Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - ZCO LIQUIDATING Corp | c94673exv32w1.htm |
EX-99.1 - EXHIBIT 99.1 - ZCO LIQUIDATING Corp | c94673exv99w1.htm |
EX-32.2 - EXHIBIT 32.2 - ZCO LIQUIDATING Corp | c94673exv32w2.htm |
EX-22.1 - EXHIBIT 22.1 - ZCO LIQUIDATING Corp | c94673exv22w1.htm |
EX-31.2 - EXHIBIT 31.2 - ZCO LIQUIDATING Corp | c94673exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - ZCO LIQUIDATING Corp | c94673exv31w1.htm |
EX-3.1 - EXHIBIT 3.1 - ZCO LIQUIDATING Corp | c94673exv3w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 30, 2009
Commission File Number: 000-53633
OCZ TECHNOLOGY GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
04-3651093 (I.R.S Employer Identification No.) |
|
6373 San Ignacio Avenue | ||
San Jose, California | 95119 | |
(Address of Principal Executive
Offices) |
(Zip Code) |
(408) 733-8400
(Registrants telephone number, including zip code)
(Registrants telephone number, including zip code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted
on its corporate Website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
As of January 14, 2010, there were 21,278,642 shares of the registrants common stock,
$0.0025 par value, outstanding, which is the only class of common stock of the registrant issued.
OCZ TECHNOLOGY GROUP, INC.
Table of Contents
Table of Contents
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21 | ||||||||
21 | ||||||||
22 | ||||||||
22 | ||||||||
36 | ||||||||
36 | ||||||||
36 | ||||||||
36 | ||||||||
37 | ||||||||
38 | ||||||||
Exhibit 3.1 | ||||||||
Exhibit 22.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
Exhibit 99.1 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements.
OCZ TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
November 30, 2009 | February 28, 2009 | |||||||
unaudited | ||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 1,152 | $ | 420 | ||||
Accounts receivable, net of allowances of $2,804 and $2,279 |
23,259 | 23,995 | ||||||
Notes receivable |
375 | | ||||||
Deferred tax asset, net |
836 | 836 | ||||||
Inventory, net |
13,253 | 16,787 | ||||||
Prepaid expenses and other assets |
2,249 | 2,112 | ||||||
Total current assets |
41,124 | 44,150 | ||||||
Property and equipment, net |
2,769 | 2,855 | ||||||
Intangible asset |
185 | 268 | ||||||
Goodwill |
10,697 | 10,342 | ||||||
Long-term notes receivable |
668 | | ||||||
Other assets |
44 | 88 | ||||||
Total assets |
$ | 55,487 | $ | 57,703 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Notes payable, net |
$ | 500 | $ | 200 | ||||
Bank operating loan |
12,112 | 9,435 | ||||||
Accounts payable |
26,328 | 25,394 | ||||||
Accrued taxes |
2 | 4 | ||||||
Accrued wages and payroll taxes |
482 | 382 | ||||||
Accrued expense |
3,401 | 3,066 | ||||||
Accrued warranties |
159 | 132 | ||||||
Deferred revenue |
99 | 167 | ||||||
Total current liabilities |
43,083 | 38,780 | ||||||
Long-term deferred rent |
49 | | ||||||
Total liabilities |
43,132 | 38,780 | ||||||
Commitments and contingencies |
| | ||||||
Stockholders equity: |
||||||||
Preferred stock, $0.0025 par value; 20,000,000 shares
authorized, 8,000 shares issued and outstanding as of November
30, 2009 |
| | ||||||
Common stock, $0.0025 par value; 120,000,000 shares
authorized, 21,278,642 shares issued and outstanding as of
November 30, 2009 and 100,000,000 shares authorized,
21,278,642 shares issued and outstanding as of February 28,
2009 |
54 | 53 | ||||||
Additional paid in capital |
31,423 | 30,911 | ||||||
Cumulative translation adjustment |
(163 | ) | (112 | ) | ||||
Retained earnings |
(18,959 | ) | (11,929 | ) | ||||
Total stockholders equity |
12,355 | 18,923 | ||||||
Total liabilities and stockholders equity |
$ | 55,487 | $ | 57,703 |
3
Table of Contents
OCZ TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
unaudited | unaudited | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net revenues |
$ | 38,024 | $ | 35,229 | $ | 111,591 | $ | 114,863 | ||||||||
Cost of revenues |
31,567 | 34,892 | 95,178 | 101,822 | ||||||||||||
Gross profit |
6,457 | 337 | 16,413 | 13,041 | ||||||||||||
Sales and marketing |
2,520 | 2,830 | 7,727 | 8,046 | ||||||||||||
Research and development |
1,328 | 741 | 4,023 | 1,774 | ||||||||||||
General, administrative and operation |
3,659 | 5,810 | 11,214 | 13,742 | ||||||||||||
Total operating expenses |
7,507 | 9,381 | 22,964 | 23,562 | ||||||||||||
Operating
income |
(1,050 | ) | (9,044 | ) | (6,551 | ) | (10,521 | ) | ||||||||
Other income (expense) net |
600 | (88 | ) | 669 | (158 | ) | ||||||||||
Interest and financing costs |
(522 | ) | (141 | ) | (1,148 | ) | (434 | ) | ||||||||
Income from operations
before provision for
income taxes |
(972 | ) | (9,273 | ) | (7,030 | ) | (11,113 | ) | ||||||||
Tax (expense) benefit |
| (52 | ) | 1 | (52 | ) | ||||||||||
Net income |
$ | (972 | ) | $ | (9,325 | ) | $ | (7,029 | ) | $ | (11,165 | ) | ||||
Net income per share: |
||||||||||||||||
Basic |
$ | (0.05 | ) | $ | (0.44 | ) | $ | (0.33 | ) | $ | (0.53 | ) | ||||
Diluted |
$ | (0.05 | ) | $ | (0.44 | ) | $ | (0.33 | ) | $ | (0.53 | ) | ||||
Shares used in net income per share
computation: |
||||||||||||||||
Basic |
21,300 | 21,000 | 21,300 | 21,000 | ||||||||||||
Diluted |
21,300 | 21,000 | 21,300 | 21,000 |
4
Table of Contents
OCZ TECHNOLOGY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended | ||||||||
November 30, | ||||||||
2009 | 2008 | |||||||
unaudited | unaudited | |||||||
Cash flows from operation activities: |
||||||||
Net income |
$ | (7,029 | ) | $ | (11,166 | ) | ||
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities: |
||||||||
Depreciation of property and equipment |
744 | 534 | ||||||
Amortization of intangibles |
83 | 84 | ||||||
Stock-based compensation |
465 | 652 | ||||||
Non-cash gain on disposition of product line |
(668 | ) | | |||||
Changes in operating assets and current liabilities: |
||||||||
Accounts receivable |
736 | (1,185 | ) | |||||
Inventory |
3,159 | (1,959 | ) | |||||
Prepaid expenses and other assets |
(137 | ) | 1,322 | |||||
Accounts payable |
934 | 6,823 | ||||||
Accrued taxes |
(2 | ) | (4 | ) | ||||
Accrued wages and payroll taxes |
100 | 88 | ||||||
Accrued expenses |
334 | 3,862 | ||||||
Accrued warranties |
27 | 28 | ||||||
Deferred revenue |
49 | | ||||||
Deferred rent |
(68 | ) | (36 | ) | ||||
Net cash used in operating activities |
(1,273 | ) | (957 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of fixed assets |
(658 | ) | (940 | ) | ||||
Decrease in deposits |
44 | 8 | ||||||
Cash payment for acquisition |
(355 | ) | (392 | ) | ||||
Net cash used in investing activities |
(969 | ) | (1,324 | ) | ||||
Cash flows from financing activities: |
||||||||
Sale of common stock |
8 | 238 | ||||||
Issuance of preferred stock |
40 | | ||||||
Bank loan |
2,677 | 1,570 | ||||||
Notes payable |
300 | (375 | ) | |||||
Net cash provided by financing activities |
3,025 | 1,433 | ||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
(51 | ) | (287 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
732 | (1,135 | ) | |||||
Cash and cash equivalents at beginning of period |
420 | 1,544 | ||||||
Cash and cash equivalents at end of period |
$ | 1,152 | $ | 409 | ||||
Supplemental disclosures: |
||||||||
Interest paid |
$ | 571 | $ | 439 | ||||
Income taxes paid |
| $ | 50 |
5
Table of Contents
OCZ TECHNOLOGY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Note 1
Basis of Presentation
The accompanying interim condensed consolidated financial statements of OCZ Technology Group, Inc,
a Delaware corporation (the Company), are unaudited and have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, all adjustments (consisting of normal and recurring adjustments)
considered necessary for a fair statement of the consolidated financial position of the Company at
November 30, 2009, the consolidated results of operations for each of the three and nine months
ended November 30, 2009 and 2008, and the consolidated results of cash flows for each of the nine
months ended November 30, 2009 and 2008 have been included. These interim condensed consolidated
financial statements do not include all of the information and footnotes required by GAAP for
complete financial statements and, therefore, should be read in conjunction with the consolidated
financial statements and related notes contained in the Companys most recent Report on Form 10
filed with the Securities and Exchange Commission (SEC). The February 28, 2009 balances reported
herein are derived from the audited consolidated financial statements included in the Companys
Form 10. The results for the interim periods are not necessarily indicative of results to be
expected for the full year.
The condensed consolidated financial statements of the Company include the accounts of the
Companys subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make certain
estimates and assumptions that affect the reported amounts of assets and liabilities (e.g., sales
returns, bad debt and inventory reserves and asset impairments), disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. The Companys reported revenues are net of reserves for price
protection, sales returns and sales and marketing incentives. Actual results could differ from
those estimates.
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting
Standards CodificationTM (Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. Recognition of the Codification in
financial statements is effective for interim and annual periods ending after September 15, 2009.
The impact in the Companys financial statements was only to references for accounting guidance.
The company evaluated subsequent events through January 14, 2010, which is the date these financial
statements were issued.
Note 2 Inventory
Inventory consists of the following:
As at | As at | |||||||
February 28, | November 30, | |||||||
2009 | 2009 | |||||||
($000) | ($000) | |||||||
Raw materials |
5,484 | 5,741 | ||||||
Work in progress |
5,972 | 5,176 | ||||||
Finished goods |
5,331 | 2,336 | ||||||
16,787 | 13,253 | |||||||
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Note 3 Property and equipment
Net Property and equipment consists of the following:
As at | As at | |||||||
February 28, | November 30, | |||||||
2009 | 2009 | |||||||
($000) | ($000) | |||||||
Vehicles |
135 | 135 | ||||||
Furniture and fixtures |
154 | 38 | ||||||
Equipment |
3,689 | 4,348 | ||||||
Leasehold Improvement |
413 | 435 | ||||||
4,391 | 4,956 | |||||||
Less: accumulated depreciation |
(1,536 | ) | (2,187 | ) | ||||
2,855 | 2,769 | |||||||
Depreciation expense for the nine months ended November 30, 2008 and November 30, 2009 amounted to
$534,000 and $744,000, respectively. No assets were held under capital lease arrangements during
these periods.
Note 4 Goodwill on acquisition and other intangible assets
Goodwill represents the excess of the purchase price over the estimated fair value of the net
assets acquired. OCZ values goodwill in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. Goodwill is carried at fair value and reviewed at least annually for impairment
as of the last day of February, or more frequently if events and circumstances indicate that the
asset might be impaired, in accordance with SFAS No. 142. The brand name intangible assets are
being amortized over a 4-year period. Subsequent payments made for the contingent consideration
are charged to goodwill. For tax purposes, goodwill is deductible over a 15-year period.
OCZ has determined that it has one reporting unit as defined by SFAS 142. An impairment loss would
be recognized to the extent that the carrying amount exceeds the fair value of OCZ (the reporting
unit). There are two steps in the determination. OCZ has determined that it has one reporting
unit as defined by SFAS 142. An impairment loss would be recognized to the extent that the
carrying amount exceeds the fair value of OCZ (the reporting unit). There are two steps in the
determination.
The first step compares the carrying amount of the net assets (including goodwill), to OCZs fair
value. If OCZs fair value exceeds the carrying amount of OCZs net assets, goodwill is not
considered to be impaired and the second step of the impairment test is not necessary. If the
carrying amount of OCZs net assets exceeds OCZs fair value, the second step of the impairment
test is undertaken to measure the amount of impairment loss, if any. In determining OCZs fair
value consideration is firstly given to quoted market prices of the OCZs stock and where this is
not available the estimate of OCZs fair value will be based upon the best information available
and consideration of other valuation techniques.
The second step, if necessary, is used the measure the amount of impairment loss by comparing the
implied fair value of OCZs goodwill with the carrying amount of that goodwill. An impairment loss
is recognized to the extent the carrying amount of OCZs goodwill exceeds the implied fair value of
that goodwill. The implied fair value of goodwill is determined by allocating OCZs fair value in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141, Business Combinations. The residual fair value after
this allocation is OCZs implied fair value of goodwill.
7
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Once a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be
the new accounting basis and there is no subsequent reversal of previously recognized goodwill
impairment loss in future years.
OCZ has not recorded an impairment of goodwill.
The movement in goodwill on acquisition and other intangible assets can be summarized as follows:
Other | ||||||||
Intangible | ||||||||
Goodwill | Assets | |||||||
($000) | ($000) | |||||||
Cost |
||||||||
As at February 29, 2008 |
9,789 | 446 | ||||||
Additions during the period
for Goodwill contingent
payment |
553 | | ||||||
As at February 28, 2009 |
10,342 | 446 | ||||||
Additions during the period
for Goodwill contingent
payment |
356 | | ||||||
As at November 30, 2009 |
10,698 | 446 | ||||||
Amortization |
||||||||
As at February 29, 2008 |
| 66 | ||||||
Charge for the period |
| 112 | ||||||
As at February 28, 2009 |
| 178 | ||||||
Charge for the period |
83 | |||||||
As at November 30, 2009 |
261 | |||||||
Net carrying value |
||||||||
As at February 29, 2008 |
9,789 | 380 | ||||||
As at February 28, 2009 |
10,342 | 268 | ||||||
As at
November, 2009 |
10,698 | 185 |
8
Table of Contents
Note 5 Accrued expenses
Accrued expenses consist of the following:
As at | As at | |||||||
February 28, | November 30, | |||||||
2009 | 2009 | |||||||
($000) | ($000) | |||||||
Professional fees |
198 | 256 | ||||||
Interest expense |
22 | 53 | ||||||
Mail in rebate provision |
529 | 63 | ||||||
Sales marketing program |
763 | 351 | ||||||
Employee related payments |
392 | 450 | ||||||
Customer repair provision |
109 | 239 | ||||||
Deferred rent |
| 65 | ||||||
Uninvoiced goods and services |
1,053 | 1,924 | ||||||
3,066 | 3,401 | |||||||
Note 6
Accrued warranty
Accrued warranty expenses consist of the following:
As at | As at | |||||||
February 28, | November 30, | |||||||
2009 | 2009 | |||||||
($000) | ($000) | |||||||
Balance at beginning of year |
97 | 132 | ||||||
Provision for warranty expense |
437 | 189 | ||||||
Warranty replacements/repairs |
(402 | ) | (162 | ) | ||||
132 | 159 |
Note 7 Commitments and contingencies
OCZ and its subsidiaries lease office and warehouse facilities under lease terms of approximately
two to five years expiring mostly in 2011. Rent expense amounted to $956,000 and $590,000 in the
nine months ended November 30, 2008 and November 30, 2009 respectively.
Future minimum payments due under these non cancellable lease agreements are as follows:
($000) | ||||
Fiscal years ending 28 February |
||||
2010 (Q4 only) |
171 | |||
2011 |
668 | |||
2012 |
342 | |||
2013 |
13 | |||
1,194 | ||||
Note 8 Bank loan and notes payable
In November 2007, OCZ obtained a new bank line of credit facility in the amount of $10 million
which was increased to $12 million during 2008. The agreement had a one-year term, an annual
commitment fee, and bore interest at prime plus 0.75% with a floor of 6.25%. The bank has
essentially all OCZs assets as collateral and requires periodic operational reporting in lieu of
any financial covenants other than tangible net worth as defined. As of November 30, 2008, OCZ was
not in compliance with two of financial covenants in the $12 million loan agreement OCZ had with
Silicon Valley Bank. In February 2009, in connection with the execution of an
Amendment, OCZ received a waiver from our lender for these covenants but our line of credit was
reduced back to $10 million. As of February 28, 2009, OCZ was not in compliance with one financial
covenant in the Loan Agreement for which OCZ has obtained a waiver. In July 2009, OCZ entered into
a Sale of Accounts and Security
9
Table of Contents
Agreement with Faunus Group International, Inc, pursuant to which
OCZ may factor our foreign receivables up to $8 million in the aggregate (as amended, the FGI
Agreement). OCZ has entered into a Loan and Security Agreement with Silicon Valley Bank dated as
of July 2009 (as amended, the SVB Agreement and collectively with the FGI Agreement, the
Factoring Loan Agreements) to factor all our domestic receivables up to $10 million in the
aggregate. The SVB Loan Agreement also caps the aggregate debt under both Factoring Loan Agreements
to $14 million. Under the Factoring Loan Agreements OCZ has guaranteed its obligations thereunder
and has pledged substantially all of its assets as security. There is no assurance that OCZ will
not become out of compliance with one or more covenants of our Loan Agreement in the future. If OCZ
is in violation of covenants in the Factoring Loan Agreements and do not receive a waiver, the
lender could choose to accelerate payment on all outstanding loan balances. Total borrowings under
these Loan Agreements amounted to approximately $9.4 million at February 28, 2009, and $12.1
million at November 30, 2009.
In order to provide some bridge financing as these new financing arrangements were established, in
August 2009 we borrowed $500,000 from our CEO, Ryan Petersen, at 7.5% interest. The loan is
repayable in equal installments in February 2010 and September 2010. OCZ also had notes payable in
connection with the 2007 acquisitions described in Note 7 of our Form 10 which bore interest at 6%.
The amounts outstanding were $575,000 at February 29, 2008 and $200,000 at February 28, 2009. The
$200,000 note was repaid in September 2009.
Note 9
Stockholders Equity
(The numbers of shares and their prices have been adjusted to reflect the 2.5-for-1 stock reverse
split that took place in September 2009).
As at December 31, 2004 and December 31, 2005 OCZ had 15,000,000 shares of $0.0025 par value common
stock authorized of which 12,193,200 and 13,234,130 shares were outstanding, respectively.
On January 1, 2005, OCZ purchased the 30% minority interest in OCZ Canada by the issuance of
480,000 shares of common stock, valued at approximately $0.43 per share.
During the fiscal year ended December 31, 2005, OCZ sold 7,200 shares of common stock valued at
approximately $0.43 and 411,658 shares of common stock valued at $0.63, which equaled the estimated
fair market value at the time of sale.
During the remainder of 2005, OCZ engaged in routine stock option and stock sale transactions as
further described in the Consolidated Statement of Changes in Stockholder Equity.
In June 2006, OCZ issued 3,020,000 shares of common stock as part of the Initial Listing at 162.50
pence ($3.00) and 484,000 shares upon conversion of convertible unsecured loan stock at a price of
121.88 pence ($2.25). OCZ raised an aggregate of $8.2 million after costs in connection with the
Initial Listing. In October 2006, OCZ issued an additional 516,000 shares of common stock in
connection with the Initial Listing at 212.50 pence ($4.15), which raised approximately $1.7
million after costs.
During the remainder of 2006, approximately 141,600 shares of common stock were issued from the
exercise of stock option and warrants.
During May 2007, OCZ completed a secondary offering of 2,651,000 shares of common stock at 312.50
pence ($6.18), which raised approximately $15.3 million after costs. In connection with the May
2007 acquisition of PC Power and Cooling, Inc., OCZ issued 249,200 shares of common stock, and in
February 2008, OCZ issued 231,600 shares as part of a capitalization of $500,000 of an acquisition
related note. Also in May 2007 the number of authorized shares was increased to 40,000,000 shares,
which is the level at each of the subsequent balance sheet dates presented herein.
In November 2008, OCZ issued 339,200 shares as part of a capitalization of $200,000 of an
acquisition related note in favor of Douglas A. Dodson.
10
Table of Contents
During fiscal years ended February 29, 2008 and February 28, 2009, approximately 328,528 shares of
common stock and 74,000 shares of common stock, respectively, were issued in connection with the
exercise of stock options. In November 2009, the Board approved the issuance of 25,710 shares of
common stock, but such shares have not been issued. As of November 30, 2009 OCZ had issued and sold
8,000 of its Series A Preferred Stock at a price of $5.00. As of January 14, 2010, OCZ has, in the
aggregate, issued 30,990 shares of its Series A Preferred Stock at the price of $5.00 per share.
Stock incentive plan
In December 2004, OCZ adopted a stock incentive plan with 1,800,000 shares of common stock
authorized for issuance. The shares subject to the stock incentive plan was subsequently increased
to 5,232,873. The shares to be purchased are subject to forfeiture conditions, rights of
repurchase, rights of first refusal and other transfer restrictions as the Board may determine. The
options granted will expire in a term not to exceed 10 years.
The following table summarizes option activity for the fiscal year ended February 28, 2009 and
the interim 9 month period ended November 30, 2009.
Number of | Weighted | |||||||||||||||||||
Shares | shares | Average | ||||||||||||||||||
available | under | Exercise | Total | exercise | ||||||||||||||||
for grant | option | Price | $ | price | ||||||||||||||||
Balance at 29
February 2008 |
465,059 | 2,047,663 | 10,065,859 | $ | 4.93 | |||||||||||||||
Options granted
(weighted average
fair value of
$0.37) |
(525,600 | ) | 525,600 | $ | 0.40-1.43 | 547,760 | $ | 1.05 | ||||||||||||
Options exercised |
| (74,000 | ) | $ | 0.63 | (46,250 | ) | $ | 0.63 | |||||||||||
Options forfeited |
940,116 | (940,116 | ) | $ | 0.63-$8.53 | (4,912,033 | ) | $ | 5.23 | |||||||||||
Balance at 28
February 2009 |
879,575 | 1,559,147 | 5,655,336 | $ | 3.63 | |||||||||||||||
New authorized |
2,000,000 | | | | | |||||||||||||||
Options granted
(weighted average
fair value of
$0.61) |
(1,630,400 | ) | 1,630,400 | $ | 1.28 | $ | 2,078,760 | $ | 1.28 | |||||||||||
Options exercised |
| | | | | |||||||||||||||
Options forfeited |
368,633 | (368,633 | ) | $ | 0.42-$8.28 | (1,458,966 | ) | $ | 3.96 | |||||||||||
Balance at 30
November 2009 |
1,617,808 | 2,820,914 | 6,275,130 | $ | 2.22 | |||||||||||||||
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The following table summarizes information about stock options outstanding and exercisable:
As at | As at | As at | ||||||||||
February 29, 2008 | February 28, 2009 | November 30, 2009 | ||||||||||
Exercise price range |
$ | 0.63-$8.53 | $ | 0.40-$8.53 | $ | 0.40-$8.53 | ||||||
Shares outstanding |
2,047,663 | 1,559,147 | 2,820,914 | |||||||||
Weighted average exercise price |
$ | 4.93 | $ | 3.63 | $ | 2.22 | ||||||
Weighted average contractual life |
8.5 years | 8.0 years | 8.7 years | |||||||||
Shares exercisable |
634,125 | 733,929 | 1,123,601 | |||||||||
Weighted average exercise price |
$ | 2.10 | $ | 3.74 | $ | 2.84 | ||||||
Weighted average contractual life |
7.6 years | 7.2 years | 7.6 years |
Stock-based compensation
On January 1, 2006, OCZ adopted SFAS 123(R) using the modified prospective application method.
Under this method, compensation cost recognized for the fiscal years ended February 29, 2008, and
February 28, 2009, and the nine months ended November 30, 2009 included: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
Since OCZs stock-based compensation plan was established in December 2004, all options have been
issued at or above the estimated fair market value so that there is no intrinsic value to be
expensed. Stock based compensation charged to expenses was $772,000 and $877,000 for the fiscal
years ending February 29, 2008 and February 28, 2009, respectively and $465,000 for the interim
period ending November 30, 2009. As of February 28, 2009, compensation costs related to non vested
awards amounted to approximately $1.3 million and will be recognized in the periods to February 29,
2013 over a weighted average term of 16.9 months. As of November 30, 2009, compensation costs
related to non vested awards amounted to approximately $1.5 million and will be recognized in the
periods to February 29, 2013 over a weighted average term of 12.8 months.
The fair value of options grants is determined using the Black-Scholes option pricing model with
the following weighted average assumptions:
As at | As at | |||||||
February 28, 2009 | November 30, 2009 | |||||||
Expected dividend |
0 | % | 0 | % | ||||
Risk free interest rate |
2.8 | % | 2.0 | % | ||||
Expected volatility |
0.4 | 0.58 | ||||||
Expected life (in years) |
4.24 | 4.28 |
On April 20, 2008 options for 301,200 shares with exercise prices ranging from $4.18 to $8.53
were cancelled. These options, for non-senior management employees, were then regranted with a
three year vesting period and an exercise price of $1.05 which was the fair market value at date of
grant. Incremental compensation cost of the excess fair value of the replacement awards will be
recognized over the three year term.
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Warrants
The following table summarizes warrant activity for the fiscal years ended February 29, 2008 and
February 28, 2009.
Weighted | ||||||||||||||||
average | ||||||||||||||||
Number | Exercise | Total | exercise | |||||||||||||
of shares | price | $ | price | |||||||||||||
Balance at 29 February 2008 |
142,564 | $ | 2.25-$3.90 | 159,371 | $ | 2.80 | ||||||||||
Warrants granted |
| | | | ||||||||||||
Warrants exercised |
| | | | ||||||||||||
Warrants forfeited |
| | | | ||||||||||||
Balance at 28 February 2009 |
142,564 | $ | 2.25-$3.90 | 159,371 | $ | 2.80 | ||||||||||
Warrants granted |
| | | | ||||||||||||
Warrants exercised |
| | | | ||||||||||||
Warrants forfeited |
| | | | ||||||||||||
Balance at 30 November 2009 |
142,564 | $ | 2.25-$3.90 | 159,371 | $ | 2.80 | ||||||||||
Note 10
Segment and geographic information
OCZ operates in a single industry segment and has three product groups comprised of memory
processing, power supplies, and flash memory storage.
The following table sets forth the revenues for each of OCZs product groups for the interim
periods ended November 30, 2008 and 2009:
Nine months | Nine months | |||||||
ended | ended | |||||||
November 30, | November 30, | |||||||
2008 | 2009 | |||||||
($) | ($) | |||||||
Memory processing |
76,291 | 57,301 | ||||||
Power supplies |
18,297 | 17,122 | ||||||
Flash memory storage |
20,275 | 37,168 | ||||||
Total |
114,863 | 111,591 |
OCZs revenues by major geographic area (based on destination) were as follows:
Nine months | Nine months | |||||||
ended | ended | |||||||
November 30, | November 30, | |||||||
2008 | 2009 | |||||||
($) | ($) | |||||||
United States |
43,045 | 47,249 | ||||||
Canada |
8,503 | 5,311 | ||||||
Europe/Middle East/Africa |
56,557 | 44,615 | ||||||
Rest of World |
6,758 | 14,416 | ||||||
Total |
114,863 | 111,591 |
Note 11
New Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may
impact its consolidated financial statements and does not believe that there are any other new
accounting pronouncements that
have been issued that might have a material impact on its consolidated financial statements.
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Item 2.
Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Cautionary Statement
Certain information in this report contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of
the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking
statements often can be, but are not always, identified by the use of words such as assume,
expect, intend, plan, project, believe, estimate, predict, anticipate, may,
might, should, could, goal, potential and similar expressions. They include, but are not
limited to: statements regarding our revenue growth initiatives; continued growth in the sales of
our various product lines; changes in the average selling prices of our products; the loss of, or
reduction in sales to, any of our key customers; our ability to deliver new and enhanced products
on a timely basis; our sales, operating results and anticipated cash flows; our ability to forecast
customer demand; the availability of certain components in our products which we obtain from a
limited number of suppliers; competition from other companies in our industry; changes in political
and economic conditions and local regulations, particularly outside of the United States; and our
ability to protect our intellectual property rights. We base these forward-looking statements on
our current expectations and projections about future events, our assumptions regarding these
events and our knowledge of facts at the time the statements are made. These forward-looking
statements are subject to various risks and uncertainties that may be outside our control and our
actual results could differ materially from our projected results. Please see our Form 10 and the
other information contained in our other SEC filings for a further discussion of these and other
risk and uncertainties applicable to our business. We are not able to predict all the factors that
may affect future results. Forward-looking statements speak only as of the date of this Quarterly
Report on Form 10-Q. Except as required by applicable laws or regulations, we do not undertake any
obligation to update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
The following discussion should be read in conjunction with our consolidated financial statements
and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a leading provider of high performance SSDs and Memory Modules for computing devices
and systems. Founded in 2002, OCZ Technology Group, Inc. is incorporated in Delaware with
headquarters in San Jose, California and offices in Canada, the Netherlands, and Taiwan. Our
fiscal year ends on the last day of February.
Historically, we had primarily sold high performance Memory Modules to individual computing
enthusiasts through catalog and online retail channels. As such, we believe that we benefit from
significant brand recognition and affinity amongst computing enthusiasts many of which are
enterprise IT professionals. Today, as part of a diversification strategy which began in Fiscal
2009, our product mix is more heavily weighted toward the sale of SSDs and our target customers are
increasingly enterprises and original equipment manufacturers or OEMs.
In addition to our SSD and Memory Module product lines, we design, develop, manufacture and
distribute other high performance components for computing devices and systems, including thermal
management solutions, AC/DC switching PSUs and computer gaming solutions. We offer our customers
flexibility and customization by providing a broad array of solutions which are interoperable and
can be configured alone or in combination to make computers run faster, more reliably, efficiently
and cost effectively. Through our diversified and global distribution channel, we offer more than
500 products to over 300 customers, including leading retailers, etailers, OEMs and computer
distributors.
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Our ten largest customers measured by gross revenue for our fiscal year 2009 and the
fiscal year 2010 (through November 2009) are listed as follows in alphabetical order:
Amazon.com;
ASK Corporation;
Cyberslim International Ltd.;
COS Memory AG;
D&H Distribution Company;
Maxcom Memory GmbH;
Memoryworld GmbH & Co., KG;
Micro Center Corporation;
NewEgg.com, operated by ABS Computer Technologies, Inc.; and
SYX Distribution, Inc.
These ten customers represented approximately 50% our gross revenue for the period set forth
above. Our largest customer is NewEgg.com, which represented approximately 18% of our revenue. No
other customer was responsible for 10% or more of our gross revenue.
We develop flexible and customizable component solutions quickly and efficiently to meet the
ever changing market needs and provide superior customer service. We believe our high performance
computer components offer the speed, density, size and reliability necessary to meet the special
demands of:
industrial equipment and computer systems;
computer and computer gaming and enthusiasts;
mission critical servers and high end workstations;
personal computer or PC upgrades to extend the useable life of existing PCs;
high performance computing and scientific computing;
video and music editing;
home theatre PCs and digital home convergence products; and
digital photography and digital image manipulation computers.
We perform the majority of our research and development efforts in-house, which increases
communication and collaboration between design teams, streamlines the development process and
reduces time-to-market.
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We commenced operations in 2002 and shares of our common stock began trading on the AIM Market
(AIM) of the London Stock Exchange plc in June 2006. On April 28, 2006, we amended our
certificate of incorporation to, among other matters, effect a 3-for-1 forward stock split. In May
2007, we acquired PC Power and Cooling, Inc., a privately-held manufacturer of PSUs that was based
in San Diego, California. We now offer both PC Power and Cooling, Inc. and OCZ branded PSUs. In
October 2007, we acquired substantially all of the assets of Silicon Data
Inc., doing business as
Hypersonic PC Systems, a privately-held manufacturer of high performance gaming PCs and laptops
aimed at the computer gaming community that was based in Great Neck, New York. In March 2009, we
amended our certificate of incorporation primarily to increase the number of authorized shares and
eliminate a number of provisions which required us to comply with various UK laws in the case of,
among other things,
takeovers and tender offers. On April 1, 2009, following appropriate stockholder approval, we
voluntarily delisted our common stock from trading on AIM. Accordingly, as of the date of this Form
10Q, our common stock does not trade on any public securities exchange.
As of November 30, 2009, we had over 300 customers, most of which are distributors or etailers
in more than 30 countries. For the nine months ended November 30, 2009 and November 30, 2008, our
net sales were $111,6 million and $114.9 million, respectively and our net income (loss) was $(7.0)
million and $(11.2) million, respectively.
In September 2009, we sold all inventory, patents and goodwill related to our Neural Impulse
Actuator product line to BCInet, Inc., a Delaware corporation, in exchange for notes with principal
amounts in the aggregate of $895,415 and shares of BCInet, Inc.s Series A Preferred Stock,
representing a 27% equity stake in BCInet, Inc. Also in September 2009, we amended our certificate
of incorporation to effect a 2.5-to-1 reverse stock split. All share amounts in this document have
been adjusted for the effect of this reverse split.
Results of Operations
The following table sets forth our financial results, as a percentage of net sales for the
periods indicated.
Three Months Ended | Nine Months Ended | |||||||||||||||
November 30, | November 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Revenue |
||||||||||||||||
Sales net |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of revenue |
83.0 | % | 99.0 | % | 85.3 | % | 88.6 | % | ||||||||
Gross profit |
17.0 | % | 1.0 | % | 14.7 | % | 11.4 | % | ||||||||
Expenses |
||||||||||||||||
Sales and marketing |
6.6 | % | 8.0 | % | 6.9 | % | 7.0 | % | ||||||||
Research and development |
3.5 | % | 2.1 | % | 3.6 | % | 1.5 | % | ||||||||
General, administrative and operations |
9.6 | % | 16.5 | % | 10.0 | % | 12.0 | % | ||||||||
Total operating expenses |
19.7 | % | 26.6 | % | 20.6 | % | 20.5 | % | ||||||||
Operating profits / (loss) |
(2.8 | )% | (25.7 | )% | (5.9 | )% | (9.2 | )% | ||||||||
Other income / (expense) |
||||||||||||||||
Other income
net |
1.6 | % | (0.3 | )% | 0.6 | % | (0.1 | )% | ||||||||
Interest and financing costs |
(1.4 | )% | (0.4 | )% | (1.0 | )% | (0.4 | )% | ||||||||
Total other income/ (expense) |
0.2 | % | (0.7 | )% | (0.4 | )% | (0.5 | )% | ||||||||
Profit / (Loss) before tax |
(2.6 | )% | (26.3 | )% | (6.3 | )% | (9.7 | )% | ||||||||
Tax (expense) benefit |
| (0.1 | )% | | 0.0 | % | ||||||||||
Retained profit / (loss) |
(2.6 | )% | (26.5 | )% | (6.3 | )% | (9.7 | )% |
Comparison of Three Months ended November 30, 2008 and November 30, 2009
Net sales. Net sales increased by $2.8 million, or 7.9%, from $35.2 million to $38.0 million,
for the three months ended November 30, 2008 and November 30, 2009, respectively. This was due
primarily to a 56% increase in Average Selling Prices (ASPs) offset by decreased unit sales. This
ASP increase was partially due to our
transitioning to sales of higher margin SSDs. For the three months ended November 30, 2009,
the approximate number of units sold decreased 35% to 549,000 units compared to 837,000 units for
the three months ended November 30, 2008. The decrease in unit volumes was primarily due to the
lack of working capital needed to fill orders.
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Cost of revenue. Cost of revenue decreased by $3.3 million, or (9.5%), from $34.9 million to
$31.6 million for the three months ended November 30, 2008 and November 30, 2009, respectively.
Cost of revenue as a percentage of net sales was 99% and 83% for the three months ended November
30, 2008 and November 30, 2009, respectively. The decrease in absolute dollars of cost of sales was
attributable to the decrease in unit volumes sold. The lower cost of revenues as a percentage of
net sales in three months ended November 30, 2009 was driven by higher average selling prices.
Cost of revenue does not include any stock-based compensation expense for the three months
ended November 30, 2009 and November 30, 2008.
Sales and marketing expenses. Sales and marketing expenses in aggregate dollars decreased
$310,000 from $2.8 million to $2.5 million or (11%) for the three months ended November 30, 2008
and November 30, 2009 respectively. Sales and marketing expenses were 8% and 6.6% of net sales for
the three months ended November 30, 2008 and November 30, 2009, respectively. The decrease in sales
and marketing expenses was due to reductions in marketing programs.
Sales and marketing expenses include stock-based compensation expense of $91,000 and $19,000
for the three months ended November 30, 2008 and November 30, 2009, respectively.
Research and development expenses. Research and development expenses increased by $587,000,
or 79%, from $741,000 to $1.3 million for the three months ended November 30, 2008 and November 30,
2009, respectively. Research and development expenses were 2.1% and 3.5% of net sales for the
three months ended November 30, 2008 and November 30, 2009, respectively. The increase in absolute
dollars was primarily due to an increase of $466,000 in salary and benefits (including stock based
compensation) resulting from growth in research and development personnel and an increase in
overhead and development costs associated with new products.
Research and development expenses include stock-based compensation expense of $35,000 and
$21,000 for the three months ended November 30, 2008 and November 30, 2009, respectively.
General, administrative and operations expenses. General, administrative and operations
expenses decreased by $2.2 million, or 37%, from $5.8 million to $3.7 million for the three months
ended November 30, 2008 and November 30, 2009, respectively. General, administrative and
operations expenses were 16.5% and 9.6% of net sales for the three months ended November 30, 2008
and November 30, 2009, respectively. The decrease in absolute dollars was primarily due to a
decrease of $1.1 million worth of bad debt reserves, $612,000 decrease in shipping costs (due to
lower volume of sales), $241,000 decrease of wages and other salaries, $60,000 decrease in rent,
offset by a $180,000 increase in legal costs primarily in connection with the Department of
Commerce investigation described in Legal Proceedings and a $221,000 increase in potential equity
offering expenses.
General and administrative expenses include stock-based compensation expense of $166,000 and
$34,000 for the three months ended November 30, 2008 and November 30, 2009, respectively.
Other income/(expense)-net. Other income/(expense)-net increased by $307,000 from ($229,000)
to $78,000 for the three months ended November 30, 2008 and November 30, 2009, respectively. The
increase was primarily due to a $668,000 gain on the sale of all inventory, patents and goodwill
related to our Neural Impulse Actuator product line to BCInet, Inc., a Delaware corporation offset
by an increase of interest and financing costs of $381,000. Interest expense and financing costs
increased from $141,000 for the three months ended November 30, 2008 to $522,000 for the three
months ended November 30, 2009. The increase in financing cost was due to the additional interest
payable under our new factoring financing arrangements.
Provision for income taxes. The income tax (provision) benefit amounted increased from
($52,000) to zero for the three months ended November 30, 2008 and November 30, 2009, respectively.
The 2008 provision related to taxes due for the Taiwan branch operations, which did not reoccur in
2009.
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Table of Contents
Comparison of Nine Months ended November 30, 2008 and November 30, 2009
Net sales. Net sales decreased by $3.27 million, or (2.8%) from $114.8 million to $111.6
million, for the nine months ended November 30, 2008 and November 30, 2009, respectively. This was
due primarily to a decrease in the number of units sold due to limited working capital partially
offset by a 1.7% increase in Average Selling Prices (ASPs). The approximate number of units sold
for the nine months ended November 30, 2009 decreased 7.5% to 2.2 million units compared to 2.4
million units for the nine months ended November 30, 2008. The decrease in unit volumes was
primarily due to the lack of working capital needed to fill orders.
Cost of revenue. Cost of revenue decreased by $6.6 million, or (6.5%), from $101.8 million to
$95.2 million for the nine months ended November 30, 2008 and November 30, 2009, respectively.
Cost of revenue as a percentage of net sales was 88.6% and 85.3% for the nine months ended November
30, 2008 and November 30, 2009, respectively. The decrease in absolute dollars of cost of sales was
attributable to the decrease in net sales and related unit volume. The lower cost of revenues as a
percentage of net sales in nine months ended November 30, 2009 was driven by higher average selling
prices of products.
Cost of revenue does not include any stock-based compensation expense for the nine months
ended November 30, 2008 and November 30, 2009.
Sales and marketing expenses. Sales and marketing expenses in aggregate dollars decreased
$319,000 from $8.0 million to $7.7 million or (4%) for the nine months ended November 30, 2008 and
November 30, 2009 respectively. Sales and marketing expenses were 7.0% and 6.9% of net sales for
the nine months ended November 30, 2008 and November 30, 2009, respectively. The variation in sales
and marketing expenses in absolute dollars was because of the scaling back of certain marketing
programs.
Sales and marketing expenses include stock-based compensation expense of $202,000 and $129,000
for the nine months ended November 30, 2008 and November 30, 2009, respectively.
Research and development expenses. Research and development expenses increased by $2.2
million, or 127%, from $1.8 million to $4.0 million for the nine months ended November 30, 2008 and
November 30, 2009, respectively. Research and development expenses were 1.5% and 3.6% of net sales
for the nine months ended November 30, 2008 and November 30, 2009, respectively. The increase in
absolute dollars was primarily due to an increase of $1.5 million in salary and benefits (including
stock based compensation) resulting from growth in research and development personnel and an
increase in overhead and development costs associated with new products.
Research and development expenses include stock-based compensation expense of $78,000 and
$130,000 for the nine months ended November 30, 2008 and November 30, 2009, respectively.
General, administrative and operations expenses. General, administrative and operations
expenses decreased by $2.5 million, or 18.3%, from $13.7 million to $11.2 million for the nine
months ended November 30, 2008 and November 30, 2009, respectively. General, administrative and
operations expenses were 12.0% and 10.0% of net sales for the nine months ended November 30, 2008
and November 30, 2009, respectively. The decrease in absolute dollars was primarily due to a
decrease of $447,000 of wages and other salaries, $349,000 decrease in rent, a $1.3 million
decrease in bad debt reserve, a decrease of $740,000 of shipping costs (due to lower unit sales)
offset by $210,000 increase in lease termination related fees, and $182,000 increase in legal costs
and receivables writeoffs related to the Department of Commerce investigation described in Legal
Proceedings.
General and administrative expenses include stock-based compensation expense of $372,000 and
$214,000 for the nine months ended November 30, 2008 and November 30, 2009, respectively.
Other income/(expense)-net. Other income/(expense)-net increased by $113,000 from ($592,000)
to ($479,000) for the nine months ended November 30, 2008 and November 30, 2009, respectively, of
which $434,000 and $1.1 million, respectively, was interest expense. The increase was primarily
due to $0.6 million of additional interest costs incurred from the new Factoring Loan Agreements
entered into in the second quarter of 2009 offset by the recognition of $668,000 of gain from the
sale of all inventory, patents and goodwill related to our Neural Impulse Actuator product line to
BCInet, Inc., a Delaware corporation.
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Table of Contents
Provision for income taxes. The income tax (provision) benefit amounted increased from
($52,000) to $1,000 for the nine months ended November 30, 2008 and November 30, 2009,
respectively. The 2008 provision related to taxes due for the Taiwan branch operations, which did
not reoccur in 2009.
Liquidity and Capital Resources
Since our inception, we have historically not generated cash from operations and have relied
upon funds from equity offerings, primarily on the London Stock Exchanges Alternative Investment
Market in accordance with Regulation S, and, as we have grown, receivable financing.
Operating Activities. Net cash used by operating activities was $1.27 million for the nine
months ended November 30, 2009 and $1.0 million for the nine months ended November 30, 2008. The
decrease in net cash was due primarily to a $1.9 million decrease in accounts receivable, a $5.1
million decrease in inventory, $4.0 million decrease in operating losses offset by a $1.5 million
increase in prepaid expenses and other assets, a $5.9 million decrease in accounts payable and a
$3.5 million decrease in accrued expenses. Additionally, net cash from operating activities was
reduced by $0.7 million due to the non-cash consideration received for the sale of the Neural
Impulse Actuator product line to BCInet in September 2009. The decrease in accounts receivable and
inventory was due to better inventory management during the period. The decrease in accrued
expenses was due to a decrease in sales incentive and rebate programs.
Investing activities. Net cash used by investing activities was $1.0 million for the nine
months ended November 30, 2009 and $1.3 million for the nine months ended November 30, 2008. The
decrease in investing activity was primarily due to $0.3 million lower purchases of fixed assets in
the nine months ended November 30, 2009 versus the nine months ended November 30, 2008.
Financing activities. Net cash provided by our financing activities increased by $1.6 million
from $1.4 million to $3.0 million for the nine months ended November 30, 2008 and November 30, 2009
respectively. The increase in net cash was primarily due to increases in factoring loans of $1.1
million and a $0.6 million increase in notes payable partially offset by a $0.2 million decrease in
sales of common stock.
Other factors affecting liquidity and capital resources
We have historically not generated cash from funds generated from operations and have relied
upon equity offerings and debt financing such as receivable factoring, increased trade terms from
vendors, and bank lines of credit as we have grown. In July 2009, we entered into a Sale of
Accounts and Security Agreement with Faunus Group International, Inc, pursuant to which we may
factor our foreign receivables up to $8 million in the aggregate (as amended, the FGI Agreement).
We have entered into a Loan and Security Agreement with Silicon Valley Bank dated as of July 2009
(as amended, the SVB Agreement and collectively with the FGI Agreement, the Factoring Loan
Agreements) to factor all our domestic receivables up to $10 million in the aggregate. The SVB
Loan Agreement also caps the aggregate debt under both Factoring Loan Agreements to $14 million.
Under the Factoring Loan Agreements we have guaranteed our obligations thereunder and have pledged
substantially all of our assets as security. As of November 30, 2009, the outstanding loan
balances under the Factoring Loan Agreement was $12.1 million in the aggregate. In order to
provide some bridge financing as these new financing arrangements were established, in August 2009
we borrowed $500,000 from our CEO, Ryan Petersen, at 7.5% interest. The loan is repayable in equal
installments in February 2010 and September 2010. Also, we may incur additional debt in the
future, subject to certain limitations contained in our debt instruments.
We expect to experience continued growth in our working capital requirements as we continue to
expand our business. We cannot assure that we will find additional debt or equity financing
allowing us to grow. We intend to fund this continued expansion through cash generated by
operations, increased debt facilities, and proceeds from any equity offerings. We anticipate that
working capital will constitute a material use of our cash resources.
The SVB Agreement was a result of renegotiation with Silicon Valley Bank and replaced our
prior agreement with them. Since we entered into this new agreement, we have not failed to comply
with any of its requirements. However, under our prior agreement, we had certain measures of
financial performance that we were required to meet and, on occasion, with which we were unable to
comply. In February through May of 2009, we did not meet a
minimum required threshold as set forth in the original Silicon Valley Bank agreement for a
financial performance ratio called a quick ratio which is the ratio of our cash, marketable
securities and accounts receivable divided by our liabilities, and Silicon Valley Bank granted us a
waiver for these months. In addition, in May 2009, we did not meet a threshold requirement for a
minimum amount of earnings before interest, taxes, depreciation and amortization (EBITDA) and
Silicon Valley Bank also granted us a waiver in this instance as well. Although the quick ratio
test remains in our current SVB Agreement, this agreement does not contain a requirement of a
minimum amount of EBITDA.
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The SVB Agreement also has a number of other requirements, also called covenants, with which
we are required to comply, including among other things:
| delivery of monthly and annual financial statements; |
| tax, deposit account and insurance requirements; |
| restrictions on our ability to complete dispositions, debt incurrence, distributions, investments, liens, mergers and acquisitions; and |
| certain financial covenants that are tested on a monthly basis. |
The FGI Agreement has a number of covenants with which we are required to comply, including
among other things:
| delivery of monthly and annual financial statements; |
| giving notice if we have a material adverse change and under other circumstances; and |
| restrictions on our ability to complete dispositions, debt incurrence, distributions, investments and other liens. |
Our long-term future capital requirements will depend on many factors, including our level of
revenues, the timing and extent of spending to support our product development efforts, the
expansion of sales and marketing activities, the timing of our introductions of new products, the
costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of
our products. We could be required, or could elect, to seek additional funding through public or
private equity or debt financing and additional funds may not be available on terms acceptable to
us or at all.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table summarizes our outstanding contractual obligations as of November 30,
2009:
Payments due by period
Q4 | Beyond | |||||||||||||||||||||||||||||
Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | Fiscal | |||||||||||||||||||||||||
(in thousands) | Total | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||||||||||||||||||||||
Long-term debt obligations |
$ | 500 | $ | 250 | $ | 250 | ||||||||||||||||||||||||
Capital lease obligations |
N/A | |||||||||||||||||||||||||||||
Operating lease obligations |
$ | 1,194 | $ | 171 | $ | 668 | $ | 342 | $ | 13 | | | ||||||||||||||||||
Other long-term
liabilities reflected on
the balance sheet under
GAAP |
N/A | |||||||||||||||||||||||||||||
Total |
$ | 1,694 | $ | 421 | $ | 918 | $ | 342 | $ | 13 | | |
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Inflation
Inflation was not a material factor in either revenue or operating expenses during each of the
first nine months ended November 30, 2008 and 2009.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The preparation of these
financial statements requires us to make estimates and judgments that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses for each period. Information
with respect to our critical accounting policies which we believe could have the most significant
effect on our reported results and require subjective or complex judgments is contained in the
notes to the consolidated financial statements in our Form 10 for the fiscal year ended February
28, 2009. There have been no significant changes in our critical accounting policies and estimates
during the nine months ended November 30, 2009 as compared to what was previously disclosed in our
Form 10 for the fiscal year ended February 28, 2009.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting
Standards CodificationTM (Codification) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. Recognition of the Codification in financial
statements is effective for interim and annual periods ending after September 15, 2009. The impact
in our financial statements was only to references for accounting guidance.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to a variety of risks, including foreign currency exchange rate fluctuations and
changes in the market value of our investments in marketable securities (if any). In the normal
course of business, we employ established policies and procedures to manage these risks which may
include the use of derivative instruments. There have been no material changes in our foreign
exchange risk management strategy subsequent to August 31, 2009.
Item 4T.
Controls and Procedures.
Evaluation of disclosure Controls and Procedures
Based on managements evaluation (with the participation of our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO)), at the end of the period covered by this report, our CEO and CFO
have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) are effective.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of fiscal
2010 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no governmental, legal or arbitration proceedings to which we or our subsidiaries
are a party or to which any of our or any of our subsidiaries property is subject, the resolution
of which would have a material effect on our financial position or results of operations.
In 2009, we received inquiries from the U.S. Department of Commerce and the Federal Bureau of
Investigation regarding the potential re-export of our products from the United Arab Emirates into
Iran. We consequently launched an internal investigation performed by outside counsel. The
investigation concluded that while between 2004 and 2008, we maintained a relationship with a
distributor in the United Arab Emirates, we have not found any specific facts confirming these
suspicions or any information about when such reexports would have occurred or who may have
received the products. However, we did provide approximately $500 in sales support materials to
the distributor in connection with a sales presentation in Iran. We have terminated our
relationship with this distributor.
The investigation separately discovered that in 2007 and 2008, in a total of three instances,
we sent one of our high speed Reaper memory module products free of charge as either samples or
replacement parts to individuals in Iran and an individual who claimed an address in Cuba but
subsequently changed the address to one in Mexico.
We also have received information that a distributor in Lebanon to whom we sold Neural Impulse
Actuators September 2008 may have re-exported one of these units into Syria and in general was
interested in distributing our products in Syria, but we have not found specific facts confirming
when such reexport would have occurred or who may have received the product. We have terminated
our relationship with this distributor.
We have voluntarily disclosed these transactions to the U.S. Department of Commerce and the
U.S. Department of the Treasury and have cooperated fully with requests for information from these
entities as well as the Federal Bureau of Investigation. Should the U.S. government allege that we
have violated the Iranian Transaction Regulations and/or Export Administration Regulations, the
maximum fine for each violation that we could be subject to would be the greater of $250,000 or two
times the value of the illegal transaction. Based on the list price of the products in question,
we believe the maximum fine per violation would be $250,000. We believe, however, there is a good
faith basis for leniency if any fines are assessed, given the relatively small number of units and
revenue at issue, our full cooperation with the U.S. government and our immediate attention to
rectifying the underlying causes of the problems. As a result of the discovery of these events, we
have implemented more stringent export control procedures to prevent inadvertent transfers and
retransfers to sanctioned countries.
Item 1A. Risk Factors.
The Risk Factors included in our Form 10, which has become effective December 1, 2009, as
amended, have not materially changed. You should carefully consider the following risk factors, as
well as the other information in this Form 10-Q, before deciding whether to invest in shares of our
stock. Our business, financial condition and results of operations may be materially and adversely
affected due to any or all of the following risks. In this case, the trading price of our common
stock would likely decline and you might lose all or part of your investment in our common stock.
The risks described below are not the only ones we face. Additional risks of which we are not
presently aware or that we currently believe are immaterial may also impair our business.
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Risks Related to Our Business
We are subject to the cyclical nature of the markets in which we compete and a continued
downturn could adversely affect our business.
The markets in which we compete, including the SSDs, flash, memory, thermal management, power
supply, and computer gaming station markets, are highly cyclical and characterized by constant and
rapid technological change, rapid product obsolescence and price erosion, evolving standards, short
product life cycles and wide fluctuations in product supply and demand. These markets have
experienced significant downturns often connected with, or in anticipation of, maturing product
cycles of both manufacturers and their customers products and declines in general economic
conditions. These downturns have been characterized by diminished product demand, production
overcapacity, high inventory levels and accelerated erosion of average selling prices.
Our historical operating results have been subject to substantial fluctuations, and we may
experience substantial period-to-period fluctuations in future operating results. A downturn in
these markets could have a material adverse effect on the demand for our products and therefore a
material adverse effect on our business, financial condition and results of operations. Moreover,
changes in end-user demand for the products sold by any individual customer can have a rapid and
disproportionate effect on demand for our products from that customer in any given period,
particularly if the customer has accumulated excess inventories of products purchased from us.
There can be no assurance that our net sales and results of operations will not be materially and
adversely affected in the future due to changes in demand from individual customers or cyclical
changes in the industries utilizing our products.
We have experienced quarterly and annual losses in the past and may experience losses in the
future.
We have experienced losses on a quarterly and annual basis in the past. We have expended, and
will continue to expend, substantial funds to pursue engineering, research and development
projects, enhance sales and marketing efforts and otherwise operate our business. There can be no
assurance that we will be profitable on a quarterly or annual basis in the future.
Declines in our average selling prices may result in declines in our net sales and gross
profit.
Our average selling prices may decline due to several factors. Over the last few years,
overcapacity in the DRAM memory component market resulted in significant declines in component
prices, which negatively impacted our average selling prices and net sales. During periods of
overcapacity, our net sales may decline if we do not increase unit sales of existing products or
fail to introduce and sell new products in quantities sufficient to offset declines in selling
prices. Our efforts to increase unit sales, reduce costs and develop new products to offset the
impact of further declines in average selling prices may not be successful. Declines in DRAM and
NAND flash prices could also (as they have in the past) affect our gross profit and the valuation
of our inventory, which could harm our financial results.
Declines in average selling prices would enable OEMs to pre-install higher capacity based
memory into new systems at existing price points, and thereby reduce the demand for future memory
upgrades. Further, our net sales and gross profit may be negatively affected by shifts in our
product mix during periods of declining average selling prices.
In addition, the continued transition to smaller design geometries and the use of 300
millimeter wafers by existing memory manufacturers could lead to a significant increase in the
worldwide supply of DRAM and flash components. Increases in the worldwide supply of memory
components could also result from manufacturing capacity expansions. If not offset by increases in
demand, these increases would likely lead to further declines in the average selling prices of our
products and have a material adverse effect on our business, financial condition and results of
operations. Furthermore, even if supply remains constant, if demand were to decrease, it would harm
our average selling prices.
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Sales to a limited number of customers represent a significant portion of our net sales, and
the loss of any key customer would materially harm our business.
Our dependence on a limited number of customers means that the loss of a major customer or any
reduction in orders by a major customer would materially reduce our net sales and adversely affect
our results of operations. We expect that sales to relatively few customers will continue to
account for a significant percentage of our net sales for the foreseeable future. However, there
can be no assurance that any of these customers or any of our other customers will continue to
utilize our products at current levels, if at all. We have no firm, long-term volume commitments
from any of our major customers and we generally enter into individual purchase orders with our
customers, in certain cases under master agreements that govern the terms and conditions of the
relationship. We have experienced cancellations of orders and fluctuations in order levels from
period to period and expect that we will continue to experience such cancellations and fluctuations
in the future. Customer purchase orders may be cancelled and order volume levels can be changed,
cancelled or delayed with limited or no penalties. The replacement of cancelled, delayed or reduced
purchase orders with new orders cannot be assured.
For our the nine months ended November 30, 2008 and November 30, 2009, our ten largest
customers accounted for 48.4% and 50.2% of net sales, respectively. For the nine months ended
November 30, 2008 and November 30, 2009, NewEgg accounted for 18% and 18% of our net sales,
respectively. During these periods, no other customers accounted for more than 10% of our net
sales.
Our customers are primarily in the computing markets, and fluctuations in demand in these
markets may adversely affect sales of our products.
Sales of our products are dependent upon demand in the computing markets. We may experience
substantial period-to-period fluctuations in future operating results due to factors affecting the
computing markets. From time to time, these markets have experienced downturns, often in
connection with, or in anticipation of, declines in general economic conditions. A decline or
significant shortfall in demand in any one of these markets could have a material adverse effect on
the demand for our products and therefore a material adverse effect on our business, financial
condition and results of operations.
Customer demand is difficult to accurately forecast and, as a result, we may be unable to
optimally match production to customer demand.
We make significant decisions, including determining the levels of business that we will seek
and accept, production schedules, component procurement commitments, personnel needs and other
resource requirements, based on our estimates of customers future requirements. The short-term
nature of commitments by many of our customers and the possibility of unexpected changes in demand
for their products reduces our ability to accurately estimate future customer requirements. On
occasion, customers may require rapid increases in production, which can challenge our resources
and can reduce margins. We may not have sufficient capacity at any given time to meet our
customers demands. Conversely, downturns in the markets in which our customers compete can, and
have, caused our customers to significantly reduce the amount of products ordered from us or to
cancel existing orders leading to lower-utilization of our facilities. Because many of our costs
and operating expenses are relatively fixed, reduction in customer demand would have an adverse
effect on our gross margins, operating income and cash flow.
During an industry downturn, there is also a higher risk that our trade receivables would be
uncollectible, which would be materially adverse to our cash flow and business.
Order cancellations or reductions, product returns and product obsolescence could result in
substantial inventory write-downs.
To the extent we manufacture products in anticipation of future demand that does not
materialize, or in the event a customer cancels or reduces outstanding orders, we could experience
an unanticipated increase in our inventory. Slowing demand for our products may lead to product
returns which would also increase our inventory. In the past, we have had to write-down inventory
due to obsolescence, excess quantities and declines in market value below our costs.
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We may be less competitive if we fail to develop new or enhanced products and introduce them in
a timely manner.
The markets in which we compete are subject to rapid technological change, product
obsolescence, frequent new product introductions and enhancements, changes in end-user requirements
and evolving industry standards. Our ability to successfully compete in these markets and to
continue to grow our business depends in significant part upon our ability to develop, introduce
and sell new and enhanced products on a timely and cost-effective basis, and to anticipate and
respond to changing customer requirements.
The markets for our products are characterized by frequent transitions in which products
rapidly incorporate new features and performance standards. A failure to develop products with
required feature sets or performance standards or a delay as short as a few months in bringing a
new product to market could significantly reduce our net sales for a substantial period, which
would have a material adverse effect on our business, financial condition and results of
operations.
We have experienced, and may in the future experience, delays in the development and
introduction of new products. These delays could provide a competitor a first-to-market opportunity
and allow a competitor to achieve greater market share. Defects or errors found in our products
after commencement of commercial shipment could result in delays in market acceptance of these
products. Lack of market acceptance for our new products will jeopardize our ability to recoup
research and development expenditures, hurt our reputation and harm our business, financial
condition and results of operations. Accordingly, there can be no assurance that our future product
development efforts will result in future profitability or market acceptance.
Our dependence on a small number of suppliers for components, including integrated circuit
devices, and inability to obtain a sufficient supply of these components on a timely basis
could harm our ability to fulfill orders and therefore materially harm our business.
Typically, integrated circuit, or IC, devices represent 60-80% of the component costs of our
products. We are dependent on a small number of suppliers that supply key components used in the
manufacture of our products. Since we have no long-term supply contracts, there is no assurance
that our suppliers will agree to supply the quantities of components we may need to meet our
production goals. Samsung, Toshiba and Intel currently supply substantially all of the IC devices
used in our Flash memory products. Micron, Elpida, PSC (Powerchip) currently supply substantially
all of the DRAM IC devices used in our DRAM products.
Moreover, from time to time, our industry experiences shortages in IC devices and foundry
services which have resulted in foundries their customers, ourselves included, on component
allocation. While to date this has not disrupted our business in a material way, in the future if
such shortages occur, we may not be able to obtain the materials that we need to fill orders in a
timely manner or at competitive prices. As a result, our reputation could be harmed, we may lose
business from our customers, our revenues may decline, and we may lose market share to our
competitors.
The markets in which we compete are constantly evolving and competitive, and we may not have
rights to manufacture and sell certain types of products utilizing emerging formats, or we may
be required to pay a royalty to sell products utilizing these formats.
The markets in which we compete are constantly undergoing rapid technological change and
evolving industry standards. For example, many consumer devices, such as digital cameras, PDAs and
smartphones, are transitioning to emerging flash memory formats, such as the Memory Stick and xD
Picture Card formats, which we do not currently manufacture and do not have rights to manufacture,
and which could result in a decline in demand, on a relative basis, for other products that we
manufacture such as CompactFlash and secured digital USB drives. If we decide to manufacture
products utilizing emerging formats such as those mentioned, we will be required to secure licenses
to give us the right to manufacture such products which may not be available at reasonable rates or
at all. If we are not able to supply formats at competitive prices or if we were to have product
shortages, our net sales could be adversely impacted and our customers would likely cancel orders
or seek other suppliers to replace us.
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Our growth strategy includes expanding our presence in the solid state drive, high performance
memory and computer components markets all of which are highly competitive.
Solid state drive, high performance memory and computer components markets are highly
competitive. Certain of our competitors are more diversified than us and may be able to sustain
lower operating margins in their solid state drive, high performance memory and computer components
business based on the profitability of their other businesses. We expect competition in these
markets to increase as existing manufacturers introduce new products and process technologies, new
manufacturers enter the market, industry-wide production capacity increases and competitors
aggressively price products to increase market share. We only have limited experience competing in
these markets. Our growth strategy includes expanding our presence in these markets, and there can
be no assurance that we will be successful in doing so.
Industry consolidation could adversely affect our business by reducing the number of our
potential significant customers and increasing our reliance on our existing key customers.
Many significant participants in our customers industries are merging and consolidating as a
result of competitive pressures, and we expect this trend to continue. Consolidation will likely
decrease the number of potential significant customers for our products and services. Fewer
significant customers will increase our reliance on key customers and, due to the increased size of
these companies, may negatively impact our bargaining position and profit margins. Consolidation in
some of our customers industries may result in increased customer concentration and the potential
loss of customers. The loss of, or a reduced role with, key customers due to industry consolidation
could negatively impact our business.
We may make acquisitions which involve numerous risks. If we are not successful in integrating
the technologies, operations and personnel of acquired businesses or fail to realize the
anticipated benefits of an acquisition, our operations may be adversely affected.
As part of our business and growth strategy, we expect to acquire or make significant
investments in businesses, products or technologies that allow us to complement our existing
product offering, expand our market coverage, increase our engineering workforce or enhance our
technological capabilities. For example in 2007, we acquired PC Power and Cooling, Inc., a producer
of PC thermal management products, and substantially all the assets of Silicon Data Inc., doing
business as Hypersonic PC Systems, a manufacturer of boutique high performance gaming PCs and
laptops. Any such future acquisitions or investments would expose us to the risks commonly
encountered in acquisitions of businesses. Such risks include, among others:
problems integrating the purchased operations, technologies or products;
costs associated with the acquisition;
negative effects on profitability resulting from the acquisition;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering markets in which we have no or limited prior experience;
loss of key employees of the acquired business; and
litigation arising from the acquired companys operations before the acquisition.
Our inability to overcome problems encountered in connection with any acquisition could divert
the attention of management, utilize scarce corporate resources and otherwise harm our business. In
addition, we are unable to predict whether or when any prospective acquisition candidate will
become available or the likelihood that any acquisition will be completed. Even if we do find
suitable acquisition opportunities, we may not be able to consummate the acquisitions on
commercially acceptable terms or realize the anticipated benefits of any acquisitions we do
undertake.
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We may not be able to maintain or improve our competitive position because of the intense
competition in the markets we serve.
We conduct business in markets characterized by intense competition, rapid technological
change, constant price pressures and evolving industry standards. Our competitors include many
large domestic and international companies that have substantially greater financial, technical,
marketing, distribution and other resources, broader product lines, lower cost structures, greater
brand recognition and longer-standing relationships with customers and suppliers than we do. As a
result, our competitors may be able to respond better to new or emerging technologies or standards
and to changes in customer requirements. Further, some of our competitors are in a better financial
and marketing position from which to influence industry acceptance of a particular industry
standard or competing technology than we are. Our competitors may also be able to devote greater
resources to the development, promotion and sale of products, and may be able to deliver
competitive products at a lower price.
We compete against global technology vendors such as Intel Corporation and Samsung Electronics
Co., Ltd. Our primary competitors in the specialized memory module and flash products industry
include Kingston Technology, SanDisk, Crucial Memory and Corsair. Our primary competitors in the
solid state storage maker industry include STEC, Fusion I/O and Mtron. Our primary competitors in
the specialized power supply chassis and cooling manufacturing industry include Antec, Inc.,
Thermaltake Technology Inc. USA and Enermax Technology Corporation. Finally, our primary
competitors in the computer peripheral manufacturing industry include Logitech International S.A.
and Saitek, acquired by Mad Catz Interactive, Inc.
We expect to face competition from existing competitors and new and emerging companies that
may enter our existing or future markets with similar or alternative products, which may be less
costly or provide additional features. In the PC market in Asia, we expect to face increasing
competition from local competitors such as A-DATA Technology Co., Ltd. and GSkill International
Enterprise. We also face competition from current and prospective customers that evaluate our
capabilities against the merits of manufacturing products internally. In addition, some of our
significant suppliers, including Samsung Electronics Co., Ltd, Infineon Technologies AG and Micron
Technology, Inc., are also our competitors, many of whom have the ability to manufacture
competitive products at lower costs as a result of their higher levels of integration. Competition
may also arise due to the development of cooperative relationships among our current and potential
competitors or third parties to increase the ability of their products to address the needs of our
prospective customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
We expect that our competitors will continue to improve the performance of their current
products, reduce their prices and introduce new products that may offer greater performance and
improved pricing, any of which could cause a decline in sales or loss of market acceptance of our
products. In addition, our competitors may develop enhancements to, or future generations of,
competitive products that may render our technology or products obsolete or uncompetitive.
The future growth of our OEM-focused products is dependent on achieving design wins into
commercially successful OEM systems and the failure to achieve design wins or of OEM customers
to incorporate our products in their systems could adversely affect our operating results and
prospects.
Our OEM-focused products are generally incorporated into our OEM customers systems at the
design stage. As a result, we rely on OEMs to select our products to be designed into their
systems, which we refer to as a design win. We often incur significant expenditures in the
development of a new product without any assurance that an OEM will select our product for design
into its system. Additionally, in some instances, we may be dependent on third parties to obtain or
provide information that we need to achieve a design win. Some of these third parties may not
supply this information to us on a timely basis, if at all. Furthermore, even if an OEM designs
one of our products into its system, we cannot be assured that its product will be commercially
successful or that we will receive any net sales as a result of that design win. Our OEM customers
are typically not obligated to purchase our products and can choose at any time to stop using our
products if their own systems are not commercially successful, if they decide to pursue other
systems strategies, or for any other reason. If we are unable to achieve design wins or if our OEM
customers systems incorporating our products are not commercially successful, our net sales would
suffer.
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Our future success is dependent on our ability to retain key personnel, including our executive
officers, and attract qualified personnel. If we lose the services of these individuals or are
unable to attract new talent, our business will be adversely affected.
Our future operating results depend in significant part upon the continued contributions of
our key technical and senior management personnel, many of whom would be difficult to replace. We
are particularly dependent on the continued service of Ryan Petersen, our chief executive officer,
Kerry T. Smith, our chief financial officer, and Alex Mei, our chief marketing officer. Our future
operating results also depend in significant part upon our ability to attract, train and retain
qualified management, manufacturing and quality assurance, engineering, marketing, sales and
support personnel. We are continually recruiting such personnel. However, competition for such
personnel is intense, and there can be no assurance that we will be successful in attracting,
training or retaining such personnel now or in the future. There may be only a limited number of
persons with the requisite skills to serve in these positions and it may be increasingly difficult
for us to hire such persons over time. The loss of any key employee, the failure of any key
employee to perform in his or her current position, our inability to attract, train and retain
skilled employees as needed or the inability of our officers and key employees to expand, train and
manage our employee base could materially and adversely affect our business, financial condition
and results of operations.
We rely on third-party sales representatives to assist in selling our products, and the failure
of these representatives to perform as expected could reduce our future sales.
We sell our products to some of our customers through third-party sales representatives. Our
relationships with some of our third-party sales representatives have been established recently,
and we are unable to predict the extent to which our third-party sales representatives will be
successful in marketing and selling our products. Moreover, many of our third-party sales
representatives also market and sell competing products. Our third-party sales representatives may
terminate their relationships with us at any time. Our future performance will also depend, in
part, on our ability to attract additional third-party sales representatives that will be able to
market and support our products effectively, especially in markets in which we have not previously
sold our products. If we cannot retain our current third-party sales representatives or recruit
additional or replacement third-party sales representatives, our net sales and operating results
could be harmed.
We have and will continue to incur increased costs as a result of becoming a public reporting
company.
We have incurred, and will continue to face, increased legal, accounting, administrative and
other costs as a result of becoming a reporting company that we did not incur as a private company.
The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and
Exchange Commission (the SEC), and the Public Company Accounting Oversight Board, have required
changes in the corporate governance practices of public companies. We expect these rules and
regulations to increase our legal and financial compliance costs and to make legal, accounting and
administrative activities more time-consuming and costly. We have also incurred substantially
higher costs to obtain directors and officers insurance. In addition, as we gain experience with
the costs associated with being a reporting company, we may identify and incur additional overhead
costs.
If we fail to maintain an effective system of internal controls or discover material weaknesses
in our internal controls over financial reporting, we may not be able to report our financial
results accurately or detect fraud, which could harm our business and the trading price of our
common stock.
Effective internal controls are necessary for us to produce reliable financial reports and are
important in our effort to prevent financial fraud. Beginning with our fiscal year ending February
28, 2010, we will be required to periodically evaluate the effectiveness of the design and
operation of our internal controls. These evaluations may result in the conclusion that
enhancements, modifications or changes to our internal controls are necessary or desirable. While
management evaluates the effectiveness of our internal controls on a regular basis, these controls
may not always be effective. There are inherent limitations on the effectiveness of internal
controls including collusion, management override, and failure of human judgment. Because of this,
control procedures are designed to reduce rather than eliminate business risks. If we fail to
maintain an effective system of internal controls or if management or our independent registered
public accounting firm were to discover material weaknesses in our internal controls, we may be
unable to produce reliable financial reports or prevent fraud and it could harm our financial
condition and results of operations and result in loss of investor confidence and a decline in our
share price.
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Our indemnification obligations to our customers and suppliers for product defects could
require us to pay substantial damages.
A number of our product sales and product purchase agreements provide that we will defend,
indemnify and hold harmless our customers and suppliers from damages and costs which may arise from
product warranty claims or claims for injury or damage resulting from defects in our products. We
maintain insurance to protect against certain claims associated with the use of our products, but
our insurance coverage may not be adequate to cover all or any part of the claims asserted against
us. A successful claim brought against us that is in excess of, or excluded from, our insurance
coverage could substantially harm our business, financial condition and results of operations.
Our operations in the United States and foreign countries are subject to political and economic
risks, which could have a material adverse effect on our business and operating results.
Our financial success may be sensitive to adverse changes in general political and economic
conditions in the United States such as changes in regulatory requirements, taxes, recession,
inflation, unemployment and interest rates. Such changing conditions could reduce demand in the
marketplace for our products or increase the costs involved for us to manufacture our products.
Sales outside of the United States accounted for approximately 58% of net sales for the nine
months ended November 30, 2009. Sales outside of the United States accounted for approximately 63%
and 61% of net sales in fiscal years ended February 29, 2008 and February 28, 2009, respectively.
We anticipate that international sales will continue to constitute a meaningful percentage of our
total net sales in future periods. In addition, a significant portion of our design and
manufacturing is performed at our facilities in Taiwan. As a result, our operations may be subject
to certain risks, including changes in regulatory requirements, tariffs and other barriers,
increased price pressure, timing and availability of export licenses, difficulties in accounts
receivable collections, difficulties in protecting our intellectual property, natural disasters,
difficulties in staffing and managing foreign operations, difficulties in managing distributors,
difficulties in obtaining governmental approvals for products that may require certification,
restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions,
foreign currency exchange fluctuations, the burden of complying with a wide variety of complex
foreign laws and treaties, potentially adverse tax consequences and uncertainties relative to
regional, political and economic circumstances.
We are also subject to the risks associated with the imposition of legislation and regulations
relating to the import or export of high technology products. We cannot predict whether quotas,
duties, taxes or other charges or restrictions upon the importation or exportation of our products
will be implemented by the United States or other countries. Some of our customers purchase orders
and agreements are governed by foreign laws, which often differ significantly from United States
laws. Therefore, we may be limited in our ability to enforce our rights under such agreements and
to collect damages, if awarded. These factors may have a material adverse effect on our business,
financial condition and results of operations.
Our inability to effectively manage our operations in foreign countries could harm our
operating results.
A significant portion of our design and manufacturing operations are carried out outside of
the United States at our foreign facilities. Further, international sales have accounted for a
significant portion of our overall sales. In some of the countries in which we operate or sell our
products, it is difficult to recruit, employ and retain qualified personnel to manage and oversee
our local operations, sales and other activities. Further, given our executive officers existing
managerial burdens, their lack of physical proximity to the activities being managed and the
inherent limitations of cross-border information flow, our executive officers who reside in the
United States may be unable to effectively oversee the day-to-day management of our foreign
subsidiaries and operations. The inability of or failure by our domestic and international
management to effectively and efficiently manage our overseas operations could have a negative
impact on our business and adversely affect our operating results.
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Worldwide economic and political conditions may adversely affect demand for our products.
The current economic slowdown in the United States and worldwide has adversely affected and
may continue to adversely affect demand for our products. Another decline in the worldwide
computing markets or a future decline in economic conditions or consumer confidence in any
significant geographic area would likely decrease the overall demand for our products, which could
have a material adverse effect on us. For example, a decline in economic
conditions in China could lead to declining worldwide economic conditions. If economic
conditions decline, whether in China or worldwide, we could be materially adversely affected.
The occurrence and threat of terrorist attacks and the consequences of sustained military
action in the Middle East have in the past, and may in the future, adversely affect demand for our
products. In addition, terrorist attacks may negatively affect our operations directly or
indirectly and such attacks or related armed conflicts may directly impact our physical facilities
or those of our suppliers or customers. Furthermore, these attacks may make travel and the
transportation of our products more difficult and more expensive, ultimately affecting our sales.
Also as a result of terrorism, the United States has been and may continue to be involved in
armed conflicts that could have a further impact on our sales, our supply chain and our ability to
deliver products to our customers. Political and economic instability in some regions of the world
could negatively impact our business. The consequences of armed conflicts are unpredictable, and
we may not be able to foresee events that could have a material adverse effect on us.
More generally, any of these events could cause consumer confidence and spending to decrease
or result in increased volatility to the United States economy and worldwide financial markets. Any
of these occurrences could have a material adverse effect on our business, financial condition and
results of operations.
Unfavorable currency exchange rate fluctuations could result in our products becoming
relatively more expensive to our overseas customers or increase our manufacturing costs, each
of which could adversely affect our profitability.
Our international sales and our operations in foreign countries make us subject to risks
associated with fluctuating currency values and exchange rates. Because sales of our products have
been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could
increase the price of our products so that they become relatively more expensive to customers in
the local currency of a particular country, leading to a reduction in sales and profitability in
that country. Future international activity may result in increased foreign currency denominated
sales. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable
and other monetary assets and liabilities arising from international sales or operations may
contribute to fluctuations in our results of operations. In addition, as a result of our foreign
sales and operations, we have revenues, costs, assets and liabilities that are denominated in
foreign currencies. Therefore, decreases in the value of the U.S. dollar could result in
significant increases in our manufacturing costs that could have a material adverse effect on our
business and results of operations.
Our worldwide operations could be subject to natural disasters and other business disruptions,
which could materially adversely affect our business and increase our costs and expenses.
Our worldwide operations could be subject to natural disasters and other business disruptions,
which could harm our future revenue and financial condition and increase our costs and expenses.
For example, our corporate headquarters in San Jose, California and our manufacturing facilities in
Taiwan are located near major earthquake fault lines. Taiwan is also subject to typhoons during
certain times of the year. In the event of a major earthquake, typhoon or hurricane, or other
natural or manmade disaster, we could experience business interruptions, destruction of facilities
and/or loss of life, any of which could materially adversely affect our business and increase our
costs and expenses.
Our ability to compete successfully and achieve future growth will depend, in part, on our
ability to protect our intellectual property, as well as our ability to operate without
infringing the intellectual property of others.
We attempt to protect our intellectual property rights through trade secret laws,
non-disclosure agreements, confidentiality procedures and employee disclosure and invention
assignment agreements. To a lesser extent, we also protect our intellectual property through
patents, trademarks and copyrights. It is possible that our efforts to protect our intellectual
property rights may not:
prevent our competitors from independently developing similar products, duplicating our
products or designing around the patents owned by us;
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prevent third-party patents from having an adverse effect on our ability to do business;
provide adequate protection for our intellectual property rights;
prevent disputes with third parties regarding ownership of our intellectual property rights;
prevent disclosure of our trade secrets and know-how to third parties or into the public
domain;
prevent the challenge, invalidation or circumvention of our existing patents;
result in patents that lead to commercially viable products or provide competitive advantages
for our products; and
result in issued patents and registered trademarks from any of our pending applications.
If any of our issued patents are found to be invalid or if any of our patent applications are
rejected, our ability to exclude competitors from making, using or selling the same or similar
products as us could be compromised. We have occasionally applied for and may in the future apply
for patent protection in foreign countries. The laws of foreign countries, however, may not
adequately protect our intellectual property rights. Many U.S. companies have encountered
substantial infringement problems in foreign countries. Because we conduct a substantial portion
of our operations and sell some of our products overseas, we have exposure to foreign intellectual
property risks.
In addition, the industries in which we compete are characterized by vigorous protection and
pursuit of intellectual property rights. We believe that it may be necessary, from time to time,
to initiate litigation against one or more third parties to preserve our intellectual property
rights. From time to time, we have received, and may receive in the future, notices that claim we
have infringed upon, misappropriated or misused other parties proprietary rights. Any of the
foregoing events or claims could result in litigation. Such litigation, whether as plaintiff or
defendant, could result in significant expense to us and divert the efforts of our technical and
management personnel, whether or not such litigation is ultimately determined in our favor. In the
event of an adverse result in such litigation, we could be required to pay substantial damages,
cease the manufacture, use and sale of certain products, expend significant resources to develop or
acquire non-infringing technology, discontinue the use of certain processes or obtain licenses to
use the infringed technology. Product development or license negotiating would likely result in
significant expense to us and divert the efforts of our technical and management personnel. We
cannot assure you that we would be successful in such development or acquisition or that necessary
licenses would be available on reasonable terms, or at all.
Our indemnification obligations for the infringement by our products of the intellectual
property rights of others could require us to pay substantial damages.
We currently have in effect a number of agreements in which we have agreed to defend,
indemnify and hold harmless our customers and suppliers from damages and costs which may arise from
the infringement by our products of third-party patents, trademarks or other proprietary rights.
We may periodically have to respond to claims and litigate these types of indemnification
obligations. Any such indemnification claims could require us to pay substantial damages. Our
insurance does not cover intellectual property infringement.
We could incur substantial costs as a result of violations of or liabilities under
environmental laws.
Our business involves purchasing finished goods as components from different vendors and then
assembly of these components into finished products at our facilities. We therefore are not
involved in the actual manufacturing of components, which can often involve significant
environmental regulations with respect to the materials used, as well as work place safety
requirements. Our operations and properties, however, do remain subject in particular to domestic
and foreign laws and regulations governing the storage, disposal and recycling of computer
products. For example, our products may be subject to the European Unions Directive 2002/96/EC
Waste Electrical and Electronic Equipment and Directive 2002/95/EC on Restriction on the Certain
Hazardous Substances in Electrical and Electronic Equipment. Our failure to comply with present
and future requirements could cause us to incur substantial costs, including fines and penalties,
investments to upgrade our product cycle or curtailment of operations. Further, the identification
of presently unidentified environmental conditions, more vigorous
enforcement by regulatory agencies, enactment of more stringent laws and regulations, or other
unanticipated events may arise in the future and give rise to material environmental liabilities
and related costs which could have a material adverse effect on our business, financial condition
and results of operations.
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We are subject to a variety of federal, state and foreign laws and regulatory regimes. Failure
to comply with governmental laws and regulations could subject us to, among other things,
mandatory product recalls, penalties and legal expenses which could have an adverse effect on
our business.
Our business is subject to regulation by various federal and state governmental agencies.
Such regulation includes the radio frequency emission regulatory activities of the Federal
Communications Commission, the anti-trust regulatory activities of the Federal Trade Commission and
Department of Justice, the consumer protection laws of the Federal Trade Commission, the
import/export regulatory activities of the Department of Commerce, the product safety regulatory
activities of the Consumer Products Safety Commission, the regulatory activities of the
Occupational Safety and Health Administration, the environmental regulatory activities of the
Environmental Protection Agency, the labor regulatory activities of the Equal Employment
Opportunity Commission and tax and other regulations by a variety of regulatory authorities in each
of the areas in which we conduct business. We are also subject to regulation in other countries
where we conduct business. In certain jurisdictions, such regulatory requirements may be more
stringent than in the United States. We are also subject to a variety of federal and state
employment and labors laws and regulations, including the Americans with Disabilities Act, the
Federal Fair Labor Standards Act, the WARN Act and other regulations related to working conditions,
wage-hour pay, over-time pay, employee benefits, anti-discrimination, and termination of
employment.
We have voluntarily disclosed potential violations of the Iranian Transaction Regulations and
the Export Administration Regulations of the U.S. Department of Treasury, Office of Foreign Assets
Control and the U.S. Department of Commerce, Office of Export Enforcement as a result of recently
discovered actions by a former employee. See Legal Proceedings.
Noncompliance with applicable regulations or requirements could subject us to investigations,
sanctions, mandatory product recalls, enforcement actions, disgorgement of profits, fines, damages,
civil and criminal penalties, or injunctions. In addition from time to time we have received, and
expect to continue to receive, correspondence from former employees terminated by us who threaten
to bring claims against us alleging that we have violated one or more labor and employment
regulations. In certain instances former employees have brought claims against us and we expect
that we will encounter similar actions against us in the future. An adverse outcome in any such
litigation could require us to pay contractual damages, compensatory damages, punitive damages,
attorneys fees and costs.
Any enforcement action could harm our business, financial condition and results of operations.
If any governmental sanctions are imposed, or if we do not prevail in any possible civil or
criminal litigation in the future, our business, financial condition and results of operations
could be materially adversely affected. In addition, responding to any action will likely result
in a significant diversion of managements attention and resources and an increase in professional
fees.
Risks Related to our Debt
Our indebtedness could impair our financial condition, harm our ability to operate our
business, limit our ability to borrow additional funds or capitalize on acquisition or other
business opportunities.
We have entered into a Sale of Accounts and Security Agreement with Faunus Group
International, Inc, pursuant to which we may factor our foreign receivables up to $8 million in the
aggregate (as amended, the FGI Agreement). We have entered into a Loan and Security Agreement
with Silicon Valley Bank dated as of July 2009 (as amended, the SVB Agreement and collectively
with the FGI Agreement, the Factoring Loan Agreements) to factor all our domestic receivables up
to $10 million in the aggregate. The SVB Loan Agreement also caps the aggregate debt under both
Factoring Loan Agreements to $14 million. Under the Factoring Loan Agreements we have guaranteed
our obligations thereunder and have pledged substantially all of our assets as security. As of
November 30, 2009, the outstanding loan balances under the Factoring Loan Agreement was $12.1
million in the aggregate. Also, we may incur additional debt in the future, subject to certain limitations
contained in our debt instruments.
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The degree to which we are leveraged and the restrictions governing this indebtedness (such as
minimum Quick Ratio (our cash and accounts receivable divided by current liabilities)) amounts
could have important consequences including, but not limited to, the following:
it may limit our ability to service all of our debt obligations;
it may impair our ability to incur additional indebtedness or obtain additional
financing in the future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes;
some of our debt is and will continue to be at variable rates of interest, which may
result in higher interest expense in the event of increases in interest rates;
our debt agreements contain, and any agreements to refinance our debt likely will
contain, financial and restrictive covenants, and our failure to comply with them may
result in an event of default which, if not cured or waived, could have a material adverse
effect on us;
our level of indebtedness will increase our vulnerability to general economic downturns
and adverse industry conditions;
our debt service obligations could limit our flexibility in planning for, or reacting to,
changes in our business and our industry; and
it may limit our ability to engage in certain transactions or capitalize on acquisition
or other business opportunities.
The Factoring Loan Agreements also have material adverse change provisions that essentially
grant the lenders broad discretion in determining whether to accelerate the payment of all amounts
due under the Factoring Loan Agreements when adverse events occur with respect to our company, its
business, financial condition, results of operation, assets, liabilities or prospects. As of
November 30, 2008 and February 28, 2009 we failed to comply with one or more loan covenants under
the loan agreement with Silicon Valley Bank which was the predecessor to the Factoring Loan
Agreements. We received a waiver from our lender for such non-compliances. We cannot assure that
we will not violate one or more loan covenants in the future. As we are in violation of covenants
in either of the Factoring Loan Agreements and do not receive a waiver, the lender could choose to
accelerate payment on all outstanding loan balances. There can be no assurance that we would be
able to quickly obtain equivalent or suitable replacement financing in this event. If we are unable
to secure alternative sources of funding, such acceleration would have a material adverse impact on
our financial condition.
To service our debt, we will require cash and we may not be able to generate sufficient cash
flow from operations to satisfy these obligations or to refinance these obligations on
acceptable terms, or at all.
Our ability to generate cash depends on many factors beyond our control. Our ability to make
payments on our debt and to fund working capital requirements, capital expenditures and research
and development efforts will depend on our ability to generate cash in the future. Our historical
financial results have been, and we expect our future financial results will be, subject to
substantial fluctuation based upon a wide variety of factors, many of which are not within our
control including, among others, those described in this section.
Unfavorable changes in any of these factors could harm our operating results and our ability
to generate cash to service our debt obligations. If we do not generate sufficient cash flow from
operations to satisfy our debt obligations, we may have to undertake alternative financing plans,
such as refinancing or restructuring our debt, selling assets, reducing or delaying capital
investments or seeking to raise additional capital. Also, certain of these actions would require
the consent of our lenders. The terms of our financing agreements contain limitations on our
ability to incur debt. We cannot assure you that any refinancing would be possible, that any assets
could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from
those sales, or that additional financing could be obtained on acceptable terms, if at all, or
would be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our debt
obligations, or to refinance our obligations on commercially reasonable terms, would have an
adverse effect on our business, financial condition and results of operations.
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Risks Related to our Common Stock
The price of our common stock may be volatile and subject to wide fluctuations.
The market price of the securities of technology companies has been especially volatile. Thus,
the market price of our common stock may be subject to wide fluctuations. If our net sales do not
increase or increase less than we anticipate, or if operating or capital expenditures exceed our
expectations and cannot be adjusted accordingly, or if some other event adversely affects us, the
market price of our common stock could decline. Broad market and industry factors may adversely
affect the market price of our common stock, regardless of our actual operating performance.
Factors that could cause fluctuations in our stock price may include, among other things:
actual or anticipated variations in quarterly operating results;
changes in financial estimates by us or by any securities analysts who might cover our stock,
or our failure to meet the estimates made by securities analysts;
changes in the market valuations of other companies operating in our industry;
announcements by us or our competitors of significant acquisitions, strategic partnerships or
divestitures;
additions or departures of key personnel; and
a general downturn in the stock market.
The market price of our stock also might decline in reaction to events that affect other
companies in our industry, even if these events do not directly affect us. In the past, companies
that have experienced volatility in the market price of their stock have been the subject of
securities class action litigation. If we were to become the subject of securities class action
litigation, it could result in substantial costs and a diversion of managements attention and
resources.
We may experience significant period-to-period quarterly and annual fluctuations in our net
sales and operating results, which may result in volatility in our share price.
We may experience significant period-to-period fluctuations in our net sales and operating
results in the future due to a number of factors and any such variations may cause our share price
to fluctuate. It is likely that in some future period our operating results will be below the
expectations of securities analysts or investors. If this occurs, our share price could drop
significantly.
A number of factors, in addition to those cited in other risk factors applicable to our
business, may contribute to fluctuations in our sales and operating results, including:
the timing and volume of orders from our customers;
the rate of acceptance of our products by our customers, including the acceptance of
design wins;
the demand for and life cycles of the products incorporating our products;
the rate of adoption of our products in the end markets we target;
cancellations or deferrals of customer orders in anticipation of new products or product
enhancements from us or our competitors or other providers;
changes in product mix; and
the rate at which new markets emerge for products we are currently developing or for
which our design expertise can be utilized to develop products for these new markets.
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The sale of our outstanding common stock and exercise of outstanding warrants and options are
not subject to lock-up restrictions and may have an adverse effect of the market price of the
our stock.
As of January 14, 2010, approximately 21,278,642 shares of common stock, 30,990 shares of
series A preferred stock, approximately 2,820,914 options for our stock and warrants exercisable
for approximately 142,564 shares of our stock are currently outstanding. In addition, our Board of
Directors approved the issuance of 25,710 shares of common stock, but such shares have not been
issued. We also have a commitment to issue warrants to purchase up to 59,800 shares of our Series A
Preferred Stock. Shares of series A preferred stock will be converted into shares of common stock
sixty days after our common shares are traded on a public stock exchange in the U.S. Since most of
our common stock, options and warrants are not subject to lock-up restrictions, we cannot assure
investors that the holders of our stock will not sell substantial amounts of their holdings of our
stock. The sale or even the possibility of sale of such stock or the stock underlying the options
and warrants could have an adverse effect on the market price for our securities or on our ability
to obtain a future public financing. If and to the extent that warrants and/or options are
exercised, stockholders could be diluted.
Future sales of shares could depress our share price.
If our existing stockholders sell substantial amounts of our common stock in the public
market, the market price of our common stock could decline. Based on shares outstanding as of the
date of the filing of this Form 10-Q we will have outstanding approximately 21,278,642 shares of
common stock. If our principal stockholders sell a large number of shares, the market price of our
common stock could decline, as these sales may be viewed by the public as an indication of an
upcoming or recently occurring shortfall in our financial performance. Moreover, the perception in
the public market that these stockholders might sell our common stock could depress the market
price of the common stock. Additionally, we may sell or issue shares of common stock in a public
offering or in connection with acquisitions, which will result in additional dilution and may
adversely affect market prices for our common stock. See Shares Eligible for Future Sale on page
60 for more detailed information.
There is no existing market for our common stock, and we do not know if one will develop that
will provide you with adequate liquidity.
Currently, there is no public market for shares of our common stock. Our common stock traded
on the AIM of the London Stock Exchange from June 21, 2006 to April 1, 2009 with limited liquidity
and high price fluctuations. If we are able to list our common stock on a securities market in the
United States, our stock may fluctuate dramatically similar to AIM. We cannot predict when or
whether investor interest in our common stock might lead to an increase in its market price or the
development of a more active trading market or how liquid that market might become.
Anti-takeover provisions in our organizational documents may discourage our acquisition by a
third party, which could limit your opportunity to sell your shares at a premium
Our certificate of incorporation includes provisions that could limit the ability of others to
acquire control of us, modify our structure or cause us to engage in change of control
transactions, including, among other things, provisions that restrict the ability of our
stockholders to call meetings and provisions that authorize our board of directors, without action
by our stockholders, to issue additional common stock. These provisions could deter, delay or
prevent a third party from acquiring control of us in a tender offer or similar transactions, even
if such transaction would benefit our stockholders.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ended November 30, 2009, the Board of Directors granted options to purchase
an aggregate of 1,630,400 shares of OCZs Common Stock under OCZs stock option plan with the
exercise price of $1.275 per share. These options were granted in reliance on Rule 701 of the
Securities Act. The Board of Directors also approved the issuance of 25,710 shares of OCZs Common
Stock, but such shares have not been issued.
As of January 14, 2010, OCZ has issued 30,990 shares of its Series A Preferred Stock at $5.00
per share. These shares were issued in reliance on Rule 506 of the Securities Act. In addition,
OCZ also has a commitment to issue warrants to purchase up to 59,800 shares of its Series A
Preferred Stock. Such warrants would be issued in reliance on Regulation S of the Securities Act.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
In September 2009, OCZ had submitted to holders of a majority of its outstanding shares a
proposed stockholder action by written consent to approve the filing of OCZs restated certificate
of incorporation to effect a 2.5-to-1 reverse stock split, and OCZ obtained the consent from all of
such holders, holding 26,706,675 shares (or 10,682,670 shares post-split) of OCZs Common Stock.
Item 5. Other Information.
In September 2009, we sold all inventory, patents and goodwill related to our Neural Impulse
Actuator product line to BCInet, Inc., a Delaware corporation, in exchange for notes with principal
amounts in the aggregate of $895,415 and shares of BCInet, Inc.s Series A Preferred Stock,
representing a 27% equity stake in BCInet, Inc.
In September 2009, we issued options to purchase an aggregate of 1,559,400 shares of our
Common Stock under our stock option plan with an exercise price of $1.275. In November 2009, we
issued additional options to purchase an aggregate of 71,000 shares of our Common Stock under our
stock option plan at the price of $1.275 per share. These options were granted in reliance of Rule
701 of the Securities Act. In November 2009, the Board of Directors approved the issuance of
25,710 shares of Common Stock, but such shares have not been issued.
As of January 14, 2010, OCZ has issued 30,990 shares of our Series A Preferred Stock at the
price of $5.00 per share. These shares were issued in reliance of Rule 506 of Regulation D under
the Securities Act.
In November 2009, with approval from its Board of Directors, OCZ filed a Certificate of
Designation with Delaware Secretary of State to amend its Certificate of Incorporation to authorize
OCZ to issue up to 2,000,000 shares of its Series A Preferred Stock.
Quentin Solt resigned from the Board of Directors of OCZ Technology Group, Inc. on January 11,
2010. Mr. Solt was a member of the audit committee and remunerations committee of the Board of
Directors. Mr. Solts resignation was not a result of any disagreement with OCZ Technology Group,
Inc.s management or its operations, policies or practices.
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Item 6. Exhibits.
Exhibit No. | Description | |||
3.1 | * | Certificate of Designations as filed with Delaware Secretary of State on November 4, 2009. |
||
22.1 | * | Action by written consent of the stockholders to approve the Fourth Amended and Restated Certificate of Incorporation. |
||
31.1 | * | Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities
Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities
Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | ** | Certification of 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 | ** | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
||
99.1 | * | Resignation of
Quentin Solt from the Board of Directors. |
* | Filed herewith | |
** | Furnished herewith |
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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.
OCZ TECHNOLOGY GROUP, INC. |
||||
/s/ Ryan M. Petersen | ||||
Ryan M. Petersen | ||||
President & CEO |
Date: January 14, 2010
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