OCZ Technology Group, Inc. Reports Results for Its Second Quarter of Fiscal 2014

OCZ Technology Group, Inc. Reports Results for Its Second Quarter of Fiscal 2014 
SAN JOSE, CA  -- (Marketwired) -- 10/15/13 --  OCZ Technology Group,
Inc. (NASDAQ: OCZ), a leading provider of high-performance
solid-state drives (SSDs) for computing devices and systems, reports
its second quarter (Q2'14) results which ended on August 31, 2013. 
"Revenue and gross margins declined in the second quarter as revenue
for our client SSD products continued to be impacted by our
challenges in procuring flash. Revenue from our enterprise solutions
accounted for roughly half of our SSD revenue, compared to about 60%
in the first quarter, as a major data center customer completed its
installation during the quarter," said Ralph Schmitt, CEO of OCZ
Technology. "This has been a difficult quarter as demand for our
products continues to be greater than our ability to supply, given
our capital constraints."  
"Over the course of the quarter we continued to add strategic channel
partners that help extend the reach of both our high-end client
products and enterprise solutions worldwide. During the second fiscal
quarter we also announced the general availability of our PCIe-based
ZD-XL SQL accelerator which is a new way for OCZ to go to market with
a total solution consisting of both our enterprise solid state
storage and virtualization software. This innovative product is
primarily targeted at our channel partners and offers an optimized
plug-and-play storage system solution for enterprise customers,"
added Schmitt. 
Revenue for the second quarter of 2014 was $33.5 million compared to
revenue of $55.3 million for the first quarter of 2014 and revenue of
$88.6 million for the second quarter of 2013.  
Gross margin for the second quarter of 2014 was 4.2% compared to a
gross margin of 14.7% for the first quarter of 2014 and a gross
margin loss of (4.6%) for the second quarter of 2013. Gross margins
declined on a sequential basis primarily due to increased costs and
decreasing sales prices in our mainstream client business. Enterprise
margins remained consistent in the quarter.  
Operating expenses for the second quarter of 2014 were $20.5 million,
compared to operating expenses of $19.7 million for the first quarter
of 2014 and operating expenses of $26.6 million for the second
quarter of 2013. Operating expenses for the second quarter of 2014
include restatement related expenses of $3.4 million compared to $1.7
million in the first quarter of 2014.  
Cash and cash equivalents at the end of second quarter of 2014 were
$10.6 million compared to $5.0 million at the end of the first
quarter of 2014. The increase in cash primarily reflects the issuance
of $13.1 million of convertible debentures partially offset by cash
used to finance our on-going operations.  
2Q14 Highlights: 


 
--  Announced the general availability of the award winning ZD-XL SQL
    Accelerator, a tightly integrated hardware/software storage solution
    that accelerates and optimizes Microsoft SQL Server database
    applications in enterprise environments
--  Expanded the partnership with SED International, an established
    multinational distributor of leading computer technology products. SED
    is now authorized to distribute OCZ's complete portfolio of SSDs and
    power supply products throughout the U.S. region
--  OCZ Technology raised $13.1 million in a private placement
--  OCZ Technology announced new partnership with TechData and its complete
    portfolio of enterprise and high-end client solid state storage
    solutions are now distributed by Tech Data in North America and Latin
    America
--  OCZ Technology signed Joint Harvest to distribute its complete portfolio
    of solid state drives and power supplies in China
--  Announced an agreement in principle to settle the shareholder derivative
    litigation

 
Subsequent Highlights: 


 
--  Announced an agreement in principle to settle the consolidated
    shareholder class action litigation
--  Unveiled the upcoming Aeon Series 3.5" SSD, a Non-Volatile Memory (NVM)
    SAS drive specifically targeted to meet the stringent requirements of
    latency sensitive applications currently being mired by legacy hard-disk
    drive (HDD) infrastructures
--  Unveiled the upcoming smaller form factor Z-Drive R4 PCIe 4500 SSD
    Series which supports the Open Compute Project
--  Introduced new enterprise SATA III SSDs based on 19nm NAND flash process
    geometry to the popular Deneva 2 Series. These new Deneva 2 models
    deliver improved features and superior total cost of ownership (TCO) for
    enterprise customers

 
Business Outlook and Commentary: 
"Due to uncertainties in being able to procure forecasted flash
amounts and credit constraints, we will not be providing guidance for
the fiscal third quarter of 2014, ending November 30, 2013. It is our
belief that at this point we cannot accurately predict the outcome of
our efforts to resolve these issues," stated Schmitt. "We continue to
engage with interested parties in the various strategic options
available to the Company, including additional financing initiatives
and strategic alternatives and plan on providing an update to discuss
progress regarding flash availability, credit, and our strategic
activities when appropriate." 
Conference Call:  
OCZ will host its fiscal 2014 second quarter conference call for the
period ended August 31, 2013 at 5:00pm ET (2:00pm PT), on October 15,
2013. A live audio webcast of the conference call will be available
by visiting the Investor Relations events conference call section of
OCZ's website at http://ir.ocz.com/conference-calls which will be
archived for replay until November 15, 2013. All interested parties
can join the call by dialing (720) 545-0009 or (877) 430-3736. Please
call-in 15 minutes prior to the call to secure a line. The conference
call will be archived for phone replay until October 22, 2013. To
access the archived conference call, please dial (404) 537-3406 or
(855) 859-2056 and enter replay passcode 86704652. 
Additional Financial Information 
To help investors better understand OCZ's historical revenue trends,
including geographic revenue by delivery location and revenue by
product groups, additional revenue information is shown in the charts
below.  
Quarterly net revenue by product groups and major geographic area by
delivery location ($000)'s (Unaudited) 


 
Product Groups           Q2 2014    Q1 2014    Q4 2013    Q3 2013    Q2 2013
                     -------------------------------------------------------
                       $  29,789  $  49,767  $  63,683  $  92,322  $  83,436
Power supplies &                                                            
 Other                     3,711      5,555      5,989      6,880      5,162
                     -------------------------------------------------------
  Total                $  33,500  $  55,322  $  69,672  $  99,202  $  88,598
                     =======================================================
                                                                            
                                                                            
Major Geographic                                                            
 Areas                   Q2 2014    Q1 2014    Q4 2013    Q3 2013    Q2 2013
                     -------------------------------------------------------
United States          $  18,534  $  35,215  $  27,243  $  37,243  $  33,034
EMEA                      11,694     12,290  $  27,935     45,553    
 38,834
ROW                        3,272      7,817  $  14,494     16,406     16,730
                     -------------------------------------------------------
  Total                $  33,500  $  55,322  $  69,672  $  99,202  $  88,598
                     =======================================================

 
The chart below is a summary comparison of GAAP to Non-GAAP measures.
Please refer to the sections below regarding the calculation and
explanation of Non-GAAP financial measures (unaudited). 


 
(In thousands, except per share amount)                                     
                                                                            
                                                                            
GAAP Financial Comparison                                                   
                                                                            
                                  Q2 2014          Q1 2014          Q2 2013 
                         ---------------- ---------------- ---------------- 
Net revenue                    $   33,500       $   55,322       $   88,598 
Gross margin                          4.2%            14.7%            -4.6%
Net loss                       $  (26,053)      $  (13,232)      $  (33,179)
Loss per share                 $    (0.38)      $    (0.19)      $    (0.49)
                                                                            
Non-GAAP Financial Comparison                                               
                                  Q2 2014          Q1 2014          Q2 2013 
                         ---------------- ---------------- ---------------- 
Net revenue                    $   33,500       $   55,322       $   88,598 
Gross margin                          5.6%            15.5%            -4.3%
Net loss                       $  (17,562)      $   (9,723)      $  (27,891)
Loss per share                                                              
                               $    (0.26)      $    (0.14)      $    (0.41)

 
About OCZ Technology Group, Inc. 
Founded in 2002, San Jose, CA-based OCZ Technology Group, Inc. (OCZ)
is a global leader in the design, manufacturing, and distribution of
high-performance solid-state storage solutions and premium computer
components. Offering a complete spectrum of solid-state drives
(SSDs), OCZ provides SSDs in a variety of form factors and interfaces
(i.e. PCIe, SAS and SATA) to address a wide range of client and
enterprise applications. Having developed firmware and controller
platforms, to virtualization and endurance extending technologies,
the company delivers vertically integrated solutions enabling
transformational approaches to how digital data is captured, stored,
accessed, analyzed and leveraged by customers. More information is
available at www.ocz.com. 
Forward-Looking Statements  
Certain statements in this release relate to future events and
expectations and as such constitute forward-looking statements
involving known and unknown factors that may cause actual results of
OCZ Technology Group, Inc. to be different from those expressed or
implied in the forward-looking statements. In this context, words
such as "will," "would," "expect," "anticipate," "should" or other
similar words and phrases often identify forward-looking statements
made on behalf of OCZ. It is important to note that actual results of
OCZ may differ materially from those described or implied in such
forward-looking statements based on a number of factors and
uncertainties, including, but not limited to OCZ's ability to
continue as a going concern, the risk of litigation or governmental
investigations or proceedings relating to OCZ's historical accounting
policies, practices and procedures and other matters; OCZ's ability
to timely file periodic reports in the future, that margins in the
third quarter of FY 2014 will continue to be impacted by flash supply
and unfavorable pricing of flash; credit constraints affecting
revenue and margins; market acceptance of OCZ's products and OCZ's
ability to continually develop enhanced products; adverse changes
both in the general macro-economic environment as well as in the
industries OCZ serves, including computer manufacturing, traditional
and online retailers, information storage, internet search and
content providers and computer system integrators; OCZ's ability to
efficiently manage material and inventory; OCZ's ability to obtain
sufficient component parts, including NAND flash, at acceptable
prices, and OCZ's ability to generate cash from operations, secure
external funding for its operations, secure appropriate levels of
credit and manage its liquidity needs. Other general economic,
business and financing conditions and factors are described in more
detail in "Item 1A -- Risk Factors" in Part I in OCZ's Annual Report
on Form 10-K filed with the SEC on October 7, 2013, and statements
made in other subsequent filings. The filing is available both at
www.sec.gov as well as via OCZ's website at www.ocz.com. OCZ does not
undertake to update its forward-looking statements. 
Calculation of Non-GAAP net loss 
Non-GAAP net loss is calculated as net loss excluding non-cash
charges related to stock options and warrants, and certain other
one-time charges and credits specifically identified in the non-GAAP
reconciliation schedules set forth below.  
Non-GAAP Financial Measures 
OCZ continues to provide all information required in accordance with
GAAP, but believes evaluating its ongoing financial results may not
be as useful if an investor is limited to reviewing only GAAP
financial measures. Accordingly, OCZ uses non-GAAP financial
information to evaluate its ongoing operations and for internal
planning and forecasting purposes. OCZ's management does not itself,
nor does it suggest that investors should, consider such non-GAAP
financial measures in isolation from, or as a substitute for,
financial information prepared in accordance with GAAP. OCZ presents
such non-GAAP financial measures in reporting its financial results
to provide investors with an additional tool to evaluate OCZ's
financial results in a manner that focuses on what OCZ believes to be
its ongoing business operations.  
OCZ's management believes it is useful for itself and investors to
review, as applicable, both GAAP information and the non-GAAP
measures in order to assess the performance of OCZ's business and for
planning and forecasting in subsequent periods. Whenever OCZ uses
such a non-GAAP financial measure, it provides a reconciliation of
the non-GAAP financial measure to the most closely applicable GAAP
financial measure. Investors are encouraged to review the related
GAAP financial measures and the reconciliation of these non-GAAP
financial measures to their most directly comparable GAAP financial
measures as detailed above. 


 
Condensed Consolidated Statements of Operations                             
In thousands,                                                               
 except per                                                                 
 share data             Three Months Ended              Six Months Ended    
                August 31,     May 31,  August 31,   August 31,  August 31, 
                      2013        2013        2012         2013        2012 
                   Q2 2014     Q1 2
014     Q2 2013                          
                                          Restated                 Restated 
                 unaudited   unaudited   unaudited    unaudited   unaudited 
Net revenue     $   33,500  $   55,322  $   88,598   $   88,822  $  165,090 
Cost of revenue     32,100      47,217      92,667       79,317     177,564 
               ------------------------------------ ------------------------
  Gross profit                                                              
   (loss)            1,400       8,105      (4,069)       9,505     (12,474)
               ------------------------------------ ------------------------
                                                                            
Research and                                                                
 development         8,227       8,870      11,489       17,097      23,294 
Sales and                                                                   
 marketing           4,888       5,164       8,373       10,052      15,122 
General and                                                                 
 administrative      7,406       5,680       5,961       13,086      10,384 
Impairment of                                                               
 intangible                                                                 
 assets                  -           -         781            -         781 
               ------------------------------------ ------------------------
  Total                                                                     
   operating                                                                
   expenses         20,521      19,714      26,604       40,235      49,581 
               ------------------------------------ ------------------------
Loss from                                                                   
 operations        (19,121)    (11,609)    (30,673)     (30,730)    (62,055)
                                                                            
Change in fair                                                              
 value of                                                                   
 common stock                                                               
 warrants                                                                   
and derivative                                                              
 liabilities        (2,752)       (979)     (2,084)      (3,731)      4,933 
Interest and                                                                
 financing                                                                  
 costs              (3,974)       (550)        (40)      (4,524)        (96)
Other income                                                                
 (expense), net       (112)         14        (258)         (98)       (362)
               ------------------------------------ ------------------------
  Loss before                                                               
   income taxes    (25,959)    (13,124)    (33,055)     (39,083)    (57,580)
Provision for                                                               
 income taxes           94         108         124          202          83 
               ------------------------------------ ------------------------
Net loss        $  (26,053) $  (13,232) $  (33,179)  $  (39,285) $  (57,663)
               ==================================== ========================
                                                                            
Net loss per                                                                
 share:                                                                     
  Basic and                                                                 
   diluted      $    (0.38) $    (0.19) $    (0.49)  $    (0.58) $    (0.85)
               ==================================== ========================
Shares used in                                                              
 net loss per                                                               
 share                                                                      
 computation:                                                               
  Basic and                                                                 
   diluted          68,292      68,172      67,679       68,232      67,592 
               ==================================== ========================
 

 
                                                                            
                                                                            
                                                                            
                         OCZ Technology Group, Inc.                         
                   Condensed Consolidated Balance Sheets                    
              (In thousands, except share and per share data)               
                                                                            
                                         August 31, 2013  February 28, 2013 
                                      --------------------------------------
                                               unaudited                    
                                                                            
ASSETS                                                                      
Current Assets:                                                             
  Cash and cash equivalents               $       10,580     $       12,224 
  Restricted cash                                      -                 62 
  Accounts receivable, net of                                               
   allowances                                      9,105             12,228 
  Inventories, net                                23,772             32,753 
  Prepaid expenses and other current                                        
   assets                                          4,741              7,831 
                                      --------------------------------------
    Total current assets                          48,198             65,098 
  Property and equipment, net                      6,905              7,795 
  Intangible assets, net                           4,041              4,892 
  Non-current deferred tax assets                    553                553 
  Other assets                                       584                492 
                                      --------------------------------------
    Total assets                          $       60,281     $       78,830 
                                      ======================================
                                                                            
 LIABILITIES AND STOCKHOLDERS' EQUITY                                       
Current liabilities:                                                        
  Accounts payable                        $       19,725     $       26,730 
  Accrued and other liabilities                   17,076             22,172 
  Loans payable                                   16,405                  - 
  Derivative liabilities                           5,478                  - 
  Subordinate convertible debentures                                        
   payable                                           646                  - 
                                      --------------------------------------
    Total current liabilities                     59,330             48,902 
Common stock warrant liabilities                   7,284              1,160 
Non-current deferred tax liabilities                 209                209 
Other long-term liabilities                        2,494              2,254 
                                                                            
                                      --------------------------------------
    Total liabilities                             69,317             52,525 
                       
               --------------------------------------
                                                                            
Stockholders' equity:                                                       
  Preferred stock, $0.0025 par value,                                       
   20,000,000 shares authorized; no                                         
   shares issued or outstanding                        -                  - 
  Common stock, $0.0025 par value,                                          
   120,000,000 shares authorized;                                           
   68,207,166 and 68,102,890 shares                                         
   issued and outstanding at August                                         
   31, 2013 and February 28, 2013,                                          
   respectively                                      170                170 
  Additional paid-in capital                     341,392            337,403 
  Accumulated deficit                           (349,948)          (310,663)
  Accumulated other comprehensive loss              (650)              (605)
                                      --------------------------------------
    Total stockholders' equity                                              
     (deficit)                                    (9,036)            26,305 
                                      --------------------------------------
    Total liabilities and                                                   
     stockholders' equity                 $       60,281     $       78,830 
                                      ======================================

 
Set forth below are reconciliations of the non-GAAP financial
measures to the most directly comparable GAAP financial measures. The
non-GAAP financial measures disclosed by the Company have limitations
and should not be considered a substitute for, or superior to,
financial measures prepared in accordance with GAAP, and the
financial results prepared in accordance with GAAP and
reconciliations from these results should be carefully evaluated.
Please refer to "Explanation of Non-GAAP Financial Measures" in this
document for a detailed explanation of the adjustments made to
comparable GAAP measures, the ways management uses these non-GAAP
measures, and the reasons why management believes these non-GAAP
measures provide useful information for investors. 


 
Reconciliation of Selected GAAP Measures to Non-GAAP Measures               
 (Unaudited)                                                                
(In thousands, except per share data)                                       
                                                                            
                                         August 31,     May 31,  August 31, 
                                               2013        2013        2012 
                                            Q2 2014     Q1 2014     Q2 2013 
                                                                   Restated 
                                                                            
GAAP GROSS PROFIT (LOSS)                  $   1,400   $   8,105   $  (4,069)
GAAP GROSS MARGIN                               4.2%       14.7%       -4.6%
                                                                            
Stock-based compensation                        240         245         164 
Amortization of intangible assets               230         230          95 
                                        ------------------------------------
NON-GAAP GROSS PROFIT (LOSS)              $   1,870   $   8,580   $  (3,810)
                                        ------------------------------------
NON-GAAP GROSS MARGIN                           5.6%       15.5%       -4.3%
                                        ------------------------------------
                                                                            
GAAP OPERATING EXPENSES                   $  20,521   $  19,714   $  26,604 
Stock-based compensation                     (1,645)     (1,859)     (1,797)
Amortization of intangible assets              (195)       (196)       (367)
Impairment of intangible assets                   -           -        (781)
                                        ------------------------------------
NON-GAAP OPERATING EXPENSES               $  18,681   $  17,659   $  23,659 
                                        ------------------------------------
                                                                            
GAAP NET LOSS                             $ (26,053)  $ (13,232)  $ (33,179)
Adjustments for:                                                            
Stock-based compensation                      1,885       2,104       1,961 
Amortization of intangible assets               425         426         462 
Impairment of intangible assets                   -           -         781 
Charges to debt discount and deferred                                       
 issuance costs                               3,429           -           - 
Charges for change in fair value of                                         
 common                                                                     
stock warrants and derivative                                               
 liabilities                                  2,752         979       2,084 
                                        ------------------------------------
NON-GAAP NET LOSS                         $ (17,562)  $  (9,723)  $ (27,891)
                                        ------------------------------------
                                                                            
GAAP BASIC AND DILUTED NET LOSS PER                                         
 SHARE                                    $   (0.38)  $   (0.19)  $   (0.49)
Adjustments for:                                                            
Stock-based compensation                       0.03        0.03        0.03 
Amortization of intangible assets              0.01        0.01        0.01 
Impairment of intangible assets                   -           -        0.01 
Charges to debt discount and deferred                                       
 issuance costs                                0.05           -           - 
Charges for change in fair value of                                         
 common                                                                     
stock warrants and derivative                                               
 liabilities                                   0.04        0.01        0.03 
                                        ------------------------------------
NON-GAAP NET LOSS PER SHARE               $   (0.26)  $   (0.14)  $   (0.41)
                                        ------------------------------------
                                                                            
SUPPLEMENTAL INFORMATION                    Q2 2014     Q1 2014     Q2 2013 
Stock-based compensation expenses                                           
 included in:                                                               
Cost of revenue                           $     240   $     245   $     164 
Research and development                        791         942         753 
Sales and marketing                             434         452         516 
General and administrative                      420         465         528 
                                        ------------------------------------
Total stock-based compensation            $   1,885   $   2,104   $   1,961 

  
OCZ Investor Relations Contact: 
Bonnie Mott 
Senior Manager of Investor Relations 
(408) 440-3428 
bmott@ocztechnology.com  
Media Contact:
Scott Harlin
Director of Marketing Communications - Enterprise
(408) 733-8400
sharlin@ocztechnology.com