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EX-31.1 - ZCO LIQUIDATING Corpv185858_ex31-1.htm
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EX-32.1 - ZCO LIQUIDATING Corpv185858_ex32-1.htm
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EX-10.33 - ZCO LIQUIDATING Corpv185858_ex10-33.htm
EX-10.31 - ZCO LIQUIDATING Corpv185858_ex10-31.htm
EX-10.32 - ZCO LIQUIDATING Corpv185858_ex10-32.htm

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, 2010
 
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 000-53633
 

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
 

 
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  x    No  ¨
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   x    No   ¨
 
Indicate by check mark 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 or any amendment to this Form 10-K.   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 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
¨
Non-Accelerated Filer
x
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
 
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $14.3 million as of August 31, 2009, the last business day of the Registrant’s most recently completed second fiscal quarter.  This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purpose.
 
21,278,643 shares of the Registrant’s common stock, $0.0025 par value, and 60,990 shares of Registrant’s Series A preferred stock, $0.0025 par value, were outstanding as of the fiscal year ended February 28, 2010.
 
Documents Incorporated By Reference

None.

 
 

 

OCZ Technology Group, Inc.
 
Form 10-K
 
Index

 
Page
Forward Looking Statements
3
Part I
 
Item 1.
Business
3
Item 1A.
Risk Factors
15
Item 1B.
Unresolved Staff Comments
29
Item 2.
Properties
29
Item 3.
Legal Proceedings
30
Item 4.
(Removed and Reserved)
31
Part II
 
Item 5.
Market for Registrant’s Common Equity.  Related Stockholder Matters and Issuer Purchases of Equity Securities
32
Item 6.
Selected Financial Data
36
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
37
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
48
Item 8.
Financial Statements and Supplementary Data
49
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
71
Item 9A(t).
Controls and Procedures
71
Item 9B.
Other Information
72
Part III
 
Item 10.
Directors, Executive Officers and Corporate Governance
73
Item 11.
Executive Compensation
78
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
91
Item 13.
Certain Relationships and Related Transactions, and Director Independence
92
Item 14
Principal Accounting Fees and Services
93
Item 15
Exhibits, Financial Statement Schedules
94
Part IV
 
Signatures
95
 
 
2

 
 
Forward Looking Statements
 
This annual report on Form 10-K, including the following sections, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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.”
 
Part I
 
Item 1.
Business

General

OCZ Technology Group, Inc., a Delaware corporation (“OCZ”) was formed in 2002.  OCZ has two subsidiaries, OCZ Canada, Inc., a Canadian corporation, and OCZ Technology Ireland Limited, an Irish corporation. Unless the context requires otherwise, references in this document to “us” or “we” are to OCZ on a consolidated basis.

Overview
 
We are a leading provider of high performance solid state drives (“SSDs”) and memory modules for computing devices and systems.  Founded in 2002, OCZ is incorporated in Delaware with headquarters in San Jose, California and offices in Canada, the Netherlands, and Taiwan.  Our fiscal year ends on the last day of February.
 
Historically, we primarily sold high performance memory modules to individual computing enthusiasts through catalog and online retail channels.  However, SSDs have emerged as a strong market alternative to conventional disk drive technology and SSDs are rooted in much of the same basic technological concepts as our legacy memory module business.  Today, as part of a diversification strategy which began in fiscal year 2009, our product mix is significantly more weighted toward the sale of SSDs and the SSD product line has become central to our business.  As a result, our target customers are increasingly enterprises and original equipment manufacturers (or “OEMs”).
 
In addition to our SSD and Memory Module product lines, we design, develop, manufacture and distribute other high performance components for computing devices and systems, including thermal management solutions and AC/DC switching power supply units (“PSUs”).  We offer our customers flexibility and customization by providing a broad array of solutions which are interoperable and can be configured alone or in combination to make computers run faster, more reliably, efficiently and cost effectively.  Through our diversified and global distribution channel, we offer more than 450 products to 376 customers, including leading retailers, on-line retailers (“etailers”), OEMs and computer distributors.

 
3

 

Our ten largest customers measured by net revenue for our fiscal year ended February 28, 2010 are listed as follows in alphabetical order:

 
§
Amazon.com;

 
§
ASK Corporation;

 
§
BAS Group;

 
§
D&H Distribution Company;

 
§
Maxcom Memory GmbH;

 
§
Memoryworld GmbH & Co., KG;

 
§
Micro Center Corporation;

 
§
Micro Peripherals LTD;

 
§
NewEgg.com, operated by Magnell Associate Inc.; and

 
§
SYX Distribution, Inc.

These ten customers represented approximately 51% our net revenue for the period set forth above.  Our largest customer is NewEgg.com, which represented approximately 19% of our revenue.  No other customer was responsible for 10% or more of our net revenue.

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

 
§
industrial equipment and computer systems;

 
§
computer and computer gaming and enthusiasts;

 
§
mission critical servers and high end workstations;

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

 
§
high performance computing and scientific computing;

 
§
video and music editing;

 
§
home theatre PCs and digital home convergence products; and

 
§
digital photography and digital image manipulation computers.

We perform the majority of our research and development efforts in-house, which increases communication and collaboration between design teams, streamlines the development process and reduces time-to-market.

 
4

 
 
We commenced operations in 2002 and shares of our common stock began trading on the Alternative Investment Market (“AIM”) of the London Stock Exchange in June 2006.  On April 28, 2006, we amended our certificate of incorporation to, among other matters, affect a 3-for-1 forward stock split.  In May 2007, we acquired PC Power and Cooling, Inc., a privately-held manufacturer of PSUs that was based in San Diego, California.  We now offer both PC Power and Cooling, Inc. and OCZ branded PSUs.  In October 2007, we acquired substantially all of the assets of Silicon Data Inc., doing business as Hypersonic PC Systems, a privately-held manufacturer of high performance gaming PCs and laptops aimed at the computer gaming community that was based in Great Neck, New York.  In March 2009, we amended our certificate of incorporation primarily to increase the number of authorized shares and eliminate a number of provisions which required us to comply with various United Kingdom laws in the case of, among other things, takeovers and tender offers.  On April 1, 2009, following appropriate stockholder approval, we voluntarily delisted our common stock from trading on AIM.  From January 14, 2010 to April 22, 2010 our common stock was quoted on the Over-the-Counter Bulletin Board (“OTCBB”).  Since April 23, 2010, our common stock has been quoted on The NASDAQ Capital Market.
 
Currently, our products are purchased by 376 customers, most of which are distributors or etailers in 69 countries.  For our fiscal years ended February 28, 2010, February 28, 2009 and February 29, 2008, our net sales were $144 million, $156 million and $118.3 million, respectively, and our net income (loss) was $(13.5) million, $(11.7) million and $1.4 million, respectively.
 
In September 2009, we sold all inventory, patents and other assets related to our Neural Impulse Actuator product line to BCInet, Inc., a Delaware corporation, in exchange for notes with principal amounts in the aggregate of $895,415 and shares of BCInet, Inc.’s Series A preferred stock, representing a 27% equity stake in BCInet, Inc.  Also in September 2009, we amended our certificate of incorporation to affect a 1 for 2.5 reverse stock split.  All share amounts in this report have been adjusted for the effect of this reverse split.
 
Under the terms of our certificate of incorporation with respect to our Series A preferred stock, each share of Series A preferred stock was to be automatically converted into shares of common stock on the sixtieth (60th) trading day following the commencement of trading of our common shares on a public stock exchange, including OTCBB (“Mandatory Conversion”).  The trading of our common shares commenced on OTCBB on February 10, 2010, and the 60th trading day following the commencement of trading was May 4, 2010.  The number of shares of our common stock issued upon Mandatory Conversion was determined by dividing $5.00 by the Denominator Price, which was determined as follows:  If the sixty (60) day per share average closing price of our common stock on such public stock exchange (the “60 Day Average”) is between $3.00 and $5.00, then the Denominator Price will be the 60 Day Average.  Based on the 60 Day Average of $4.86, and after taking into account fractional shares, on May 4, 2010, 60,990 shares of our Series A preferred stock were converted into 62,733 shares of our common stock, and warrants to purchase 140,520 shares of our Series A preferred stock were converted into warrants to purchase 144,541 shares of our common stock.
 
Industry Overview
 
PCs and other industrial and consumer electronics products and systems are increasingly complex and require additional functionality and processing power to allow more effective gaming, high performance computing, scientific computing, video and music editing, virtual home theatres, digital home convergence products, digital photography and digital image manipulation.  As these products and systems increase in complexity, functionality and processing power, demand for high performance components and solutions increases.
 
Anatomy of the Computing Environment
 
A PC is most often considered to be a desktop computer, a laptop computer, or a netbook solution.  PCs are most often utilized by consumers for work and entertainment purposes.  A typical PC contains the following key components:

 
5

 
 
 
1.
Visual Display Unit (Monitor)
2.
Motherboard
3.
Central Processing Unit (CPU)
4.
Memory
5.
Graphics Processing Unit (Video Card)
6.
Power Supply and Chassis
7.
Optical Drive (DVD-ROM, DVD Writer, Blue-Ray)
8.
Storage Drive (Traditional Hard Drive or Solid State Drive)
9.
Keyboard
10.
Mouse

Corporations or “enterprises”, in addition to deploying PCs for individual employee use, perform a substantial amount of computing in “server rooms” housed in local offices or “data centers” where computing resources are consolidated on a regional or global basis.  In both the server room and data center, the computing resources are comprised of high performance servers (which can be thought of as special purpose PCs often comprised of only a motherboard, power supply and memory), storage arrays (banks of independently housed storage drives with a power unit), and other network equipment (infrastructure that facilitates communication between network resources).

PCs are primarily built by OEMs (such as Dell, Lenovo, and HP), valued-added resellers (“VARs”) and technically advanced consumers who prefer to assemble customized systems rather than purchase pre-assembled computers.  PC performance enhancements are often necessary in order to take advantage of the latest applications and increase the useable life of the PC.  Historically, we have been supplying high-performance memory (#4 above) for VARs and after-market installation.  Our product mix is now more heavily weighted toward providing SSDs (#8) and power supply units (#6) for use in PCs and laptops with an increasing emphasis for sales to OEM and enterprise customers.
 
Memory Market
 
Memory is a critical component of electronic products and systems and is used in a wide variety of end markets, such as PCs and other industrial and consumer electronic markets and is a key component in a variety of applications.  As these products and systems increase in complexity, functionality and processing power, they require increasing amounts and densities of memory.  Key drivers of the demand for memory are both the increasing number and variety of electronic products and systems and the increasing amount of memory they require by such electronic products and systems.  Demand for memory is also fueled by a shift toward higher data rates, new operating systems that require higher levels of memory, greater storage content in high-end computing, and higher IT hardware replacement cycle and general corporate IT spending.

 
6

 
 
Memory semiconductors can be divided into two types, volatile and non-volatile memory.  Volatile memory, consisting of Dynamic Random Access Memory (“DRAM”) and Static Random Access Memory (“SRAM”), maintains stored data only when connected to a power source.  Non-volatile memory, consisting principally of flash memory (which are used to make SSDs), is able to maintain stored data even when the power source is removed.
 
Solid State Drives
 
SSDs use flash memory chips, rather than the rotating platters used by hard disk drives (“HDDs”), to store data.  Flash memory is a type of non-volatile memory, meaning that it can continue to store information even when the power is turned off.  It also allows information to be erased and rewritten.  SSDs based on flash memory have a number of unique advantages over conventional hard disk drive technology and represent the next step in the evolution of storage technology:
 
 
§
faster start-up because, unlike HDDs, there is no spinning disk;
 
 
§
at least 10x faster than HDDs, allowing quicker access to the stored data, because no read/write head is required;
 
 
§
high mechanical reliability and durability due to lack of moving parts;
 
 
§
far more resistant to the failure due to shock, high altitude, vibration, humidity, and extreme temperature;
 
 
§
less failure while writing or erasing data, which translates into lower chance of irrecoverable data damage; and
 
 
§
require less power to operate and generate less heat than that of conventional hard disk drives, resulting in decreased power consumption specifically in data centers, which reduces operating costs significantly for data center operators.  The reduced power consumption also makes SSDs ideal for use in laptop computers and appliances where battery life is a consideration.
 
 
Note the numerous mechanical parts included in the traditional hard disk drive shown above on the left picture.  Solid state drives, pictured on the right, have no moving parts.

 
7

 
 
According to International Data Corporation (“IDC”) and Web-Feet Research, Inc., the SSD market grew from approximately $400 million in 2007 to $700 million in 2008.  According to IDC, the SSD market was projected to have grown to $1.1 billion in 2009.  In addition, the SSD market is projected to grow from $1.8 billion in 2010 to $2.8 billion in 2011, to $3.9 billion in 2012 and to $5.3 billion by 2013.  A significant portion of this growth will be driven by penetration of SSDs into the laptop and netbook markets.
 
We believe the advantages of SSD technology are particularly beneficial to at least five distinct market segments:
 
 
§
enterprise storage and video-on-demand (VoD) applications;
 
 
§
military and industrial applications;
 
 
§
servers and workstations;
 
 
§
portable, ULPC and desktop PCs; and
 
 
§
consumer related markets.
 
According to IDC, these market segments are all expected to grow substantially in the near and medium term.
 
Enterprise SSDs
 
The enterprise segment is comprised of high performance servers (a form of specialized computer), storage arrays (banks of independently housed hard drives or SSDs) and network equipment.  Performance is paramount to this segment of the market.  Traditional enterprise storage solutions make use of HDDs, whose ability to input and output data is limited by the maximum speed of about 15,000 RPM with which the disk can rotate.  To work around the speed limitations of HDDs, existing solutions employ complex strategies to speed up access to data on disk such as “striping” or “short-stroke”.  Although such strategies increase the speed with which data can be read from and written to the disk they also reduce the usable capacity of each disk.  Less capacity per disk creates a need for additional disks to achieve a desired total capacity.  SSDs also have faster read and write speeds, at least 10x that of HDDs, according to LaptopAdvisor and Gartner, an independent analysis firm.  Also, while HDDs are highly economic on a cost per amount of storage basis at the time of purchase, the total cost of ownership of an enterprise storage solution is heavily influenced by the power consumption and heat generation.  Without moving parts, SSDs require significant less power to operate compared to HDDs.  This means less heat generation, which in turn means lower power requirement for cooling at the system level.  Reduced power consumption and cooling requirements for the datacenter translate into lower datacenter operating costs.
 
We have focused on gaining market-share within the enterprise segment of the SSD market, which we believe will be the highest margin segment of the market.  Our solutions are designed to address what we believe to be the key challenges enterprises currently face with regard to high performance storage solutions: performance, reliability, power consumption, and cooling requirements.  At this time we believe OCZ, STEC, Toshiba and Fusion I/O are the only vendors currently shipping enterprise-ready SSD products.
 
DRAM
 
DRAM is the most common type of memory semiconductor.  iSuppli Corporation, an independent market research firm, projects DRAM to have a market size of $31.9 billion in 2010, representing more than a 40% increase from the 2009 market size.

 
8

 
 
Flash and Solid State Drive Technology
 
Flash memory is a type of non-volatile memory, meaning that it can continue to store information when the power to a particular device is turned off.  It also allows information to be erased and rewritten.  Flash is the largest segment of the non-volatile memory market according to Web-Feet Research, Inc., an independent research firm.  Many consumers are familiar with a flash technology known as “NAND Flash,” which is typically used in USB “memory sticks,” digital cameras and mobile phones.  Flash drives are increasing in density and capacity and are becoming alternatives to traditional hard disk drives in certain devices such as personal MP3 players.  According to In-Stat, an independent market research firm, worldwide NAND flash revenues are expected to grow at a compound annual growth rate (“CAGR”) of 29.7% during 2007-2012 and to reach $61 billion annually by 2012.
 
Memory Modules
 
Memory modules are compact circuit board assemblies consisting of DRAM or other semiconductor memory devices and related circuitry.  The use of memory modules enables systems to be easily configured with a variety of different levels of memory, thus increasing their flexibility to address multiple price points or applications with a single base system design.  In addition, the use of memory modules provides a relatively easy path for upgradeability of PCs or workstation, a feature of system design that is increasingly required by end users.  To achieve this flexibility and upgradeability, systems are designed to use memory modules as a “daughter card,” reducing the need to include memory devices on the motherboard.  This design structure frees up space on the motherboard and enables a single motherboard to be a common central element for a variety of different systems, resulting in significant cost savings.
 
The market for memory modules includes both standard and specialty modules.  The high volume standard memory module market includes modules that can be sourced from many module suppliers, and are designed to be incorporated into a wide variety of equipment.  These modules employ designs meeting widely used industry specifications and are available with a variety of options to address the needs of multiple users.  Standard memory modules are typically used in desktop PCs and printers and are sold to OEMs and through computer resellers and directly to end users.
 
Specialty memory modules include both custom and application specific modules.  The varying requirements of different electronic systems and the increased number of memory device options have resulted in a market for specialized memory modules that are designed to enhance the performance of a particular system or a set of applications.  These modules are based on DRAM technologies and may include additional control circuitry.  Specialty memory modules are typically sourced from a limited number of suppliers.  Application specific and custom memory modules are used in PCs, mobile computers and workstations for computer gaming, video editing, and generally any area where higher performance and/or reliability is a customer requirement.
 
Opportunity for Manufacturers of Memory Modules
 
As the variety of memory devices available to address specific high-performance applications has expanded, the design and manufacture of memory modules have increasingly become areas of opportunity for independent memory module manufactures such as OCZ.
 
There are two main types of suppliers of memory modules: memory semiconductor manufacturers and independent “third party” memory module manufacturers.  The world’s largest memory semiconductor manufacturers focus on industry standard memory modules for high volume applications such as desktop PCs.  Some independent memory module manufacturers also focus on high volume industry standard applications; however, most independent memory module manufacturers, including OCZ, focus on providing broad product portfolios that cover a variety of type, density, data rate, voltage, packaging and other increasingly complex features.
 
Power Supply Units
 
Power supply units 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.  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 increased power consumption.  According to Databeans, an independent marketing research firm, the global market for power management products for 2009 is estimated at $15.4 billion, and is expected to grow at 10% for 2010.

 
9

 
 
Thermal Management
 
A computer system’s components produce large amounts of heat during operation, including integrated circuits such as central processing units (“CPUs”), chipset and graphics cards, along with hard drives.  This heat must be dissipated in order to keep these components within their safe operating temperatures.  This is done mainly using heat sinks to increase the surface area which dissipates heat, and, separately, fans to speed up the exchange of air heated by the computer parts for cooler ambient air.  According to BCC Research, an independent market research firm, the global market for thermal management technologies increased from approximately $6.8 billion in 2008 to approximately $11.1 billion by 2013, a compound annual growth rate of approximately 10.3%.  Thermal management hardware accounts for more than 80% of the total thermal management market.  The largest end-markets for thermal management technologies in 2007 were the computer industry (57% of total revenues) and telecommunications (16% of total revenue).  By 2013, medical and office electronics are expected to increase to 12% of total revenue, tying the expected telecommunications market.
 
The OCZ Approach
 
We design, develop, manufacture and distribute high performance components for computing devices and systems, including SSDs, other flash memory storage, memory modules, thermal management solutions and PSUs.  We believe our primary competitive advantages arise from how we use our internal research and development team to develop the intellectual property used in our component solutions.  These have enabled us to incorporate advanced functionality and capabilities and to quickly and efficiently develop new component solutions that are optimized for our customers’ requirements.
 
Flexible and Customizable Component Solutions
 
We provide flexible and customizable component solutions to address the specific application needs of our end users.  Our design principles allow us to develop proprietary components to deliver a broad range of products with superior features.  As of our fiscal year ended February 28, 2010 we offered over 450 SKUs including SKUs for memory, SSDs, laptop computers and power supplies.
 
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 test components.
 
Extensive Distribution Channels
 
We have built a diverse and extensive distribution network reaching a wide range of customers in 69 countries.  This network includes traditional retailers and etailers, as well as OEMs, systems integrators and distributors.
 
Strategic Relationship
 
We have engineering and marketing relationships (for example, being a nominated “solutions partner” or “certified supplier”) with certain motherboard manufacturers and integrated circuit manufacturers and chipset/platform providers such as ATI Technologies, Inc., Advanced Micro Devices, Inc., NVIDIA Corporation, DFI USA, MSI Computer Corporation and First International Computer, Inc.  We believe that these relationships enable us to respond to changing consumer needs, to develop product ranges which are compatible with multiple platforms and to develop other products designed to obtain optimum performance from a specific platform.

 
10

 
 
Customer Service
 
We seek to build brand loyalty by offering product warranties, comprehensive return and replacement policies and accessible technical support.  Members of our customer service staff have technical expertise which we believe supports us in maintaining our reputation for technical expertise and attentive customer care.
 
Strategy
 
Our goal is to be a worldwide leader in the design, manufacture and distribution of SSDs and other high performance computer components and solutions. The following are key elements of our strategy:
 
 
§
increase our penetration of the international consumer electronics and OEM markets by expanding our sales and marketing efforts;
 
 
§
expand and broaden our product line by leveraging our technology and design expertise;
 
 
§
build strong supplier relationships with our primary component vendors;
 
 
§
identify new applications and customers for our technology;
 
 
§
increase our manufacturing efficiencies; and
 
 
§
pursue acquisitions of complementary businesses and technologies.
 
Our Products and Services
 
We provide our customers with a variety of advanced technological products, including:
 
Solid State Storage and Other Flash Memory Based Products
 
We design and manufactures flash memory products in a broad variety of forms and capacities.  Our wide range of flash storage products come in a variety of formats and interfaces.  Our SSD products are predominantly used in computers, servers and industrial equipment that require increased speed, lower power consumption and or increased reliability.  Our Solid State storage products are available with a variety of interfaces including PCIe, SATA, PATA, USB, IE 1394, SAS and mini PCIe and in various form factors, including 3.5 inch, 2.5 inch as well as card based and external (pen drive based formats).  We also manufacture Secure Digital (“SD”) cards meant for use primarily in consumer applications, such as digital photography.
 
The following table summarizes certain of our SSDs and other flash product offerings:

Product
 
Density
 
Features
 
Applications
 
MLC- Based Solid State Disk Drives
 
Up to 2TB
 
Low power consumption Read/write speeds up to 1.3GB/s
 
Mobile computing, PCs, RAID controllers
             
SLC-Based Solid State Disk Drives
 
Up to 512GB
 
Low power consumption Read/write speeds up to 1.3GB/s, Lower latency
 
Enterprise, Servers, workstations, storage area networks, high performance computing
             
USB Key Drives
 
128MB -64GB
 
18MB per second read/write
 
Mobile computing, PCs
             
Normal and High Capacity SD and Micro SD Cards
 
128MB-16GB
 
Speeds up to 25Mbs
 
Notebooks, networking, communications, photography
 
 
11

 
 
DRAM Modules
 
We offer a comprehensive lineup of DRAM memory modules utilizing a wide range of DRAM technologies from legacy DDR SDRAM (double data rate synchronous dynamic random access memory) to leading-edge high performance DDR3 SDRAM devices, the evolutionary improvements over DDR SDRAM.  These modules encompass a broad range of form factors and functions including dual in-line memory modules (“DIMMs”), small outline dual in-line memory modules (“SODIMMs”), and very low profile (“VLP”) DIMMs and mini-DIMMs for space-constrained blade server, or 1.75 inch thin computing server, and networking applications.  These memory modules come in configurations of up to 244 pins, which is the number of pins that plug into a motherboard, and densities of up to 8GB.  We also accommodate custom module designs based on specific OEM requirements.  Our modules are tested at-speed on high-end proprietary functional testers utilizing comprehensive test suites, enabling these modules to meet the stringent requirements of our focus markets.
 
The following table summarizes certain of our DRAM memory product offerings:

DDR3
 
Density
 
Speed (MHz)
 
Applications
 
High Speed / Low Latency DIMMs
 
512MB-8GB
 
533-2133Mhz
 
Overclocking, gaming, home theater, 3d modeling and audio/video editing computers and workstations
             
High Speed / Low Latency SODIMMs
 
256MB-4GB
 
533-1600Mhz
 
High performance notebooks, sub-notebooks
             
Industry Standard Unbuffered DIMM
 
256MB-4GB
 
400-1600Mhz
 
PCs
             
Registered DIMMs
 
512MB-8GB
 
400/533/667
 
Servers, workstations, storage area networks, high performance computing
             
Industry Standard SODIMMs
 
256MB-4GB
 
533/667
 
Notebooks, sub-notebooks
 
Power Supply
 
We manufacture power supplies that are designed to power computers and industrial devices while maintaining interoperability, adhering to industry standards and increasing output efficiency through design.  Our power supplies are designed to operate at higher temperatures and under more demanding internal conditions with stricter load regulation than is required under normal circumstances.
 
The following table contains some of our power supply product offerings:

Product
 
Density
 
Features
 
Applications
 
High Wattage Power Supplies
 
Up to 1200 watts
 
50 C operation, 80%+ efficiency and 1% load regulation, multiple formats
 
OEM applications servers, workstations, storage area networks, high performance computing
Low Noise Power Supplies
 
Up to 750 watts
 
Low audible noise
 
Overclocking, PCs and video/audio workstations
             
Modular PSUs
 
Up to 1000 watts
 
Removable reconfigurable cables
 
End-user upgrades, gaming computers and home theater PCs
             
High Efficiency PSUs
 
Up to 1000 watts
 
Green friendly with 85% plus efficiency
 
End-user upgrades, gaming computers and home theater PCs
 
Thermal Management
 
We design, manufacture and sell various computer related thermal management products that sell through substantially the same sales channel as other OCZ products.  These products take advantage of OCZ developed technology and concepts in order to deliver products that our customer base requests or that we believe they will have interest in.

 
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Suppliers
 
We do not have any long term supplier contracts or obligations to purchase raw materials.
 
Manufacturing
 
We believe that one of the keys to our product development and manufacturing is our speed testing and sorting of components, which enables us to grade components and select the highest speed memory, and allows us to sell such memory at premium prices.  Our products are built to our requirements and specifications in our own facilities as well as at several contract-manufacturing facilities in the United States and Taiwan.  In order to maintain quality control, products are tested when they reach the point of final assembly at our premises.  Certain items are purchased from several manufacturers with final assembly, testing and packaging completed in our in-house manufacturing facilities.
 
In September 2007, we established our own testing and manufacturing facilities in Taiwan, followed by the addition, in August 2008, of our own surface mount assembly equipment.  The establishment of our manufacturing facilities has helped improve and expand our ability to manufacture certain key components and products, such as memory modules, in-house.
 
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 high-speed SSDs memory modules, flash technology, power supplies and 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 end users.
 
Our engineering staff continually explores practical applications of new technologies, works closely with our customers and provides services throughout the product life cycle, including architecture definition, 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 $5.3 million, $2.6 million and $1.6 million in the fiscal years ended February 28, 2010, February 28, 2009 and February 29, 2008, respectively.
 
Intellectual Property
 
We attempt to protect our intellectual property rights through a variety of measures, including non-disclosure agreements, trade secrets and to a lesser extent, patents and trademarks.  We have three issued patents in the United States that will expire between 2024 and 2025, and fifteen patent applications pending in the United States.  We expect to file new patent applications where appropriate to protect our proprietary technologies; however, we believe that our continued success depends primarily on factors such as the know-how, technological skills and innovation of our personnel rather than on patent protection.
 
Competition
 
The market for our products is highly competitive, rapidly evolving and subject to new technological developments, changing customer needs and new product introductions.  We compete primarily with large vendors of computer components, and to a lesser extent, large vendors of PCs.  In addition, we also compete with a number of smaller vendors who specialize in the sale of high performance products and computer systems and components.

 
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We believe our principal competitors include:
 
 
§
specialized solid state storage makers such as STEC, Inc., Fusion I/O and Mtron Storage Technology Co., Ltd.;
 
 
§
global technology vendors such as Intel Corporation and Samsung Electronics Co., Ltd.;
 
 
§
specialized memory module and flash product vendors such as Kingston Technology Corporation, SanDisk Corporation, Crucial Technology, the consumer brand of Micron Technology, Inc., and Corsair Memory, Inc.; and
 
 
§
specialized power supply chassis and cooling manufacturers such as Antec, Inc., Thermaltake Technology Inc. USA and Enermax Technology Corporation.
 
We believe that the principal competitive factors in our market 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.  However, most of our competitors have longer operating histories, significantly greater resources and greater name recognition.  They may be able to devote greater resources to the development, promotion and sale of their products than we can, which could allow them to respond more quickly to new technologies and changes in customer needs.
 
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, 2010, we employed 312 full-time employees, of which 202 were in general and administration (including operations, finance, administration, information technology, quality assurance, procurement and materials work), 76 were in research and development, and 34 were in sales and marketing.  Our employees are not represented by any collective bargaining agreements and we have never experienced a work stoppage.  Our employees are located in San Jose and Carlsbad, California; Ontario, Canada; the Netherlands and Taiwan.
 
Environmental Matters
 
Our business involves purchasing finished goods as components from different vendors and then assembly of these components into finished products 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, 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.  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.

 
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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 Business
 
We are subject to the cyclical nature of the markets in which we compete and a continued downturn could adversely affect our business.
 
The markets in which we compete, including SSDs, flash, memory, thermal management 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.  There can be no assurance that our net sales and results of operations will not be materially and adversely affected in the future due to changes in demand from individual customers or cyclical changes in the industries utilizing our products.
 
We have experienced quarterly and annual losses in the past and may experience losses in the future.
 
We have experienced losses on a quarterly and annual basis in the past.  We have expended, and will continue to expend, substantial funds to pursue engineering, research and development projects, enhance sales and marketing efforts and otherwise operate our business.  There can be no assurance that we will be profitable on a quarterly or annual basis in the future.
 
Declines in our average selling prices of DRAM may result in declines in our net sales and gross profit.
 
Our average selling prices may decline due to several factors.  Over the last few years, overcapacity in the DRAM memory component market resulted in significant declines in component prices, which negatively impacted our average selling prices and net sales.  During periods of overcapacity, our net sales may decline if we do not increase unit sales of existing products or fail to introduce and sell new products in quantities sufficient to offset declines in selling prices.  Our efforts to increase unit sales, reduce costs and develop new products to offset the impact of further declines in average selling prices may not be successful.  Declines in DRAM prices, which represent a significant component of our memory sales could also (as they have in the past) affect our gross profit and the valuation of our inventory, which could harm our financial results.
 
Declines in average selling prices would enable OEMs to pre-install higher capacity based memory into new systems at existing price points and thereby reduce the demand for future memory upgrades.  Further, our net sales and gross profit may be negatively affected by shifts in our product mix during periods of declining average selling prices.

 
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In addition, the continued transition to smaller design geometries and the use of 300 millimeter wafers by existing memory manufacturers could lead to a significant increase in the worldwide supply of DRAM.  Increases in the worldwide supply of memory components could also result from manufacturing capacity expansions.  If not offset by increases in demand, these increases would likely lead to further declines in the average selling prices of our products and have a material adverse effect on our business, financial condition and results of operations.  Furthermore, even if supply remains constant, if demand were to decrease, it would harm our average selling prices.
 
Sales to a limited number of customers represent a significant portion of our net sales, and the loss of any key customer would materially harm our business.
 
Our dependence on a limited number of customers means that the loss of a major customer or any reduction in orders by a major customer would materially reduce our net sales and adversely affect our results of operations.  We expect that sales to relatively few customers will continue to account for a significant percentage of our net sales for the foreseeable future.  However, there can be no assurance that any of these customers or any of our other customers will continue to utilize our products at current levels, if at all.  We have no firm, long-term volume commitments from any of our major customers and we generally enter into individual purchase orders with our customers, in certain cases under master agreements that govern the terms and conditions of the relationship.  We have experienced cancellations of orders and fluctuations in order levels from period to period and expect that we will continue to experience such cancellations and fluctuations in the future.  Customer purchase orders may be cancelled and order volume levels can be changed, cancelled or delayed with limited or no penalties.  The replacement of cancelled, delayed or reduced purchase orders with new orders cannot be assured.
 
For our fiscal years ended February 28, 2010, February 28, 2009 and February 29, 2008, our ten largest customers accounted for 51%, 49% and 47% of net sales, respectively.  For our fiscal years ended February 28, 2010, February 28, 2009 and February 29, 2008, NewEgg accounted for 19%, 19% and 12% of our net sales, respectively.  During these periods, no other customers accounted for more than 10% of our net sales.
 
If a standardized memory solution which addresses the demands of our customers is developed, our net sales and market share may decline.
 
Many of our memory subsystems are specifically designed for our OEM customers’ high performance systems.  In a drive to reduce costs and assure supply of their memory module demand, our OEM customers may endeavor to design JEDEC standard DRAM modules into their new products.  This trend could reduce the demand for our higher priced customized memory solutions which in turn would have a negative impact on our financial results. In addition, customers deploying custom memory solutions today may in the future choose to adopt a JEDEC standard, and the adoption of a JEDEC standard module instead of a previously custom module might allow new competitors to participate in a share of our customers’ memory module business.
 
If our OEM customers were to adopt JEDEC standard modules, our future business may be limited to identifying the next generation of high performance memory demands of OEM customers and developing solutions that addresses such demands.  Until fully implemented, this next generation of products may constitute a much smaller market, which may reduce our net sales and market share.
 
Our customers are primarily in the computing markets and fluctuations in demand in these markets may adversely affect sales of our products.
 
Sales of our products are dependent upon demand in the computing markets.  We may experience substantial period-to-period fluctuations in future operating results due to factors affecting the computing markets.  From time to time, these markets have experienced downturns, often in connection with, or in anticipation of, declines in general economic conditions.  A decline or significant shortfall in demand in any one of these markets could have a material adverse effect on the demand for our products and therefore a material adverse effect on our business, financial condition and results of operations.

 
16

 
 
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 customer’s 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.
 
We may be less competitive if we fail to develop new or enhanced products and introduce them in a timely manner.
 
The markets in which we compete are subject to rapid technological change, product obsolescence, frequent new product introductions and enhancements, changes in end-user requirements and evolving industry standards.  Our ability to successfully compete in these markets and to continue to grow our business depends in significant part upon our ability to develop, introduce and sell new and enhanced products on a timely and cost-effective basis, and to anticipate and respond to changing customer requirements.
 
The markets for our products are characterized by frequent transitions in which products rapidly incorporate new features and performance standards.  A failure to develop products with required feature sets or performance standards or a delay as short as a few months in bringing a new product to market could significantly reduce our net sales for a substantial period, which would have a material adverse effect on our business, financial condition and results of operations.
 
We have experienced, and may in the future experience, delays in the development and introduction of new products.  These delays could provide a competitor a first-to-market opportunity and allow a competitor to achieve greater market share.  Defects or errors found in our products after commencement of commercial shipment could result in delays in market acceptance of these products.  Lack of market acceptance for our new products will jeopardize our ability to recoup research and development expenditures, hurt our reputation and harm our business, financial condition and results of operations.  Accordingly, there can be no assurance that our future product development efforts will result in future profitability or market acceptance.

 
17

 
 
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 (“IC”) devices represent a significant majority of our component costs for our memory and SSD products.  We are dependent on a small number of suppliers that supply key components used in the manufacture of our products.  Since we have no long-term supply contracts, there is no assurance that our suppliers will agree to supply the quantities of components we may need to meet our production goals.  Samsung, Toshiba and Intel currently supply substantially all of the IC devices used in our Flash memory products.  Micron, Elpida and PSC (Powerchip) currently supply substantially all of the DRAM IC devices used in our DRAM 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.  While to date neither delayed payment nor component shortages has disrupted our business in a material way, in the future, we may not be able to obtain the materials that we need to fill orders in a timely manner or at competitive prices.  As a result, our reputation could be harmed, we may lose business from our customers, our revenues may decline, and we may lose market share to our competitors.
 
The markets in which we compete are constantly evolving and competitive, and we may not have rights to manufacture and sell certain types of products utilizing emerging formats, or we may be required to pay a royalty to sell products utilizing these formats.
 
The markets in which we compete are constantly undergoing rapid technological change and evolving industry standards.  For example, many consumer devices, such as digital cameras, PDAs and smartphones, are transitioning to emerging flash memory formats, such as the Memory Stick and xD Picture Card formats, which we do not currently manufacture and do not have rights to manufacture, and which could result in a decline in demand, on a relative basis, for other products that we manufacture such as CompactFlash and secured digital USB drives.  If we decide to manufacture products utilizing emerging formats such as those mentioned, we will be required to secure licenses to give us the right to manufacture such products which may not be available at reasonable rates or at all.  If we are not able to supply formats at competitive prices or if we were to have product shortages, our net sales could be adversely impacted and our customers would likely cancel orders or seek other suppliers to replace us.
 
Our growth strategy includes expanding our presence in the SSD and high performance memory markets both of which are highly competitive.
 
SSD and high performance memory markets are highly competitive.  Certain of our competitors are more diversified than us and may be able to sustain lower operating margins in their SSD and high performance memory businesses based on the profitability of their other businesses.  We expect competition in these markets to increase as existing manufacturers introduce new products and process technologies, new manufacturers enter the market, industry-wide production capacity increases and competitors aggressively price products to increase market share.  We only have limited experience competing in these markets. Our growth strategy includes expanding our presence in these markets, and there can be no assurance that we will be successful in doing so.
 
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.

 
18

 
 
Industry consolidation could adversely affect our business by reducing the number of our potential significant customers and increasing our reliance on our existing key customers.
 
Many significant participants in our customers’ industries are merging and consolidating as a result of competitive pressures and we expect this trend to continue.  Consolidation will likely decrease the number of potential significant customers for our products and services.  Fewer significant customers will increase our reliance on key customers and, due to the increased size of these companies, may negatively impact our bargaining position and profit margins.  Consolidation in some of our customers’ industries may result in increased customer concentration and the potential loss of customers.  The loss of, or a reduced role with, key customers due to industry consolidation could negatively impact our business.
 
We may make acquisitions which involve numerous risks.  If we are not successful in integrating the 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.  Any future acquisitions or investments would expose us to the risks commonly encountered in acquisitions of businesses.  Such risks include, 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;
 
 
§
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, 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 combinations 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 competitive position because of the intense competition in the markets we serve.
 
We conduct business in markets characterized by intense competition, rapid technological change, constant price pressures and evolving industry standards.  Our competitors include many large domestic and international companies that have substantially greater financial, technical, marketing, distribution and other resources, broader product lines, lower cost structures, greater brand recognition and longer-standing relationships with customers and suppliers than we do.  As a result, our competitors may be able to respond better to new or emerging technologies or standards and to changes in customer requirements.  Further, some of our competitors are in a better financial and marketing position from which to influence industry acceptance of a particular industry standard or competing technology than we are.  Our competitors may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products at a lower price.

 
19

 
 
We compete against global technology vendors such as Intel Corporation and Samsung Electronics Co., Ltd.  Our primary competitors in the specialized memory module and flash products industry include Kingston Technology, SanDisk, Crucial Memory and Corsair.  Our primary competitors in the solid state storage maker industry include STEC, Fusion I/O and Mtron.  Our primary competitors in the specialized power supply chassis and cooling manufacturing industry include Antec, Inc., Thermaltake Technology Inc. USA and Enermax Technology Corporation.
 
We expect to face competition from existing competitors and new and emerging companies that may enter our existing or future markets with similar or alternative products, which may be less costly or provide additional features.  In the PC market in Asia, we expect to face increasing competition from local competitors such as A-DATA Technology Co., Ltd. and GSkill International Enterprise.  We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally.  In addition, some of our significant suppliers, including Samsung Electronics Co., Ltd., Infineon Technologies AG and Micron Technology, Inc., are also our competitors, many of whom have the ability to manufacture competitive products at lower costs as a result of their higher levels of integration.  Competition may also arise due to the development of cooperative relationships among our current and potential competitors or third parties to increase the ability of their products to address the needs of our prospective customers.  Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.
 
We expect that our competitors will continue to improve the performance of their current products, reduce their prices and introduce new products that may offer greater performance and improved pricing, any of which could cause a decline in sales or loss of market acceptance of our products.  In addition, our competitors may develop enhancements to, or future generations of, competitive products that may render our technology or products obsolete or uncompetitive.
 
The future growth of our OEM-focused products is dependent on achieving design wins into commercially successful OEM systems and the failure to achieve design wins or of OEM customers to incorporate our products in their systems could adversely affect our operating results and prospects.
 
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.
 
Our future success is dependent on our ability to retain key personnel, including our executive officers, and attract qualified personnel.  If we lose the services of these individuals or are unable to attract new talent, our business will be adversely affected.
 
Our future operating results depend in significant part upon the continued contributions of our key technical and senior management personnel, many of whom would be difficult to replace.  We are particularly dependent on the continued service of Ryan M. Petersen, our chief executive officer, Kerry T. Smith, our chief financial officer, and Alex Mei, our chief marketing officer.  Our future operating results also depend in significant part upon our ability to attract, train and retain qualified management, manufacturing and quality assurance, engineering, marketing, sales and support personnel.  We are continually recruiting such personnel.  However, competition for such personnel is intense, and there can be no assurance that we will be successful in attracting, training or retaining such personnel now or in the future.  There may be only a limited number of persons with the requisite skills to serve in these positions and it may be increasingly difficult for us to hire such persons over time.  The loss of any key employee, the failure of any key employee to perform in his or her current position, our inability to attract, train and retain skilled employees as needed or the inability of our officers and key employees to expand, train and manage our employee base could materially and adversely affect our business, financial condition and results of operations.

 
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We have and will continue to incur increased costs as a result of becoming a public reporting company.
 
We have incurred, and will continue to face, increased legal, accounting, administrative and other costs as a result of becoming a reporting company that we did not incur as a private company.  The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission (the “SEC”), and the Public Company Accounting Oversight Board, have required changes in the corporate governance practices of public companies.  We expect these rules and regulations to increase our legal and financial compliance costs and to make legal, accounting and administrative activities more time-consuming and costly.  We have also incurred substantially higher costs to obtain directors’ and officers’ insurance. In addition, as we gain experience with the costs associated with being a reporting company, we may identify and incur additional overhead costs.
 
If we fail to maintain an effective system of internal controls 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 are required to periodically evaluate the effectiveness of the design and operation of our internal controls.  These evaluations may result in the conclusion that enhancements, modifications or changes to our internal controls are necessary or desirable.  While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective.  There are inherent limitations on the effectiveness of internal controls including collusion, management override, and failure of human judgment.  Because of this, control procedures are designed to reduce rather than eliminate business risks.  If we fail to maintain an effective system of internal controls or if management or our independent registered public accounting firm were to discover material weaknesses in our internal controls, we may be unable to produce reliable financial reports or prevent fraud and it could harm our financial condition and results of operations and result in loss of investor confidence and a decline in our share price.
 
Our indemnification obligations to our customers and suppliers for product defects could require us to pay substantial damages.
 
A number of our product sales and product purchase agreements provide that we will defend, indemnify and hold harmless our customers and suppliers from damages and costs which may arise from product warranty claims or claims for injury or damage resulting from defects in our products.  We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not be adequate to cover all or any part of the claims asserted against us.  A successful claim brought against us that is in excess of, or excluded from, our insurance coverage could substantially harm our business, financial condition and results of operations.
 
Our operations in the United States and foreign countries are subject to political and economic risks, which could have a material adverse effect on our business and operating results.
 
Our financial success may be sensitive to adverse changes in general political and economic conditions in the United States such as changes in regulatory requirements, taxes, recession, inflation, unemployment and interest rates.  Such changing conditions could reduce demand in the marketplace for our products or increase the costs involved for us to manufacture our products.
 
Sales outside of the United States accounted for approximately 57% of net sales for the fiscal year ended February 28, 2010.  Sales outside of the United States accounted for approximately 61% and 63% of net sales in fiscal years ended February 28, 2009 and February 29, 2008, respectively.  We anticipate that international sales will continue to constitute a meaningful percentage of our total net sales in future periods.  In addition, a significant portion of our design and manufacturing is performed at our facilities in Taiwan.  As a result, our operations may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, increased price pressure, timing and availability of export licenses, difficulties in accounts receivable collections, difficulties in protecting our intellectual property, natural disasters, difficulties in staffing and managing foreign operations, difficulties in managing distributors, difficulties in obtaining governmental approvals for products that may require certification, restrictions on transfers of funds and other assets of our subsidiaries between jurisdictions, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties, potentially adverse tax consequences and uncertainties relative to regional, political and economic circumstances.

 
21

 
 
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 current economic slowdown in the United States and worldwide has adversely affected and may continue to adversely affect demand for our products.  Another decline in the worldwide computing markets or a future decline in economic conditions or consumer confidence in any significant geographic area would likely decrease the overall demand for our products, which could have a material adverse effect on us.  For example, a decline in economic conditions in China could lead to declining worldwide economic conditions.  If economic conditions decline, whether in China or worldwide, we could be materially adversely affected.
 
The occurrence and threat of terrorist attacks and the consequences of sustained military action in the Middle East have in the past, and may in the future, adversely affect demand for our products.  In addition, terrorist attacks may negatively affect our operations directly or indirectly and such attacks or related armed conflicts may directly impact our physical facilities or those of our suppliers or customers.  Furthermore, these attacks may make travel and the transportation of our products more difficult and more expensive, ultimately affecting our sales.
 
Also as a result of terrorism, the United States has been and may continue to be involved in armed conflicts that could have a further impact on our sales, our supply chain and our ability to deliver products to our customers.  Political and economic instability in some regions of the world could negatively impact our business.  The consequences of armed conflicts are unpredictable and we may not be able to foresee events that could have a material adverse effect on us.
 
More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility to the United States economy and worldwide financial markets.  Any of these occurrences could have a material adverse effect on our business, financial condition and results of operations.
 
Unfavorable currency exchange rate fluctuations could result in our products becoming relatively more expensive to our overseas customers or increase our manufacturing costs, each of which could adversely affect our profitability.
 
Our international sales and our operations in foreign countries make us subject to risks associated with fluctuating currency values and exchange rates.  Because sales of our products have been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country.  Future international activity may result in increased foreign currency denominated sales.  Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international sales or operations may contribute to fluctuations in our results of operations.  In addition, as a result of our foreign sales and operations, we have revenues, costs, assets and liabilities that are denominated in foreign currencies.  Therefore, decreases in the value of the U.S. dollar could result in significant increases in our manufacturing costs that could have a material adverse effect on our business and results of operations.

 
22

 
 
Our worldwide operations could be subject to natural disasters and other business disruptions, which could materially adversely affect our business and increase our costs and expenses.
 
Our worldwide operations could be subject to natural disasters and other business disruptions, which could harm our future revenue and financial condition and increase our costs and expenses.  For example, our corporate headquarters in San Jose, California and our manufacturing facilities in Taiwan are located near major earthquake fault lines.  Taiwan is also subject to typhoons during certain times of the year.  In the event of a major earthquake, typhoon or hurricane, or other natural or manmade disaster, we could experience business interruptions, destruction of facilities and/or loss of life, any of which could materially adversely affect our business and increase our costs and expenses.
 
Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our intellectual property, as well as our ability to operate without infringing the intellectual property of others.
 
We attempt to protect our intellectual property rights through trade secret laws, non-disclosure agreements, confidentiality procedures and employee disclosure and invention assignment agreements.  To a lesser extent, we also protect our intellectual property through patents, trademarks and copyrights.  It is possible that our efforts to protect our intellectual property rights may not:
 
 
§
prevent our competitors from independently developing similar products, duplicating our products or designing around the patents owned by us;
 
 
§
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 cannot assure you that we would be successful in such development or acquisition or that necessary licenses would be available on reasonable terms, or at all.

 
23

 
 
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 regulatory activities of the Occupational Safety and Health Administration, the environmental regulatory activities of the Environmental Protection Agency, the labor regulatory activities of the Equal Employment Opportunity Commission and tax and other regulations by a variety of regulatory authorities in each of the areas in which we conduct business.  We are also subject to regulation in other countries where we conduct business.  In certain jurisdictions, such regulatory requirements may be more stringent than in the United States. We are also subject to a variety of federal and state employment and labors laws and regulations, including the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the WARN Act and other regulations related to working conditions, wage-hour pay, over-time pay, employee benefits, anti-discrimination, and termination of employment.
 
We have voluntarily disclosed potential violations of the Iranian Transaction Regulations and the Export Administration Regulations of the U.S. Department of Treasury, Office of Foreign Assets Control and the U.S. Department of Commerce, Office of Export Enforcement as a result of recently discovered actions by a former employee.
 
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.

 
24

 
 
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.  As a result, our future effective tax rates could be impacted by changes in the applicable tax laws of such jurisdictions or the interpretation of such tax laws.  For example, on May 5, 2009, President Obama and the U.S. Treasury Department proposed changing certain tax rules for U.S. corporations doing business outside the U.S.  The proposed changes would restrict the ability of U.S. corporations to transfer funds between foreign subsidiaries without triggering U.S. income tax, limit the ability of U.S. corporations to deduct expenses attributable to un-repatriated foreign earnings and modify the foreign tax credit rules.  These changes have been proposed to be effective beginning January 1, 2011.  We cannot determine whether these proposals will be enacted into law or what changes, if any, may be made to such proposals prior to their being enacted into law.  Depending on their content, such proposals (if enacted) or other changes in the applicable tax laws could increase our effective tax rate and adversely affect our after-tax profitability.
 
Risks Related to our Debt
 
Our indebtedness could impair our financial condition, harm our ability to operate our business, limit our ability to borrow additional funds or capitalize on acquisition or other business opportunities.
 
We have entered into a Sale of Accounts and Security Agreement with Faunus Group International, Inc, pursuant to which we may factor our foreign receivables up to $10 million in the aggregate (as amended, the “FGI Agreement”).  We have entered into a Loan and Security Agreement with Silicon Valley Bank dated as of July 2009 (as amended, the “SVB Agreement” and collectively with the FGI Agreement, the “Factoring Loan Agreements”) to factor all our domestic receivables up to $10 million in the aggregate.  As of May 10, 2010, the SVB Agreement also caps the aggregate debt under both Factoring Loan Agreements to $17.5 million.  Under the Factoring Loan Agreements we have guaranteed our obligations thereunder and have pledged substantially all of our assets as security.  As of our fiscal year ended February 28, 2010, the outstanding loan balances under the Factoring Loan Agreements were $10.4 million in the aggregate.  Also, 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 this indebtedness, such as a minimum Quick Ratio, (our cash and accounts receivable divided by current liabilities) could have important consequences including, but not limited to, the following:
 
 
§
it may limit our ability to service all of our debt obligations;
 
 
§
it may impair our ability to incur additional indebtedness or obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes;
 
 
§
some of our debt is and will continue to be at variable rates of interest, which may result in higher interest expense in the event of increases in interest rates;
 
 
§
our debt agreements contain, and any agreements to refinance our debt likely will contain, financial and restrictive covenants, and our failure to comply with them may result in an event of default which, if not cured or waived, could have a material adverse effect on us;
 
 
§
our level of indebtedness will increase our vulnerability to general economic downturns and adverse industry conditions;
 
 
§
our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry; and
 
 
§
it may limit our ability to engage in certain transactions or capitalize on acquisition or other business opportunities.

 
25

 
 
The Factoring Loan Agreements also have “material adverse change” provisions that essentially grant the lenders broad discretion in determining whether to accelerate the payment of all amounts due under the Factoring Loan Agreements when adverse events occur with respect to our Company, its business, financial condition, results of operation, assets, liabilities or prospects.  As of November 30, 2008 and February 28, 2009 we failed to comply with one or more loan covenants under the loan agreement with Silicon Valley Bank which was the predecessor to the Factoring Loan Agreements.  We received a waiver from Silicon Valley Bank for such non-compliances.  We cannot assure that we will not violate one or more loan covenants in the future.  As we are in violation of covenants in either of the Factoring Loan Agreements and do not receive a waiver, the lender could choose to accelerate payment on all outstanding loan balances.  There can be no assurance that we would be able to quickly obtain equivalent or suitable replacement financing in this event.  If we are unable to secure alternative sources of funding, such acceleration would have a material adverse impact on our financial condition.
 
To service our debt, we will require cash and we may not be able to generate sufficient cash flow from operations to satisfy these obligations or to refinance these obligations on acceptable terms, or at all.
 
Our ability to generate cash depends on many factors beyond our control.  Our ability to make payments on our debt and to fund working capital requirements, capital expenditures and research and development efforts will depend on our ability to generate cash in the future.  Our historical financial results have been, and we expect our future financial results will be, subject to substantial fluctuation based upon a wide variety of factors, many of which are not within our control including, among others, those described in this section.
 
Unfavorable changes in any of these factors could harm our operating results and our ability to generate cash to service our debt obligations.  If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital.  Also, certain of these actions would require the consent of our lenders.  The terms of our financing agreements contain limitations on our ability to incur debt.  We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, or that additional financing could be obtained on acceptable terms, if at all, or would be permitted under the terms of our various debt instruments then in effect.  Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, would have an adverse effect on our business, financial condition and results of operations.
 
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, 2009 and only recently began trading on The NASDAQ Capital Market on April 23, 2010.  Accordingly, we have an extremely limited history of public trading of our common stock within the United States.  Thus, the market price of our common stock may be subject to wide fluctuations.  If our net sales do not increase or increase less than we anticipate, or if operating or capital expenditures exceed our expectations and cannot be adjusted accordingly, or if some other event adversely affects us, the market price of our common stock could decline.  Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance.  Factors that could cause fluctuations in our stock price may include, among other things:
 
 
§
actual or anticipated variations in quarterly operating results;
 
 
§
changes in financial estimates by us or by any securities analysts who might cover our stock, or our failure to meet the estimates made by securities analysts;
 
 
§
changes in the market valuations of other companies operating in our industry;
 
 
§
announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;
 
 
§
additions or departures of key personnel; and
 
 
§
a general downturn in the stock market.

 
26

 
 
The market price of our stock also might decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us.  In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation.  If we were to become the subject of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.
 
We may experience significant period-to-period quarterly and annual fluctuations in our net sales and operating results, which may result in volatility in our share price.
 
We may experience significant period-to-period fluctuations in our net sales and operating results in the future due to a number of factors and any such variations may cause our share price to fluctuate.  It is likely that in some future period our operating results will be below the expectations of securities analysts or investors.  If this occurs, our share price could drop significantly.
 
A number of factors, in addition to those cited in other risk factors applicable to our business, may contribute to fluctuations in our sales and operating results, including:
 
 
§
the timing and volume of orders from our customers;
 
 
§
the rate of acceptance of our products by our customers, including the acceptance of design wins;
 
 
§
the demand for and life cycles of the products incorporating our products;
 
 
§
the rate of adoption of our products in the end markets we target;
 
 
§
cancellations or deferrals of customer orders in anticipation of new products or product enhancements from us or our competitors or other providers;
 
 
§
changes in product mix; and
 
 
§
the rate at which new markets emerge for products we are currently developing or for which our design expertise can be utilized to develop products for these new markets.
 
The sale of our outstanding common stock and exercise of outstanding warrants and options are not subject to lock-up restrictions and may have an adverse effect of the market price of the our stock.

As of our fiscal year ended February 28, 2010, we had 60,990 shares of Series A preferred stock outstanding (which were converted into 62,733 shares of common stock on May 4, 2010), 21,278,643 shares of common stock outstanding, 2,779,111 options to purchase an aggregate of 2,779,111 shares of common stock outstanding, 140,520 warrants to purchase an aggregate of 140,520 shares of Series A preferred stock outstanding (which were converted into warrants to purchase 144,541 shares of common stock on May 4, 2010) and 142,564 warrants to purchase an aggregate of 142,564 shares of common stock outstanding.  Since only 1,405,199 shares of our common stock are subject to lock-up restrictions, we cannot assure investors that the holders of our stock will not sell substantial amounts of their holdings of our stock.  The sale or even the possibility of sale of such stock or the stock underlying the options and warrants could have an adverse effect on the market price for our securities or on our ability to obtain a future public financing.  If and to the extent that warrants and/or options are exercised, stockholders could be diluted.
 
Future sales of shares could depress our share price.
 
As of our fiscal year ended February 28, 2010, we had 21,278,643 shares of common stock outstanding.  On May 20, 2010 we expect to file a registration statement with the SEC pursuant to which we would register the resale of 5,244,105 shares of common stock, as well as shares issuable upon the exercise of warrants, for a total of 8,338,866 shares of our common stock.  Sales by the Selling Stockholders (as defined in the registration statement) thereunder, 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 or in connection with 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.

 
27

 
 
Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium.
 
Our fourth amended and restated certificate of incorporation (“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.

 
28

 
 
Item 1B.           Unresolved Staff Comments
 
Not Applicable.
 
Item 2.              Properties
 
We lease the following properties:

Property
 
Square Feet
 
Lease Expiration
 
Property Uses
             
6373 San Ignacio Avenue
 
41,000
 
July 31, 2011
 
-Corporate Headquarters
San Jose, California, USA
         
-General, administrative, sales and
marketing office
           
-Research and Development
           
-Warehouse
             
160 Konrad Crescent, Unit #1,
 
3,375
 
June 30, 2010
 
-Sales and marketing office
Markham, Ontario, Canada
         
-Warehouse
             
             
Kleveringweg 23, Unit 6
 
3,229
 
May 31, 2010
 
-Sales and marketing office
             
Delft, The Netherlands
         
-Warehouse
             
             
16F-3, No. 700, Chung Cheng
 
2,334
 
August 31, 2011
 
-Sales and marketing office
Road
         
-Research and Development
Chung Ho City, Taipei County
         
-Purchasing
Taiwan, 235, RoC
           
             
No. 165, Changrong Road,
 
40,920
 
June 15, 2011
 
-Research and Development
Lujhu Township, Taiwan RoC
         
-Manufacturing
           
-Warehouse
             
5995 Avenida Encinas, Suite 101
 
13,031
 
March 31, 2012
 
-Research and Development
Carlsbad, California, USA
         
-Warehouse
 
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.

 
29

 
 
Item 3.              Legal Proceedings
 
We are from time to time involved in legal matters that arise in the normal course of business.  We do not believe that the ultimate resolution of any current matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition and results of operations.
 
In 2009, we received inquiries from the U.S. Department of Commerce and the Federal Bureau of Investigation regarding the potential re-export of our products from the United Arab Emirates into Iran.  We consequently launched an internal investigation performed by outside counsel.  The investigation concluded that while between 2004 and 2008, we maintained a relationship with a distributor in the United Arab Emirates, we have not found any specific facts confirming these suspicions or any information about when such re-exports would have occurred or who may have received the products.  However, we did provide approximately $500 in sales support materials to the distributor in connection with a sales presentation in Iran.  We have terminated our relationship with this distributor.
 
The investigation separately discovered that in 2007 and 2008, in a total of three instances, we sent one of our high speed Reaper memory module products free of charge as either samples or replacement parts to individuals in Iran and an individual who claimed an address in Cuba but subsequently changed the address to one in Mexico.
 
We also have received information that a distributor in Lebanon to whom we sold Neural Impulse Actuators September 2008 may have re-exported one of these units into Syria and in general was interested in distributing our products in Syria, but we have not found specific facts confirming when such re-export would have occurred or who may have received the product.  We have terminated our relationship with this distributor.
 
We have voluntarily disclosed these transactions to the U.S. Department of Commerce and the U.S. Department of the Treasury and have cooperated fully with requests for information from these entities as well as the Federal Bureau of Investigation.  Should the U.S. government allege that we have violated the Iranian Transaction Regulations and/or Export Administration Regulations, the maximum fine for each violation that we could be subject to would be the greater of $250,000 or two times the value of the illegal transaction.  Based on the list price of the products in question, we believe the maximum fine per violation would be $250,000.  We believe, however, there is a good faith basis for leniency if any fines are assessed, given the relatively small number of units and revenue at issue, our full cooperation with the U.S. government and our immediate attention to rectifying the underlying causes of the problems.  As a result of the discovery of these events, we have implemented more stringent export control procedures to prevent inadvertent transfers and retransfers to sanctioned countries.

 
30

 
 
Item 4.              (Removed and Reserved)

 
31

 
 
Part II
 
Item 5.
Market for Registrants 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.” 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.  The quotations below reflect the high and low bid prices for our common stock since May 31, 2007 as reported on AIM, OTCBB and The NASDAQ Capital Market, as applicable.  The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
 
The NASDAQ Capital Market
           
      
High
   
Low
 
2010:
           
Period of April 23 – May 14, 2010
  $ 5.05     $ 3.75  
                 
OTCBB
               
       
High
   
Low
 
2010:
               
Period of March 1 – April 22, 2010
  $ 6.00     $ 3.95  
Period of January 14 – February 28, 2010
  $ 6.25     $ 5.25  
                 
AIM
               
       
High
   
Low
 
2009:
               
Period of March 1 – April 1, 2009
  $ 0.36     $ 0.12  
4th Quarter (February 28, 2009)
  $ 0.51     $ 0.11  
                 
2008:
               
3rd Quarter (November 30, 2008)
  $ 0.65     $ 0.38  
2nd Quarter (August 31, 2008)
  $ 1.25     $ 0.75  
1st Quarter (May 31, 2008)
  $ 1.88     $ 0.90  
2 Month Period Ended February 29, 2008
  $ 2.28     $ 1.48  
                 
2007:
               
4th Quarter (December 31, 2007)
  $ 7.28     $ 2.10  
3rd Quarter (September 30, 2007)
  $ 9.72     $ 6.00  
2nd Quarter (June 30, 2007)
  $ 8.78     $ 5.65  

The closing sales price for our common stock on May 14, 2010 was $4.04, as reported by The NASDAQ Capital Market.

As of our fiscal year ended February 28, 2010 we have approximately 167 stockholders and 130 holders of outstanding options.

 
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As of our fiscal year ended February 28, 2010, 60,990 shares of our Series A preferred stock (which were converted into 62,733 shares of common stock on May 4, 2010), 21,278,643 shares of our common stock, and 2,779,111 shares of our common stock subject to options were issued and outstanding.  In addition, there were warrants to purchase (i) 140,520 shares of our Series A preferred stock at an exercise price of $5.00 per share, and (ii) 142,564 shares of our common stock at exercise prices ranging between $2.25 and $3.90 and an average exercise price of $2.80 per share outstanding.

Dividends

We have not paid any dividends on any of our shares to date, and we do not anticipate declaring or paying any 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 (the “Board”) 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 may deem relevant.  The payment of any dividends will also be subject to the requirements of the Delaware General Corporation Law (“DGCL”) and certain restrictions contained in the Factoring Loan Agreements for our credit lines from Silicon Valley Bank and Faunus Group International.  For as long as such agreements remain in effect, we would need both lenders’ written consent 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.

Equity Compensation Plan Information

In December 2004, our Board adopted and our stockholders approved a stock incentive plan with 1,800,000 shares of common stock authorized for issuance (the “Stock Incentive Plan”).  The shares subject to the Stock Incentive Plan was subsequently increased to 5,232,873.  The shares to be purchased are subject to forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Board may determine.  The purpose of the Stock Incentive Plan is to offer selected providers the opportunity to acquire equity in OCZ through awards of options over common stock (which may constitute incentive stock options (an “ISO”) or non-statutory stock options (an “NSO”)) and the award or sale of common stock.  The options granted will expire in a term not to exceed 10 years.

The following table summarizes our equity compensation plans as of our fiscal year ended February 28, 2010:
 
Plan Category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
   
Weighted-average
exercise price of
outstanding
options, warrants
and rights
   
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
 
                   
Equity compensation plans approved by security holders
    2,779,111     $ 2.20       1,659,614  
                         
Equity compensation plans not approved by security holders
    -       -       -  
Totals
    2,779,111     $ 2.20       1,659,614  

Stock Price Performance Graph

The following graph shows a comparison of cumulative a total stockholder return calculated on a dividend reinvested basis, for us, the NASDAQ Composite Index and the Standard & Poor’s Semiconductor Index assuming an Investment of $100 on February 28, 2007.  Periods prior to February 28, 2010 reflect the trading prices of our common stock on the AIM.  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, 2010.  The comparison below are based upon historical data and are not indicative of, nor intended to forecast, the future performance of our common stock. 

 
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Comparison Of Cumulative Return From February 28, 2007
Among OCZ Technology Group, Inc., The NASDAQ Composite index and the S&P Semiconductors Index

 
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.
 
Recent Sales of Unregistered Securities

We have sold or issued the following securities that were not registered under the Securities Act during the past three years.  The historical share data set forth in this document have been adjusted to reflect the 1 for 2.5 reverse stock split that took place in September 2009.
 
In June 2006, we issued 3,020,000 shares of common stock in connection with our initial listing on AIM for 163 pence (or $3.00) per share.  Also, in conjunction with this initial listing, we issued 484,000 shares upon conversion of convertible unsecured loans at a conversion price of 121.88 pence (or $2.25) per share.  We raised an aggregate of $8.2 million net of costs in connection with the initial listing.  The shares were offered and sold outside of the United States in reliance upon Regulation S (“Regulation S”) under the Securities Act.
 
In October 2006, we issued an additional 516,000 shares of common stock in connection with our listing on AIM at 212.5 pence (or $4.15) per share, with net aggregate proceeds of approximately $1.7 million.  The shares were offered and sold outside of the United States in reliance upon Regulation S.

 
34

 
 
During the remainder of 2006, we issued approximately 141,600 shares of common stock upon the exercise of stock option and warrants.  The shares related to the exercise of the warrants were offered and sold outside of the United States in reliance upon Regulation S.  Certain shares of common stock were offered and sold in connection with the exercise of stock options outside of the United States in reliance upon Regulation S.  The remaining shares were offered and sold in connection with the exercise of stock options in the United States in reliance upon Rule 701 of the Securities Act.
 
During May 2007, we completed a secondary offering of 2,651,000 shares of common stock at 312.5 pence (or $6.18) per share, with aggregate net proceeds of approximately $15.3 million.  These shares were offered and sold outside of the United States in reliance upon Regulation S.
 
Also in May 2007, we issued 249,200 shares of common stock in connection with our acquisition of PC Power and Cooling, Inc.  In February 2008, we issued 231,600 shares of its common stock as part of a capitalization of $500,000 of an acquisition-related note.  These shares were issued in the United States in reliance of Rule 506 of Regulation D under the Securities Act and all recipients of our common stock were “accredited” as defined under the rules of the SEC.
 
During the fiscal year ended February 29, 2008, we issued approximately 328,528 shares of common stock in connection with the exercise of stock options in the United States in reliance of Rule 701 of the Securities Act.
 
In February 2009, we issued 339,200 shares of common stock as part of a capitalization of $200,000 of an acquisition-related note in favor of Douglas A. Dodson.  The shares were issued in reliance upon Rule 506 of Regulation D under the Securities Act.  Mr. Dodson was an “accredited” investor as defined under the rules of the SEC.
 
As of our fiscal year ended February 28, 2010, we issued 60,990 shares of our Series A preferred stock at $5.00 per share.  These shares were issued in reliance on Rule 506 of the Securities Act.  In addition, we also issued warrants to purchase up to 140,520 shares of our Series A preferred stock.  Such warrants have been issued in reliance on Regulation S of the Securities Act.  Under the terms of our certificate of incorporation with respect to our Series A Preferred Stock, each share of Series A Preferred Stock was to be automatically converted into shares of common stock on the sixtieth (60th) trading day following the commencement of trading of our common shares on a public stock exchange, including OTCBB (Mandatory Conversion).  The trading of our common shares commenced on OTCBB on February 10, 2010, and the 60th trading day following the commencement of trading was May 4, 2010.  The number of shares of our common stock issued upon Mandatory Conversion was determined by dividing $5.00 by the sixty (60) day per share average closing price of our common stock on such public stock exchange (the 60 Day Average).  Based on the 60 Day Average of $4.86, and after taking into account fractional shares, on May 4, 2010, 60,990 shares of our Series A Preferred Stock were converted into 62,733 shares of our common stock, and warrants to purchase 140,520 shares of our Series A Preferred Stock were converted into warrants to purchase 144,541 shares of our common stock at $4.86 per share.
 
In March 2010, we issued an aggregate of 5,151,662 shares of our common stock at $3.00 per share in connection with a private placement.  These shares were issued in the United States in reliance of Rule 506 of Regulation D under the Securities Act and all recipients of our common stock were “accredited” as defined under the rules of the SEC.  As part of the private placement offering, we also issued warrants to purchase up to (i) 2,575,831 shares of our common stock at $5.25 per share (the “$5.25 Warrants”) and (ii) 154,550 shares of our common stock at $3.00 per share (the “$3.00 Warrants”).  The warrants have been issued in reliance on the exemptions provided by Section 4(2) of the Securities Act.  In addition, we have a commitment to issue a warrant for up to 77,275 shares of our common stock at $5.25 per share.  Each of the $5.25 Warrants and the $3.00 Warrants are immediately exercisable, will expire on March 23, 2015 and may be exercised by the holders on a cashless basis.
 
Since March 1, 2008, we have issued options to purchase an aggregate of 2,156,000 shares of our common stock under our stock option plan with a weighted average exercise price of $1.22 per share, including options to purchase an aggregate of 330,000 shares of our common stock issued to our newly elected directors, at an exercise price of $4.35.  These options were granted in reliance of Rule 701 of the Securities Act.  Further information regarding grants made to our executive officers and directors may be found under “Executive Compensation - Director Compensation” and “Executive Compensation - Outstanding Equity Awards at February 28, 2010” herein.

 
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Item 6.              Selected Financial Data

The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated.  The selected historical consolidated financial data for each of the fiscal years in the three year period ended February 28, 2010, February 28, 2009 and February 29, 2008 has been derived from our audited historical consolidated financial statements included elsewhere in this report.  The selected historical consolidated financial data as of and for the fiscal years ended December 31, 2006 and December 31, 2005 and for the two months period ended February 28, 2007 has been derived from our audited historical consolidated financial statements not included in this report.  The selected historical consolidated financial data for the two months ended February 28, 2006 has been derived from our unaudited condensed consolidated financial statements not included in this report, which have been prepared on a basis consistent with our annual audited consolidated financial statements.  In the opinion of management, such unaudited financial data reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of our financial position and results of our operations for the periods.  The historical results of operations for any period are not necessarily indicative of the results to be expected for any future period.

The selected historical consolidated financial data should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and by our consolidated financial statements and related notes thereto, each appearing elsewhere in this report.

   
Years Ended
February 28/29,
   
Years Ended
December 31,
   
Two months
Ended February 28,
 
   
2010
   
2009
   
2008
   
2006
   
2005
   
2007
   
2006
 
   
(in thousands, except per share data)
   
(unaudited)
 
Statement of Operations Data:
                                         
Revenue
  $ 143,959     $ 155,982     $ 118,352     $ 67,772     $ 35,718     $ 16,335     $ 8,310  
Cost of Revenue
    125,303       136,191       95,419       58,826       29,493       13,153       7,117  
Gross profit
    18,656       19,791       22,933       8,946       6,225       3,182       1,193  
Operating Expenses:
                                                       
Sales and marketing
    10,249       11,401       9,125       4,735       3,059       1,136       542  
Research and development
    5,331       2,575       1,570       452       232       202       52  
General and administrative
    14,711       16,709       11,704       5,006       3,067       1,212       573  
Impairment of goodwill and intangible assets
    911       -       -       -       -       -       -  
Total operating expenses
    31,202       30,685       23,399       10,193       6,358       2,550       1,167  
Income (loss) from operations
    (12,546 )     (10,894 )     534       (1,247 )     (133 )     632       26  
Other income and expense:
                                                       
Other (expense) income
    727       (169 )     256       (30 )     4       (5 )     -  
Interest and financing expense
    (1,716 )     (600 )     (289 )     (682 )     (570 )     (51 )     (165 )
Interest and other income (expense), net
    (989 )     (769 )     (33 )     (712 )     (566 )     56       (165 )
Income (loss) before income taxes
    (13, 535 )     (11,663 )     501       (1,959 )     (699 )     576       (139 )
Income tax expense (benefit)
    (1 )     61       (936 )     (120 )     (110 )     196       (9
Net income (loss)
  $ (13,534 )   $ (11,724 )   $ 1,437     $ (1,839 )   $ (589 )   $ 380     $ (130 )
                                                         
Income (loss) per share attributable to common stockholders:
                                                       
Basic
  $ (0.64 )   $ (0.56 )   $ 0.07     $ (0.12 )   $ (0.14 )                
Diluted
  $ (0.64 )   $ (0.56 )   $ 0.07     $ (0.12 )   $ (0.14 )                
Common shares and equivalents outstanding:
                                                       
Basic weighted average shares
    21,300       21,000       19,800       15,400       4,200                  
Diluted weighted average shares
    21,300       21,000       20,400       15,400       4,200                  
Balance Sheet Data:
                                                       
Cash and cash equivalents
  $ 1,224     $ 420     $ 1,544     $ 1,423     $ 120                  
Total assets
    47,849       57,703       52,947       19,358       3,567                  
Deferred revenue
    95       167       92       89       61                  
Notes payable, capital lease obligation, long term deferred rent
    532       200       575       -       317                  
Total stockholders’ equity
  $ 6,288     $ 18,923     $ 29,798     $ 9,026     $ 556                  

 
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Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading provider of high performance Solid State Drives (“SSDs”) and Memory Modules for computing devices and systems.  Founded in 2002, we are incorporated in Delaware and have our headquarters in San Jose, California and offices in Canada, the Netherlands, and Taiwan.  Our fiscal year ends on the last day of February.

Historically, we primarily sold high performance memory modules to individual computing enthusiasts through catalog and online retail channels.  However, SSDs have emerged as a strong market alternative to conventional disk drive technology and SSDs are rooted in much of the same basic technological concepts as our legacy memory module business.  Today, as part of a diversification strategy which began in fiscal year 2009, our product mix is significantly more weighted toward the sale of SSDs and the SSD product line has become central to our business.  As a result, our target customers are increasingly enterprises and original equipment manufacturers (or “OEMs”).

In addition to our SSD and Memory Module product lines, we design, develop, manufacture and distribute other high performance components for computing devices and systems, including thermal management solutions, AC/DC switching PSUs and computer gaming solutions.  We offer our customers flexibility and customization by providing a broad array of solutions which are interoperable and can be configured alone or in combination to make computers run faster, more reliably, efficiently and cost effectively.  Through our diversified and global distribution channel, we offer more than 450 products to 376 customers, including leading retailers, etailers, OEMs and computer distributors.

Our ten largest customers measured by net revenue for our fiscal year ended February 28, 2010 are listed as follows in alphabetical order:

 
§
Amazon.com;

 
§
ASK Corporation;

 
§
BAS Group;

 
§
D&H Distribution Company;

 
§
Maxcom Memory GmbH;

 
§
Memoryworld GmbH & Co., KG;

 
§
Micro Center Corporation;

 
§
Micro Peripherals LTD;

 
§
NewEgg.com, operated by Magnell Associate  Inc.; and

 
§
SYX Distribution, Inc.

These ten customers represented approximately 51% our net revenue for the period set forth above.  Our largest customer is NewEgg.com, which represented approximately 19% of our revenue for our fiscal year ended February 28, 2010.  No other customer was responsible for 10% or more of our net revenue.

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

 
37

 

 
§
industrial equipment and computer systems;

 
§
computer and computer gaming and enthusiasts;

 
§
mission critical servers and high end workstations;

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

 
§
high performance computing and scientific computing;

 
§
video and music editing;

 
§
home theatre PCs and digital home convergence products; and

 
§
digital photography and digital image manipulation computers.

We perform the majority of our research and development efforts in-house, which increases communication and collaboration between design teams, streamlines the development process and reduces time-to-market.

We commenced operations in 2002 and shares of our common stock began trading on AIM in June 2006.  On April 28, 2006, we amended our certificate of incorporation to, among other matters, affect a 3 for 1 forward stock split.  In May 2007, we acquired PC Power and Cooling, Inc., a privately-held manufacturer of PSUs that was based in San Diego, California.  We now offer both PC Power and Cooling, Inc. and OCZ branded PSUs.  In October 2007, we acquired substantially all of the assets of Silicon Data Inc., doing business as Hypersonic PC Systems, a privately-held manufacturer of high performance gaming PCs and laptops aimed at the computer gaming community that was based in Great Neck, New York.  In March 2009, we amended our certificate of incorporation primarily to increase the number of authorized shares and eliminate a number of provisions which required us to comply with various United Kingdom laws in the case of, among other things, takeovers and tender offers.  On April 1, 2009, following appropriate stockholder approval, we voluntarily delisted our common stock from trading on AIM.  On January 14, 2010 our common stock was listed on the OTCBB, and from February 10, 2010 to April 22, 2010, our common stock was traded on the OTCBB.  Since April 23, 2010, our common stock has been traded on The NASDAQ Capital Market.

Our fiscal years ended on December 31 from 2002 to 2006.  Effective March 1, 2008, we changed our fiscal year end from December 31 to the last day of February resulting in a 14-month period from January 1, 2007 to February 29, 2008.  However, for comparison purposes throughout this report, the twelve month period which began March 1, 2007 and ended February 29, 2008 has been presented and is named “the fiscal year ended February 29, 2008.”

As of our fiscal year ended February 28, 2010, we had 376 customers, most of which are distributors or etailers in 69 countries.

For the fiscal years ended February 28, 2010 and February 28, 2009, our net sales were $144 million and $156 million, respectively and our net (loss) was $(13.5) million and $(11.7) million, respectively.

In September 2009, we sold all inventory, patents and other assets related to our Neural Impulse Actuator product line to BCInet, Inc., a Delaware corporation, in exchange for notes with principal amounts in the aggregate of $895,415 and shares of BCInet, Inc.’s Series A preferred stock, representing a 27% equity stake in BCInet, Inc.  Also in September 2009, we amended our certificate of incorporation to affect a 1 for 2.5 reverse stock split.  All share amounts in this document have been adjusted for the effect of this reverse split.

 
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Results of Operations for Fiscal Years Ended February 28, 2010, February 28, 2009 and February 29, 2008

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

   
Year Ended
February 28/29,
 
   
2010
   
2009
   
2008
 
   
(audited)
   
(audited)
   
(audited)
 
Revenue
                 
Sales – net
    100 %     100 %     100 %
Cost of revenue
    87.0       87.3       80.6  
                         
Gross Profit
    13.0       12.7       19.4  
                         
Expenses
                       
Sales and marketing
    7.1       7.3       7.7  
Research and development
    3.7       1.7       1.3  
General, administrative and operations
    10.3       10.7       9.9  
Impairment of goodwill and intangible assets
    0.6       -       -  
                         
Total operating expenses
    21.7       19.7       18.9  
                         
Operating profit/(loss)
    (8.7 )     (7.0 )     0.5  
                         
Other income/(expense)
                       
Other income – net
    0.5       (0.1 )     0.2  
Interest and financing costs
    (1.2 )     (0.4 )     (0.2 )
                         
Total other income/(expense)
    (0.7 )     (0.5 )     0.0  
                         
Profit/(Loss) before tax
    (9.4 )     (7.5 )     0.4  
                         
Tax (expense) benefit
    -       -       0.8  
                         
Net profit/(loss)
    (9.4 )%     (7.5 )%     1.2 %
 
Comparison of Fiscal Years Ended February 28, 2009 and February 28, 2010
 
Net sales.  Net sales decreased by $12.0 million, or 7.7%, from $155.9 million in fiscal year ended February 28, 2009 to $143.9 million in fiscal year ended February 28, 2010.  This decrease was due primarily to several factors.  Overall, there was a 25% decrease, in the aggregate, of unit sales across all product lines from 3.4 million units in fiscal year ended February 28, 2009 to 2.6 million units in fiscal year ended February 28, 2010.  Memory processing unit sales decreased from fiscal year ended February 28, 2009 to fiscal year ended February 28, 2010 by 34%.  This was partially offset by a 3.4% increase in the average selling price per units of these products.  Power supply unit sales remained flat from fiscal year ended February 28, 2009 to fiscal year ended February 28, 2010, while the average selling prices of our power supply units fell 13.3% over the same period.  Decreases in memory processing and power supply unit sales were partially offset by a 194% increase in SSD units sold from fiscal year ended February 28, 2009 to fiscal year ended February 28, 2010 coupled with an increase in the average selling price per SSD units of 14% over the same period.  In general, the decrease in unit sales was the result of working capital constraints which prohibited us from buying sufficient raw materials necessary to fulfill the demand for our products.
 
Cost of revenue.  Cost of revenue decreased by $10.9 million, or 8.0%, from $136.2 million in fiscal year ended February 28, 2009 to $125.3 million in fiscal year ended February 28, 2010.  Cost of revenue as a percentage of net sales was 87.3% in fiscal year ended February 28, 2009 compared to 87.0% in fiscal year ended February 28, 2010.  The decrease in absolute dollars of cost of sales was attributable to the decrease in net sales.  The lower cost of revenues as a percentage of net sales in fiscal year ended February 28, 2010 was driven by slightly higher average sales prices.

 
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Cost of revenue does not include any stock-based compensation expense for fiscal year ended February 28, 2009 and fiscal year ended February 28, 2010.
 
Sales and marketing expenses.  Sales and marketing expenses decreased by $1.2 million, or 10.1%, from $11.4 million in fiscal year ended February 28, 2009 to $10.2 million in fiscal year ended February 28, 2010.  Sales and marketing expenses were 7.3% and 7.1% of net sales in fiscal year ended February 28, 2009 and 2010, respectively.  The decrease in absolute dollars was primarily due to a decrease in the sales and marketing programs necessary to support the lower sales volume.
 
Sales and marketing expenses include stock-based compensation expense of $287,000 and $166,000 for fiscal year ended February 28, 2009 and fiscal year ended February 28, 2010, respectively.
 
Research and development expenses.  Research and development expenses increased by $2.7 million, or 107.0% from $2.6 million in fiscal year ended February 28, 2009 to $5.3 million in fiscal year ended February 28, 2010.  Research and development expenses were 1.7% and 3.7% of net sales in fiscal year ended February 28, 2009 and 2010, respectively.  The increase in absolute dollars was primarily due to additional resources being used in the development of our SSD products.
 
Research and development expenses include stock-based compensation expense of $130,000 and $184,000 for fiscal year ended February 28, 2009 and fiscal year ended February 28, 2010, respectively.
 
General, administrative and operations expenses.  General, administrative and operations expenses decreased by $1.9 million, or 11.9%, from $16.7 million in fiscal year ended February 28, 2009 to $14.7 million in fiscal year ended February 28, 2010.  General, administrative and operations expenses remained relatively flat as a percentage of net sales at 10.7% and 10.2%, respectively.  The decrease in absolute dollars was primarily due to $1.3 million of lower shipping costs because of lower sales volume and $991,000 of lower bad debt expenses, partially offset by a $264,000 increase in contractor costs.
 
General and administrative expenses include stock-based compensation expenses of $461,000 and $313,000 for fiscal year ended February 28, 2009 and February 28, 2010, respectively.
 
Impairment of goodwill and intangible assets.  In February 2010, we stopped the manufacture and sale the Hypersonic PC Systems products which we purchased from Silicon Data in 2007.  Therefore, the $911,000 carrying value of goodwill and related intangibles recorded from that acquisition were determined to be fully impaired and were written off in their entirety.
 
Other income/(expense)-net.  Other expense-net increased by $220,000 or 28.6% from $668,000 in fiscal year ended February 28, 2009 to $989,000 in fiscal year ended February 28, 2010.  Included in the total is $600,000 and $1.7 million, respectively, of interest expense.  The increase in interest expense was primarily due to the higher interest rates charged on borrowed funds payable under our new credit facilities which began in August 2009 coupled with higher borrowing amounts.  The increase in interest expense in the period was partially offset by a $668,000 increase in other gains relating to the sale of the NIA product line in fiscal year ended February 28, 2010.
 
Provision for income taxes.  The income tax provision/(benefit) amounted to $61,000 in fiscal year ended February 28, 2009 and ($1,000) in fiscal year ended February 28, 2010 We did not record a tax benefit at the statutory combined federal and state income tax rates of approximately 40% due to the uncertainty surrounding the future realization of the potential tax benefit associated with net operating loss carryforwards.
 
Comparison of Fiscal Years Ended February 29, 2008 and February 28, 2009
 
Net sales.  Net sales increased by $37.6 million, or 31.8%, from $118.3 million in fiscal year ended February 29, 2008 to $155.9 million in fiscal year ended February 28, 2009.  This was due primarily to a 62% increase in unit sales from 2.1 million units in fiscal year ended February 29, 2008 to 3.4 million units in fiscal year ended February 28, 2009.  Sales of memory processing units increased by 32% and power supplies increased by 95% during this period.  However, these unit increases were partially offset by decreases in average per-unit selling prices of approximately 20% for memory processing products and 23% for power supplies.  Sales of flash memory storage units increased by 242% and average selling prices increased by 38% from fiscal year ended February 28, 2009 to fiscal year ended February 28, 2010.  The flash growth was partially due to the introduction of solid state drives as without them, the unit growth would have been approximately 215% while average selling prices would have decreased by 8%.  In general, the growth in unit volumes was primarily due to the introduction and growth of our new products coupled with the continued expansion of our sales channels outside of North America.

 
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Cost of revenue.  Cost of revenue increased by $40.8 million, or 42.7%, from $95.4 million in fiscal year ended February 29, 2008 to $136.2 million in fiscal year ended February 28, 2009.  Cost of revenue as a percentage of net sales was 80.6% in fiscal year ended February 29, 2008 and 87.3% in fiscal year ended February 28, 2009.  The increase in absolute dollars of cost of sales was attributable to the increase in net sales.  The higher cost of revenues as a percentage of net sales in fiscal year ended February 28, 2009 was driven by lower average selling prices of products due to falling prices of memory components.
 
Cost of revenue does not include any stock-based compensation expense for fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009.
 
Sales and marketing expenses.  Sales and marketing expenses increased by $2.3 million, or 24.9%, from $9.1 million in fiscal year ended February 28, 2009 to $11.4 million in fiscal year ended February 28, 2010.  Sales and marketing expenses were 7.7% and 7.3% of net sales for the fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009, respectively.  The increase in absolute dollars was primarily due to an increase in the sales and marketing programs necessary to support the higher sales volume.
 
Sales and marketing expenses include stock-based compensation expense of $272,000 and $287,000 for fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009, respectively.
 
Research and development expenses.  Research and development expenses increased by $1.0 million, or 64.0%, from $1.6 million in fiscal year ended February 29, 2008 to $2.6 million in fiscal year ended February 28, 2009.  Research and development expenses were 1.3% and 1.7% of net sales for the fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009, respectively.  The increase in absolute dollars was primarily due to an increase of $552,000 in salary and benefits resulting from growth in research and development personnel and an increase of $217,000 in development costs associated with new products.  The increase in personnel was primarily related to expanded product development initiatives.
 
Research and development expenses include stock-based compensation expense of $99,000 and $130,000 for fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009, respectively.
 
General, administrative and operations expenses.  General, administrative and operations expenses increased by $5.0 million, or 42.7%, from $11.7 million in fiscal year ended February 29, 2008 to $16.7 million in fiscal year ended February 28, 2009.  General, administrative and operations expenses were 9.9% and 10.7% of net sales for the fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009, respectively.  The increase in absolute dollars was primarily due to an increase of $938,000 in salary and benefits, an increase of $1.6 million in shipping costs due to increased sales volume, an increase of $296,000 in facility expenses, an increase of $479,000 in professional and legal fees, an increase of $134,000 in depreciation expenses and an increase of $1.3 million in bad debt expense primarily related to a single customer.
 
General and administrative expenses include stock-based compensation expenses of $452,000 and $461,000 for fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009, respectively.
 
Other income/(expense)-net.  Other expense-net increased by $736,000 from $33,000 in fiscal year ended February 29, 2008 to ($769,000) in fiscal year ended February 28, 2009.  Included in the total is interest expense of $289,000 and $600,000, respectively.  The increase in interest expense was primarily due to higher borrowing levels to support the working capital needs associated with the increased revenue levels in fiscal year ended February 28, 2009 as compared to fiscal year ended February 29, 2008.

 
41

 
 
Provision for income taxes.  The income tax provision (benefit) amounted to ($936,000) in fiscal year ended February 29, 2008 and $61,000 in fiscal year ended February 28, 2009.  The effective tax rates of 186% in fiscal year ended February 29, 2008 and (0.5%) in fiscal year ended February 28, 2009 reflect the estimated tax benefit of net operating loss carry forwards and other deferred taxes, net of valuation allowances.
 
Liquidity and Capital Resources
 
Since our inception, we have historically not generated cash from operations and have relied upon funds from equity offerings and debt financing. 
 
Operating Activities.  Net cash provided (used) by operating activities was ($9.9) million, ($1.0) million and $640,000 for fiscal year ended February 29, 2008, fiscal year ended February 28, 2009 and fiscal year ended February 28, 2010, respectively.  Net cash used by operating activities during fiscal year ended February 29, 2008 was due primarily to increases in inventories of $10.5 million, in accounts receivable of $7.4 million, and in prepaid expenses of $2.1 million, partially offset by an increase in accounts payable of $7.6 million, and net income of $1.4 million.  Net cash used by operating activities during fiscal year ended February 28, 2009 was due primarily to increases in accounts payable of $12.3 million and prepaid expenses of $974,000 partially offset by an increase in accounts receivable of $3.5 million and inventory of $1.9 million.  Net cash provided by operating activities during fiscal year ended February 28, 2010 was due primarily to an increase in accounts payable of $924,000, a decrease in inventories of $6.6 million, a decrease in accounts receivable of $3.6 million, a decrease in accrued expenses of $573,000 and a decrease in prepaid expenses of $301,000, partially offset by a non-cash gain on disposition of the NIA product line of $668,000 and a net loss of $13.5 million.  The decreases in accounts receivable and inventory in fiscal year ended February 28, 2010 was primarily due to lower sales levels while the increase in accounts payable was due to us paying vendors later because of working capital constraints.  The increases in accounts receivable and inventory in fiscal year ended February 29, 2008 and fiscal year ended February 28, 2009 were primarily due to higher sales levels, while increases in accounts payable was due to the ability to negotiate longer payment terms and an increase in the sales mix of power supplies which have longer payment terms.  Due to the $15.4 million which we raised in March 2010, we anticipate that accounts receivable, inventory and accounts payable will increase because we have additional working capital to grow our product line and our business.
 
Investing activities.  Net cash used by our investing activities was $9.3 million, $2.2 million and $1.3 million for fiscal year ended February 29, 2008, fiscal year ended February 28, 2009 and fiscal year ended February 28, 2010, respectively.  Of these amounts, $1.5 million, $1.6 million and $887,000, respectively, were related to the purchase of fixed assets including those needed to support our growth and establishment of a warehouse and manufacturing facility in Taiwan.  In fiscal year ended February 29, 2008, we used $7.8 million for the acquisitions of PC Power and Cooling, Inc. and Silicon Data Inc., doing business as Hypersonic PC Systems.  The expansion of our manufacturing capability has to date not been capital intensive as our internal manufacturing has historically been limited to assembly and test while board level assembly was outsourced.  In August 2008, we acquired our first surface mount technology (“SMT”) line as a beginning initiative to move memory module manufacturing in-house.  We expect to make additional capital investments in the future to expand this in-house manufacturing as well as our assembly and test capabilities.  We will also invest in our infrastructure in order to improve our controls and procedures as part of growing our business and meeting regulatory requirement associated with being a public company.
 
Financing activities.  Net cash provided by our financing activities was $19.9 million, $2.4 million and $1.5 million for fiscal year ended February 29, 2008, fiscal year ended February 28, 2009 and fiscal year ended February 28, 2010, respectively.  Cash provided by financing activities in fiscal year ended February 29, 2008 was primarily from common stock offerings on AIM in accordance with Regulation S of approximately $15.5 million in May 2007 as well as increases in bank loans of $3.9 million.  Cash provided by financing activities in fiscal year ended February 28, 2009 was primarily due to increases in bank loans of $2.5 million.  Cash provided by financing activities in fiscal year ended February 28, 2010 was primarily due to common stock and preferred stock issuances of $7,000 and $281,000, respectively, as well as increases in bank loans of $919,000 and $500,000 borrowings from Ryan M. Petersen, our Chief Executive Officer, made to us in fiscal year ended February 28, 2010.  In March 2010, we issued an aggregate of 5,151,662 shares of our common stock at $3.00 per share in connection with a private placement, whereby we received gross proceeds of $15.45 million.  As part of the private placement offering, we also issued warrants to purchase up to (i) 2,575,831 shares of our common stock at $5.25 per share and (ii) 154,550 shares of our common stock at $3.00 per share.

 
42

 
 
Other factors affecting liquidity and capital resources.

We have historically not generated cash from operations and have relied upon equity offerings and debt financing such as receivable factoring, increased trade terms from vendors, and bank lines of credit as we have grown.  In July 2009, we entered into a Sale of Accounts and Security Agreement with Faunus Group International, Inc, pursuant to which we may factor our foreign receivables up to $10 million in the aggregate (as amended, the “FGI Agreement”).  Additionally, in July 2009, we entered into a Loan and Security Agreement with Silicon Valley Bank (as amended, the “SVB Agreement” and collectively with the FGI Agreement, the “Factoring Loan Agreements”) to factor all our domestic receivables up to $10 million in the aggregate.  The SVB Loan Agreement caps the aggregate debt under both Factoring Loan Agreements to $17.5 million.  Under the Factoring Loan Agreements we have guaranteed our obligations thereunder and have pledged substantially all of our assets as security.  As of February 28, 2010, the outstanding loan balances under the Factoring Loan Agreement were $10.4 million in the aggregate. 

Under the SVB Agreement, we can borrow an amount up to 75% of the value of our approved factored customer invoices.  Interest is payable monthly on the aggregate of the face amounts of the unpaid factored customer invoices each month.  SVB also charges a monthly collateral handling fee based upon the unpaid factored customer invoices each month.  The rate of interest and the amount of the collateral handling fee is dependent upon our Quick Ratio which is defined for this purpose as our cash, marketable securities and accounts receivable divided by our current liabilities. If our Quick Ratio is greater than 0.75:1.00 in any month, the applicable interest rate is SVB Prime plus 2.25% per annum and the collateral handling fee is 0.10%.  If our Quick Ratio is less than 0.75:1.00 in any month, the applicable interest rate is SVB Prime plus 2.75% per annum and the collateral handling fee is 0.45%.  The SVB Agreement requires a minimum Quick Ratio of 0.50:1.00.  Receivables are subject to recourse in the event of nonpayment by the customer.  

Under the FGI Agreement, we can borrow an amount up to 75% of the value of its approved factored customer invoices.  Interest is payable each month on the aggregate of the face amounts of the unpaid factored customer invoices at a rate greater of 8.00% per annum or 3.00% above the rate of interest designated by FGI as its selected “Prime Rate” or “Base Rate”, as the case may be (currently based upon the Wall Street Journal, Money Rates Section).  Additionally, FGI charges a collateral management fee equal to 0.58% of the average monthly balance of the face amount of the outstanding unpaid factored customer invoices.  If we fail to maintain minimum monthly borrowings of at least $2.5 million, FGI will assess a deficiency charge in an amount equal to charges that would apply had we maintained a $2.5 million borrowing minimum for the applicable month less the actual charges paid for such month.  FGI has the option under the FGI Agreement of buying customer invoices without recourse.  To date, FGI has not done so and we do not anticipate that it will do so.  Receivables are subject to recourse in the event of nonpayment by the customer.  

In order to provide some bridge financing as these new financing arrangements were established, in August 2009 we borrowed $500,000 from our Chief Executive Officer, Ryan M. Petersen, at 7.5% interest per annum.  The loan is repayable in equal installments in February 2010 and September 2010.  Even though the first installment of the loan to Mr. Petersen was due in February, Mr. Petersen waived payment until April 2010, at which time he was paid the first installment amount plus interest accrued through April 2010.  Also, we may incur additional debt in the future, subject to certain limitations contained in our debt instruments.

We expect to experience growth in our working capital requirements as we continue to expand our business.  We cannot assure that we will find additional debt or equity financing allowing us to grow.  We intend to fund this continued expansion through cash generated by operations, increased debt facilities, and proceeds from any equity offerings.  We anticipate that working capital will constitute a material use of our cash resources.

 
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The SVB Agreement was a result of renegotiation with Silicon Valley Bank and replaced our prior agreement with them.  Since we entered into this new agreement, we have not failed to comply with any of its requirements.  However, under our prior agreement, we had certain measures of financial performance that we were required to meet and, on occasion, with which we were unable to comply.  In February through May of 2009, we did not meet a minimum required threshold as set forth in the original Silicon Valley Bank agreement for a financial performance ratio called a ‘quick ratio’ which is the ratio of our cash, marketable securities and accounts receivable divided by our liabilities, and Silicon Valley Bank granted us a waiver for these months.  In addition, in May 2009, we did not meet a threshold requirement for a minimum amount of earnings before interest, taxes, depreciation and amortization (“EBITDA”) and Silicon Valley Bank also granted us a waiver in this instance as well.  Although the ‘quick ratio’ test remains in our current SVB Agreement, this agreement does not contain a requirement of a minimum amount of EBITDA.
 
The SVB Agreement also has a number of other requirements, also called covenants, with which we are required to comply, including among other things:

 
§
delivery of monthly and annual financial statements;

 
§
tax, deposit account and insurance requirements;

 
§
restrictions on our ability to complete dispositions, debt incurrence, distributions, investments, liens, mergers and acquisitions; and

 
§
certain financial covenants that are tested on a monthly basis.

The FGI Agreement has a number of covenants with which we are required to comply, including among other things:

 
§
delivery of monthly and annual financial statements;

 
§
giving notice if we have a material adverse change and under other circumstances; and

 
§
restrictions on our ability to complete dispositions, debt incurrence, distributions, investments and other liens.

Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products.  We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all.

There is no assurance that we will not become out of compliance with one or more covenants of our Factoring Loan Agreements in the future.  If we dare in violation of covenants in the Factoring Loan Agreements and do not receive a waiver, the lender could choose to accelerate payment effectively causing all loan balances to become due.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

The following table summarizes our outstanding contractual obligations as of February 28, 2010:

Payments due by period

(in thousands)
 
Total
   
Less
than 1
year
   
1-3
years
   
3-5
years
   
More
than 5
years
 
Long-term debt obligations
  $ 500     $ 500     $ -     $ -     $ -  
                                         
Operating lease obligations
  $ 1,002     $ 667     $ 335       -       -  
                                         
Total
  $ 1,502     $ 1,167     $ 335     $ -     $ -  

 
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Inflation

Inflation was not a material factor in either revenue or operating expenses during our fiscal year ended February 28, 2010.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period.  Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments is contained in the notes to the consolidated financial statements in this report for the fiscal year ended February 28, 2010.

We believe the following are our most critical accounting policies as they require our more significant judgments in the preparation of our financial statements.

Revenue recognition.  We record all of our product sales net of allowances for returns, product rebates, sales credits, and market development funds.  We recognize revenue when there is persuasive evidence of an arrangement, product shipment by a common carrier has occurred, risk of loss has passed, the terms are fixed and collection is probable.  We generally use customer purchase orders and/or contracts as evidence of an arrangement and the underlying payment terms to determine if the sales price is fixed.  We also purchase credit insurance for the majority of our accounts.

We offer certain customers limited product return rights.  To estimate reserves for future sales returns, we regularly review our history of actual returns and monitor the inventory levels of our customers.  Reserves for future returns are adjusted as necessary, based on returns experience, future expectations and communication with our customers.

Probability of collection is assessed for each customer as it is subjected to a credit review process that evaluates its financial position, ability to pay, and the potential coverage by our credit insurer.  If it is determined from the outset of an arrangement that collection is not probable, the customer is required to pay cash in advance of shipment.  We provide for price protection credits on a case-by-case basis after assessing the market competition and product technology obsolescence.  These credits are recorded as a reduction to revenue at the time we reduce the product prices.

Marketing cooperative arrangements.  We have arrangements with resellers of our products to reimburse the resellers for cooperative marketing costs meeting specified criteria.  In certain arrangements, we record advertising costs meeting specified criteria within sales and marketing expenses in the accompanying consolidated statements of operations.  For those reimbursements that do not meet the criteria for advertising costs, the amounts are recorded as a reduction to sales in the accompanying consolidated statements of operations.

Product warranties.  We offer our customers warranties on certain products sold to them.  These warranties typically provide for the replacement of its products if they are found to be faulty within a specified period.  Concurrent with the sale of products, a provision for estimated warranty expenses is recorded with a corresponding increase in cost of goods sold.  The provision is adjusted periodically based on historical and anticipated experience.  Actual expense of replacing faulty products under warranty, including parts and labor, are charged to this provision when incurred.

 
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Inventory.  Inventory is valued at the lower of cost or market value with cost being valued using the average cost method.  Inventory consists of raw materials, work in progress and finished goods.  We write down inventory for slow moving and obsolete inventory based on assessments of future demands and market conditions.

Income taxes.  We account for income taxes using an asset and liability approach, which requires us to recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in a company’s financial statements or tax returns.  Under this method, deferred tax assets and liabilities are determined based on the difference between the financial information’s carrying amounts and tax basis of assets and liabilities using the enacted tax rates.  In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.  Our Canadian subsidiary pays taxes in Canada.  We do not file consolidated tax returns.

Goodwill and Other Intangibles.  We review goodwill for impairment annually or more frequently whenever events or changes in circumstances indicate its carrying value may not be recoverable.

There are two steps in assessing whether impairment of goodwill and other indefinite lived intangible assets has occurred  The first step compares the carrying amount of the net assets (including goodwill), to the reporting unit’s fair value (OCZ comprises a single reporting unit).  If OCZ’s fair value exceeds the carrying amount of OCZ’s net assets, goodwill is not considered to be impaired and the second step of the impairment test is not required.  If the carrying amount of OCZ’s net assets exceeds OCZ’s fair value, the second step of the impairment test is undertaken to measure the amount of impairment loss, if any.  In determining OCZ’s fair value consideration is first given to quoted market prices of OCZ’s stock and, where this is not available, the estimate of OCZ’s fair value will be based upon the best information available and consideration of other valuation techniques.  The second step, if necessary, is used the measure the amount of impairment loss by comparing the implied fair value of OCZ’s goodwill with the carrying amount of that goodwill.  An impairment loss is recognized to the extent the carrying amount of OCZ’s goodwill exceeds the implied fair value of that goodwill.  The implied fair value of goodwill is determined by allocating OCZ’s fair value in a manner similar to a purchase price allocation in a business combination.  The residual fair value after this allocation is OCZ’s implied fair value of goodwill.

Once a goodwill impairment loss is recognized, the adjusted carrying amount of goodwill shall be the new accounting basis and there is no subsequent reversal of previously recognized goodwill impairment loss in future years.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.  These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables.  We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain.  Actual future results may differ from those estimates.

Our most recent annual goodwill impairment analysis, which was performed during the fourth quarter of fiscal year ended February 28, 2010, did not result in an impairment charge with respect to our acquisition of the assets of PC Power & Cooling in 2007 since the fair values exceeded the carrying values by amounts of 5% to 40%, nor did we record any goodwill or intangible asset impairments in prior fiscal periods.  We stopped the manufacture and sale of certain Hypersonic PC products which were purchased in 2007.  Therefore, all goodwill related to that acquisition was deemed fully impaired and written off.

Stock-based compensation.

On January 1, 2006 we adopted FASB Accounting Standards Codification (“ASC”) 718, Accounting for Stock-Based Compensation using the modified prospective application method.  Under this method, compensation cost recognized for the fiscal years ended February 28, 2010, February 28, 2009 and February 29, 2008, included: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of ASC 718, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of ASC 718.

 
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Since our stock-based compensation plan was established in December 2004, all options have been issued at or above the estimated fair market value so that there is no intrinsic value to be expensed.  Stock based compensation charged to expenses was $663,000, $877,000 and $722,000 for the fiscal years ended February 28, 2010, February 28, 2009 and February 29, 2008, respectively.  As of our fiscal year ended February 28, 2010, compensation costs related to non vested awards amounted to approximately $1.3 million and will be recognized in the periods to February 29, 2014 over a weighted average term of 15.5 months.

The fair value of options grants was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

   
Fiscal Year Ended
   
Fiscal Year Ended
   
Fiscal Year Ended
 
   
February 28, 2010
   
February 28, 2009
   
February 29, 2008
 
Expected dividend
    0 %     0 %     0 %
Risk free interest rate
    2.0 %     2.8 %     4.7 %
Expected volatility
    0.58       0.40       0.37  
Expected life (in years)
    4.28       4.24       4.28  

New Accounting Pronouncements

In June 2009, the FASB issued the Accounting Standards Codification ("Codification"), which became the single source of authoritative non-governmental Generally Accepted Accounting Principles.  The Codification does not change Generally Accepted Accounting Principles, but instead introduces a new structure that combines all authoritative standards into a  comprehensive, topically-organized online database.  All references to the authoritative accounting literature in our financial statements are referenced in accordance with the Codification.  There were no material changes to the financial statements as a result of implementing the Codification.
 
In May 2009, we adopted FASB ASC 855, Subsequent Events.  ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued.  ASC 855 provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.  The statement was effective for OCZ during the fiscal year ended February 28, 2010.  
 
In February 2010, the FASB issued a new accounting standards update that eliminated the requirement for an entity that is an SEC filer to disclose the date through which subsequent events have been evaluated in its financial statement disclosures.  This new accounting standards update is effective upon release.  The adoption of the new accounting standards update did not have a material impact on our consolidated results of operations, financial condition or financial disclosures.
 
In January 2010, the FASB issued a new accounting standards update for fair value measurements and disclosures.  A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 and describe the reasons for the transfers.  A reporting entity should separately disclose information about purchases, sales, issuances and settlements for Level 3 reconciliation disclosures.  The new disclosures and clarifications of existing disclosures are effective for financial statements issued interim or annual financial periods ending after December 15, 2009, with the exception for the reconciliation disclosures for Level 3, which are effective for financial statements issued interim or annual financial periods ending after December 15, 2010. The adoption of the new accounting standards update did not have a material impact on our consolidated results of operations, financial condition or financial disclosures.

 
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Item 7A.
Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

Although the functional currency of our foreign offices is their local currency, we bill almost all of our sales for our products in U.S. dollars.  Accordingly, our results of operations and cash flows are subject to a limited extent to fluctuations due to changes in foreign currency exchange rates.  In the event our foreign sales and expenses increase, and we also increase our sales denominated in currencies other than U.S. dollars, our operating results may be more affected by fluctuations in the exchange rates of other currencies.  The volatility of applicable rates is dependent on many factors that we cannot forecast with reliable accuracy.  At this time we do not, but we may in the future, invest in derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk.

Interest Rate Sensitivity

Interest income and expense are sensitive to changes in the general level of U.S. interest rates.  However, because our interest income historically has been negligible, we believe that there is no material risk of exposure.

 
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Item 8.
Financial Statements and Supplementary Data
 
Index to Consolidated Financial Statements of OCZ Technology Group, Inc.
 
Page
Reports of Independent Registered Public Accountants
50
Consolidated Statements of Operations
52
Consolidated Balance Sheets
53
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss
54
Consolidated Statements of Cash Flows
55
Notes to Consolidated Financial Statements
56

 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
OCZ Technology Group, Inc.
 
We have audited the accompanying consolidated balance sheet of OCZ Technology Group, Inc. and Subsidiaries (the “Company”) as of February 28, 2010, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
  
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of February 28, 2010, and the consolidated results of their operations and  their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 
Crowe Horwath LLP
 
Sherman Oaks, California
May 20, 2010
 
50

 
Report of the Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
OCZ Technology Group, Inc.

We have audited the accompanying consolidated balance sheet of OCZ Technology Group Inc (“OCZ”) as of February 28, 2009, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the 12 months ended February 28, 2009 and 12 months ended February 29, 2008.  These financial statements and financial statement schedule are the responsibility of our management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We are not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of our internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OCZ as of February 28, 2009, and the consolidated results of its operations and its cash flows for the 12 months ended February 28, 2009 and 12 months ended February 29, 2008, in conformity with U.S. generally accepted accounting principles.

Horwath Clark Whitehill LLP
London, United Kingdom
May 1, 2009
 
 
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OCZ technology Group, Inc.
Consolidated Statements of Operations
($ in thousands, expect for per share data)

   
Year Ended February 28/29
 
   
2010
   
2009
   
2008
 
                   
Net revenues
  $ 143,959     $ 155,982     $ 118,352  
Cost of revenues
    125,303       136,191       95,419  
Gross profit
    18,656       19,791       22,933  
                         
Sales and marketing
    10,249       11,401       9,125  
Research and development
    5,331       2,575       1,570  
General, administrative and operations
    14,711       16,709       11,704  
Impairment of goodwill and intangible assets
    911       -       -  
Total operating expenses
    31,202       30,685       22,399  
Operating income (loss)
    (12,546 )     (10,894 )     534  
Other income (expense) - net
    727       (169 )     256  
Interest and financing costs
    (1,716 )     (600 )     (289 )
Income (loss) before income taxes
    (13,535 )