10-Q 1 d597935d10q.htm FORM 10-Q Form 10-Q

 

 

FORM 10-Q

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

(Mark One)

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

For the quarterly period ended August 31, 2013

OR

 

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

For the transition period from                      to                     

Commission file number:

1-34650

 

 

OCZ Technology Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   04-3651093

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

6373 San Ignacio Avenue

San Jose, CA

  95119
(Address of principal executive offices)   (Zip Code)

(408) 733-8400

Registrant’s telephone number, including area 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  ¨    No  x

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. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The number of shares outstanding of the Registrant’s common stock, $0.0025 par value, was 00,000,000 as of September 30, 2013.

 

 

 


OCZ TECHNOLOGY GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share data)

 

     August 31,     February 28,  
     2013     2013  

ASSETS

  

Current assets:

    

Cash and cash equivalents

   $ 10,580      $ 12,224   

Restricted cash ( ** included in PP, to be deleted post review **)

     0        0   

Accounts receivable, net of allowances of $5,043 and $11,930

     10,035        12,228   

Inventories, net

     23,490        32,753   

Prepaid expenses and other current assets

     5,233        7,888   
  

 

 

   

 

 

 

Total current assets

     49,338        65,093   

Property and equipment, net

     6,905        7,795   

Intangible assets, net

     4,041        4,892   

Non-current deferred tax assets

     553        553   

Other assets

     1,127        491   
  

 

 

   

 

 

 

Total assets

   $ 61,964      $ 79,824   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Loan payable

   $ 1,934      $ 0   

Accounts payable

     19,724        26,730   

Derivative Liability

     0        0   
  

 

 

   

 

 

 

Accrued and other liabilities

     17,152        22,168   
  

 

 

   

 

 

 

Total current liabilities

     38,810        48,898   

Convertible subordinated debentures

     11,957        0   

Loans Payable, net of current portion

     7,705        0   

Common stock warrant liability

     2,081        1,160   

Deferred tax liabilities, net of current portion

     205        205   

Other long-term liabilities

     2,444        2,298   
  

 

 

   

 

 

 

Total liabilities

     63,202        52,561   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Stockholders’ equity:

    

Preferred stock, $0.0025 par value, 20,000,000 shares authorized; No shares issued or outstanding

     0        0   

Common stock, $0.0025 par value; 120,000,000 shares authorized; 00,000,000 and 68,102,890 shares issued and outstanding as of August 31, 2013 and February 28, 2013, respectively

     170        170   

Additional paid-in capital

     341,460        337,403   

Accumulated deficit

     (342,219     (310,705

Accumulated other comprehensive loss

     (649     (605
  

 

 

   

 

 

 

Total stockholders’ equity

     (1,238     26,263   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 61,964      $ 78,824   
  

 

 

   

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

2


OCZ TECHNOLOGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 
     2013     2012     2013     2012  

Net revenue

   $ 32,929      $ 88,598      $ 89,752      $ 165,090   

Cost of revenue

     31,915        92,667        79,583        177,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,014        (4,069     10,169        (12,474
  

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

     8,232        12,036        17,101        24,503   

Sales and marketing

     5,166        8,373        10,330        15,122   

General and administrative

     7,537        5,960        13,217        10,383   

Impairment of intangibles and goodwill

     0        62,633        0        62,633   

Restructuring

     0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     20,935        89,003        40,648        112,641   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (19,921     (93,072     (30,479     (125,115

Other income (expense), net

     (115     (258     (99     (362

Interest and financing costs

     (333     (40     (907     (96

Revaluation of common stock warrants and derivatives

     0        (2,084     79        4,933   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (20,369     (95,454     (31,406     (120,640

Provision for (benefit from) income taxes

     0        (382     108        (568
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (20,369   $ (95,072   $ 31,514      $ (120,072
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share:

        

Basic

   $ (0.30   $ (0.38   $ (0.46   $ (0.38
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.30   $ (0.38   $ (0.46   $ (0.38
  

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in net loss per share computation:

        

Basic

     68,172        67,679        68,172        67,592   

Diluted

     68,172        67,679        68,172        67,592   

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

3


OCZ TECHNOLOGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 
     2013     2012     2013     2012  

Net loss

   $ (20,369   $ (95,072   $ (31,514   $ (120,072

Change in unrealized loss on foreign currency translation adjustments, net of tax

     10        148        (44     6   

Total comprehensive loss

   $ (11,359   $ (94,924   $ 31,558   $ (120,066
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

4


OCZ TECHNOLOGY GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Six Months Ended
August 31,
 
     2013     2012  

Cash flows from operating activities:

    

Net loss

   $ (31,514   $ (120,072

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

    

Depreciation of property and equipment

     1,325        1,124   

Amortization of intangtible assets

     851        968   

Payment in kind interest accrual

     0        0   

Provision for accounts receivable allowances

     2,385        4,300   

Share-based compensation

     4,057        3,550   

Revaluation of common stock warrants and derivatives

     921        (4,933

Deferred rent

     0        0   

Deferred income taxes

     0        (746

Net loss on disposal of property and equipment

     0        552   

Provision for inventory write-downs

     2,880        8,613   

Changes in assets and liabilities:

    

Accounts receivable

     (192     (1,587

Inventories

     6,383        (40,226

Prepaid expenses and other assets

     1,956        (236

Accounts payable

     (7,005     (4,729

Accrued and other liabilities

     (3,870     4,401   
  

 

 

   

 

 

 

Net cash provided by operating activities

     (22,823     (83,214
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Property and equipment purchases

     (435     (5,501

Purchased intangible assets

     0        (151
  

 

 

   

 

 

 

Net cash used in investing activities

     (435     (5,652
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net proceeds from issuance of common stock, net

     0        8,508   

Proceeds from employee stock programs, net

     0        122   

Proceeds from exercise of warrants for common stock

     0        97   

Restricted cash for letters of credit

     62        (62

(Repayment) proceeds of bank loan, net

     21,597        20,000   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     21,559        28,665   
  

 

 

   

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

     (45     134   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,644     (60,067

Cash and cash equivalents at beginning of period

     12,224        92,049   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 10,580      $ 31,982   
  

 

 

   

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

5


OCZ TECHNOLOGY GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Business and Basis of Presentation

Business

OCZ Technology Group, Inc., a Delaware corporation (“OCZ”) was formed in 2002 and is a global leader in the design, manufacturing, and distribution of high-performance solid-state storage solutions and premium computer components. Offering a complete spectrum of solid-state drives (“SSDs”), OCZ provides SSDs in a variety of form factors and interfaces (i.e. PCIe, SAS and SATA) to address a wide range of client and enterprise applications. Having developed firmware and controller platforms, leading edge solid state drives in a wide spectrum of interfaces, and virtualization acceleration software for the enterprise, OCZ delivers vertically integrated solutions enabling transformational approaches to how digital data is captured, stored, accessed, analyzed and leveraged by customers. In addition to SSD technology, OCZ offers a complete range of consumer and industrial-grade power management products. Through strategic acquisitions, the Company has acquired technology and believes it has a competitive advantage that can contribute to its future operating leverage.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. These consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and the consolidated financial position of the Company at the date of the balance sheets. All significant intercompany transactions and balances have been eliminated in consolidation. The Condensed Consolidated Balance Sheet at February 28, 2013 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended February 28, 2013 (“2013 Form 10-K”), which was filed with the Securities and Exchange Commission on October 7, 2013.

The interim results presented herein are not necessarily indicative of the results of operations that may be expected for any future period. The Company’s audited consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business. The Company has incurred recurring operating losses and negative cash flows from operating activities since inception through August 31, 2013. In addition, the Company had an accumulated deficit of $342.2 million and $309.8 million as of August 31, 2013 and February 28, 2013. Through August 31, 2013, the Company has not generated sufficient cash from operations and has relied primarily on the proceeds from equity offerings and debt financing such as accounts receivable factoring, increased trade terms from vendors and banking credit facilities to finance its operations. The Company’s ability to continue as a going concern is predicated upon, among other things, generating positive cash flows from operations, maintaining compliance with the provisions of its existing credit agreements and, when necessary, its ability to renew such agreements and/or obtain alternative or additional financing. Accordingly, compliance by the Company with the provisions of its existing credit agreements and its ability to obtain alternative or additional financing when needed as well as profitable operations, are important parts of its ability to continue as a going concern.

To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting the Company’s ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. The Company’s credit agreements include material debt service costs, operating ratios that the Company must meet and other financial covenants such as the raising of additional capital and the delivery of past due audited financial statements to the lenders. The Company is currently not in compliance with such covenants, and there can be no assurances that the Company will be able to obtain a waiver for non-compliance and comply with these covenants in the future. If the Company does not obtain a waiver and maintain future compliance with the covenants in its credit agreements or if the Company is not able to generate sufficient cash from operations to make the principal and interest payments under the agreements when due, the lenders could declare a default. Any default under its credit agreements will allow the lenders under these agreements the option to demand repayment of the indebtedness outstanding under the applicable credit agreements.

 

6


If lenders were to exercise their rights to accelerate the indebtedness outstanding, there can be no assurance that the Company would be able to refinance or otherwise repay any amounts that may become accelerated under the agreements. The acceleration of a significant portion of the Company’s indebtedness would have a material adverse effect on the Company’s business, liquidity and financial condition. There is no assurance that alternative or additional funding will be available to the Company on acceptable terms on a timely basis, if at all, or that the Company will achieve profitable operations. If the Company is unable to raise additional capital to fund its operations, it will need to curtail planned activities to reduce costs. Doing so may affect the Company’s ability to operate effectively. Given the Company’s existing financial condition and current conditions in the global credit markets, should these events occur, there would likely be uncertainties regarding its ability to continue as a going concern. The Company’s audited consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Use of Estimates

In the preparation of these condensed consolidated financial statements in conformity with U.S. GAAP, management was required to make estimates and assumptions and to exercise judgment that affect the reported amounts of assets, liabilities, revenue and expenses and related note disclosures. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could differ from those estimates.

Reclassifications [delete?]

Certain prior year balances have been reclassified to conform to the current year presentation.

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 3 to its audited Notes to Consolidated Financial Statements included in its 2013 Form 10-K.

 

2. New Accounting Pronouncements

Income taxes

In July 2013, the FASB amended Accounting Standards Codification (“ASC”) Income Taxes. (Topic 740), “Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendment provides guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. The amendments will be effective for interim and annual periods beginning after December 15, 2013 and may be applied on a retrospective basis. Early adoption is permitted. The Company does not expect the adoption of these amendments to have a significant effect on the Company’s consolidated financial position or results of operations.

Comprehensive Income

In February 2013, the FASB issued revised guidance on “Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The revised guidance does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the revised guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The revised guidance is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. The revised guidance will not have a material effect on the Company’s financial position, results of operations or liquidity upon our adoption on March 1, 2012.

 

7


3. Fair Value of Financial Instruments

The following table summarizes, for assets or liabilities measured at fair value at the reporting date, the respective fair value and the classification by level of input within the fair value hierarchy (in thousands):

 

     Level 1      Level 2      Level 3  

August 31, 2013

        

Cash deposits with third-party financial institutions

   $ 10,580       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

 

Total assets measured and recorded at fair value

   $ 10,580       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

 

Derivative liability

   $ 0       $ 0       $ 1,036   

Common stock warrant liability

   $ 0       $ 0       $ 2,081   
  

 

 

    

 

 

    

 

 

 

Total liabilities measured and recorded at fair value

   $ 0       $ 0       $ 3,117   
  

 

 

    

 

 

    

 

 

 

February 28, 2013

        

Cash deposits with third-party financial institutions

   $ 11,127       $ 0       $ 0   

Money market funds

     1,159         0         0   
  

 

 

    

 

 

    

 

 

 

Total assets measured and recorded at fair value

   $ 12,286       $ 0       $ 0   
  

 

 

    

 

 

    

 

 

 

Common stock warrant liability

   $ 0       $ 0       $ 1,160   
  

 

 

    

 

 

    

 

 

 

Total liabilities measured and recorded at fair value

   $ 0       $ 0       $ 1,160   
  

 

 

    

 

 

    

 

 

 

During the three and six months ended August 31, 2013, there were no transfers between Level 1 and Level 2 fair value instruments. Common stock warrant liability is revalued to current fair value at each reporting period. Fair value of the common stock warrant liability is classified as Level 3 due to the models reliance upon significant unobservable inputs. The following table includes the activity in the common stock warrant liability for the six months ended August 31, 2013 (in thousands):

 

     Derivative
Liability
     Warrant
Liability
    Total  

Balance at beginning of period

   $ 0       $ 1,160      $ 1,160   

Issuance of common stock warrants

        1,000        1,000   

Issuance of derivative

     78           78   

Warrants exercised at fair value

     0         0        0   

Revaluation of warrant liability to current fair value

     958         (79     879   
  

 

 

    

 

 

   

 

 

 

Balance at end of period

   $ 1,036       $ 2,081      $ 3,117   
  

 

 

    

 

 

   

 

 

 

 

4. Balance Sheet Details

Inventories

Ending inventory by major category includes (in thousands):

 

     August 31,
2013
     February 28,
2013
 

Raw materials

   $ 11,491       $ 8,807   

Work in progress

     3,087         2,619   

Finished goods

     8,911         21,723   
  

 

 

    

 

 

 

Total net inventory

   $ 23,490       $ 33,149   
  

 

 

    

 

 

 

 

8


Finished goods inventory at August 31, 2013 and February 28, 2013 includes $0.7 million and $2.7 million, respectively, of estimated inventory expected to be returned to the Company as part of its allowance for sales returns.

Accrued and Other Liabilities

Prepaid and other assets consist of the following (in thousands):

 

     August 31,      February 28,  
     2013      2013  

Sales and use tax receivable

   $ 2,670       $ 4,025   

Prepaid expenses

     1,730         1,454   

Other assets

     634         2,147   

Deferred tax current portion

     199         199   
  

 

 

    

 

 

 

Prepaid expenses and other current assets

   $ 5,233       $ 7,825   
  

 

 

    

 

 

 

Accrued and Other Liabilities

Accrued and other liabilities consist of the following (in thousands):

 

     August 31,      February 28,  
     2013      2013  

Warranty

   $ 8,902       $ 11,773   

Professional fees

     1,496         2,769   

Wages and other compensation

     3,672         2,658   

Customer deposits

     980         2,429   

Other liabilities

     2,102         2,539   
  

 

 

    

 

 

 

Accrued and other liabilities

   $ 17,152       $ 22,168   
  

 

 

    

 

 

 

 

9


5. Intangible Assets

The following is a summary of the carrying amount of intangible assets at August 31, 2013 and February 28, 2013 (in thousands):

 

     August 31, 2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Value
     Weighted-
Average
Remaining
Useful Life
 

Identifiable finite lived intangibles:

          

Existing and core technology

   $ 4,687       $ (1,113   $ 3,574         3.9 years   

Customer relationships/contracts

     75         (36     39         2.6 years   

Trademarks and trade names

     505         (394     111         6.5 years   

Licensed technology

     1,613         (1,322     291         0.9 years   
  

 

 

    

 

 

   

 

 

    

Subtotal of finite-lived intangibles:

     6,880         (2,865     4,015         3.7 years   

In-process technology, with indefinite lives

     26         0        26         indefinite   
  

 

 

    

 

 

   

 

 

    

Identifiable intangibles

   $ 6,906       $ (2,865   $ 4,041      
  

 

 

    

 

 

   

 

 

    

 

     February 28, 2013  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Impairment     Net
Carrying
Value
     Weighted-
Average
Remaining
Useful

Life
 

Identifiable finite lived intangibles:

            

Existing and core technology

   $ 5,606       $ (791   $ (781   $ 4,034         4.4 years   

Customer relationships/contracts

     75         (29     0        46         3.1 years   

Trademarks and trade names

     505         (362     0        143         6.0 years   

Licensed technology

     3,656         (1,601     (1,411     644         1.3 years   
  

 

 

    

 

 

   

 

 

   

 

 

    

Subtotal of finite-lived intangibles:

     9,842         (2,783     (2,192     4,867         4.0 years   

In-process technology, with indefinite lives

     26         0        0        26         indefinite   
  

 

 

    

 

 

   

 

 

   

 

 

    

Identifiable intangibles

   $ 9,868       $ (2,783   $ (2,192   $ 4,893      
  

 

 

    

 

 

   

 

 

   

 

 

    

For the three and six months ended August 31, 2013, the Company recorded $0.5 [Note, rounded to 0.5 from 0.4 due to YTD rounding, same with Cogs — >] million and $0.9 million of amortization expense, respectively, for identified intangibles, $0.3 million and $0.5 million of which was included in cost of revenue, respectively. For the three and six months ended August 31, 2012, the Company recorded $0.5 million and $1.0 million of amortization expense, respectively, for identified intangibles, $0.1 million and $0.2 million of which was included in cost of revenue, respectively. During the quarter ended August 31, 2012, the Company recorded an impairment of Goodwill related to existing and core technologies of approximately $0.8 million.

 

10


The estimated future amortization expense of purchased and acquired intangible assets with definite lives as of August 31, 2013 is as follows (in thousands):

 

     Cost of Revenue      Operating
Expenses
     Total  

Future amortization expense:

        

2014 (remaining 6 months)

   $ 459       $ 215       $ 674   

2015

     918         118         1,036   

2016

     918         44         962   

2017

     918         14         932   

Thereafter

     360         51         411   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,573       $ 442       $ 4,015   
  

 

 

    

 

 

    

 

 

 

 

6. Credit Facilities

Wells Fargo Capital Finance Senior Secured Credit Facility

On May 10, 2012 the Company signed an agreement with Wells Fargo Capital Finance (“WFCF”) for a $35 million senior secured credit facility (“WFCF Facility”).Borrowings under the WFCF Facility were limited to a borrowing base based on the Company’s receivables. The WFCF Facility had a 5-year term and provided for a committed expansion up to $60 million of cumulative borrowings and for a potential further expansion to $100 million of total borrowings, in each case if certain conditions are met. The WFCF facility contained minimum liquidity levels and certain financial covenants if these levels were not met. At February 28, 2013, no borrowings were outstanding, and in March 2013, the Company terminated the WFCF Facility.

Hercules Technology Growth Capital Loan and Security Agreement

On March 11, 2013, the Company entered into a $30 million loan and security agreement (“Hercules Loan Agreement”) with Hercules Technology Growth Capital, Inc. (“Hercules”). This Hercules Loan Agreement provides for the following:

 

    Term Loan ($15 million) – The first $10 million of the term loan was drawn at closing with interest only payments due over the first six months and principal repayments due in thirty monthly installments beginning in November 2013. The remaining $5 million of the term loan is contingent upon the Company being current in its SEC filings and achieving certain revenue levels for two consecutive quarters. During the first year, the Term Loan bears interest at an annual interest rate equal to the greater of 12.50% or prime plus 8.75%. After the first year, the Term Loan bears interest at an annual rate equal to the greater of 10% or prime plus 6.25%. In addition to cash interest, the Term Loan accrues payment in kind (“PIK”) interest at a PIK interest rate of 3.0% per year.

 

    Revolving Loan Facility ($15 million) — Under the revolving loan facility, the Company may draw down up to $10 million initially, and an additional $5 million may be available upon achieving certain financial covenants. Borrowings under the revolving loan facility bear interest at an annual rate equal to the greater of 9% or prime plus 5.25%, are limited by a borrowing base of eligible accounts receivable (less certain reserves) multiplied by an advance rate, and are due on April 1, 2016. The Company is also obligated to comply with certain financial covenants and pay an unused line fee on the Loan Facility of 0.50% per annum times the unused portion of the Loan Facility. Unless the Loan Facility has been terminated prior to either such date, on each of the first and second anniversaries of the closing date of the Loan Agreement, the Company is obligated to pay a fee of 1.0% times the Loan Facility. Initial borrowings are due on April 1, 2016.

Per the financial covenants, the Company must raise a minimum of $20 million in new equity and/or subordinated debt financing no later than January 31, 2014, of which $10 million in new equity or subordinated debt financing must be raised no later than May 31, 2013. The failure to comply with any financial covenant could result in an event of default. Upon the occurrence and during the continuation of an event of default under the Loan Agreement, the interest rate applicable to both the Term Loan and the Loan Facility shall be increased by 2% per annum.

As of August 31, 2013, borrowings under the Hercules Loan Agreement were $7.7 million, net of debt discount.

In June 2013 through September 2013, the Company entered into three amendments to the Hercules Loan Agreement. See Note 13. As of August31, 2013, the Company [was not] in compliance with all covenants of Amendment No. 1 to the Hercules Loan Agreement.

 

11


7. Common Stock Warrant Liability

In March 2010, the Company issued warrants to purchase up to 2,575,833 shares of its common stock at $5.25 per share (the “Pipe 1 Warrants”). In connection with a $30 million loan and security agreement with Hercules Technology Growth Capital, entered into on March 11, 2013, and receipt of the initial $10 million term loan proceeds, the Company issued warrants to purchase up to an additional 688,073 shares of OCZ Technology stock common stock at an exercise price of $2.18 per share (the “March Hercules Warrants”). Each of these warrants contains certain embedded conversion features and provisions which are subject to anti-dilution adjustments requiring the fair value of the warrants to be reflected on the balance sheet as a liability. The common stock warrant liability related to each warrant is measured at fair value upon issuance, and requires remeasurement to fair value upon each reporting date while the common stock warrants are outstanding.

The fair value of the Pipe 1 Warrants upon issuance ($2.1 million) was recorded as a liability upon issuance, with a corresponding reduction of additional paid-in capital. As a result of the Company’s November 2, 2010 private placement equity financing, the exercise price of the Pipe 1 Warrants was adjusted to $4.87 per share, and as a result of the Company’s issuance of the March 2013 Hercules Warrants, the exercise price was further adjusted to $4.85 per share. These warrants will expire on March 23, 2015 and may be exercised at any time at the option of the holders and may be exercised on a cashless basis. As of August 31, 2013, there were 1,979,168 remaining Pipe 1 Warrants outstanding.

The fair value of the March 2013 Hercules Warrants estimated to be $0.8 million upon issuance, was also recorded as a liability with a corresponding debt discount recorded against the $10 million term loan liability. With the assistance of an independent third-party valuation specialist the fair value of the warrants on the date of issue was determined using the Monte Carlo simulation model, with the following assumptions: five year contractual term, 95% expected volatility, 0.9% risk free rate and no expected dividend. These warrants will expire on March 11, 2018 and may be exercised at any time at the option of the holders and may be exercised on a cashless basis. As of August 31, 2013, all 688,073 warrants were outstanding.

The Company recognized revaluation (income)/expense adjustments in the Consolidated Statements of Operations for the three and six months ended August 31, 3013 was $0.0 million and $0.0 million, respectively, compared with the three and six months ended August 31, 2012 of $0.0 million and $0.0 million, respectively.

The fair value of the common stock warrant liability for the period ended August 31, 2013 and fiscal year ended February 28, 2013 was calculated using the following assumptions: [TBD]

 

     Pipe 1 Warrants     Hercules
Warrants
 
     August 31,     February 28,     August 31,  
     2013     2013     2013  

Share price

   $ 1.46      $ 4.48      $ 1.46   

Expected life (in years)

     1.8        2.8        4.8   

Risk free interest rate

     0.3     0.3     1.0

Volatility

     110     75     95

Dividend Yield

     0.0     0.0     0.0

Subsequent to May 31, 2013, the Company issued an additional warrant to Hercules. See Note [t – wording on Note 13 is extensive] .

 

8. Income Taxes

The Company uses an estimated annual effective tax rate to measure the income tax benefit or expense recognized in each interim period. The Company recorded an income tax provision for the three and six months ended August 31, 2013 of $0.0 and $0.0, respectively, for taxes in non-U.S. jurisdictions, as compared to a tax benefit related to the release of deferred tax liabilities recorded for the same periods of the prior year. The Company’s effective tax rate for the three months ended August 31, 2013 and 2012 was zero.

 

12


The Company has maintained a valuation allowance fully offsetting its gross deferred tax assets in accordance with the provisions of ASC 740, “Accounting for Income Taxes,” which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets. The valuation allowance is reviewed quarterly and is maintained until management determines there is sufficient positive evidence such that it is more likely than not that its deferred tax assets will be realized to support a reversal. In determining net deferred tax assets and valuation allowances, management is required to make judgments and estimates related to projections of profitability, the timing and extent of the utilization of net operating loss carryforwards, applicable tax rates, transfer pricing methodologies and tax planning strategies. Any release of the valuation allowance will be recorded as a tax benefit increasing net income and will not affect the amount of cash paid for income taxes.

 

9. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of the common shares outstanding during the period. The diluted net loss per share is the same as basic net loss per share for the three and six months ended August 31, 2013 and 2012, because potential common shares, such as common shares issuable under the exercise of stock options or warrants, are only considered when their effect would be dilutive.

Following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations (in thousands, except per share amounts):

 

     Three Months Ended
August 31,
    Six Months Ended
August 31,
 
     2013     2012     2013     2012  

Net loss (numerator)

   $ (20,369   $ (95,072   $ (31,514   $ (120,072

Shares calculation (denominator)

        

Weighted average shares outstanding – basic

     68,172        67,679        68,172        67,592   

Effect of dilutive securities:

        

Potential common stock relating to stock options, restricted stock units and warrants

     0        0        0        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding – diluted

     68,172        67,679        68,172        67,592   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share – basic and diluted

   $ (0.17   $ (1.40   $ 0      $ (1.78
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows the potentially dilutive shares, consisting of options, restricted stock units and warrants, for the periods presented that were excluded from the net loss per share computations because their effect was anti-dilutive (In thousands):

 

     Three Months Ended
August 31,
     Six Months Ended
August 31,
 
     2013      2012      2013      2012  

Potentially dilutive equity awards outstanding:

           

Stock options and restricted stock units

     8,858         7,845         8,858         7,845   

Warrants

     4,146         3,478         4,146         3,478   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13,004         11,323         13,004         11,323   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


10. Stockholders’ Equity

Common Stock

During the three and six months ended August 31, 2013, we issued 104,276 shares and 000,000 shares of common stock, respectively, in connection to the grant of immediately vested restricted stock units. There were no exercises of stock options or warrants during the period. During the three and six months ended August 31, 2012, the Company issued 24,244 shares and 00,000 of common stock, in connection with the exercise of stock options resulting in net proceeds of $42,000 and $00,000, respectively. In addition, during the three and six months ended August 31, 2013, the Company issued 00,000 and 27,446 shares of common stock in connection with the exercise of warrants in a cashless transaction.

Warrants

The following table summarizes warrant activity for the six months ended August 31, 2013:

 

     Number of
Shares
     Exercise Price
Range
     Total Exercise
Price
    Weighted Average
Exercise Price
 

Balances at February 28, 2013

     3,457,521       $ 3.00 -$4.87       $ 17,386,514      $ 5.03   

Warrants granted

     688,073       $ 2.18         1,500,000      $ 2.18   
           (39,584  
  

 

 

       

 

 

   

Balances at August 31, 2013

     4,389,604       $ 2.18 -$4.85       $ 22,068,133      $ 4.55   
  

 

 

       

 

 

   

As a result of the Company’s issuance of warrants to Hercules in connection with the term loan obtained on March 11, 2013, a price adjustment calculation was applied to the outstanding Pipe 1 warrants resulting in a revised exercise price from $4.87 to $4.85 per share, reducing the warrant proceeds by $39,584. As of August 31, 2013, there are 0,000,000 Pipe 1 warrants outstanding.

Stock Incentive Plans

The Company currently grants stock option awards under the 2012 Equity Compensation Plan (“2012 Plan”). The following table summarizes stock option and restricted stock unit activity for the six months ended August 31, 2013:

 

           Stock Options      Restricted Stock Units  
     Number of
Shares
Available for
Grant
    Number of
Stock Options
Outstanding
    Weighted
Average
Exercise
Price Per
Option
     Restricted
Stock Units
Outstanding
    Weighted
Average
Grant-Date
Fair Value
 

Balance at February 28, 2013

     3,365,888        8,259,209      $ 5.19         803,591      $ 3.65   

Authorized

     0        0        0         0        0   

Granted

     (458,026     267,500        1.76         190,526        1.73   

Options exercised and RSU’s vested

     0        0        0         (104,276     1.88   

Forfeited or cancelled

     96,474        (552,211     2.62         (21,000     1.78   
  

 

 

   

 

 

      

 

 

   

 

 

 

Balance at August 31, 2013

     3,004,336        7,974,498        4.05         868,841        3.59   
  

 

 

   

 

 

      

 

 

   

Vested and expected-to-vest at August 31, 2013

       6,714,893        5.08         625,566      $ 3.59   

Vested and exercisable at August 31, 2013

       3,475,909      $ 5.55        

 

14


The weighted-average remaining contractual life of all vested and expected-to-vest stock options at August 31, 2013 was 0.0 years. The weighted-average remaining contractual life for all exercisable stock options at August 31, 2013 was 0.0 years. The weighted-average remaining contractual life of all expected-to-vest RSUs at August 31, 2013 was 0.0 years.

The aggregate intrinsic value of options vested and exercisable at August 31, 2013 was $0.0 million. The aggregate intrinsic value of stock options vested and expected to vest was $0.0 million at August 31, 2013. The aggregate intrinsic value of RSUs expected to vest was $0.0 million at August 31, 2013. For stock options, aggregate intrinsic value represents the differences between the exercise price of dilutive stock options and the closing price of the Company’s stock on August 31, 2013, which was $1.46. For RSUs, aggregate intrinsic value represents RSUs valued at the closing price of the Company’s stock on August 31, 2013.

The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the closing stock price of the Company’s stock on the date of exercise. The intrinsic value of vested RSUs vested is calculated based on the Company’s stock price on the date of vesting.

The weighted-average fair value of options granted for the six months ended August 31, 2013 was $1.73.

Stock-Based Compensation

The following table summarizes stock-based compensation costs in OCZ’s Condensed Consolidated Statements of Operations for the three and six months ended August 31, 2013 and 2012 (in thousands):

Employee stock-based compensation by category of expense:

 

     Three months ended      Six months ended  
     August 31, 2013      August 31, 2012      August 31, 2013      August 31, 2012  

Cost of Revenue

   $ 368       $ 66       $ 645       $ 127   

Research and development

     368         66         645         127   

Sales and marketing

     151         46         273         88   

General and administrative

     280         88         557         169   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 799       $ 200       $ 1,475       $ 384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Employee stock-based compensation by instrument:

 

Stock options

   $ 368       $ 66       $ 645       $ 127   

Restricted stock units

     280         88         557         169   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 799       $ 200       $ 1,475       $ 384   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company did not capitalize any stock-based compensation as inventory in the three and six months ended August 31, 2013 and 2012, as such amounts were immaterial. [ ** check ** ]

As of August 31, 2013 and 2012, total unamortized stock-based compensation related to non-vested stock options and RSUs was $11.7 million and $1.1 million, respectively, which will be recognized over weighted-average periods of 2.9 years and 1.7 years, respectively.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes single option pricing model with the following assumptions:

 

     Three months ended     Six months ended  
     August 31, 2013     August 31, 2012     August 31, 2013     August 31, 2012  

Expected life (in years)

     4.13        4.46        4.23        4.32   

Volatility

     73.9     43     73.8     45

Risk-free interest rate

     1.74     2.01     1.87     2.02

Dividend yield

     0.0     0.0     0.0     0.0

 

15


The expected life is based on multiple factors, including historical exercise patterns of relatively homogeneous groups with respect to exercise and post-vesting termination behaviors, expected future exercising patterns for these same homogeneous groups of similar public companies in terms of type of business, industry, stage of life cycle, size and geographical market. Volatility is based on our historical volatility. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury Constant Maturity Rate. The dividend yield assumption is based on our history and lack of an expectation of dividend payouts.

 

11. Commitments and Contingencies

Lease Commitments

The Company leases office and warehouse facilities under lease terms expiring at various dates through 2018. Certain leases contain provisions which allow for early termination of the obligation prior to the end of the lease term. Rent expense was $0.6 million and $1.1 million for the three and six months ended August 31, 2013, respectively, compared with $0.6 and $1.1 for the three and six months ended August 31, 2012, respectively. As of August 31, 2013, the future minimum payments due under these non-cancellable lease agreements are as follows (in thousands):

 

Years ending February 28/29

  

2014 (remaining 6 months)

   $ 1,073   

2015

     2,126   

2016

     1,715   

2017

     1,384   

2018

     920   

Thereafter

     390   
  

 

 

 

Total

   $ 7,608   
  

 

 

 

Non-Cancelable Purchase Commitments

From time to time, the Company enters into various inventory and engineering services related purchase commitments with its suppliers. The Company had approximately $10.6 million in non-cancelable purchase commitments for goods and engineering services with certain suppliers as of August 31, 2013, which are expected to settle within the next 12 months. Two key suppliers represented 69% of these goods and engineering services commitments.

Warranties

The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual for the three months ended August 31, 2013, which is included in accrued liabilities, is summarized below (in thousands):

 

     Six Months Ended
August 31,
 
     2013     2012  

Balance at beginning of period

   $ 11,773      $ 10,074   

Accrual for current period warranties

     2,077        7,235   

Warranty costs incurred

     (4,948     (4,189
  

 

 

   

 

 

 

Balance at end of period

   $ 8,902      $ 13,119   
  

 

 

   

 

 

 

Standby Letters of Credit

As of August 31, 2013, the Company had no financial guarantees consisting of standby letters of credit.

 

16


Indemnifications

In its sales agreements, the Company may agree to indemnify its indirect sales channels and end user customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is unlimited. To date the Company has not paid any amounts to settle claims or defend lawsuits pursuant to any indemnification obligation. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements since these obligations are not capped but are conditional to the unique facts and circumstances involved. Accordingly, the Company has no liabilities recorded for these agreements as of August 31, 2013.

Litigation [Need update from legal / Quentin?]

Product Quality Claim

On March 24, 2011, a purported class action suit was filed in the United States District Court for the Northern District of California, San Jose Division, alleging that certain of our SSD products sold after January 1, 2011 did not meet certain speed and storage criteria and, as a result, we supposedly engaged in certain deceptive practices and violated various laws. Among other things, the suit sought unspecified actual and compensatory damages, as well as punitive damages, restitution, disgorgement, and injunctive and other equitable relief. Following were certain successful pretrial rulings on our behalf relating to the claims that could be brought but before any determination as to the ability of the case to proceed as a class action. On January 4, 2013, the parties entered into a Confidential Settlement Agreement and Release (the “Settlement Agreement”), as a result of which the individual plaintiff dismissed the case and we were released of all liability in connection therewith. The Settlement Agreement also contains an agreement by Plaintiffs’ Counsel that they did not intend to file any claim against us in connection with any of the claims that were asserted or could have been asserted in the lawsuit. The Court dismissed the case with prejudice on January 9, 2013.

Shareholder Litigation

On October 11, 2012, a purported securities class action lawsuit was filed in the United States District Court for the Northern District of California (Case No. C 12-05265-RS) against us, our former Chief Executive Officer, and our former Chief Financial Officer. Between October 12, 2012 and November 6, 2012, a number of similar putative class action lawsuits were filed in the United States District Court for the Northern District of California against the same defendants. The shareholder class action lawsuits have been consolidated as In re OCZ Technology Group, Inc. Securities Litigation, Case No. C 12-05265-RS, and a consolidated amended complaint was filed on March 5, 2013. The amended class action complaint asserts claims for alleged violations of the federal securities laws on behalf of a putative class of persons who purchased or otherwise acquired OCZ common stock and/or call options between July 6, 2011 and January 22, 2013. The amended complaint generally alleges that OCZ and the individual defendants made false and misleading statements regarding OCZ’s business and financial results and seeks unspecified money damages and other relief.

Between October 29, 2012 and December 14, 2012, three purported shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California against certain of our current and former officers and directors. OCZ is named as a nominal defendant. The federal derivative lawsuits have been consolidated as In re OCZ Technology Group, Inc. Shareholder Derivative Litigation, Master File No. C-12-05556-RS (the “Federal Derivative Action”), and a consolidated shareholder derivative complaint was filed on February 13, 2013. The consolidated derivative complaint asserts claims for alleged breaches of fiduciary duties, waste of corporate assets, and unjust enrichment and generally alleges that the defendants misrepresented and/or failed to disclose material information regarding our business and financial results and failed to maintain adequate internal and financial controls. The consolidated derivative complaint seeks unspecified monetary damages, equitable and/or injunctive relief, restitution, disgorgement, attorneys’ fees and costs, and other relief. In May 2013, the parties reached a settlement in principle of the Federal Derivative Action. The settlement is subject to court approval. The proposed settlement includes, among other things, our implementation of certain policies and procedures and the payment of attorneys’ fees to plaintiffs’ counsel, which will be funded by OCZ’s D&O liability insurance. There can be no assurance that the settlement will be approved by the Court.

On November 13, 2012, a purported shareholder derivative lawsuit, captioned Briggs v. Petersen, et al., Case No. 1:12-cv-235866, was filed in Santa Clara County Superior Court against certain of our current and former officers and directors. OCZ is named as a nominal defendant. The Briggs complaint asserts claims for various alleged breaches of fiduciary duties and unjust enrichment and generally alleges that the defendants issued false and misleading statements regarding the Company’s financial condition and future business prospects. On February 22, 2013, the court entered an order granting the Company’s motion to

 

17


stay proceedings in the Briggs action pending the resolution of the Federal Derivative Action. On December 18, 2012 and January 23, 2013, two purported shareholder derivative lawsuits, captioned Armstrong v. Petersen, et al., Case No. 1:12-cv-238051, and Kapoosuzian v. Schmitt, et al., Case No. 1:13-cv-240033, respectively, were filed in Santa Clara County Superior Court against certain of our current and former officers and directors. OCZ is named as a nominal defendant and/or party in the Armstrong and Kapoosuzian actions. The Armstrong and Kapoosuzian actions have been stayed pending the resolution of the Federal Derivative Action pursuant to a stipulation and order entered in each action, respectively.

Securities and Exchange Commission Investigation

On November 15, 2012, the Company received a letter from the SEC indicating that the SEC is conducting an investigation. In connection with the investigation, the Company received subpoenas requesting that the Company produce certain documents relating to, among other things, our historical financial statements. The Company is cooperating fully with the SEC’s investigation. This investigation could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Failure to Satisfy a Continued Listing Rule

On April 11, 2013, the Company received a letter from Nasdaq stating that unless the Company requested a hearing before the Nasdaq Hearing Panel that the Company’s common stock would be subject to delisting from Nasdaq for noncompliance with the Rule with respect to its failure to file on a timely basis its Forms 10-Q for the period ended August 31, 2012 and November 30, 2012. The Company announced on April 8, 2013 that it would not be able to file its second and third quarter Forms 10-Q prior to the April 8, 2013 extended filing deadline previously established by Nasdaq, resulting in continued noncompliance with the Rule for those filings. On May 28, 2013 the Company received a determination from the NASDAQ Listing Qualifications Panel (the “Panel”) indicating that the Panel had granted the Company’s request to remain listed on The NASDAQ Stock Market, subject to the condition that the Company is current in the filing of its periodic reports with the Securities and Exchange Commission by September 16, 2013. See Note 13.

Patent Infringement Claim [No longer in Q1. Settled?]

The Company believes that the lawsuit has no merit and the Company intends to vigorously defend against this litigation. On September 7, 2011 a complaint for patent infringement was filed by Solid State Storage Solutions, Inc. in the United States District Court for the Eastern District of Texas alleging patent infringement against OCZ and eight other companies. The Company was served with a copy of the complaint on October 26, 2011 and filed six affirmative defenses in response on December 23, 2011. The plaintiff seeks an injunction and unspecified damages, special damages, interest and compulsory royalty payments.

 

12. Segment and Geographic Information

Operating segments are defined as components of an enterprise that engage in business activities for which separate financial information is available and evaluated by the chief operating decision maker in deciding how to allocate resources and assessing performance. OCZ reviews financial data and operates its business in one reportable business segment comprised of two revenue product groups including SSD storage and Power supplies, memory, and other. The DRAM memory products were discontinued as of February 28, 2011.

The following table sets forth the net revenues for each of the Company’s product groups for the three and six months ended August 31, 2013 and 2012 (in thousands):

 

     Three months ended      Six months ended  
     August 31, 2013      August 31, 2012      August 31, 2013      August 31, 2012  
     (in thousands)      (in thousands)  

Product Group Revenue

           

SSD

   $ 29,282       $ 83,436       $ 80,520       $ 155,039   

Power supplies/Memory/Other [suggest just other]

     3,647         5,162         9,232         10,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,929       $ 88,598       $ 89,752       $ 165,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Net revenues by major geographic area (based on shipping destination), major customers and the Company’s property and equipment, net by geographic region for the three and six months ended August 31, 2013 and 2012 (in thousands):

 

     Three months ended      Six months ended  
     August 31, 2013      August 31, 2012      August 31, 2013      August 31, 2012  
     (in thousands)      (in thousands)  

Revenue

           

United States

   $ 18,219       $ 33,034       $ 54,753       $ 59,952   

Canada

     165         0         733      

Germany

     2,444         16,293         5,408         27,790   

Other Europe/Middle East/Africa

     9,051         22,541         18,635         44,061   

Rest of World

     3050         16.730         10,223         33,287   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,929       $ 88,598       $ 89,752       $ 165,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

Major customers

For the three months ended August 31, 2013, one customer represented more than 10% of net revenue, accounting for 28% of net revenue. For the six months ended August 31, 2013, one customer represented more than 10% of net revenue, accounting for 36% of net revenue. For the three months ended August 31, 2012, there was one customer that represented more than 10% of net revenue, accounting for 12% of net revenue. For the six months ended August 31, 2012, there was one customer that represented more than 10% of net revenue, accounting for approximately 10% of net revenue.

As of August 31, 2013, no customer represented for more than 10% of net trade receivables. As of August 31, 2012, one customer accounted for approximately 31% of net trade receivables.

Property and equipment

The following table sets forth our property and equipment, net by geographic region as of August 31, 2013 and February 28, 2013:

 

     August 31, 20113      February 28, 2013  
     (in thousands)  

Property and equipment, net:

     

Taiwan

   $ 4,435       $ 4,967   

United States

     1,262         1,424   

United Kingdom

     832         984   

Rest of World

     376         420   
  

 

 

    

 

 

 

Total

     6,905         7,795   
  

 

 

    

 

 

 

 

13. Subsequent Events [TBD]

Update of Failure to Satisfy a Continued Listing Rule

On September 12, 2013, the NASDAQ Listing Qualifications panel granted the Company’s request to remain listed on The NASDAQ Stock Market, subject to the condition that the Company becomes current in the filings of its periodic reports with the Securities and Exchange Commission by October 7, 2013.

Hercules Technology Growth Capital, Inc. Loan and Security Agreement [ this and below now longer subsequent – need to check to make sure properly included elsewhere such as L&CR and Notes.]

In June 2013, the Company entered into an amendment (the “First Amendment”) to the Hercules Loan Agreement that redefined certain calculations with respect to the financial tests and extended the requirement to consummate such financing to June 21, 2013. The Company agreed to certain other terms and conditions, including an amendment to the March Warrants and the issuance of additional warrants to purchase that number of shares of the Company’s common stock equal to the quotient obtained by dividing $365,000 (the “Aggregate Amount”) by an exercise price which was initially set at $1.46 per share (the “June Warrants”), resulting in 250,000 shares of common stock issuable upon full exercise of the June Warrants; provided, that if the Company did not consummate a financing of new equity, together with any subordinated debt, of at least $10 million on or

 

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before June 18, 2013, the Aggregate Amount shall be increased by $73,000 each calendar day until the closing of such financing, each as defined and described below, and the payment of an amendment fee of $200,000. In addition, the Company reset the exercise price of the March Warrants to purchase 688,072 shares of common stock from $2.18 to $1.46 per share, resulting in 1,027,397 shares of common stock issuable upon full exercise of the March Warrant. Also under the terms of the First Amendment, the Company shall pay a facility modification charge of $200,000.

In August 2013, the Company entered into a second amendment to the Hercules Loan Agreement (the “Second Amendment”). Under the Second Amendment:

 

    all outstanding amounts under the Hercules Loan Agreement, other than the Warrant Exchange Fee (as defined below), are due and payable June 1, 2014;

 

    Hercules may make advances under the revolving portion of the Hercules Loan Agreement in its sole discretion;

 

    the principal balance on the term loan outstanding on October 31, 2013 is repayable in equal monthly installments of principal and interest beginning November 1, 2013 (calculated on a mortgage style basis as if the final maturity date was 30 months after the date of the initial installment), with the balance due on June 1, 2014;

 

    the Company is required to provide Hercules with the Company’s audited financial statements for the fiscal years ended February 29, 2012 and February 28, 2013 as soon as practicable and in any event by September 16, 2013;

 

    certain covenants were amended to permit the Company to issue the Debentures and perform its obligations thereunder;

 

    if, prior to delivery of the Company’s financial statements for any fiscal quarter, the Company takes action to improve its liquidity to the satisfaction of Hercules, the quarterly EBITDA and minimum liquidity covenants will be deemed to be waived until delivery of the financial statements for the next fiscal quarter; and

 

    Hercules waived all events of default existing prior to the date of the Second Amendment.

In addition, pursuant to the Second Amendment, the March Warrants and June Warrants were cancelled in exchange for a fee (the “Warrant Exchange Fee”) of $6.5 million, payable upon the earlier to occur of (a) the consummation of any sale of all or any material portion of the Company’s assets in one or a series of transactions, the merger, consolidation, share exchange or similar transaction of the Company with or into another corporation, company or other entity or a Change of Control (as defined in the Hercules Loan Agreement), (b) the payment in full in cash of the then outstanding principal amount of and all accrued and unpaid interest on the Debentures, (c) the Hercules term loan maturity date, or (d) the payment in full of the outstanding secured obligations under the Hercules Loan Agreement. However, the Second Amendment provides that the Company will not make and Hercules will not accept the payment of the Warrant Exchange Fee unless and until the principal amount of the outstanding Debentures and all accrued and unpaid interest, fees and other amounts due and payable thereon shall have been paid in full or otherwise converted into shares of common stock. The Warrant Exchange Fee does not bear interest but it is secured by the collateral under the Hercules Loan Agreement. As of the time immediately prior to the cancellation of the March Warrants and June Warrants, such warrants entitled Hercules to purchase 4,077,397 shares of the Company’s common stock at an exercise price of $1.46 per share, with the March Warrants to purchase 1,027,397 shares to expire in March 2018 and the June Warrants to purchase 3,050,000 shares to expire in June 2018. The March Warrants and the June Warrants were cancelled effective August 13, 2013.

[ Below is still subsequent]

In September 2013, the Company entered into a third amendment to the Hercules Loan Agreement (the “Third Amendment”). Under the terms of the Third Amendment, the $200,000 facility modification charge included in the First Amendment was deferred from being currently due to being due upon facility termination.

Convertible Debentures and Warrants[ this and below now longer subsequent – need to check to make sure properly included elsewhere such as L&CR and Notes.]

Also in August 2013, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) under which it issued $13.1 million aggregate principal amount of 9% Senior Secured Convertible Debentures due August 13, 2014 (the “Debentures”) at par and issued warrants to purchase 5,778,750 shares of Common Stock (the “August Warrants”) that are exercisable until August 13, 2018. The conversion price of the Debentures is $1.70 per share, and the exercise price for the August Warrants is $0.75 per share, both subject to adjustment. The Debentures are secured by a security interest in substantially all of the personal property of the Company. The indebtedness and obligations under the Debentures, as well as the liens securing such indebtedness and obligations, are subordinate to the Hercules Loan Agreement, except as otherwise described below.

The Debentures are redeemable at the election of the holders at 125% of the then outstanding principal amount plus interest under certain circumstances if the Company enters into an agreement providing for the sale or transfer of control of the Company or a material portion of its respective assets. The Debentures are redeemable at the option of the Company in whole or in part from time to time, and the Company may cause the holders to convert all or part of the Debentures under certain conditions.

 

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The Debentures provide for customary events of default for transactions of this nature. If an event of default occurs under the Debentures, the holders may declare the outstanding principal amount thereof to be immediately due and payable. The amount due and payable in the event of an acceleration following an event of default would be the sum of (a) the greater of (i) the outstanding principal amount of the Debentures, plus all accrued and unpaid interest hereon, divided by the conversion price, multiplied by the volume weighted average price of the Common Stock over the period specified in the Debentures, or (ii) 125% of the outstanding principal amount of the Debentures, plus 100% of accrued and unpaid interest, and (b) all other amounts, costs, expenses and liquidated damages due in respect of the Debentures.

If the Company is not current in its SEC filings at any time after six months following the date of the Purchase Agreement and prior to the date on which the Debentures, the August Warrants and the underlying shares may be resold by non-affiliates without restriction under Rule 144, it would owe liquidated damages equal to 2% of the principal amount of the Debentures per month until the Company makes the required SEC filings or the underlying shares may be resold by non-affiliates without complying with the current public information requirement of Rule 144. In connection with the Purchase Agreement, the Company entered into a Registration Rights Agreement with the parties to the Purchase Agreement pursuant to which the Company has agreed to file a registration statement with the SEC within 60 days of the closing to register the resale of the shares of common stock issuable upon conversion of the Debentures and upon exercise of the August Warrants. If the Company fails to file the registration statement when required, the registration statement is not declared effective when required or fails to remain effective during the period specified in the Registration Rights Agreement, then the Company would owe monthly liquidated damages equal to 2% of the aggregate purchase price paid for the Registrable Securities pursuant to the Purchase Agreement.

 

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