10-K 1 d560743d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED FEBRUARY 28, 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 001-34650

 

 

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, California

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

Registrant’s telephone number, including area code: (408) 733-8400

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

 

Common stock, $0.0025 par value   The Nasdaq Capital Market
(title of each class)   (name of each exchange on which registered)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  ¨    No  x

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 (§229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Based upon the closing sales price of the Common Stock on The Nasdaq Capital Market on August 31, 2012, the aggregate market value of the voting Common Stock held by non-affiliates of the Registrant was $367.0 million. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons are deemed to be affiliates. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.

The number of shares outstanding of the Registrant’s common stock, $0.0025 par value, was 68,207,166 as of September 30, 2013.

 

 

 


Table of Contents

OCZ TECHNOLOGY GROUP, INC.

FORM 10-K

TABLE OF CONTENTS

 

              PAGE  

FORWARD LOOKING STATEMENTS

     3   

EXPLANATORY NOTE

     4   
 

PART I

     

ITEM 1.

    

BUSINESS

     5   

ITEM 1A.

    

RISK FACTORS

     13   

ITEM 1B.

    

UNRESOLVED STAFF COMMENTS

     27   

ITEM 2.

    

PROPERTIES

     27   

ITEM 3.

    

LEGAL PROCEEDINGS

     28   

ITEM 4.

    

MINE SAFETY DISCLOSURES

     29   
 

PART II

     

ITEM 5.

    

MARKET FOR REGISTRANT’S COMMON EQUITY.  RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     30   

ITEM 6.

    

SELECTED FINANCIAL DATA

     33   

ITEM 7.

    

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     37   

ITEM 7A.

    

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     58   

ITEM 8.

    

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     59   

ITEM 9.

    

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     117   

ITEM 9A.

    

CONTROLS AND PROCEDURES

     117   

ITEM 9B.

    

OTHER INFORMATION

     121   
 

PART III

     

ITEM 10.

    

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     121   

ITEM 11.

    

EXECUTIVE COMPENSATION

     123   

ITEM 12.

    

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     136   

ITEM 13.

    

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     137   

ITEM 14

    

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     137   

ITEM 15

    

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     138   
 

PART IV

     
    

SIGNATURES

     139   


Table of Contents

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act” ) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), particularly, our expectations regarding results of operations, our ability to expand our market penetration, our ability to expand our distribution channels, customer acceptance of our products, our ability to meet the expectations of our customers, product demand and revenue, cash flows, product gross margins, our expectations to continue to develop new products and enhance existing products, our expectations regarding the amount of our research and development expenses, our expectations relating to our selling, general and administrative expenses, our efforts to achieve additional operating efficiencies and to review and improve our business systems and cost structure, our expectations to continue investing in technology, resources and infrastructure, our expectations concerning the availability of products from suppliers and contract manufacturers, anticipated product costs and sales prices, our expectations that we have sufficient capital to meet our requirements for at least the next twelve months, and our expectations regarding materials and inventory management. These forward-looking statements involve risks and uncertainties, and the cautionary statements set forth below and those contained in the section entitled Risk Factors identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. We caution investors that actual results may differ materially from those projected in the forward-looking statements as a result of certain risk factors identified in this Form 10-K and other filings we have made with the Securities and Exchange Commission. More information about potential factors that could affect our business and financial results is set forth under Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained within this Annual Report on Form 10-K.

 

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EXPLANATORY NOTE

This Annual Report on Form 10-K for the year ended February 28, 2013 includes the restatements of our audited consolidated financial statements, the notes thereto and related disclosures for the years ended February 28/29, 2012 and 2011, as well as our selected financial data included in Item 6 for the years ended February 28/29 2010, 2009 and 2008, and our condensed consolidated interim financial statements for the quarterly periods through May 31, 2012. We have elected not to file separate Quarterly Reports on Form 10-Q for the quarters ended August 31, 2012 and November 30, 2012, separate amended Quarterly Reports on Form 10-Q for the quarters ended May 31, 2011, August 31, 2011, November 30, 2011, May 31, 2010, August 31, 2010 and November 30, 2010, and separate amended Annual Reports on Form 10-K for the years ended February 28/29, 2012, 2011 and 2010, and instead have incorporated the information which would have otherwise appeared in such reports into this Annual Report on Form 10-K for the year ended February 28, 2013. We are concurrently filing our delinquent quarterly report on Form 10-Q for the quarter ended May 31, 2013, which includes restated condensed consolidated quarterly financial statements for the periods referenced above.

In August 2012, the Audit Committee of our Board of Directors commenced an internal investigation principally related to our timing of revenue recognition, the classification of certain customer incentive costs and the level of reserves for product returns. In October 2012, the Audit Committee engaged a legal firm to lead an independent investigation into certain accounting practices. In turn, the independent legal firm engaged a forensic accounting firm to provide consulting services in connection with the independent investigation, and during the investigation, special counsel was engaged to investigate compliance with the Foreign Corrupt Practices Act (“FCPA”). The scope of the independent investigation was determined by the Audit Committee and its legal and accounting advisors. As a result of the internal assessment and the evaluation of the substance of information obtained during the independent investigation (collectively, the “Investigation”), we concluded that errors had been made in our previously-issued consolidated financial statements pertaining to: 1) recording accruals for customer incentive program credits, (“CIP Credits”) 2) the misclassification of certain CIP Credits, 3) the recognition of revenue in advance of all revenue recognition criteria being met, 4) recording accruals for estimated product returns, and 5) the timing of write-downs of excess inventories to net realizable value. These errors principally related to the year ended February 29, 2012 and the quarter ended May 31, 2012. In addition to these errors, in the course of our restatement work, we identified several additional errors, including errors in the capitalization of certain manufacturing and freight costs, the classification of costs and expenses in our consolidated statements of operations and the recording of inventory reserves, warranty accruals, shipping cutoff transactions and income tax liabilities. Also, based upon the above errors and the related control weaknesses, we reassessed the carrying amount of goodwill and determined that an impairment should be recorded as of February 29, 2012. For a more detailed description of these issues, see Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations, and Part II – Item 9A Controls and Procedures, below.

Based upon the results of the Investigation and as a result of these additional errors, our consolidated financial statements as of and for the fiscal years ended February 28/29, 2012 and 2011, as well as the nine interim quarterly periods ended May 31, 2012, are being restated. These adjustments are further described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Management has evaluated the effectiveness of our disclosure controls and procedures as of February 28, 2013 and the effectiveness of our internal control over financial reporting as of February 28, 2013. As a result, we have determined that material weaknesses in our internal controls existed as of February 28, 2013. For a description of the material weaknesses in internal control over financial reporting and our actions and plans to remediate those material weaknesses, see Part II – Item 9A Controls and Procedures.

 

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PART I

 

ITEM 1. BUSINESS

General

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.

Overview

Historically, we had focused on developing, manufacturing, and selling high-performance DRAM memory modules and flash drives to computing enthusiasts through catalog and online retail channels. As the growth in the market for SSDs began to accelerate over the last several years, we have evolved from offering high performance DRAM memory modules to serve the emerging SSD market as our primary focus. Our strong foundation in memory technology provided a solid research and development platform and natural transition to develop our SSD capabilities given the technological similarities between these product categories. We have enhanced our SSD capabilities through three acquisitions during fiscal 2012: (i) Indilinx Co., Ltd. (“Indilinx”), a leading fabless provider of flash controller silicon and software for SSDs, (ii) the UK Design Team of PLX Technology, Inc., a developer of system-on-chip solutions, and (iii) Sanrad Inc. (“Sanrad”), a privately-held provider of flash caching and virtualization software and hardware. The acquisitions of Indilinx and the UK Design Team, have enhanced our capabilities in firmware and controller technology, as well as development and commercialization of fully-integrated SSD products. The acquisition of Sanrad, provides software-defined storage technology that we believe will allow us to increase data center performance and efficiency by putting more virtual machines, or VMs, on a server without slowing down the VM’s ability to access stored data.

We have built a diverse and extensive distribution network reaching a wide range of customers in approximately 60 countries. We sell our SSD solutions directly to enterprise end-customers and original equipment manufacturers (“OEMs”) through a direct sales force or through a channel of systems integrators, information technology (“IT”) integrators, and fulfillment and retail distributors, including online retailers focused on technology.

As discussed in Note 1 to the consolidated financial statements, we have incurred recurring operating losses and negative cash flows from operating activities since inception through February 28, 2013. In addition, we have an accumulated deficit of over $300 million as of February 28, 2013. Through February 28, 2013, we have not generated sufficient cash from operations and have relied primarily on the proceeds from equity offerings and debt financing such as increased trade terms from vendors and credit facilities to finance our operations. Accordingly, we need to secure one or more additional financings to fund our near-term operations, and such financings may not be available on acceptable terms or at all. These matters raise substantial doubt about our ability to continue as a going concern.

On August 13, 2013, we announced that we had retained Deustche Bank Securities Inc. to assist the Board of Directors in evaluating various strategic alternatives available to the Company.

Industry Background

Solid State Drives

The worldwide market for SSDs continues to grow and is increasingly accepted as a mainstream storage device across broad market segments. The need for data storage has continued to grow rapidly in recent years due to the growth in volume of data produced and shared, as well as the increase in computing, networking and cloud architectures. Emergent technologies such as virtualization and cloud computing have placed new demands on storage infrastructures and necessitated a re-architecture of traditional storage solutions. Furthermore, enterprises are increasingly dependent on the collection, reporting and analysis of data to efficiently run their businesses, which has driven the need for higher performing and more reliable data storage devices. Finally, the rapid growth in the number of devices that produce and utilize data across both enterprise and client markets has also increased the need for faster access to information.

SSDs have rapidly gained market acceptance in a brief period of time; these markets had been dominated by traditional mechanical hard disk drives, or HDDs. SSD technology is a faster, more durable, reliable, and energy efficient alternative to HDDs. As the benefits of deploying SSDs increase and outweigh the lower up-front cost benefits of HDDs, many segments of the market have rapidly shifted to adopt SSD technology. Historically, cost effectiveness on a per-gigabyte basis limited the adoption of SSDs across all market segments. SSD manufacturers have increasingly incorporated the use of Multi-Level Cell (“MLC”) and Enterprise Multi-Level Cell (“eMLC”) NAND flash memory, which has allowed manufacturers to lower their total bill of materials, thereby enabling SSDs to be priced competitively with HDDs on a total cost of ownership basis. In addition, SSDs require less power to operate and generate less heat than that of conventional HDDs, resulting in decreased power consumption specifically in data centers, which reduces operating costs significantly for data center operators.

 

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SSDs are being deployed in increasing numbers throughout virtual data centers providing the benefits of increased performance and reduced total cost of ownership (TCO). In terms of I/O access, one host-based flash SSD can deliver random input/output operations per second (IOPS) comparable to thousands of HDDs. When deployed with caching and virtualization software, these SSDs provide accelerated data access and an immediate performance boost of business-critical applications.

SSDs are able to be built in denser smaller form factors and are also now being utilized in an increasing number of mobile devices including tablets and new thin chassis notebook PCs which require faster boot ups and a more responsive computing experience by consumers. Because SSDs have no moving parts and are more durable, the technology is ideally suited for applications ranging from automotive to aviation where high reliability and resistance to shock, vibration and temperature are all required. As the price per gigabyte of SSDs continues to decline and relative performance continues to improve, SSD adoption is expected to continue to accelerate.

Technological advancements and evolutionary trends have catalyzed the market adoption of SSDs. The major technological advancements have included:

 

   

Advancement of MLC technology—MLC, is a memory element capable of using multiple levels of a cell to store information, as opposed to SLC, or single-level cell memory. The use of multiple levels of a cell increases total usable capacity and decreases latency when accessing stored data. One of the primary benefits of MLC flash memory is the lower cost per unit of storage due to the higher data density which reduces the total cost of the solid state drive.

 

   

Introduction of sophisticated tiering software—Tiering software has added intelligence to the datacenter and storage stack, allowing applications to automatically recognize and differentiate frequently used data from less frequently used data. Tiering allows for frequently used data to be directed towards SSDs, where rapid access is a principal requirement. This allows users to retrieve data and run applications with the lowest possible latency by leveraging the improved performance of SSDs to manage mission-critical functions from booting to launching apps, while infrequently accessed or archived items are stored on traditional rotational media.

 

   

Introduction of storage virtualization—Storage virtualization provides companies with tools to address the underutilization of resources and the poor economics of silo-based storage, as well as the flexibility to respond to changing business requirements. In a storage virtualized environment, organizations achieve the full benefits of consolidation, improved resource usage and comprehensive disaster recovery. Storage virtualization also reduces power and cooling costs.

 

   

Broadened mix of interface technologies—The broadened range of interfaces compatible with SSDs has increased adoption, particularly in the enterprise market. Common interfaces such as PCIe, SATA and SAS are expected to dominate enterprise SSD deployment in the future. PCIe is expected to continue to grow rapidly in both the server and datacenter storage markets due to the availability of slots with this existing interface as well as the greater bandwidth and density that is achievable with these drives.

Power Supply Units

Power supply units (“PSU”) are the main source of conversion between main alternating current and the direct current used by computers and other electronic devices. As modern electronics, computers, servers and workstations become more complicated, the increased power handling and efficiency of AC/DC conversion become paramount. As processing power increases and productivity software and gaming places higher demands on components more users are leveraging multi-GPU configurations, this requires higher output from power supplies. As energy costs have risen, so has the demand for more efficient power supplies. Higher efficiency power supplies utilize higher grade components to waste less power and generate less heat and will qualify for the industry standard “80 Plus” certification. Key drivers in the power supply unit industry are the release of new PCs and industry standards, as well as growing regulatory requirements in the European Union, North America and Japan for power consumption.

Our Product Groups

OCZ operates its business in one reportable segment comprised of two product groups of SSD storage and then power supplies, memory processing, and other. We discontinued our DRAM memory products as of February 28, 2011. The following table summarizes our revenue by product group (in thousands):

 

     Years Ended February 28/29  
     2013      2012      2011  
            Restated      Restated  

Net revenue by product group:

        

SSD

   $ 311,043       $ 285,644       $ 121,441   

Power supplies, memory, other

     22,921         24,516         59,187   
  

 

 

    

 

 

    

 

 

 

Net revenue

   $ 333,964       $ 310,160       $ 180,628   
  

 

 

    

 

 

    

 

 

 

OCZ’s SSD product group includes Solid State Drives for both client and enterprise, related Software Solutions and standalone semiconductor-based Controller products.

 

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Solid State Drives

OCZ’s SSD products are primarily used in PCs, servers, data storage systems and industrial equipment that require increased performance, power efficiency, and reliability. Our SSD products can be integrated with storage systems and servers through various standard interfaces. Given the ubiquity of the HDD interfaces in the storage industry, these SSDs provide scalability, flexibility, and ease of integration into existing storage systems and infrastructures. We support all of the most popular, fastest-growing interfaces:

 

   

PCI Express (PCIe)—We offer PCIe interface for the enterprise and client markets as PCIe has the least amount of latency, while maintaining high bandwidth, and maximum performance between the host and the solid state memory. PCIe SSDs can also be built with a variety of form factors allowing for drives with very large densities. These drives can also be paired with our enterprise software products to become complete enterprise storage solutions.

 

   

Serial Attached SCSI (SAS)—We offer the SAS interface primarily for enterprise server and storage customers as SAS is one of the fastest growing interfaces in the SSD market and is a drop-in replacement for existing SAS-based HDDs. SAS remains dominant in markets where enhanced reliability and redundancy is required.

 

   

Serial ATA (SATA)—We offer the SATA interface across all of our markets as SATA provides the optimum level of performance and reliability and can be deployed in everything from ultra-thin notebooks and workstations to racks within the datacenter. Enterprise class SATA SSDs are preferred in markets such as Cloud Computing where the added features of a SAS product don’t factor into the overall TCO equation at the customer.

OCZ’s client products are targeted for a broad array of consumer devices ranging from portable computers to high performance workstations and offers advantages over traditional hard disk drives in terms of performance, reduced heat, and in the case of portable units, battery life. Our primary client product families include:

 

   

RevoDrive 3 Series SSDs are bootable and feature high-speed PCI Express architecture which increases bandwidth and helps eliminate the SATA bottleneck. The RevoDrive has a robust feature set including TRIM support, intelligent SMART reporting and system level software updating for an enhanced user experience. The PCIe-based RevoDrive 3 delivers up to 1.5GB/s of bandwidth and 230,000 4KB random write IOPS making this an ideal SSD for high-performance applications, multimedia, and workstations.

 

   

Vector SATA III-based SSD Series features our proprietary Barefoot 3 controller and provides exceptional input/output operations per second (IOPS) performance. This SSD series provides faster file transfers and boot-ups, and a quicker, more responsive storage experience. The Vector SSD Series is available in 128GB, 256GB and 512GB capacities and its ultra-slim, 7mm housing supports a wide spectrum of computers including the latest thin form factor notebooks. The Vector family currently offers up to 100,000 IOPS for 4KB random write and is designed for high performance computing, gaming and workstation applications.

 

   

Vertex 450 SATA III-based SSD Series features our proprietary Barefoot 3 M10 controller and addresses the needs of high-end client applications. Replacing the 25nm-based Vertex 4, the new Vertex 450 uses NAND flash based on the state-of-the-art 20nm process geometry to deliver superior, cost-effective solid state storage and features. The Vertex 450 provides bandwidth of up to 540MB/s read, 530MB/s write, and 4K random write performance of up to 90,000 IOPS, accelerating gaming, content creation, and multimedia applications, while driving an improved overall computing experience.

 

   

Vertex 3.20 SATA III-based SSD Series that was the first OCZ drive built around smaller 20nm NAND flash process geometry. The Vertex 3.20 SSD delivers exceptional performance of synchronous 20nm NAND flash supporting read bandwidth up to 550MB/s, write bandwidth up to 520MB/s, random read performance up to 35,000 input/output operations per second (IOPS), and random write performance up to 65,000 IOPS. It is also optimized to provide excellent endurance and reliability coupled with power efficiency.

OCZ’s enterprise products address the performance, capacity, reliability, endurance, and security needs for integration into the latest storage appliances, data centers, and servers, reducing the data bottlenecks and operating footprint inherent to hard drive arrays. OCZ’s flash storage products are specifically designed to optimize productivity and throughput and address cloud computing, data-center, SMB and storage area network applications. Our primary enterprise products include:

 

   

Deneva 2 SATA SSDs are designed and manufactured to solve today’s enterprise storage challenges and address the limitations hard drive technology imposes on IT infrastructures. The Deneva 2 Series delivers performance while meeting the stringent reliability, security, and economical needs of enterprise storage environments including cloud storage, web-serving, and data warehousing. Deneva 2 maximizes IOPS per dollar enabling increased data throughput with lower power consumption and a smaller operating footprint. The Deneva 2 series is designed with enhanced reliability features including data fail recovery and strong error correction for enhanced data integrity. It is also available in a wide array of configurations leveraging multiple NAND types including MLC, eMLC, and SLC to address the complete spectrum of enterprise applications.

 

   

Talos 2 SAS Series is a 6Gbit dual ported active/active SAS solution that is designed to deliver high performance, reliability and enterprise features to meet the demands of today’s I/O-intensive applications and is an easy to deploy drop in solution for existing SAS HDD based infrastructures. Available in storage capacities up to 1TB these high capacity drives can also be utilized in a storage tiering model at Tier 0 or 1 to address hot data while cheaper HDDs can still be leveraged for cold or archive data. Talos 2 SAS drives deliver superior mixed-workload performance for increased throughput of 54,000 IOPS 4K random (75% read; 25% write) and also offer power loss protection and drive level recovery for superior reliability in mission critical applications

 

   

Z-Drive R4 PCIe flash-based cards provide compact, power-efficient solid-state storage that delivers fast and reliable access to data without burdening host CPU or memory resources. The cards are available in full height and half height. The Z-Drive R4 merges the best feature sets of both the pure hardware and pure software based approaches to data management. Designed and manufactured for a wide range of enterprise environments including cloud computing and data centers, the Z-Drive R4 provides excellent performance, flexibility, durability and enhanced reliability, allowing data centers to utilize a PCIe-based SSD as their primary tier one storage solution. Additionally, the Z-Drive R4’s level of concentrated performance enables system architects to design more productive infrastructures while lowering operating costs associated with hard drive technology and because the drive integrates

 

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seamlessly with servers at the system bus and kernel level it creates a new flash memory tier (Tier 0) and dramatically increases throughput and application performance all while slashing capital and operating costs. The Z-Drive R4 features complete power fail protection and drive level recovery and delivers up to 2,800MB/s sequential read and write and up to 410,000 IOPS 4K random writes.

Software and Solutions

With its XL Software and Solutions product line, OCZ offers a suite of products that enable software defined flash delivery to the data center. To effectively accelerate data center applications, the data on SSD flash must be quickly accessible both locally and over the network and relevant to the needs of the enterprise application. Caching, virtualization and other techniques are required to assure data relevancy and high availability while delivering accelerated performance. By combining enterprise-class flash-based storage with enterprise flash caching and virtualization software the XL suite provides the basic ingredients of a successful enterprise flash implementation.

 

   

VXL Software maximizes performance of virtualized server environments by combining advanced application-optimized caching with dynamic allocation of on-host flash. In conjunction with an OCZ PCIe solid state drives, VXL enables intelligent and efficient on-demand distribution of flash between Virtual Machines (VMs) based on need. VXL virtualizes OCZ PCIe SSD flash and presents it as network-available storage volumes and caching resources. With essential features such as High Availability (HA) and end-to-end Fault Tolerance (FT), VXL provides superior application performance and access, with or without a back-end SAN or storage appliance.

 

   

ZD-XL SQL Accelerator utilizes OCZ PCIe solid state drive hardware and enterprise software to deliver a seamless easy to deploy plug-and-play flash acceleration solution optimized for SQL Server deployments. It represents the convergence of enterprise hardware and software as one tightly integrated, optimized solution ensuring that appropriate and readily available data is on SSD flash when a SQL Server needs it. Plugging seamlessly into existing or new SQL Server installations, ZD-XL provides on-host application-optimized flash caching for SAN or DAS DB volumes, optimized flash volumes for tempdb, advanced cache warm-up analysis, and best practice deployment wizards.

 

   

WXL Software is a caching solution for Windows Server based Physical Servers and Hyper-V based Virtual environments, which transforms these computing environments by providing application optimize, low latency, high performance storage access for key enterprise data. Using OCZ’s direct pass caching technology, an advanced policy mechanism utilizing out of band cache statistics processing, WXL avoids any data-path processing penalty while selectively caching data and significantly boosting application performance.

 

   

StoragePro XL Central Management is an enterprise SSD management application that provides IT managers with a cross-platform view of their enterprise flash resources for unified central management and monitoring. Featuring Linux and Windows OS integration and an easy-to-use web-based centralized GUI (graphical user interface), IT managers are provided details on drive health and caching efficiency as well have the capability to perform remote maintenance. Tightly integrated with OCZ’s acceleration software, StoragePro XL further enables managing and monitoring the utilization of OCZ’s Solid State Drives as an acceleration cache resource through the central application of optimized caching policies.

Controllers

Our original products were comprised of advanced solid state drive controllers, SSD reference designs, and software, which enabled the rapid development and deployment of high performance solid state drives. OCZ’s current NAND flash controllers are designed from ground up for internal use in our finished goods SSD products. The design of these controllers and their corresponding firmware development is a result of coordination of our global technical teams. OCZ’s controllers are designed to meet the needs of demanding applications with a priority on performance and reliability.

 

   

Barefoot3 is a 6Gbit/s SATA SSD controller designed in our UK research and development (“R&D”) center, and is the backbone of our award winning Vector line of SSDs. Barefoot3’s unique architecture and IP allow for best in class performance not only when the SSD is new, but over a sustained period of time as well. High sequential speeds and the combination of performance in various workloads makes the Barefoot3 controller ideal for the OCZ Vector SSD Series which addresses the demanding requirements of the gaming, content creation and workstation markets.

 

   

Barefoot3 M10 is a derivative of the original Barefoot3controller and is the heart of the mainstream Vertex 450 SSD series which is optimized to accelerating gaming, drive productivity applications, and enable multimedia software to run at their peak performance without limitations on storage I/O.

Power Supplies

We design and develop power supplies that power PCs and industrial devices while maintaining interoperability with other system components, adhering to industry standards and increasing output efficiency through superior design. Our power supplies are designed to be easy to integrate and operate under more demanding internal conditions with stricter load regulation than is required under normal circumstances. Power supplies are sold under both the OCZ and PC Power & Cooling brands, and are able to address a wide range of computing applications.

 

   

High Wattage Power Supplies —We currently offer high wattage power supplies with density up to 1200 watts, featuring 50° C operation, 80%+ efficiency and 1% load regulation, in multiple formats. The target applications are OEM application servers, workstations, storage area networks, and high performance computing.

 

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Low-Noise Power Supplies—We currently offer low noise power supplies with density up to 750 watts, featuring low audible noise. The target applications are PCs and video/audio workstations, and home theater PCs.

 

   

Modular PSUs—We currently offer modular PSUs with density up to 1000 watts, featuring removable reconfigurable cables. The target applications are end-user upgrades, overclocking and case modding, gaming computers and home theater PCs.

 

   

High-Efficiency PSUs—We currently offer high-efficiency PSUs with density up to 1000 watts that are green friendly with 80% plus Bronze, Silver, Gold, and Platinum efficiency. The target applications are end-user upgrades, gaming computers and home theater PCs.

The OCZ Solution

We believe our primary competitive advantages arise from our internal research and development expertise and the expertise to develop differentiated solutions for our customers. This has enabled us to incorporate advanced functionality and capabilities and to develop and commercialize products that are optimized for our customers’ requirements quickly and efficiently. Our solutions offer key benefits to our customers including:

 

   

Superior performance – Our solid state drive hardware and firmware incorporate proprietary technology and design to deliver superior sequential performance and overall IOPS for a wide range of client and enterprise applications

 

   

Compelling value proposition versus legacy HDDs – Our broad array of SSD products provides performance advantages when compared to HDDs, and our incorporation of MLC-based technology and the latest NAND lithography increases our ability to compete on price as well. Our SATA III SSDs are innovatively engineered to deliver industry-leading file transfer rates and superior system responsiveness, all while providing a more durable, reliable, and energy efficient storage solution compared to traditional hard drives.

 

   

Offer all interfaces – Unlike many competitors, OCZ is a one stop source

 

   

Vertically integrated commercialized controller technology – We believe ownership of proprietary controller technology enables us to produce all of the elements of performance and feature differentiation outside of the NAND flash development. This includes our controller firmware which we believe allows us to tailor our SSDs for specific end markets to deliver superior functionality and performance.

 

   

Offer maximized performance with hardware, controller, and software technology – silicon expertise to design in-house controllers, the firmware expertise to address the latest NAND types, and enterprise-based application software expertise to deliver total storage solutions for the enterprise

 

   

Improved performance via software-defined storage—We believe our flash caching and virtualization software and hardware will enable us to increase datacenter performance and efficiency and address the enterprise market with a total solution which includes PCIe SSDs like the Z-Drive Series and the VXL software. VXL flash caching and storage virtualization software distributes flash caching resources on demand across virtual machines (VMs), maximizing the full potential of virtualization by dissolving SAN bottlenecks which normally result from the use of traditional HDD storage. Our virtualization software and solutions are designed to run in the world’s #1 virtualization platform, VMware, to allow enterprises to realize the benefit of a single unified virtualized environment.

 

   

Ease of use / wizards / software managers that make the installation of solid state solutions much easier for IT Architects and Managers

Rapid Time to Market

We strive to reduce the design and development time required to incorporate the latest technologies and to deliver the next generation of products and solutions. Our in-house design competencies and control of the design of many of the pieces used within our component solutions enable us to rapidly develop, build and launch products utilizing the latest NAND components.

Customers

For our fiscal years ended February 28, 2013, February 29, 2012, and February 28, 2011, our ten largest customers accounted for 49%, 40% and 50% of net revenue, respectively. For fiscal 2013 and fiscal 2012, no customer accounted for more than 10% of our net revenue, and in fiscal 2011, one customer accounted for 17% of our net revenue.

Customer Service

We seek to build brand loyalty by offering competitive product warranties, comprehensive return and replacement policies and accessible technical support. Members of our consumer customer service staff have technical expertise which we believe supports us in maintaining our reputation for technical expertise and attentive customer care. From deciding which product is most ideal for the customer’s system or application, walking customers through installation and setup, or troubleshooting and RMA service, the in-house consumer support team is committed to delivering exceptional service and tech support. In addition to a support call center OCZ also offers 24/7 support on our global support forum which is staffed by employees that provide individual and community support in local languages.

 

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Enterprise customers receive support from a dedicated enterprise technical solutions support team that is certified in all the leading platforms and provides customers with direct access to experts with broad technical experience and engineering knowledge. OCZ recognizes the importance of ensuring mission-critical applications maintain peak performance around-the-clock and also offers a variety of support plans to provide enterprise customers with the support they need, when they need it.

Strategic Relationships

We have engineering and marketing relationships with general partners, certain motherboard manufacturers, integrated circuit manufacturers and chipset/platform providers such as Areca, ASRock, ASUS, ATTO, EVGA, Gigabyte Technology, Marvell Technology Group Ltd, LSI Corporation, Micron Technology Incorporated, MSI Computer Corporation, NVIDIA Corporation and Toshiba Corporation. We believe that these relationships enable us to respond to changing customer needs to develop products which are compatible with multiple platforms as well as being designed to obtain optimum performance from a specific product or platform.

Suppliers

Typically, NAND flash represents a significant majority of our component costs for our SSD products. We are dependent on a small number of suppliers that supply key components used in the manufacture of our products.

From time to time, our industry experiences shortages which have resulted in foundries putting their customers, ourselves included, on component allocation. We have no long-term supply contracts and our suppliers may not supply the quantities of components we may need to meet our production goals. Micron, Toshiba and Intel currently supply substantially all of the NAND flash used in our SSD products. We also purchase numerous other components for our SSDs that are readily available in the market.

Manufacturing

Our SSD products are assembled and tested in our manufacturing facility in Taiwan. This facility has achieved International Organization for Standardization (“ISO”) ISO 9001:2008 certification. We also use other contract-manufacturing suppliers in both the United States and Taiwan to support both our SSD and power supply business. In order to maintain OCZs high quality standards all SSD products are tested at our facilities regardless of assembly location.

We do not own or operate semiconductor fabrication or packaging facilities to support our vertical integration of semiconductor-based controllers and OCZ branded Flash. We currently outsource our semiconductor wafer manufacturing and IC packaging/solutions.

Research and Development

We believe that the timely development of new products is essential to maintaining our competitive position. Our research and development activities are focused primarily on new SSD based system solutions, comprising high-speed SSDs, controller silicon and firmware, and Software Storage Acceleration Applications and driver suites. Furthermore we develop new power supplies and invest in ongoing improvement in manufacturing processes and technologies and continual improvement in test routines and software. We plan to continue to devote research and development efforts to the design of new products which address the requirements of our target markets.

Our engineering staff continually explores practical applications of new technologies, works closely with our customers and provides services throughout the product life cycle, including full eco-system architecture definition, silicon, firmware and software design, component selection, schematic design, layout, manufacturing and test engineering. We design our products to be compatible with existing industry standards and, where appropriate, develop and promote new standards. An important aspect of our research and development effort is to understand the challenges presented by our customers’ requirements and satisfy them by utilizing our industry knowledge, proprietary technologies and technical expertise.

Our research and development expenses totaled approximately $40.1 million, $31.6 million and $5.5 million in the fiscal years ended February 28, 2013, February 29, 2012 and February 28, 2011, respectively.

Intellectual Property

We protect our intellectual property through a variety of measures, including trade secrets, non-disclosure agreements, trademarks, copyrights and patents. Currently, we have 26 patents issued in the United States, with five applications allowed and awaiting formal issue, along with 49 pending US utility applications. In addition, we have 14 international patents issued in Korea, one in Europe and one in Taiwan. Several of the pending US applications have received favorable office actions requiring relatively minor amendments. We are further aggressively expanding our intellectual property portfolio by continuously filing new patent applications. We maintain our patents and trademarks as part of our intellectual property to extend the durations as necessary to achieve our business goals.

Competition

We conduct business in markets characterized by intense competition, rapid technological change, constant price pressures and evolving industry standards. We compete against global technology vendors such as Intel Corporation and Samsung Electronics Co., Ltd. Our primary competitors in the SSD industry include Fusion-io, Inc., Intel Corporation, SanDisk Corporation, Micron Technology, Inc. (Crucial), SMART Storage Systems., and STEC, Inc. Our primary competitors in the specialized power supply chassis and cooling manufacturing industry include Antec, Inc., Thermaltake Technology Inc. USA and Corsair Microsystems. We currently compete or may compete with, among others, EMC Corporation Hitachi, Ltd., Seagate Technology, Toshiba, and Western Digital. Our flash caching and virtualization software and hardware primarily competes with products from suppliers of software-hardware solutions, including Fusion-io and other software-hardware solutions being developed by privately held companies.

 

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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 LSI Corporation, 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 believe that the principal competitive factors in our target markets include the following:

 

   

first to market with new emerging technologies;

 

   

flexible and customizable products to fit customers’ objectives;

 

   

high product performance reliability;

 

   

early identification of emerging opportunities;

 

   

cost-effectiveness;

 

   

interoperability of products;

 

   

scalability; and

 

   

localized and responsive customer support on a worldwide basis.

We believe that we compete favorably with respect to most of these factors. 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.

Backlog

Sales of our products are generally made pursuant to purchase orders. We include in backlog only those customer orders for which we have accepted purchase orders and to which we expect to ship within 45 days. Since orders constituting our current backlog are subject to changes in delivery schedules or cancellation with only limited or no penalties, we believe that the amount of our backlog is not necessarily an accurate indication of our future net sales.

Employees

As of our fiscal year ended February 28, 2013, we employed 597 regular employees, of which 271 were in general and administration (including operations, finance, administration, human resources and information technology), 241 were in research and development, and 85 were in sales and marketing. Approximately 382 employees are located outside the United States, principally in Taiwan, United Kingdom, Netherlands, and Israel. Our employees are not represented by any collective bargaining agreements. We have never experienced a work stoppage and believe that our employee relations are good.

Environmental Matters

Our business involves purchasing finished goods as components from different vendors and then integration of these components into system level finished products of our own design at our facilities. Accordingly, we 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, are subject 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 Union’s Directive 2011/65/EU on Restriction on the Certain Hazardous Substances in Electrical and Electronic Equipment, Directive 2012/19/EU on Waste Electrical and Electronic Equipment, and European REACH Regulation No. 1907/2006 for Registration Evaluation, Authorization and Restrictions of Chemicals.

To date, we have not been the subject of any material investigation or enforcement action by either U.S. or foreign environmental regulatory authorities. Further, because we do not engage in primary manufacturing processes like those performed by our suppliers who are industrial manufacturers, we believe that costs related to our compliance with environmental laws should not materially adversely affect us.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 12(a) or 15(d) of the Securities Exchange Act of 1934, as amended are available free of charge on our website (www.ocztechnology.com under the “Investor Relations – Regulatory Info – SEC Filings” caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “ SEC” ). The contents of our web site are not intended to be incorporated by reference into this report or in any other report or document we file or furnish, and any references to our web site are intended to be textual references only.

 

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The public may also read or copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1.800.SEC.0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including OCZ, that file electronically with the SEC. The address of the website is http://www.sec.gov.

 

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ITEM 1A. RISK FACTORS

In addition to the other information described elsewhere in this Annual Report, you should carefully consider the following risk factors, which could materially adversely affect our business, financial condition and results of operations. The risks described below are not the only risks facing OCZ. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition and results of operations.

Risks Related to Our Restatements

We face risks related to the ongoing SEC investigation.

On November 15, 2012, the Securities and Exchange Commission (“SEC”) informed us that it is conducting an investigation of us. In connection with this investigation, we have received subpoenas requesting that we produce certain documents relating to, among other things, our historical financial statements. We are cooperating fully with the SEC’s investigation. The investigation has resulted and could continue to result in considerable legal expenses, divert management’s attention from other business concerns, and harm our business. The amount of time needed to resolve the investigation is uncertain, and we cannot predict the outcome of this investigation or whether we will face additional government inquiries or other actions. If the SEC were to file an action, we could be required to pay significant penalties and/or other amounts and could become subject to injunctions, an administrative cease and desist order, and/or other equitable remedies, which could have a material adverse effect on our financial condition, business, results of operations, and cash flow. The filing of our restated financial statements to correct the discovered accounting errors will not resolve the SEC investigation. Further, the resolution of the SEC investigation could require the filing of additional restatements of our prior financial statements, and/or our restated financial statements, or require that we take other actions not presently contemplated. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees in connection with the ongoing SEC investigation and any future government inquiries, investigations, or actions.

OCZ Technology, and some of our current and former officers and directors, have been named as parties to various lawsuits arising out of, or related to, our restatements of the consolidated financial statements and those lawsuits could adversely affect us, require significant management time and attention, result in significant legal expenses or damages, and cause our business, financial condition, results of operations, and cash flows to suffer.

A number of shareholder lawsuits, both class action and derivative, have been filed against us and certain of our current and former officers and directors, as detailed more fully in Item 3, Legal Proceedings. The first purported securities class action lawsuit was filed on October 11, 2012 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. The consolidated amended class action complaint asserts claims for alleged violations of the federal securities laws and seeks unspecified money damages and other relief 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 parties have reached an agreement in principle to settle the consolidated class action. The settlement is subject to negotiation of final documentation and court approval. There can be no assurance that the settlement will be approved by the Court.

Between October 29, 2012 and December 14, 2012, three 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. We are 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 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 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. There can be no assurance that the settlement will be approved by the Court.

Three shareholder derivative lawsuits also were filed in Santa Clara County Superior Court against certain of our current and former officers and directors (the “State Derivative Actions”). We are named as a nominal defendant and/or party in the State Derivative Actions. The State Derivative Actions have been stayed pending the resolution of the Federal Derivative Action.

The matters which led to our Audit Committee’s investigation and the restatements of our consolidated financial statements have exposed us to greater risks associated with litigation, regulatory proceedings, and government enforcement actions. We and our current and former officers and directors may, in the future, be subject to additional litigation relating to such matters. Subject to certain limitations, we are obligated to indemnify our current and former officers and directors in connection with such lawsuits and any related litigation or settlement amounts. Regardless of the outcome, these lawsuits, and any other litigation that may be brought against us or our current or former officers and directors, could be time-consuming, result in significant expense, and divert the attention and resources of our management and other key employees. An unfavorable outcome in any of these matters could exceed coverage provided under potentially applicable insurance policies, which is limited. Any such unfavorable outcome could have a material adverse effect on our business, financial condition, results of operations, and cash flows. Further, we could be required to pay damages or additional penalties or have other remedies imposed against us, or our current or former directors or officers, which could harm our reputation, business, financial condition, results of operations, or cash flows.

 

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As a result of the delayed filing of our periodic reports with the SEC, we are not currently eligible to use a registration statement on Form S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.

As a result of the delayed filing of our periodic reports with the SEC, we will not be eligible to register the offer and sale of our securities using a short form registration statement on Form S-3 until we have timely filed all periodic reports required under the Securities Exchange Act of 1934 for one year. As descried more fully elsewhere in this Annual Report on Form 10-K, we need to raise additional capital to fund our near-term operations. Should we wish to register the offer and sale of our securities to the public prior to the time that regain eligibility to use Form S-3, our transaction costs would increase and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.

Management’s determination that material weaknesses exist in our internal controls over financial reporting could have a material adverse impact on the Company.

We are required to maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. In Item 9A of this Annual Report, management reports that material weaknesses exist in our internal control over financial reporting. Due to these material weaknesses, management has concluded that as of the end of the period covered by this Annual Report, our disclosure controls and procedures were not effective. Consequently, pending our remediation of the matters that have caused the control deficiencies underlying the material weaknesses, our business and results of operations could be harmed, we may be unable to report properly or timely the results of our operations, and investors may lose faith in the reliability of our financial statements. Accordingly, the price of our securities may be adversely and materially impacted.

Risks Related to Our Business

We Have A History Of Losses And Our Liquidity Position Imposes Risk To Our Operations

We have incurred recurring operating losses and negative cash flows from operating activities since inception through February 28, 2013, and we have an accumulated deficit of over $300 million as of February 28, 2013. Through February 28, 2013, we have not generated sufficient cash from operations and have relied primarily on the proceeds from equity offerings and debt financing such as increased trade terms from vendors and credit facilities to finance its operations. These matters raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our obtaining the necessary financing to finance our operations. Our 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.

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. We may not be profitable on a quarterly or annual basis in the future. Our existing cash balance and any cash flow from operating activities may not be sufficient to satisfy current obligations or finance our operations. If we are not able to finance our expected future operations from existing cash, future cash flows and new capital, we may need to curtail our operations. We are considering various alternatives to remedy any future shortfall in capital. We may deem it necessary to raise capital through equity markets, debt markets or other financing arrangements that may be available. Moreover, the terms of our existing indebtedness and the fact that we are not in compliance with the terms of our existing indebtedness may make it more difficult for us to obtain additional capital. See “– Risks Related to Our Debt” below. We may not be able to raise capital on terms acceptable to us or at all, which may cause us to curtail our operations.

Should the going concern assumption not be appropriate and we are not able to continue in the normal course of operations, adjustments would be required to our consolidated financial statements to the amounts and classifications of assets and liabilities, and these adjustments could be significant. Our consolidated financial statements do not reflect the adjustments or reclassifications of assets and liabilities that would be necessary if we are unable to continue as a going concern.

Our Board of Directors is exploring and evaluating strategic alternatives for our company and this process may have an adverse impact on our business.

On August 13, 2013, we announced that we had retained Deustche Bank Securities Inc. to assist the Board of Directors in evaluating various strategic alternatives available to the company. In connection with this process, we expect to incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be disruptive to our business operations and may not result in the consummation of any transaction. If we are unable to effectively manage the process, our business, financial condition and results of operations could be materially and adversely affected.

We do not intend to comment regarding the evaluation of strategic alternatives until such time as our Board of Directors has determined the outcome of the process or otherwise has deemed that disclosure is appropriate. As a consequence, perceived uncertainties related to the future of our company may result in the loss of potential business opportunities and may make it more difficult for us to attract and retain qualified personnel and business partners.

We will require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.

We intend to continue to make investments to support our business growth, which will require additional funds to respond to business challenges, including the need to develop new products or enhance our existing products, enhance our operating infrastructure and acquire

 

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complementary businesses and technologies. Accordingly, we will need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our common stock. Any debt financing in the future could involve additional restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business, operating results, financial condition, and prospects could be adversely affected.

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 SSDs, flash and power supply 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. Our net sales and results of operations could 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.

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, these customers or our other customers may not use our products at current levels in the future, 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. We may not be able to replace cancelled, delayed or reduced purchase orders with new orders. Further, the Company’s restatement, SEC investigation and its inability to make timely filings with the SEC has impacted key customer relationships, and the Company’s ability to build and maintain these relationships in the future will depend on its ability to favorably resolve outstanding litigation and comply with regulatory requirements.

For our fiscal years ended February 28, 2013, February 29, 2012, and February 28, 2011, our ten largest customers accounted for 49%, 40% and 50% of net sales, respectively. For fiscal 2013 and fiscal 2012, no customers accounted for more than 10% of our net revenue, and in fiscal 2011, one customer accounted for 17% of our net revenue. During each of these periods, no other customers accounted for more than 10% of our net revenue.

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, such as NAND flash memory, represent a significant majority of our component costs for our SSD products. We are dependent on a small number of suppliers that supply key components used in the manufacture of our products. Since we generally do not have long-term supply contracts, our suppliers may not supply the quantities of components we may need to meet our production goals. Micron, Toshiba and Intel currently supply substantially all of the IC devices used in our flash memory products.

Additionally, because of constraints on working capital, we have delayed payments to a number of vendors which could have an adverse effect on our ability to source product. Moreover, from time to time, our industry experiences shortages in IC devices and foundry services which have resulted in foundries putting their customers, ourselves included, on component allocation. We have experienced shortages of flash memory for the past several quarters, which has resulted in our loss of sales. We have also paid more for flash memory in the past several quarters than we have in the past. We expect that the supply of flash memory will continue to be constrained for the foreseeable future and that prices will be higher than our historical costs for flash memory. 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.

 

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Our gross margins are impacted by a variety of factors, are subject to variation from period to period and are difficult to predict.

Our gross margins have fluctuated from period to period, are likely to continue to fluctuate and may be affected by a variety of factors, including:

 

   

demand for our products;

 

   

changes in customer, geographic, or product mix, including mix of configurations within products;

 

   

significant new customer deployments

 

   

the cost of components and freight;

 

   

changes in our manufacturing costs, including fluctuations in yields and production volumes;

 

   

new product introductions and enhancements, potentially with initial sales at relatively small volumes and higher product costs;

 

   

rebates, sales and marketing initiatives, discount levels, and competitive pricing;

 

   

changes in the mix between direct versus indirect sales;

 

   

the timing and amount of revenue recognized and deferred;

 

   

excess inventory levels or purchase commitments as a result of changes in demand forecasts or last time buy purchases;

 

   

write-downs due to excess and obsolete inventory;

 

   

possible product and software defects and related increased warranty or repair costs;

 

   

expenses relating to licensed technology;

 

   

inventory stocking requirements to support new product introductions; and

 

   

product quality and service ability issues.

Due to such factors, gross margins are subject to variation from period to period and are difficult to predict. If we are unable to manage these factors effectively, our gross margins may decline, and fluctuations in gross margin may make it difficult to manage our business and achieve or maintain profitability, which could materially harm our business and operating results.

Ineffective management of our inventory levels could adversely affect our operating results.

If we are unable to properly forecast, monitor, control, and manage our inventory and maintain appropriate inventory levels and mix of products to support our customers’ needs, we may incur increased and unexpected costs associated with our inventory. Sales of our products are generally made through individual purchase orders and some of our customers place large orders with short lead times, which make it difficult to predict demand for our products and the level of inventory that we need to maintain to satisfy customer demand. If we build our inventory in anticipation of future demand that does not materialize, or if a customer cancels or postpones outstanding orders, we could experience an unanticipated increase in levels of our finished products. For some customers, even if we are not contractually obligated to accept returned products, we may determine that it is in our best interest to accept returns in order to maintain good relationships with those customers. Product returns would increase our inventory and reduce our revenue. If we are unable to sell our inventory in a timely manner, we could incur additional carrying costs, reduced inventory turns, and potential write-downs due to obsolescence.

Alternatively, we could carry insufficient inventory, and we may not be able to satisfy demand, which could have a material adverse effect on our customer relationships or cause us to lose potential sales.

We have often experienced order changes including delivery delays and fluctuations in order levels from period-to-period, and we expect to continue to experience similar delays and fluctuations in the future, which could result in fluctuations in inventory levels, cash balances, and revenue.

The occurrence of any of these risks could adversely affect our business, operating results, and financial condition.

To the extent we purchase excess or insufficient component inventory in connection with supply allocation or discontinuations by our vendors of components used in our products, our business or operating results may be adversely affected.

It is common in the storage and networking industries for component vendors to discontinue the manufacture of, or experience lack of supply on, certain types of components from time to time due to evolving technologies and changes in market demands. A supplier’s discontinuation or allocation of a particular type of component, such as a specific size of NAND flash memory, may require us to make significant “last time” or higher cost purchases of component inventory that is being discontinued or limited by the vendor to ensure supply continuity until the transition to products based on next generation components or until we are able to secure an alternative supply. To the extent we purchase insufficient component inventory in connection with these discontinuations or allocations, we may experience delayed shipments, order cancellations or otherwise purchase more expensive components to meet customer demand, which could result in reduced gross margins. Alternatively, to the extent we purchase excess component inventory that we cannot use in our products due to obsolescence, we could be required to reduce the carrying value of inventory or be required to sell the components at or below our carrying value, which could reduce our gross margins.

Our operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below expectations.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company, the price of our common stock would likely decline.

 

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Factors that are difficult to predict and that could cause our operating results to fluctuate include:

 

   

the timing and magnitude of orders, shipments, and acceptance of our products in any quarter;

 

   

our ability to control the costs of the components we use in our hardware products;

 

   

our ability to adopt subsequent generations of non-volatile memory components into our hardware products;

 

   

disruption in our supply chains, component availability, and related procurement costs;

 

   

reductions in customers’ budgets for information technology purchases;

 

   

delays in customers’ purchasing cycles or deferments of customers’ product purchases in anticipation of new products or updates from us or our competitors;

 

   

fluctuations in demand and prices for our products;

 

   

changes in industry standards in the data storage industry;

 

   

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

 

   

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

 

   

any change in the competitive dynamics of our markets, including new entrants or discounting of product prices;

 

   

our ability to control costs, including our operating expenses; and

 

   

future accounting pronouncements and changes in accounting policies.

The occurrence of any one of these risks could negatively affect our operating results in any particular quarter, which could cause the price of our common stock to decline.

If our industry experiences declines in average sales prices, it may result in declines in our revenue and gross profit.

The industry for data storage products is highly competitive and has historically been characterized by declines in average sales prices. It is possible that the market for SSDs could experience similar trends. Our average sales prices could decline due to pricing pressure caused by several factors, including competition, the introduction of competing technologies, overcapacity in the worldwide supply of flash-based or similar memory components, increased manufacturing efficiencies, implementation of new manufacturing processes, and expansion of manufacturing capacity by component suppliers. If we are required to decrease our prices to be competitive and are not able to offset this decrease by increases in volume of sales or the sales of new products with higher margins, our gross margins and operating results could likely be adversely affected.

Developments or improvements in storage system technologies may materially adversely affect the demand for our products.

Significant developments in data storage systems, such as advances in SSDs or improvements in non-volatile memory, may materially and adversely affect our business and prospects in ways we do not currently anticipate. For example, improvements in existing data storage technologies, such as a significant increase in the speed of traditional interfaces for transferring data between storage and a server or the speed of traditional embedded controllers, could emerge as preferred alternative to our products especially if they are sold at lower prices. This could be the case even if such advances do not deliver all of the benefits of our products. Any failure by us to develop new or enhanced technologies or processes, or to react to changes or advances in existing technologies, could materially delay our development and introduction of new products, which could result in the loss of competitiveness of our products, decreased revenue, and a loss of market share to competitors.

We derive a large proportion of our revenue from our SSDs, and a decline in demand for these products would cause our revenue to grow more slowly or to decline.

Our SSDs account for a large proportion of our revenue and will continue to do so for the foreseeable future. As a result, our revenue could be reduced by:

 

   

the failure of our storage class memory products to achieve broad market acceptance;

 

   

any decline or fluctuation in demand for our storage class memory products, whether as a result of product obsolescence, technological change, customer budgetary constraints or other factors;

 

   

the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, these products; and

 

   

our inability to release enhanced versions of our products, including any related software, on a timely basis.

If the storage markets grow more slowly than anticipated or if demand for our products declines, we may not be able to increase our revenue sufficiently to achieve and maintain profitability and our stock price would decline.

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. It has been reported in the press recently that manufacturers of personal computers are experiencing substantially lower sales and sales of tablets that are used as personal computing devices. A decline or significant shortfall in demand in any one of the computing 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.

 

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We encounter long sales and implementation cycles in the enterprise class SSD market, which could have an adverse effect on the size, timing and predictability of our revenues.

Potential or existing customers, particularly larger enterprise customers, generally commit significant resources to an evaluation of available products and require us to expend substantial time, effort and money educating them as to the value of our products and software. Accordingly, sales of our enterprise SSDs often require an extensive education and marketing effort.

We could expend significant funds and resources during a sales cycle and ultimately fail to win the customer. Our sales cycle for all of our products is subject to significant risks and delays over which we have little or no control, including:

 

   

our customers’ budgetary constraints;

 

   

the timing of our customers’ budget cycles and approval processes;

 

   

our customers’ willingness to replace their current storage solutions; and

 

   

our need to educate potential customers about the uses and benefits of our products.

If our sales cycles lengthen unexpectedly, they could adversely affect the timing of our revenues or increase costs, which may cause fluctuations in our quarterly revenues and results of operations. Finally, if we are unsuccessful in closing sales of our products after spending significant funds and management resources, our operating margins and results of operations could be adversely impacted, and the price of our common stock could decline

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.

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 revenue 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. In the past, we have had revenue fluctuations in our Indilinx product revenue due to product delays, and similar delays could occur again in the future. 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, our future product development efforts may not result in future profitability or market acceptance.

Our growth strategy includes expanding our presence in the SSD market which is highly competitive.

The SSD market is highly competitive. Certain of our competitors are more diversified than us and may be able to sustain lower operating margins in their SSD business based on the profitability of their other businesses. We expect competition in this market 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 this market. Our growth strategy includes expanding our presence in this market, and we may not be successful in doing so.

 

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The market for enterprise Flash-based SSD products is relatively new and evolving, which makes it difficult to forecast end user adoption rates and customer demand for our products.

The enterprise flash-based SSD market is new and rapidly evolving. As a result, we may encounter risks and uncertainties related to our business and future prospects. It is difficult to predict, with any precision, end user adoption rates, customer demand for our products or the future growth rate and size of this market. The rapidly evolving nature of the markets in which we sell our products, as well as other factors that are beyond our control, reduce our ability to accurately evaluate our future outlook and forecast quarterly or annual performance. Furthermore, our ability to predict future sales is limited and our SSD product may never reach mass adoption.

Our products are highly technical and may contain undetected defects, which could cause data unavailability, loss or corruption that might, in turn, result in liability to our customers and harm to our reputation and business.

Our products are highly technical and complex and are often used to store information critical to our customers’ business operations. Our products may contain undetected errors, defects, or security vulnerabilities that could result in data unavailability, loss, or corruption or other harm to our customers. Some errors in our products may only be discovered after they have been installed and used by customers. Any errors, defects, or security vulnerabilities discovered in our products after commercial release could result in a loss of revenue or delay in revenue recognition, injury to our reputation, a loss of customers or increased service and warranty costs, any of which could adversely affect our business.

Our products must interoperate with operating systems, software applications and hardware that are developed by others and if we are unable to devote the necessary resources to ensure that our products interoperate with such software and hardware, we may fail to increase, or we may lose, market share and we may experience a weakening demand for our products.

Our products must interoperate with our customers’ existing infrastructure, specifically their networks, servers, software, and operating systems, which may be manufactured by a wide variety of vendors and OEMs. When new or updated versions of these software operating systems or applications are introduced, we must sometimes develop updated versions of our software so that our products will interoperate properly. We may not accomplish these development efforts quickly, cost-effectively, or at all. These development efforts require capital investment and the devotion of engineering resources. If we fail to maintain compatibility with these applications, our customers may not be able to adequately utilize the data stored on our products, and we may, among other consequences, fail to increase, or we may lose, market share and experience a weakening in demand for our products, which would adversely affect our business, operating results, and financial condition.

We may be unable to sustain our past growth or manage our future growth, which may have a material adverse effect on our future operating results.

We have experienced significant growth over the last few years. Our future success will depend upon various factors, including market acceptance of our current and future products, competitive conditions, our ability to manage increased sales, if any, the implementation of our growth strategy and our ability to manage our anticipated growth. We intend to finance our anticipated growth through cash flows generated from our sales, borrowings under debt arrangements and future offerings of our securities. However, if our net sales decline, we may not have the cash flow necessary to pursue our growth.

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 that involve numerous risks. If we are not successful in integrating 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. We stopped the manufacture and sale of certain Hypersonic PC products in our fiscal year ended February 28, 2010. On March 25, 2011, we acquired Indilinx Co., Ltd, a privately-held fabless provider of flash controller silicon and software for SSDs, on October 24, 2011, we acquired the UK Design Team of PLX Technology, Inc., a developer of system-on-chip solutions, and on January 9, 2012, we acquired Sanrad Inc., a privately-held provider of flash caching and virtualization software and hardware. Acquisitions or investments expose us to the risks commonly encountered in acquisitions of businesses, including, among others:

 

   

lower than anticipated sales and profitability;

 

   

problems integrating the purchased operations, technologies or products;

 

   

costs associated with the acquisition;

 

   

negative effects on profitability resulting from the acquisition;

 

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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 company’s operations before the acquisition.

Our inability to overcome problems encountered in connection with any acquisition could divert the attention of management from other strategic opportunities and operational matters, 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.

We may make acquisitions that are dilutive to existing stockholders, result in unanticipated accounting charges or otherwise adversely affect our results of operations.

We may grow our business through business mergers and/or other acquisitions of businesses, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. If we make any future acquisitions, we could issue stock that would dilute our stockholders’ percentage ownership, incur substantial debt, reduce our cash reserves or assume contingent liabilities. Furthermore, acquisitions may require material charges and could result in adverse tax consequences, substantial depreciation, deferred compensation charges, in-process research and development charges, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill, any of which could negatively impact our results of operations.

We may not be able to maintain or improve our market share 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 solid state storage maker industry include Fusion-io, Inc., Intel Corporation, SanDisk Corporation, Micron Technology, Inc. (Crucial), SMART Modular Technologies Inc., and STEC, Inc. Our primary competitors in the specialized power supply chassis and cooling manufacturing industry include Antec, Inc., Thermaltake Technology Inc. USA and Enermax Technology Corporation. We currently compete or may compete with, among others, EMC Corporation, Hitachi, Ltd., Seagate Technology, Toshiba, and Western Digital. Our flash caching and virtualization software and hardware primarily competes with products from suppliers of software-hardware solutions, including Fusion IO and other software-hardware solutions being developed by privately held companies.

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 LSI Corporation, 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 customer 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.

We rely on OEMs to select our OEM-focused 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 Ralph Schmitt, our Chief Executive Officer, Rafael Torres, our Chief Financial Officer, Alex Mei, our Chief Marketing Officer, James Viggo Tout, our Senior Vice President of Worldwide Engineering and Vice President and General Manager for OCZ Technology, Ltd., Daryl Lang, our Senior Vice President of Product Management, Wayne Eisenberg, our Senior Vice President of Sales and Jason Ruppert, our Senior Vice President of Operations. 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 we may not 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 have and will continue to incur increased costs as a result of being a U.S. publicly-reporting company.

We have incurred, and will continue to face, increased legal, accounting, administrative and other costs as a result of being a publicly-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 SEC, and the Public Company Accounting Oversight Board, have required changes in the corporate governance practices of public companies. In July 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd Frank Act, was enacted. There are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas. We expect these rules and regulations to increase our legal and financial compliance costs, to make legal, accounting and administrative activities more time-consuming and costly and to result in a diversion of management’s time from our other business activities. 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 publicly-reporting company, we may identify and incur additional overhead costs.

If we fail to maintain an effective system of 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 ended February 28, 2011, we have been 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. For example, our management has concluded that material weaknesses exist in our internal control over financial reporting, and through February 28, 2013, our disclosure controls and procedures were not 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, 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.

Our indemnification obligations to our customers and suppliers for product defects and adverse decisions in lawsuits relating to product performance issues 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.

We have been, and may in the future be, subject to lawsuits from customers and consumers relating to product defects and performance issues. An adverse decision in any such litigation could materially 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.

Net revenue outside of the United States accounted for approximately 63%, 71% and 63% of net revenue in fiscal 2013, 2012 and 2011, respectively. We anticipate that international net revenue will continue to constitute a meaningful percentage of our total net revenue 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

 

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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 those of the United States. 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.

Worldwide economic and political conditions may adversely affect demand for our products.

The recent 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. dollar, 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. dollar 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.

 

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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 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 ours 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 may not be successful in such development or acquisition and necessary licenses may not 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 Union’s 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.

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

 

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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 received information that a distributor in the United Arab Emirates may have re-exported some of our products into Iran and that a distributor in Lebanon may have re-exported our products into Syria. We also discovered that we sent products to persons in Iran and in Cuba (although that person later changed his address to one in Mexico) and provided sales support materials for a presentation in Iran. 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. We have terminated our relationships with these distributors. While we attempt to ensure that our distributors comply with applicable law, their actions are not within our complete control, and there are risks that our products may be re-exported to certain jurisdictions in contravention of our requirements or instructions in the future.

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 management’s attention and resources and an increase in professional fees.

Changes in the applicable tax laws could materially affect our future results.

We operate in different countries and are subject to taxation in different jurisdictions. Changes in the applicable tax laws of such jurisdictions or the interpretations of such tax laws could increase our effective tax rate and adversely affect our after-tax profitability.

Risks Related to Our Debt

We are not in compliance with the covenants of our outstanding indebtedness, and if those lenders were to declare an event of default and accelerate the repayment of that indebtedness, our business and financial position could be materially adversely affected.

Our credit agreements and other loan documents include material debt service costs, operating ratios that we 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. We are currently not in compliance with certain of our lending covenants, including certain minimum operating ratios. We may not be able to obtain a waiver for non-compliance and comply with these covenants in the future. If we do not obtain a waiver and maintain future compliance with the covenants in our credit agreements and other loan documents, the lenders could declare a default. Any default under our credit agreements will allow the lenders under these agreements the option to demand repayment of the indebtedness outstanding under the applicable credit agreements and to foreclose on our assets that have been pledged as collateral under the applicable agreement.

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 substantial indebtedness outstanding under a credit facility from Hercules Technology Growth Capital, Inc. and borrowings from investors pursuant to senior secured convertible debentures, which are subordinated to the Hercules credit facility. The terms of the Hercules credit facility and of the senior convertible debentures are described under “Management’s Discussion and Analysis of Results of Operations – Liquidity and Capital Resources.” Pursuant to the terms of our current debt facilities, we are subject to liquidity thresholds and financial covenants and cannot engage in certain transactions, including disposing of certain assets, incurring additional indebtedness, declaring dividends, or acquiring or merging with another entity unless certain conditions are met or unless we receive prior approval from the lenders. If the lenders do not consent to any of these actions or if we are unable to comply with these covenants, we could be prohibited from engaging in transactions which could be beneficial to our business and our stockholders. In addition, the Debentures are redeemable at the option of the holders in the event of a change of control or similar transactions, which could make it more difficult to enter into these types of transactions.

We may incur additional debt in the future, subject to certain limitations contained in our debt instruments.

The degree to which we are leveraged and the restrictions governing our indebtedness, such as a minimum liquidity threshold, could have important consequences including, but not limited to, the following:

 

   

it may limit our ability to service all of our debt obligations;

 

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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.

Historically, we have failed to comply with one or more loan covenants and had to receive waivers from lenders for such non-compliances. We could violate one or more loan covenants in the future. If we are in violation of covenants in the Hercules debt facility or in similar agreements in the future and do not receive a waiver, the lender could choose to accelerate payment on all outstanding loan balances. If we needed to obtain replacement financing, we may not be able to quickly obtain equivalent or suitable replacement financing. 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 may not be able to obtain refinancing on acceptable terms or at all or sell assets on a timely basis, at reasonable prices or at all. 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.

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. In addition, our common stock was listed on the OTCBB since January 14, 2010 and began trading on the Nasdaq Capital Market on April 23, 2010. Accordingly, we have a limited history of public trading of our common stock within the United States. 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 additional securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.

 

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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.

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 on the market price of our stock.

As of February 28, 2013, we had 68,102,890 shares of common stock outstanding, options and restricted stock units to purchase an aggregate of 9,062,800 shares of common stock outstanding, and warrants to purchase an aggregate of 3,457,521 shares of common stock outstanding. On August 13, 2013, we issued $13,098,500 aggregate principal amount of Debentures (which are convertible into shares of our common stock) and the August Warrants to purchase 5,778,750 shares of common stock that are exercisable until August 13, 2018 (and cancelled the warrants issued to Hercules). 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 the conversion price of the Debentures and the exercise price of the August Warrants and our other warrants are subject to adjustment upon certain events. Subject to certain exceptions, the other holders of our common stock could sell substantial amounts of their holdings. 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.

We currently have three effective registration statements pursuant to which the selling stockholders identified in the prospectuses that are part of those registration statements may sell from time to time up to an aggregate of (i) 21,159,510 shares of outstanding common stock and (ii) 4,961,835 shares of common stock issuable upon exercise of outstanding warrants. In addition, we issued 1,775,296 shares of common stock upon the closing of the Sanrad acquisition and have issued 313,286 shares of common stock post-closing in connection with the Sanrad acquisition, most of which may be eligible for resale within six months of January 9, 2012. In connection with the August 2013 sale of the Debentures and August Warrants, we have agreed to register the shares underlying the Debentures and August Warrants with the SEC. Sales by those selling stockholders, especially if in heavy volume and at the same time, could negatively affect our stock price. 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, one or more additional financings or in connection with future acquisitions, which will result in additional dilution and may adversely affect market prices for our common stock.

No prediction can be made as to the precise effect, if any, that sales of shares of our common stock or the availability of such shares for sale will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for our common stock and could impair our ability to raise capital through the sale of our equity securities.

Anti-takeover provisions in our organizational documents and our stockholder rights plan may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.

Our fourth amended and restated 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.

On October 25, 2011, our Board of Directors authorized a stockholder rights plan and declared a dividend of one preferred share purchase right for each share of our common stock outstanding to stockholders of record at the close of business on November 4, 2011. When exercisable, each right will entitle the registered holder to purchase from us one one-hundredth of a share of our Series A Junior Participating Preferred Stock at a price of $35.00, subject to adjustment.

 

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The rights are designed to assure that all of our stockholders receive fair and equal treatment in the event of any proposed takeover of us and to guard against partial tender offers, open market accumulations and other abusive tactics to gain control of us without paying all stockholders a control premium. The rights will cause substantial dilution to a person or group that acquires beneficial ownership of 20% or more of our common stock on terms not approved by our Board of Directors. However, the rights may have the effect of making an acquisition of us, which may be beneficial to our stockholders, more difficult, and the existence of such rights may prevent or reduce the likelihood of a third-party making an offer for an acquisition of us.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

 

ITEM 2. PROPERTIES

Our corporate headquarters are located in San Jose, California, where we lease one building comprising approximately 82,000 square feet. In addition to our executive offices, this facility also includes personnel from engineering, sales, marketing, operations and administration and a warehouse. We lease a building in Taiwan that represents approximately 108,000 square feet primarily for manufacturing and also includes additional research and development and a warehouse. We also lease a number of small facilities in both foreign and domestic locations for additional engineering, marketing, purchasing and sales personnel and for storage that total approximately 42,000 square feet.

We consider each facility to be in good operating condition and adequate for its present use, and believe that each facility has sufficient capacity to meet our current and anticipated operating requirements. We lease the properties under lease terms expiring at various dates through July 2018. If needed, we expect that suitable replacement and additional space will be available in the future on commercially reasonable terms.

 

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ITEM 3. LEGAL PROCEEDINGS

Litigation

We are a party to various legal proceedings related to the on-going operation of our business, including claims both by and against us. At any time, such proceedings typically involve claims related to product liability, contract disputes, wage and hour laws, employment practices, or other actions brought by employees, consumers, competitors, or suppliers. We establish accruals for our potential exposure, as appropriate, for claims against us when losses become probable and reasonably estimable. However, future developments or settlements are uncertain and we may be required to change such accruals as proceedings progress. Resolution of any currently known matters, either individually or in the aggregate, may have a material adverse effect on our financial condition, results of operations or liquidity.

Taiwan Vendor Claim

In July 2010, we received notice that a former vendor had filed legal proceedings in Taiwan demanding payment for materials which we contended were defective. At that time we accrued approximately $1.25 million for this contingency and an additional $0.1 million during the third quarter of fiscal 2011 for potential interest costs. In December 2010, we paid a ‘counter bond’ in cash to the Taoyuan District Court in the amount of $1.28 million for the specific purpose of satisfying OCZ’s obligation under the court order. On April 25, 2011, the Taoyuan District Court found in favor of the former vendor and we were ordered to pay approximately $1.2 million plus interest of approximately $0.2 million. During June 2011, these payments were made to the vendor and the case was formally closed.

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.

Patent Infringement Claim

On September 7, 2011 a complaint for patent infringement was filed by a storage technology company in the United States District Court for the Eastern District of Texas alleging patent infringement against OCZ and eight other companies. We were served with a copy of the complaint on October 26, 2011 and filed six affirmative defenses in response on December 23, 2011. The plaintiff was seeking an injunction and unspecified damages, special damages, interest and compulsory royalty payments. We filed a motion to sever plaintiff’s case against us and to transfer the case to the United States District Court for the Northern District of California. On January 5, 2013, we entered into a SSD patent settlement and license agreement under which we were granted a worldwide, perpetual, irrevocable, non-exclusive and non-transferable, royalty-bearing license in exchange for payments of $200,000 in January 2013, $300,000 in January 2014 and $500,000 in January 2015. In addition, we will pay royalties of 1% of the net sales of SSD products sold in excess of $100 million with the total not to exceed $2 million for each calendar year 2014, 2015, 2016, and 2017. The license will be fully paid after December 2017.

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. The parties have reached an agreement in principle to settle the consolidated class action. The proposed settlement of $7.5 million will be funded by the Company’s D&O liability insurance. The settlement may include an additional payment of the lesser of $6 million or 4% of net proceeds in the event that the Company or any portion of it is sold within six months of an executed settlement agreement. The settlement is subject to negotiation of final documentation and court approval. There can be no assurance that the settlement will be approved by the Court.

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.

 

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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 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 Securities and Exchange Commission (“SEC”) informed us that it is conducting an investigation of OCZ. In connection with this investigation, we have received subpoenas requesting that we produce certain documents relating to, among other things, our historical financial statements. We are cooperating fully with the SEC’s investigation.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY. RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

From June 21, 2006 through April 1, 2009, our common stock was traded on the Alternative Investment Market (“AIM”) of the London Stock Exchange under the symbol “OCZ.” From April 2, 2009 to January 13, 2010, our common stock was not publicly traded. On January 14, 2010 our common stock was listed on the Over-the-Counter Bulletin Board (“OTCBB”) and was traded on the OTCBB from February 10, 2010 to April 22, 2010. Since April 23, 2010, our common stock has been quoted on The Nasdaq Capital Market under the symbol “OCZ”. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock for the two most recent fiscal years as reported on NASDAQ.

 

     High      Low  

Fiscal 2013:

     

Fourth quarter

   $ 2.77      $ 1.57  

Third quarter

     5.98        1.11  

Second quarter

     7.67        4.14  

First quarter

     9.09        4.46  

Fiscal 2012:

     

Fourth quarter

   $ 10.05      $ 6.26  

Third quarter

     8.75        4.14  

Second quarter

     10.94        4.84  

First quarter

     10.48        6.25  

The closing sales price for our common stock on September 30, 2013 was $1.30, as reported by The Nasdaq Capital Market.

As of September 30, 2013, there were 70 holders of record of our common stock.

 

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Stock Price Performance Graph

The following graph shows a comparison of cumulative total stockholder return calculated on a dividend reinvested basis, for us, the Nasdaq Composite Index and the Standard & Poor’s 500 Information Technology Sector Index assuming an investment of $100 on February 29, 2008. Periods prior to February 28, 2010 reflect the trading prices of our common stock on the AIM of the London Stock Exchange. No dividends have been declared on our common stock. The graph covers the period from February 28, 2007 to the last trading day of our year ended February 28, 2013. The comparison below are based upon historical data and are not indicative of, nor intended to forecast, the future performance of our common stock.

Comparison Of Cumulative Return From February 29, 2008

Among OCZ Technology Group, Inc., The Nasdaq Composite Index and the S&P 500 Information

Technology Sector Index

 

LOGO

Notwithstanding anything to the contrary set forth in any of our previous filings made under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate future filings made by us under those statutes, the preceding Stock Performance Graph is not to be incorporated by reference into any such prior filings, nor shall such graph be incorporated by reference into any future filings made by us under those statutes.

Dividends

We have not paid any cash dividends on any of our shares to date, and we do not anticipate declaring or paying any cash dividends on our common stock. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will be contingent upon our then existing conditions, operating results, revenues and earnings, if any, contractual restrictions, capital requirements, business prospects and general financial condition, and other factors our Board of Directors may deem relevant. The payment of any dividends will also be subject to the requirements of the Delaware General Corporation Law and certain restrictions contained in the Hercules Loan and Security Agreement. For as long as such agreement remains in effect, we would need the written consent of Hercules before making a cash dividend payment. There are currently no restrictions that materially limit our ability to pay stock dividends, or that we reasonably believe are likely to limit materially the future payment of stock dividends.

Recent Sales of Unregistered Securities

We have sold or issued the following securities that were not registered under the Securities Act during the last fiscal year.

We issued 372,340 unregistered shares for restricted stock units that vested.

 

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Securities Authorized for Issuance under Equity Compensation Plans

The following table provides certain information as of February 28, 2013 with respect to our existing equity compensation plans.

 

Plan category

   Number of  securities
to be issued upon
exercise of
outstanding options and
restricted stock units
     Weighted-average
exercise
price
of outstanding

options 1
     Number of  securities
remaining
available for  future
issuances under
equity compensation
plans
 

Equity compensation plans approved by security holders

     9,062,800       $ 5.19         3,365,888   

Equity compensation plans not approved by security holders

     —          —           —     
  

 

 

    

 

 

    

 

 

 

Total

     9,062,800       $ 5.19         3,365,888   
  

 

 

    

 

 

    

 

 

 

 

1

Based on the weighted-average exercise price of outstanding options only. There are 803,591 restricted stock units outstanding, as of February 28, 2013 that do not have an exercise price, each unit of which represents a contingent right to receive one share of common stock upon vesting.

 

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the consolidated financial statements and related notes thereto appearing elsewhere in this annual report on Form 10-K. We have derived the Consolidated Statement of Operations data for fiscal 2013, 2012 and 2011 and consolidated balance sheet data as of February 28, 2103 and February 29, 2012 from audited consolidated financial statements included elsewhere in this report. The consolidated statements of operations and consolidated balance sheet data for the years ended February 28/29, 2012 and 2011 have been restated to reflect adjustments to our financial statements as described in the “Explanatory Note” in the beginning of this Amendment, under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, and in Note 2, Restatements of Previously-Issued Financial Statements in the notes to consolidated financial statements under Item 8. Financial Statements and Supplementary Data. You should read the following selected consolidated financial data with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our consolidated financial statements and the notes to consolidated financial statements, which are included in this Annual Report on Form 10-K.

SELECTED CONSOLIDATED FINANCIAL DATA

 

                                                                                                     
     Years Ended February 28/29,  
     2013     2012     2011     2010     2009     2008  
           Restated (2)     Restated (2)     Restated (2)     Restated (2)     Restated (2)  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

            

Net revenue

   $ 333,964      $ 310,160      $ 180,628      $ 137,695      $ 155,372      $ 118,108   

Gross profit (loss)

     (36,519     12,210        10,077        10,290        15,100        21,489   

Total operating expenses

     97,323        131,371        30,236        25,612        25,994        20,955   

Income (loss) from operations

     (133,842     (119,161     (20,159     (15,322     (10,894     534   

Net income (loss)

     (125,786     (123,452     (33,186     (16,310     (11,724     1,437   

Net income (loss) per common share, basic and diluted

   $ (1.86   $ (2.43   $ (1.16   $ (0.77   $ (0.56   $ 0.07   

 

                                                                                                     
     As of February 28/29,  
     2013     2012     2011     2010     2009     2008  
           Restated (2)     Restated (2)     Restated (2)     Restated (2)     Restated (2)  
     (In thousands)  

Consolidated Balance Sheet Data:

            

Cash and cash equivalents (1)

   $    12,224      $ 92,049      $   17,514      $ 1,224      $ 420      $ 1,544   

Inventory, net (1)

     32,753         112,133        26,844          13,087        16,787          14,827   

Total assets (1)

     78,830        272,033        85,488        46,786        57,703        52,947   

Total current liabilities

     48,902        124,454        68,949        43,274        38,780        22,649   

Total liabilities

     52,525        137,124        78,366        43,274        38,780        23,149   

Total stockholders’ equity (1)

     26,305        134,909        7,123        3,512        18,923        29,798   

 

(1) The significant increases in this item from fiscal 2011 to 2012 were primarily due to follow-on public equity offerings in April 2011 and February 2012 which provided $194.3 million of net proceeds.
(2) The following tables include a reconciliation of previously-filed amounts to these restated amounts:

 

     As of and for the Years Ended February 28/29,  
     2012     2011  
     As Filed     Effect of
Restatement
    Restated     As Filed     Effect of
Restatement
    Restated  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

            

Net revenue

   $ 365,774      $ (55,614   $ 310,160      $ 190,116      $ (9,488   $ 180,628   

Gross profit (loss)

     82,436        (70,226     12,210        24,154        (14,077     10,077   

Total operating expenses

     94,373        36,998        131,371        41,154        (10,918     30,236   

Loss from operations

     (11,937     (107,224     (119,161     (17,000     (3,159     (20,159

Net income (loss)

     (17,667     (105,785     (123,452     (30,027     (3,159     (33,186

Net income (loss) per common share, basic and diluted

   $ (0.35   $ (2.08   $ (2.43   $ (1.05   $ (0.11   $ (1.16

Consolidated Balance Sheet Data:

            

Cash and cash equivalents (1)

   $ 92,339      $ (290   $ 92,049      $ 17,514      $ —        $ 17,514   

Inventory, net (1)

     108,664        3,469        112,133        22,798        4,046        26,844   

Total assets (1)

     358,703        (86,670     272,033        89,269        (3,781     85,488   

Total current liabilities

     100,842        23,612        124,454        66,793        2,155        68,949   

Total liabilities

     112,201        24,923        137,124        76,210        2,155        78,366   

Total stockholders’ equity (1)

     246,502        (111,593     134,909        13,059        (5,935     7,123   

 

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     As of and for the Years Ended February 28/29,  
     2010     2009     2008  
     As Filed     Effect of
Restatement
    Restated     As Filed     Effect of
Restatement
    Restated     As Filed      Effect of
Restatement
    Restated  
     (In thousands, except per share data)  

Consolidated Statements of Operations Data:

                   

Net revenue

   $ 143,959      $ (6,264   $ 137,695      $ 155,982      $ (610   $ 155,372      $ 118,352       $ (244   $ 118,108   

Gross profit (loss)

     18,656        (8,366     10,290        19,791        (4,691     15,100        22,933         (1,444     21,489   

Total operating expenses

     31,202        (5,590     25,612        30,685        (4,691     25,994        22,399         (1,444     20,955   

Income (loss) from operations

     (12,546     (2,776     (15,322     (10,894     —          (10,894     534         —          534   

Net income (loss)

     (13,534     (2,776     (16,310     (11,724     —          (11,724     1,437         —          1,437   

Net income (loss) per common share, basic and diluted

   $ (0.64   $ (0.13   $ (0.77   $ (0.56   $ —        $ (0.56   $ 0.07       $ —        $ 0.07   

Consolidated Balance Sheet Data:

                   

Cash and cash equivalents (1)

   $ 1,224      $ —        $ 1,224      $ 420      $ —        $ 420      $ 1,544       $ —        $ 1,544   

Inventory, net (1)

     9,846        3,241        13,087        16,787        —          16,787        14,827         —          14,827   

Total assets (1)

     47,849        (1,063     46,786        57,703        —          57,703        52,947         —          52,947   

Total current liabilities

     41,561        1,713        43,274        38,780        —          38,780        22,649         —          22,649   

Total liabilities

     41,561        1,713        43,274        38,780        —          38,780        23,149         —          23,149   

Total stockholders’ equity (1)

     6,288        (2,776     3,512        18,923        —          18,923        29,798         —          29,798   

 

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The following table sets forth the significant components of the adjustments made to the above Selected Consolidated Financial Data (in thousands):

 

     Revenue
Recognition
    CIP
Credits
    Manufacturing
and Freight
    Goodwill
and
Intangibles
    Inventory
Reserves
    Accruals     Income
Taxes
     Reclassifications     Other     Total
Adjustments
 
     (1)     (2)     (3)     (4)     (5)     (6)     (7)      (8)              
     (In thousands, except per share data)  

As of and for the Year Ended February 29, 2012

                     

Consolidated Statements of Operations Data:

                     

Net revenue

   $ (37,1127   $ (17,529   $ —        $ —        $ —        $ (403   $ —         $ (570   $ —        $ (55,614

Gross profit (loss)

     (14,132     (16,249     (8,426     —          (20,337     (3,310     —           (7,772     —          (70,226

Total operating expenses

     (1,191     (12,183     (9,328     61,852        2,861        —          —           (7,202     2,189  (9)      36,998   

Loss from operations

     (12,941     (4,066     902        (61,852     (23,199     (3,310     —           (569     (2,189 ) (9)      (107,224

Net income (loss)

     (12,941     (4,066     902        (61,852     (23,199     (3,310     870         (0     (2,189 ) (9)      (105,785

Net income (loss) per common share, basic and diluted

   $ (0.25   $ (0.08   $ 0.02      $ (1.22   $ (0.46   $ (0.07   $ 0.02       $ —        $ (0.04   $ (2.08

Consolidated Balance Sheet Data:

                     

Cash and cash equivalents (1)

   $ —        $ —        $ —        $ —        $ —        $ —        $ —         $ (290   $ —          (290

Inventory, net (1)

     28,830        —          1,311        —          (24,133     (2,539     —           —          —          3,469   

Total assets (1)

     2,166        (4,066     1,311        (61,852     (24,133     2,090        1,826         (1,823     (2,188 ) (9)      (86,670

Total current liabilities

     16,268        —          —          —          —          9,650        —           (2,306     —          23,612   

Total liabilities

     16,268        —          —          —          —          9,650        943         (1,938     —          24,923   

Total stockholders’ equity (1)

     (14,102     (4,066     1,311        (61,852     (24,133     (7,560     880         118        (2,189 ) (9)      (111,593

As of and for the Year Ended February 28, 2011

                     

Consolidated Statements of Operations Data:

                     

Net revenue

   $ (1,995   $ (5,631   $ —        $ —        $ —        $ (1,862   $ —         $ —        $ —        $ (9,488

Gross profit (loss)

     (425     (5,631     (5,782     —          (269     (1,970     —           —          —          (14,077

Total operating expenses

     —          (5,631     (5,952     —          665        —          —           —          —          (10,918

Loss from operations

     (425     —          170        —          (934     (1,970     —           —          —          (3,159

Net income (loss)

     (425     —          170        —          (934     (1,970     —             —          (3,159

Net income (loss) per common share, basic and diluted

   $ (0.01   $ —        $ 0.01      $ —        $ (0.03   $ (0.07   $ —         $ —        $ —        $ (0.11

Consolidated Balance Sheet Data:

                     

Inventory, net (1)

   $ 4,571      $ —        $ 409      $ —        $ (934   $ —        $ —         $ —        $ —        $ 4,046   

Total assets (1)

     (1,160     —          409        —          (934     1        —           (2,097     —          (3,781

Total current liabilities

     —          —          —          —          —          4,252        —           (2,097     —          2,155   

Total liabilities

     —          —          —          —          —          4,252        —           (2,097     —          2,155   

Total stockholders’ equity (1)

     (1,160     —          409        —          (934     (4,250     —           —          —          (5,935

As of and for the Year Ended February 28, 2010

                     

Consolidated Statements of Operations Data:

                     

Net revenue

   $ (3,737   $ (931   $ —        $ —        $ —        $ (1,597   $ —         $ —        $ —        $ (6,264

Gross profit (loss)

     (735     (931     (4,420     —          —          (2,280     —           —          —          (8,366

Total operating expenses

     —          (931     (4,659     —          —          —          —           —          —          (5,590

Loss from operations

     (735     —          239        —          —          (2,280     —           —          —          (2,776

Net income (loss)

     (735     —          239        —          —          (2,280     —           —          —          (2,776

Net income (loss) per common share, basic and diluted

   $ (0.03   $ —        $ 0.01      $ —        $ —        $ (0.11   $ —         $ —        $ —        $ (0.13

Consolidated Balance Sheet Data:

                     

Inventory, net (1)

   $ 3,002      $ —        $ 239      $ —        $ —        $ —        $ —         $ —        $ —        $ 3,241   

Total assets (1)

     (734     —          239        —          —          —          —           (568     —          (1,063

Total current liabilities

     —          —          —          —          —          2,281        —           (568     —          1,713   

Total liabilities

     —          —          —          —          —          2,281        —           (568     —          1,713   

Total stockholders’ equity (1)

     (734     —          239        —          —          (2,281     —           —          —          (2,776

As of and for the Year Ended February 28, 2009

                     

Consolidated Statements of Operations Data:

                     

Net revenue

   $ —        $ (610   $ —        $ —        $ —        $ —        $ —         $ —        $ —        $ (610

Gross profit (loss)

     —          (610     (4,081     —          —          —          —           —          —          (4,691

Total operating expenses

     —          (610     (4,081     —          —          —          —           —          —          (4,691

As of and for the Year Ended February 29, 2008

                     

Consolidated Statements of Operations Data:

                     

Net revenue

   $ —        $ (244   $ —        $ —        $ —        $ —        $ —         $ —        $ —        $ (244

Gross profit (loss)

     —          (244     (1,200     —          —          —          —           —          —          (1,444

Total operating expenses

     —          (244     (1,200     —          —          —          —           —          —          (1,444

 

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(1) “Revenue Recognition” represents various transactions that were recognized prior to meeting the revenue recognition criteria. Adjustments were recorded to reverse the original revenue recorded, defer the original revenue recorded or provide reserves against net revenue for future product returns and where applicable, to recognize the revenue in the appropriate period. Also included are adjustments to recognize the reversal of the product cost, which are recorded as reductions of cost of revenue and increases to either inventory or deferred product cost and where applicable, to recognize the cost of revenue in the appropriate period.
(2) “CIP Credits” represent Market Development Funds, rebates and price protection credits. These adjustments were made to record CIP Credits in the correct accounting period and to classify them correctly in our Consolidated Statements of Operations.
(3) “Manufacturing and Freight” represents manufacturing and freight costs that should have been capitalized as a component of product costs but were incorrectly expensed as incurred. Adjustments were made to reduce operating expenses and increase inventory (for products on hand) and cost of revenue (for products shipped).
(4) “Goodwill and Intangibles” represents a write-off of goodwill related to prior acquisitions due to a revision to our estimated enterprise value and a revision to the estimated value of certain intangible assets.
(5) “Inventory Reserves” represents adjustments to reduce the carrying value of certain inventory items that either had been returned from customers or were being used for internal development purposes.
(6) “Accruals” represents accruals for future costs to be incurred primarily for warranty and repair obligations.
(7) “Income Taxes” represents adjustments to reflect the tax impact of the restatement adjustments noted above and to record the appropriate tax provision for each jurisdiction in which we operate.
(8) “Reclassifications” represents the impact of expense reclassifications on prior period financial statements in order to conform to the current year presentation.
(9) Includes the expensing of certain prepaid assets to research and development of $2.1 million and changes in allowances for bad debts of $78k.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with our Consolidated Financial Statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. All statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements and are statements based upon our current expectations, assumptions, estimates and projections about the future. These forward-looking statements involve risk and uncertainties and our actual results regarding the future could differ materially from those indicated as more fully described in “Risk Factors” in item 1A of this Form 10-K. We assume no obligation to update publicly any forward-looking statements.

Overview of Restatements

On October 11, 2012, we filed a Form 12b-25, Notification of Late Filing, with the Securities and Exchange Commission with respect to our Quarterly Report on Form 10-Q for the quarter ended August 31, 2012, due to the time required to conduct an internal assessment of our accounting for customer incentive programs. In August 2012, the Audit Committee of our Board of Directors commenced an internal investigation principally related to the classification of certain customer marketing costs, our timing of revenue recognition and the level of reserves for product returns. In October 2012, the Audit Committee engaged a legal firm to lead an independent investigation into certain accounting practices. In turn, the independent legal firm engaged a forensic accounting firm to provide consulting services in connection with the independent investigation, and during the investigation, special counsel was hired to investigate FCPA compliance. The scope of the independent investigation was determined by the Audit Committee and its legal and accounting advisors. As a result of the internal assessment and the evaluation of the substance of information obtained during the independent investigation, as discussed further below, we concluded that errors had been made in our previously-issued consolidated financial statements. Accordingly, based upon extensive reviews of forensic materials, interviews and analyses of subsequent accounting records, adjustments were made, and our consolidated financial statements as of and for the fiscal years ended February 28/29, 2012 and 2011, as well as the nine interim quarterly periods ended May 31, 2012 are being restated. These adjustments are described below:

 

  a) We entered into programs with many of our customers, which allow them to receive credits for one or more of the following: 1) reimbursement of Market Development Funds, which are negotiated individually or limited by a percentage of customer purchases of our products, 2) rebates, including performance-based incentives and consumer rebates, or 3) price protection credits if the sale price of our products decreases in a future period, subject to limitations. Accruals for these customer incentive programs (“CIP Credits”) were historically recorded at the time of sale or time of commitment based on negotiated terms, historical experience and inventory levels of our customers. Market Development Funds are classified as an operating expense if they have both an identifiable benefit to us and an established fair value; otherwise, they are classified as a reduction of our revenue. In the second and third quarters of fiscal 2013, we received a significant increase in the number of requests from our customers for CIP Credits. In connection with the results of the Investigation, management and our Audit Committee concluded that many of these CIP Credits were the result of the circumvention of established internal controls and were not accounted for correctly. We identified the following issues in recording CIP Credits:

 

  i. Due to management and personnel turnover and a lack of documentary evidence to establish the nature of certain CIP Credits recorded beginning in the third quarter of fiscal 2012, we were not able to determine the financial periods in which those CIP Credits were originally committed to customers. Therefore, for each customer, beginning with the third quarter of fiscal 2012 through the third quarter of fiscal 2013, we allocated these CIP Credits ratably over the periods in which gross revenue was generated.

 

  ii. Historically, we had included in operating expense Market Development Funds reimbursed by us if such costs both had an identifiable benefit to us, and for which we were able to determine fair value. However, in connection with the Investigation, we determined that in substance, a portion of the credits recorded as Market Development Funds represented incentive rebates, volume discounts and price protection adjustments, which had been incorrectly documented as marketing commitments to customers as a result of the circumvention of the established internal controls as discussed above, and which should have been recorded as a reduction of revenue. Consequently, as part of the restatements, we have reclassified all such credits from operating expenses to a reduction of revenue, and recorded certain of these credits ratably over the period in which gross revenue was generated.

Corrections and adjustments for these errors and irregularities accounted for reductions of revenue of $5.6 million, $17.5 million and $15.1 million in the years ended February 28/29, 2011 and 2012 and the first quarter of fiscal 2013, respectively, and reductions of operating expenses of $5.6 million, $12.2 million and $8.0 million in the years ended February 28/29, 2011 and 2012 and the first quarter of fiscal 2013, respectively.

 

  b) Our revenue recognition policy provides for revenue to be recognized upon product shipment, provided certain criteria are met. In connection with the results of the Investigation, we determined that there were some sales that did not meet the criteria for revenue recognition in the period in which the sale had originally been recognized. These sales were primarily related to distributor customers who either were offered return rights, were not able to pay us until they were able to re-sell to their end customers or who required us to perform post-delivery obligations. Consequently, since we had originally recorded these sales as revenue upon shipment, we recorded adjustments to defer these sales, net of the corresponding cost of these sales, as a deferred liability until the criteria for revenue recognition was met. This deferral of revenue accounted for a reduction of revenue of $12.6 million and $12.2 million in fiscal 2012 and the first quarter of fiscal 2013, respectively, and a reduction of cost of revenue of $9.8 million and $9.6 million in fiscal 2012 and the first quarter of fiscal 2013, respectively.

 

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  c) We received a significant increase in product returns from our customers beginning in the second quarter of fiscal 2013. In connection with the results of the Investigation, management and our Audit Committee concluded that due to the amount and product mix of inventory our customers were holding, these sales had not met the criteria for revenue recognition as the fees were not considered to be fixed and determinable at the time of shipment. Consequently, as these sales had been accounted for as revenue in financial periods beginning in the third quarter of fiscal 2012 through the first quarter of fiscal 2013, we reversed the revenue in the period in which the sales had originally been recognized. These reversals accounted for a reduction of revenue and accounts receivable of $6.5 million and $5.3 million in fiscal 2012 and the first quarter of fiscal 2013, respectively, and a reduction in cost of revenue and increase in inventory of $4.9 million and $3.7 million in fiscal 2012 and the first quarter of fiscal 2013, respectively.

 

  d) In connection with the Investigation, we re-evaluated our original estimate of the allowance for product we expected to be returned, and consequently, we increased our allowance for sales returns. This increased estimate for sales returns accounted for reductions of revenue and accounts receivable of $0.5 million, $8.9 million and $3.1 million in fiscal 2011, 2012 and the first quarter of fiscal 2013, respectively, and reductions in cost of revenue and increases in inventory of $0.4 million, $7.1 million and $2.2 million in the same periods, respectively.

 

  e) After recording the adjustments to revenue described above, the cost of revenue exceeded the net revenue recognized for certain sales transactions. In accordance with established accounting guidance, we evaluated whether this negative gross margin might indicate an impairment of existing inventory at each prior financial period. This analysis resulted in increases to cost of revenue and the corresponding inventory reserves of $3.7 million and $6.1 million in fiscal 2012 and the first quarter of fiscal 2013, respectively.

 

  f) Also in connection with the Investigation, we identified a $1.9 million sale to a customer, which we recorded as revenue in the third and fourth quarters of fiscal 2012, that did not meet the criteria for revenue recognition at the time of the original shipment since we did not have sufficient evidence of a persuasive arrangement and collectability was not reasonably assured. In connection with the $1.9 million original sale, $1.2 million and $0.7 million were subsequently recorded as a bad debt expense and an allowance for doubtful accounts in the fourth quarter of fiscal 2012 and the second quarter of fiscal 2013, respectively. As part of the restatements, in the third quarter of 2012, the original $1.9 million sale was reversed, and in the fourth quarter of fiscal 2012, the related $1.2 million bad debt expense was reversed.

In addition to the above errors, in the course of our restatement work, we identified additional errors that were corrected including:

 

  a) Certain manufacturing and freight costs that had been expensed should have been capitalized in inventory. In connection with the restatements, we reduced operating expenses of $6.0 million, $9.3 million and $3.0 million for the years ended February 28/29, 2011 and 2012 and for the three months ended May 31, 2012, respectively. Cost of revenue was increased by $5.8 million, $8.4 million and $2.7 million, and inventory was increased by $0.4 million, $1.3 million and $1.6 million, for the same periods, respectively.

 

  b) Our reserves for excess and obsolete inventory had incorrectly excluded reserves to reduce the carrying value of certain items that had been returned from customers. Further, we had not recognized costs on a timely basis related to inventories used for internal development purposes. Therefore, in connection with the restatements, we increased (decreased) cost of revenue by $0.3 million, $16.6 million and $(1.6) million for the year ended February 28/29, 2011 and 2012 and the three months ended May 31, 2012, respectively. In addition, research and development expenses were increased by $0.7 million, $2.9 million and $0.1 million for the years ended February 28/29, 2011 and 2012 and the three months ended May 31, 2012, and inventory was reduced by $0.9 million, $24.1 million, and $28.8 million as of the end of the same periods, respectively.

 

  c) We noted errors in our calculation of accruals for estimated future warranty and repair obligations. The correction of these errors resulted in higher cost of revenue of $0.1 million, $2.9 million and $0.5 million for the years ended February 28/29, 2011 and 2012 and for the three months ended May 31, 2012, respectively. Further, we recorded reductions of revenue of $1.9 million, $0.4 million and $0.3 million for the same periods, respectively, with corresponding adjustments to accrued warranty liabilities and net inventories.

 

  d) We incorrectly recognized revenue and related cost of revenue upon shipment for certain sales transactions that were determined to be in-transit at the balance sheet date and for which title had not transferred to the customer. We reversed revenue of $1.5 million, $7.0 million and $0.8 million for the years ended February 28/29, 2011 and 2012 and for the three months ended May 31, 2012, respectively, and we reduced (increased) cost of revenue by $1.2 million, $5.2 million and $(0.6) million for the same periods, respectively.

 

  e) We incorrectly classified certain costs of revenue as operating expenses, which caused our gross margins to be overstated. In connection with the restatement, we reclassified $4.2 million and $6.6 million from research and development expenses to cost of revenue for the fiscal year ended February 29, 2012 and for the three months ended May 31, 2012, respectively.

Further, as a result of the above entries, we reassessed the carrying amount of goodwill and determined that an impairment should be recorded as of February 29, 2012. We originally performed our annual impairment test of goodwill as of February 29, 2012, and determined that no impairment existed. However, based upon the errors and related control weaknesses discussed above, and the continued deterioration in our operating results and revenue forecasts, we reperformed our impairment test as of February 29, 2012, and concluded that an impairment charge of $61.9 million should be recorded in the three months ended February 29, 2012, representing a write-off of the entire amount of previously-recorded goodwill. Also as a result of the above entries, our income tax provision was adjusted to reflect the impact of the restatement adjustments noted above and to record the appropriate tax provision for each jurisdiction in which we operate.

 

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For further information related to the restatements, see Note 2 of the Notes to Consolidated Financial Statements.

Management has re-evaluated the effectiveness of our disclosure controls and procedures as of February 28, 2013 and the effectiveness of our internal control over financial reporting as of February 28, 2013 based on the framework in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have determined that material weaknesses in our internal controls existed as of February 28, 2013. For a description of the material weaknesses in internal control over financial reporting and our actions and plans to remediate those material weaknesses, see Part II – Item 9A Controls and Procedures.

Business Overview

OCZ Technology Group, Inc., a Delaware corporation (“OCZ”) was formed in 2002. OCZ is a leader in the design, manufacturing, and distribution of high performance and reliable Solid-State Drives (“SSDs”) and premium computer components. We have built on our expertise in high-speed memory to become a leader in the enterprise and client SSD markets, a technology that competes with traditional rotating magnetic hard disk drives (“HDDs”). SSDs are faster, more reliable, generate less heat and use less power than traditional rotational based HDDs used in personal computers and servers today. OCZ designs and manufactures SSDs in a variety of form factors and interfaces including SATA, SAS, PCIe, as well as offers flash caching and virtualization software to provide a total solution for enterprise clients. In addition to SSD technology, we also offer high performance power management products.

Our corporate headquarters is located in San Jose, California. We have subsidiaries and/or offices located in Canada, Israel, Netherlands, Germany, Taiwan and the United Kingdom. Our fiscal year ends on the last day of February.

Historically, we had focused on developing, manufacturing, and selling high-performance DRAM memory modules and flash drives to computing enthusiasts through catalog and online retail channels. As the market for SSDs began to develop over the last several years, we shifted our focus to serve this emerging market as our primary focus. We believe that our strong R&D foundation in memory and portable flash devices provides a solid R&D platform and natural transition to develop our SSD capabilities, given the technological similarities between product categories. In 2009, we began to implement a strategy to shift our focus towards the emerging SSD market, which has resulted in our revenue mix shifting heavily towards SSDs, which became a majority of our business beginning in 2010. In August 2010, we announced that we planned to deemphasize our legacy memory products by discontinuing certain low margin commodity DRAM module products. By February 28, 2011, the end of our fiscal year 2011, we had discontinued our legacy memory products to focus on SSDs in accordance with our previously announced plans in January 2011. In October 2012, we announced that we planned to streamline our product offerings, including the reduction of our value SSDs for the client market, in order to address the mainstream and high performance client markets, as well as enterprise and OEM solutions. By February 28, 2013, the end of our fiscal year 2013, we had substantially discontinued most of our value SSDs as well as reduced the number of our other product offerings. Throughout this period, we have continued to invest in research and development surrounding a wide array of SSD types and interfaces and developing our own in-house silicon and firmware. Today the vast majority of our high performance client drives, including those in top selling Vertex and Vector families utilize our own in-house designed proprietary Barefoot 3 controller. In addition to our SSD product line, we design, develop, and distribute components including AC/DC switching power supplies that are designed for high performance computing systems, workstations and servers.

We offer our customers flexibility and customization by providing a broad variety of solutions which are interoperable and are designed to enable computers to run faster and more reliably, efficiently, and cost effectively. Through our diversified and global distribution channel, we offer a wide variety of products to our customers, including leading online and offline retailers and OEMs.

We develop flexible and customizable solutions quickly and efficiently to meet the ever changing market needs and we provide superior customer service. We believe our high performance product offerings offer the speed, density, size, and reliability necessary to meet the special demands of:

 

   

mission critical servers and high end workstations;

 

   

industrial equipment and computer systems;

 

   

computer and computer gaming enthusiasts;

 

   

personal computer (“PC”) upgrades to extend the useable life of existing PCs;

 

   

high performance computing and scientific computing;

 

   

video and music editing and content creation;

 

   

mobile computing;

 

   

home theater PCs and digital home convergence products; and

 

   

digital photography and digital image manipulation computers.

As of our fiscal year ended February 28, 2013, we had over 400 customers, most of which are distributors or retailers in 60 countries. 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. Our in-house hardware R&D capabilities include ASIC design and verification, system level design including board design and layout, industrial design and thermal optimization. We also have in-house software R&D which includes NAND flash firmware development, kernel mode device drivers, tools that encompass both manufacturing and end-user manageability, and virtualization and caching software that is offered both standalone and bundled with our SSD hardware for total system solutions.

Acquisition of Sanrad Inc. On January 9, 2012, we acquired Sanrad Inc. (“Sanrad”), a privately-held provider of flash caching and virtualization software and hardware. Total consideration exchanged was comprised of 2.1 million shares of our common stock valued at $16.9 million determined based on the market value of our common stock on the date of closing. Sanrad’s technology enables customers to fully

 

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leverage their flash based storage investments, extending the lifespan of the storage infrastructure and maximizing efficiency of their data centers. The acquisition of Sanrad includes its research and development facilities located in Tel Aviv, Israel and is expected to help accelerate the customer adoption of OCZ’s offerings in the PCIe based flash storage systems.

Assets acquisition from PLX Technology. On October 24, 2011, we completed an acquisition of certain assets from PLX Technology, Inc. (“PLX”). This transaction provided further access to advanced technology in our effort to maintain and expand our market position as a leader in the design, manufacture and distribution of high performance SSDs. Pursuant to the agreement, we obtained a non-exclusive perpetual license related to consumer storage technology, capital equipment and a Design Team, which consisted primarily of approximately 40 engineers located in Abingdon, United Kingdom in exchange for cash consideration of $2.2 million.

Acquisition of Indilinx Co., Ltd. On March 25, 2011, we completed the acquisition of 100% of the equity interests of Indilinx Co., Ltd., (“Indilinx”) a privately-held company organized under the laws of the Republic of Korea. Indilinx’s products and solutions are comprised of advanced SSD controllers, SSD reference designs, and software, which enable the rapid development and deployment of high performance solid state drives. This technology is applicable to a wide range of storage solutions from cost-sensitive consumer devices to performance-optimized systems demanded by mission-critical enterprise applications. The total acquisition consideration of $32.8 million consisted of (i) 4.2 million shares of OCZ common stock with a total fair value of $32.2 million, based on the price of OCZ common stock at the time of close, and (ii) $0.6 million of cash paid to the holders of Indilinx vested and unvested stock options as of the close of the transaction.

Audit Opinion Going Concern Emphasis. As discussed in Note 1 to the consolidated financial statements, we have incurred recurring operating losses and negative cash flows from operating activities since inception through February 28, 2013. In addition, we have an accumulated deficit of $310.7 million as of February 28, 2013. Through February 28, 2013, we have not generated sufficient cash from operations and have relied primarily on the proceeds from equity offerings and debt financing such as increased trade terms from vendors and credit facilities to finance our operations. Moreover, we need to secure one or more additional financings to fund our near-term operations. These matters raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Strategic Alternatives. On August 13, 2013, we announced that we had retained Deustche Bank Securities Inc. to assist the Board of Directors in evaluating various strategic alternatives available to the Company.

For our fiscal years ended February 28, 2013, February 29, 2012, and February 28, 2011, our ten largest customers accounted for 49%, 40% and 50% of net sales, respectively. For fiscal 2013 and fiscal 2012, no customers accounted for more than 10% of our net revenue, and in fiscal 2011, one customer accounted for 17% of our net revenue.

Results of Operations

The following table presents our Consolidated Statements of Operations for Fiscal Years Ended February 28/29, 2013, 2012 and 2011 (in thousands, except per share amounts):

 

     Years Ended February 28/29  
     2013     2012     2011  
           Restated     Restated  

Net revenue

   $ 333,964      $ 310,160      $ 180,628   

Cost of revenue

     370,483        297,950        170,551   
  

 

 

   

 

 

   

 

 

 

Gross profit

     (36,519     12,210        10,077   

Research and development

     40,063        31,635        5,541   

Sales and marketing

     27,738        20,771        11,501   

General and administrative

     25,675        14,267        12,200   

Impairment of goodwill and intangible assets

     2,192        61,890        994   

Acquistion-related charges

     —          2,808        —     

Restructuring charges

     1,655        —          —     
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     97,323        131,371        30,236   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (133,842     (119,161     (20,159

Change in fair value of common stock warrants

     9,857        (4,290     (7,924

Other expense, net

     (654     (132     (1,068

Interest and financing costs

     (1,138     (739     (3,174
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (125,777     (124,322     (32,325

Provision for (benefit from) income taxes

     9        (870     861   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (125,786   $ (123,452   $ (33,186
  

 

 

   

 

 

   

 

 

 

Net loss per share:

      

Basic and diluted

   $ (1.86   $ (2.43   $ (1.16
  

 

 

   

 

 

   

 

 

 

Shares used in net loss per share computation:

      

Basic and diluted

     67,722        50,855        28,689   
  

 

 

   

 

 

   

 

 

 

 

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The following table sets forth our operating results, as a percentage of net revenue for the periods indicated.

 

     Years Ended February 28/29  
     2013     2012     2011  
           Restated     Restated  

Net revenue

     100.0     100.0     100.0

Cost of revenue

     110.9        96.1        94.4   
  

 

 

   

 

 

   

 

 

 

Gross profit

     (10.9     3.9        5.6   

Research and development

     12.0        10.2        3.1   

Sales and marketing

     8.3        6.7        6.4   

General and administrative

     7.7        4.6        6.8   

Impairment of goodwill and intangible assets

     0.7        19.9        0.6   

Acquisition-related charges

     —          0.9        —     

Restructuring charges

     0.5        —          —     
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     29.2        42.3        16.7   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (40.1     (38.4     (11.2

Change in fair value of common stock warrants

     2.9        (1.4     (4.4

Other income (expense), net

     (0.2     —          (0.6

Interest and financing costs

     (0.3     (0.2     (1.8
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (37.7     (40.0     (17.9

Provision for (benefit from) income taxes

     —          (0.2     0.5   
  

 

 

   

 

 

   

 

 

 

Net loss

     (37.7 )%      (39.8 )%      (18.4 )% 
  

 

 

   

 

 

   

 

 

 

Comparison of the Years Ended February 28, 2013 and February 29, 2012

Net Revenue

 

     Years Ended
February 28/29,
        
(dollars in thousands)    2013      2012      Increase (Decrease)  

Net revenue:

          

SSD

   $ 311,043       $ 285,644       $ 25,399        9

Power supplies, memory, other

     22,921         24,516         (1,595     (7 )% 
  

 

 

    

 

 

    

 

 

   

Total net revenue

   $ 333,964       $ 310,160       $ 23,804        8
  

 

 

    

 

 

    

 

 

   

For fiscal 2013, net revenue was $334.0 million, an increase of 8% from the prior year. The increase, in absolute dollars, was primarily related to market acceptance of our SSD products. While unit shipments increased year over year, we experienced a decline in our average selling price (“ASP”) reflecting a significant increase in marketing incentives to customers and increased competition. Revenues from SSD products declined by 31% during the fourth quarter of fiscal 2013, as a result of the shortage of Flash memory world-wide and restricted vendor credit due to the restatement process. We expect the lack of availability of NAND to continue to affect our sales into fiscal 2014. Additionally we experienced a decline in the unit shipments of our power supply products and to a lesser extent, a slight decline in the ASPs of our power supplies.

Changes in revenue by geography and channel generally reflect normal fluctuations in market demand and competitive dynamics. In addition, for fiscal 2013 and 2012, no customers accounted for more than 10% of our net revenue.

In accordance with standard industry practice, we have sales incentive and marketing programs that provide customers with price protection and other incentives or reimbursements that are recorded as a reduction to gross revenue. For both fiscal 2013 and 2012, these programs represented 15% and 10% of gross revenues, respectively. These amounts generally vary according to several factors, including industry conditions, seasonal demand, competitor actions, channel mix and overall availability of product.

 

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Gross Profit

 

     Years Ended
February 28/29,
       
(dollars in thousands)    2013     2012     Decrease  

Gross profit

   $ (36,519   $ 12,210      $ (48,729     (399 )% 
  

 

 

   

 

 

   

 

 

   

Gross margin

     (10.9 )%      3.9    
  

 

 

   

 

 

     

For fiscal 2013, gross profit decreased $48.7 million and decreased as a percentage of revenue to a negative 10.9% compared to the prior-year period of 3.9%. Contributing to the decrease in gross profit was a narrowing of our product margins as we experienced declines in our ASPs in both our client and enterprise product lines and an increase in the cost of NAND flash, which is a major component of our product cost. We also implemented a strategic change by streamlining our product offerings in the third quarter of fiscal 2013. The product streamline steps included the discontinuance of low and negative margin client products in order to focus on mainstream and higher-end client products, as well as the enterprise and OEM solutions. These steps included significant charges to write-down discontinued inventories which impacted our annual gross margin by approximately 11%. Gross profit was also impacted by the write-off of $0.8 million intangible assets in the second quarter of fiscal 2013.

 

     Years Ended
February 28/29,
        
(dollars in thousands)    2013      2012      Increase / (Decrease)  

Operating expenses:

          

Research and development

   $ 40,063       $ 31,635       $ 8,428        27

Sales and marketing

     27,738         20,771         6,967        34   

General and administrative

     25,675         14,267         11,408        80   

Impairment of goodwill and intangible assets

     2,192         61,890         (59,698        ** 

Acquisition related charges

     —           2,808         (2,808     (100

Restructuring charges

     1,655         —           1,655        100   
  

 

 

    

 

 

    

 

 

   

Total operating expenses

   $ 97,323       $ 131,371       $ (34,048     26
  

 

 

    

 

 

    

 

 

   

 

** Not meaningful

Research and development

The increase of $8.4 million in research and development expenses for fiscal year 2013 compared to fiscal 2012 was due to significant incremental investments in product development efforts to address growing market opportunities. Employee compensation and related expenses increased by $11.0 million due to headcount increases, and a full year of expenses related to engineering teams acquired as part of the Indilinx, Sanrad and PLX acquisitions in fiscal 2012. In addition, engineering project costs, including material and tooling costs incurred with the development of product prototypes to develop the technological capabilities necessary to support new product introductions, increased $2.2 million. Research and development-related overhead costs also increased by $2.0 million in fiscal 2013 in order to support the growth in our engineering efforts.

Sales and marketing

The increase of $7.0 million in sales and marketing expenses in fiscal year 2013 compared to 2012 was primarily due to increased salaries and other compensation expense of $4.3 million related to headcount increases to support anticipated growth. In addition, marketing program costs increased $2.3 million primarily for advertising and promotion, marketing materials, and trade shows activities.

General and administrative

The increase of $11.4 million in general and administrative expenses in fiscal year 2013 compared to 2012, was primarily due to a $6.6 million increase in legal, investigative and accounting expenses arising from our internal Investigation, the ongoing SEC investigation, related accounting restatements and shareholder litigation expenses. Also contributing to the increase were higher compensation related costs of $5.6 million, which included increased stock-based compensation charges of $1.5 million related to our efforts to retain employees through our stock incentive programs, as well as a hiring incentive of cash and restricted stock units paid to recruit our new Chief Executive Officer of $1.4 million in October 2012. Additionally, we incurred expenses of $0.9 million to relocate our Taiwan office.

Impairment of goodwill and intangible assets

As of February 29, 2012, we conducted an annual impairment test on goodwill and concluded that an impairment charge of $61.9 million should be recorded in the three months ended February 29, 2012, representing a write-off of the entire amount of

 

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previously-recorded goodwill. We originally performed an annual impairment test of goodwill as of February 29, 2012, and determined that no impairment existed. However, based upon the errors and related control weaknesses described in Note 2 to our consolidated financial statements and the significant operating losses generated and reductions in our revenue forecasts, we reperformed our impairment test as of February 29, 2012, and concluded that the impairment charge should be recorded. In addition, in the fourth quarter of fiscal 2012, an impairment charge of $38,000 was recorded related to the abandonment of an in-process research and development project acquired from Indilinx. In fiscal 2013, we recorded intangible asset impairment charges of $2.2 million related to acquired or licensed intellectual property for which the underlying product line was discontinued.

Acquisition-related charges

We did not enter into any business combinations during fiscal year 2013. During fiscal 2012, we incurred $2.8 million in acquisition-related charges, including $1.7 million related to the acquisition of Indilinx in the first quarter of fiscal 2012, $0.2 million related to the acquisition of certain assets from PLX Technology, Inc. in the third quarter of fiscal 2012 and $0.9 million related to the acquisition of Sanrad in the fourth quarter of fiscal 2012.

Restructuring charges

During the third and fourth quarters of fiscal 2013, we recorded restructuring charges of $1.7 million related to our corporate initiative to make our business more efficient and profitable. Our initiative included streamlining our product offerings and shifting our sales channels towards enterprise and OEM solutions. The restructuring charges included $1.4 million for severance and benefits related to terminating 228 employees, of which, the majority were located at our Korean facility which we are closing. In addition, we recorded a $0.2 million charge for the disposal of fixed assets and $0.1 million for legal and other fees related to the Korean facility closure. No restructuring charges were recorded in fiscal 2012.

Other Income (Expense)

 

     Years Ended
February 28/29,
       
(dollars in thousands)    2013     2012     Increase / (Decrease)  

Other income (expenses):

        

Change in fair value of common stock warrants

   $ 9,857      $ (4,290   $ 14,147        330

Other income (expenses), net

     (654     (132     (522     (396

Interest and financing costs

     (1,138     (739     (399     (54

Other income (expense), net

Other expense, net, increased in fiscal 2013 due to unrealized losses resulting from fluctuations in foreign currency exchange rates.

Interest and financing costs

The increase in interest and financing costs of $0.4 million in fiscal 2013 was primarily due to the timing and amount borrowed, which resulted in higher average balances throughout the year on our credit facility.

Change in fair value of common stock warrant liability

The fluctuations in the change in the common stock warrant liability for fiscal years 2013 and 2012 were due to fluctuations in the trading price of our common stock underlying the common stock warrant instrument.

Provision for (Benefit from) Income Taxes

 

     Years Ended
February 28/29,
       
(dollars in thousands)    2013      2012     Increase  

Provision for (benefit from) income taxes

   $ 9       $ (870   $ 879         121
  

 

 

    

 

 

   

 

 

    

Our income tax provision for fiscal 2013 is comprised of tax provisions for our profitable foreign operations of $0.6 million offset by a change in various deferred tax liabilities of $0.6 million.

Included in the increase of $0.9 million income tax benefit for fiscal 2012 is a $1.3 million tax benefit from the release of valuation allowances on our deferred tax assets (“DTAs”). In connection with our acquisition of Sanrad and Indilinx during fiscal 2012, deferred tax liabilities (“DTLs”) were established related to the acquired identifiable intangible assets. These DTLs exceeded the acquired DTAs by $1.3 million. The excess DTLs allow us to realize a tax benefit by releasing the valuation allowances associated with DTAs previously established from OCZ operations and resulted in an income tax benefit of $1.3 million. The benefit was offset by tax provisions for our profitable foreign operations of $0.5 million.

 

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We anticipate that we will continue to record a valuation allowance against our U.S. deferred tax assets. We expect our future tax provisions, during the time such valuation allowances are recorded, will consist primarily of the tax provision of our profitable non-U.S. jurisdictions. At February 28, 2013, we had federal and state net operating loss carry forwards of approximately $177 million and $127 million, respectively. The Federal and state net operating loss carry forwards expire at various dates from 2033 through 2034.

Our effective tax rate may vary from period to period based on changes in estimated taxable income or loss by jurisdiction, changes to the valuation allowance, changes to U.S. Federal, state or foreign tax laws, future expansion into areas with varying country, state, and local income tax rates, deductibility of certain costs and expenses by jurisdiction.

Comparison of the Years Ended February 29, 2012 and February 28, 2011

Net Revenue

 

     Years Ended
February 28/29,
        
(dollars in thousands)    2012      2011      Increase / (Decrease)  

Revenue:

          

SSD

   $ 285,644       $ 121,441       $ 164,203        135

Power supplies, memory, other

     24,516         59,187         (34,671     (59 )% 
  

 

 

    

 

 

    

 

 

   

Total revenue

   $ 310,160       $ 180,628       $ 129,532        72
  

 

 

    

 

 

    

 

 

   

The increase in consolidated net revenue of $164.2 million, an increase of 135% from fiscal 2011 to fiscal 2012, was primarily due to increased worldwide demand for SSD products. During fiscal 2012, the SSD storage market was characterized by rapid growth and rapid technological advances and OCZ was able to deliver significant new SSD products throughout the year to meet evolving customer needs and requirements for faster, reliable storage capabilities. Power supplies, memory processing, and other revenue decreased in fiscal year ended February 2012 compared to fiscal year ended February 2011 by 59%, as expected, reflecting our decision to discontinue offering legacy memory products and focus strategically on gaining SSD market share.

Gross Profit

 

     Years Ended
February 28/29,
       
(dollars in thousands)    2012     2011     Increase  

Gross profit:

   $ 12,210      $ 10,077      $ 2,133         21
  

 

 

   

 

 

   

 

 

    

Gross margin

     3.9     5.6     
  

 

 

   

 

 

      

The increase in gross profit of $2.1 million, or 21%, from fiscal 2011 to 2012 is directly related to the increase in net revenue of 72% over 2011, the change in product mix towards higher margin enterprise products and our key initiative to purchase the majority of our NAND flash, which accounts for the majority of our product costs, directly from manufacturers rather than on the spot market through brokers contributed to lower cost. However, during fiscal 2012 we incurred significant charges to write-down our inventories which impacted our annual gross margin by approximately 8%

Operating Expenses

 

     Years Ended
February 28/29,
        
(dollars in thousands)    2012      2011      Increase / (Decrease)  

Operating expenses:

           

Research and development

   $ 31,635       $ 5,541       $ 26,094         471

Sales and marketing

     20,771         11,501         9,270         81   

General and administrative

     14,267         12,200         2,067         17   

Impairment of goodwill and intangible assets

     61,890         994         60,896            ** 

Acquisition related charges

     2,808         —           2,808         100   
  

 

 

    

 

 

    

 

 

    

Total operating expenses

   $ 131,371       $ 30,236       $ 101,135         334
  

 

 

    

 

 

    

 

 

    

 

** Not meaningful

Research and development

The increase of $26.1 million in research and development expenses in fiscal 2012 compared to fiscal 2011 was due to increased product development investments to address the expanding market opportunities. Payroll and related expenses increased $13.7 million, which included stock-based compensation of $1.4 million, due to the 2012 acquisitions of Indilinx and Sanrad referred to above, and due

 

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to the addition of approximately 100 research and development positions added in our corporate headquarters in San Jose, California. In addition, we increased investments in engineering project costs of $10.0 million, and other overhead costs of $2.0 million, including depreciation of $0.5 million, to build incremental product features to address the needs of the rapidly evolving market for solid state drives.

Sales and marketing

The increase of $9.3 million in sales and marketing expenses in fiscal 2012 compared to fiscal 2011 was primarily due to increased staffing and related payroll expenses, including commissions of $5.3 million and other direct selling costs of $3.0 million, including shipping costs of $1.8 million associated with the net revenue growth of 72%.

General and administrative

The increase of $2.1 million in general and administrative expenses in fiscal 2012 compared to fiscal 2011, primarily included increased payroll and related expenses associated with additional administrative personnel of $1.4 million, including an increase in stock based compensation in fiscal 2012 related to the higher fair value of stock options granted in fiscal 2012 than in previous years. Legal and professional fees increased by $1.3 million to support the significant company growth. General and administrative expenses for fiscal 2011 included a charge of $1.3 million related to a legal action asserted by a former product supplier.

Impairment of goodwill and intangible assets

As of February 29, 2012, we recorded impairment charges of $61.9 million related to goodwill and certain intangible assets, as described above. In fiscal 2011, we acquired certain assets of Solid Data Systems (“SDS”) and shortly following the acquisition, we determined that a charge should be recorded to impair the value of the goodwill and intangible assets acquired. Accordingly, an impairment charge of $1.0 million was recorded in the third quarter of fiscal 2011.

Acquisition-related charges

During our fiscal year ended February 2012, we incurred $2.8 million in acquisition-related charges, including $1.7 million related to the acquisition of Indilinx in the first quarter of fiscal 2012, $0.9 million related to the acquisition of Sanrad in the fourth quarter of fiscal 2012 and $0.2 million related to the acquisition of certain assets from PLX Technology, Inc. in the third quarter of fiscal 2012. We had no acquisition related charges during fiscal 2011.

Other Income (Expense)

 

     Years Ended
February 28/29,
       
(dollars in thousands)    2012     2011     Decrease  

Other income (expense):

        

Change in fair value of common stock warrants

   $ (4,290   $ (7,924   $ (3,634     (46 )% 

Other income (expense), net

     (132     (1,068     (936     (88

Interest and financing costs

     (739     (3,174     (2,435     (77

Other income (expense), net

The reduction in other income (expense), net, of $0.9 million from fiscal 2011 to fiscal 2012 was due to the write-off of the notes receivable and business investment in BCInet of $1.0 million in fiscal 2011.

Interest and financing costs

The decrease in interest and financing costs of $2.4 million from fiscal 2011 to fiscal 2012 was due to the repayment during the first quarter of fiscal 2012 of our outstanding debt that existed at the end of fiscal 2011 and due to certain loan cancellation fees and borrowing expenses incurred in fiscal 2011 that did not recur in fiscal 2012.

Change in fair value of common stock warrants

The fluctuations in the change in the common stock warrant liability for fiscal years 2012 and 2011 were due to fluctuations in the trading price of our common stock underlying the common stock warrant instrument.

 

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Provision For (Benefit from) Income Taxes

 

     Years Ended
February 28/29,
        
(dollars in thousands)    2012     2011      Increase / (Decrease)  

Provision for (benefit from) income taxes

   $ (870   $ 861       $ (1,731     (201 )% 
  

 

 

   

 

 

    

 

 

   

Included in the $0.9 million income tax benefit for fiscal 2012 is a $1.3 million tax benefit from the release of valuation allowances on our deferred tax assets (“DTAs”). In connection with our acquisition of Sanrad and Indilinx during fiscal 2012, deferred tax liabilities (“DTLs”) were established related to the acquired identifiable intangible assets. These DTLs exceeded the acquired DTAs by $1.3 million. The excess DTLs allow us to realize a tax benefit by releasing the valuation allowances associated with DTAs previously established from OCZ operations and resulted in an income tax benefit of $1.3 million. The benefit was offset by tax provisions for our profitable foreign operations of $0.5 million.

The income tax provision for fiscal 2011 was due primarily to a $0.8 million increase in our valuation allowances for the deferred tax assets due to the uncertainty surrounding the future realization of the potential tax benefit.

Quarterly Results of Operations Data

The following tables set forth our unaudited quarterly consolidated statements of operations for each of the twelve quarters in the period ended February 28, 2013. We have prepared the quarterly consolidated statements of operations data on a basis consistent with the audited consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K, including Note 2, “Restatements of Previously-Issued Financial Statements” and Note 20, “Selected Quarterly Financial Information (Unaudited)”. The information below for the three month periods ended August 31, 2012 and November 30, 2012 has not been included in a previously-filed Quarterly Report on Form 10-Q. The results of historical periods are not necessarily indicative of the results of operations for any future period.

 

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Quarterly Consolidated Statements of Operation for the Fiscal Years Ended February 28/29, 2013, 2012 (as restated) and 2011 (as restated)

 

     Three Months Ended     Three Months Ended     Three Months Ended  
     May 31,
2010
    August 31,
2010
    November 30,
2010
    February 28,
2011
    May 31,
2011
    August 31,
2011
    November 30,
2011
    February 29,
2012
    May 31,
2012
    August 31,
2012
    November 30,
2012
    February 28,
2013
 
     Restated     Restated     Restated     Restated     Restated     Restated     Restated     Restated     Restated                    
                             (In thousands)                          

Net revenue

   $ 34,227      $ 34,821      $ 52,600      $ 58,980      $ 63,968      $ 76,396      $ 87,660      $ 82,137      $ 76,492      $ 88,598      $ 99,202      $ 69,672   

Cost of revenue

     31,519        36,573        49,249        53,211        58,359        69,569        86,649        83,373        84,897        92,667        124,406        68,513   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,708        (1,752     3,351        5,769        5,609        6,828        1,011        (1,237     (8,405     (4,069     (25,204     1,159   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

     863        970        1,188        2,520        3,532        5,970        7,055        15,079        11,805        11,489        8,831        7,938   

Sales and marketing

     2,417        2,753        3,022        3,310        4,157        4,904        5,446        6,264        6,749        8,373        7,160        5,456   

General and administrative

     2,530        3,765        3,148        2,757        3,199        2,744        3,063        5,261        4,423        5,960        7,456        7,836   

Impairment of goodwill and intangible assets

     —          —          994        —          —          —          —          61,890        —          781        1,411        —     

Acquistion-related charges

     —          —          —          —          1,702        —          —          1,106        —          —          —          —     

Restructuring charges

     —          —          —          —          —          —          —          —          —          —          1,475        180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,810        7,488        8,352        8,587        12,590        13,618        15,564        89,600        22,977        26,604        26,333        21,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,102     (9,239     (5,001     (2,818     (6,981     (6,791     (14,553     (90,836     (31,382     (30,673     (51,537     (20,251

Change in fair value of common stock warrant liability

     (899     2,450        (2,788     (6,687     (4,241     5,387        (2,998     (2,438     7,017        (2,084     4,899        25   

Other expense, net

     (3     (8     (101     (956     (75     2        (64     5        (104     (258     (128     (164

Interest and financing costs

     (542     (626     (851     (1,155     (302     (81     (80     (276     (56     (40     (171     (871
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (4,546     (7,423     (8,741     (11,616     (11,599     (1,483     (17,695     (93,545     (24,525     (33,055     (46,936     (21,261

Provision for (benefit from) income taxes

     —          836        25        —          154        267        299        (1,590     (41     124        88        (162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (4,546   $ (8,259   $ (8,766   $ (11,616   $ (11,753   $ (1,750   $ (17,994   $ (91,955   $ (24,484   $ (33,179   $ (47,024   $ (21,099
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As a Percentage of Net Revenue

 

    Three Months Ended     Three Months Ended     Three Months Ended  
    May 31,
2010
    August 31,
2010
    November 30,
2010
    February 28,
2011
    May 31,
2011
    August 31,
2011
    November 30,
2011
    February 29,
2012
    May 31,
2012
    August 31,
2012
    November 30,
2012
    February 28,
2013
 
    Restated     Restated     Restated     Restated     Restated     Restated     Restated     Restated     Restated                    

Net revenue

    100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of revenue

    92.1        105.0        93.6        90.2        91.2        91.1        98.8        101.5        111.0        104.6        125.4        98.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7.9        (5.0     6.4        9.8        8.8        8.9        1.2        (1.5     (11.0     (4.6     (25.4     1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Research and development

    2.5        2.8        2.3        4.3        5.5        7.8        8.0        18.4        15.4        13.0        8.9        11.4   

Sales and marketing

    7.1        7.9        5.7        5.6        6.5        6.4        6.2        7.6        8.8        9.5        7.2        7.8   

General and administrative

    7.4        10.8        6.0        4.7        5.0        3.6        3.5        6.4        5.8        6.7        7.5        11.2   

Impairment of goodwill and intangible assets

    —          —          1.9        —          —          —          —          75.4        —          0.9        1.4        —     

Acquistion-related charges

    —          —          —          —          2.7        —          —          1.3        —          —          —          —     

Restructuring charges

    —          —          —          —          —          —          —          —          —          —          1.5        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    17.0        21.5        15.9        14.6        19.7        17.8        17.8        109.1        30.0        30.0        26.5        30.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (9.1     (26.5     (9.5     (4.8     (10.9     (8.9     (16.6     (110.6     (41.0     (34.6     (52.0     (29.1

Change in fair value of common stock warrant liability

    (2.6     7.0        (5.3     (11.3     (6.6     7.1        (3.4     (3.0     9.2        (2.4     4.9        0.0   

Other income (expense), net

    (0.0     (0.0     (0.2     (1.6     (0.1     0.0        (0.1     0.0        (0.1     (0.3     (0.1     (0.2

Interest and financing costs

    (1.6     (1.8     (1.6     (2.0     (0.5     (0.1     (0.1     (0.3     (0.1     (0.0     (0.2     (1.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (13.3     (21.3     (16.6     (19.7     (18.1     (1.9     (20.2     (113.9     (32.1     (37.3     (47.3     (30.5

Provision for (benefit from) income taxes

    —          2.4        0.1        —          0.3        0.4        0.3