Table of Contents

As filed with the Securities and Exchange Commission on April 23, 2010

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Corsair Components, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3577   27-1735357
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

46221 Landing Parkway

Fremont, California 94538

(510) 657-8747

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Nicholas B. Hawkins

46221 Landing Parkway

Fremont, California 94538

(510) 657-8747

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Thomas C. DeFilipps
Eric S. Haueter
Sharon R. Flanagan
Sidley Austin LLP
1801 Page Mill Road, Suite 110

Palo Alto, California 94304

Telephone: (650) 565-7000

Telecopy: (650) 565-7100

 

Tad J. Freese

Latham & Watkins LLP

140 Scott Drive

Menlo Park, California 94025

Telephone: (650) 328-4600

Telecopy: (650) 463-2600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 
Title of each class of
securities to be registered
  Proposed maximum
aggregate offering
price(1)(2)
  Amount of
registration fee

Common stock, par value $0.0001 per share

  $86,250,000   $6,150
 
 
(1) Includes offering price of shares that the underwriters have the option to purchase.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

Subject to Completion dated April 23, 2010

PRELIMINARY PROSPECTUS

Shares

LOGO

Corsair Components, Inc.

Common Stock

 

 

This is the initial public offering of the common stock of Corsair Components, Inc. We are offering                              shares of our common stock and the selling stockholders identified in this prospectus are offering                              shares of our common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. We estimate that the initial public offering price will be between $             and $             per share.

We intend to apply to list our common stock on the Nasdaq Global Market under the symbol “CRSR.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 13 of this prospectus.

 

     Per Share    Total

Initial public offering price

   $                 $             

Underwriting discounts and commissions

   $      $  

Proceeds to Corsair, before expenses

   $      $  

Proceeds to selling stockholders, before expenses

   $      $  

We and the selling stockholders have granted the underwriters a 30 day option to purchase a total of up to an additional                      shares of common stock on the same terms and conditions set forth above if the underwriters sell more than                      shares of common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2010.

 

 

 

Barclays Capital   Jefferies & Company

 

 

 

Oppenheimer & Co.   RBC Capital Markets

The date of this prospectus is                     , 2010


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   13

Special Note Regarding Forward-Looking Statements and Market Data

   40

Use of Proceeds

   41

Dividend Policy

   42

Capitalization

   43

Dilution

   45

Selected Consolidated Financial Data

   48

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   53

Business

   76

Management

   92

Executive Compensation

   98

Certain Relationships and Related Party Transactions

   117

Principal and Selling Stockholders

   120

Description of Capital Stock

   122

Shares Eligible for Future Sale

   126

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

   129

Underwriting

   133

Legal Matters

   140

Experts

   140

Where You Can Find More Information

   140

Index to Consolidated Financial Statements

   F-1

You should rely only on the information contained in this prospectus and in any free writing prospectus that we may provide to you in connection with this offering. Neither we nor any of the selling stockholders or underwriters has authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any such free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor any of the selling stockholders or underwriters is making an offer to sell or seeking offers to buy these securities in any jurisdiction where or to any person to whom the offer or sale is not permitted. The information in this prospectus is accurate only as of the date on the front cover of this prospectus and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates.

Until                     , 2010 (the 25th day after the date of this prospectus), all dealers effecting transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States: Neither we nor any of the selling stockholders or underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights some of the information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, including “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise expressly stated or the context otherwise requires, the terms “Corsair,” “our company,” “we,” “us” and “our” and similar references in this prospectus refer to Corsair Components, Inc. and its predecessors (including Corsair Memory, Inc.) and their respective consolidated subsidiaries.

Corsair Components, Inc.

Company Overview

We are a leading designer and supplier of high-performance components to the personal computer, or PC, gaming hardware market. Our products are purchased primarily by PC gaming enthusiasts who build their own high-performance desktop computer systems or buy pre-assembled customized systems in order to achieve the processing speeds and graphics capabilities necessary to fully experience leading edge computer games. According to a report that we commissioned from Jon Peddie Research, a market research firm, sales in the do-it-yourself, or DIY, portion of the worldwide PC gaming hardware market are forecasted to be approximately $10.4 billion in 2010. We believe, based on our management’s estimates, that our current product portfolio addresses approximately one-third of this DIY market segment. We believe that we have a leading brand among PC gaming enthusiasts, reflecting our superior product performance, design and reliability. Over the last four years we have introduced new, higher value added PC gaming components, both leveraging and reinforcing our brand image within our target market. Through our 16 years of operation, we have developed a global, scalable operations infrastructure with extensive marketing and distribution channel relationships with distributors and retailers in Europe, the Americas and the Asia Pacific region.

We have established a strong brand that we believe is widely recognized and respected in the PC gaming hardware market. We believe that our reputation, reinforced by favorable reviews of our products within the PC gaming community, is instrumental to building and maintaining our market leadership, particularly in light of the technical sophistication of many of our end-users. Our products have won numerous awards from computer enthusiast websites, such as hexus.net, hardocp.com, xbitlabs.com, driverheaven.net (now known as hardwareheaven.net) and legitreviews.com. Our products have also been recognized by a variety of publications, such as Maximum PC, a leading PC enthusiast magazine in the United States, which included our high-performance dynamic random access memory, or DRAM, modules in their “Dream Machine” PC in 2007, 2008 and 2009, and Custom PC, a widely distributed computer enthusiast magazine in the United Kingdom, whose readers voted us as the Computer Power Supply Manufacturer of the Year in each of the last three years.

Our products are sold to end-users in more than 60 countries through our customers, primarily retailers and distributors. End-users purchase our products primarily from online and brick-and-mortar retailers, including major retailers such as Newegg.com, TigerDirect.com, Amazon.com and Best Buy in the United States, Media Markt in Germany, PC World in the United Kingdom and Surcouf in France. For the year ended December 31, 2009, despite challenging market conditions, we generated net revenues of $325.6 million, gross profit of $46.7 million, a net loss of $8.7 million and adjusted net income of $7.0 million. Adjusted net income (loss), which is not a financial measure under U.S. generally accepted accounting principles, or GAAP, is equal to net income (loss) plus tax-adjusted stock-based compensation (benefit) expense (which was an expense of $15.7 million in 2009) and is included in this prospectus to provide investors with a supplemental measure of our operating performance. See “Summary Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Measures” below for an explanation of how we compute adjusted net income (loss) and for a reconciliation to net income (loss), the most directly comparable GAAP financial measure.

 

 

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Industry Overview

Consumers desire increasing realism in videogames and game publishers have responded with games that incorporate enhanced live-action, movie-like graphics, sophisticated game play and multi-player interactivity. Although videogames can be played on consoles, smartphones and dedicated handheld gaming devices, the most advanced games require the processing and graphics power of a high-performance gaming PC for optimal performance. The emergence of advanced, multiplayer online videogames, such as World of Warcraft, Need for Speed and Crysis, has also placed increased demands on processing speed and power by giving an inherent competitive performance advantage to players with faster systems. Moreover, gaming enthusiasts often utilize multiple large format video displays and game specific controllers, such as steering wheels and joysticks, for a more immersive experience. This increased complexity of games, along with the use of multiple displays and interface devices, require increased memory, faster processing speeds and superior graphics for optimal performance, which we believe drives the purchase of high-performance PC gaming systems and components.

The worldwide installed base of consumer PCs that could be used to play games was estimated to be approximately 228 million in 2008 and is projected to increase to more than 600 million by 2013, according to the PC Gaming Alliance, a computer gaming industry trade association. According to an independent research report by Jon Peddie Research, the worldwide PC gaming hardware market (including systems, accessories and upgrades) was estimated to be approximately $20.8 billion in sales in 2009 and is projected to grow to approximately $35.2 billion in sales in 2013, reflecting a compound annual growth rate of approximately 14.0%. In the separate report that we commissioned, Jon Peddie Research forecasts that sales in the DIY segment of the worldwide PC gaming hardware market will be approximately $10.4 billion in 2010.

Our Competitive Strengths

We are a leading provider of high-performance PC gaming hardware. We believe that we have a strong position in our target market as a result of the following competitive strengths:

 

   

Strong Brand Recognition and Customer Loyalty. We have been shipping high-performance DRAM modules for over 10 years and believe that we have established ourselves as a leading brand among computer gaming enthusiasts. We deliver high-performance and reliable products that have consistently met our targeted and advertised product specifications. This has helped us create a strong brand that we believe is widely recognized and respected in the PC gaming hardware market, as well as a loyal customer base among gaming enthusiasts.

 

   

Broad and Expanding Product Portfolio. We have demonstrated the ability to grow our business by successfully expanding our product portfolio. In late 2006, we launched our first line of non-memory components by introducing high-performance power supply units and in 2009 we launched three additional product categories: solid-state drives, cooling systems and computer cases. As of March 31, 2010, these four new product categories constituted our gaming components and peripherals segment, which experienced growth in net revenues from approximately $17.3 million in 2007 to approximately $82.5 million in 2009, reflecting a compound annual growth rate of approximately 118%.

 

   

Rapid and Effective Product Development. We leverage the active online community of gaming enthusiasts to understand better the needs of our end-users, with whom we continuously communicate through forums, blogs, customer surveys, social networking websites and other media. Our website, corsair.com, which includes forums, blogs and on-line tutorials, had a monthly average of over 700,000 visits in the fourth quarter of 2009. We believe that our proactive efforts to solicit and integrate end-user feedback into our product designs enhance our ability to deliver new products within a relatively short time frame and provide us with significant competitive advantages.

 

   

Global Sales and Distribution Network. In over 16 years of operation, we have developed a comprehensive global marketing and distribution network with representation in major markets

 

 

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worldwide. We currently ship to more than 60 countries and to major retailers including Newegg.com, TigerDirect.com, Amazon.com and Best Buy in the United States, Media Markt in Germany, PC World in the United Kingdom and Surcouf in France.

 

   

Scalable and Efficient Operating Model. We maintain a highly scalable and efficient operating model designed to manage the global supply chain of an increasingly diverse mix of products. As we have expanded our product portfolio, we have developed increasingly sophisticated tools for forecasting and managing our supply chain, freight costs and inventory in a variety of economic environments.

Our Growth Strategy

We intend to maintain and extend our position as a leading provider of high-performance PC gaming hardware by pursuing the following growth strategies:

 

   

Increase Product Sales to our Core Gaming Enthusiast Market. Our goal is to be the leading provider of high-performance components for the PC gaming enthusiast. Our strategy is to maintain and strengthen our position as a leading provider of DRAM modules to the PC gaming market, while growing the market share of our newer product categories.

 

   

Expand our Served Market. We seek to expand our end-user base and end markets by introducing new peripheral products intended to appeal to consumers in the significantly larger mainstream PC gaming market. We intend to leverage our brand and apply our expertise with existing technologies, our product development capabilities and our knowledge of customer requirements in order to enter product categories such as audio products, which we are currently developing, and input/output devices that are designed to appeal to both mainstream and enthusiast PC gamers.

 

   

Leverage our Scalable Operating and Business Model. We intend to continue to leverage our flexible operating model, which has allowed us to limit our operating expenses and deploy our capital efficiently, despite sometimes challenging market conditions. We believe that our global and scalable operations infrastructure and outsourced manufacturing model can support meaningful growth with modest incremental capital investment.

 

   

Build on our Existing Infrastructure to Address Growing Opportunities in the Asia Pacific Region. For the year ended December 31, 2009, sales to the Asia Pacific markets generated 12.7% of our net revenues, with most of our sales in that region coming from Australia and Japan. We believe that there are significant opportunities in China, India and other Asian markets with substantial populations as consumer spending on PC gaming hardware increases with growth in disposable income.

 

   

Pursue Selective Complementary Acquisitions. The markets for some of our products are highly fragmented, with a number of relatively small suppliers, some of which may lack the necessary resources to market and distribute their products effectively. We plan to evaluate, and may pursue, acquisitions that diversify our product offerings and broaden our end-user base or expand our geographic presence.

Risks Affecting Us

Our business is subject to numerous risks, including those described in the section entitled “Risk Factors” immediately following this prospectus summary. These risks represent challenges to the implementation of our strategy and to the success of our business. These risks include the following:

 

   

integrated circuits account for most of the cost of producing our DRAM modules, USB flash drives and solid-state drives and fluctuations in the market price of integrated circuits may have a material impact on our net revenues and gross profit;

 

 

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the majority of our net revenues is generated by sales of DRAM modules and any significant decrease in the average selling prices of our DRAM modules would have a material adverse effect on our business, results of operations and financial condition;

 

   

our gross profit can vary significantly depending on fluctuations in the market price of DRAM modules, product mix and other factors, many of which are beyond our control;

 

   

our competitive position depends to a significant degree upon our ability to maintain the strength of our brand among PC gaming enthusiasts;

 

   

our success and growth depend on our ability to continuously develop and successfully market new products and improvements;

 

   

we depend on the introduction and success of new high-performance computer hardware, particularly microprocessors and graphics cards, and sophisticated new computer games to drive sales of our products;

 

   

we face intense competition and the markets we serve are characterized by continuous and rapid technological developments and change;

 

   

our results of operations are subject to substantial quarterly and annual fluctuations, which may adversely affect the market price of our common stock;

 

   

we do not own any manufacturing facilities, we do not have any guaranteed sources of supply of products or components, and we depend upon a small number of manufacturers, some of which are single-source suppliers, to supply our products, which may result in product and component shortages, delayed deliveries and quality control problems; and

 

   

your ability to influence matters that require approval of our stockholders will be limited because a small group of our existing stockholders will own a substantial portion of our outstanding common stock immediately after this offering.

Corporate Information

We were founded in 1994 as a California corporation. We reincorporated in the State of Delaware in 2007. Our executive offices are located at 46221 Landing Parkway, Fremont, California 94538 and our telephone number is (510) 657-8747. Our website address is www.corsair.com. Information contained on, or accessible through, our website is not incorporated by reference into this prospectus and should not be considered to be part of this prospectus.

We use various trademarks and trade names in our business, including Corsair, Dominator, Dominator GT, Dominator GTX, XMS, Value Select, DHX, DHX+, Flash Voyager, Flash Voyager GT, Flash Voyager GTR, Flash Voyager Mini, Flash Voyager Port, Flash Survivor, Flash Survivor GT, Flash Padlock, Corsair Professional Series, Corsair Enthusiast Series, Corsair Builder Series, Corsair Obsidian Series, Corsair Air Series, Corsair Hydro Series, Corsair Ice Series, Corsair Storage Solutions, Corsair Performance Series, Corsair Extreme Series, Corsair Reactor Series and Corsair Nova Series, some of which appear in this prospectus, as well as the sail logo appearing on the cover page of this prospectus. All other trademarks and trade names appearing in this prospectus are the property of their respective owners.

 

 

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The Offering

 

Total common stock offered

                                                          shares

 

Common stock offered by us

                                                          shares

 

Common stock offered by the selling stockholders

                                                          shares

 

Total common stock to be outstanding immediately after this offering

                                                          shares

 

Use of proceeds

We estimate that the net proceeds we receive from the sale of common stock in this offering will be approximately $             million (or approximately $             million if the underwriters exercise their option to purchase additional shares of common stock in full), in each case assuming an initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds that we receive from the sale of shares of our common stock in this offering for general corporate purposes, which may include working capital, capital expenditures and possible acquisitions of other businesses, products, assets or technologies. Although one of our strategies is to grow through acquisitions, we have no present commitments or agreements to make any acquisitions. We will not receive any proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”

 

Proposed Nasdaq Global Market symbol

We intend to apply to list our common stock on the Nasdaq Global Market under the symbol “CRSR.”

The total number of shares of our common stock to be outstanding immediately after this offering as set forth above is based on the number of shares outstanding as of March 31, 2010 (assuming that the Holding Company Formation referred to below had occurred as of that date) and excludes:

 

   

38,524,482 shares of our common stock issuable upon the exercise of options outstanding under our equity incentive plans as of March 31, 2010 at a weighted average exercise price of $0.38 per share;

 

   

             shares of our common stock that will be issuable upon exercise of options we intend to grant prior to the closing of this offering under our 2010 Equity Incentive Plan at an exercise price equal to $             per share;

 

   

             additional shares of our common stock that will be available for future awards under our 2010 Equity Incentive Plan, plus automatic annual increases in the number of shares of common stock available for future awards under that plan, as more fully described in “Executive Compensation—Equity Incentive Plans”;

 

   

             additional shares of our common stock that will be available for future awards under our 2010 Employee Stock Purchase Plan, as more fully described in “Executive Compensation—Equity Incentive Plans”; and

 

 

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shares of our common stock issuable upon the exercise of outstanding warrants at an exercise price of $0.55 per share (subject to adjustment as provided in the warrants). The number of shares of our common stock issuable upon exercise of the warrants is equal to the sum of (a) 1,942,827 shares of common stock plus (b) the number of shares of common stock equal to 2% of the total number of shares of common stock of all classes issued by us (other than shares of common stock issued in this offering) during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering, calculated as of the date of exercise on a fully-diluted basis after giving effect to the exercise of all other warrants, options and rights to acquire any shares of our common stock issued by us, and the conversion of any convertible securities issued by us, during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering.

Unless otherwise expressly stated or the context otherwise requires, the information in this prospectus gives effect to and assumes the following:

 

   

the completion of the Holding Company Formation described below, which will occur prior to the closing of this offering;

 

   

no exercise of outstanding options or warrants;

 

   

the effectiveness of our amended and restated certificate of incorporation, which we sometimes refer to as our certificate of incorporation, and of our amended and restated bylaws, which we sometimes refer to as our bylaws, which will occur prior to the closing of this offering;

 

   

the effectiveness of a      for      reverse split of our common stock and the amendment of some of the terms of our outstanding warrants, both of which will occur prior to the closing of this offering; and

 

   

no exercise by the underwriters of their option to purchase a total of                  additional shares of common stock on the terms and conditions set forth on the cover page of this prospectus if the underwriters sell more than                  shares of common stock in this offering, consisting of up to                  shares that may be purchased from us and a total of up to                  shares that may be purchased from the selling stockholders.

The Holding Company Formation and Repurchase Right Termination

Corsair Components, Inc., or Corsair Components, the issuer of the common stock to be sold in this offering, was incorporated in Delaware in January 2010. Our business was in the past conducted through Corsair Memory, Inc., or Corsair Memory, and its predecessors and their respective subsidiaries. Prior to the closing of this offering, Corsair Memory will effect a corporate reorganization, which we sometimes refer to as the Holding Company Formation, pursuant to which Corsair Memory will become a wholly-owned subsidiary, and all of our other subsidiaries will become direct or indirect subsidiaries, of Corsair Components. In connection with the Holding Company Formation, the outstanding shares of Corsair Memory’s common stock will be converted into shares of Corsair Components’ common stock and outstanding options and warrants to purchase Corsair Memory’s common stock will become options or warrants, as the case may be, to purchase shares of Corsair Components’ common stock. Accordingly, our consolidated financial statements and other financial information included in this prospectus as of dates and for periods prior to date of the Holding Company Formation reflect the results of operations and financial position of Corsair Memory and its consolidated subsidiaries, and our consolidated financial statements and other financial information, if any, as of dates and for periods from and after the date of the Holding Company Formation reflect the results of operations and financial condition of Corsair Components and its consolidated subsidiaries, in each case unless otherwise expressly stated or the context otherwise requires.

 

 

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The terms of our employee stock ownership plan, or ESOP, currently provide that ESOP participants have the right, for a specified period of time, to require us to repurchase shares of our common stock that are distributed to them by the ESOP. As a result, the shares of common stock held by the ESOP are reflected in our consolidated balance sheet in a line item (called “redeemable ESOP shares”) below liabilities and above stockholders’ (deficit) equity and in an offsetting line item (also called “redeemable ESOP shares”) that is a component of stockholders (deficit) equity. We plan to terminate this repurchase right, which we sometimes refer to as the ESOP Repurchase Right Termination, upon the closing of this offering, whereupon this accounting treatment for the ESOP shares will be discontinued.

The holders of our outstanding warrants to purchase shares of our common stock have the right to require us to repurchase those warrants or the shares of common stock issued on exercise of those warrants on June 18, 2012 and under other specified circumstances. As a result, the warrants are reflected as a liability on our consolidated balance sheet. The holder of the warrants has agreed to terminate this repurchase right, which we sometimes refer to as the Warrant Repurchase Right Termination, upon the closing of this offering, which means that the outstanding warrants will then be reflected in stockholders’ (deficit) equity on our consolidated balance sheet.

A significant number of our outstanding employee based awards are subject to repurchase rights that, combined with our past practices of repurchasing shares, caused such awards to be reflected as a stock compensation liability on our consolidated balance sheet. We expect that these repurchase rights will be terminated in connection with this offering, which means the amount previously reflected as stock compensation liability will then be reflected in stockholders’ (deficit) equity in our consolidated balance sheet. We sometimes refer to this repurchase right termination, the ESOP Repurchase Right Termination and the Warrant Repurchase Right Termination, collectively, as the Repurchase Right Termination.

 

 

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Summary Consolidated Financial Data

We derived the following summary consolidated statement of operations data and other financial and operating data (other than units sold) for the years ended December 31, 2007, 2008 and 2009 and the following summary historical consolidated balance sheet data as of December 31, 2009 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the following summary consolidated statement of operations data and other financial and operating data (other than units sold) for the year ended December 31, 2005 from our unaudited restated consolidated financial statements for that year and for the year ended December 31, 2006 from our audited consolidated financial statements for that year, which financial statements are not included in this prospectus. Our results of operations and financial condition presented below do not purport to be indicative of our results of operations or financial condition as of any future date or for any future period. You should read the following information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Consolidated Financial Data” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     Year Ended December 31,  
     Restated
2005(3)
    2006     2007     2008     2009  
     (in thousands except per share amounts)  

Consolidated Statement of Operations Data:

          

Net revenues

   $ 275,950      $ 378,050      $ 379,718      $ 341,072      $ 325,633   

Cost of revenue(1)

     254,776        350,830        343,337        305,505        278,976   
                                        

Gross profit

     21,174        27,220        36,381        35,567        46,657   

Operating expenses:

          

Product development(1)

     6,704        8,748        1,736        87        13,514   

Sales and marketing(1)

     9,912        10,969        15,751        17,534        23,780   

General and administrative(1)

     15,724        12,734        11,039        4,668        20,201   
                                        

Total operating expenses(2)

     32,340        32,451        28,526        22,289        57,495   
                                        

Income (loss) from operations

     (11,166     (5,231     7,855        13,278        (10,838

Interest expense, net

     (1,019     (2,388     (3,267     (2,543     (1,730

Loss on revaluation of common stock warrants

     —          —          —          —          (1,722

Other income (expense), net

     21        154        70        (90     310   
                                        

Income (loss) before income taxes

     (12,164     (7,465     4,658        10,645        (13,980

Income tax expense (benefit)

     702        1,296        67        (557     (5,290
                                        

Net income (loss)

   $ (12,866   $ (8,761   $ 4,591      $ 11,202      $ (8,690
                                        

Net income (loss) per share:

          

Basic

   $ (0.23   $ (0.15   $ 0.08      $ 0.19      $ (0.14
                                        

Diluted

   $ (0.23   $ (0.15   $ 0.00      $ (0.03   $ (0.14
                                        

Weighted average shares used in computing net income (loss) per share:

          

Basic

     55,464        57,976        58,494        59,643        61,251   

Diluted

     55,464        57,976        79,783        75,579        61,251   

 

 

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(1) Includes stock-based compensation (benefit) expense as follows:

 

     Year Ended December 31,  
     Restated
2005(3)
     2006      2007      2008      2009  
     (in thousands)  

Cost of revenue

   $ 1,924       $ 1,033       $ (476    $ (1,674    $ 448   

Product development

     4,488         2,895         (1,672      (4,353      8,389   

Sales and marketing

     1,866         1,477         (398      (1,389      7,878   

General and administrative

     5,509         3,604         (1,984      (5,407      11,289   
                                            

Total

   $  13,787       $    9,009       $   (4,530    $ (12,823    $  28,004   
                                            

 

(2) For years prior to 2007, we had a bonus plan under which the bonus payouts were significantly larger than under our current bonus plan. In 2005, our total bonus expense was approximately $3.6 million compared to adjusted EBIT of approximately $2.6 million and adjusted EBIT before bonus expense of approximately $6.2 million. In 2006, our total bonus expense was approximately $7.3 million compared to adjusted EBIT of approximately $3.8 million and adjusted EBIT before bonus expense of approximately $11.1 million. Adjusted EBIT is a non-GAAP financial measure that we include in this prospectus to provide investors with a supplemental measure of our operating performance. For a definition of adjusted EBIT and reconciliation to net income (loss), the most directly comparable GAAP measure, see note (1) on the following page.
(3) We restated our consolidated financial statements as of December 31, 2005 primarily to correct the accounting treatment for stock options under variable accounting. The net effects of the restatement resulted in a net loss of $12.9 million instead of previously reported net income of $1.5 million for the year ended December 31, 2005 after adjusting for the stock-based compensation expense of $13.8 million and $0.6 million of other items.

 

 

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     Year Ended December 31,
     Restated
2005(4)
   2006    2007    2008     2009
     (dollars and units in thousands)

Other Financial and Operating Data:

             

Adjusted EBIT(1)

   $ 2,621    $ 3,778    $ 3,325    $ 455      $ 17,166

Adjusted net income (loss)(1)

   $ 921    $ 248    $ 61    $ (1,621   $ 7,022

Gross profit:(2)

             

High-performance memory components

   $ —      $ —      $ —      $ —        $ 30,167

Gaming components and peripherals

   $ —      $ —      $ —      $ —        $ 16,490
                                   

Total

   $ 21,174    $ 27,220    $ 36,381    $ 35,567      $ 46,657
                                   

Gross margin:(2)(3)

             

High-performance memory components

     —  %      —  %      —  %      —  %        12.4%

Gaming components and peripherals

     —  %      —  %      —  %      —  %        20.0%

Total

     7.7%      7.2%      9.6%      10.4%        14.3%

Total units sold

     4,947      6,560      9,314      10,700        9,083

 

(1) We present adjusted EBIT and adjusted net income (loss) in this prospectus to provide investors with supplemental measures of our operating performance. Adjusted EBIT and adjusted net income (loss) are non-GAAP financial measures. We define adjusted EBIT as net income (loss) less other income (expense), net, plus interest expense, net, loss on revaluation of common stock warrants, income tax expense (benefit) and stock-based compensation (benefit) expense. We define adjusted net income (loss) as net income (loss) plus tax-adjusted stock-based compensation (benefit) expense.

We believe that adjusted EBIT and adjusted net income (loss) assist our board of directors, management and investors in comparing our operating performance from period to period on a consistent basis because, in the case of adjusted EBIT, it removes the impact of stock-based compensation (benefit) expense (which is a non-cash item that can vary substantially from period to period), loss on revaluation of our outstanding common stock warrants (which is a non-cash item), other income (expense), net (which consists primarily of items, such as foreign currency gain or loss and income from scrap sales, that we do not consider indicative of our operating performance) and variations in our capital structure (affecting interest expense, net) and tax position (such as the impact of changes in effective tax rates) and because, in the case of adjusted net income (loss), it removes the impact of tax-adjusted stock-based compensation (benefit) expense. We also use adjusted EBIT as a performance measure in determining management bonuses. The use of adjusted EBIT and adjusted net income (loss) have limitations and you should not consider these performance measures in isolation from or as an alternative to GAAP measures such as net income (loss). For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Measures.”

The following table provides a reconciliation of adjusted EBIT to net income (loss), the most directly comparable GAAP financial measure, for the following periods:

 

     Year Ended December 31,  
     Restated
2005(4)
    2006     2007     2008     2009  
     (in thousands)      

Net income (loss)

   $ (12,866   $   (8,761   $    4,591      $ 11,202      $ (8,690

Less: other income (expense), net

     21        154        70        (90     310   

Plus:

          

Interest expense, net

     1,019        2,388        3,267        2,543        1,730   

Loss on revaluation of common stock warrants

     —          —          —          —          1,722   

Income tax expense (benefit)

     702        1,296        67        (557     (5,290

Stock-based compensation (benefit) expense

     13,787        9,009        (4,530     (12,823     28,004   
                                        

Adjusted EBIT

   $ 2,621      $ 3,778      $ 3,325      $ 455      $  17,166   
                                        

(Footnote continued on next page)

 

 

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(1) (cont.) The following table provides a reconciliation of adjusted net income (loss) to net income (loss), the most directly comparable GAAP financial measure, for the following periods. The tax adjustment in the following table reflects the increase in income tax expense or decrease in income tax benefit, as the case may be, that would have been reflected in our consolidated statement of operations for the applicable period if stock-based compensation (benefit) expense was not deducted or added, as the case may be, in computing net income (loss).

 

     Year Ended December 31,  
     Restated
2005(4)
     2006      2007      2008      2009  
     (in thousands)  

Net income (loss)

   $ (12,866    $ (8,761    $    4,591       $ 11,202       $ (8,690

Plus stock-based compensation (benefit) expense

     13,787            9,009         (4,530      (12,823       28,004   

Less tax adjustment

     —           —           —           —           12,292   
                                            

Adjusted net income (loss)

   $ 921       $ 248       $ 61       $ (1,621    $ 7,022   
                                            

 

(2) Our business has two operating segments: high-performance memory components and gaming components and peripherals. Prior to 2009, we evaluated the performance of our two operating segments based on net revenues; accordingly, information relating to cost of revenue and gross profit for each operating segment is not available for periods prior to 2009. Starting in 2009, we began evaluating the performance of our two operating segments based on cost of revenue and gross profit, in addition to net revenues.
(3) Gross margin is gross profit as a percentage of net revenues.
(4) We restated our consolidated financial statements as of December 31, 2005 primarily to correct the accounting treatment for stock options under variable accounting. The net effects of the restatement resulted in a net loss of $12.9 million instead of previously reported net income of $1.5 million for the year ended December 31, 2005 after adjusting for the stock-based compensation expense of $13.8 million and $0.6 million of other items.

 

 

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     As of December 31, 2009
     Actual     Pro Forma    Pro Forma
As  Adjusted(1)
     (in thousands)        

Consolidated Balance Sheet Data:

       

Cash

   $ 1,367      $ 1,367    $             

Total assets

     100,637        100,637   

Short-term debt and current portion of long-term debt and capital lease obligations

     25,986        25,986   

Long-term debt and capital lease obligations (less current portion)

     —          —     

Stock compensation liability

     31,072        —     

Common stock warrant liability

     1,895        —     

Redeemable ESOP shares

     14,298        —     

Total stockholders’ (deficit) equity

     (25,106     22,159   

 

(1) The pro forma balance sheet data in the table above gives effect to the Repurchase Right Termination and the pro forma as adjusted balance sheet data in the table above gives effect to the Repurchase Right Termination and the sale of shares of our common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, and our receipt of the estimated net proceeds from the sale of the shares sold by us, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if these transactions had occurred as of December 31, 2009. None of this data gives effect to our application of those net proceeds. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, would increase (decrease) our pro forma as adjusted cash, total assets and total stockholders’ equity by approximately $             million, assuming that the number of shares of common stock sold by us, as set forth on the cover page of this preliminary prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A 100,000 share increase (decrease) in the number of shares of common stock sold by us in this offering would increase (decrease) our pro forma as adjusted cash, total assets and total stockholders’ equity by approximately $             million, assuming an initial public offering price per share equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information set forth above is provided for illustrative purposes only and our actual consolidated balance sheet data after this offering will be determined in part by the actual public offering price and number of shares sold by us and other terms of this offering.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with the risks and uncertainties described elsewhere in this prospectus, including in our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks is realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Business

Integrated circuits account for most of the cost of producing our DRAM modules, USB flash drives and solid-state drives and fluctuations in the market price of integrated circuits may have a material impact on our net revenues and gross profit.

DRAM integrated circuits, or ICs, account for most of the cost of producing our DRAM modules and NAND flash memory ICs account for most of the cost of producing our USB flash drives and solid-state drives. The market for these ICs is highly competitive and cyclical. Prices of DRAM ICs and NAND flash memory ICs have been volatile and subject to significant fluctuations in the past over relatively short periods of time due to a number of factors, including excess supply of ICs due to manufacturing overcapacity and imbalances in supply and demand. Prices for DRAM ICs and NAND flash memory ICs may fluctuate substantially in the future over relatively short periods of time, which may materially affect our net revenues and gross profit.

A majority of our net revenues is generated by sales of DRAM modules and any significant decrease in the average selling prices of our DRAM modules would have a material adverse effect on our business, results of operations and financial condition.

A majority of our net revenues is generated by sales of DRAM modules. In particular, net revenues of our high-performance memory segment, most of which are generated by sales of DRAM modules, accounted for a total of 95.4%, 86.7% and 74.7% of our consolidated net revenues in 2007, 2008 and 2009, respectively. As a result, any significant decrease in average selling prices of our DRAM modules, whether as a result of declining market prices of DRAM ICs or for any other reason, would have a material adverse effect on our business, results of operations and financial condition. Selling prices for our DRAM modules tend to increase or decrease with increases or decreases, respectively, in market prices of DRAM ICs and average selling prices of DRAM modules declined substantially in 2008, which had a material adverse effect on our results of operations for that year. Furthermore, while sales of USB flash drives and solid-state drives generate substantially smaller percentages of our total net revenues than sales of DRAM modules, declines in average selling prices of our USB flash drives and solid-state drives, whether as a result of declining prices of NAND flash memory ICs or for other reasons, may adversely affect our business, results of operations and financial condition. Similarly, declines in average selling prices of DRAM modules and, to a lesser extent, USB flash drives and solid-state drives could affect the valuation of our inventory and may lead to inventory write-downs. Declines in average selling prices of DRAM modules could also allow original equipment manufacturers to pre-install higher capacity DRAM modules into new computers at existing price points, which could reduce the demand for our DRAM modules in the retail market.

Our gross profit and gross margin can vary significantly depending on changes in product mix, fluctuations in the market price of DRAM ICs and other factors, many of which are beyond our control.

Our gross profit, which we define as net revenues minus cost of revenue, can vary substantially due to consumer demand, competition, product life cycles, new product introductions, fluctuations in average selling prices for our products (including fluctuations resulting from changes in the market price of DRAM and NAND flash memory ICs), unit volumes and manufacturing, freight and distribution costs. In particular, if we are not able to introduce new products in a timely manner, if our product, freight or other costs exceed our expectations, if demand for our products is less than we anticipate, or if there are product pricing, marketing and other

 

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initiatives by our competitors to which we need to react by lowering our selling prices or increasing promotional and marketing expenditures, our gross profit may be materially adversely affected. In addition, because we carry inventories of both DRAM ICs and DRAM modules at our facility in Taiwan, as well as inventories of DRAM modules at our shipping hubs, fluctuations in the market price of DRAM ICs can also have an effect on our gross margins, which we define as gross profit as a percentage of net revenues. For example, if prices of DRAM ICs and DRAM modules decrease, this has in the past tended to have a negative short-term impact on gross margins of our DRAM modules (reflecting the relatively higher cost of DRAM modules held in our inventory). As a result, our gross profit and gross margin may vary materially from quarter to quarter due to changes in prices of DRAM ICs.

In addition, our gross margins may vary significantly by product line. For example, due to price competition in the market for DRAM modules and solid-state drives and, to a lesser extent, USB flash drives, these products generally have lower gross margins than our power supply units, cooling systems and computer cases. Should the mix of products sold shifts from higher margin products to lower margin products, our overall gross margins may be adversely affected.

Our competitive position depends to a significant degree upon our ability to maintain the strength of our brand among PC gaming enthusiasts.

We regard our brand as one of our most valuable assets and we consider it essential to both maintaining and strengthening our brand that we be perceived by the computer gaming market as a leading supplier of cutting-edge, high-performance products. This requires that we constantly innovate by introducing new and enhanced high-performance products that achieve high levels of acceptance among computer gamers. We also need to spend substantial amounts of money on, and devote substantial resources to, advertising, marketing and other efforts to create and maintain brand recognition and loyalty among end-users. Product development, marketing and other brand promotion activities may not yield increased revenues and, even if they do, any increased revenues may not offset the expenses incurred in building our brand. If we fail to maintain and build our brand, or if we incur substantial expenses in an unsuccessful attempt to maintain and build our brand, it may have a material adverse effect on our business and revenues. Our brand may also be damaged by events such as product recalls, perceived declines in quality or reliability, product shortages and other events, some of which are beyond our control.

Our success and growth depend on our ability to continuously develop and successfully market new products and improvements.

The products we sell are characterized by short product life cycles, frequent new product introductions, rapidly changing technology and evolving industry standards. In addition, average selling prices of our products tend to decline as they mature. As a result, we must continually anticipate and respond to changing customer requirements, innovate in our current and emerging product categories, introduce new product lines and products, and enhance existing products in order to remain competitive and execute our growth strategy.

The success of our products depends on many factors, including our ability to:

 

   

identify new features or product opportunities;

 

   

anticipate technological developments and market trends;

 

   

develop innovative and reliable new products and enhancements to our existing products in a cost-effective and timely manner;

 

   

quickly develop, manufacture and ship new products to take advantage of developments in enabling technologies and the introduction of new computer hardware (such as new generations of microprocessors and more powerful graphics cards) and computer games that drive demand for our products; and

 

   

distinguish our products from those of our competitors.

 

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If we do not execute on these factors successfully, demand for our current products may decline and any new products that we may introduce may not gain widespread acceptance, adversely affecting our business and operating results. In addition, if we do not continue to distinguish our products through distinctive, technologically advanced features and designs, as well as continue to build and strengthen our brand recognition and our access to distribution channels, our business could be harmed.

We depend on the introduction and success of new high-performance computer hardware, particularly microprocessors and graphics cards, and sophisticated new computer games to drive sales of our products.

We believe that the introduction of more powerful central processing units, or CPUs, graphics cards and similar computer hardware that place increased demands on other system components, such as memory, power supply or cooling, has a significant effect on the demand for our products. As a result, our operating results can be materially affected by the frequency with which new high-performance hardware products are introduced, whether these products achieve widespread consumer acceptance and whether additional memory, enhanced power supply units or cooling systems, solid-state drives, new computer cases or other peripheral devices are necessary to support those products. Although we believe that, historically, new generations of high-performance CPUs and graphics cards have positively affected the demand for our products, we cannot assure you that this will be the case in the future. For example, the introduction of a new generation of highly efficient CPUs and graphics cards that require less power or that generate less heat than prior generations may reduce the demand for both our power supply units and cooling systems. In the past, semiconductor and computer hardware companies have typically introduced new products annually, generally in the second calendar quarter, which has tended to drive our sales in the following two quarters. If computer hardware companies do not continue to regularly introduce new and enhanced CPUs, graphics cards and other products that place increasing demands on system memory and processing speed, require larger power supply units or cooling systems or that otherwise drive demand for computer cases, USB flash drives and other peripherals, or if consumers do not accept those products, it would likely have a material adverse effect on our business, results of operations and financial condition.

We also believe that sales of our products are driven by conditions in the computer gaming industry. In particular, we believe that our business depends on the introduction and success of computer games with sophisticated graphics that place greater demands on system processing speed and capacity and therefore require more powerful CPUs or graphics cards, which in turn drives demand for our high-performance DRAM modules, power supply units, cooling systems and other components and peripheral drives. Likewise, we believe that the continuing introduction and market acceptance of new or enhanced versions of computer games helps sustain consumer interest in computer gaming generally. The demand for our products would likely decline, perhaps substantially, if computer game companies and developers do not introduce and successfully market sophisticated new and improved games that require increasingly high levels of system and graphics processing power on an ongoing basis or if demand for computer games among computer gaming enthusiasts or conditions in the computer gaming industry deteriorate for any reason. As a result, our sales and other operating results fluctuate due to conditions in the market for computer games and downturns in this market may materially adversely affect our business, results of operations and financial condition.

We face intense competition and, if we do not compete effectively, demand for our products could decline and our business and operating results could suffer.

We face intense competition in the markets for all of our products. We operate in markets that are characterized by rapid technological change, constant price pressure, rapid product obsolescence, evolving industry standards and new demands for features and performance. We experience aggressive price competition and other promotional activities by competitors, including in response to declines in consumer demand and excess product supply or as competitors seek to gain market share.

In recent years, we have added new product categories and we intend to introduce new product categories in the future. To the extent we are successful in adding new product categories, we will confront new competitors,

 

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many of which may have more experience, better known brands and greater distribution capabilities in the new product categories and markets than we do. In addition, because of the continuing convergence of the markets for computing devices and consumer electronics, we expect greater competition in the future from well-established consumer electronics companies. Many of our current and potential competitors, some of which are large, multi-national businesses, have substantially greater financial, technical, sales, marketing, personnel and other resources and greater brand recognition than we have. In addition, some of our competitors are small or mid-sized specialty companies, which may enable them to react to changes in industry trends or consumer preferences or to introduce new or innovative products more quickly than we can.

Our primary competitors in the markets for DRAM modules and USB flash drives include Adata, GSkill, Kingston Technology, Micron Technology through its Crucial division, OCZ Technology and SanDisk. Our primary competitors in the market for solid-state drives include Intel, Micron Technology through its Crucial division, OCZ Technology, Patriot, and Super Talent. In that regard, we face the risk that established semiconductor companies, such as Intel, Micron Technology, Samsung and SanDisk, which both manufacture DRAM or NAND flash memory ICs and incorporate them into the DRAM modules, USB flash drives or solid-state drives they sell, or established disk drive companies, such as Seagate or Western Digital, that sell solid-state drives, will use their lower cost structures, widely recognized brands and other resources to price their products substantially below ours and capture market share from us. Our primary competitors in the market for our power supply units, cooling systems and computer cases include Antec, Coolermaster and Thermaltake.

In addition, we are developing audio products and are considering a number of other new computer hardware product categories and, to the extent we introduce products in new categories, we will likely experience substantial competition from additional companies, which may include large computer peripherals and consumer electronics companies with global brand recognition and significant resources. The principal competitive factors in our market include the following:

 

   

performance;

 

   

reliability;

 

   

brand and associated style and image;

 

   

price;

 

   

time to market with new emerging technologies;

 

   

early identification of emerging opportunities;

 

   

interoperability of products; and

 

   

responsive customer support on a worldwide basis.

Computer games may be subject to significant competition from dedicated video game consoles, such as Microsoft’s Xbox, Nintendo’s Wii and Sony’s PlayStation, to the extent that the processing and graphics power of those consoles increase substantially. Our products are not designed for use in video game consoles. As a result, our net revenues and other operating results may suffer to the extent that consumer spending on video game consoles and related games increases, whether as a result of the introduction of new games or improved gaming consoles or for other reasons.

If we do not compete effectively, demand for our products could decline, our net revenues and gross margin could decrease and we could lose market share.

If we lose or are unable to attract and retain key management, our financial performance could suffer.

Our performance depends to a significant degree upon the continued individual and collective contributions of our management team, particularly Andrew J. Paul, our Chief Executive Officer and President and one of our co-founders. If we lose the services of one or more of our key executives, we may not be able to successfully

 

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manage our business or achieve our growth objectives. To the extent that our business grows, we will need to attract and retain additional qualified management personnel in a timely manner and we may not be able to do so.

We rely on highly-skilled personnel and if we are unable to attract, retain or motivate key personnel or hire qualified personnel, we may not be able to grow or our business may contract.

Our performance is largely dependent on the talents and efforts of highly-skilled individuals, particularly our electrical engineers, mechanical engineers and computer professionals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly-skilled personnel and, if we are unable to hire and train a sufficient number of qualified employees for any reason, we may not be able to implement our current initiatives or grow, or our business may contract and we may lose market share. Moreover, certain of our competitors or other technology businesses may seek to hire our employees. Although we have granted stock-based incentives to employees in the past and intend to continue doing so, there is no assurance that stock-based compensation will provide adequate incentives to attract, retain and motivate employees in the future, particularly if the market price of our common stock does not increase or declines. If we do not succeed in attracting, retaining and motivating highly qualified personnel, our business will suffer.

Our results of operations are subject to substantial quarterly and annual fluctuations, which may adversely affect the market price of our common stock.

Our results of operations have in the past fluctuated, sometimes substantially, from period to period, and we expect that these fluctuations will continue. A number of factors, many of which are outside our control, may cause or contribute to significant fluctuations in our quarterly and annual net revenues and other operating results. These fluctuations may make financial planning and forecasting more difficult. In addition, these fluctuations may result in unanticipated decreases in our available cash, which could negatively impact our business and prospects. These fluctuations also could both increase the volatility and adversely affect the market price of our common stock. Factors that may cause or contribute to fluctuations in our operating results include:

 

   

changes in the frequency with which new high-performance computer hardware, particularly CPUs and graphics cards, and sophisticated new computer games that drive demand for additional DRAM modules, larger power supplies, enhanced cooling systems and other peripherals are introduced;

 

   

fluctuations in average selling prices of and demand for our products, particularly DRAM modules;

 

   

changes in demand for our lower margin products relative to demand for our higher margin products;

 

   

loss of significant customers, cancellations or reductions of orders and product returns;

 

   

a delay, reduction or cessation of deliveries from one or more of the third parties that manufacture our products;

 

   

uncertainty in economic conditions, either globally or in specific countries or regions;

 

   

competitive pressures resulting in, among other things, lower selling prices or loss of market share;

 

   

introduction or enhancement of products by us and our competitors, and market acceptance of these new or enhanced products;

 

   

delays or problems in our introduction of new products or in the delivery of products;

 

   

changes in purchasing patterns by the distributors and retailers to which we sell our products;

 

   

discounts and price reductions offered by our competitors;

 

   

rapid, wholesale changes in technology in the markets in which we compete;

 

   

increased costs or shortages of our products or components used in our products;

 

   

changes in freight costs;

 

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fluctuations in currency exchange rates;

 

   

seasonal electronics product purchasing patterns by our customers and consumers;

 

   

the impact of political instability, natural disasters, war and/or events of terrorism;

 

   

changes in business cycles that affect the markets in which we sell our products;

 

   

the effect of fluctuations in interest rates on consumer disposable income;

 

   

cost and adverse outcomes of litigation, governmental proceedings or any proceedings to protect our brand or other intellectual property; and

 

   

the potential success of cloud computing.

One or more of the foregoing or other factors may cause our expenses to be disproportionately higher or lower or may cause our net revenues and other operating results to fluctuate significantly in any particular quarterly or annual period. Our results of operations in one or more future quarters or years may fail to meet the expectations of investment research analysts or investors, which could cause an immediate and significant decline in the market price of our common stock.

Conditions in the retail and consumer electronics markets may significantly affect our business, and the global economic downturn has harmed and could continue to harm our operating results.

We derive most of our revenue from higher priced products sold through online and brick-and-mortar retailers to end-users, and we are vulnerable to declines in consumer spending due to, among other things, depressed economic conditions, reductions in disposable income and other factors that affect the retail and consumer electronics markets generally. In addition, most of our revenues are attributable to sales of high-performance DRAM modules, USB flash drives, power supply units, solid-state drives, cooling systems and computer cases, all of which are products that are geared to the computer gaming market which, like other consumer electronic markets, is susceptible to the adverse effects of poor economic conditions.

The downturn in worldwide economic conditions, particularly in retail markets, has had a negative effect on our business. To the extent that these adverse economic conditions continue or worsen, they will likely continue to have a number of negative effects on our business, operating results and financial condition, which may include the following:

 

   

downward pressure on our product prices;

 

   

limited growth or reductions in our sales, reflecting lower consumer demand for our products as well as a shift in consumer buying patterns toward lower priced products and away from the relatively higher priced products that we sell;

 

   

limited growth or reductions in worldwide sales of products that incorporate DRAM modules, such as PCs, resulting in excess supply in the worldwide DRAM market;

 

   

reduced demand for our products from our customers as they limit or lower their inventory levels;

 

   

reduced cash flow due to delays in customer payments and increased risk of customer bankruptcy or business failures, resulting in increases in bad debt write-offs and receivables reserves;

 

   

higher costs for promotions, customer incentive programs and other initiatives used to stimulate demand;

 

   

increased risk of excess and obsolete inventories, which may require write-downs or impairment charges; and

 

   

financial distress or bankruptcy of key suppliers or third-party manufacturers, resulting in insufficient product quantities to meet demand or increases in the cost of producing our products.

 

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A continuation or worsening of depressed global economic conditions, or the occurrence of similar conditions in the future, could have a material adverse effect on our results of operations and financial condition.

We do not own any manufacturing facilities, we have no guaranteed sources of supply of products or components, and we depend upon a small number of manufacturers, many of which are single-source suppliers, to supply our products, which may result in product or component shortages, delayed deliveries and quality control problems.

We do not have any manufacturing facilities and we depend entirely on third parties to manufacture and supply the products we sell and the components used in our products. Our products are generally produced by only one or a limited number of manufacturers. For example, our Obsidian 800D and 700D computer cases are produced by a single manufacturer, each model of our power supply units, cooling systems and solid-state drives is produced by a single manufacturer, and our USB flash drives are produced by two manufacturers. Likewise, there are a limited number of companies capable of producing the advanced DRAM ICs required for our high-performance DRAM modules and NAND flash memory ICs required for our USB flash drives and solid-state drives. We do not have any long-term supply agreements with any of our manufacturers or suppliers. This reliance on a limited number of manufacturers and suppliers exposes us to numerous risks, including the following:

 

   

our manufacturers or suppliers may cease or reduce production or deliveries, raise prices or renegotiate other terms;

 

   

we may be slower than our competitors in introducing new products due to production or delivery delays by our third-party manufacturers or suppliers;

 

   

we carry very limited inventories of our products and the loss of one or more of these manufacturers or suppliers, or a significant decline in production or deliveries by any of them, could significantly limit our shipments of the product in question or prevent us from shipping that product entirely;

 

   

if one of our single source manufacturers were to stop production, we may be unable to locate a suitable replacement on terms we consider acceptable and there would likely be significant delays before we were able to transition production to a new manufacturer and potential significant costs associated with that transition;

 

   

the supply of products from these manufacturers and suppliers may be interrupted or delayed and we may be unable to obtain sufficient quantities because, among other things, these manufacturers or suppliers may experience financial difficulties, be affected by natural disasters or may have limited production facilities;

 

   

our manufacturers or suppliers may provide us with products or components that do not perform reliably, do not meet our quality standards or performance specifications, are susceptible to early failure or contain other defects, which may harm our reputation, increase our warranty and other costs or lead to product returns and recalls; and

 

   

lead times for the delivery of products being manufactured for us can vary significantly and depend on many factors outside of our control, such as demand for manufacturing capacity and availability of components.

From time to time we have experienced product shortages due to both disruptions in supply from the third parties that manufacture or supply our products and our inability or the inability of these third-party manufacturers to obtain necessary components, and we may experience similar shortages in the future. For example, from time to time our industry experiences shortages in DRAM ICs and NAND flash memory ICs which have resulted in placing companies, including us, on component allocation. Because sales of DRAM modules account for a majority of our net revenues, a shortage of DRAM ICs, particularly high-speed DRAM ICs, could have a material adverse effect on our net revenues and cash flow. Moreover, procurement of the other

 

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components used in our products is generally the responsibility of the third parties that manufacture our products and we therefore have limited or no ability to control or influence the procurement process or to monitor the quality of components.

Any disruption in or termination of our relationship with any of our manufacturers or suppliers or our inability to develop relationships with new manufacturers or suppliers as and when required would cause delays, disruptions or reductions in product shipment and may require product redesigns, all of which could damage relationships with our customers, harm our brand, increase our costs and otherwise materially adversely affect our business. Likewise, shortages or interruptions in the supply of products or components, or any inability to procure these products or components from alternate sources at acceptable prices in a timely manner, could delay shipments to our customers and increase our costs, any of which could materially adversely affect our business and operating results.

We rely on manufacturers in Taiwan to supply a significant portion of our DRAM modules, most of our USB flash drives and some of our solid-state drives, we rely on manufacturers in China to produce all of our power supply units, cooling systems and computer cases, and the facility where we perform testing and packaging of most of our DRAM modules is located in Taiwan, which exposes us to risks.

We purchase a significant portion of our DRAM modules, most of our USB flash drives and some of our solid-state drives from manufacturers and suppliers in Taiwan. All of our power supply units, cooling systems and computer cases are produced at factories located in Southeast China and we perform testing and packaging of most of our DRAM modules at our facility in Taiwan. The fact that all of these manufacturers, suppliers and factories and our facility are concentrated in Taiwan and China exposes us to numerous risks, including the following:

 

   

production may be interrupted or limited because of labor shortages in southern China or by strains on the local infrastructure;

 

   

production at facilities located in China or Taiwan (including our own testing and packaging facility in Taiwan) may be adversely affected by tensions or hostilities between China and Taiwan and deliveries from these facilities may be adversely effected by trade disputes between China and the United States or other countries;

 

   

the interpretation and enforcement of China’s laws continues to evolve, which may make it more difficult for us to obtain a reliable supply of our products at predictable costs;

 

   

these facilities are located in regions that may be affected by earthquakes, typhoons, other natural disasters, political instability, power outages or other conditions that may cause a disruption in supply;

 

   

our costs may be increased and deliveries of our products may be decreased or delayed by trade restrictions, such as increased tariffs or quotas; and

 

   

our reliance on foreign manufacturers and suppliers exposes us to other risks of doing business internationally, some of which are described below under “We conduct our operations and sell our products internationally and the effect of business, legal and political risks associated with international operations could significantly harm us.”

If we do not successfully coordinate the worldwide manufacturing and distribution of our products, we could lose sales.

Our business requires that we coordinate the manufacture and distribution of our products over a significant portion of the world. We rely on third parties to manufacture our products and to transport and distribute our products to our customers. If we do not successfully coordinate the timely and efficient manufacturing and distribution of our products, our costs may increase, we may experience a build-up in inventory, we may not be able to deliver sufficient quantities of products to meet customer demand, and we could lose sales.

 

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Our operating results are particularly sensitive to freight costs, and our costs may increase significantly if we are unable to ship and transport finished products efficiently and economically across long distances and international borders.

All of our products are manufactured in Asia and we transport significant volumes of finished products across long distances and international borders. As a result, our operating results can be significantly affected by changes in transportation costs. In that regard, although we ship our DRAM modules, USB flash drives and solid-state drives (all of which have selling prices that are relatively high compared to their size and weight) by air, we use ocean freight to ship our other products because of their relatively low selling prices compared to their size and weight. If we underestimate the demand for any of the products we ship by ocean freight, or if deliveries of those products to us by our manufacturers are delayed or interrupted, we may be required to ship those products by air in order to fill orders on a timely basis. Shipping items like power supply units, cooling systems and computer cases by air is significantly more expensive than using ocean freight. As a result, any requirement that we ship these products by air, whether because we underestimate demand or because of an interruption in supply from the manufacturers who produce these products or for any other reason, could materially increase our costs. In addition, freight rates can vary significantly due to large number of factors beyond our control, including changes in fuel prices or general economic conditions or the threat of terrorist activities or acts of piracy. If demand for air or ocean freight should increase substantially, it could make it difficult for us to procure sufficient cargo transportation space at prices we consider acceptable, or at all. Increases in our freight expenses, or any inability to ship our products as and when required, could harm our business substantially.

Because our products must cross international borders, we are subject to risk of delay due to customs inspections, if our documentation does not comply with customs rules and regulations or for similar reasons. In addition, any increases in customs duties or tariffs, as a result of changes to existing trade agreements between countries or otherwise, could increase our costs or the final cost of our products to our customers or end-users or decrease our margins. The laws governing customs and tariffs in many countries are complex, subject to many interpretations and often include substantial penalties for non-compliance.

Our effective tax rates may increase in the future and we are subject to ongoing tax audits in various jurisdictions, which could adversely affect our results of operations.

We operate in multiple jurisdictions and we are taxed pursuant to the tax laws of these jurisdictions. Our effective tax rate may be affected by changes in or interpretations of tax laws in any given jurisdiction, utilization of, or limitations on our ability to utilize any tax credit carry-forwards, changes in geographical allocation of revenue and expense, and changes in management’s assessment of matters such as the realizability of deferred tax assets. In the past, we have experienced fluctuations in our effective income tax rate. Our effective income tax rate in a given year reflects a variety of factors that may not be present in any prior or succeeding year. There is no assurance that our effective income tax rate will not change in future periods. We are currently subject to tax audits in various jurisdictions and expect that we will be subject to similar tax audits on an ongoing basis. Because we have operations in a number of locations worldwide, tax authorities in various jurisdictions may raise questions concerning matters such as transfer pricing, whether revenues or expenses should be attributed to particular countries, the presence or absence of permanent establishments in particular countries and similar matters. A material assessment by a tax authority in any jurisdiction could require that we make significant cash payments. Accordingly, if this were to occur, or if our effective tax rate were to increase, our results of operations could be adversely affected, perhaps materially.

Our markets are characterized by constant and rapid technological developments and change, and market downturns could materially adversely affect our business, results of operations and financial condition.

The markets in which we compete are characterized by constant and rapid technological developments and change, rapid product obsolescence, evolving industry standards, short product life cycles, constant pricing

 

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pressure, new demands for features and performance and wide fluctuations in product supply and demand. In particular, the markets for our DRAM modules are, and the markets for USB flash drives and solid-state drives may be, subject to significant variations in average selling prices. The markets in which we compete have in the past experienced significant downturns from time to time and will likely do so again in the future. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of selling prices. The timing of new product development and introduction by us and our competitors, the level of acceptance of new products and the life-cycle of existing products can also affect demand for our products. Downturns in the markets we serve can have a material adverse effect on our results of operations and financial condition.

Our customers do not enter into long-term purchase agreements with us and may stop purchasing our products at any time, which makes it difficult for us to accurately forecast product demand and may result in unexpected declines in revenue.

We sell our products primarily to distributors and brick-and-mortar and online retailers. These customers generally order our products on an as-needed basis and typically do not enter into long-term purchase commitments or agreements with us or provide us with any significant advance notice of their orders. As a result, we have minimal backlog, which means that our forecasts of product demand are highly subjective and depend to a large degree on our ability to predict the amount and timing of new orders. Because customers who have purchased our products in the past may in the future reduce the quantities of products that they purchase from us or stop purchasing from us altogether with little or no advance notice, and generally may also cancel, reduce or postpone orders with little or no penalty, our ability to forecast our future orders, and therefore our future revenue, is extremely limited and we may experience unexpected revenue declines, which could be substantial, due to loss of one or more customers or cancellations or reductions of orders, any of which could have a material adverse effect on our results of operations. Likewise, our revenues in any quarter depend primarily on orders booked and shipped in that quarter. We have experienced cancellations of orders and substantial fluctuations in order levels from period to period, and we expect this to continue in the future.

We order our products from third-party manufacturers based primarily on our forecasts of future demand, which exposes us to the risk of both shortages of our products and excess inventory.

We depend upon our forecasts of product demand to make decisions regarding investments of our resources and production levels of our products. Because of the lead time necessary to manufacture our products and the fact that we usually have little or no advance notice of customer orders, we must order our products from third-party manufacturers and therefore commit to substantial purchases prior to obtaining orders for those products from our customers. This makes it difficult for us to adjust our costs if orders fall below our expectations. Our failure to predict low demand for product can result in excess inventory, as well as lower cash flows and lower margins if we are unable to sell a product or if we are required to lower product prices in order to reduce inventories, and may also result in inventory write-downs. In addition, the cancellation or reduction of orders by our customers may also result in an oversupply of our products and excess inventory. On the other hand, if actual orders exceed our expectations, we may need to incur additional costs, such as higher shipping costs for air freight or other expedited delivery or higher product costs for expedited manufacturing, in order to deliver sufficient quantities of products to meet customer orders on a timely basis or we may be unable to fill some orders altogether. In addition, many of our products have short product life cycles, so a failure to accurately predict and meet demand for product can result in lost sales that we may be unable to recover in subsequent periods. These short life cycles also make it more likely that slow moving or excess inventory may become obsolete, requiring us to sell it at significant discounts or write it off entirely. Any failure to deliver products in quantities sufficient to satisfy demand can also harm our reputation with both our customers and end-users.

Over the past few years, we have expanded the number and types of products we sell, and the geographic markets in which we sell them, and we will endeavor to further expand our product portfolio and sales reach. The growth of our product portfolio and the markets in which we sell our products has increased the difficulty of

 

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accurately forecasting product demand. We have in the past experienced significant differences between our forecasts and actual demand for our products and expect similar differences in the future. If we do not accurately predict product demand, our business and operating results could be materially adversely affected.

Order cancellations, product returns, price erosion, product obsolescence and customer and end-user incentive programs may result in substantial inventory and/or receivables write-downs.

The products we sell are characterized by rapid technological change and short product life cycles. As a result, products that we hold in inventory may be subject to significant price erosion or may become obsolete, requiring inventory write-downs. We may experience excess or unsold inventory for a number of reasons, including demand for our products being lower than our forecasts, order cancellations by our customers and product returns.

In that regard, rights to return products vary by customer and range from the right to return defective products to stock rotation rights allowing the exchange of a limited percentage of the customer’s previous quarter purchases. If the estimated market values of products held in our finished goods and work in process inventories at the end of any fiscal quarter are below our cost of these products, we will recognize charges to write down the carrying value of our inventories to market value. For example, in 2008 and 2009 our inventory write-downs were approximately $0.4 million and $0.3 million, respectively.

In addition, we provide a variety of rebates to both customers and end-users of our products, including instant, volume incentive and mail-in rebates. We also have contractual agreements and cooperative marketing, promotional and other arrangements that provide rebates and other financial incentives to our customers. To a limited extent, we also offer financial incentives related to customer inventory of specific products. The aggregate amount of charges incurred as a result of all of these rebates and other incentives was $14.6 million, $27.6 million and $18.1 million in 2007, 2008 and 2009, respectively. These charges are offsets to our gross revenues and may result in a write-down in accounts receivable. In the future, we also may be required to write down inventory or receivables due to product obsolescence or because of declines in market prices of our products. Any write-downs could have a material adverse effect on our results of operations.

The need to continuously develop new products and product improvements increases the risk that our products will contain defects or fail to meet specifications, which may increase our warranty costs, lead to product recalls and damage our reputation.

Products that do not meet specifications or that contain, or are perceived by our customers or end-users to contain, defects could impose significant costs on us or otherwise materially adversely affect our business, results of operations or financial condition. Our products may suffer from design flaws, quality control problems in the manufacturing process or components that are defective or do not meet our quality standards. Moreover, the markets we serve are characterized by rapidly changing technology and intense competition and the pressure to continuously develop new products and improvements and bring those products and improvements to market quickly heightens the risks that our products will be subject to both quality control and design problems. Because we rely on third parties to manufacture our products, our ability to control the quality of the manufacturing process and the components that are used to manufacture our products is limited. Product quality issues, whether as a result of design or manufacturing flaws or the use of components that are not of the requisite quality or do not meet our specifications, could result in product recalls, product redesign efforts, lost revenue, loss of reputation, and significant warranty and other expenses. In that regard, we have been required to institute product recalls in the past. Product recalls can be costly, cause damage to our reputation and result in increased expenses, lost revenue and production delays. We may also be required to compensate customers for costs incurred or damages caused by defective products.

 

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Our indemnification obligations to our customers and suppliers for product defects could require us to pay substantial amounts.

In the ordinary course of our business, we enter into agreements with a limited number of our customers and suppliers providing that we will indemnify them for damages and costs which may arise from product warranty claims or claims for personal injury or property damage resulting from the use of our products and we may enter into similar agreements in the future. We maintain insurance to protect against these claims, but our insurance coverage may not be adequate to cover all or any part of the claims asserted against us or may not cover those claims at all. 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.

If we are unable to integrate our products with third-party hardware, operating system software and other products, the functionality and sales of our products would be adversely affected.

The functionality of our products depends on our ability to integrate our products with the hardware, operating system software and related products of providers such as Intel, AMD, NVIDIA and Asus, among others. We rely to a great extent on the relationships we have with those companies in developing our products and resolving issues. We cannot assure you that those relationships will be maintained or that those companies will continue to provide the necessary information and support to allow us to develop products that integrate with their own. If integration with the products of those companies becomes more difficult, our products would likely be more difficult to use or may not be compatible with key hardware, operating systems or other products, which would harm our reputation and the utility and desirability of our products, and, as a result, would likely have a material adverse effect on our net revenues.

One of our strategies is to grow through acquisitions, which could result in operating difficulties, dilution to our stockholders and other harmful consequences.

One of our strategies is to grow through acquisitions and we may also seek to grow through other strategic transactions such as alliances and joint ventures. In particular, we believe that our future growth depends in part on our ability to enhance our existing product lines and introduce new products and product categories through acquisitions and other strategic transactions. There is substantial competition for attractive acquisitions and other strategic transactions and we may not be successful in completing any such acquisitions or other strategic transactions in the future. If we are successful in making any acquisition or strategic transaction, it could nonetheless have a material adverse effect on our financial condition or results of operations. Among other things, acquisitions and strategic transactions involve numerous risks, including the following:

 

   

difficulties in integrating the operations, products, technologies, employees, management information systems, human resources and other administrative systems of acquired or newly formed entities or of strategic partners with our existing business and systems, particularly as we have not previously made any acquisitions or entered into any joint ventures or other strategic transactions;

 

   

unanticipated capital expenditures or investments in order to maintain, improve or sustain the operations of any business we acquire or strategic partnership or alliance we enter into;

 

   

difficulties in managing larger or more complex operations and facilities and employees in separate geographic areas;

 

   

diversion of management time and focus from operating our business due to challenges of integrating acquired businesses;

 

   

cultural challenges associated with integrating employees from acquired businesses into our organization;

 

   

difficulties in retaining employees from businesses we acquire;

 

   

the need to implement or improve internal controls, procedures and policies appropriate for a public company at businesses that prior to the acquisition lacked these controls, procedures and policies;

 

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possible write-offs, impairment charges or amortization charges resulting from acquisitions; and

 

   

unanticipated or unknown liabilities relating to acquired businesses.

In addition, we may finance acquisitions or investments, strategic partnerships or joint ventures by issuing common stock, which may be dilutive to our stockholders, or by incurring indebtedness, which could increase our interest expense, perhaps substantially. Acquisitions and other investments may also result in charges for the impairment of goodwill or other acquired assets. Acquisitions of, or alliances with, technology companies are inherently risky, and any acquisitions or investments we make, or alliances we enter into, may not perform in accordance with our expectations. Accordingly, any of these transactions, if completed, may not be successful and may materially adversely affect our business, results of operations or financial condition.

In addition, foreign acquisitions or strategic transactions with foreign partners involve additional risks, including those related to integration of operations across different geographies, cultures and languages, currency risks and risks associated with the particular economic, political and regulatory environment in specific countries.

We need substantial working capital to operate our business and we rely to a significant degree on credit extended by our manufacturers and suppliers and borrowings under our revolving credit facility to meet our working capital needs.

We need substantial working capital to operate our business and, as of March 31, 2010, we had cash totaling only $1.3 million. We rely to a significant degree on credit and the extended payment terms offered by many of our manufacturers and suppliers in order to meet our working capital needs. We also utilize borrowings under our revolving credit facility to provide working capital, and access to external debt financing has historically been and will likely continue to be very important to us. As a result of the downturn in general economic conditions, the adverse conditions in the credit markets or other factors, manufacturers and suppliers may be reluctant to provide us with the same credit and extended payment terms that they have in the past, which would require that we increase the level of borrowing under our revolving credit facility or obtain other external financing to provide for our substantial working capital needs. Additional financing may not be available on terms acceptable to us, or at all. To the extent we are required to use additional borrowings under our revolving credit facility or from other sources (if available) to provide working capital, it will increase our interest expense and expose us to other risks of leverage. Any inability to meet our working capital or other cash needs as and when required would likely have a material adverse effect on our business, results of operations and financial condition and could require, among other things, that we reduce expenses, which might require us to reduce shipments of our products or our inventory levels substantially or to delay or curtail the development, commercialization and marketing of our products.

Indebtedness and the terms of our revolving credit facility may impair our ability to respond to changing business and economic conditions and harm our operating results.

We had $19.8 million of outstanding debt as of March 31, 2010. We regularly make borrowings under our revolving credit facility to fund working capital and other cash needs and we may incur additional indebtedness in the future, particularly if we use borrowings or other debt financing to finance all or a portion of any future acquisitions. In addition, the terms of our revolving credit facility require, and any debt instruments we enter into in the future may require, that we comply with a number of significant restrictions and covenants. These covenants and restrictions, as well as any significant increase in our indebtedness, could adversely impact us. For example, they could:

 

   

limit our ability to plan for or react to market conditions or otherwise restrict our activities or business plans;

 

   

adversely affect our ability to finance our operations, any acquisitions or investments or other capital needs or engage in other business activities that would be in our interests;

 

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require us to dedicate a substantial portion of our available cash flow to debt service;

 

   

limit our future ability to raise funds for working capital, capital expenditures, acquisitions, product development and other general corporate requirements;

 

   

increase our vulnerability to economic downturns and adverse competitive and industry conditions and place us at a disadvantage compared to our competitors; and

 

   

expose us to fluctuations in interest rates with respect to debt which bears interest at a variable rate.

If we breach or are unable to comply with a covenant or other agreement contained in a debt instrument, the lenders generally have the right to declare all borrowings outstanding under that debt instrument, together with accrued interest, to be immediately due and payable and may have the right to raise the interest rate. As a result, any breach or failure to comply with covenants contained in our debt instruments could have a material adverse effect on us. Moreover, if we are unable to pay indebtedness secured by collateral when due, whether at maturity or if declared due and payable by the lender following a default, the lender generally has the right to seize and sell the collateral securing that indebtedness. In the first quarter of 2009 and other times, in the past, we have been required to obtain amendments and waivers under our revolving credit facility because of our failure to comply with covenants, and we may in the future need to obtain waivers or amendments under our revolving credit facility or other debt instruments in order to avoid a breach or default, particularly if our business deteriorates or does not perform in accordance with our expectations. There can be no assurance that we will not breach the covenants or other terms of our revolving credit facility or any other debt instruments in the future and, if a breach occurs, there can be no assurance that we will be able to obtain necessary waivers or amendments from the lenders or to refinance the related indebtedness on terms we find acceptable, or at all. As a result, any breach or default of this nature could have a material effect on our results of operations, financial condition and business.

In connection with this offering, we expect to enter into a new revolving credit facility, which we sometimes refer to as the new credit facility, which will replace our current revolving credit facility. We anticipate that the new credit facility will be secured by a lien on substantially all of our assets, except assets of our foreign subsidiaries and shares of our foreign subsidiaries in excess of 65% owned by us and our domestic subsidiaries. We also anticipate that the new credit facility will include financial and other covenants that will limit or restrict our ability to, among other things, incur liens on our properties, make acquisitions and other investments, sell assets and incur indebtedness, subject to specified exceptions. The new credit facility may also restrict or prohibit the payment of dividends on our common stock and repurchases or redemptions of our common stock. We also expect that the new credit facility will require us to maintain the ratio of:

 

  (1) (a) the sum of our net income (adjusted as provided in the new credit agreement) plus depreciation, amortization, taxes and interest expense, minus (b) unfinanced capital expenditures, to

 

  (2) current maturities of our long term debt plus interest expense,

at 1.10 to 1 or better. We expect that the new credit facility will contain customary events of default, including an event of default triggered by specified changes in control of our company, and to provide that, upon the occurrence of any event of default, the lender may require us to repay all outstanding borrowings and accrued interest and seize and sell the collateral securing the new credit facility, which would likely have a material adverse effect on our business, results of operations and financial condition. In addition, during the continuance of specified events of default under the new credit facility (subject to a cure period for some events of default), we expect that interest will accrue at a rate that is 200 basis points above the otherwise applicable rate.

We do not have patents or other intellectual property that would prevent third parties from selling products similar to ours.

As of March 31, 2010, our patent portfolio consisted of two utility patents issued in the United States and six utility patent applications pending (five in the United States and one in a foreign country). Neither of our

 

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issued patents nor, if granted, any of the patents that we have applied for would prevent third parties from selling products similar to ours. In addition, we do not have any confidential or proprietary processes or procedures that would make it difficult for a competitor to produce products like ours. This lack of intellectual property protection may adversely affect our results of operations.

We may be unable to protect our brand and other intellectual property.

We consider the Corsair brand to be one of our most valuable assets. Our future success depends to a large degree upon our ability to defend the Corsair brand from infringement and, to a limited extent, to protect our other intellectual property. We rely on a combination of copyright, trademark, patent and other intellectual property laws and confidentiality procedures and contractual provisions such as nondisclosure terms to protect our intellectual property. Although we hold a trademark on the Corsair name in the United States and a number of other countries, the Corsair name does not have trademark protection in other parts of the world, including some major markets, and we may be unable to register the Corsair name as a trademark in some countries. If third parties misappropriate or infringe on our brand or we are unable to protect our brand, or if third parties use the Corsair name to sell their products in countries where we do not have trademark protection, it could have a material adverse affect on our reputation and results of operations.

We hold a limited number of patents and pending patent applications. It is possible that any patent owned by us will be invalidated, deemed unenforceable, circumvented or challenged or that any of our pending or any future patent applications will not be granted. In addition, other intellectual property laws or our confidentiality procedures and contractual provisions may not adequately protect our intellectual property. Also, others may independently develop similar technology, duplicate our products, or design around any intellectual property rights we may have. Any of these events could harm our business, financial condition and operating results.

Certain of our licenses can be terminated at any time by us or the other party. If we are unable to negotiate and maintain licenses on acceptable terms, we will be required to develop alternative technology internally or license it from other third parties, which may be difficult and costly or impossible.

The expansion of our business will require us to protect our trademarks, domain names, copyrights, patents and other intellectual property in an increasing number of jurisdictions, a process that is expensive and sometimes requires litigation. If we are unable to protect our trademarks, domain names, copyrights, patents and other intellectual property rights, or prevent third parties from infringing upon them, our business may be materially adversely affected.

We have taken steps in the past to enforce our intellectual property rights and expect to continue to do so in the future. However, it may not be practicable or cost-effective for us to enforce our rights with respect to certain items of intellectual property fully, or at all, particularly in developing countries where the enforcement of intellectual property rights may be more difficult than in the United States. It is also possible that, given the costs of obtaining patent protection, we may choose not to seek patent protection for certain items of intellectual property that may later turn out to be important.

We have in the past been, are currently, and may in the future be, subject to intellectual property infringement claims, which are costly to defend, could require us to pay damages or royalties and could limit our ability to use certain technologies in the future.

Companies in the technology industry are frequently subject to litigation or disputes based on allegations of infringement or other violations of intellectual property rights. We have faced claims that we have infringed intellectual property rights of others in the past, we face these claims currently and we expect to face similar claims in the future.

On March 24, 2010, Ring Technology Enterprises of Texas, LLC, or Ring Technology, filed a complaint in the U.S. District Court for the Eastern District of Texas Marshall Division, or the Texas District Court, against us

 

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and 42 other companies. Ring Technology claims that certain server memory modules that we sold and continue to sell infringe U.S. Patent No. 6,879,526, or the ‘526 patent. Ring Technology’s complaint requested, among other things, that the Texas District Court grant a permanent injunction to enjoin us from infringing the ‘526 patent. In the event that Ring Technology prevails in this action, we will be precluded from selling certain server memory modules in the United States without obtaining a license from Ring Technology, which would likely require that we pay Ring Technology royalties, which could be substantial. In addition, to settle this matter we might be required to make a payment, which could be substantial, to Ring Technology. Although we have at times in the past sold significant quantities of the server memory modules that are the subject of Ring Technology’s complaint, the server market has not been one of our core markets for a number of years and, in both 2008 and 2009, our net revenues from sales of server memory modules were less than $1.0 million. Accordingly, we do not believe that this action, if decided adversely to us, would have a material adverse effect on our net revenues, although there can be no assurance in that regard. However, this action will result in legal and other costs, which could be substantial, and may divert the attention of our management from running our business. For additional information, see “Business—Legal Proceedings.”

On February 19, 2010, Infineon Technologies AG and Infineon Technologies North America Corp., which we refer to, collectively, as Infineon, filed a complaint under the Tariff Act of 1930 in the U.S. International Trade Commission, or the ITC, against us, our subsidiary Corsair Memory (Taiwan), and 18 other companies, including Elpida Memory Inc. and Elpida Memory (USA) Inc., which we refer to, collectively, as Elpida. Infineon claims that some DRAM ICs manufactured by Elpida and included in some products that we and the other respondents sold and continue to sell infringe claims of some U.S. patents held by Infineon. We use DRAM ICs manufactured by Elpida, as well as by other manufacturers, in our DRAM modules. In the event that Infineon prevails in this action, we will be precluded from using some Elpida DRAM ICs in DRAM modules that we sell in the United States without obtaining a license from Infineon, which would likely require that we pay royalties, which could be substantial, to Infineon. However, we plan to use equivalent DRAM ICs from other manufacturers in place of the DRAM ICs sold to us by Elpida that are the subject to of this complaint and therefore do not believe that this action, if decided adversely to us, would have a material adverse effect on our ability to supply our DRAM modules to customers in the United States or require that we obtain such a license, although there can be no assurance in that regard. In addition, although we think it is unlikely that Infineon will pursue a damages claim against us in this matter, there can be no assurance that they will not do so and any such claim could be substantial. In addition, this action will result in legal and other costs and may divert the attention of our management from running our business. For additional information, see “Business—Legal Proceedings.”

Any intellectual property claims, with or without merit, can be time-consuming, expensive to litigate or settle and can divert management resources and attention. For example, in the past we have settled claims relating to infringement allegations and agreed to make royalty or license payments in connection with such settlements. An adverse determination could require that we pay damages, which could be substantial, or stop using technologies found to be in violation of a third-party’s rights and could prevent us from selling some of our products. In order to avoid these restrictions, we may have to seek a license for the technology. Any such license may not be available on reasonable terms or at all, could require us to pay significant royalties and may significantly increase our operating expenses. As a result, we may be required to develop alternative non-infringing technologies, which could require significant effort and expense and might not be successful. If we cannot license or develop technologies for any infringing aspects of our business, we may be forced to halt sales of products incorporating the infringing technologies and may be unable to compete effectively. Any of these results could materially harm our brand, our operating results and our financial condition.

Our products are designed to appeal to the high-performance computer gaming market, which represents a relatively small portion of the overall personal computing market, and we will need to develop and successfully market additional products and new categories of products to this market, as well as develop and successfully market products that appeal to broader markets, in order to grow.

Most of our DRAM modules are higher priced, high-performance products intended to appeal primarily to computer gaming enthusiasts focused on building and customizing their own PCs to enhance their processing

 

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power and speed. Likewise, our power supplies, solid-state drives, cooling systems and computer cases are marketed primarily to these same consumers for use in building or customizing high-performance PCs. Similarly, our USB flash drives feature high capacity, high levels of performance or enhanced shock-proofing or water resistance and are therefore sold at prices that are unlikely to appeal to mainstream consumers.

As a result, the market for our products is limited primarily to the high-performance computer gaming market. Moreover, some of our current products are suitable for use only with desktop PCs and not with laptops, netbooks or other portable computing devices and none of our current products is suitable for use with video game consoles or with smart phones or other mobile communications devices, which further limits the potential markets for our products. The relatively small size of the market for our current products will limit our ability to grow, and our growth therefore depends in large part on our ability to develop and successfully produce and market, or to acquire other companies or businesses that sell, additional products and product categories targeted to the high-performance computer gaming market, as well as new categories of products that appeal to broader computer gaming markets. We cannot predict whether we will be successful in developing or marketing new products and product categories and, if we fail to do so, it may have material adverse effect on our business. We plan to introduce audio products and in the future may introduce computer peripherals and other products designed to appeal to broader markets. To the extent we do so, we will likely encounter competition from large, well-known consumer electronics and peripheral companies.

Many consumers purchase our products using the Internet, which exposes us to the risk of disruptions in Internet communications.

We generate substantial revenue from sales to online retailers such as Newegg.com, Amazon.com and TigerDirect.com. Because consumers use the Internet to purchase our products from online retailers, a disruption or outage in internet communication, even if confined to a relatively small geographic area, could have a negative effect on our sales. Likewise, a reduction in the speed of internet communications, whether as a result of inadequate bandwidth or otherwise, could make it less convenient for end-users to buy our products over the internet and therefore harm our sales.

Sales to a limited number of customers represent a significant portion of our revenue, and the loss of one or more of our key customers could adversely affect our operating results.

In 2007, 2008 and 2009, sales to Newegg.com accounted for approximately 11.8%, 10.8% and 11.1%, respectively, of our net revenues and sales to our ten largest customers accounted for approximately 45.6%, 45.3% and 42.7%, respectively, of our net revenues. Our customers typically do not enter into long-term agreements to purchase our products but instead enter into purchase orders with us from time to time. These purchase orders may generally be cancelled and orders can be reduced or postponed with limited or no penalties. In addition, our customers are under no obligation to continue purchasing from us and may purchase similar products from our competitors. A decision by one or more of our key customers to reduce or terminate their purchases from us, or their failure or inability to pay amounts owed to us in a timely manner, or at all, could have a material adverse effect on our operating results. In addition, because of our reliance on key customers, the bankruptcy or liquidation of any of these customers, and the resulting loss of sales, could have a material adverse effect on our operating results.

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 operating results.

Our international sales and our operations in foreign countries subject us to risks associated with fluctuating currency exchange rates. Because sales of our products are denominated primarily in U.S. dollars, an increase in the value of the U.S. dollar relative to the currency used in the countries where our products are sold may result in an increase in the price of our products in those countries, which may lead to a reduction in sales. Likewise,

 

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because we pay our suppliers and third-party manufacturers, most of which are located outside of the United States, primarily in U.S. dollars, any decline in the value of the U.S. dollar relative to the applicable local currency may cause our suppliers and manufacturers to raise the prices they charge us. In addition, we generally pay our employees located outside the United States in the local currency and, as a result of our foreign sales and operations, we have other expenses, assets and liabilities that are denominated in foreign currencies and changes in the value of the U.S. dollar could result in significant increases in our expenses that could have a material adverse effect on our business and results of operations.

Sales of our products are subject to seasonal fluctuations.

We have experienced and expect to continue to experience seasonal fluctuations in sales due to the spending patterns of our customers. Our unit sales volumes have generally been lowest in the first and second calendar quarters due to a drop off in sales following the fourth quarter holiday season and because of the decline in sales that typically occurs in anticipation of the introduction of new or enhanced CPUs, graphics cards and other computer hardware products, which usually takes place in the second calendar quarter and which tends to drive sales in the following two quarters. As a consequence of seasonality, our total unit shipments for the second calendar quarter are generally the lowest of the year, followed by unit shipments for the first calendar quarter, although the effect of these lower quarterly unit volumes on our consolidated net revenues may be masked by changes in average selling prices of our products. We expect these seasonality trends to continue.

We conduct our operations and sell our products internationally and the effect of business, legal and political risks associated with international operations could significantly harm us.

Sales to customers outside the United States accounted for approximately 70.4% of our consolidated net revenues for 2009, approximately 71.6% of our consolidated net revenues for 2008 and approximately 68.4% of our consolidated net revenues for 2007. In addition, substantially all of the products that we sell are manufactured at facilities in Asia. Our international sales and operations are subject to a variety of risks, including:

 

   

export and import duties, changes to import and export regulations, and restrictions on the transfer of funds;

 

   

political and economic instability;

 

   

problems with the transportation or delivery of our products;

 

   

issues arising from cultural or language differences and labor unrest;

 

   

longer payment cycles and greater difficulty in collecting accounts receivable;

 

   

compliance with trade and technical standards in a variety of jurisdictions;

 

   

difficulties in staffing and managing international operations;

 

   

compliance with laws and regulations, including environmental, employment and tax laws, which vary from country to country and over time, increasing the costs of compliance and potential risks of non-compliance;

 

   

difficulties enforcing our contractual and intellectual property rights, especially in those foreign countries that do not respect and protect intellectual property rights to the same extent as the United States and European countries;

 

   

the risk that trade to or from some foreign countries, or companies in foreign countries that manufacture our products or supply components that are used in our products, may be affected by political tensions, trade disputes and similar matters, particularly between China and Taiwan or between China and the United States;

 

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U.S. and foreign trade restrictions, including those that may limit the importation of technology or components to or from various countries or impose tariffs or quotas;

 

   

difficulties or increased costs in establishing sales and distribution channels in unfamiliar markets, with their own market characteristics and competition; and

 

   

imposition of currency exchange controls or taxes that make it impracticable or costly to repatriate funds from foreign countries.

To the extent we successfully execute our strategy of expanding into new geographic areas, these and similar risks will increase. We cannot assure you that risks relating to our international operations will not have a material adverse effect on our business or operating results.

Our Chief Executive Officer and our two other co-founders have significant influence over, and acting collectively will be able to control, our management and affairs.

Immediately after completion of this offering, Andrew J. Paul, our Chief Executive Officer, President and one of our co-founders, and our other two co-founders will own a total of approximately                 % of our outstanding common stock. Specifically, Mr. Paul will own approximately                 % of our outstanding common stock and our two other co-founders will own a total of approximately                 % of our outstanding common stock.

As a result, Mr. Paul and our two other co-founders will have significant influence over our management and affairs and, acting together, will be able to control virtually all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers, consolidations, sales of assets, recapitalizations and amendments to our certificate of incorporation.

In addition, our employee stock ownership plan, or ESOP, will own approximately             % of our outstanding common stock, immediately after this offering. The shares held by the ESOP are voted by Andrew J. Paul, our Chief Executive Officer and President, Nicholas B. Hawkins, our Chief Financial Officer and Treasurer, and John E. Green, our Corporate Secretary, in their capacity as ESOP trustees and in accordance with instructions from our board of directors or a committee of our board of directors.

These holders of our common stock may use their voting power to take actions with which you do not agree, including actions that could delay, defer or prevent a change of control of our company or that could cause the market price of our common stock to decline.

Cloud computing may harm our business.

Cloud computing refers to a computing environment in which software is run on third-party servers and accessed by end-users over the Internet. In a cloud computing environment a user’s computer may be a so-called “dumb terminal” with minimal processing power and limited need for high-performance components. As a result, widespread adoption of cloud computing, either generally or by the computer gaming community, may harm our business, perhaps substantially.

We may recognize restructuring and impairment charges in future periods.

Depending on market and economic conditions in future periods, we may implement restructuring initiatives. As a result of these initiatives, we could incur restructuring charges, lose key personnel and experience disruptions in our operations and difficulties in delivering products.

We are required to test long-lived assets and goodwill for recoverability and may be required to record charges if there are indicators of impairment and we have in the past recognized impairment charges. As of

 

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December 31, 2009, we had approximately $2.7 million of long-lived assets and no goodwill. One of our strategies is to grow through acquisitions of other businesses or technologies and, if we are successful in doing so, these acquisitions may result in goodwill and other long-lived assets. The risk that we will be required to recognize impairment charges is also heightened by the fact that the life cycles of many of our products are relatively short, which increases the possibility that we may be required to recognize impairment charges for obsolete inventory. Impairment charges will adversely affect our operating results and could harm our reputation with securities analysts, investors and others.

We will incur significant expenses as a result of being a public company, which will negatively impact our financial performance.

We will incur significant legal, accounting, insurance and other expenses as a result of being a public company. The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the SEC and Nasdaq Global Market, have required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act as discussed below, will substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. We also expect these laws, rules and regulations to make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers. As a result of the foregoing, we expect a substantial increase in legal, accounting, insurance and certain other expenses in the future, which will negatively impact our results of operations and financial condition.

As a public reporting company, we will be subject to additional rules and regulations established from time to time by the Securities and Exchange Commission and the Nasdaq Global Market.

Upon completion of this offering, we will become a public reporting company subject to the rules and regulations established from time to time by the Securities and Exchange Commission, or SEC, and the Nasdaq Global Market. These rules and regulations will require, among other things, that we establish and periodically evaluate procedures with respect to our internal controls over financial reporting. Reporting obligations as a public company are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company we will be required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify as to the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal controls over financial reporting by the time our annual report for the year ending December 31, 2011 is due and thereafter, which will require us to document and make significant changes to our internal controls over financial reporting. As a result, we will be required to improve our financial and managerial controls, reporting systems and procedures, to incur substantial expenses to test our systems and to make such improvements and possibly to hire additional personnel. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if we identify or fail to remediate material weaknesses in our internal controls, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our reputation and the market price of our common stock. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to manage our business effectively or accurately report our financial performance on a timely basis, which could cause a decline in our common stock price and adversely affect our results of operations and financial condition.

 

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We have identified material weaknesses in our internal control over financial reporting. Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, damage our reputation and harm our ability to manage our business.

 

Our independent registered public accounting firm identified two material weaknesses in connection with its audit of our consolidated financial statements for the year ended December 31, 2009, as well as one significant deficiency. Under rules of the SEC, a material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. SEC rules define a significant deficiency as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting.

The first material weakness related to our lack of effective controls over the use of outside consultants that we engaged to assist with accounting for stock-based compensation and income taxes. Among other things, our auditors noted that we did not identify several errors and the misapplication of accounting rules in the worksheets prepared by these consultants, resulting in adjustments to related items in our financial statements. The second material weakness related to our lack of effective controls over the administration of option and stock transactions with employees and our lack of expertise regarding the appropriate accounting for these transactions. Among other things, our auditors noted that documentation for stock-based transactions was either missing or incorrect and that we did not have controls to ensure the proper accounting for these transactions, resulting in adjustments to our financial statements for outstanding shares of common stock, stock-based compensation expense and notes receivable from stockholders. The significant deficiency related to our lack of effective controls for the timely preparation of GAAP financial statements and related footnote disclosures. Our auditors noted, among other things, that our financial reporting process did not include procedures to verify all numbers and disclosures in the financial statements and that procedures intended to ensure that our financial statements complied with GAAP did not identify missing and inappropriate disclosures, resulting in changes to our financial statements. In connection with its audit of our consolidated financial statements for the years ended December 31, 2007 and 2008, our independent registered public accounting firm identified five material weaknesses and three material weaknesses, respectively. Through the date of this prospectus, we have taken steps intended to remediate our past material weaknesses and significant deficiencies, primarily through the hiring of additional personnel, and we intend to take additional steps to address further these material weaknesses and this significant deficiency by, among other things, hiring additional accounting personnel and a general counsel. Full remediation will also require significant improvements to our overall financial controls and procedures.

We cannot assure you that further material weaknesses will not be identified in the future. If we fail to remediate the material weaknesses and significant deficiency identified in connection with the audit of our 2009 financial statements, if other material weaknesses occur in the future or if we otherwise fail to maintain proper and effective internal controls over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could have a material adverse effect on our business and results of operations.

We may be adversely affected by seismic activity or other disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Our corporate headquarters are located in the San Francisco Bay Area and the testing and packaging of most of our DRAM modules take place in our facility in Taiwan, which in the past have both experienced severe earthquakes. Most of the third-party facilities where our products and some of the components used in our products are manufactured are located in China, Japan, Taiwan and other areas that are known for seismic activity. We do not carry earthquake insurance. As a result, earthquakes or other natural disasters could severely disrupt our operations, either directly or as a result of their effect on third-party manufacturers and suppliers upon whom we rely, and have a material adverse effect on our business.

 

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All of our enterprise data processing systems are located in our Fremont, California headquarters, and, as noted above, we have a DRAM module testing and packaging facility in Taiwan. If a disaster, power outage or other event occurred that prevented us from using all or a significant portion of either of these facilities, that damaged critical infrastructure, such as enterprise resources planning systems, or that otherwise disrupted operations at either location, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place currently are limited and are unlikely to prove adequate in the event of a serious disaster or similar event.

We are subject to various environmental laws and regulations that could impose substantial costs upon us and may adversely affect our business, operating results and financial condition.

Our operations and properties are subject to a variety of U.S. and foreign environmental laws and regulations governing, among other things, air emissions, wastewater discharges, management and disposal of hazardous and non-hazardous materials and waste, and remediation of releases of hazardous materials. Our failure to comply with present and future requirements under these laws and regulations, or environmental contamination or releases of hazardous materials, could cause us to incur substantial costs, including clean up costs, fines and penalties, investments to upgrade our facilities and legal costs, or to curtail our operations. Environmental contamination or releases of hazardous materials may also subject us to claims of property damage or personal injury, which could result in litigation and require us to make substantial payments to satisfy adverse judgments or pay settlements. Liability under environmental laws can be joint and several and without regard to comparative fault. We also expect that our operations will be affected by new environmental laws and regulations on an ongoing basis, which will likely result in additional costs. Environmental laws and regulations could also require that we redesign our products or change how our products are made, any of which could have a material adverse effect on our business.

Failure to comply with governmental laws and regulations could harm our business.

Our business is subject to regulation by various federal and state governmental agencies. Such regulation includes 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, state and foreign employment and labors laws and regulations, including the Americans with Disabilities Act, the Federal Fair Labors Standards Act and other laws and regulations related to working conditions, wage-hour pay, over-time pay, employee benefits, anti-discrimination, and termination of employment.

Noncompliance with applicable regulations or requirements could subject us to investigations, sanctions, mandatory product recalls, enforcement actions, 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 of these instances the former employee has 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 damages, which may include punitive damages, attorneys’ fees and costs.

As a result, noncompliance or any related enforcement or civil actions could result in governmental sanctions and possible civil or criminal litigation, which could have a material adverse effect on our business, financial condition, results of operations and cash flow and result in a significant diversion of management’s attention and resources.

 

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We may not be able to manage successfully the challenges associated with our planned expansion in the Asia Pacific region.

A component of our growth strategy involves expanding our presence in the Asia Pacific region. We may not be able to successfully manage the challenges associated with our current and planned operations in the Asia Pacific region due to risks such as:

 

   

disposable income and consumer spending on PC gaming hardware in the Asia Pacific region may grow more slowly than we anticipate or may decline;

 

   

we may not be able to achieve the same brand recognition in the Asia Pacific region as we have in some other parts of the world;

 

   

consumer expectations and purchasing behaviors that we may not adequately understand;

 

   

a dynamic competitive environment;

 

   

restrictions imposed by local labor practices and laws on our business and operations;

 

   

difficulties and costs of staffing and managing foreign operations;

 

   

exposure to foreign business practices and legal standards;

 

   

unexpected changes in regulatory requirements;

 

   

the imposition of governmental controls and restrictions;

 

   

political, social and economic instability and the risk of war, terrorist activities or other international incidents;

 

   

natural disasters and public health emergencies;

 

   

potentially adverse tax consequences; and

 

   

the failure of local laws to provide a sufficient degree of protection against infringement of our intellectual property.

We may not be able to grow our operations in the Asia Pacific region at the rate or with the level of success we anticipate, or at all, which would adversely impact our future results.

Risks Related to This Offering

The market price of our common stock may be volatile and may decline.

Prior to this offering, our common stock has not been sold in a public market. We cannot predict the extent to which a trading market will develop or how liquid that market might become. An active trading market for our common stock may never develop or may not be sustained, which could adversely affect your ability to sell your common stock and the market price for the common stock. The initial public offering price for our common stock was determined by negotiations between us and the underwriters and does not purport to be indicative of prices at which our common stock will trade upon completion of this offering.

The stock market in general, and the market for stocks of technology companies in particular, has been highly volatile. In our case, this volatility may be increased by the volatility in market prices for, and the fact that we derive a majority of our net revenues from sales of, DRAM modules. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their common stock or the loss of their entire investment for a number of reasons, including reasons unrelated to our operating performance or prospects. The market price of our

 

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common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this “Risk Factors” section and this prospectus, and the following:

 

   

variations in our operating performance and the performance of our competitors;

 

   

actual or anticipated fluctuations in our quarterly or annual operating results;

 

   

changes in estimates or recommendations by securities analysts concerning us or our competitors;

 

   

publication of research reports by securities analysts about us or our competitors or our industry;

 

   

our failure or the failure of our competitors to meet analysts’ estimates or guidance that we or our competitors may give to the market;

 

   

additions and departures of key personnel;

 

   

strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;

 

   

developments of new technologies or other innovations;

 

   

the passage of legislation or other regulatory developments affecting us or our industry;

 

   

speculation in the press or investment community;

 

   

changes in accounting principles;

 

   

natural disasters, terrorist acts, acts of war or periods of widespread civil unrest; and

 

   

changes in general market and economic conditions.

In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.

We may invest or spend the proceeds of this offering in ways you may not agree with or in ways which may not yield a return.

We will have broad discretion over how we use the net proceeds from this offering received by us. We intend to use the net proceeds we receive from our sale of stock in this offering for general corporate purposes and we have not reserved specific amounts for any particular purposes and cannot specify with certainty how we will use these funds. Accordingly, our management will have considerable discretion in the application of these funds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. These funds may be used for purposes that do not improve our operating results or the market value of our common stock. Until these funds are used, they may be placed in investments that produce only limited income or do not produce income at all or that lose value.

Future sales of our common stock in the public market could cause our stock price to fall.

Sales of our common stock in the public market after this offering, or the perception that such sales might occur, could cause the market price of our common stock to decline. Immediately after completion of this offering, we will have a total of                      shares of common stock outstanding, including                      shares of common stock owned by Andrew J. Paul, our Chief Executive Officer, President and one of the our co-founders,                      shares of common stock owned by our ESOP and a total of                      shares of common stock owned by our two other co-founders. In general, the shares of common stock sold in this offering will be freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act. In addition, the                      remaining shares of our common stock that will be

 

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outstanding immediately after completion of this offering will be available for sale in the public markets, pursuant to Rule 144 or Rule 701 under the Securities Act, subject, in some cases, to the lock-up agreements described under “Underwriting.” Any or all of the shares subject to the lock-up agreements may be released for sale in the public market prior to expiration of the lock-up period at the discretion of Barclays Capital Inc. and Jefferies & Company, Inc. Sales of our common stock in the public market, or the perception that those sales may occur, could cause the market price of our common stock to decline. For additional information, see “Shares Eligible for Future Sale” and “Underwriting.”

Purchasers in this offering will immediately experience substantial dilution in the net tangible book value of their shares.

Assuming that the initial public offering price of our common stock is $             per share (which is the midpoint of the estimated price range appearing on the cover page of this preliminary prospectus), the initial public offering price of our common stock will be substantially higher than as adjusted net tangible book value per share of our common stock, calculated as described below under “Dilution,” immediately after this offering. Therefore, if you purchase our common stock in this offering, you will suffer an immediate dilution of $             in as adjusted net tangible book value per share from the assumed initial public offering price. For more information, see “Dilution” below.

We have outstanding options and warrants that have the potential to dilute stockholder value and cause the market price of our common stock to decline.

In the past, we have issued, and we expect to continue to issue, stock options or other forms of stock-based compensation to our directors, officers and employees. In addition, we have outstanding warrants that we issued to a former lender. Stock options issued in the past have per share exercise prices below the assumed initial public offering price of $             per share of common stock (which is the midpoint of the estimated price range appearing on the cover page of this preliminary prospectus). As of March 31, 2010, we had options outstanding to purchase 38,524,482 shares of our common stock with a weighted average exercise price of $0.38 per share. Our outstanding warrants entitle the holders to purchase a number of shares of our common stock equal to the sum of (a) 1,942,827 shares of common stock plus (b) the number of shares of common stock equal to 2% of the total number of shares of common stock of all classes issued by us (other than shares of common stock issued in this offering) during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering, calculated as of the date of exercise on a fully-diluted basis after giving effect to the exercise of all other warrants, options and rights to acquire any shares of our common stock issued by us, and the conversion of any convertible securities issued by us, during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering, at an exercise price of $0.55 per share, which is also below the assumed initial public offering price per share in this offering. We intend to file a registration statement under the Securities Act covering all of the shares of our common stock issuable on exercise of our outstanding options or reserved for issuance under our equity incentive plans as soon as practicable after the closing of this offering, which would permit those shares to be sold in the public markets. In addition, the holders of our outstanding warrants are entitled, subject to specified conditions and exceptions, to include the shares of common stock issuable on exercise of those warrants in any future registration statement we file under the Securities Act and will also be entitled to sell those shares pursuant to Rule 144 under the Securities Act (upon satisfaction of the conditions of that rule and subject to the lock-up agreement entered into in connection with this offering), both of which would permit those shares to be sold in the public markets. If some or all of these options or warrants are exercised and the shares issued on exercise are sold into the public market, the market price of our common stock may decline.

Our certificate of incorporation and bylaws contain antitakeover provisions that could delay, deter or prevent takeover attempts that stockholders may consider favorable or attempts to replace or remove our management that would be beneficial to our stockholders.

Certain provisions of our certificate of incorporation and bylaws may delay, deter or prevent a change in control or other takeover of our company that our stockholders might consider to be in their best interests,

 

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including transactions that might result in a premium being paid over the market price of our common stock, and also may limit the price that investors are willing to pay in the future for our common stock. For example, our certificate of incorporation and bylaws include provisions that:

 

   

authorize our board of directors, without further action by the stockholders, to issue preferred stock in one or more series and, with respect to each series, to fix the number of shares constituting that series and to establish the rights and other terms of that series, which may include dividend and liquidation rights and preferences, conversion rights and voting rights;

 

   

require that actions to be taken by our stockholders may only be taken at an annual or special meeting of our stockholders and not by written consent;

 

   

specify that special meetings of our stockholders can be called only by our board of directors, the Chairman of our board of directors, our Chief Executive Officer or our President and not by our stockholders or any other persons;

 

   

establish advance notice procedures for stockholders to submit nominations of candidates for election to our board of directors and other proposals to be brought before a stockholders meeting;

 

   

provide that directors may be removed only for cause;

 

   

provide that vacancies on our board of directors or newly created directorships resulting from an increase in the number of our directors may be filled only by a majority of directors then in office, even though less than a quorum;

 

   

divide our board of directors into three classes, serving staggered terms of three years each;

 

   

do not give the holders of our common stock cumulative voting rights with respect to the election of directors, which means that the holders of a majority of our outstanding shares of common stock can elect all directors standing for election; and

 

   

require the affirmative vote by the holders of at least two-thirds of the combined voting power of all shares of our outstanding capital stock entitled to vote generally in the election of our directors (voting as a single class) in order to amend the provisions of our certificate of incorporation or by-laws described in the bullet points above or remove any directors.

In addition, although we are not subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, our certificate of incorporation contains provisions that prohibit, unless specified conditions are met and subject to exceptions, specified business combinations between us and any “interested stockholder” (as defined and which will exclude, in general,              and              and, subject to exceptions, their direct and indirect transferees and their respective affiliates and successors, as well as any “group” (within the meaning of Rule 13d-5 of the Securities Exchange Act of 1934, as amended, or Securities Exchange Act) that includes any of the foregoing persons or entities) in a manner similar to that of Section 203 of the Delaware General Corporation Law. These provisions may have the effect of delaying, deterring or preventing a third party from acquiring us. See “Description of Capital Stock.”

We do not expect to pay cash dividends on our common stock for the foreseeable future.

We currently intend to retain all available funds for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, we expect that financial and other covenants in our new credit facility will restrict or prohibit, and other instruments and agreements that we may enter into in the future may restrict or prohibit, the payment of dividends on our common stock. Investors seeking or expecting cash dividends should not purchase our common stock.

 

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If securities or industry analysts do not publish or cease publishing research or reports about our business, if they adversely change their recommendations regarding our shares or if our operating results do not meet their expectations, the market price of our common stock could decline.

The market price of our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume of our common stock to decline. Moreover, if one or more of the analysts who cover our company downgrade our common stock or if our operating results or prospects do not meet their expectations, the market price of our common stock could decline.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND MARKET DATA

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that are based on our management’s current beliefs, projections and assumptions and on information currently available to our management. All statements other than statements of historical fact contained in this prospectus, including statements regarding our future or expected results of operations and financial condition, business strategies, plans, competitive position, industry and market environment and potential growth opportunities, are forward-looking statements. Forward-looking statements can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors, including those described in “Risk Factors” and elsewhere in this prospectus, that may cause actual results, performance, conditions or achievements to be materially different from results, performance, conditions or achievements expressed or implied by the forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as may be required by law, we do not intend to update these forward-looking statements.

This prospectus also contains estimates, projections and other information concerning our industry, markets and products, including estimated historical and projected market size and growth rates, that are based on data and projections by market research firms or trade associations and information we obtained from websites and magazines targeted to computer enthusiasts, as well as estimates and forecasts prepared by our management. This information involves a number of assumptions, estimates, uncertainties and limitations and we have not verified its accuracy or completeness. Accordingly, you should not place undue reliance on this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in “Risk Factors.” These and other factors could cause actual industry, market or other conditions to differ materially from those reflected in these estimates, projections and other information. In particular, data regarding the size of the DIY segment of the PC gaming hardware market, our belief that our current product portfolio addresses approximately one-third of this DIY market segment, the estimated size of the installed base of consumer PCs that could be used to play games and the projected growth in that installed base and the estimated size of the worldwide PC gaming hardware market and the projected growth in the size of that market are all subject to a high degree of uncertainty and these estimates, beliefs and projections may prove to have been incorrect and these markets and this installed base may not grow at the projected rates, or at all. The inaccuracy of any of this data or these beliefs, or the failure of these markets or installed base to grow at these projected rates, may have a material adverse effect on our business, financial condition and results of operations and the market price of our common stock.

 

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USE OF PROCEEDS

We estimate that the net proceeds we receive from the sale of common stock in this offering will be approximately $             million (or approximately $             million if the underwriters exercise their option to purchase additional shares of common stock in full), in each case assuming an initial public offering price of $              per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) the estimated net proceeds to us by approximately $             million (or by approximately $             million if the underwriters exercise their option to purchase additional shares of common stock in full), assuming that the number of shares of common stock sold by us, as set forth on the cover page of this preliminary prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A 100,000 share increase (decrease) in the number of shares of common stock sold by us in this offering would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming an initial public offering price per share equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

The principal purposes of this offering are to create a public market for our common stock, obtain additional capital, facilitate our future access to the public equity markets, position us to issue common stock to make acquisitions and generally increase awareness of our company.

We intend to use the net proceeds that we receive from the sale of shares of our common stock in this offering for general corporate purposes, which may include working capital, capital expenditures and possible acquisitions of other businesses, products, assets or technologies. Although one of our strategies is to grow through acquisitions, we have no present commitments or agreements to make any acquisitions. The manner in which we apply the net proceeds we receive from this offering and the timing of those expenditures will vary depending on a number of factors, including competitive and technological developments, our results of operations and whether or not we are able to consummate any acquisitions. Our management will have broad discretion in the application of the net proceeds we receive from this offering, and investors will be relying on the judgment of our management regarding the application of the proceeds.

Pending the application of the net proceeds we receive from this offering for the purposes described above, we may invest the net proceeds in short-term interest-bearing and similar investments, which may include interest-bearing bank accounts, money market funds, certificates of deposit and government securities, and we may also use the net proceeds to repay temporarily borrowings outstanding under our revolving credit facility. Borrowings we repay under our revolving credit facility may be re-borrowed, subject to compliance with conditions in the credit agreement. The revolving credit facility that we plan to enter into in connection with this offering and that will replace our existing revolving credit facility is expected to mature in June 30, 2012 and, as of December 31, 2009, borrowings under our existing revolving credit facility bore interest at a weighted average rate of 4.5% per annum. We use borrowings under our revolving credit facility primarily for working capital. For more information about our revolving credit facility, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

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DIVIDEND POLICY

We currently intend to retain all available funds for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements and other cash needs, general business conditions, relevant legal requirements and other factors that our board of directors may deem relevant. In addition, we expect that covenants in the new revolving credit facility that we plan to enter into in connection with this offering will restrict or prohibit, and other instruments and agreements that we may enter into in the future may restrict or prohibit, the payment of cash dividends on our common stock.

 

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CAPITALIZATION

The following table sets forth our consolidated cash and capitalization as of December 31, 2009 on:

 

   

an actual basis;

 

   

a pro forma basis, assuming that the Repurchase Right Termination had occurred as of December 31, 2009; and

 

   

on a pro forma as adjusted basis to give effect to the Repurchase Right Termination, the amendment of our certificate of incorporation to authorize the issuance of preferred stock and our sale of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, and our receipt of the net proceeds from that sale, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if those transactions had occurred as of December 31, 2009. The pro forma as adjusted information does not give effect to our application of any of the net proceeds we receive from this offering as described under “Use of Proceeds.”

You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of December 31, 2009
     Actual     Pro Forma     Pro Forma
As  Adjusted(1)
     (in thousands except share and per
share amounts)

Cash

   $ 1,367      $ 1,367      $             
                      

Stock compensation liability

   $ 31,072      $ —        $  

Common stock warrant liability

     1,895        —       

Long-term debt and capital leases, excluding current portion(2)

     —          —       

Redeemable ESOP shares

     14,298        —       

Stockholders’ (deficit) equity:

      

Preferred stock, $0.0001 par value: no shares authorized, issued, or outstanding, actual and pro forma;              shares authorized, no shares issued and outstanding, pro forma as adjusted

     —          —       

Common stock, $0.0001 par value: 110,000,000 shares authorized, 61,260,568 shares issued and outstanding,              shares authorized,              shares issued and outstanding, pro forma; and              shares authorized,              shares issued and outstanding, pro forma as adjusted

     1        1     

Additional paid-in capital

     4,412        37,379     

Notes receivable from stockholders

     (1,386     (1,386  

Redeemable ESOP shares

     (14,298     —       

Accumulated deficit

     (13,882     (13,882  

Accumulated other comprehensive income (loss)

     47        47     
                      

Total stockholders’ (deficit) equity

     (25,106     22,159     
                      

Total capitalization

   $ 22,159      $ 22,159      $             
                      

 

(1)

Information in this column assumes an initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, and is calculated after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) our pro forma as adjusted cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming that the number of shares of common stock sold by us, as set forth on the cover page of this

 

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  preliminary prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A 100,000 share increase (decrease) in the number of shares of common stock sold by us in this offering would increase (decrease) our pro forma as adjusted cash, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming an initial public offering price equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information appearing above is provided for illustrative purposes only and our actual consolidated cash and consolidated capitalization following this offering will be determined in part by the actual initial public offering price and number of shares sold by us and other terms of this offering.
(2) Excludes $19.9 million aggregate principal amount of borrowings under our revolving credit facility and an outstanding $5.0 million loan as of December 31, 2009, all of which were classified as short-term indebtedness.

Information in the foregoing table as to the number of shares issued and outstanding excludes:

 

   

38,524,482 shares of our common stock issuable upon the exercise of options outstanding under our equity incentive plans as of March 31, 2010 at a weighted average exercise price of $0.38 per share;

 

   

             shares of our common stock that will be issuable upon exercise of options we intend to grant prior to the closing of this offering under our 2010 Equity Incentive Plan at an exercise price equal to $             per share;

 

   

             additional shares of our common stock that will be available for future awards under our 2010 Equity Incentive Plan, plus automatic annual increases in the number of shares of common stock available for future awards under that plan, as more fully described in “Executive Compensation—Equity Incentive Plans”;

 

   

             additional shares of our common stock that will be available for future awards under our 2010 Employee Stock Purchase Plan, as more fully described in “Executive Compensation—Equity Incentive Plans”; and

 

   

shares of our common stock issuable upon the exercise of outstanding warrants at an exercise price of $0.55 per share (subject to adjustment as provided in the warrants). The number of shares of our common stock issuable upon exercise of the warrants is equal to the sum of (a) 1,942,827 shares of common stock plus (b) the number of shares of common stock equal to 2% of the total number of shares of common stock of all classes issued by us (other than shares of common stock issued in this offering) during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering, calculated as of the date of exercise on a fully-diluted basis after giving effect to the exercise of all other warrants, options and rights to acquire any shares of our common stock issued by us, and the conversion of any convertible securities issued by us, during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering.

 

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DILUTION

Dilution represents the difference between the initial public offering price per share set forth on the cover page of this prospectus and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share represents the amount of our tangible assets less our liabilities, divided by the shares of our common stock outstanding. As of December 31, 2009, our net tangible book value was approximately $             million, or approximately $             per share of our outstanding common stock.

After giving effect to the sale of the shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, and our receipt of the estimated net proceeds from the shares of common stock sold by us in this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if those transactions had occurred as of December 31, 2009, our as adjusted net tangible book value as of that date would have been approximately $             million, or approximately $             per share of our outstanding common stock. This represents an immediate increase in as adjusted net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors. The following table illustrates this dilution:

 

Assumed initial public offering price per share of common stock

      $             

Net tangible book value per share of common stock as of December 31, 2009

   $                

Increase in net tangible book value per share of common stock attributable to new investors

     
         

As adjusted net tangible book value per share of common stock after this offering

     
         

As adjusted dilution per share of common stock to new investors in this offering

      $  
         

If the underwriters exercise their option to purchase additional shares of common stock in full, the as adjusted net tangible book value per share of our common stock after this offering would be approximately $             per share of common stock and the as adjusted dilution per share to new investors in this offering would be approximately $             per share of common stock, in each case calculated as described above.

The information in the preceding table has been calculated using an assumed initial public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus. A $1.00 increase (decrease) in the assumed initial public offering price per share would increase (decrease) the as adjusted net tangible book value per share of common stock after this offering by approximately $             per share and the as adjusted dilution per share of common stock to new investors in this offering by approximately $             per share, in each case calculated as described above and assuming that the number of shares sold by us and the selling stockholders, as set forth on the cover page of this preliminary prospectus, remains the same. Likewise, the information in the preceding table has been calculated assuming that we and the selling stockholders sell the respective numbers of shares of common stock in this offering equal to the numbers of shares appearing on the cover page of this preliminary prospectus. A 100,000 share increase (decrease) in the number of shares of common stock that we sell in this offering would increase (decrease) the as adjusted net tangible book value per share of common stock after this offering by approximately $             per share and increase (decrease) the as adjusted dilution per share of common stock to new investors in this offering by approximately $             per share, in each case calculated as described above and assuming an initial public offering price per share equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus. A 100,000 share increase (decrease) in the number of shares of common stock that the selling stockholders sell in this offering would increase (decrease) the as adjusted net tangible book value per share of common stock after this offering by approximately $             per share and increase (decrease) the as

 

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adjusted dilution per share of common stock to new investors in this offering by approximately $             per share, in each case calculated as described above and assuming an initial public offering price per share equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus.

The following table summarizes, as of December 31, 2009, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares of common stock in this offering, after giving effect to the sale of the common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus, as if those transactions had occurred as of December 31, 2009.

 

     Shares Purchased     Total Consideration     Average
Price

Per  Share
     Number    Percent     Amount    Percent    

Existing stockholders

                     $                                $             

New investors

                     $                               
                          

Total

      100   $      100  
                          

If the underwriters exercise their option to purchase additional shares of common stock in full, our existing stockholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding immediately after this offering, and our existing stockholders would have paid     % of the total consideration and new investors would have paid     % of the total consideration, in each case calculated as described above.

The information in the preceding table has been calculated using an assumed public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus. A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, respectively, the consideration paid by new investors and in total by approximately $             million and the percentage of total consideration paid by new investors by approximately              basis points, and would decrease or increase, respectively, the percentage of total consideration paid by existing stockholders by approximately              basis points, in each case calculated as described above and assuming that the number of shares sold by us and the selling stockholders, as set forth on the cover page of this preliminary prospectus, remains the same. Likewise, the information in the preceding table has been calculated assuming that we and the selling stockholders sell the respective numbers of shares of common stock in this offering equal to the numbers of shares appearing on the cover page of this preliminary prospectus. A 100,000 share increase or decrease in the number of shares of common stock that we sell in this offering would increase or decrease, respectively, the percentage of shares purchased by new investors by approximately              basis points, the amount of consideration paid by new investors and in total by approximately $             million and the percentage of total consideration paid by new investors by approximately              basis points and would decrease or increase, respectively, the percentage of shares purchased by existing stockholders by approximately              basis points and the percentage of total consideration paid by existing stockholders by approximately              basis points, in each case calculated as described above and assuming an initial public offering price per share equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus. A 100,000 share increase or decrease in the number of shares of common stock that the selling stockholders sell in this offering would increase or decrease, respectively, the percentage of shares purchased by new investors by approximately              basis points, the amount of consideration paid by new investors and in total by approximately $             million and the percentage of total consideration paid by new investors by approximately              basis points, and would decrease or increase, respectively, the percentage of shares purchased by existing stockholders by approximately              basis points and the percentage of total consideration paid by existing stockholders by approximately              basis points, in each case calculated as described above and assuming an initial public offering price per share equal to the midpoint of the estimated price range set forth on the cover page of this preliminary prospectus.

 

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The tables above exclude the following shares:

 

   

38,524,482 shares of our common stock issuable upon the exercise of options outstanding under our equity incentive plans as of March 31, 2010 at a weighted average exercise price of $0.38 per share;

 

   

             shares of our common stock that will be issuable upon exercise of options we intend to grant prior to the closing of this offering under our 2010 Equity Incentive Plan at an exercise price equal to $             per share;

 

   

             additional shares of our common stock that will be available for future awards under our 2010 Equity Incentive Plan, plus automatic annual increases in the number of shares of common stock available for future awards under that plan, as more fully described in “Executive Compensation—Equity Incentive Plans”;

 

   

             additional shares of our common stock that will be available for future awards under our 2010 Employee Stock Purchase Plan, as more fully described in “Executive Compensation—Equity Incentive Plans”; and

 

   

shares of our common stock issuable upon the exercise of outstanding warrants at an exercise price of $0.55 per share (subject to adjustment as provided in the warrants). The number of shares of our common stock issuable upon exercise of the warrants is equal to the sum of (a) 1,942,827 shares of common stock plus (b) the number of shares of common stock equal to 2% of the total number of shares of common stock of all classes issued by us (other than shares of common stock issued in this offering) during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering, calculated as of the date of exercise on a fully-diluted basis after giving effect to the exercise of all other warrants, options and rights to acquire any shares of our common stock issued by us, and the conversion of any convertible securities issued by us, during the period beginning on and including April 1, 2010 to but excluding the closing date of this offering.

To the extent that any of these options or warrants are exercised, new options are issued under our equity incentive plans or we issue additional shares of common stock or warrants or convertible securities in the future, there will be (in the case of options and warrants outstanding as of the date of this prospectus with an exercise price per share less than the initial public offering price per share set forth on the cover page of this prospectus) or may be further dilution to investors participating in this offering.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

We derived the following selected consolidated statement of operations data and other financial and operating data (other than units sold) for the years ended December 31, 2007, 2008 and 2009 and the following selected consolidated balance sheet data as of December 31, 2008 and 2009 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the following selected consolidated statement of operations data and other financial and operating data (other than units sold) for the years ended December 31, 2005 and 2006 and the following selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 from our audited financial statements or, in the case of data as of and for the year ended December 31, 2005, our unaudited restated consolidated financial statements, which financial statements are not included in this prospectus. Our results of operations and financial condition presented below do not purport to be indicative of our results of operations or financial condition as of any future date or for any future period. You should read the following information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     Year Ended December 31,  
     Restated
2005(3)
    2006     2007     2008     2009  
     (in thousands except per share amounts)  

Consolidated Statement of Operations Data:

          

Net revenues

   $ 275,950      $ 378,050      $ 379,718      $ 341,072      $ 325,633   

Cost of revenue(1)

     254,776        350,830        343,337        305,505        278,976   
                                        

Gross profit

     21,174        27,220        36,381        35,567        46,657   

Operating expenses:

          

Product development(1)

     6,704        8,748        1,736        87        13,514   

Sales and marketing(1)

     9,912        10,969        15,751        17,534        23,780   

General and administrative(1)

     15,724        12,734        11,039        4,668        20,201   
                                        

Total operating expenses(2)

     32,340        32,451        28,526        22,289        57,495   
                                        

Income (loss) from operations

     (11,166     (5,231     7,855        13,278        (10,838

Interest expense, net

     (1,019     (2,388     (3,267     (2,543     (1,730

Loss on revaluation of common stock warrants

     —          —          —          —          (1,722

Other income (expense), net

     21        154        70        (90     310   
                                        

Income (loss) before income taxes

     (12,164     (7,465     4,658        10,645        (13,980

Income tax expense (benefit)

     702        1,296        67        (557     (5,290
                                        

Net income (loss)

   $ (12,866   $ (8,761   $ 4,591      $ 11,202      $ (8,690
                                        

Net income (loss) per share:

          

Basic

   $ (0.23   $ (0.15   $ 0.08      $ 0.19      $ (0.14
                                        

Diluted

   $ (0.23   $ (0.15   $ 0.00      $ (0.03   $ (0.14
                                        

Weighted average shares used in computing net income (loss) per share:

          

Basic

     55,464        57,976        58,494        59,643        61,251   

Diluted

     55,464        57,976        79,783        75,579        61,251   

(Footnotes appear on next page)

 

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(1) Includes stock-based compensation (benefit) expense as follows:

 

     Year Ended December 31,
     Restated
2005(3)
   2006    2007     2008     2009
     (in thousands)

Cost of revenue

   $ 1,924    $ 1,033    $ (476   $ (1,674   $ 448

Product development

     4,488      2,895      (1,672     (4,353     8,389

Sales and marketing

     1,866      1,477      (398     (1,389     7,878

General and administrative

     5,509      3,604      (1,984     (5,407     11,289
                                    

Total

   $  13,787    $   9,009    $   (4,530   $ (12,823   $  28,004
                                    

 

(2) For years prior to 2007, we had a bonus plan under which the bonus payouts were significantly larger than under our current bonus plan. In 2005, our total bonus expense was approximately $3.6 million compared to adjusted EBIT of approximately $2.6 million and adjusted EBIT before bonus expense of approximately $6.2 million. In 2006, our total bonus expense was approximately $7.3 million compared to adjusted EBIT of approximately $3.8 million are adjusted EBIT before bonus expense of approximately $11.1 million. Adjusted EBIT is a non-GAAP financial measure that we include in this prospectus to provide investors with a supplemental measure of our operating performance. For a definition of adjusted EBIT and reconciliation to net income (loss), the most directly comparable GAAP measure, see note (1) on the following page.
(3) We restated our consolidated financial statements as of December 31, 2005 primarily to correct the accounting treatment for stock options under variable accounting. The net effects of the restatement resulted in a net loss of $12.9 million instead of previously reported net income of $1.5 million for the year ended December 31, 2005 after adjusting for the stock-based compensation expense of $13.8 million and $0.6 million of other items.

 

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     Year Ended December 31,
     Restated
2005(4)
   2006    2007    2008     2009
     (dollars and units in thousands)

Other Financial and Operating Data:

             

Adjusted EBIT(1)

   $ 2,621    $ 3,778    $ 3,325    $ 455      $ 17,166

Adjusted net income (loss)(1)

   $ 921    $ 248    $ 61    $ (1,621   $ 7,022

Gross profit:(2)

             

High-performance memory components

   $ —      $ —      $ —      $ —        $ 30,167

Gaming components and peripherals

   $ —      $ —      $ —      $ —        $ 16,490
                                   

Total

   $ 21,174    $ 27,220    $ 36,381    $ 35,567      $ 46,657
                                   

Gross margin:(2)(3)

             

High-performance memory components

     —  %      —  %      —  %      —  %        12.4%

Gaming components and peripherals

     —  %      —  %      —  %      —  %        20.0%

Total

     7.7%      7.2%      9.6%      10.4%        14.3%

Total units sold

     4,947      6,560      9,314      10,700        9,083

 

(1) We present adjusted EBIT and adjusted net income (loss) in this prospectus to provide investors with supplemental measures of our operating performance. Adjusted EBIT and adjusted net income (loss) are non-GAAP financial measures. We define adjusted EBIT as net income (loss) less other income (expense), net, plus interest expense, net, loss on revaluation of common stock warrants, income tax expense (benefit) and stock-based compensation (benefit) expense. We define adjusted net income (loss) as net income (loss) plus tax-adjusted stock-based compensation (benefit) expense.

 

   We believe that adjusted EBIT and adjusted net income (loss) assist our board of directors, management and investors in comparing our operating performance from period to period on a consistent basis because, in the case of adjusted EBIT, it removes the impact of stock-based compensation (benefit) expense (which is a non-cash item that can vary substantially from period to period), loss on revaluation of our outstanding common stock warrants (which is a non-cash item), other income (expense), net (which consists primarily of items, such as foreign currency gain or loss and income from scrap sales, that we do not consider indicative of our operating performance) and variations in our capital structure (affecting interest expense, net) and tax position (such as the impact of changes in effective tax rates) and because, in the case of adjusted net income (loss), it removes the impact of tax-adjusted stock-based compensation (benefit) expense. We also use adjusted EBIT as a performance measure in determining management bonuses. The use of adjusted EBIT and adjusted net income (loss) have limitations and you should not consider these performance measures in isolation from or as an alternative to GAAP measures such as net income (loss). For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Measures.”

The following table provides a reconciliation of adjusted EBIT to net income (loss), the most directly comparable GAAP financial measure, for the following periods:

 

     Year Ended December 31,  
     Restated
2005(4)
    2006     2007     2008     2009  
     (in thousands)  

Net income (loss)

   $ (12,866   $ (8,761   $ 4,591      $ 11,202      $ (8,690

Less: other income (expense), net

     21        154        70        (90     310   

Plus:

          

Interest expense, net

     1,019        2,388        3,267        2,543        1,730   

Loss on revaluation of common stock warrants

     —          —          —          —          1,722   

Income tax expense (benefit)

     702        1,296        67        (557     (5,290

Stock-based compensation (benefit) expense

     13,787        9,009        (4,530     (12,823      28,004   
                                        

Adjusted EBIT

   $ 2,621      $    3,778      $    3,325      $ 455      $ 17,166   
                                        

(Footnote continued on next page)

 

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(1) (cont.) The following table provides a reconciliation of adjusted net income (loss) to net income (loss), the most directly comparable GAAP financial measure, for the following periods. The tax adjustment in the following table reflects the increase in income tax expense or decrease in income tax benefit, as the case may be, that would have been reflected in our consolidated statement of operations for the applicable period if stock-based compensation (benefit) expense was not deducted or added, as the case may be, in computing net income (loss).

 

     Year Ended December 31,  
     Restated
2005(4)
    2006     2007     2008     2009  
     (in thousands)  

Net income (loss)

   $ (12,866   $   (8,761   $ 4,591      $ 11,202      $   (8,690

Plus stock-based compensation (benefit) expense

     13,787        9,009          (4,530     (12,823     28,004   

Less tax adjustment

     —          —          —          —          12,292   
                                        

Adjusted net income (loss)

   $ 921      $ 248      $ 61      $ (1,621   $ 7,022   
                                        

 

(2) Our business has two operating segments: high-performance memory components and gaming components and peripherals. Prior to 2009, we evaluated the performance of our two operating segments based on net revenues; accordingly, information relating to cost of revenue and gross profit for each operating segment is not available for periods prior to 2009. Starting in 2009, we began evaluating the performance of our two operating segments based on cost of revenue and gross profit, in addition to net revenues.
(3) Gross margin is gross profit as a percentage of net revenues.
(4) We restated our consolidated financial statements as of December 31, 2005 primarily to correct the accounting treatment for stock options under variable accounting. The net effects of the restatement resulted in a net loss of $12.9 million instead of previously reported net income of $1.5 million for the year ended December 31, 2005 after adjusting for the stock-based compensation expense of $13.8 million and $0.6 million of other items.

 

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     As of December 31,  
     Restated
2005(1)
    2006     2007     2008     2009  
     (in thousands)  

Consolidated Balance Sheet Data:

          

Cash

   $ 850      $ 872      $ 1,095      $ 648      $ 1,367   

Total assets

     48,379        86,097        85,192        61,924        100,637   

Short-term debt and current portion of long-term debt and capital lease obligations

     393        34,471        34,038        23,421        25,986   

Long-term debt and capital lease obligations (less current portion)

     933        922        1,417        400        —     

Redeemable ESOP shares

     5,955        8,848        7,129        3,049        14,298   

Total stockholders’ deficit

     (17,091     (28,582     (21,562     (5,616     (25,106

 

(1) We restated our consolidated financial statements as of December 31, 2005 primarily to correct the accounting treatment for stock options under variable accounting. The net effects of the restatement resulted in a net loss of $12.9 million instead of previously reported net income of $1.5 million for the year ended December 31, 2005 after adjusting for the stock-based compensation expense of $13.8 million and $0.6 million of other items.

 

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

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those expressed or implied by those forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a leading designer and supplier of high-performance components to the PC gaming hardware market. Our products are purchased primarily by PC gaming enthusiasts who build their own high-performance desktop computer systems or buy pre-assembled customized systems in order to achieve the processing speeds and graphics capabilities necessary to fully experience leading edge computer games. We believe that we have a leading brand among PC gaming enthusiasts, reflecting our superior product performance, design and reliability. Over the last four years we have introduced new, higher value added PC gaming components, both leveraging and reinforcing our brand image within our target market. Through our 16 years of operation, we have developed a global, scalable operations infrastructure with extensive marketing and distribution channel relationships with distributors and retailers in Europe, the Americas and the Asia Pacific region.

We have achieved five straight years of positive adjusted EBIT, which we define as net income (loss) less other income (expense), net, plus interest expense, net, loss on revaluation of common stock warrants, income tax expense (benefit) and stock-based compensation (benefit) expense. In 2009, despite challenging market conditions, we generated net revenues of $325.6 million, gross profit of $46.7 million and adjusted EBIT of $17.2 million. Adjusted EBIT is a non-GAAP financial measure that we include in this prospectus to provide investors with a supplemental measure of our operating performance. See “Selected Consolidated Financial Data” above and “—Key Performance Measures” below for an explanation of how we compute adjusted EBIT and for a reconciliation to net income (loss), the most directly comparable GAAP financial measure.

Our business has two operating segments:

 

   

high-performance memory components, which includes DRAM modules and USB flash drives; and

 

   

gaming components and peripherals, which includes power supply units, solid-state drives, cooling systems and computer cases.

Over the last few years, we have expanded our product portfolio beyond DRAM modules and leveraged our recognized brand in the markets for high-performance PC gaming components to help grow our business. We introduced power supply units in 2006, and launched solid-state drives, computer cases and a new cooling system product in 2009. As a result, net revenues of our gaming components and peripherals segment grew from $17.3 million, or 4.6% of consolidated net revenues, in 2007 to $82.5 million, or 25.3% of consolidated net revenues, in 2009. Likewise, our unit sales volumes grew from 6.6 million units in 2006 to 9.3 million units in 2007, 10.7 million units in 2008 and 9.1 million units in 2009.

Our net revenues by segment for the following periods, expressed both in dollars and as a percentage of total net revenues, are shown below:

 

     Year Ended December 31,  
     2007     2008     2009  
     (dollars in thousands)  

High-performance memory components

   $ 362,419    95.4   $ 295,755    86.7   $ 243,124    74.7

Gaming components and peripherals

   $ 17,299    4.6   $ 45,317    13.3   $ 82,509    25.3
                                       

Total

   $ 379,718    100.0   $ 341,072    100.0   $ 325,633    100.0
                                       

 

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Our gaming components and peripherals segment generally has a higher gross margin than our high-performance memory components segment. The continued growth in net revenues of our gaming components and peripherals segment was the primary driver for an increase in our gross profit from $36.4 million, or 9.6% of consolidated net revenues, in 2007 to $46.7 million, or 14.3% of consolidated net revenues, in 2009.

Our gross profit and gross margin, which we define as gross profit as a percentage of net revenues, by segment are shown below:

 

     Year Ended December 31,  
     2007(1)     2008(1)     2009  
     Gross
Profit
   Gross
Margin
    Gross
Profit
   Gross
Margin
    Gross
Profit
   Gross
Margin
 
     (dollars in thousands)  

High-performance memory components

   $ —      —     $ —      —     $ 30,167    12.4

Gaming components and peripherals

   $ —      —     $ —      —     $ 16,490    20.0
                           

Total

   $ 36,381    9.6   $ 35,567    10.4   $ 46,657    14.3
                           

 

(1) Prior to 2009, we evaluated the performance of our two operating segments based on net revenues; accordingly, information relating to cost of revenue and gross profit for each operating segment is not available for periods prior to 2009. Starting in 2009, we began evaluating the performance of our two operating segments based on cost of revenue and gross profit, in addition to net revenues.

We are a global company with operations in Hong Kong, the Netherlands, Taiwan and the United States and sales employees in Canada, China, France, Germany, India, Italy, Poland, Russia, Switzerland and the United Kingdom. Our products are sold in more than 60 countries around the world, through online as well as brick-and-mortar retailers. Our net revenues by geographic area for the following periods, expressed both in dollars and as a percentage of total net revenues, are shown below:

 

     Year Ended December 31,  
     2007     2008     2009  
     (dollars in thousands)  

Europe

   $ 188,073    49.5   $ 188,434    55.2   $ 169,928    52.2

Americas

     141,267    37.2        117,181    34.4        114,265    35.1   

Asia Pacific

     50,378    13.3        35,457    10.4        41,440    12.7   
                                       

Total

   $ 379,718    100.0   $ 341,072    100.0   $ 325,633    100.0
                                       

Factors Affecting Our Business

Our results of operations and financial condition are affected by numerous factors, including those described above under “Risk Factors” and elsewhere in this prospectus and those described below.

DRAM IC Pricing. DRAM ICs account for most of the cost of producing our DRAM modules and prices of DRAM ICs are volatile and subject to substantial fluctuations. Fluctuations in the market prices of DRAM ICs can have a material effect on both the selling prices of our DRAM modules and, because a majority of our net revenues is generated by sales of DRAM modules, our total net revenues. However, in the past fluctuations in market prices of DRAM ICs have generally had a less pronounced impact on our gross margin than on our net revenues, because selling prices of our DRAM modules have tended to rise or fall with the prices of DRAM ICs. Nonetheless, because we carry inventories of both DRAM ICs and DRAM modules at our facility in Taiwan, as well as inventories of DRAM modules at our shipping hubs, fluctuations in the market price of DRAM ICs can have an effect on our gross margins. For example, if prices of DRAM ICs and DRAM modules increase, this has in the past tended to have a positive short-term impact on gross margins of our DRAM modules (reflecting the relatively lower cost of DRAM modules held in our inventory), while declines in prices of DRAM ICs and

 

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DRAM modules have tended to have a negative short-term impact on gross margins of our DRAM modules (reflecting the relatively higher cost of DRAM modules held in our inventory). As a result, our net revenues, gross profit and gross margin may vary materially from quarter to quarter due to changes in prices of DRAM ICs.

Impact of Product Mix. Our gaming components and peripherals segment generally has a higher gross margin than our high-performance memory components segment. As a result, our consolidated gross margin is affected by changes in product mix. One of our strategies is to increase the percentage of our net revenues generated by higher margin, higher value added components and peripherals.

Introduction of New High-Performance Computing Hardware and Sophisticated PC games. We believe that the introduction of more powerful CPUs, graphics cards and similar computer hardware that place increased demands on other system components, such as memory, power supply or cooling, has a significant effect on the demand for our products. In addition, we believe that our business depends on the introduction and success of computer games with sophisticated graphics that place increasing demands on system processing speed and capacity and therefore require more powerful CPUs or graphics cards, which in turn drives demand for our high performance DRAM modules, power supply units, cooling systems and other components and peripherals. In addition, we must continually introduce new products that are compatible with these new technologies and time those introductions to coincide with the release of new PC hardware and computer gaming software.

Seasonal Sales Trends. We have experienced and expect to continue to experience seasonal fluctuations in sales due to the spending patterns of our customers. Our unit sales volumes have generally been lowest in the first and second calendar quarters due to a drop off in sales following the fourth quarter holiday season and because of the decline in sales that typically occurs in anticipation of the introduction of new or enhanced CPUs, graphics cards and other computer hardware, which usually takes place in the second calendar quarter and which tends to drive sales in the following two quarters. As a consequence of seasonality, our total unit shipments for the second calendar quarter are generally the lowest of the year, followed by unit shipments for the first calendar quarter, although the effect of these lower quarterly unit volumes on our consolidated net revenues may be masked by changes in average selling prices of our products. We expect these seasonality trends to continue.

Financial Operations Overview

Net Revenues

We generate substantially all of our revenues from sales of DRAM modules, USB flash drives, power supply units, solid-state drives, cooling systems and computer cases to distributors and retailers. Average selling prices of our products, particularly our DRAM modules, can fluctuate significantly independent of unit sales, which can lead to significant variations in our net revenues and gross profit. We present our net revenues as revenues less returns, rebates, discounts and other financial incentives to customers. Although we sell our products to a broad range of distributors and retailers, we have one customer, Newegg.com, that accounted for approximately 11.8%, 10.8% and 11.1% of our consolidated net revenues, and our top ten customers accounted for approximately 45.6%, 45.3% and 42.7% of our consolidated net revenues, in 2007, 2008 and 2009, respectively.

We provide a variety of rebates to both our customers and end-users of our products, including instant, volume incentive and mail-in rebates. We treat these rebates, which can vary greatly depending on market and competitive conditions, as pricing mechanisms and larger rebates during some periods are not necessarily an indication of weaker markets and do not necessarily lead to lower gross margins. For example, the greater use of mail-in rebates as a pricing mechanism in 2008 compared with 2007 did not adversely impact our gross margin in 2008 compared to 2007. In addition, we also have contractual agreements and cooperative marketing, promotional and other arrangements that provide rebates and other financial incentives to our customers. To a limited extent, we also offer financial incentives related to customer inventory of specific products. The aggregate amount of charges incurred as a result of all of these rebates and other incentives was $14.6 million, $27.6 million and $18.1 million in 2007, 2008 and 2009, respectively. These charges were offsets to our gross revenues.

 

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Cost of Revenue

The most significant components of cost of revenue are materials (primarily amounts paid to third parties who manufacture and supply our DRAM modules and other products), inbound and internal freight, manufacturing, supply chain and warehousing personnel costs, including stock-based compensation (benefit) expense, and assembly and warehousing facility costs.

Gross Profit

In general, products in our high-performance memory components segment have lower gross margins than products in our gaming components and peripherals segment. In addition, rapidly changing IC prices can affect the average selling prices of our DRAM modules, USB flash drives and solid-state drives, which in turn affect our net revenues, gross profit and gross margin, primarily in our high-performance memory components segment. One of our strategies is to increase the percentage of our total net revenues generated by our higher margin gaming components and peripherals segment.

Operating Expenses

We classify our operating expenses into three categories: product development, sales and marketing, and general and administrative. Our operating expenses consist primarily of personnel costs and, to a lesser extent, professional fees and rent. Personnel costs for each category of operating expenses generally include salaries, bonuses, commissions, stock-based compensation (benefit) expense and employee benefit costs.

Product Development. Product development expenses consist primarily of the costs associated with the design and testing of new products and improvements to existing products. These costs relate primarily to compensation of personnel involved with product design, definition, compatibility testing and qualification. We believe that continued innovation is critical to attaining our strategic objectives and, as a result, we expect product development expenses to increase in future periods.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel costs, including commissions and benefits, costs related to advertising and marketing, outgoing freight, travel, other support costs, including utilities, insurance, allocations for facilities and information technology services, and professional fees. We expect sales and marketing expenses to increase as we hire additional sales and marketing personnel to support our growth strategy.

General and Administrative. General and administrative expenses consist primarily of personnel costs of our executive, finance and administrative personnel, accounting, legal and professional services fees, allowances for bad debts, travel, allocations for facilities and information technology services and other corporate expenses. We expect general and administrative expenses to increase as we continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs, insurance premiums and compliance costs associated with the Sarbanes-Oxley Act of 2002.

Interest Expense, Net

Interest expense, net consists of our payments on borrowings under our revolving credit facility, other indebtedness and capital leases, less interest received on our cash.

Other Income (Expense), Net

Other income (expense), net consists primarily of foreign currency gain or loss and scrap sales.

 

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Critical Accounting Policies

In presenting our consolidated financial statements in conformity with U.S. generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures.

Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base these estimates and assumptions on historical experience or on various other factors that we believe to be reasonable and appropriate under the circumstances. On an ongoing basis, we reconsider and evaluate our estimates and assumptions. Actual results may differ significantly from these estimates.

We believe that the critical accounting policies listed below involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our consolidated financial statements. In addition, we believe that a discussion of these policies is necessary to understand and evaluate the consolidated financial statements contained in this prospectus.

For further information on our critical and other significant accounting policies, see note 2 to our audited consolidated financial statements, which are included elsewhere in this prospectus.

Revenue Recognition

Our products are sold through a network of distributors and retailers. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, title has transferred, the price becomes fixed and determinable and collectability is reasonably assured. Evidence of an arrangement exists when there is a customer contract or a standard customer purchase order. We consider delivery complete when title and risk of loss transfer to the customer, which is generally upon shipment, but no later than physical receipt by the customer. We record revenue net of estimated returns, customer incentive programs and other incentive offerings, including special pricing arrangements, promotions, rebates and volume-based incentives. We recognize reserves for these arrangements, promotions, rebates and incentives as a reduction of revenue and determine estimates of required reserves based on negotiated terms and consideration of historical experience. We grant limited rights of return, which vary by customer and range from the right to return defective products to limited stock rotation rights allowing the exchange of a percentage of the customer’s quarterly purchases. We estimate these allowances based on historical rates of return and record them as a reduction of revenues.

Accounts Receivable Allowance

We record an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The allowance is recorded as a general and administrative expense in our consolidated financial statements. We base our allowance on periodic assessments of our customers’ liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical collection trends. Additional allowances may be required if the liquidity or financial condition of our customers deteriorate.

Stock-Based Compensation

A significant number of our outstanding employee based awards are subject to repurchase rights that, combined with our past practice of repurchasing shares, caused such awards to be reflected as a stock compensation liability on our consolidated balance sheet. The repurchase price is a formulaic price not determinable until the date of the exercise of the repurchase right. Stock-based awards granted under our Non-Qualified Stock Option Plan, or NQSO Plan, and our 2006 Stock Purchase Plan and certain awards granted under our 2008 Stock Incentive Plan are liability-classified awards because shares of common stock issued under these awards are subject to these repurchase rights, as described in “Stock Repurchase Features” in note 15 to our audited consolidated financial statements, which are included elsewhere in this prospectus, and because of our

 

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past practices of repurchasing common stock related to those awards. We have elected the intrinsic value method to measure our liability-classified awards and amortize stock-based compensation expense for those awards expected to vest on a straight-line basis over the requisite service period. We re-measure the intrinsic value of the awards at the end of each reporting period until either the repurchase rights are exercised or the holders are exposed to the market value of the shares for a reasonable period of time (at least six months), or the awards are settled, cancelled or expire unexercised.

Other stock-based awards granted under our 2008 Stock Incentive Plan which were not subject to the repurchase rights described above were equity-classified. We adopted the Black-Scholes model to estimate the fair value of these equity-classified awards. We recognize the value of the portion of the award that we ultimately expect to vest as expense over the requisite service periods in our consolidated statements of operations.

We computed the fair value of the equity-classified awards on the date of grant using the Black-Scholes pricing model, with the following weighted average assumptions:

 

     Year Ended
December 31,
     2008    2009

Fair value of underlying common stock per share

   $ 0.29    $ 0.54

Expected term in years

     6.25      6.25

Expected volatility

     52%      52%

Expected dividend yield

     —  %      —  %

Risk free interest rate

     3.2%      2.6%

We determine expected volatility using average volatility of a peer group of publicly traded companies. We selected this peer group based on criteria including similar industry, life cycle, revenue and market capitalization. We determine the expected term of options granted utilizing the “simplified” method as prescribed by Staff Accounting Bulletin, or SAB, No. 107, Share-Based Payment, or SAB 107, of the SEC. We determine the risk free interest rate by using published zero coupon rates for U.S. treasury notes for each grant date given the expected term. The expected dividend yield is zero based on the fact that we have never paid, and do not intend to pay, cash dividends on our common stock.

We are also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that we expect to vest.

We believe that the determinations of the fair market value of our common stock were fair and reasonable at the times they were made. Our board of directors utilized methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the AICPA Practice Guide.

The methodology we utilized to arrive at the per share value uses estimates of the enterprise value using market, income or cost approaches, an analysis of possible future events, a lack of marketability discount and a risk-adjusted discount rate. The future events considered are initial public offering, strategic sale or merger, dissolution/no value to common stockholders or remaining a private company. We base the timing and probability of these events on discussions between our board of directors and management. The market- comparable approach estimates the fair market value of a company by applying market multiples of publicly-traded companies in the same or similar lines of business to the results and projected results of the company being valued. When choosing the market-comparable companies to be used for the market-comparable approach, we focused on companies operating within our industry. The income approach involves applying an appropriate risk-adjusted discount rate to projected debt free cash flows, based on forecasted revenue and costs. The cost or asset-based approach could not be independently relied upon since certain intangible assets could not be valued without reference to the market-comparable or income approach and was thus not used in determining the final valuation.

 

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We also prepared financial forecasts for each valuation report date used in the computation of our enterprise value for both the market-comparable approach and the income approach. We based the financial forecasts on assumed revenue growth rates that took into account our past experience and contemporaneous future expectations. The lack of marketability discount in 2009 was reduced to 18.0% from 26.5% in prior years reflecting the increased likelihood of an initial public offering.

The weighting of the valuation methods and possible future events changed from the December 31, 2008 valuation to the December 31, 2009 valuation to reflect the increased likelihood of an initial public offering and is shown below:

 

Valuation Method Weighting

  

Dec. 31, 2008

 

Sept. 30, 2009

 

Dec. 31, 2009

Income approach

   40.0%   70.0%   60.0%

Market approach—public company analysis

   10.0%   20.0%   35.0%

Market approach—merger and acquisition analysis

   50.0%   10.0%     5.0%

For the December 31, 2008 stock valuation we used a probability weighted expected return method and took the calculated enterprise value for each of the four future events considered, applied the probability of these future events, applied the marketability discount and divided by the fully-diluted stock count as of the date of valuation. For the December 31, 2009 stock valuation we took the enterprise value and applied the Black-Scholes option pricing model to calculate the equity value and divided it by the fully-diluted stock count as of the date of valuation.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income (loss) in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period of enactment. We are subject to foreign income taxes on our foreign operations. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more likely than not to be realized.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. We consider the scheduled reversal of deferred tax liabilities (including the impact of available carry-back and carry-forward periods), projected taxable income, and tax-planning strategies in making this assessment. The ultimate realization of deferred tax assets as of December 31, 2009 depends on the generation of future taxable income. We reversed our valuation allowance during the fourth quarter of 2009 as, based on our long term projections of profitability and other available information, it is more likely than not that our deferred tax assets as of December 31, 2009, will be realized. Prior to that, our deferred tax assets were subject to a valuation allowance based on the level of historical income and projections over the periods for which the deferred tax assets were deductible. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry-forward period are reduced.

The accounting for uncertainty in income taxes recognized in an enterprise’s financial statements prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are required to recognize in our financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The accounting for uncertainty in income taxes also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. Our policy is to record interest and penalties related to unrecognized tax benefits as income tax expense.

 

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Inventories

We periodically evaluate our ending inventories for excess quantities and obsolescence and write down our inventories to the lower of cost or market. We may be required to write down inventory below our costs for reasons such as obsolescence, excess quantities, product returns and declines in market value. This evaluation includes analysis of sales levels by products. Among other factors, we consider historical demand and forecasted demand in relation to the inventory on hand, product life cycles, product development plans and technology trends.

Common Stock Warrant Liability

In connection with a $5.0 million loan made to us in June 2009, we issued warrants to purchase our common stock to the lender. The fair value of the common stock warrants was allocated to common stock warrant liability and the residual amount of the loan proceeds was allocated to debt. We classify our common stock warrants as liabilities on our balance sheet due to the holder’s right to require us to repurchase the common stock warrants or the shares of common stock issued on exercise of the warrants for cash under specified circumstances. As a result, the common stock warrant liability is subject to re-measurement at each balance sheet date and we recognize the change in fair value, if any, as loss on revaluation of the common stock warrants. The common stock warrant liability as of December 31, 2009 is based on the estimated valuation of our common stock as of that date. Our estimate of the common stock valuation is further described under “—Critical Accounting Policies—Stock-Based Compensation.” We expect that this repurchase right will be terminated in connection with this offering, which means that the outstanding common stock warrants will then be reflected in stockholders’ (deficit) equity on our consolidated balance sheet. We will continue to adjust the liability for changes in fair value until the earlier of (i) exercise of the common stock warrants, (ii) conversion into common stock, (iii) expiration of the common stock warrants or (iv) the termination of this repurchase right.

 

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Consolidated Results of Operations

The following table shows the line items that appear on our consolidated statement of operations, expressed in dollars and as a percentage of consolidated net revenues, for the periods presented.

 

    Year Ended December 31,  
    2007     2008     2009  
    (dollars in thousands)  

Net revenues

  $ 379,718      100.0   $ 341,072      100.0   $ 325,633      100.0

Cost of revenue(1)

    343,337      90.4        305,505      89.6        278,976      85.7   
                                         

Gross profit

    36,381      9.6        35,567      10.4        46,657      14.3   

Operating expenses

           

Product development(1)

    1,736      0.5        87      0.0        13,514      4.2   

Sales and marketing(1)

    15,751      4.1        17,534      5.1        23,780      7.3   

General and administrative(1)

    11,039      2.9        4,668      1.4        20,201      6.2   
                                         

Total operating expenses

    28,526      7.5        22,289      6.5        57,495      17.7   
                                         

Income (loss) from operations

    7,855      2.1        13,278      3.9        (10,838   (3.3
                                         

Interest expense, net

    (3,267   (0.9     (2,543   (0.7     (1,730   (0.5

Loss on revaluation of common stock warrants

    —        —          —        —          (1,722   (0.5

Other income (expense), net

    70      0.0        (90   0.0        310      0.1   

Income before income taxes

    4,658      1.2        10,645      3.1        (13,980   (4.3

Income tax expense (benefit)

    67      0.0        (557   (0.2     (5,290   (1.6
                                         

Net income (loss)

  $ 4,591      1.2   $ 11,202      3.3   $ (8,690   (2.7 )% 
                                         

 

(1) Includes stock-based compensation (benefit) expense, expressed in dollars and as a percentage of consolidated net revenues, as follows:

 

     Year Ended December 31,  
     2007     2008     2009  
     (dollars in thousands)  

Cost of revenue

   $ (476    (0.1 )%    $ (1,674    (0.5 )%    $ 448    0.1

Product development

     (1,672    (0.4     (4,353    (1.3     8,389    2.6   

Sales and marketing

     (398    (0.1     (1,389    (0.4     7,878    2.4   

General and administrative

     (1,984    (0.5     (5,407    (1.6     11,289    3.5   
                                           

Total

   $   (4,530    (1.2 )%    $ (12,823    (3.8 )%    $  28,004    8.6
                                           

Net Revenues

Net revenues declined in 2009 compared with 2008 primarily due to the continuing global economic downturn and its adverse impact on consumer spending. Net revenues decreased $15.4 million, or 4.5%, from 2008 to 2009, reflecting a decrease in net revenues generated by our high-performance memory components segment, offset in part by increased net revenues from our gaming components and peripherals segment. The decrease in net revenues from our high-performance memory components segment was primarily due to a decrease in the number of unit shipments. The increase in net revenues of our gaming components and peripherals segment was primarily due to an increase in sales of existing products and strong sales of new cooling system, solid-state drive and computer case products launched in 2009.

Net revenues declined in 2008 compared with 2007 primarily due to substantially lower average selling prices of our DRAM modules, as well as the impact of the global economic downturn and its adverse impact on consumer spending. Net revenues decreased $38.6 million, or 10.2%, from 2007 to 2008, reflecting a decrease in net revenues of our high-performance memory components segment, offset in part by an increase in net revenues of our gaming components and peripherals segment. The decrease in net revenues of our high-performance

 

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memory segment was primarily due to a significant decrease in the average selling price of our DRAM modules, which was offset in part by an increase in DRAM module unit shipments. The increase in net revenues of our gaming components and peripherals segment was primarily due to an increase in sales of power supply units, a product category that we launched in December 2006, which gained considerable momentum in 2007 and 2008.

Cost of Revenue

In 2009, cost of revenue decreased $26.5 million, or 8.7%, from $305.5 million in 2008 to $279.0 million in 2009, primarily due to a decrease in net revenues.

In 2008, cost of revenue decreased $37.8 million, or 11.0%, from $343.3 million in 2007 to $305.5 million in 2008, primarily due to a decrease in net revenues.

Gross Profit

In 2009, gross profit increased $11.1 million, or 31.2%, from $35.6 million in 2008 to $46.7 million in 2009, primarily due to a change in product mix, with our higher margin gaming components and peripherals segment accounting for a greater percentage of our total net revenues in 2009 than in 2008.

In 2008, gross profit decreased $0.8 million, or 2.2%, from $36.4 million in 2007 to $35.6 million in 2008, primarily due to substantially lower average selling prices of our DRAM modules in 2008 compared to 2007, offset in part by changes in product mix, with net revenue of our higher margin gaming components and peripherals segment accounting for a greater percentage of total net revenues in 2008 than in 2007.

Operating Expenses

We have three categories of operating expenses: product development expense, sales and marketing expense and general and administrative expense. Stock-based compensation (benefit) expense, which is a non-cash item that can vary significantly from period to period for reasons unrelated to our operating results, is a component of each of these three categories of expenses. In the following sections, we include a discussion of each of these three categories of expenses before giving effect to the impact of stock-based compensation (benefit) expense in order to focus on other components included in these expenses.

Our stock-based compensation (benefit) expense, which is accounted predominantly under the liability method, changes primarily due to changes in the fair value of our common stock. The intrinsic value of awards to most of our employees is re-measured at the end of each reporting period until the award is exercised and the holder is exposed to the market value of the shares for a reasonable period of time (at least six months) or the award is settled, cancelled or expires unexercised. We incurred stock-based compensation expense of $28.0 million in 2009 primarily due to an increase in the fair market value of our common stock. We recorded a stock-based compensation benefit of $4.5 million in 2007 and $12.8 million in 2008 due to a decline in the fair value of our common stock. These amounts are included in cost of revenue, product development expense, sales and marketing expense and general and administrative expense.

A significant number of our outstanding employee stock-based awards are subject to repurchase rights that, combined with our past practices of repurchasing shares, changed such awards to be reflected as a stock compensation liability on our consolidated balance sheet. We expect that these repurchase rights will be terminated on or before the closing of this offering, at which time the stock compensation liability will be reclassified to equity and will no longer be subject to remeasurement each period.

 

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Product Development Expense

 

     Year Ended December 31,    Change From  
     2007     2008     2009    2007 to 2008     2008 to 2009  
     (dollars in thousands)  

Product development expense

   $ 1,736      $ 87      $ 13,514    $ (1,649   (95.0 )%    $ 13,427    N/M   

Less stock-based compensation (benefit) expense included in product development expense

   $ (1,672   $ (4,353   $ 8,389    $ (2,681   160.3   $ 12,742    N/M   
                                          

Product development expense before stock-based compensation (benefit) expense

   $ 3,408      $ 4,440      $ 5,125    $ 1,032      30.3   $ 685    15.4
                                          

 

N/M means not meaningful.

In 2009, product development expense increased $13.4 million, from $0.1 million in 2008 to $13.5 million in 2009. Excluding stock-based compensation benefit of $4.4 million in 2008 and stock-based compensation expense of $8.4 million in 2009, product development expense before stock-based compensation (benefit) expense increased $0.7 million, or 15.4%, from $4.4 million in 2008 to $5.1 million in 2009, primarily due to a $0.6 million increase in personnel costs due to increased headcount and a $0.1 million increase in costs for design and testing of new products launched in 2009.

In 2008, product development expense decreased $1.6 million, or 95.0%, from $1.7 million in 2007 to $0.1 million in 2008. Excluding stock-based compensation benefit of $1.7 million in 2007 and $4.4 million in 2008, product development expense before stock-based compensation (benefit) expense increased $1.0 million, or 30.3%, from $3.4 million in 2007 to $4.4 million in 2008, primarily due to a $0.9 million increase in facilities and related expenses associated with a production line which became dedicated to product development after the expansion of offshore manufacturing in 2007 and $0.4 million increase in information technology-related expenses in support of new product development, offset in part by a $0.3 million decrease in expenses relating to the design and testing of new products.

Sales and Marketing Expense

 

     Year Ended December 31,     Change From  
     2007     2008     2009     2007 to 2008     2008 to 2009  
     (dollars in thousands)  

Sales and marketing expense

   $ 15,751      $ 17,534      $ 23,780      $ 1,783      11.3   $ 6,246      35.6

Less stock-based compensation (benefit) expense included in sales and marketing expense

   $ (398   $ (1,389   $ 7,878      $ (991   249.0   $    9,267      N/M   
                                            

Sales and marketing expense before stock-based compensation (benefit) expense

   $  16,149      $  18,923      $  15,902      $    2,774      17.2   $ (3,021   (16.0 )% 
                                            

 

N/M means not meaningful.

In 2009, sales and marketing expense increased $6.2 million, or 35.6%, from $17.5 million in 2008 to $23.8 million in 2009. Excluding stock-based compensation benefit of $1.4 million in 2008 and stock-based compensation expense of $7.9 million in 2009, sales and marketing expense before stock-based compensation (benefit) expense decreased $3.0 million, or 16.0%, from $18.9 million in 2008 to $15.9 million in 2009, primarily due to a $2.1 million decrease in freight expense primarily due to reduced shipments as a result of decreased sales, a $1.3 million decrease in advertising, tradeshow and marketing expenses as a result of cost cutting measures, a $0.5 million decrease in consulting and external services expenses, offset by a $0.9 million increase in personnel costs.

 

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In 2008, sales and marketing expenses increased $1.8 million, or 11.3%, from $15.8 million in 2007 to $17.5 million in 2008. Excluding stock-based compensation benefit of $0.4 million in 2007 and $1.4 million in 2008, sales and marketing expense before stock-based compensation (benefit) expense increased $2.8 million, or 17.2%, from $16.1 million in 2007 to $18.9 million in 2008, primarily due to a $1.1 million increase in freight cost due to an increase in unit shipments, a $0.7 million increase in personnel expense due to an increase in headcount, a $0.6 million increase in information technology-related expenses in support of sales and marketing activities and a $0.4 million increase in consulting and external services.

General and Administrative Expense

 

     Year Ended December 31,     Change From  
     2007     2008     2009     2007 to 2008     2008 to 2009  
     (dollars in thousands)  

General and administrative expense

   $ 11,039      $ 4,668      $ 20,201      $ (6,371   (57.7 )%    $  15,533      332.8

Less stock-based compensation (benefit) expense included in general and administrative expense

   $ (1,984   $ (5,407   $ 11,289      $ (3,423   172.5   $ 16,696      N/M   
                                            

General and administrative expense before stock-based compensation (benefit) expense

   $  13,023      $  10,075      $    8,912      $   (2,948   (22.6 )%    $ (1,163   (11.5 )% 
                                            

 

N/M means not meaningful.

In 2009, general and administrative expense increased $15.5 million, from $4.7 million in 2008 to $20.2 million in 2009. Excluding stock-based compensation benefit of $5.4 million in 2008 and stock-based compensation expense of $11.3 million in 2009, general and administrative expense before stock-based compensation (benefit) expense decreased $1.2 million, or 11.5%, from $10.1 million in 2008 to $8.9 million in 2009, primarily due to a $1.0 million decrease in legal and professional fees, a $0.7 million decrease in consulting fees and a $0.4 million decrease in other administrative expense, including travel and depreciation, due to cost cutting measures, offset in part by a $0.9 million increase in personnel expense.

In 2008, general and administrative expense decreased $6.4 million, or 57.7%, from $11.0 million in 2007 to $4.7 million in 2008. Excluding stock-based compensation benefit of $2.0 million in 2007 and $5.4 million in 2008, general and administrative expense before stock-based compensation (benefit) expense decreased $2.9 million, or 22.6%, from $13.0 million in 2007 to $10.1 million in 2008, due primarily to a $1.6 million decrease in legal and professional fees, a $1.6 million decrease in information technology-related expenses primarily due to the additional costs incurred in 2007 associated with the installation of Oracle enterprise resource planning software and a $0.4 million decrease in other operating expense, offset in part by a $0.4 million increase in bad debt expense and a $0.3 million increase in personnel expense.

Interest Expense, Net

Interest expense, net declined $0.8 million from 2008 to 2009 due primarily to a decrease in average borrowings under our revolving credit facility, offset in part by interest on a term loan made to us in June 2009. Interest expense, net declined $0.7 million from 2007 to 2008 due primarily to lower average borrowings under our revolving credit facility.

 

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Loss on Revaluation of Common Stock Warrants

Loss on revaluation of common stock warrants was $1.7 million in 2009 and was due to a fair market value adjustment relating to warrants we issued in 2009 to a lender in connection with a loan made to us by that lender. There was no similar gain or loss in 2007 or 2008 as no warrants were outstanding during those years.

Other Income (Expense), Net

Other income (expense), net increased by $0.4 million from 2008 to 2009, primarily due to $0.2 million we received from a litigation settlement and a $0.2 million decrease in foreign exchange losses. Other income (expense), net decreased by $0.2 million from 2007 to 2008, due primarily to foreign exchange losses.

Income Tax Expense (Benefit)

We recognized income tax benefit of $0.6 million for 2008, compared to $5.3 million for 2009. The $4.7 million increase in income tax benefit was due primarily to higher losses in 2009. Our effective tax rate for 2009 was significantly affected due to the reversal of the beginning of the year valuation allowance of $ 1.8 million.

We recognized income tax expense of $0.1 million for 2007, compared to a $0.6 million benefit for 2008. Our effective tax rate for 2008 was significantly affected due to the reversal of the beginning of the year valuation allowance of $ 4.7 million.

 

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Quarterly Results of Operations

The following table sets forth our unaudited quarterly consolidated statement of operations data and other financial data for 2009, expressed in dollars and as a percentage of consolidated net revenues. We have prepared the statements of operations for each of these quarters on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and, in the opinion of the management, each statement of operations includes all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of our results of operations for these periods. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The quarterly statement of operations data and other financial data are not indicative of operating results for any future period.

 

    Three Months Ended  
    Mar. 31, 2009     June 30, 2009     Sept. 30, 2009     Dec. 31, 2009  
    (dollars in thousands)  

Consolidated Statement of Operations Data:

               

Net revenues

  $    64,409      100.0   $    61,374      100.0   $    86,711      100.0   $  113,139      100.0

Cost of revenue(1)

    56,489      87.7        55,645      90.7        72,691      83.8        94,151      83.2   
                                                       

Gross profit

    7,920      12.3        5,729      9.3        14,020      16.2        18,988      16.8   

Operating expenses:

               

Product development(1)

    968      1.5        897      1.5        4,309      5.0        7,340      6.5   

Sales and marketing(1)

    3,898      6.1        3,263      5.3        6,604      7.6        10,015      8.9   

General and administrative(1)

    1,933      3.0        1,590      2.6        6,824      7.9        9,854      8.7   
                                                       

Total operating expenses

    6,799      10.6        5,750      9.4        17,737      20.5        27,209      24.0   
                                                       

Income (loss) from operations

    1,121      1.7        (21   0.0        (3,717   (4.3     (8,221   (7.3

Interest expense, net

    (496   (0.8     (223   (0.4     (448   (0.5     (563   (0.5

Loss on revaluation of common stock warrants

    —        —          —        —          (625   (0.7     (1,097   (1.0

Other income (expense), net

    13      0.0        63      0.1        69      0.1        165      0.1   
                                                       

Income (loss) before income taxes

    638      1.0        (181   (0.3     (4,721   (5.4     (9,716   (8.6

Income tax expense (benefit)

    385      0.6        (2   0.0        (1,294   (1.5     (4,379   (3.9
                                                       

Net income (loss)

  $ 253      0.4   $ (179   (0.3 )%    $ (3,427   (4.0 )%    $ (5,337   (4.7 )% 
                                                       

Other Financial Data:

               

Adjusted EBIT(2)

  $ 1,102      1.7   $ 55      0.1   $ 6,135      7.1   $ 9,874      8.7

Adjusted net income (loss)(2)

  $ 234      0.4   $ (103   (0.2 )%    $ 6,425      7.4   $ 466      0.4

 

(1)    Includes stock-based compensation (benefit) expense for the following periods expressed in dollars and as a percentage of consolidated net revenues:

        

    Three Months Ended  
    Mar. 31, 2009     June 30, 2009     Sept. 30, 2009     Dec. 31, 2009  
    (dollars in thousands)  

Cost of revenue

  $ (49   (0.1 )%    $ 2      0.0   $ 199      0.2   $ 296      0.3

Product development

    (54   (0.1     4      0.0        3,037      3.5        5,402      4.8   

Sales and marketing

    58      0.1        62      0.1        2,578      3.0        5,180      4.6   

General and administrative

    26      0.0        8      0.0        4,038      4.7        7,217      6.4   
                                                       

Total

  $ (19   (0.1 )%    $ 76      0.1   $ 9,852      11.4   $ 18,095      16.1
                                                       

 

(2) We present adjusted EBIT and adjusted net income (loss) in this prospectus to provide investors with supplemental measures of our operating performance. Adjusted EBIT and adjusted net income (loss) are non-GAAP financial measures. See “—Key Performance Measures” below for an explanation of how we compute adjusted EBIT and adjusted net income (loss) and for a reconciliation to net income (loss), the most directly comparable GAAP financial measure.

 

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We have experienced and expect to continue to experience seasonal fluctuations in sales due to the spending patterns of our customers. Our unit sales volumes have generally been lowest in the first and second calendar quarters due to a drop off in sales following the fourth quarter holiday season and because of the decline in sales that typically occurs in anticipation of the introduction of new or enhanced CPUs, graphics cards and other computer hardware, which usually takes place in the second calendar quarter and which tends to drive sales in the following two quarters. As a consequence of seasonality, our total unit shipments for the second calendar quarter are generally the lowest of the year, followed by unit shipments for the first calendar quarter, although the effect of these lower quarterly unit volumes on our consolidated net revenues may be masked by changes in average selling prices of our products. We expect these seasonality trends to continue.

Our quarterly net revenues decreased $3.0 million, or 4.7%, from $64.4 million for the three months ended March 31, 2009 to $61.4 million for the three months ended June 30, 2009. Net revenues of our high-performance memory components segment decreased by $5.3 million in the second quarter compared to the first quarter of 2009. The decrease in net revenues of our high-performance memory components segment was partially offset by a $2.3 million increase in net revenues of our gaming components and peripherals segment in the second quarter compared to the first quarter of 2009. Net revenues in the first two quarters of 2009 were adversely affected by continuing weakness of the global economy and its adverse impact on consumer spending.

Our quarterly net revenues increased $25.3 million, or 41.3%, from $61.4 million for the three months ended June 30, 2009 to $86.7 million for the three months ended September 30, 2009. Net revenues of our high-performance memory components segment increased by $17.2 million in the third quarter compared to the second quarter of 2009. The remaining $8.1 million increase in third quarter over second quarter net revenues was attributable to an increase in net revenues of our gaming components and peripherals segment due to sales of new solid-state drive, computer case and cooling system products introduced in the second quarter of 2009, as well as an increase in sales of existing products in this segment.

Our quarterly net revenues increased $26.4 million, or 30.5%, from $86.7 million for the three months ended September 30, 2009 to $113.1 million for the three months ended December 31, 2009. Net revenues of our high-performance memory components segment increased by $18.0 million in the fourth quarter compared to the third quarter of 2009 primarily due to an increase in average selling prices of our DRAM modules. The remaining $8.4 million increase in fourth quarter over third quarter net revenues was attributable to an increase in net revenues of our gaming components and peripherals segment due to an increase in sales of new solid-state drive, computer case and cooling system products introduced in the second quarter of 2009, as well as an increase in sales of existing products in this segment.

Our gross profit trended upward from the first half to the second half of 2009 due to increases in average selling prices of our DRAM modules and increases in net revenues of our higher margin gaming components and peripherals segment.

Key Performance Measures

In evaluating our business, our management considers adjusted EBIT and adjusted net income (loss) as key indicators of operating performance. We include adjusted EBIT and adjusted net income (loss) in this prospectus because:

 

   

each of them is a basis upon which our management assesses our operating performance; and

 

   

adjusted EBIT is a performance measure we use in determining management bonuses.

We define adjusted EBIT as net income (loss) less other income (expense), net, plus interest expense, net, loss on revaluation of common stock warrants, income tax expense (benefit) and stock-based compensation (benefit) expense. We define adjusted net income (loss) as net income (loss) plus tax-adjusted stock-based compensation (benefit) expense.

 

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We use adjusted EBIT and adjusted net income (loss) as key performance measures because we believe they facilitate operating performance comparisons from period to period by removing, in the case of adjusted EBIT, the impact of stock-based compensation (benefit) expense (which is a non-cash item that can vary substantially from period), loss on revaluation of our outstanding common stock warrants (which is a non-cash item), other income (expense), net (which consists primarily of items, such as foreign currency gain or loss and income from scrap sales, that we do not consider indicative of our operating performance) and variations in capital structure (affecting interest expense, net) and tax positions (such as the impact of changes in effective tax rates) and, in the case of adjusted net income (loss), by removing the impact of tax-adjusted stock-based compensation (benefit) expense. Because adjusted EBIT and adjusted net income facilitate comparisons of our historical operating performance on a more consistent basis, we also use adjusted EBIT and adjusted net income for business planning purposes and for measuring our performance relative to that of our competitors. We also use adjusted EBIT as a performance measure in determining management bonuses. In addition, we believe adjusted EBIT and adjusted net income (loss) and similar measures are widely used by investors and securities analysts as measures of financial performance.

Our use of adjusted EBIT and adjusted net income (loss) have limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:

 

   

they do not reflect our cash expenditures for capital expenditures or other contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, our working capital needs;

 

   

they do not consider the potentially dilutive impact of issuing equity-based compensation;

 

   

they do not reflect the cash requirements necessary to service principal payments on our indebtedness or, in the case of adjusted EBIT, to pay interest on our indebtedness; and

 

   

other companies, including companies in our industry, may calculate these measures differently, and as the number of differences in the way different companies calculate these measures increases, the degree of their usefulness as a comparative measure correspondingly decreases.

Because of these limitations, adjusted EBIT and adjusted net income (loss) should not be considered as a measure of discretionary cash available to us to invest in our business.

The following table provides a reconciliation of adjusted EBIT to net income (loss), the most directly comparable GAAP financial measure, for each of the periods indicated:

 

     Three Months Ended  
         Mar. 31,    
2009
        June 30,    
2009
        Sept. 30,    
2009
        Dec. 31,    
2009
 
     (in thousands)  

Net income (loss)

   $ 253      $ (179   $ (3,427   $ (5,337

Less: other income (expense), net

     (13     (63     (69     (165

Plus:

        

Interest expense, net

     496           223        448        563   

Loss on revaluation of common stock warrants

     —          —          625        1,097   

Income tax expense (benefit)

     385        (2     (1,294     (4,379

Stock-based compensation (benefit) expense

     (19     76        9,852        18,095   
                                

Adjusted EBIT

   $   1,102      $       55      $   6,135      $ 9,874   
                                

 

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The following table provides a reconciliation of adjusted net income (loss) to net income (loss), the most directly comparable GAAP financial measure, for each of the periods indicated:

 

     Three Months Ended  
     Mar. 31,
2009
    June 30,
2009
    Sept. 30,
2009
    Dec. 31,
2009
 
     (in thousands)  

Net income (loss)

   $     253      $    (179   $ (3,427   $ (5,337

Plus stock-based compensation (benefit) expense

     (19     76        9,852        18,095   

Less tax adjustment(1)

                          12,292   
                                

Adjusted net income (loss)

   $ 234      $ (103   $ 6,425      $ 466   
                                

 

(1) The tax adjustment reflects the increase in income tax expense or decrease in income tax benefit, as the case may be, that would have been reflected in our consolidated statement of operations for the applicable period if stock-based compensation (benefit) expense was not deducted or added, as the case may be, in computing net income (loss). We revised our valuation allowance during the fourth quarter of 2009. Prior to that, there was no income tax impact associated with the stock-based compensation (benefit) expense as the related deferred tax assets were subject to a full valuation allowance.

Liquidity and Capital Resources

Our primary operating cash requirements are the cost of purchasing DRAM ICs, amounts paid to third parties who manufacture our products, personnel costs, freight costs, costs of information technology systems and facilities costs.

We finance our operations primarily through cash flow from operations, borrowing under our bank credit facility and the extended payment terms provided by manufacturers and suppliers of our products and components. See “Risk Factors—We need substantial working capital to operate our business and we rely to a significant degree on credit extended by our manufacturers and suppliers and borrowings under our revolving credit facility to meet our working capital needs.” In the past we have also financed our operations with the proceeds from loans made to us by some of our stockholders. We do not anticipate that any similar stockholder loans will be made in the future if this offering is completed.

Net Cash Provided by or Used in Operating Activities. Net cash provided by operating activities was $3.2 million and $13.2 million in 2007 and 2008, respectively. Net cash used in operating activities was $1.4 million in 2009. Net cash provided by or used in operating activities is primarily a result of our net income (loss) adjusted by non-cash items, including stock-based compensation (benefit) expense, changes in working capital components and depreciation and amortization, and is influenced by, among other things, the timing of cash collections from our customers and cash payments for purchases of inventories and other expenses.

Net cash used in operating activities in 2009 was primarily due to a net loss of $8.7 million, an increase in inventories of $15.4 million, an increase in deferred tax benefit of $13.4 million and an increase in accounts receivable, net of provision for doubtful accounts and revenue return reserves, of $11.0 million. Net cash used in operating activities in 2009 was offset in part by stock-based compensation expense of $28.0 million, an increase in income taxes payable of $4.2 million, an increase in accounts payable of $7.0 million, non-cash depreciation and amortization expense of $1.9 million, loss on revaluation of common stock warrants of $1.7 million, an increase in other liabilities and accrued expenses of $2.7 million, loss on sale of property and equipment of $0.4 million and a decrease in prepaid expenses and other current assets of $1.2 million. The increase in inventory was primarily due to increased sales. The increase in accounts receivable was primarily due to increased revenue in the last quarter of 2009, as well as the timing of receipts. The increases in income taxes payable, accounts payable and other liabilities and accrued expenses was primarily due to the timing of payments. The stock-based compensation expense was primarily due to an increase in the fair value of our common stock, which was predominantly accounted for under the liability method.

 

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Net cash provided by operating activities in 2008 was primarily due to net income of $11.2 million, decreases in inventories of $11.2 million, accounts receivable, including provision for doubtful accounts and revenue return reserves, of $10.4 million and prepaid expenses and other current assets of $1.5 million and non-cash depreciation and amortization expense of $1.8 million. Net cash provided by operating activities was offset in part by stock-based compensation benefit of $12.8 million, a decrease in accounts payable of $5.0 million, a decrease in other liabilities and accrued expenses of $4.6 million and an increase in deferred tax benefit of $0.4 million. The decrease in accounts receivable was primarily due to timing of receipts. This decrease in inventory was primarily due to our proactive inventory management program. The decrease in prepaid expenses and other current assets was due primarily to timing of payments. The stock-based compensation benefit was primarily due to a decrease in the fair value of our common stock, which was predominantly accounted for under the liability method. The decreases in accounts payable and other liabilities and accrued expenses were due primarily to the timing of payments.

Net cash provided by operating activities in 2007 was primarily due to net income of $4.6 million, decrease in accounts receivable, including provision for doubtful accounts and revenue return reserves, of $3.7 million, decrease in prepaid expenses and other current assets of $3.5 million and non-cash depreciation and amortization expense of $1.1 million and an increase in other liabilities and accrued expenses of $0.6 million. Net cash provided by operating activities was offset in part by stock-based compensation benefit of $4.5 million, an increase in inventories of $4.7 million, a decrease in income taxes payable of $0.6 million, and an increase in deferred tax benefits of $0.4 million. The decrease in accounts receivable was primarily due to the timing of receipts. The increase in inventory was primarily due to an increase in in-transit inventory in connection with a ramp-up in shipments of power supply units. The decrease in prepaid expenses and other current assets and the increase in other liabilities and accrued expenses were due to the timing of payments. The stock-based compensation benefit was primarily due to decrease in the fair value of our common stock, which was predominantly accounted for under the liability method.

Net Cash Used in Investing Activities. Net cash used in investing activities was $2.0 million, $1.5 million and $1.0 million for 2007, 2008 and 2009, respectively. Net cash used in investing activities in each of these periods reflected purchases of property and equipment, which consisted primarily of manufacturing equipment and enterprise software.

Net Cash Provided by or Used in Financing Activities. Net cash provided by financing activities in 2009 was $3.1 million. Net cash used in financing activities was $1.0 million and $12.1 million in 2007 and 2008, respectively. Net cash provided by financing activities in 2009 was primarily due to new borrowings, net of issuance costs of $4.4 million, offset in part by a repayment of borrowings under our revolving credit facility of $1.0 million and a reduction in other debt obligations of $0.3 million. Net cash used in financing activities in 2008 was primarily due to a repayment of borrowings under our revolving credit facility of $11.2 million and reductions of other debt obligations aggregating $0.9 million. Net cash used in financing activities in 2007 was primarily due to repayment of $1.0 million of borrowing under our revolving credit facility.

We need substantial working capital to operate our business and, as of December 31, 2009, we had cash totaling only $1.4 million. We rely to a significant degree on credit and the extended payment terms offered by many of our manufacturers and suppliers in order to meet our working capital needs. We also rely on borrowings under our revolving credit facility to provide working capital, and access to external debt financing has historically been and will likely continue to be very important to us.

We believe, based on our management’s assessment of our business and prospects and prospective and current economic conditions, that our cash, funds generated by our operations, credit and extended payment terms provided by many of the manufacturers and suppliers of our products and components and borrowings available under our credit facility, together with the net proceeds we receive from this offering, will be sufficient to meet our working capital and our currently budgeted, non-acquisition related capital expenditure requirements for at least the next 12 to 18 months. If these sources are insufficient to satisfy our liquidity requirements, we

 

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may seek to sell convertible or other debt securities or additional shares of common stock or obtain additional loans or credit facilities. In addition, one of our strategies is to grow through acquisitions and, if we are successful in identifying and entering into an agreement to make any acquisition, we may seek to finance all or a portion of the acquisition cost by issuing common stock or convertible or other debt securities or through additional borrowings. If we raise funds for operations or finance any acquisitions by issuing common stock or convertible debt securities, our stockholders may experience dilution. Debt financing, if available, may involve burdensome financial and other covenants, may require that we pledge collateral to secure the debt and will require us to use cash to pay interest, premium, if any, and principal. In addition, the manufacturers and suppliers of our products and components are under no obligation to continue to extend credit or provide extended payment terms to us and, if one or more of them reduces or terminates this credit or these extended payment terms, whether as a result of the downturn in general economic conditions, adverse conditions in the credit markets or other factors, we would be required to finance our working capital needs by additional borrowings, if available, under our revolving credit facility or from other external sources. Additional debt or equity financing may not be available in amounts or on terms acceptable to us, or at all. If we are unable to obtain additional financing if and when needed on terms acceptable to us, or at all, it would likely have a material adverse effect on our business, results of operations and financial condition and could require, among other things, that we reduce expenses, which might require us to reduce shipments of our products or our inventory levels substantially or to delay or curtail the development, commercialization and marketing of our products.

Capital Expenditures. Our capital expenditures were $2.0 million in 2007, $1.5 million in 2008 and $1.0 million in 2009. We have currently budgeted $3.5 million for capital expenditures in 2010, excluding any acquisitions. Of that amount, we have spent $0.4 million for capital expenditures during the first two months of 2010.

Revolving Credit Facility. We currently have a $40 million revolving credit facility, which we sometimes refer to as the existing credit facility, and a related equipment loan facility, which is discussed below, with Wells Fargo. The existing credit facility and related equipment loan facility are secured by substantially all of our assets, except assets of our foreign subsidiaries and shares of our foreign subsidiaries in excess of 65% owned by us and our domestic subsidiaries. As of December 31, 2009, borrowings in an aggregate principal amount of $19.9 million and no letters of credit were outstanding under our existing credit facility. For more information about our existing credit facility, see note 9 to our consolidated financial statements, which are included elsewhere in this prospectus.

In connection with this offering, we plan to enter into a new revolving credit facility, which we sometimes refer to as the new credit facility, which will replace the existing credit facility. The lender under the new credit facility will be Wells Fargo. We anticipate that the new credit facility will provide for extensions of credit (including letters of credit of up to $5.0 million and revolving loans) in an aggregate amount not to exceed the lesser of:

(a) $30 million, and

(b) the sum of 85% of our eligible domestic and foreign accounts receivable, subject to not more than 70% of availability from foreign accounts receivable, plus 35% of our eligible raw materials and finished goods inventory, subject to a $2 million maximum.

We will be permitted, subject to conditions, to make and repay borrowings under the new credit facility from time to time. We anticipate that the new credit facility will mature three years from its initial effective date.

We expect that borrowings under the new credit facility will bear interest at a per annum rate equal to, at our option:

(a) the 30-, 60- or 90- day London Interbank Offered Rate, or LIBOR, plus an interest rate margin, or

(b) a floating rate to be defined as three-month LIBOR plus an interest rate margin.

 

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We expect the interest rate margin to be 250 basis points. In addition, we expect that, during the continuance of events of default (subject to a cure period for specified events of default), interest will accrue at a rate that is 200 basis points above the otherwise applicable rate. We expect letters of credit to accrue a fronting fee of 2.0% per annum on the face amount of all outstanding letters of credit. We expect that the unused portion of the new credit facility will accrue a fee equal to 0.50% per annum. We expect that, if we elect to terminate the new credit facility prior to its stated maturity, we will be required to pay a termination fee of 2.50% of the aggregate amount of the facility if such termination occurs on or prior to June 30, 2010 or 1.50% of the aggregate amount of the facility if such termination occurs after June 30, 2010 but on or prior to June 30, 2012.

We anticipate that the new credit facility will be secured by a lien on substantially all of our assets, except assets of our foreign subsidiaries and shares of our foreign subsidiaries in excess of 65% owned by us and our domestic subsidiaries. We also anticipate that the new credit facility will include financial and other covenants that will limit or restrict our ability to, among other things, incur liens on our properties, make acquisitions and other investments, sell assets and incur indebtedness, subject to specified exceptions. We expect that the new credit facility will restrict or prohibit the payment of dividends on our common stock and repurchases or redemptions of our common stock. We also expect that the new credit facility will require us to maintain the ratio of: (1) (a) the sum of our net income (adjusted as provided in the new credit agreement) plus depreciation, amortization, taxes and interest expense minus (b) unfinanced capital expenditures, to (2) current maturities of our long term debt plus interest expense, at 1.10 to 1 or better. We expect that the new credit facility will contain customary events of default, including an event of default triggered by specified changes in control of our company, and to provide that, upon the occurrence of any event of default, the lender may require us to repay all outstanding borrowings and seize and sell the collateral securing the new credit facility, which would likely have a material adverse effect on our business, results of operations and financial condition.

Equipment Loans. Pursuant to the terms of the equipment loan facility, the lender agreed to make three advances to us up to a total of $2.0 million to provide equipment financing. We cannot re-borrow an equipment loan after it is repaid. As of December 31, 2009, we had received two loans under the equipment loan facility. The outstanding principal balance of each equipment loan must be repaid in monthly installments. Interest is payable on a monthly basis computed at three month LIBOR plus 4.25%, which was equal to approximately 4.5% per annum as of December 31, 2009. The equipment loan facility is secured, together with the existing credit facility, by substantially all of our assets, except assets of our foreign subsidiaries and shares of our foreign subsidiaries in excess of 65% owned by us and our domestic subsidiaries. As of December 31, 2009, the total outstanding balance of the equipment loans was $165,000. The equipment loans mature on the earliest of June 30, 2012 (the termination date of the existing credit facility), the date we terminate the credit facility or the date on which the lender demands payment in full following an event of default. The entire unpaid principal balance of the equipment loans, plus accrued interest, is due and payable at maturity. However, we expect that the equipment loans will remain outstanding and continue to amortize under, and be secured by the same collateral as, the new credit facility.

Second Lien Credit Facility. On June 18, 2009, we entered into a financing facility with BHC Interim Funding III, L.P., which we sometimes refer to as second lien credit facility, and received a $5.0 million term loan under that facility. The maturity date of borrowings under the second lien credit facility was June 30, 2012 and loans under the facility bore interest at a per annum rate equal to 14.5%. Our obligations under the second lien credit facility were secured by a second-priority lien on some of our assets. As of December 31, 2009, the aggregate principal amount of borrowing outstanding under the second lien credit facility was $5.0 million. On February 2, 2010 we repaid all borrowings under, and terminated, the second lien credit facility and paid a $0.2 million termination fee. At the time we entered into the second lien credit facility, we granted the lender a warrant to purchase shares of our common stock. See “Description of Capital Stock—Warrants.”

Loans from Stockholders. We had outstanding loans from some of our stockholders in an aggregate principal amount of $0.7 million as of December 31, 2009. These loans bear interest at the rate of prime plus 4% per annum and mature in October 2010. We are required to make quarterly amortization repayments of these

 

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loans. We do not anticipate that any similar stockholder loans will be made in the future if this offering is completed. See “Certain Relationships and Related Party Transactions.”

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2009 that were fixed and determinable and the payments due under those obligations in the following periods:

 

     Payments Due by Period
     Total    Less than
1 Year
   1-3 Years    3-5 Years    More than
5 Years
     (in thousands)

Operating lease obligations

   $ 3,912    $ 957    $ 1,400    $ 1,033    $ 522

Purchase obligations—inventory

     22,280      22,280      —        —        —  

Purchase obligations—capital expenditures

     168      168      —        —        —  

Purchase obligations—operating expenses

     869      869      —        —        —  

Bank credit facilities

     19,937      19,937      —        —        —  

Interim funding facility

     5,000      5,000      —        —        —  
                                  

Total contractual obligations

   $ 52,166    $ 49,211    $   1,400    $   1,033    $      522
                                  

Our operating lease obligations relate solely to our facilities leases.

We have commitments for inventory purchases made in the normal course of business to manufacturers and suppliers. At December 31, 2009, purchase commitments for inventory amounted to $22.3 million, which were fulfilled by January 31, 2010. At December 31, 2009, we also had purchase commitments of $0.2 million for capital expenditures primarily related to commitments for leasehold improvements and purchase commitments of $0.9 million for operating expenses, including consulting, marketing arrangements, advertising and other services. The purchase obligations include all open purchase commitments, both cancellable and non-cancellable.

As of December 31, 2009, unrecognized tax benefits and potential interest and penalties resulted in accrued liabilities of $3.0 million, of which $1.0 million is classified as other current liabilities and accrued expenses, and $2.0 million is classified as other long-term liabilities on our consolidated balance sheets. As of December 31, 2009, the settlement period for the $2.0 million long-term income tax liabilities cannot be determined; however, the amounts are not expected to become due within the next twelve months.

Guarantees

In connection with this offering, we will enter into agreements whereby we agree to indemnify our officers and directors against certain liabilities that may arise as a result of serving in these capacities. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and that we believe should enable us to recover all or a portion of any future amounts paid so long as the matters leading to the payment are covered by the policy. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements.

In the ordinary course of our business, we enter into agreements with a limited number of our customers and suppliers providing that we will indemnify them for damages and costs which may arise from product warranty claims or claims for personal injury or property damage resulting from the use of our products and we may enter into similar agreements in the future. We maintain insurance to protect against these claims, but our insurance coverage may not be adequate to cover all or any part of the claims asserted against us or may not cover those claims at all. We also have agreements with a limited number of customers and suppliers in which we have

 

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agreed to defend and indemnify them and hold them harmless from damages and costs which may arise if our products infringe third-party patents or other proprietary rights and we may enter into similar agreements or arrangements from time to time in the future. We may periodically have to respond to claims and litigate these types of indemnification obligations. Any such indemnification claims could require us to make substantial settlement, damages or royalty payments or result in our incurring substantial legal costs. Our insurance does not cover intellectual property infringement. The potential amount of future payments to defend lawsuits or settle indemnified claims under any of these indemnification provisions may be unlimited; however, we believe the estimated fair value of these indemnity provisions is minimal, and accordingly, we have not recorded any liabilities for these agreements.

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board, or FASB, issued a new accounting standard for determining whether instruments granted in share-based payment transactions are considered participating securities for the purposes of calculating earnings per share. The standard clarified that all outstanding unvested stock-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common stockholders, and therefore, are considered participating securities. The two-class method of computing basic and diluted earnings per share would have to be applied. This standard is effective for year beginning after December 31, 2008. The adoption of the accounting standard did not have a material impact on our consolidated financial statements, since our restricted stock awards do not provide for nonforfeitable dividends.

In August 2009, the FASB updated its accounting standard that measures the fair value of liabilities. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. The update of this standard did not have any impact on our consolidated financial statements.

In June 2009, the FASB issued a new accounting standard that provides for a codification of accounting standards to be the authoritative source of GAAP in the United States. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. We adopted the provisions of the authoritative accounting guidance for the year ended December 31, 2009. The adoption of this standard did not have any impact on our consolidated financial statements.

Off-Balance Sheet Arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. As a global business, we face exposure to adverse movements in foreign currency exchange rates and interest rates. These exposures may change over time as our business evolves and could have a material adverse impact on our results of operations or financial condition.

Foreign Currency Exchange Risk

We are subject to inherent risks attributed to operating in a global economy. Our operations in foreign countries make us subject to risks associated with fluctuating currency values and exchange rates. Sales of our

 

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products are denominated primarily in U.S. dollars, which limits the risk that our receivables and net revenues will be adversely affected by changes in currency exchange rates. However, an increase in the value of the U.S. dollar relative to the currency used in the countries where our products are sold may result in an increase in the price of our products in those countries, which may lead to a reduction in sales. Likewise, because we pay our suppliers and third-party manufacturers, most of which are located outside of the United States, primarily in U.S. dollars, any decline in the value of the U.S. dollar relative to the applicable local currency may cause our suppliers and manufacturers to raise the prices they charge us. In addition, we generally pay our employees located outside of the United States in the local currency, with a significant portion of those payments in 2009 having been made in Taiwan dollars.

Interest Rate Risk

Interest on our current revolving credit facility is, and we expect that interest on the new credit facility we plan to enter into in connection with this offering will be, payable on a floating rate. A hypothetical increase or decrease of 1% in the interest rate on our existing credit facility would have led to higher or lower interest expense, net of $0.2 million to our consolidated results of operations based on typical levels of indebtedness during 2009.

 

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BUSINESS

Company Overview

We are a leading designer and supplier of high-performance components to the personal computer, or PC, gaming hardware market. Our products are purchased primarily by PC gaming enthusiasts who build their own high-performance desktop computer systems or buy pre-assembled customized systems in order to achieve the processing speeds and graphics capabilities necessary to fully experience leading edge computer games. According to a report that we commissioned from Jon Peddie Research, a market research firm, sales in the do-it-yourself, or DIY, portion of the worldwide PC gaming hardware market are forecasted to be approximately $10.4 billion in 2010. We believe, based on our management’s estimates, that our current product portfolio addresses approximately one-third of this DIY market segment. We believe that we have a leading brand among PC gaming enthusiasts, reflecting our superior product performance, design and reliability. Over the last four years we have introduced new, higher value added PC gaming components, both leveraging and reinforcing our brand image within our target market. Through our 16 years of operation, we have developed a global, scalable operations infrastructure with extensive marketing and distribution channel relationships with distributors and retailers in Europe, the Americas and the Asia Pacific region.

Our business has two operating segments:

 

   

high-performance memory components, which includes DRAM modules and high capacity USB flash drives; and

 

   

gaming components and peripherals, which includes power supply units, solid-state drives, cooling systems and computer cases.

We believe that we are a leader in the worldwide PC gaming hardware market for high-performance DRAM modules and that our Dominator product line includes some of the world’s fastest DRAM modules. We have also demonstrated the ability to expand our sales in the highly fragmented gaming components and peripherals market, with net revenues from this segment of our business growing 82.1% in 2009 compared to 2008, and generating 25.3% of our 2009 net revenues. We will seek to expand our end-user base and end markets by introducing new peripheral products that are intended to appeal to consumers in the significantly larger mainstream PC gaming market.

We have established a strong brand that we believe is widely recognized and res