolidated balance sheets.

In May 2014, the FASB issued their guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for public entities for reporting periods beginning after December 15, 2016, and interim and annual reporting periods thereafter. In April 2015, the FASB voted for a one-year deferral of the effective date and is expected to issue an exposure draft during the second quarter of 2015. Early adoption is not permitted for public entities. The Company is currently evaluating the impact of the amended guidance on its consolidated financial position, results of operations and cash flows.

In June 2014, the FASB issued their guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The amendments may be applied prospectively to all awards granted or modified after the effective date or retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented. The Company is currently evaluating the impact of the amended guidance on its condensed consolidated financial statements.

3. Inventory

Inventory as of March 31, 2015 and December 31, 2014 is as follows (in thousands):


	March 31, 2015		December 31, 2014
Finished goods	$	9,200	$	8,521
Channel inventory		464		461

Inventory	$	9,664	$	8,982

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, restricted stock units, stock options to purchase common 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 under the treasury stock method.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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:


	Three Months Ended March 31,
	2015		2014
Stock awards and stock options to purchase common stock *		4,965,983		5,002,818
Common stock warrants		468,293		468,293

*	Includes 289,515 and 195,370 shares, which were expected to be issued pursuant to the Company’s Employee Stock Purchase Plan as of March 31, 2015 and 2014, respectively, based on employee enrollment.

5. Cost Reduction Program

2014 Plan

In January 2014, the Company commenced a realignment of its resources in accordance with the evolving demands of the business. While the Company continued to invest in research and development in an effort to enhance existing products as well as develop new products, it consolidated certain functions which resulted in a restructuring cost of $0.7 million in 2014. As part of the plan, the Company eliminated approximately 18 positions worldwide in its research and development, sales and marketing and general and administrative functions. The restructuring costs consist primarily of severance expenses. The affected employees departed by June 30, 2014.

2015 Plan

In January 2015, the Company announced a plan of reorganization (the “Restructuring”) pursuant to which, among other things, employees were terminated under a plan of termination. The Company recorded restructuring charges of $0.7 million during the three months ended March 31, 2015 in connection with the Restructuring relating to one-time employee termination benefits, including severance benefits and other employee termination expenses, and other one-time items. In order to further preserve existing cash, a portion of the severance benefits were paid with stock in the form of accelerated vesting of outstanding restricted stock units. In connection with the efforts to streamline its business structure with the Restructuring, the Company reduced worldwide headcount by approximately 10%. The majority of these reductions were effective by the end of January 2015. In addition, for the subsequent three months ending June 30, 2015, the Company currently anticipates recording an additional charge of approximately $0.5 million in connection with the Restructuring.

The Company recorded the restructuring expenses under the 2015 Plan in the condensed consolidated statements of operations as follows (in thousands):


	Three Months Ended
	March 31, 2015
Costs of revenues	$	9
Research and development		69
Sales and marketing		609
General and administrative		21

Total restructuring expenses	$	708

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table provides a summary of the restructuring activities included in accrued liabilities during the three months ended March 31, 2015 (in thousands):


	2014 Plan					2015 Plan						Total
	Employee Severance			Other Exit- Related Costs		Employee Severance			Other Exit- Related Costs			Total
Balance at January 1, 2015	$	18		$	17	$	—		$	—		$	35
Restructuring expenses		—			—		573			135			708
Cash payments		(18	)		—		(211	)		(94	)		(323	)
Stock-based compensation		—			—		(346	)		—			(346	)

Balance at March 31, 2015	$	—		$	17	$	16		$	41		$	74

For the 2014 Plan, the restructuring costs included $147,000 of stock-based compensation expense resulting from the acceleration of vesting of 59,000 restricted stock units to two affected employees. For the 2015 Plan, the restructuring costs include $346,000 of stock-based compensation expense resulting from the acceleration of vesting of 9,667 restricted stock units and the grant of 98,438 fully vested restricted stock units to two affected employees.

The balance at March 31, 2015 represents remaining estimated costs for activities that have incurred, but have yet to be paid, as a result of the restructuring. Payments for the remaining $74,000 are expected to be paid by September 30, 2015.

6. 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 and that require 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. The Company did not have any financial liabilities that are measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014.

Level I instrument valuations are obtained from quotes for transactions in active exchange markets involving identical assets. The Company’s cash equivalents are valued using market prices on active markets (Level I). 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 its advisors. 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 three months ended March 31, 2015 and December 31, 2014.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of March 31, 2015, the Company’s fair value hierarchy for its financial assets was as follows (in thousands):


	March 31, 2015
	Active Markets for Identical Instruments (Level I)		Significant Other Observable (Level II)		Significant Unobservable (Level III)		Total Fair Value
Assets:
Money market funds	$	6,085	$	—	$	—	$	6,085

As of December 31, 2014, the Company’s fair value hierarchy for its financial assets was as follows (in thousands):


	December 31, 2014
	Active Markets for Identical Instruments (Level I)		Significant Other Observable (Level II)		Significant Unobservable (Level III)		Total Fair Value
Assets:
Money market funds	$	9,085	$	—	$	—	$	9,085

7. Goodwill

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. The Company recorded $1.7 million goodwill as a consequence of that acquisition. The Company performed an impairment test in March 2015 and determined that its goodwill was impaired. As of March 31, 2015, the Company performed a qualitative impairment testing and identified factors that indicated there was an impairment of its goodwill and wrote-off the full carrying value of $1.7 million in goodwill. The amount of goodwill impairment loss is presented as a separate line item in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2015.

8. Cost Method Investments

During the year ended December 31, 2011, the Company invested $1,250,000 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. In March 2015, the Company sold this investment back to the company at its cost for a cash price of $1,250,000. The investment of $1,250,000 was included in other assets in the condensed consolidated balance sheet as of December 31, 2014.

9. Borrowings

In June 2012, the Company entered into a loan and security agreement (the “VLL Agreement”), with Venture Lending and Leasing VI, Inc. (“VLL”), pursuant to which VLL made a term loan to the Company in the aggregate principal amount of $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, among others, on the Company’s ability to incur additional indebtedness; its ability to acquire, merge or consolidate with other businesses; and its ability to pay dividends on its equity securities. As of March 31, 2015, the Company was in compliance with all of its loan covenants.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 on the earlier of a change of control or September 1, 2015, which is the maturity date of the VLL Agreement. The Company recorded additional interest expense of $0.1 million and $0.2 million during the three months ended March 31, 2015 and 2014 related to the $2.0 million payment. The Company 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 principal balance plus interest at any time, provided the Company is not then in default, subject to prepayment penalties. On or after January 1, 2014, if prepaid, a prepayment penalty in the amount of 80% of the remaining scheduled but unpaid interest through the maturity date will become due.

In connection with the VLL Agreement, the Company issued Venture Lending & Leasing, LLC 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 condensed consolidated balance sheet in the amount of $384,000. In addition, debt issuance costs 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 net interest expense related to the debt discounts of $15,000 and $41,000 during the three months ended March 31, 2015 and 2014. As of March 31, 2015, the remaining unamortized amount of the debt discounts was $9,000 and was classified as a current debt discount.

The remaining principal payments for the Company’s long-term debt under the VLL Agreement as of March 31, 2015 was $1.8 million.

10. Commitments and Contingencies

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 March 2020. 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. The Company has the option to renew the lease for an additional five years. The Company also leases office space for sales offices and test facilities in multiple locations around the world under noncancelable operating leases that expire at various dates. Commitments under these operating leases are as follows (in thousands):


	Operating Leases
Fiscal Years:
2015 (remainder)	$	721
2016		1,201
2017		1,110
2018		1,144
2019		1,178
Thereafter		297

Total	$	5,651

Other commitments as of March 31, 2015 totaled approximately $7.3 million and consisted of inventory and other noncancelable purchase obligations.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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. The Company records litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), the Company has determined that it does not have material exposure, or it is unable to develop a range of reasonably possible losses.

In May 2011, Linex Technologies, Inc. (“Linex”) 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 No. 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 Linex’s complaint that the 322 and 219 patents were infringed by 802.11n products imported and sold by us and by Hewlett-Packard, Apple, Aruba Networks, and Ruckus Wireless. The case in Delaware was stayed due to the pending ITC Investigation. Linex subsequently withdrew its ITC complaint and moved to lift the stay of the Delaware litigation, which was not opposed by the defendants and was granted by the Delaware court. On December 12, 2012, Linex amended its complaint to add a third patent, U.S. Patent No. RE43,812. The defendants filed a motion to transfer the case to the Northern District of California, which was granted by the Delaware court on January 7, 2013. The case was pending before the Honorable Claudia Wilken, and trial was set for July 28, 2014. We filed a responsive Markman brief and dispositive motions on December 9, 2013. The court held a Markman hearing on January 23, 2014. On May 20, 2014, the court entered summary judgment in favor of the defendants, finding some of the asserted patent claims invalid, and the remaining asserted patent claims not infringed. On June 18, 2014, Linex filed a notice of appeal to the Court of Appeals for the Federal Circuit. On September 15, 2014, the court awarded to the defendants a portion of their attorneys’ fees spent defending against Linex’s claims. On January 14, 2015, we reached a settlement with Linex that included a perpetual covenant not to sue us or our customers on any Linex patents. As part of the settlement, Linex dismissed its infringement claims, and we dismissed our counterclaims, with prejudice. The Court signed an order dismissing the cases with prejudice on January 15, 2015.

On August 15, 2012, ReefEdge Networks, LLC (“ReefEdge”) filed suit against us and CDW (an IT reseller) and filed suits separately against CDW and various other defendants, including Cisco Systems, Aruba Networks, Dell Computer, and Ruckus Wireless in the United States District Court for the District 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. The case was pending before the Honorable Leonard P. Stark. On April 29, 2013, Brocade Communications Systems tendered a request to us for indemnity in a related case (ReefEdge Networks v. Motorola Solutions and Brocade Communications) before the same judge in Delaware, based on our sales to Brocade and its predecessors in interest. We accepted Brocade’s request. The court held a claim construction hearing on April 18, 2014. The parties entered into a settlement on October 16, 2014, and the case was dismissed with prejudice on October 22, 2014. We made no payment to ReefEdge. The Brocade case was also settled, and was dismissed with prejudice on November 3, 2014, with no payment by us to ReefEdge under the Brocade indemnity obligations.

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.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Indemnifications — Our customer agreements generally include certain provisions for indemnifying such customers against certain liabilities, including if our products infringe a third party’s intellectual property rights. From time to time, we receive requests for indemnification from our customers. We review these requests on a case-by-case basis and may choose to assume the defense of such litigation asserted against our customers. We have agreed in certain circumstances to indemnify certain suppliers and service providers in connection with liabilities they may incur in connection with the provision of services to us. To date, we have not incurred any material costs as a result of such indemnification provisions and we have not accrued any liabilities related to such obligations in the accompanying condensed consolidated financial statements.

In addition, our Bylaws provide that we shall indemnify our directors, officers, employees and agents to the extent such person becomes a party or is threatened to become a party to litigation or other proceedings arise by reason of their service to the Company, subject to certain limitations . In addition, we have entered into indemnification agreements or other contractual arrangements with current and former executive officers and directors of the Company which contain provisions that may require us, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and officers.

In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or settlement, may cause a material adverse effect on the Company’s future business, operating results or financial condition. It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

From time to time, the Company may receive indemnification claims in the normal course of business. The Company does not believe it is party to any currently pending claims the outcome of which will have a material adverse effect on its operations or financial position.

11. Common Stock

Warrants for Common Stock

As described in Note 9, 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)		5.0
Expected volatility		59.1	%

The relative fair value of the warrant was recorded as a debt discount on the condensed consolidated balance sheet in the amount of $384,000. As of March 31, 2015, this warrant has not been exercised and was still outstanding.

12. 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.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2013 New Employee Stock Inducement Plan

On June 6, 2013, the Company’s Board of Directors approved the Company’s 2013 New Employee Stock Inducement Plan (the “2013 Plan”), under which 500,000 shares of common stock were reserved for issuance. The 2013 Plan is designed to attract new employees by providing for awards in the form of restricted stock units, restricted stock awards, stock options (which shall be nonstatutory stock options) or stock appreciation rights. As of March 31, 2015, 210,000 shares of restricted stock units were outstanding. As of March 31, 2015, 185,000 shares of common stock were available for future issuance under the 2013 Plan.

Inducement Plan and Agreement and Restricted Stock Unit Plan and Agreements with Chief Executive Officer

In March 2012, the Company granted options to purchase 600,000 shares of common stock under the Inducement Stock Option Plan (the “2012 Plan”) and Agreement, 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, to Dr. Bami Bastani, Chief Executive Officer (“CEO”), as a material inducement to the acceptance of employment with the Company. The grants were approved by the Company’s board of directors, as specified under the Listing Rules of the Nasdaq Stock Market. The 50,000 shares of restricted stock units under the Performance-Based Restricted Stock Unit Plan were cancelled during 2014 while the 50,000 shares of restricted stock units under the Service-Based Restricted Stock Unit Plan and Agreement were fully vested as of December 31, 2014. As of March 31, 2015, options to purchase 600,000 shares of common stock were issued and outstanding under the Inducement Stock Option Plan.

Stock Incentive Plans

In March 2010, the Company’s board of directors and its stockholders approved the 2010 Stock Incentive Plan (the “2010 Plan”), 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 is 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 Company’s board of directors.

The Company’s stock-based compensation expense was $2.1 million and $2.0 million during the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015 and December 31, 2014, the Company accrued $0.3 million and zero, respectively, in accrued liabilities on the consolidated balance sheets for awards that were earned but not issued as of the balance sheet date.

Determining Fair Value of Stock Options

The fair value of stock options granted by the Company is determined 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-employment exercises taking into account the contractual life of the award.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Expected Volatility — The expected volatility was calculated using the historical stock volatilities of the Company’s historical data over a period based on the expected terms of the options.

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, 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.

The Company did not grant any stock options during the three months ended March 31, 2015 and 2014. The Company recognized stock-based compensation expense in the amount of $0.3 million and $0.4 million for stock options in the three months ended March 31, 2015 and 2014.

A summary of the Company’s stock award activity during the three months ended March 31, 2015 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, 2015		2,401,148			2,319,577		$	4.81		6.8	$	789
Additional shares authorized		964,006			—			—
Restricted stock granted		(1,045,867	)		—			—
Cancelled options		115,342			(115,342	)		3.86
Restricted stock returned		379,996			—			—
Exercised options		—			(8,509	)		2.02

Outstanding – March 31, 2015		2,814,625			2,195,726		$	4.87		6.2	$	4

Vested and expected to vest – March 31, 2015					1,963,180		$	4.96		6.0	$	4
Vested – March 31, 2015					1,704,526		$	5.19		5.8	$	4

The aggregate intrinsic value of options exercised was $10,000 and $89,000 for the three months ended March 31, 2015 and 2014, determined as of the date of option exercise.

Additional information regarding the Company’s stock options outstanding and vested as of March 31, 2015 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		200,924		5.9	$	1.66		142,672	$	1.64
$2.18 – $4.33		810,264		6.7		3.45		562,715		3.44
$4.34 – $6.50		829,024		6.6		4.83		647,721		4.84
$6.51 – $19.51		355,514		4.0		10.04		351,418		10.06

		2,195,726		6.2	$	4.87		1,704,526	$	5.19

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of March 31, 2015, total compensation cost related to unvested stock-based awards granted to employees, but not yet recognized, was $7.4 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted-average remaining period of 1.7 years and will be adjusted for subsequent changes in estimated forfeitures. Future option grants increase the amount of compensation expense that will be recorded.

Restricted Stock Awards and Restricted Stock Units — The Company has issued restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) to employees and members of the board of directors. These restricted shares have vesting periods ranging from immediate vesting to four years from the date of issuance and vesting is subject to the recipient continuing to provide service to the Company for the duration of the vesting period. The vesting of some RSUs is also performance-based and the vesting of those RSUs is subject to the achievement of specific performance metrics in addition to continued service. The Company issued 1,045,867 and 980,021 RSUs during the three months ended March 31, 2015 and 2014, respectively, which were issued from the 2010 Plan, and there were no RSAs outstanding during the three months ended March 31, 2015. The Company did not issue RSAs during the three months ended March 31, 2015 and 2014. The Company recognized stock-based compensation in the amount of $1.8 million and $1.4 million for RSUs during the three months ended March 31, 2015 and 2014, respectively.

A summary of the Company’s RSU activity during the three months ended March 31, 2015 is presented below:


	Number of Restricted Stock Units Outstanding			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value (in thousands)
Outstanding – January 1, 2015		2,017,412		$	4.13	$	7,571
Restricted stock units granted		1,045,867			2.68
Restricted stock units released		(318,990	)		4.59
Restricted stock units forfeited		(263,547	)		3.73

Outstanding – March 31, 2015		2,480,742		$	3.50	$	3,572

The majority of the RSUs that vested in the three months ended March 31, 2015 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 three months ended March 31, 2015, 318,990 shares of RSUs vested with an intrinsic value of approximately $1.0 million. The Company withheld 117,703 shares to satisfy approximately $0.4 million of employees’ minimum tax obligation on the vested RSUs. The withheld shares are returned to the share pool and are available for future grant.

Employee Stock Purchase Plan — In March 2010, the Company’s board of directors approved the 2010 Employee Stock Purchase Plan (“ESPP”). 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, additional shares equal to the lesser of 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 after March 30, 2020.

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The Company calculates the compensation expense for the ESPP using the Black-Scholes option-pricing model. There were no ESPP offering periods subject to valuation during the three months ended March 31, 2015 and 2014.

The Company recognized compensation expense related to the ESPP in the amount of $0.1 million and $0.2 million for the three months ended March 31, 2015 and 2014. The Company had 356,659 shares of its common stock available for future issuance under the ESPP as of March 31, 2015.

13. 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 local area networks solutions.

Revenues

Revenues by geography are based on the billing address of the customer. The following table sets forth revenue by geographic area (in thousands):


	Three Months Ended March 31,
	2015		2014
United States	$	6,652	$	9,501
United Kingdom		4,119		5,110
Asia Pacific		3,086		2,279
Rest of EMEA		2,730		2,223
Rest of Americas		829		1,487

Total	$	17,416	$	20,600

Long-Lived Assets

The following table sets forth long-lived assets by geographic area (in thousands):


	March 31, 2015		December 31, 2014
United States	$	997	$	1,144
India		624		721
United Kingdom		11		13
Japan		1		1

Total	$	1,633	$	1,879

MERU NETWORKS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

14. Income Taxes

The Company’s provision for income taxes was $103,000 and $112,000 for the three months ended March 31, 2015 and 2014, consisting primarily of provisions for foreign income taxes.

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 unutilized tax credits from such years. The Company’s tax years for December 31, 2008 and forward are subject to examination by the major foreign taxing jurisdictions in which the Company is subject to tax.

15. Related-Party Transactions

The Company had a reseller in Japan that was a related party by virtue of its ownership of shares of the Company’s stock during the three months ended March 31, 2014. However, as of the third quarter of 2014, this reseller was no longer a related party due to the fact that it no longer owned shares of the Company’s stock. The total revenue from this former related party amounted to $0.3 million for the three month ended March 31, 2014.

Item 2. 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 condensed consolidated financial statements and related notes included elsewhere in this report. This Periodic Report on Form 10-Q 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-Q, 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 “Part II, Item 1A. Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-Q 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-Q to confirm these statements to actual results or revised expectations.

Overview

We serve customers around the world by delivering high performance intelligent Wi-Fi solutions that are designed to deliver an extraordinary mobility experience, including for enterprises in high density and bandwidth intensive environments, as well as for small-and-medium enterprises. Our best-of-breed mobile access and virtualized Wi-Fi solutions are designed to be easy to deploy, operate and expand for our customers’ ever-changing mobility requirements. Our products are designed to enable enterprises to migrate their business-critical applications from wired networks to wireless networks, and become what we refer to as All-Wireless Enterprises. We offer a wireless architecture designed to manage enterprise access networks for maximum flexibility and mobility.

We were founded in 2002 with the vision of enabling organizations to become All-Wireless Enterprises. We began commercial shipments of our products in 2003. Our products are sold worldwide primarily through value-added resellers, or VARs, and distributors, and have been deployed by approximately 14,000 customer installations worldwide. We employ a sales force that is responsible for managing sales within each geographic territory in which we market and sell our products.

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.

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. In July 2013, we announced an 802.11ac solution and commenced commercial shipments in the third quarter of 2013. In February 2015, we launched XPress Cloud which is a new cloud service intended to serve the complementary small-and-medium enterprise market.

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 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.

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 $90.9 million in 2014 and were $17.4 million and $20.6 million during the three months ended March 31, 2015 and 2014, respectively. It is difficult to predict our revenues in the near term. Our revenues have fluctuated significantly in the past, and may continue to fluctuate in the future. For example, our revenues declined by $14.9 million in 2014 compared to 2013. 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.

There can be significant seasonal factors that may cause the first quarter of our fiscal year to have relatively weaker products revenues than the second, third and fourth fiscal quarters. Those factors include year-end spending by our customers, end of year sales incentives, the procurement and deployment cycles of our education customers and seasonal reductions in business activities during the summer. The magnitude of this seasonality may be overshadowed by overall growth in product sales, variation in deferred revenue, and the timing of large transactions. 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 grow our business and invest in research and development, sales and marketing, and administrative functions. As of March 31, 2015, we had an accumulated deficit of $294.3 million.

In January 2015, we announced that we had retained Deutsche Bank as our exclusive financial advisor to explore strategic options, including, but not limited to, strategic partnering of our technology and possible sale or merger of the Company. There can be no assurance that our exploration of strategic options will result in a transaction. We have not set a timetable for the completion of this process and do not intend to disclose further developments unless and until our Board of Directors approves a specific action or otherwise concludes the review of strategic options.

In January 2015, we announced a plan of reorganization (the “Restructuring”) pursuant to which, among other things, employees were terminated under a plan of termination. We recorded restructuring charges of $0.7 million during the three months ended March 31, 2015 in connection with the Restructuring relating to one-time employee termination benefits, including severance benefits and other employee termination expenses, and other one-time items. In connection with the efforts to streamline our business structure with the Restructuring, we reduced worldwide headcount by approximately 10%. The majority of these reductions were effective by the end of January 2015. In addition, for the subsequent three months ending June 30, 2015, we currently anticipate recording an additional charge of approximately $0.5 million in connection with the Restructuring. Please refer to Note 5, Cost Reduction Program, for details.

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” and we discuss our cash and cash equivalents under “Liquidity and Capital Resources.”


	Three Months Ended March 31,
	2015			2014
	(dollars in thousands)
Products revenues	$	12,917		$	15,833
Support and services revenues		4,499			4,767
Gross margin-products and support and services		60	%		62	%
Loss from operations (1)	$	(7,718	)	$	(7,556	)
Cash and cash equivalents		11,599			25,664
Net cash used in operating activities		(3,114	)		(3,780	)
(1) Includes stock-based compensation expense of:	$	2,136		$	1,973

Gross margin. 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 whether 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 have been for personnel-related expenditures, purchases of inventory, and costs related to our facilities. 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, and 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:

•

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

•

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

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

•

Costs of Products Revenues — A substantial majority of the costs of products revenues consists of third-party manufacturing costs and component costs. Our costs of products revenues also include shipping costs, third-party logistics costs, write-offs for excess and obsolete inventory and warranty costs.

•

Costs of Support and Services Revenues — Costs of support and services revenues are primarily comprised of personnel costs associated with our technical support, professional services and training teams.

Operating Expenses. Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The largest component of our operating expenses is personnel costs. Personnel costs consist of salaries, commissions, bonuses and benefits for our employees. We grant our employees and members of our executive advisory board and 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.

•

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

•

Sales and Marketing Expenses. Sales and marketing expenses represent the largest component of our operating expenses and primarily consist of personnel costs, sales commissions, travel costs, costs for marketing programs and facilities costs.

•

General and Administrative Expenses. General and administrative expenses primarily consist of personnel, professional services and facilities costs related to our executive, finance, human resource and information technology functions. Professional services consist of outside legal and accounting services and information technology consulting costs. We have incurred additional accounting and legal costs related to compliance with rules and regulations enacted by the SEC, as well as additional insurance, investor relations and other costs associated with being a public company.

Interest Expense, Net. During the three months ended March 31, 2015 and 2014, interest expense, net consists primarily of interest expense on debt. As of March 31, 2015, we had $1.8 million of outstanding debt before debt discounts.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these condensed 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, comprehensive income and cash flows will be affected.

We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates and, therefore, could potentially have a significant impact on our condensed consolidated financial statements: revenue recognition; stock-based compensation; fair value of financial instruments; inventory valuation; allowance for doubtful accounts; income taxes and loss contingencies.

There have been no significant changes in our accounting policies during the three months ended March 31, 2015, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2014.

Results of Operations

Three months ended March 31, 2015 compared to three months ended March 31, 2014

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


	Three Months Ended March 31,
	2015					2014
REVENUES:
Products	$	12,917		74.2	%	$	15,833		76.9	%
Support and services		4,499		25.8			4,767		23.1

Total revenues		17,416		100.0			20,600		100.0

COSTS OF REVENUES:
Products		5,514		31.7			5,875		28.5
Support and services		1,524		8.8			1,902		9.3

Total costs of revenues		7,038		40.4			7,777		37.8

Gross margin		10,378		59.6			12,823		62.2

OPERATING EXPENSES:
Research and development		4,294		24.7			5,452		26.5
Sales and marketing		9,166		52.6			11,629		56.4
General and administrative		2,978		17.1			3,298		16.0
Impairment of goodwill		1,658		9.5			—		—

Total operating expenses		18,096		103.9			20,379		98.9

Loss from operations		(7,718	)	(44.3	)		(7,556	)	(36.7	)
Interest expense, net		(164	)	(0.9	)		(378	)	(1.8	)
Other expense, net		(52	)	(0.3	)		(16	)	(0.1	)

Loss before provision for income taxes		(7,934	)	(45.6	)		(7,950	)	(38.6	)
Provision for income taxes		103		0.6			112		0.5

Net loss	$	(8,037	)	(46.1	)%	$	(8,062	)	(39.1	)%

Our total revenues decreased by $3.2 million, or 15.5%, to $17.4 million during the three months ended March 31, 2015 from $20.6 million during the three months ended March 31, 2014. This decrease was primarily the result of decreased demand for our products particularly in the Americas during the three months ended March 31, 2015. The decrease in the United States was primarily the result of the suspension of the Federal Communications Commission’s E-Rate program in February 2014, which subsidized the purchase of approved telecommunications, Internet access, and internal connections costs for our eligible public educational institution customers. After effectively halting E-Rate program funding in February 2014, the Federal Communications Commission announced that it would fund, starting in July 2015, the next two years of E-Rate for internal connections at approximately $1 billion per year.

Products revenues decreased by $2.9 million, or 18.4%, to $12.9 million during the three months ended March 31, 2015 from $15.8 million during the three months ended March 31, 2014. The decrease was primarily a result of a decrease in unit shipments particularly in the United States during the three months ended March 31, 2015.

Support and services revenues decreased by $0.3 million, or 5.6%, to $4.5 million during the three months ended March 31, 2015 from $4.8 million during the three months ended March 31, 2014. This decrease in support and services revenues is a result of marginally lower renewal of support contracts by existing customers.

Costs of Revenue and Gross Margin

Total costs of revenues decreased by $0.7 million, or 9.5%, to $7.0 million during the three months ended March 31, 2015 from $7.8 million during the three months ended March 31, 2014. Overall gross margins, as a percentage of total revenues, decreased to 59.6% during the three months ended March 31, 2015 from 62.2% during the three months ended March 31, 2014. Our product gross margins decreased to 57.3% during the three months ended March 31, 2015 from 62.9% during the three months ended March 31, 2014. This decrease in the product gross margin during the three months ended March 31, 2015 was primarily the result of decreased product shipments and product mix with increased lower margin items. Our support and services gross margins increased to 66.1% during the three months ended March 31, 2015 from 60.1% during the three months ended March 31, 2014. This increase was primarily the result of lower personnel expense.

Operating Expenses

Our operating expenses decreased by $2.3 million, or 11.2%, to $18.1 million during the three months ended March 31, 2015 from $20.4 million during the three months ended March 31, 2014, and increased as a percentage of revenue from 98.9% during the three months ended March 31, 2014 to 103.9% during the three months ended March 31, 2015.

During March 2015, we performed a qualitative impairment testing and identified factors that indicated an impairment of our goodwill. We wrote-off the full carrying value of $1.7 million in goodwill, which is included in the $18.1 million operating expense for the three months ended March 31, 2015.

Research and Development Expenses

Research and development expenses decreased by $1.2 million, or 21.2%, to $4.3 million during the three months ended March 31, 2015 from $5.5 million during the three months ended March 31, 2014. This decrease is primarily the result of a decrease of $0.7 million in research and development personnel costs as a result of reduction in headcount, a decrease of $0.3 million in professional services, and a decrease of $0.2 million in travel expenses.

Sales and Marketing Expenses

Sales and marketing expenses decreased by $2.5 million, or 21.2%, to $9.2 million during the three months ended March 31, 2015 from $11.6 million during the three months ended March 31, 2014. This decrease is primarily the result of a decrease of $1.8 million in sales and marketing personnel costs as a result of reduction in headcount, a decrease of $0.4 million in travel expenses, a decrease of $0.2 million in conference and seminar expenses, and a decrease of $0.1 million in professional services expenses.

General and Administrative Expenses

General and administrative expenses decreased by $0.3 million, or 9.8%, to $3.0 million during the three months ended March 31, 2015 from $3.3 million during the three months ended March 31, 2014. This decrease is primarily the result of a decrease of $0.3 million in general and administrative personnel costs as a result of reduction in headcount, a decrease of $0.2 million in stock-based compensation expense, and a decrease of $0.1 million in licenses and fees expenses, partially offset by an increase of $0.2 million in travel expenses, and an increase of $0.1 million in bad debt expense.

Impairment of goodwill

During the quarter ended March 31, 2015, our stock price declined significantly due to large volume of market sale of our stock, which resulted in a significant reduction in our fair value and market capitalization. The stock price dropped from $3.76 as of December 31, 2014 to $1.44 as of March 31, 2015, and subsequently dropped further. Additionally, our financial net losses continued in the quarter ended March 31, 2015, which resulted in a stockholders’ deficit as of March 31, 2015. As a result, we performed an impairment test and determined that our goodwill was impaired based on qualitative factors as our carrying value was negative. This resulted in a charge of $1.7 million during the quarter ended March 31, 2015.

Interest Expense, net

Interest expense, net decreased by $0.2 million, to $0.2 million during the three months ended March 31, 2015, from $0.4 million during the three months ended March 31, 2014. This decrease was primarily due to the paydown of the principal balances on our long-term debt related to the $12.0 million loan agreement entered into with VLL in June 2012.

Provision for Income Taxes

Our provision for income taxes decreased by $9,000, or 8.0%, to $103,000 during the three months ended March 31, 2015, from $112,000 during the three months ended March 31, 2014. This decrease in the provision for income taxes was due to lower operating income in our international entities.

Liquidity and Capital Resources

We have funded our operations primarily with proceeds from issuances of common stock and long-term debt.

During June 2012, we entered into a term loan and security agreement with VLL, or the VLL Term Loan Agreement, 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. 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 VLL Term 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:

•

incur additional indebtedness except for specified permitted indebtedness;

•

incur any liens on our property, except for specified permitted liens;

•

change our business from that in which we were engaged or reasonably related businesses at the time of the loan agreement;

•

merge or consolidate, or permit any of our subsidiaries to merge or consolidate, with any person, or acquire, or permit any of our subsidiaries to acquire, all or substantially all of the capital stock or property of another person; or

•

pay any dividends or make any distributions on our equity securities or repurchase any of our equity, except we may pay dividends payable solely in common stock and may repurchase securities from employees and consultants in a limited manner.

Amounts outstanding under the VLL 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 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 March 31, 2015, the Company was in compliance with all of its loan covenants. As of March 31, 2015, we had debt outstanding under the loan in the amount of $1.8 million, before debt discounts, that bears a fixed interest rate of 12% per year.

As of March 31, 2015, we had cash and cash equivalents of $11.6 million as compared to cash and cash-equivalents balance of $14.9 million as of December 31, 2014.

Cash Flows from Operating Activities

Our primary uses of cash from operating activities have been related to personnel and other operating expenditures. 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 $3.1 million during the three months ended March 31, 2015. Total cash used in operating activities was $3.8 million during the three months ended March 31, 2014.

During the three months ended March 31, 2015, cash used in operating activities of $3.1 million reflected a net loss of $8.0 million, partially offset by non-cash charges of $4.4 million and changes in our net operating assets and liabilities of $0.6 million. The non-cash charges were mainly comprised of $2.1 million in stock-based compensation, $1.7 million in impairment of goodwill, $0.3 million in depreciation and amortization, $0.1 million in net provision for bad debt and $0.1 million in accrued interest on long-term debt. The changes in our net operating assets and liabilities were comprised of a decrease of $5.0 million in accounts receivable that was partially offset by an aggregate decrease of $3.4 million in accounts payable and accrued liabilities, an increase of $0.7 million in inventory and a decrease of $0.5 million in deferred revenues.

Cash used in operating activities was $3.8 million during the three months ended March 31, 2014, which was primarily the result of a net loss of $8.1 million, partially offset by non-cash charges of $2.7 million and changes in our net operating assets and liabilities of $1.6 million. The non-cash charges were mainly comprised of $2.0 million in stock-based compensation, $0.4 million in depreciation and amortization and $0.2 million in accrued interest on long-term debt. The changes in our net operating assets and liabilities were comprised of a decrease of $6.8 million in accounts receivable that was partially offset by an aggregate decrease of $3.9 million in accounts payable and accrued liabilities, an increase of $0.7 million in inventory and a decrease of $0.7 million in deferred revenues.

Cash Flows from Investing Activities

Cash provided by investing activities was $1.2 million during the three months ended March 31, 2015, which was primarily the result of $1.3 million in proceeds from sale of our cost method investment which was partially offset by $0.1 million in capital expenditures. During the three months ended March 31, 2014, cash used in investing activity solely consisted of $0.3 million in capital expenditures.

Cash Flows from Financing Activities

During the three months ended March 31, 2015, cash used in financing activities was $1.4 million, which was primarily comprised of payments on our long-term debt of $1.0 million and a net payment of $0.4 million related to net share settlement of our equity awards including payment of related taxes.

During the three months ended March 31, 2014, cash used in financing activities was $1.2 million, which was primarily comprised of payments on our long-term debt of $0.9 million and a net payment of $0.2 million related to net share settlement of our equity awards including payment of related taxes.

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. Although management believes existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for the next 12 months, it may be necessary thereafter to finance our future operations and capital expenditures by raising additional capital or incurring additional debt. However, there can be no assurances that capital will be available on acceptable terms to us or at all, or that we will ever achieve profitable operations. If we are not able to raise additional capital or access additional debt in sufficient amounts to found our operations in the future, it could have a negative impact on our business plans.

Contractual Obligations

There were no significant changes during the three months ended March 31, 2015 to the contractual obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in our Annual Report on Form 10-K for the year ended December 31, 2014. We are obligated to make principal and interest payments on our debt. Our long-term debt carries a fixed interest rate of 12%. As of March 31, 2015, our obligation to make principal, interest and other payments on our debt totaled $3.8 million.

As of March 31, 2015, we had operating lease obligations of $5.7 million, of which the longest remaining lease expires in 2020. We have the option to renew our operating lease in India for an additional five years. Our outstanding purchase commitments of $7.3 million are due within the next 12 months.

Off-Balance Sheet Arrangements

As of March 31, 2015, we did not have any off balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S-K.

Item 3. 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.

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 the three months ended March 31, 2015, 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 and cash equivalents of $11.6 million and $14.9 million as of March 31, 2015 and December 31, 2014. These amounts were held primarily in cash deposits and money market funds. 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. Decreases in interest rates, however, will reduce future interest income. During the three months ended March 31, 2015, a 10% increase or decrease in overall interest rates would not have had a material impact on our earnings, fair values, or cash flows.

Item 4. 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 Rule 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 March 31, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that the 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.

Changes in Internal Control over Financial Reporting

Regulations under the Exchange Act require public companies, including our company, to evaluate any change in our “internal control over financial reporting” as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. In connection with their evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report, our CEO and CFO did not identify any changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various claims arising in the ordinary course of business. Although no assurance may be given, we believe that we are not presently a party to any litigation of which the outcome, if determined adversely, would individually or in the aggregate be reasonably expected to have a material and adverse effect on our the business, operating results, cash flows or financial position. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined that we do not have material exposure, or we are unable to develop a range of reasonably possible losses. The information set forth under Note 10, Commitments and Contingencies, in Item 1 of Part I of this Quarterly Report on Form 10-Q, is incorporated by reference.

For an additional discussion of certain risks associated with legal proceedings, see the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Item 1A. RISK FACTORS

Risks Related to Our Business and Industry

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors should be carefully considered by investors before making an investment decision. 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, our past financial performance should not be considered as a reliable indicator of our future performance and investors should not use historical trends to anticipate results or trends in future periods.

Our operating results may fluctuate significantly as a result of numerous factors, any one of which could cause our operating results to fall below expectations or guidance, making our future results difficult to predict.

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 global economic environment, particularly in the U.S. and Europe, 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 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. For example, in January 2015, we preannounced results for fourth quarter revenues that were lower than originally forecast. Following such preannouncement, the market price of our stock declined nearly 21% the following trading day. 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 cause our operating results to fluctuate include, but are not limited to:

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fluctuations in demand, including due to seasonality, for our products and services. For example, many companies in our industry experience adverse seasonal fluctuations in customer spending patterns, particularly in the first and third quarters; we have experienced these seasonal fluctuations in the past and expect that this trend will continue in the future;

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fluctuations in sales cycles, including the timing of large orders, and prices for our products and services;

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given the long lead times for the manufacture of our products, our ability to manage and maintain an appropriate level of product inventory in order to be able to ship products ordered during a quarter;

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

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

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limited visibility into customer spending plans;

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changing market conditions, including current and potential customer consolidation;

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variation in sales channels, product costs or mix of products sold;

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the timing of recognizing revenue in any given quarter as a result of revenue recognition accounting rules, including the extent to which sales transactions in a given period are unrecognizable until a future period or, conversely, the satisfaction of revenue recognition rules in a given period resulting in the recognition of revenue from transactions initiated in prior periods;

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the sale of our products in the timeframes we anticipate, including the number and size of orders, and the product mix within any such orders, in each quarter;

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our ability to develop, introduce and ship in a timely manner new products and product enhancements that meet customer requirements;

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the timing and execution of product transitions or new product introductions, including any related or resulting inventory costs;

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delays in customer purchasing cycles in response to our introduction of new products or product transitions;

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customer acceptance of new product introductions. For example, we continue to introduce new access points based on 802.11ac technology, including the wall plate access point in November 2014. These new products may not achieve any significant degree of market acceptance or be accepted into our sales channel by our channel partners. Furthermore, many of our target customers might have recently purchased our 802.11n access points and are not ready to further invest in the newer 802.11ac technology. In addition, these target customers might not have previously purchased products based on 802.11ac technology and might not have a specific budget for the purchase of these products;

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unpredictability in the development of core, new or adjacent markets, including the cloud networking market with respect to our new XPress Cloud product;

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

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our ability to execute our sales strategy focusing primarily on customers in our key verticals of education, hospitality, healthcare and enterprise;

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any significant changes in the competitive dynamics of our markets, including new entrants or substantial discounting of products;

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

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our ability to establish and maintain successful relationships with channel partners, and the effectiveness of any changes we make to our distribution model;

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any increase or decrease in operating expenses in response to changes in the marketplace or perceived marketplace opportunities;

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the quality and level of our execution of our business strategy and operating plan;

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the effectiveness of our sales and marketing programs, including our ability to provide attractive incentives to our channel partners and customers through our pricing and discount programs;

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

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the effect of impairment testing of our goodwill in connection with prior acquisitions; for example, in the first quarter of 2015, we incurred a non-cash accounting charge of $1.7 million in connection with the goodwill impairment loss.

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 $8.0 million and $8.1 million during the three months ended March 31, 2015 and 2014, respectively, and a net loss of $20.9 million for the twelve months ended December 31, 2014. As of March 31, 2015 and December 31, 2014, we had an accumulated deficit of $294.3 million and $286.3 million, respectively. 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, including through 2015 as a result of the expenses associated with the continued development and expansion of our business. In January 2015, we announced cost and expense reductions and we reduced the approximate range of quarterly revenues necessary to reach operating break-even. However, we will continue to incur operating losses if we do not achieve such quarterly revenues or if our cost and expense reduction efforts are not successful. If we continue to incur operating losses, we may be required to further restructure the business in the future, including further cost and expense reductions. Additionally, we may also be affected by the timing of litigation defense costs. Our ability to attain profitability in the future will be affected by, among other things, our ability to execute 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 level of investment in 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 that profitability. As a result, our business could be harmed and our stock price could decline.

The announcement of our engagement of Deutsche Bank as our financial advisor to explore strategic options could adversely affect our business, financial condition, and results of operations.

Our announcement that we have retained Deutsche Bank as our exclusive financial advisor to explore strategic options, including, but not limited to, strategic partnering of our technology and possible sale or merger of Meru, could disrupt our business and create uncertainty about our prospects as a stand-alone entity. This could have an adverse effect on our business, financial condition, and results of operations, regardless of whether a strategic transaction is completed. These risks to our business include:

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diversion of significant management time and resources towards the investigation or completion of a strategic transaction;

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difficulties developing and maintaining relationships with customers and other business partners; and

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impairment of our ability to attract and retain key personnel and other employees.

In addition, there can be no assurance whether or when any strategic transaction will be undertaken or thereafter consummated, and, even if a transaction is consummated, there can be no assurance as to whether or to what degree such a transaction will be successful in maximizing value to our stockholders.

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, 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 expectations. This would likely cause the market price of our common stock to decline. For example, in January 2015 we preannounced results for fourth quarter revenues that were lower than originally forecast and also announced a restructuring to reduce our operating break-even revenues. Following such preannouncement, the market price of our stock declined nearly 21% the following trading day. If we do not achieve future quarterly revenues in the revenue range for operating break-even, we will continue to incur operating losses which will continue to decrease our cash and our business may be harmed. If we continue to incur operating losses, we may be required to further restructure the business, including further cost and expense reductions. In addition to the other risk factors listed in this section, our operating results are affected by a number of factors, including:

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our sales volume;

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

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

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

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

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shortages in the availability of components used in our products, including components whose manufacturing lead times have increased significantly or may increase in the future;

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

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our ability to develop and maintain relationships with our channel partners and to increase their sales;

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

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

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

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

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changes in funding for customer technology purchases in our markets, such as policy changes in public funding of educational institutions in the United States in accordance with the Federal Communications Commission’s E-Rate program;

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

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other claims made against us and the requirement to pay settlements, damages or expenses associated with any such claims, together with the costs incurred in defending such claims; and,

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general economic conditions in our domestic and international markets.

Further, as a result of customer buying patterns, historically we have received a substantial portion of a quarter’s sales orders and generated a substantial portion of a quarter’s revenues during the last two weeks of the quarter. If expected revenues at the end of any quarter are delayed for any reason, including the failure of anticipated purchase orders to materialize, our inability to deliver products prior to quarter-end to fulfill purchase orders received near the end of the quarter, our failure to properly manage inventory 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. For example, near the end of the fourth quarter of 2014, some of our key customers delayed purchases of our products that were originally forecast for that quarter. As a result, our revenues were lower than originally forecast. Following our January 2015 preannouncement of our revenues, the market price of our stock declined nearly 21% the following trading day.

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 our expectations and the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline.

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 will be sufficient to meet our anticipated cash requirements for the next 12 months. Our cash and cash equivalents balance at March 31, 2015 was $11.6 million. While as a result of expense reductions commenced in January 2015 we have reduced the range of quarterly revenues to reach operating break-even, we will continue to incur operating losses if we do not achieve quarterly revenues in that reduced revenue range or if we are not able to recognize the intended benefits of our expense reduction efforts. Operating losses will continue to decrease our cash and we may have to delay product development efforts and/or our customers may be hesitant to continue to do business with us, in which case our business would be harmed. We may need to raise substantial additional capital or incur additional debt in order to:

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expand the commercialization of our products;

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fund our operations;

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continue our research and development;

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

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develop and commercialize new products;

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service our debt obligations and avoid any restrictions on our operations that may result from a failure to do so; and,

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acquire companies and in-licensed products or intellectual property.

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

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successful implementation of, and achieving benefits from, our marketing and sales activities;

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market acceptance of our products;

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the rate at which the markets for our products develop;

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the cost of our research and development activities;

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the cost of filing and prosecuting patent applications;

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

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

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the cost and timing of establishing additional technical support capabilities;

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the effect of competing technological and market developments; and,

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the market for such funding requirements and overall economic conditions.

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, as we did in March 2013, our stockholders would 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, including the issuance of warrants which would cause further overhang for potential shares outstanding. 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. In addition, we believe that the maintenance of cash balances at a level deemed adequate by our customers and potential customers is necessary to maintain and grow the level of our product sales. The unavailability of additional funding on acceptable terms could also result in our delaying development or commercialization of our products or licensing third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize in-house. 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 (including our equity investment in a third party company), 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.

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 are influenced by the following competitive factors:

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performance, quality, reliability and predictability of the solution;

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initial price and total cost of ownership;

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comprehensiveness of the solution;

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ability to provide quality customer service and support;

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interoperability with other devices;

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scalability of the solution;

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ability to provide secure mobile access to the network; and,

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ability to bundle the solution with other networking offerings.

Competitors are likely to attempt to compete against us by raising with customers uncertainty regarding our business and prospects as a result of our announcement that we have retained Deutsche Bank as our exclusive financial advisor to explore strategic options, including, but not limited to, strategic partnering of our technology and possible sale or merger of Meru.

Our primary competitors include Cisco Systems, Aruba Networks, Ruckus Wireless, Aerohive Networks, Motorola Solutions, Hewlett-Packard and Juniper Networks. We also face competition from a number of other companies, such as ADTRAN, AirTight Networks, Extreme Networks, Extricom, Ubiquiti Networks, and Xirrus. In addition, as we expand our business with our XPress Cloud offering, we expect to be competing with other companies who offer cloud-based networking products in addition to the competitors above. Some of these other companies include private and start-up companies, while companies such as Cisco Systems offers cloud-based products through its Meraki products. We have limited to no experience in offering cloud-based solutions. 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 our failure to increase, or our loss of, market share, any of which could seriously harm our business, operating results or financial condition. If we do not keep pace with product and technology advances, it could materially and adversely affect 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 more quickly develop and expand their product and service offerings. 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 as well as new competition as our markets continue to expand. Conditions in our markets, including the vertical markets that we serve, could change rapidly and significantly as a result of technological advancements, funding constraints or other factors. We expanded our product portfolio in February 2015 to include XPress Cloud, a cloud offering targeted to the complementary small-and-medium enterprise and medium-and-large enterprise market. If we do not expand into different markets than the markets we serve, we may not be able to grow our business. While we monitor and research developments in unserved vertical markets, we may not be able to compete in those markets if we decide to expand our markets.

In addition, current or potential competitors may be acquired by third parties with greater available resources, such as Cisco’s acquisition of Meraki and Enterasys Networks’ acquisition by Extreme Networks, Zebra Technologies Corporation’s acquisition of the Enterprise division of Motorola Solutions, as well as the currently contemplated acquisition of Aruba Networks by Hewlett-Packard. 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.

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 WLAN, our virtualized WLAN solutions 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, recently approved a new standard, IEEE 802.11ac. This major upgrade of IEEE 802.11 technologies is intended to enable very high throughput operation for stations in Wi-Fi networks. In July 2013, we announced our first 802.11ac solution. However, we may not be successful in modifying our current products or introducing new ones in a timely or appropriately responsive manner, or at all, for future technologies. If we fail to address these changes successfully, our business and operating results could be materially harmed.

In addition, in June 2014, we announced that we were the first wireless networking company to receive certification from the Open Networking Foundation (ONF) OpenFlow™ Testing Conformance Program for our 802.11ac products. ONF members including us are collaborating with companies around the world to bring open networking solutions to market and are focused on software-defined networking solution development. While we are leading innovation in software-defined networking through our participation in ONF, this technology may not lead to meaningful revenue in the short term or the long term and any lack of success in this area may delay or prevent the achievement of other product development or business objectives and could harm our business.

While our core large enterprise business continues to mature and growth rates in this market increasingly continue to decrease, we have expanded our addressable market to include small-and-medium enterprises. In February 2015, we launched XPress Cloud, a cloud offering targeted to these small-and-medium enterprises. In 2014, we also announced new software applications to complement our current products. We have limited experience in the small-and-medium enterprise market and our new products in this space may not meet customers’ needs. We continue to evaluate and develop products and product features to address this new market. If we fail to successfully adapt our products to the requirements of this market segment, our business and operating results could be materially harmed.

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 management team. All of our executive officers are at-will employees, and therefore may terminate employment with us at any time. The loss of the service of any member of our management team, or any other key employee, may significantly delay or prevent the achievement of our product development and other business objectives and could harm our business. In January 2015, we announced a restructuring of our business, which included a reduction of headcount from approximately 380 to approximately 350 employees. This reduction of headcount included members of executive management and other key employees. Remaining employees may be uncertain about the prospects of our business and attrition from remaining employees, including key management employees, may increase. If we continue to lose the services of key employees, including in the near term, our business would be harmed.

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 San Francisco Bay Area and India where we have a substantial presence and need for highly-skilled personnel. Our CEO joined the Company in March 2012 and four senior members of our executive management team joined in the second and third quarters of 2013. If we are unable to successfully integrate, as well as retain, management (including senior management such as these recent hires), our business will be harmed. We also may not be successful in attracting qualified personnel to fulfill our current or future needs.

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 key personnel. When our stock price declines, our equity incentive awards may lose retention value, which may negatively affect our ability to attract and retain such 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.

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 materially increase 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 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:

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increased price competition;

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changes in customer or product and service mix;

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introduction of new products;

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our ability to reduce production costs;

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increases in material or labor costs;

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increased costs of licensing third party technologies that are used in our products;

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excess inventory, inventory holding charges and obsolescence charges;

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the timing of revenue recognition and revenue deferrals;

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

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increased warranty costs, including providing additional products at very low or no cost to our customers to resolve product performance issues; and,

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inbound shipping charges.

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

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 in the United States generally receive funding from local and state tax and bond revenue, and from 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 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. As of July 2014, after effectively halting E-Rate program funding in February 2014, the Federal Communications Commission announced that it would fund the next two years of E-Rate for internal connections at approximately $1 billion per year. We currently expect federal E-Rate funds disbursements to schools to recommence starting in July 2015, but it is possible that the recommencement of this program may be further delayed. We continue to monitor the developments in E-Rate, but there can be no assurance that this program or its equivalent will continue, and as a result, our business may be harmed. Furthermore, if state or local funding of public education is significantly reduced because of legislative or policy changes or by reductions in tax revenues due to changing economic conditions, our sales to educational institutions may be negatively impacted by these changed conditions. Any reduction in spending on information technology systems by educational institutions would likely materially and adversely affect our business and results of operations.

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

We must develop new products and continue to enhance our WLAN 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.

For instance, in response to declining growth rates in our core large enterprise business, we expanded our addressable market to include small-and-medium enterprises. In February 2015, we launched XPress Cloud, a cloud offering targeted to these small-and-medium enterprises. In 2014, we also announced new software applications to complement our current products. If we fail to successfully adapt our products to the requirements of this market segment, our business and operating results could be materially harmed.

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 WLAN solution that could optimize the performance allowed by the 802.11n standard. In addition, the IEEE recently approved a new standard, IEEE 802.11ac. This major upgrade of IEEE 802.11 technologies is intended to enable very high throughput operation for stations in Wi-Fi networks. In July 2013, we announced our first 802.11ac solution. If our products do not comply with 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. In addition, in June 2014 we announced that we were the first wireless networking company to receive certification from the Open Networking Foundation (ONF) OpenFlow™ Testing Conformance Program for our 802.11ac products. This technology may not lead to meaningful revenue in the short term or the long term and any lack of success in this area may delay or prevent the achievement of other product development or business objectives and could harm our business.

Our research and development efforts relating to new products and technologies are time-consuming, costly and complex. In January 2015, we announced a restructuring of the business, including a reduction of workforce headcount which affected our research and development team. With our reduced resources in research and development, we may not be able to develop new products for our markets. Even if we do expend a significant amount of resources on research and development, our efforts may not lead to the successful introduction of products that are competitive in the marketplace, and this could materially and adversely affect our business and operating results.

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

Our WLAN solution incorporates complex technology and must operate with a significant number and types of wireless devices running new and complex applications in a variety of environments utilizing different wireless communication industry standards. Our products have contained and may in the future contain defects or errors. In many cases, these defects or errors have delayed the introduction of new products or software updates. 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 or new updates or upgrades are introduced. As use cases for our products continue to evolve with an increasing number of devices and applications, such as video streaming, connecting to our wireless networks, our solution may experience increased number of software defects or bugs, as well as increased network instability. 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, diversion of engineering resources, 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 generally 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.

Although certain technical problems experienced by users may not be caused by our WLAN 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 WLAN 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. Even though certain technical problems experienced by users may not be caused by our solution, users often perceive the underlying cause to be the poor performance of the wireless network. This perception, even if incorrect, could harm our business and reputation.

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, our customers depend on our support organization and our channel partners to assist in deploying and managing our products and 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, our support organization faces additional international challenges including those associated with delivering support, training and documentation in languages other than English. Our failure or the failure of our channel partners to maintain high-quality support and services could have a material and adverse effect on our business and operating results.

Our 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 three months ended March 31, 2015 and 2014, 62% and 54% 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 also have sales and support personnel in numerous countries worldwide.

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

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

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

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

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increased exposure to foreign currency exchange rate risk, against which we currently do not hedge;

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heightened exposure to political and economic instability, war and terrorism;

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reduced protection for intellectual property rights in some countries;

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costs of compliance with, and the risks and costs of non-compliance with, differing and changing regulatory and legal requirements in the jurisdictions in which we operate;

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

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multiple conflicting tax laws and regulations;

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the need to localize our products for international customers; and,

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increased cost of managing employees in foreign countries, including increased costs of terminating employees in certain jurisdictions.

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, such as the U.K. Anti-Bribery Act of 2010. 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 training and 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 and our international operations 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, litigation, 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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difficulty hiring and retaining appropriate engineering personnel due to intense competition for such resources and resulting wage inflation;

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

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

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differences in cultural expectations regarding various functions and policies;

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

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

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

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. From time to time, new accounting pronouncements and guidance are issued. For example, the Committee of Sponsoring Organizations of the Treadway Commission published an updated Internal Control-Integrated Framework and related illustrative documents in May 2013. 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 a significant burden 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 the SEC’s rules and forms.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions, and our degree of compliance with our policies or procedures may deteriorate. While we have conducted employee training and implemented various controls and procedures, 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.

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 and employee training, all of which may 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.

While we continue to evaluate disaster and business continuity risks, 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.

System security risks, data protection breaches and cyber-attacks could disrupt our internal operations or information technology or networking services provided to customers, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.

A significant portion of our business operations is conducted through use of our computer network. Maintaining the security of our computer information systems and communication systems is a critical issue for us and our customers. Although we have implemented security systems and procedures to protect the confidential information stored on these computer systems, experienced computer programmers and hackers may be able to penetrate our network security and misappropriate our confidential information or that of our customers or other third parties. As well, they may be able to create system disruptions, shutdowns or effect denial of service attacks, including a data protection breach or cyber-attack. We have been the subject of a denial of service attack in the past, although it did not materially affect our operations. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our networks or client computers, or otherwise exploit any security vulnerabilities, or that misappropriate and distribute confidential information stored on these computer systems. It is also possible that computer programmers and hackers could penetrate the network security of customers using our solutions. If our computer systems and servers go down at the end of a fiscal quarter, our ability to recognize revenue may be delayed until we are able to utilize back-up systems and continue to process and ship our orders. This could cause our stock price to decline significantly. Moreover, potential breaches of our security measures and the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers, including the potential loss or disclosure of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. Any of the foregoing could further result in damage to customer confidence in our products and services, and could require us to incur significant costs to eliminate or alleviate the problem. Additionally, our ability to transact business may be affected. Such damage, expenditures and business interruption could seriously impact our business, financial condition and results of operations.

In February 2015, we launched Meru XPress Cloud, our cloud wireless networking service targeted to the small-and-medium enterprise market. As we seek to expand our business with cloud service offerings, these cloud services may be compromised by hackers, or if customer confidential information is accessed without authorization, our business will be harmed. While we believe we have taken prudent measures with respect to customer data and data security, operating an online cloud service is a new business for us and we may not have the expertise to properly manage risks related to data security and systems security. If we are unable to successfully prevent breaches of security relating to our cloud service offerings or customer private information, including customer personal identification information, management would need to spend increasing amounts of time and effort in this area, and our business would be harmed.

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 and trademark portfolio. To date, we have not applied for patent or trademark protection outside of the U.S. In 2014, we filed 19 patent applications in the U.S., compared to 6 in the prior year. While we plan to continue to protect our intellectual property with, among other things, patent protection, there can be no assurance that:

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

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

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

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

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

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

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 market demand for wireless networks does not continue to develop as we anticipate, demand for our WLAN 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 WLAN solution. Ultimately, however, enterprises may elect not to deploy wireless networks and may elect not 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.

While our core large enterprise business continues to mature and growth rates in this market continue to decrease, we have expanded our addressable market to include small-and-medium enterprises with the launch of XPress Cloud, an offering targeted to the small-and-medium enterprise market. In 2014, we also announced new software applications to complement our current products. If we fail to successfully adapt our products to the requirements of this complementary market segment, our business and operating results could be materially harmed.

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 WLAN 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 evaluating 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 WLAN 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.

Seasonality may cause fluctuations in our operating results.

We believe that our business is subject to significant seasonal factors that may typically cause the first quarter of our fiscal year to have relatively weaker products revenues than the second, third and fourth fiscal quarters. We believe that this seasonality results from a number of factors, including:

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customers with a December 31 fiscal year end may choose to spend remaining budgets before their year end resulting in a positive impact on our product revenues in the fourth quarter of our fiscal year;

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the structure of our direct sales compensation program may provide additional financial incentives to our sales personnel for exceeding their annual goals; and,

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many of our education customers have procurement and deployment cycles that can result in stronger order flow in our second fiscal quarter than in other quarters, subject to the availability of traditional funding sources, such as the E-Rate program in the United States.

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 in the past. In addition, the timing of one or more large transactions may diminish the impact of 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.

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

Our business depends on the overall demand for IT and on the economic health of our current and prospective customers. Our current business and operating plan assumes that economic activity in general, and IT spending in particular, will at least remain at close to current levels. However, we cannot be assured of the future level of IT spending and any deterioration in the level of such spending 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 past economic downturns in the U.S. and international markets, especially in 2008 and 2009, adversely affected our business during that time period 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.

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. 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 competitors who provide network switching equipment may offer a wireless overlay network at very low prices or on a bundled basis. Furthermore, average sales prices for our products have typically decreased over product life cycles. A decline in our average selling prices in excess of our expectations may harm our operating results.

We 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.

Sales through our channel partners accounted for 97% of our total net revenues during both three months ended March 31, 2015 and 2014. 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.

Our largest distributor customers have historically distributed a significant amount of our products worldwide. Resale of product through Westcon Group, SiraCom, Ingram Micro and NOX Co. accounted for 57% of our worldwide net revenues during the three months ended March 31, 2015. Resale of product through Westcon Group, Ingram Micro, Scansource Catalyst and SiraCom accounted for 67% of our worldwide net revenues during the three months ended March 31, 2014.

Our channel partners may be unsuccessful in marketing, selling and supporting our products and services. They may also market, sell and support our competitors’ products and services, and may devote more resources to the marketing, sales and support of those competitors’ 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 reliance on our channel partners 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, or violates applicable law or our corporate policies. If we fail to effectively manage our existing or future sales channel partners, our business would be seriously harmed.

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. We have recently been in discussions with one party regarding potentially licensing patents that such third party claims we are infringing in return for royalty payments. No agreement has been reached. However, 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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We previously received letters from, and had lengthy discussions with Motorola Solutions, one of our competitors with a large patent portfolio and substantial resources, concerning its allegations that our products infringe certain of its patents. Those negotiations ultimately resulted in us entering into a cross-license with Motorola Solutions in 2011 under which we paid Motorola Solutions a substantial settlement.

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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 in April 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.

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. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined that we do not have material exposure, or we are unable to develop a range of reasonably possible losses.

As our business expands and the number of products and competitors in our markets increases and overlaps occur, we expect that infringement claims may increase in number and significance. Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we cannot be certain that we will be successful in defending ourselves against intellectual property claims. 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. Any such license 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, including third party commercial software and open source software. 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.

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.

We invest in sales and marketing programs and personnel based on the revenue that we anticipate they will generate, but our expectations may not be met in a timely fashion or at all. For example, we have in the past substantially expanded our field sales organization to provide improved coverage of the growing number of business opportunities in our target markets, and approximately doubled our sales headcount in connection with the expansion. In addition, we have in the past made a variety of investments in marketing programs to complement the expansion of our field sales headcount. However, our revenue grew more slowly than we had anticipated as a result of that expansion of our sales organization, so we subsequently took steps to reduce our sales and marketing expenses to be more in line with our revenue expectations.

Market awareness of our capabilities and products is essential to our continued growth and our success in the markets in which we compete and intend to compete. If our marketing programs are not successful in creating market awareness of our company and products and the value and need for our products or if 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.

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 ODMs or manufacturers based on our forecasts of our customers’ demand for our products. Our forecasts are based on multiple assumptions, any of which may introduce errors into our estimates and affect our ability to service our customers. When demand for our products exceeds our forecast, we may not be able to meet demand for our products 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 expedite the manufacture and delivery of additional products. If we underestimate customer demand, our manufacturers may have inadequate materials and components required to produce our products and as a result, we may forego revenue opportunities, lose market share and damage our customer relationships. Conversely, if we overestimate customer demand, our manufacturers may assess charges and we may purchase more finished goods 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 and which could negatively affect our gross margins. Our failure to accurately manage inventory against demand would adversely affect our operating results.

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

We utilize ODMs to manufacture our products, and are subject to the risk that those manufacturers will not manufacture products with the quality and performance that our customers 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 a priority in the event our manufacturers are constrained in their ability to fulfill all of their customer obligations in a timely manner. 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. Moreover, an increasing portion of our manufacturing is performed outside the United States, primarily in China and Taiwan, and is, therefore, subject to risks associated with doing business in foreign countries. This includes risks resulting from the perception that certain jurisdictions, including China, do not comply with internationally recognized rights of freedom of expression and privacy and may permit labor practices that are deemed unacceptable under evolving standards of social responsibility. If manufacturing or logistics in these foreign countries is disrupted for any reason, including natural disasters, information technology system failures, military or government actions or economic, business, labor, environmental, public health, or political issues, or if the purchase or sale of products from such foreign countries is prohibited or disfavored our business, financial condition and results of operations could be adversely affected.

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 used in 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. For example, a substantial portion of our access points and controllers incorporate chipsets from Broadcom. We do not have any supply agreement with Broadcom and if Broadcom is unable to deliver the products that we or our manufacturers order from them, we may not be able to ship our access points to our customers and our business would be materially and adversely affected.

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. In the event one of our license agreements with a supplier is terminated, we may be required to redesign some of our products in order to incorporate technology from alternative sources. The resulting redesign could require procuring additional licenses and incurring additional development costs, and materially and adversely affect our business.

As there may be no other sources for these components and technologies, the loss of any of these suppliers would require that we transition to a new component or technology, 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.

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 two third parties for the fulfillment of our customer orders, and the failure of these third parties 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 two third party logistics providers to hold our inventory and fulfill our customer orders. If these third-party logistics providers fail to perform, our ability to deliver our products and to generate revenues would be adversely affected. The failure of our third-party logistics providers 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 third-party logistics providers also may impact the timing of our revenue recognition if our logistics providers fail 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 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 and the manner in which we use it. If we combine our proprietary software with open source software in a certain manner, we could, under certain of those open source licenses, be required to release the source code of that 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 a license could not be obtained or re-engineering could not be accomplished on a timely and cost-effective basis, any of which could materially and adversely affect our business and operating results.

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

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed 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. 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, loss contingency estimates, fair value of common stock, stock-based compensation expense, fair value of warrants and fair value of earn-out consideration.

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.

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.

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 and our operating and administrative systems and controls, and we must continue to manage headcount, capital and processes in an efficient manner. We may not be able to successfully implement improvements to our infrastructure, systems and processes in a timely or efficient manner, which could result in additional operating inefficiencies and could cause unanticipated increases in our costs. 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.

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. As we seek to expand our business into the small-and-medium enterprise and medium-and-large enterprise markets, we may take orders directly from end user customers. As such, we would have to expand our systems and processes to accommodate this direct business. We have limited history in these markets and if we are unable to adapt our business processes to confirm creditworthiness of our end user customers, our business could be harmed. For instance, recently we had a bad check issued to us from a foreign end user customer.

We invest in companies for both strategic and financial reasons, but may not realize a return on our investments in every instance.

We have made, and may continue to seek to make, investments in companies around the world to further our strategic objectives and support our key business initiatives. These investments may include equity or debt instruments of public or private companies, and may be non-marketable at the time of our initial investment. We do not restrict the types of companies in which we seek to invest. These companies may range from early-stage companies that are often still defining their strategic direction to more mature companies with established revenue streams and business models. If any company in which we invest fails, we could lose all or part of our investment in that company. If we determine that an other-than-temporary decline in the fair value exists for an equity or debt investment in a public or private company in which we have invested, we will have to write down the investment to its fair value and recognize the related write-down as an investment loss. The performance of any of these investments could result in significant impairment charges and gains (losses) on other equity investments. We must also analyze accounting and legal issues when making these investments. If we do not structure these investments properly, we may be subject to certain adverse accounting issues, such as potential consolidation of financial results.

Furthermore, if the strategic objectives of an investment have been achieved, or if the investment or business diverges from our strategic objectives, we may seek to dispose of the investment. In March 2015, we sold our ownership interest in a private company and disposed of these shares at the original purchase price. However, gains or losses from any equity securities we acquire in the future could vary from expectations depending on gains or losses realized on the sale or exchange of securities and impairment charges related to debt instruments as well as equity and other investments.

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 or administrative discipline, including the possibility of a restatement of our financial statements, or litigation.

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, as well as the Waste Electrical and Electronic Equipment, or WEEE, and Restriction of the Use of Certain Hazardous Substances in Electrical and Electric Equipment, or RoHS, regulations with which our products and operations in the European Union must comply. We are further required to evaluate compliance with various laws and regulations that may be applicable to our business, such as the conflict minerals disclosure rules promulgated by the SEC in August 2012. The rule requires investigation and disclosure of the use of certain “conflict minerals” in our products. These rules apply to our business, and we are expending resources to ensure compliance. We may face reputational challenges and the loss of sales if we are required to publicly state that we are unable to sufficiently verify the origins for the defined “conflict” metals used in our products. The failure to comply with these regulations could result in the assessment of fines or penalties or other relief against us.

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 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 it is possible that the recent March 2013 secondary stock offering could result in an ownership change. In addition, 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 law. As a consequence, we may not be able to utilize a material portion of our NOLs. At December 31, 2014, we had federal and state net operating loss carryforwards of approximately $163.8 million and $119.9 million, respectively, which begin to expire in 2022 and 2015, 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:

•

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

•

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

•

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

•

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

•

tax effects of nondeductible compensation;

•

tax costs related to intercompany realignments;

•

changes in accounting principles; or,

•

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

Significant judgment is required to determine the recognition and measurement 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.

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, network security breaches 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 or the penetration of our system by “hackers”, could delay our research and development efforts and affect our internal operations. To the extent that such disruptions result in delays or cancellations of customer orders, delay of our research and development efforts or the deployment of our products, or interrupt the orderly operation of our business, our business and operating results could be materially and adversely affected.

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:

•

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

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unanticipated costs associated with the acquisition transaction;

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

•

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

•

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

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the potential loss of key employees of acquired businesses;

•

an acquisition may result in a delay or reduction of customer purchases for both us and the company acquired due to customer uncertainty about continuity and effectiveness of products and services from either company; and,

•

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

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

•

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

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incur substantial debt;

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incur significant acquisition-related expenses;

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assume contingent liabilities; or,

•

expend significant cash.

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:

•

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

•

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

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

•

additional dilution to our existing shareholders due to new financing activities;

•

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

•

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

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commencement of, or our involvement in, litigation;

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

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

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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole, such as the continuing volatility in the financial markets;

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

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any major change in our management;

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

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

In addition, the stock market in general, and the market for technology companies in particular, 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. Such 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 and industry analysts publish about us, our business and our products. 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 an analyst issues other unfavorable commentary. Additionally, if one or more 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 initiate 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 underlying outstanding options, warrants and other rights to acquire our common stock could dilute our existing stockholders and cause our stock price to decline.

As of March 31, 2015, approximately 24.3 million shares of our common stock were issued and outstanding. At that date, we had outstanding options and other rights to acquire approximately 5.0 million shares of our common stock, including stock options, restricted stock units, restricted stock and shares anticipated to be purchased under our ESPP at the next purchase date, to the extent such securities become vested and are exercised as permitted by the provisions of the plans and agreements applicable to those securities. The weighted-average exercise price for options was $4.87 per share as of March 31, 2015. In addition, on March 31, 2015, there were outstanding warrants to purchase 0.5 million shares of our common stock at a weighted average exercise price of $2.05 per share. If a substantial amount of these additional shares are issued and 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. Additionally, our existing stockholders will suffer dilution of their percentage ownership of outstanding common stock.

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

We have never paid cash dividends on any of our classes of capital stock to date, and we have contractual restrictions against paying cash dividends that are contained in our loan agreements. We 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 our stockholders in 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 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:

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the ability of our board of directors to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;

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stockholder action can only be taken at a special or regular meeting and not by written consent;

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advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings;

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allowing only our board of directors to fill vacancies on our board of directors; and,

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supermajority voting requirements to amend our bylaws and certain provisions of our certificate of incorporation.

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 even a majority, of the stockholders might believe to be in their best interests by preventing or discouraging attempts to remove and replace incumbent directors. We are also subject to Delaware laws that could discourage hostile takeover attempts. One of these laws prohibits us from engaging in a business combination with a significant stockholder unless specific conditions are met.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the accompanying index to exhibits are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

Exhibit No

Exhibit Title

Form

File No.

Exhibit

Filing Date

Filed
Herewith

10.01

Annual Meeting Agreement between Meru Networks, Inc. and the Vertex Group (as defined therein), dated March 4, 2015.

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.

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.

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.

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.

101 INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements 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: May 7, 2015


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/ Brian R. McDonald
		Brian R. McDonald Chief Financial and Administrative Officer (Principal Financial and Accounting Officer)

Exhibit Index

Exhibit No

Exhibit Title

Form

File No.

Exhibit

Filing Date

Filed
Herewith

10.01

Annual Meeting Agreement between Meru Networks, Inc. and the Vertex Group (as defined therein), dated March 4, 2015.

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.

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.

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.

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.

101 INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company