Table of Contents





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM 10-Q









(Mark
One)


x
            
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended June 30,
2009




Or




o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period
      from            
         to




Commission
file number: 0-20028







VALENCE
TECHNOLOGY, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            77-0214673(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)12303
      Technology Blvd., Suite 950, Austin, Texas
            
            78727(Address
      of principal executive offices)
            
            (Zip
      Code)




(512)
527-2900


(Registrant’s
telephone number, including area code)






(Former
name, former address and former fiscal year, if changed since last
report)








Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.      x
   Yes      o
   No




Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).    Yes    ̈    No    ̈




Table of Contents




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





Large Accelerated Filer
              o
              
              Accelerated
      Filer
              xNon-Accelerated Filer
              o
              
              Smaller Reporting Company
              o(Do
      not check if a smaller reporting company)




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




APPLICABLE
ONLY TO CORPORATE ISSUERS:




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




The
number of shares of common stock, par value of $0.001 per share, outstanding at
July 31, 2009 was 126,904,664.






Table of Contents




VALENCETECHNOLOGY, INC.


FORM 10-Q


INDEX







PART I –
      FINANCIAL INFORMATIONItem 1.
      Financial Statements (Unaudited):Condensed
      Consolidated Balance Sheets as of June 30, 2009 and March 31,
      2009
                1Condensed
      Consolidated Statements of Operations and Comprehensive Loss for the Three
      Month Periods Ended June 30, 2009 and June 30, 2008
                2Condensed Consolidated
      Statements of Cash Flows for the Three Month Periods Ended June 30,
      2009 and June 30, 2008
                3Notes to
      Condensed Consolidated Financial Statements
                4Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.
                13Item 3.
      Quantitative and Qualitative Disclosures about Market
      Risk
                20Item 4.
      Controls and Procedures
                20PART II –
      OTHER INFORMATIONItem 1.
      Legal Proceedings
                21Item 1A.
      Risk Factors
                21Item 2.
      Unregistered Sales of Equity Securities and Use of
      Proceeds.
                21Item 3.
      Defaults Upon Senior Securities.
                21Item 4.
      Submission of Matters to a Vote of Security
      Holders.
                21Item 5.
      Other Information.
                21Item 6.
      Exhibits.
                22Signatures and
      Certifications
                25







Table of Contents


PARTI –
FINANCIAL INFORMATION




Item 1.
          Financial Statements
(Unaudited).




Valence
Technology, Inc.


Condensed Consolidated Balance
Sheets


(in
thousands, except share amounts)





June 30,
                        
                        
                        March 31,2009
                        
                        
                        2009(unaudited)ASSETSCurrent assets:Cash
      and cash equivalents
                        
                        $
                        1,657
                        
                        
                        $
                        4,009Trade
      receivables, net of allowance of $172 and $191,
    respectively
                        
                        
                        4,010
                        
                        
                        
                        3,592Inventory,
      net
                        
                        
                        11,224
                        
                        
                        
                        10,736Shareholder
      receivable
                        
                        
                        —
                        
                        
                        
                        1,062Prepaid
      and other current assets
                        
                        
                        4,144
                        
                        
                        
                        3,946Total
      current assets
                        
                        
                        21,035
                        
                        
                        
                        23,345Property,
      plant and equipment, net
                        
                        
                        6,022
                        
                        
                        
                        6,291Total
      assets
                        
                        $
                        27,057
                        
                        
                        $
                        29,636LIABILITIES,
      PREFERRED STOCK AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts
      payable
                        
                        $
                        1,143
                        
                        
                        $
                        1,822Accrued
      expenses
                        
                        
                        6,492
                        
                        
                        
                        7,279Deferred
      revenue
                        
                        
                        398
                        
                        
                        
                        355Total
      current liabilities
                        
                        
                        8,033
                        
                        
                        
                        9,456Long-term
      interest payable to stockholder
                        
                        
                        25,155
                        
                        
                        
                        24,415Long-term
      debt, net of debt discount
                        
                        
                        19,565
                        
                        
                        
                        19,445Long-term
      debt to stockholder, net of debt discount
                        
                        
                        34,797
                        
                        
                        
                        34,766Other
      long-term liabilities
                        
                        
                        142
                        
                        
                        
                        129Commitments
      and contingenciesPreferred Stock:Redeemable
      convertible preferred stock, $0.001 par value, 10,000,000 shares
      authorized, 861 issued and outstanding as of June 30, 2009 and
      March 31, 2009, liquidation value $8,610
                        
                        
                        8,610
                        
                        
                        
                        8,610Stockholders’ deficit:Common
      stock, $0.001 par value, 200,000,000 shares authorized, 126,707,808 shares
      issued and 124,904,664 shares outstanding as of June 30, 2009 and
      125,042,793 shares issued and 123,239,649 shares outstanding as of
      March 31, 2009
                        
                        
                        127
                        
                        
                        
                        125Additional
      paid-in-capital
                        
                        
                        502,734
                        
                        
                        
                        498,646Treasury
      shares, 1,803,144 at cost
                        
                        
                        (5,164
                        )
                        
                        
                        (5,164
                        )Accumulated
      deficit
                        
                        
                        (563,855
                        )
                        
                        
                        (557,657
                        )Accumulated
      other comprehensive loss
                        
                        
                        (3,087
                        )
                        
                        
                        (3,135
                        )Total
      stockholders’ deficit
                        
                        
                        (69,245
                        )
                        
                        
                        (67,185
                        )Total
      liabilities, preferred stock, and stockholders’ deficit
                        
                        $
                        27,057
                        
                        
                        $
                        29,636




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


1
 Table of Contents


ValenceTechnology, Inc.


Condensed Consolidated Statements of
Operations and Comprehensive Loss


(in
thousands)


(Unaudited)





Three Months Ended
                    June 30,2009
                  
                  
                  2008Revenue:Battery
      and system sales
                  
                  $
                  4,630
                  
                  
                  $
                  10,886Licensing
      and royalty revenue
                  
                  
                  87
                  
                  
                  
                  104Total
      revenues
                  
                  
                  4,717
                  
                  
                  
                  10,990Cost
      of sales
                  
                  
                  3,910
                  
                  
                  
                  11,016Gross
      margin / (loss)
                  
                  
                  807
                  
                  
                  
                  (26
                  )Operating
      expenses:Research
      and product development
                  
                  
                  1,220
                  
                  
                  
                  1,183Marketing
                  
                  
                  722
                  
                  
                  
                  810General
      and administrative
                  
                  
                  3,827
                  
                  
                  
                  2,634Loss
      on disposal of assets
                  
                  
                  —
                  
                  
                  
                  (6
                  )Total
      operating expenses
                  
                  
                  5,769
                  
                  
                  
                  4,621Operating
      loss
                  
                  
                  (4,962
                  )
                  
                  
                  (4,647
                  )Foreign
      exchange gain
                  
                  
                  57
                  
                  
                  
                  470Interest
      and other income
                  
                  
                  16
                  
                  
                  
                  4Interest
      and other expense
                  
                  
                  (1,265
                  )
                  
                  
                  (1,350
                  )Net
      loss
                  
                  $
                  (6,154
                  )
                  
                  $
                  (5,523
                  )Dividends
      on preferred stock
                  
                  
                  (43
                  )
                  
                  
                  (43
                  )Net
      loss available to common stockholders, basic and diluted
                  
                  $
                  (6,197
                  )
                  
                  $
                  (5,566
                  )Other
      comprehensive loss:Net
      loss
                  
                  $
                  (6,154
                  )
                  
                  $
                  (5,523
                  )Change
      in foreign currency translation adjustments
                  
                  
                  48
                  
                  
                  
                  117Comprehensive
      loss
                  
                  $
                  (6,106
                  )
                  
                  $
                  (5,406
                  )Net
      loss per share available to common stockholders, basic and
      diluted
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.05
                  )Shares
      used in computing net loss per share available to common stockholders,
      basic and diluted
                  
                  
                  123,660
                  
                  
                  
                  116,396




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


2
 Table of Contents


ValenceTechnology, Inc.


Condensed Consolidated Statements of
Cash Flows


(in
thousands)


(Unaudited)





Three Months Ended
                          June 30,2009
                        
                        
                        2008Cash flows from operating
      activities:Net
      loss
                        
                        $
                        (6,154
                        )
                        
                        $
                        (5,523
                        )Adjustments
      to reconcile net loss to cash used in operating
activities:Depreciation
      and amortization
                        
                        
                        365
                        
                        
                        
                        402Loss
      on disposal of assets
                        
                        
                        —
                        
                        
                        
                        (6
                        )Bad
      debt recoveries
                        
                        
                        (18
                        )
                        
                        
                        (20
                        )Accretion
      of debt discount and other
                        
                        
                        887
                        
                        
                        
                        881Share-based
      compensation
                        
                        
                        812
                        
                        
                        
                        574Changes
      in operating assets and liabilities:Trade
      receivable
                        
                        
                        (257
                        )
                        
                        
                        (6,436
                        )Inventory
                        
                        
                        (629
                        )
                        
                        
                        (1,067
                        )Prepaid
      and other current assets
                        
                        
                        844
                        
                        
                        
                        (1,730
                        )Accounts
      payable
                        
                        
                        (680
                        )
                        
                        
                        6,074Accrued
      expenses and long-term interest
                        
                        
                        (814
                        )
                        
                        
                        900Deferred
      revenue
                        
                        
                        42
                        
                        
                        
                        269Net
      cash used in operating activities
                        
                        
                        (5,602
                        )
                        
                        
                        (5,682
                        )Cash flows from investing
      activities:Purchases
      of property, plant and equipment
                        
                        
                        (34
                        )
                        
                        
                        (776
                        )Proceeds
      from disposal of property, plant and equipment
                        
                        
                        —
                        
                        
                        
                        6Net
      cash used in investing activities
                        
                        
                        (34
                        )
                        
                        
                        (770
                        )Cash flows from financing
      activities:Proceeds
      from short term loans
                        
                        
                        —
                        
                        
                        
                        2,500Proceeds
      from stock option exercises
                        
                        
                        132
                        
                        
                        
                        638Proceeds
      from issuance of common stock and warrants, net of issuance
      costs
                        
                        
                        3,146
                        
                        
                        
                        3,162Net
      cash provided by financing activities
                        
                        
                        3,278
                        
                        
                        
                        6,300Effect
      of foreign exchange rates on cash and cash equivalents
                        
                        
                        6
                        
                        
                        
                        39Decrease
      in cash and cash equivalents
                        
                        
                        (2,352
                        )
                        
                        
                        (113
                        )Cash
      and cash equivalents, beginning of period
                        
                        
                        4,009
                        
                        
                        
                        2,616Cash
      and cash equivalents, end of period
                        
                        $
                        1,657
                        
                        
                        $
                        2,503Supplemental information:Interest
      paid
                        
                        $
                        458
                        
                        
                        $
                        351




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


3
 Table of Contents


ValenceTechnology, Inc.


Notes to Condensed Consolidated
Financial Statements


June 30,
2009


(Unaudited)




1.
            INTERIM CONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS:




These
interim condensed consolidated financial statements are unaudited but reflect,
in the opinion of management, all normal recurring adjustments necessary to
present fairly the financial position of Valence Technology, Inc. and its
subsidiaries (“Valence” or the “Company”) as of June 30, 2009, its consolidated
results of operations for each of the three-month periods ended June 30, 2009
and June 30, 2008, and the consolidated cash flows for the three-month
periods ended June 30, 2009 and June 30, 2008. Because all the disclosures
required by accounting principles generally accepted in the U.S. are not
included, these interim condensed consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto in
the Company’s Annual Report on Form 10-K as of and for the year ended March
31, 2009. The results for the three-month period ended June 30, 2009 are not
necessarily indicative of the results to be expected for the entire fiscal year
ended March 31, 2010. The year-end condensed consolidated balance sheet
data as of March 31, 2009 was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the U.S.




2.
            BUSINESS
      AND BUSINESS STRATEGY:




The
Company was founded in 1989 and has commercialized the industry’s first lithium
phosphate technology. We develop, manufacture and sell high-energy power systems
utilizing our proprietary phosphate-based lithium-ion technology for diverse
applications, with special emphasis on portable appliances and future
generations of hybrid and electric vehicles.  Our mission is to promote the
wide adoption of high-performance, safe, long cycle life, environmentally
friendly, low-cost energy storage systems. To accomplish our mission and address
the significant market opportunity we believe is available to us we utilize the
numerous benefits of our latest energy storage technology, deep intellectual
property portfolio and extensive experience of our management team.




In March
2009, we introduced a new revision of U-Charge®, our third generation of Lithium
Iron Magnesium Phosphate Energy Storage Systems, which are expected to be
commercially available in the second quarter of fiscal 2010. U-Charge® features
our safe, long-life lithium phosphate technology which utilizes a
phosphate-based cathode material. We believe that the improved features
and  functionality of the latest U-Charge® Lithium Iron Magnesium
Phosphate Energy Storage Systems are well suited for electric vehicle (EV),
plug-in hybrid electric vehicle (PHEV) and similar applications. U-Charge®
Lithium Iron Magnesium Phosphate Energy Storage Systems address the safety and
limited life weaknesses of other lithium technologies while offering a solution
that is competitive in cost and performance.  This revision of
U-Charge® builds upon these features and adds improvements in state of charge,
balancing and field repairability.




The
Company’s business plan and strategy focus on the generation of revenue from
product sales, while minimizing costs through partnerships with contract
manufacturers and internal manufacturing efforts through the Company’s two
wholly-owned subsidiaries in China. These subsidiaries initiated operations in
late fiscal 2005. Valence expects to develop target markets through the sales of
its third generation Lithium Phosphate Energy Storage Systems and custom Lithium
Phosphate Energy Storage Systems based on programmable EpochTM Command and
Control Logic. In addition, Valence expects to pursue a licensing strategy to
supply the lithium phosphate sector with advanced Valence material and
components, including lithium phosphate cathode materials to fulfill other
manufacturers’ needs.




The
Company has the following subsidiaries:




Valence
Technology (Nevada), Inc., Valence Technology Cayman Islands Inc., Valence
Technology N.V., Valence Technology International, Inc., Valence Technology
B.V., Valence Technology (Suzhou) Co., Ltd., and Valence Energy-Tech (Suzhou)
Co., Ltd.




4
 Table of Contents


Going
Concern:




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses each year since its inception in 1989 and
had an accumulated deficit of $563.9  million as of June 30, 2009. For the
three-month periods ended June 30, 2009 and June 30, 2008, the Company sustained
net losses available to common stockholders of $6.2 and $5.6 million,
respectively. These factors, among others, indicate that the Company may be
unable to continue as a going concern for a reasonable period of time. The
Company’s ability to continue as a going concern is contingent upon its ability
to meet its liquidity requirements. If the Company is unable to arrange for debt
or equity financing on favorable terms or at all, the Company’s ability to
continue as a going concern is uncertain. These financial statements do not give
effect to any adjustments to the amounts and classifications of assets and
liabilities which might be necessary should the Company be unable to continue as
a going concern.




Liquidity
and Capital Resources:




At June
30, 2009, the Company’s principal sources of liquidity were cash and cash
equivalents of $1.7 million. The Company does not expect that its cash and cash
equivalents will be sufficient to fund its operating and capital needs for the
next three to six months following June 30, 2009, nor does the Company
anticipate product sales during fiscal 2010 will be sufficient to cover its
operating expenses. Historically, the Company has relied upon management’s
ability to periodically arrange for additional equity or debt financing to meet
the Company’s liquidity requirements.




Unless
the Company’s product sales are greater than management currently forecasts or
there are other changes to the Company’s business plan, the Company will need to
arrange for additional financing within the next three to six months to fund
operating and capital needs. This financing could take the form of debt or
equity. Given the Company’s historical operating results and the amount of
existing debt, as well as the other factors, the Company may not be able to
arrange for debt or equity financing from third parties on favorable terms or at
all.




The
Company’s cash requirements may vary materially from those now planned because
of changes in the Company’s operations including the failure to achieve expected
revenues, greater than expected expenses, changes in OEM relationships, market
conditions, the failure to timely realize the Company’s product development
goals, and other adverse developments. These events could have a negative impact
on the Company’s available liquidity sources during the next 12
months.




3.
            SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES:




Revenue
Recognition:




We
generate revenues from sales of products including batteries and battery
systems, and from licensing fees and royalties per technology license
agreements. Product sales are recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred,
seller’s price to the buyer is fixed and determinable, and collection is
reasonably assured. Product shipments that are not recognized as revenue during
the period shipped, primarily product shipments to resellers that are subject to
right of return, are recorded as deferred revenue and reflected as a liability
on our balance sheet. Products shipped with the rights of return are included in
finished goods inventory as we retain title to the products.  For reseller
shipments where revenue recognition is deferred, we record revenue and relieve
inventory based upon the reseller-supplied reporting of sales to their end
customers or their inventory reporting. For all shipments, we estimate a return
rate percentage based upon our historical experience. From time to time we
provide sales incentives in the form of rebates or other price adjustments;
these are generally recorded as reductions to revenue on the latter of the date
the related revenue is recognized or at the time the rebate or sales incentive
is offered. Licensing fees are recognized as revenue upon completion of an
executed agreement and delivery of licensed information, and if there are no
significant remaining vendor obligations and collection of the related
receivable is reasonably assured. Royalty revenues are recognized upon licensee
revenue reporting and when collection is reasonably assured.




Use
of Estimates:




The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the revenues and expenses for the period. The Company has
made significant estimates in determining the amount of inventory reserves and
inventory overhead absorption as discussed in Note 4, Inventory, warranty
liabilities as discussed in Note 8, Commitments and Contingencies, and share
based compensation as discussed in Note 10, Share Based Compensation. 
Actual results could differ from those estimates.




5
 Table of Contents


Recent
Accounting Pronouncements:




In
April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible
Assets. FSP FAS 142-3 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. Based on its current
operations, the Company does not expect that the adoption of FSP FAS 142-3 will
have a material impact on its financial position or results of
operations.




In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
U.S. (the GAAP hierarchy). SFAS 162 will become effective 60 days
following the Securities and Exchange Commission’s, or SEC’s, approval of the
Public Company Accounting Oversight Board amendments to
AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. Based on its current operations, the Company does not expect
that the adoption of SFAS 162 will have a material impact on its financial
position or results of operations.




In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.FSP FAS
157-4 provides additional guidance for estimating fair value in accordance with
FASB Statement 157, Fair Value
Measurements, when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP
shall be effective for interim and annual reporting periods ending after June
15, 2009, and shall be applied prospectively. Early adoption is permitted for
periods ending after March 15, 2009. Earlier adoption for periods ending before
March 15, 2009, is not permitted. We have adopted FSP FAS 157-4 and have
determined that it did not have a material impact on our consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 115-2, Recognition and Presentation of
Other-Than-Temporary Impairments.FSP FAS 115-2 amends the
other-than-temporary impairment guidance in U.S. generally accepted accounting
principles (U.S. GAAP) for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This FSP
does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. The FSP shall be
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. Earlier
adoption for periods ending before March 15, 2009, is not permitted. We have
adopted FSP FAS 115-2 and have determined that it did not have a material impact
on our consolidated financial statements.





In May
2009, the FASB issued FASB Statement No. 165, Subsequent Events. SFAS 165
intends to establish general standards of accounting for and disclosures of
subsequent events that occurred after the balance sheet date but prior to the
issuance of financial statements. SFAS 165 is effective for financial statements
issued for interim reporting periods or fiscal years ending after June 15, 2009.
The adoption of SFAS 165 did not have a material impact on our consolidated
financial statements.





On June
12, 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation
No. 46(R), which significantly changes the consolidation model for
variable interest entities. SFAS 167 requires companies to qualitatively assess
the determination of the primary beneficiary of a variable interest entity
(“VIE”) based on whether the entity (1) has the power to direct matters that
most significantly impact the activities of the VIE, and (2) has the obligation
to absorb losses or the right to receive benefits of the VIE that could
potentially be significant to the VIE. The standard shall be effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company does not expect that the adoption of
SFAS 167 will have a material impact on its financial position or results
of operations.





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - A
Replacement of FASB Statement No. 162. SFAS 168 establishes the FASB
Accounting Standards CodificationTM
(Codification) as the single source of authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. SFAS 168 and the Codification are
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. When effective, the Codification will supersede all
existing non-SEC accounting and reporting standards. All other nongrandfathered
non-SEC accounting literature not included in the Codification will become
nonauthoritative. Following SFAS 168, the FASB will not issue new standards in
the form of Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will
serve only to: (a) update the Codification; (b) provide background information
about the guidance; and (c) provide the bases for conclusions on the change(s)
in the Codification. The adoption of SFAS 168 will not have an impact on our
consolidated financial statements.




6
 Table of Contents


Net
Loss per Share Available to Common Stockholders:




Net loss
per share is computed by dividing the net loss available to common stockholders
by the weighted average shares of common stock outstanding during the period.
The dilutive effect of the options and warrants to purchase common stock are
excluded from the computation of diluted net loss per share, since their effect
is antidilutive. The antidilutive instruments excluded from the diluted net loss
per share computation for the three-month periods ended June 30, 2009 and June
30, 2008 were as follows:





Three Months Ended June 30,2009
                  
                  
                  2008Shares
      reserved for conversion of Series C-1 and Series C-2 preferred
      stock
                  
                  
                  3,628,634
                  
                  
                  
                  3,628,634Common
      stock options reserved
                  
                  
                  6,983,009
                  
                  
                  
                  7,500,843Warrants
      to purchase common stock
                  
                  
                  —
                  
                  
                  
                  2,955,643Total
                  
                  
                  10,611,643
                  
                  
                  
                  14,085,120




The
number of shares listed above as reserved for conversion of Series C-1 and
Series C-2 preferred stock do not include shares related to accrued
dividends that are convertible at the election of the Company, subject to
certain limitations. At June 30, 2009, up to $646,000 in accrued dividends would
be convertible into up to 360,820 shares of common stock based on the closing
sales price of $1.79 per share on June 30, 2009.




4.
            INVENTORY:




Inventory
consisted of the following (in thousands) at:





June
      30, 2009
                  
                  
                  March
      31, 2009Raw
      materials
                  
                  $
                  4,264
                  
                  
                  $
                  3,711Work
      in process
                  
                  
                  2,662
                  
                  
                  
                  3,575Finished
      goods
                  
                  
                  4,298
                  
                  
                  
                  3,450Total
      inventory
                  
                  $
                  11,224
                  
                  
                  $
                  10,736




Included
in inventory at June 30, 2009 and March 31, 2009 were valuation allowances of
$4.5 million and $4.6 million to reduce their carrying values to the lower of
cost or market. Management has valued overhead absorption related to work in
process based on estimates of completion at June 30, 2009.




5.
            PREPAID
      AND OTHER CURRENT ASSETS:




Prepaid
and other current assets consisted of the following at (in
thousands):





June
      30, 2009
                
                
                March
      31, 2009Other
      receivables
                
                $
                3,000
                
                
                $
                2,854Deposits
                
                
                432
                
                
                
                432Prepaid
      insurance
                
                
                52
                
                
                
                71Other
      prepaids
                
                
                660
                
                
                
                589Total
      prepaids and other current assets
                
                $
                4,144
                
                
                $
                3,946







7
 Table of Contents


6.
            PROPERTY, PLANT AND
      EQUIPMENT:




Property,
plant and equipment, net of accumulated depreciation and impairment, consisted
of the following (in thousands) at:





June
      30, 2009
                  
                  
                  March
      31, 2009Leasehold
      improvements
                  
                  $
                  1,117
                  
                  
                  $
                  1,116Machinery
      and equipment
                  
                  
                  8,026
                  
                  
                  
                  8,021Office
      and computer equipment
                  
                  
                  2,219
                  
                  
                  
                  2,217Construction
      in progress
                  
                  
                  30
                  
                  
                  
                  —Property,
      plant and equipment, gross
                  
                  
                  11,392
                  
                  
                  
                  11,354Less:
      accumulated depreciation
                  
                  
                  (4,511
                  )
                  
                  
                  (4,204
                  )Less:
      accumulated impairment charges
                  
                  
                  (859
                  )
                  
                  
                  (859
                  )Total
      cost, net of depreciation
                  
                  $
                  6,022
                  
                  
                  $
                  6,291





Depreciation expense was $365,000 and
$372,000 for the three months ended June 30, 2009, and 2008,
respectively.




7.
            LONG TERM
      DEBT:




Long term
debt consisted of the following (in thousands) at:




June 30, 2009
                            
                            
                            March 31, 2009Long-term
      debt
                            
                            $
                            20,000
                            
                            
                            $
                            20,000Less:
      unaccreted debt discount
                            
                            
                            (435
                            )
                            
                            
                            (555
                            )Long-term
      debt, less net of debt discount
                            
                            $
                            19,565
                            
                            
                            $
                            19,4452001
      Loan
                            
                            $
                            20,000
                            
                            
                            $
                            20,0001998
      Loan
                            
                            
                            14,950
                            
                            
                            
                            14,950Less:
      unaccreted debt discount
                            
                            
                            (153
                            )
                            
                            
                            (184
                            )Long-term
      debt to stockholder, net of debt discount
                            
                            $
                            34,797
                            
                            
                            $
                            34,766




On
July 13, 2005, the Company secured a $20.0 million loan (the “2005 Loan”)
from SFT I, Inc., the full amount of which has been drawn down. The 2005
Loan is guaranteed by Carl E. Berg, Chairman of The Board, and matures in a lump
sum on July 13, 2010. Interest is due monthly based on a floating interest
rate. The interest rate is calculated as the greater of 6.75% or the sum of
LIBOR Rate, rounded to the nearest 1/16th of
1.0%, plus 4.0% (6.75% as of June 30, 2009). As of June 30, 2009, no amounts
have been paid on the 2005 Loan.




In
connection with the 2005 Loan, both SFT I, Inc. and Berg & Berg
Enterprises, LLC (“Berg & Berg”), each received warrants to purchase 600,000
shares of the Company’s common stock at a price of $2.74 per share, the closing
price of the Company’s common stock on July 12, 2005. The fair value
assigned to these warrants, totaling approximately $2.0 million, has been
recorded as a discount on the debt and will be accreted as interest expense over
the life of the loan. The warrants were valued using the Black-Scholes valuation
method using the assumptions of a life of 36 months, 96.45% volatility, and a
risk-free rate of 3.88%. On April 24, 2008, Berg & Berg exercised
its warrants by purchasing 600,000 shares of the Company’s common stock for an
aggregate purchase price of $1.6 million. In addition, SFT I, Inc.
completed  cashless exercises of its warrants on June 4, 2008 and
June 27, 2008 and received 230,767 common stock shares upon completion of
the cashless exercises. Also in connection with the 2005 Loan, the Company
incurred a loan commitment fee and attorneys’ fees which, in addition to the
interest rate cap agreement, have been recorded as a discount on the debt and
will be accreted as interest expense over the life of the loan. The rate cap
agreement terminated on August 10, 2008. Through June 30, 2009, a total of
approximately $1.9 million has been accreted and included as interest expense.
Interest payments on the 2005 Loan are currently being paid on a monthly
basis.




In
October 2001, the Company entered into a loan agreement (“2001 Loan”) with
Berg & Berg. Under the terms of the agreement, Berg & Berg
agreed to advance the Company funds of up to $20.0 million between the date of
the agreement and September 30, 2003. Interest on the 2001 Loan accrues at
8.0% per annum, payable from time to time. On July 13, 2005,
Berg & Berg agreed to extend the maturity date for the 2001 Loan
principal and interest from September 30, 2006 to September 30, 2008.
On June 12, 2008, Berg & Berg agreed to further extend the
maturity date for the loan principal and interest from September 30, 2008
to September 30, 2010.




In
conjunction with the 2001 Loan, Berg & Berg received warrants to
purchase 1,402,743 shares of the Company’s common stock at the price of $3.208
per share. These warrants were exercised on September 30, 2008 when
Berg & Berg surrendered a short term note payable of $4.5 million to
the Company as exercise consideration. The fair value assigned to these
warrants, totaling approximately $5.1 million, has been reflected as additional
consideration for the debt financing, recorded as a discount on the debt and
accreted as interest expense over the life of the loan. The warrants were valued
using the Black-Scholes method using the assumptions of a life of 47 months
(extended to 84 months), 100% volatility, and a risk-free rate of 5.5%. Through
June 30, 2009, a total of approximately $4.9 million has been accreted and
included as interest expense. The amounts charged to interest expense on the
outstanding balance of the loan for the three month periods ended June 30,
2009 and June 30, 2008 were $404,000 and $404,000. Interest payments on the
loan are currently being deferred, and are recorded as long-term interest. The
accrued interest amounts for the 2001 Loan were $12.0 million and $11.6 million
as of June 30, 2009, and March 31, 2009, respectively.


8
 Table of Contents




In
July 1998, the Company entered into an amended loan agreement (“1998 Loan”)
with Berg & Berg that allows the Company to borrow, prepay and
re-borrow up to $10.0 million principal under a promissory note on a revolving
basis. In November 2000, the 1998 Loan agreement was amended to increase
the maximum amount to $15.0 million. As of March 31, 2009, the Company had an
outstanding balance of $15.0 million under the 1998 Loan agreement. The 1998
Loan bears interest at one percent over lender’s borrowing rate (approximately
9.0 % at June 30,  2009). On July 13, 2005, Berg & Berg
agreed to extend the maturity date for the loan principal and interest from
September 30, 2006 to September 30, 2008. On June 12, 2008,
Berg & Berg agreed to further extend the maturity date for the loan
principal and interest from September 30, 2008 to September 30, 2010.
The accrued interest amounts for the 1998 Loan were $13.2 million and $12.8
million as of June 30, 2009 and March 31, 2009, respectively.




All of
the Company’s assets are pledged as collateral under the 2001 Loan and the 1998
Loan to stockholder.




8.
            COMMITMENTS AND
      CONTINGENCIES:




Warranties:




The
Company has established a warranty reserve in connection with the sale of
N-Charge® Power Systems covering a 12-month warranty period during which the
Company would provide a replacement unit to any customers returning a purchased
product because of a product performance issue. The Company has also established
a warranty reserve in relation to the sale of U-Charge® Power Systems, and other
large-format power systems. The total warranty liability was $0.7 million and
$1.0 million as of June 30, 2009, and March 31, 2009, respectively.




Litigation:




On
January 31, 2007, Valence filed a claim against Phostech Lithium Inc. in
the Federal Court in Canada (Valence Technology, Inc. v. Phostech Lithium
Inc. Court File No. T-219-07) alleging infringement of Valence Canadian
Patent 2,395,115. Subsequently, on April 2, 2007, Valence filed an amended
claim alleging infringement of its recently granted Canadian Patents 2,483,918
and 2,466,366. The action is in the discovery stage. The Company is seeking
monetary damages and injunctive relief for the acts of Phostech in
manufacturing, using and selling phosphate cathode material that infringes the
asserted Valence Canadian Patents.




On February 14, 2006, Hydro-Quebec
filed an action against the Company in the United States District Court for the
Western District of Texas (Hydro-Quebec v. Valence Technology, Civil Action
No. A06CA111). In its amended complaint filed April 13, 2006,
Hydro-Quebec alleges that Saphion ® I Technology, the technology utilized in all
of the Company’s commercial products, infringes U.S. Patent Nos. 5,910,382
and 6,514,640 exclusively licensed to Hydro-Quebec. Hydro-Quebec’s complaint
seeks injunctive relief and monetary damages. The action is in the initial
pleading state and the Company has filed a response denying the allegations in
the amended complaint. The action had been stayed by the Court pending a final
determination of the two reexaminations by the USPTO wherein the two patents
were amended.




The
Company is subject, from time to time, to various claims and litigation in the
normal course of business. In the Company’s opinion, all pending legal matters
will not have a material adverse impact on its consolidated financial
statements.




9.
            REDEEMABLE CONVERTIBLE
      PREFERRED STOCK:




On
June 2, 2003, the Company issued 1,000 shares of Series C Convertible
Preferred Stock and warrants to purchase the Company’s common stock for $10,000
per share, raising net proceeds of $9.416 million. On January 22, 2004, the
holder of the Series C Convertible Preferred Stock converted 139 of its
1,000 shares with the principal amount of $1.39 million, including accrued and
unpaid dividends, into 327,453 shares of the Company’s common stock at the
conversion price of $4.25 per share. On November 30, 2004, the Company
entered into an amendment and exchange agreement to exchange all outstanding 861
shares of the Company’s Series C Convertible Preferred Stock, representing
$8.6 million of principal. The Series C Convertible Preferred Stock was
exchanged for 431 shares of Series C-1 Convertible Preferred Stock, with a
stated value of $4.3 million, and 430 shares of Series C-2 Convertible
Preferred Stock, with a stated value of $4.3 million. When issued, the
Series C-1 Convertible Preferred Stock and Series C-2 Convertible
Preferred Stock were convertible into common stock at $4.00 per share. Each
series carries a 2% annual dividend rate, payable quarterly in cash or shares of
common stock, and was redeemable on December 15, 2005. The Company has the
right to convert the preferred stock if the average of the dollar-volume
weighted average price of the Company’s common stock for a ten-day trading
period is at or above $6.38 per share. If the preferred shares are not redeemed
in accordance with their terms, the holder of the preferred stock shall have the
option to require the Company to convert all or part of the non-redeemed shares
at a price of 95% of the lowest closing bid price of the Company’s common stock
during the three days ending on and including the conversion date. The preferred
shares are currently outstanding and subject to redemption or conversion at the
holder’s discretion.




9
 Table of Contents


Pursuant
to assignment agreements entered into between the Company and Berg &
Berg. on July 14, 2005 and December 14, 2005, Berg &
Berg purchased all of the outstanding Series C-1 Convertible Preferred
Stock and Series C-2 Convertible Preferred Stock from its original holder.
Pursuant to the terms of the assignment agreement, Berg & Berg agreed
that the failure of the Company to redeem the preferred stock on
December 15, 2005 did not constitute a default under the certificate of
designations and has waived the accrual of any default interest applicable in
such circumstance. In exchange, the Company has agreed (i) that the Series
C-1 Convertible Preferred Stock may be converted, at any time, into the
Company’s common stock at the lower of $4.00 per share or the closing bid price
of the Company’s common stock on December 13, 2005 ($1.98) and
(ii) that the Series C-2 Convertible Preferred Stock may be converted,
at any time, into the Company’s common stock at the lower of $4.00 per share or
the closing bid price of the Company’s common stock on July 13, 2005
($2.96). Berg & Berg has agreed to allow dividends to accrue on the
preferred stock.  At June 30, 2009, $646,000 in preferred stock dividends
had accrued.




In
connection with the issue of the original issuance of the Series C
Convertible Preferred Stock, in June 2003, the Company issued to the
Series C Convertible Preferred Stock original holder warrants to purchase
352,900 shares of the Company’s common stock. The warrants, which expired on
June 2, 2008, had a purchase price of $5.00 per share. The warrants were
valued using the Black-Scholes valuation model. The warrants were recorded to
additional paid in capital at their relative fair value to the Series C
Convertible Preferred Stock at $933,000. Accretion to the remaining redemption
value of $8.61 million was recorded over the eighteen-month period of the
Series C Convertible Preferred Stock ended December 2,
2004.




10.
            SHARE
      BASED COMPENSATION:




Pursuant
to the Company’s 1990 Stock Option Plan (“the 1990 Plan”), options granted may
be incentive stock options or supplemental stock options. Options are to be
granted at a price not less than fair market value (incentive options) or 85% of
fair market value (supplemental options) on the date of grant. The options vest
as determined by the Board of Directors and are generally exercisable over a
five-year period. Unvested options are canceled and returned to the 1990 Plan
upon an employee’s termination. Generally, vested options, not exercised within
three months of termination, are also canceled and returned to the 1990 Plan.
The 1990 Plan terminated on July 17, 2000, and as such, options may not be
granted after that date. Options granted prior to July 17, 2000 expire no
later than ten years from the date of grant.




In
February 1996, the Board of Directors adopted the 1996 Non-Employee
Director’s Stock Option Plan for outside directors (the “1996 Plan”). The 1996
Plan provides that new directors will receive an initial stock option of 100,000
shares of common stock upon their election to the Board. The exercise price for
this initial option will be the fair market value on the day it is granted. This
initial option will vest one-fifth on the first and second anniversaries of the
grant of the option, and quarterly over the next three years. A director who had
not received an option upon becoming a director received an initial stock option
of 100,000 shares on the date of the adoption of the 1996 Plan. At June 30,
2009, the Company had 626,048 shares available for grant under the 1996
Plan.




In
October 1997, the Board of Directors adopted the 1997 Non-Officer Stock
Option Plan (the “1997 Plan”). The Company may grant options to non-officer
employees and consultants under the 1997 Plan. Options are to be granted at a
price not less than fair market value (incentive options) on the date of grant.
The options vest as determined by the Board of Directors, generally quarterly
over a three- or four-year period. The options expire no later than ten years
from the date of grant. Unvested options are canceled and returned to the 1997
Plan upon an employee’s termination. Vested options, not exercised within three
months of termination, also are canceled and returned to the 1997 Plan. During
fiscal 2009, no shares were granted under this plan. The 1997 Plan terminated on
October 3, 2007, and as such, options may not be granted after that
date.




In
January 2000, the Board of Directors adopted the 2000 Stock Option Plan
(the “2000 Plan”). The Company may grant incentive stock options to employees
and non-statutory stock options to non-employee members of the Board of
Directors and consultants under the 2000 Plan. Options are to be granted at a
price not less than fair market value on the date of grant. In the case of an
incentive stock option granted to an employee who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any affiliate, the option is to be granted at a price not less than
110% of the fair market value on the date of grant. The options are exercisable
as determined by the Board of Directors, generally over a four-year period. The
options expire no later than ten years from the date of grant. Unvested options
are canceled and returned to the 2000 Plan upon an employee’s termination.
Vested options, not exercised within three months of termination, also are
canceled and returned to the 2000 Plan. During fiscal 2009, 745,300 shares were
granted under this plan. This plan will terminate on July 3, 2010. At June
30, 2009, the Company had 416,765 shares available for grant under the 2000
Plan.




On
April 30, 2009, the Board of Directors adopted the Valence
Technology, Inc. 2009 Equity Incentive Plan (the “2009 Plan”).  The
2009 Plan will be submitted to stockholders for approval at the 2009 Annual
Meeting of Stockholders scheduled to be held on September 8, 2009. The 2009 Plan
is a broad-based incentive plan that provides for granting stock options, stock
awards, performance awards, and other stock-based awards and substitute awards
to employees, service providers and non-employee directors.







10
 Table of Contents


The
maximum number of shares of the Company’s common stock initially reserved for
issuance under the 2009 Plan with respect to awards is 3,000,000 shares. 
The 2009 Plan contains an “evergreen” provision whereby the  number of
shares of common stock available for issuance under the 2009 Plan shall
automatically increase on the first trading day of April each fiscal year
during the term of the 2009 Plan, beginning with the fiscal year ending
March 31, 2011, by an amount (the “Annual Increase Amount”) equal to the
lesser of (i) one percent (1%) of the total number of shares of common
stock outstanding on the last trading day in March of the immediately
preceding fiscal year, (ii) 1,500,000 shares and (iii) such lesser
amount if set by the Board.  The maximum number of shares of common stock
that may be issued under the 2009 Plan pursuant to the exercise of incentive
stock options is the lesser of (A) 3,000,000 shares, increased on the first
trading day of April each fiscal year during the term of the 2009 Plan,
beginning with the fiscal year ending March 31, 2011, by the Annual
Increase Amount, and (B) 16,500,000 shares.  The 2009 Plan also
contains an automatic option grant program for our non-employee directors. 
Under the automatic option grant program, each individual who first becomes a
non-employee board member at any time after the effective date of the 2009 Plan
will receive an option grant to purchase 100,000 shares of common stock on the
date such individual joins the board.  In addition, on the date of each
annual stockholders meeting held after the effective date of the 2009 Plan, each
non-employee director who continues to serve as a non-employee director will
automatically be granted an option to purchase 50,000 shares of common stock,
provided such individual has served on the Board for at least six
months.  All employees, service providers and directors of the Company
and its affiliates are eligible to participate in the 2009 Plan. This plan will
terminate on April 29, 2019.  As of June 30, 2009, no shares had been
granted under this plan.




When
options are exercised the Company issues new shares to the grantee.




Aggregate
option activity is as follows (shares in thousands):





Outstanding OptionsNumber of
                  
                  
                  Weighted
                    AverageShares
                  
                  
                  Exercise PriceBalance
      at March 31, 2009
                  
                  
                  5,762
                  
                  
                  $
                  2.42Granted
                  
                  
                  336
                  
                  
                  
                  1.93Exercised
                  
                  
                  (76
                  )
                  
                  
                  1.75Canceled
                  
                  
                  (82
                  )
                  
                  
                  4.00Balance
      at June 30, 2009
                  
                  
                  5,940
                  
                  
                  $
                  2.38




The
following table summarizes information about fixed stock options outstanding at
June 30, 2009 (shares in thousands):





Options Outstanding
                                                    
                                                    Options ExercisableWeightedAverageRemaining
                                                    
                                                    Weighted
                                                    
                                                    
                                                    
                                                    WeightedContractual
                                                    
                                                    Average
                                                    
                                                    
                                                    
                                                    AverageRange of
                                                    
                                                    Number
                                                    
                                                    Life
                                                    
                                                    Exercise
                                                    
                                                    Number
                                                    
                                                    ExerciseExercise Prices
                                                    
                                                    Outstanding
                                                    
                                                    (years)
                                                    
                                                    Price
                                                    
                                                    Exercisable
                                                    
                                                    Price$0.63
      - $1.99
                                                    
                                                    4,565
                                                    
                                                    7.8
                                                    
                                                    $
                                                    1.59
                                                    
                                                    530
                                                    
                                                    $
                                                    1.53$1.99
      - $4.62
                                                    
                                                    1,124
                                                    
                                                    6.1
                                                    
                                                    3.17
                                                    
                                                    733
                                                    
                                                    3.09$4.62
      - $10.06
                                                    
                                                    188
                                                    
                                                    2.3
                                                    
                                                    7.24
                                                    
                                                    186
                                                    
                                                    7.24$10.06
      - $15.75
                                                    
                                                    10
                                                    
                                                    1.3
                                                    
                                                    13.84
                                                    
                                                    10
                                                    
                                                    13.84$15.75
      - $23.56
                                                    
                                                    —
                                                    
                                                    —
                                                    
                                                    —
                                                    
                                                    —
                                                    
                                                    —$23.56
      - $34.62
                                                    
                                                    52
                                                    
                                                    0.6
                                                    
                                                    34.11
                                                    
                                                    52
                                                    
                                                    34.11$0.63
      - $34.62
                                                    
                                                    5,940
                                                    
                                                    7.2
                                                    
                                                    $
                                                    2.38
                                                    
                                                    1,511
                                                    
                                                    $
                                                    4.2




Compensation expense for stock plans
has been determined based on the fair value at the grant date for options
granted in the current fiscal year. For the three months ended June 30, 2009 and
June 30, 2008, $812,000 and $574,000, respectively, of share based compensation
expense has been included in operating expenses in the condensed consolidated
statements of operations and comprehensive loss. The aggregate intrinsic value
of options exercisable at June 30, 2009 is $0.2 million. There were 75,686
options exercised during the three-month period ended June 30,
2009.




11
 Table of Contents


As of
June 30, 2009 the Company had a total of $2.4 million in compensation costs
related to share based compensation to recognize over a remaining service period
of 2.4 years for non-vested options. The fair value of each option grant is
estimated at the date of grant using the Black-Scholes pricing model with the
following weighted average assumptions for grants in the first quarter of fiscal
2010 and the fiscal year 2009:





June
      30, 2009
                  
                  March
      31, 2009Weighted
      average risk-free interest rate
                  
                  2.27
                  %
                  2.67
                  %Average
      expected life in years
                  
                  5.9
      years
                  
                  6.1
      yearsAverage
      expected volatility
                  
                  85.62
                  %
                  81.49
                  %Dividend
      yield
                  
                  None
                  
                  None




11.
            RELATED
      PARTY TRANSACTIONS:




On
June 11, 2009, Berg & Berg purchased 1,256,281 shares of common
stock for cash at a price per share of $1.99 for an aggregate purchase price of
$2,500,000. The purchase price per share equaled the closing bid price of our
common stock as of June 10, 2009.




On
November 15, 2008, Berg & Berg purchased approximately 1.7 million
shares of the Company’s common stock. As payment of the purchase price of the
common stock, Berg & Berg surrendered certain promissory notes issued
on July 23, 2008 and amended September 30, 2008 ($542,000 in principal
and approximately $14,000 in accrued interest), and June 26, 2008 ($2.5
million in principal and approximately $78,000 in accrued interest). The
surrendered promissory notes were the second and first working capital loan
installments, respectively, made pursuant to an agreement between the Company
and Berg & Berg whereby Berg & Berg agreed to provide up to
$10.0 million in interim working capital loans from time to time in order to
supplement the Company’s working capital and other financial needs. This
agreement expired on November 15, 2008 and accordingly, all outstanding
amounts were paid on November 15, 2008. No future draws can be taken
against this loan.




12.
            SEGMENT
      AND GEOGRAPHIC INFORMATION:




The
Company’s chief operating decision maker is its Chief Executive Officer, who
reviews operating results to make decisions about resource allocation and to
assess performance. The Company’s chief operating decision maker views results
of operations of a single operating segment, the development and marketing of
the Company’s lithium phosphate technology. The Company’s Chief Executive
Officer has organized the Company functionally to develop, market and
manufacture lithium phosphate products.




Long-lived
asset information by geographic area is as follows (in thousands)
at:





June
      30, 2009
                  
                  
                  March
      31, 2009United
      States
                  
                  $
                  238
                  
                  
                  $
                  236International
                  
                  
                  5,784
                  
                  
                  
                  6,055Total
                  
                  $
                  6,022
                  
                  
                  $
                  6,291




Revenues
by geographic area are as follows (in thousands) at:





Three Months Ended June 30,2009
                
                
                2008United
      States
                
                $
                3,202
                
                
                $
                5,850International
                
                
                1,515
                
                
                
                5,140Total
                
                $
                4,717
                
                
                $
                10,990




13.
            SUBSEQUENT
      EVENTS:




The
Company evaluates events and transactions that occur after the balance
sheet date as potential subsequent events.  This evaluation was performed
through August 7, 2009, the date on which the Company’s unaudited financial
statements for the fiscal period ended June 30, 2009 were completed.




On July
2, 2009, subsequent to the end of the first fiscal quarter of 2010, we entered
into Amendment No. 1 to At Market Issuance Sales Agreement with Wm. Smith &
Co., as sales agent (the “Sales Agent”), which amended that certain At Market
Issuance Sales Agreement, dated February 22, 2008, between us and the Sales
Agent, to increase the number of shares we may issue and sell thereunder from
5.0 million to 10.0 million in a series of transactions over time as we may
direct through the Sales Agent.  Sales of shares may be made in privately
negotiated transactions and/or any other method permitted by law, including
sales deemed to be an “at the market” offering as defined in Rule 415 under
the Securities Act of 1933, which includes sales made directly on the NASDAQ
Capital Market, the existing trading market for our common stock, or sales made
to or through a market maker other than on an exchange.  The Sales Agent
will make all sales on a best efforts basis using commercially reasonable
efforts consistent with its normal trading and sales practices, on mutually
agreed terms between the Sales Agent and us. Unless we and the Sales Agent agree
to a lesser amount with respect to certain persons or classes of persons, the
compensation to the Sales Agent for sales of common stock sold pursuant to the
Agreement will be 6.0% of the gross proceeds of the sales price per
share.




12
 Table of Contents


ITEM2.MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  This
Quarterly Report on Form 10-Q, which we refer to as this “Report,” contains
statements that constitute “forward-looking statements” within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. The words “may,”
“will,” “expect,” “intend,” “estimate,” “continue,” “anticipate,” “predict,”
“believe” and similar expressions and variations thereof are intended to
identify forward-looking statements. These statements appear in a number of
places in the Report and include statements regarding the intent, belief or
current expectations of Valence Technology, Inc., to which we refer in this
Report as “Valence,” the “Company,” “we” or “us,” our directors or officers with
respect to, among other things:
  ·
                
                trends
      affecting our financial condition or results of
  operations;·
                
                our
      product development strategies;·
                
                trends
      affecting our manufacturing capabilities;·
                
                trends
      affecting the commercial acceptability of our products;
  and·
                
                our
      business and growth strategies.
  You are
cautioned not to put undue reliance on forward-looking statements.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and actual results may differ materially from those
projected in this Report and the documents incorporated herein by
reference.  Factors that could cause actual results to differ
materially include those discussed under “Risk Factors,” which include, but are
not limited to the following:
  ·
                
                our
      ability to develop and market products that compete effectively in
      targeted market segments;·
                
                market
      acceptance of our current and future products;·
                
                our
      ability to meet customer demand;·
                
                our
      ability to perform our obligations under our loan
    agreements;·
                
                a
      loss of one of our key customers;·
                
                our
      ability to implement our long-term business strategy that will be
      profitable and/or generate sufficient cash flow;·
                
                the
      ability of our vendors to provide conforming materials for our products on
      a timely basis;·
                
                the
      loss of any of our key executive officers;·
                
                our
      ability to manage our foreign manufacturing and development
      operations;·
                
                international
      business risks;·
                
                our
      ability to attract skilled personnel;·
                
                our
      ability to protect and enforce our current and future intellectual
      property;·
                
                our
      need for additional, dilutive financing or future acquisitions;
      and·
                
                future
      economic, business and regulatory
conditions.
  We
believe that it is important to communicate our future expectations to
investors. However, there may be events in the future that we are not able to
accurately predict or control. The factors discussed under “Risk Factors” in
this Report or the documents incorporated by reference herein, as well as any
cautionary language in this Report, any of our other reports or filings or the
documents incorporated by reference herein or therein, including our Annual
Report on Form 10-K, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
described in our forward-looking statements.
  The
following discussion should be read in conjunction with our financial statements
and related notes, which are a part of this Report or incorporated by reference
to our reports filed with the SEC. We undertake no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. The results for the three month period ended June 30,
2009 are not necessarily indicative of the results to be expected for the entire
fiscal year ended March 31, 2010 or any other period.
  13
 Table of Contents
 
 Overview
  We were
founded in 1989 and have commercialized the industry’s first lithium phosphate
technology. We develop, manufacture and sell high-energy power systems utilizing
our proprietary phosphate-based lithium-ion technology for diverse applications,
with special emphasis on portable appliances and future generations of hybrid
and electric vehicles.  Our mission is to promote the wide adoption of
high-performance, safe, long cycle life, environmentally friendly, low-cost
energy storage systems. To address the significant market opportunity we believe
is available, we utilize the numerous benefits of our latest energy storage
technology, deep intellectual property portfolio and extensive experience of our
management team.
  In March
2009, we introduced a new revision of U-Charge®, our third generation of Lithium
Iron Magnesium Phosphate Energy Storage Systems, which are expected to be
commercially available in the second quarter of fiscal 2010. U-Charge® features
our safe, long-life lithium iron magnesium phosphate technology which utilizes a
phosphate-based cathode material. We believe that the improved features
and  functionality of the latest U-Charge® Lithium Iron Magnesium
Phosphate Energy Storage Systems are well suited for electric vehicle (EV),
plug-in hybrid electric vehicle (PHEV) and similar applications. U-Charge®
Lithium Iron Magnesium Phosphate Energy Storage Systems address the safety and
limited life weaknesses of other lithium technologies while offering a solution
that is competitive in cost and performance.  This revision of
U-Charge® builds upon these features and adds improvements in state of charge,
balancing and field repairability.
  Strategy
  Our
business plan and strategy focuses on the generation of revenue from product
sales, while minimizing costs through partnerships with contract manufacturers
and internal manufacturing efforts through our two wholly-owned subsidiaries in
China. These subsidiaries initiated operations in late fiscal 2005. We expect to
develop target markets through the sales of U-Charge® systems and custom energy
storage systems based on programmable EpochTM Command and Control Logic. In
addition, we expect to pursue a licensing strategy to supply the lithium
phosphate sector with advanced Valence material and components, including
lithium phosphate cathode materials to fulfill other manufacturers’
needs.
 
 Key
elements of our business strategy include:
 
 •Develop and market differentiated
battery solutions for a wide array of applications that leverage the advantages
of our technology.Our product development and marketing efforts are
focused on large-format battery solutions, such as our U-Charge® Lithium Iron
Magnesium Phosphate Energy Storage Systems and other custom battery solutions
that feature advanced performance and technological advantages. These products
are targeted for a broad range of applications in the motive, power and consumer
appliance, telecommunication and utility industries and as a substitute for
certain applications using lead-acid batteries.
 
 •Manufacture high-quality,
cost-competitive products using a combination of Company owned and contract
manufacturing facilities.Our products are manufactured in China, using
both internal and contract manufacturing resources. Our Company-owned China
facility includes two plants; one manufactures our advanced lithium iron
magnesium phosphate materials with our patented carbon-thermal reduction process
while the second manufactures our advanced standard large-format packs such as
U-Charge® and custom packs for customers such as Segway Inc. We have
arrangements with contract manufacturers for cylindrical cell production. We
believe this manufacturing strategy will allow us to directly control our
intellectual property and operations management as well as deliver high-quality
products that meet the needs of a broad range of customers and
applications.
  
 Our
business strategy is being implemented in three phases, each building on the
previous one:
 
 •Initial Phase: The initial
phase of our strategy, now complete, focused on the first generation of our
technology in our patented polymer construction. During this phase, we
introduced the N-Charge® Power System which has been sold through national and
regional retailers, top-tier computer manufacturers and national resellers. We
discontinued this product line during fiscal 2009 to focus on our U-Charge®
Lithium Iron Magnesium Phosphate Energy Storage Systems.
 
 •Second Phase: The second
phase of our business strategy is also complete. Throughout this phase our cell
development has focused on commercializing a cylindrical Lithium Iron Magnesium
Phosphate cell and advanced third generation Intelligent Energy Source Storage
System ). This new family of products is designed for motive applications such
as hybrid and electric vehicles, scooters and wheelchairs and has the same
dimensions as the most popular lead acid batteries but with significant
increases in performance related to safety, energy cycle life and
weight.
  • Third Phase: The third
phase of our business strategy will entail the development and commercialization
of our patented Lithium Vanadium Phosphate (LVP) and Lithium Vanadium Phosphate
Fluoride (LVPF) cathode materials into large-format, high capacity cells. These
materials offer superior performance with additional energy storage and higher
voltage capabilities for the automotive, industrial, UPS, aerospace,
telecommunications, military and other sectors.
  14
 Table of Contents
  Our
business headquarters is in Austin, Texas. Our materials research and
development center is in Las Vegas, Nevada. Our European sales and OEM
manufacturing support center is in Mallusk, Northern Ireland. Our manufacturing
and product development center is in Suzhou, China.  We have the following
subsidiaries:  Valence Technology (Nevada), Inc., Valence Technology
Cayman Islands, Inc., Valence Technology N.V., Valence Technology
International, Inc., Valence Technology B.V., Valence Technology (Suzhou)
Co., Ltd., and Valence Energy-Tech (Suzhou) Co., Ltd.
  Going
Concern
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. The
Company has incurred operating losses each year since its inception in 1989 and
had an accumulated deficit of $563.9  million as of June 30, 2009. For the
three-month periods ended June 30, 2009 and June 30, 2008, the Company sustained
net losses available to common stockholders of $6.2 and $5.6 million,
respectively. These factors, among others, indicate that the Company may be
unable to continue as a going concern for a reasonable period of time. The
Company’s ability to continue as a going concern is contingent upon its ability
to meet its liquidity requirements. If the Company is unable to arrange for debt
or equity financing on favorable terms or at all, the Company’s ability to
continue as a going concern is uncertain. These financial statements do not give
effect to any adjustments to the amounts and classifications of assets and
liabilities which might be necessary should the Company be unable to continue as
a going concern.
  At June
30, 2009, the Company’s principal sources of liquidity were cash and cash
equivalents of $1.7 million. The Company does not expect that its cash and cash
equivalents will be sufficient to fund its operating and capital needs for the
next three to six months following June 30, 2009, nor does the Company
anticipate product sales during fiscal 2010 will be sufficient to cover its
operating expenses. Historically, the Company has relied upon management’s
ability to periodically arrange for additional equity or debt financing to meet
the Company’s liquidity requirements.  The Company’s cash requirements
may vary materially from those now planned because of changes in the Company’s
operations including the failure to achieve expected revenues, greater than
expected expenses, changes in OEM relationships, market conditions, the failure
to timely realize the Company’s product development goals, and other adverse
developments. These events could have a negative impact on the Company’s
available liquidity sources during the next 12 months.
  Basis of Presentation, Critical
Accounting Policies and Estimates
  We
prepare our consolidated financial statements in conformity with generally
accepted accounting principles in the U.S. The preparation of our financial
statements requires us to make estimates and assumptions that affect reported
amounts. We believe our most critical accounting policies and estimates relate
to revenue recognition, impairment of long-lived assets, inventory reserves,
inventory overhead absorption, warranty liabilities, and share based
compensation expense. Our accounting policies are described in the Notes to
Condensed Consolidated Financial Statements, Note 3, Summary of Significant
Accounting Policies. The following further describes the methods and assumptions
we use in our critical accounting policies and estimates.
  Revenue
Recognition
  We
generate revenues from sales of products including batteries and battery
systems, and from licensing fees and royalties per technology license
agreements. Product sales are recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred,
seller’s price to the buyer is fixed and determinable, and collection is
reasonably assured. Product shipments that are not recognized as revenue during
the period shipped, primarily product shipments to resellers that are subject to
right of return, are recorded as deferred revenue and reflected as a liability
on our balance sheet. Products shipped with the rights of return are included in
finished goods inventory as we retain title to the products.  For reseller
shipments where revenue recognition is deferred, we record revenue and relieve
inventory based upon the reseller-supplied reporting of sales to their end
customers or their inventory reporting. For all shipments, we estimate a return
rate percentage based upon our historical experience. From time to time we
provide sales incentives in the form of rebates or other price adjustments;
these are generally recorded as reductions to revenue on the latter of the date
the related revenue is recognized or at the time the rebate or sales incentive
is offered. Licensing fees are recognized as revenue upon completion of an
executed agreement and delivery of licensed information, if there are no
significant remaining vendor obligations and collection of the related
receivable is reasonably assured. Royalty revenues are recognized upon licensee
revenue reporting and when collection is reasonably assured.
  15
 Table of Contents
  Results
of Operations
  The
following table summarizes the results of our operations for the three months
(also referred to as the first quarter) ended June 30, 2009 and June 30, 2008
(in thousands):
  Three Months Ended June 30,2009
                
                
                2008Total
                
                
                % of
                  Revenue
                
                
                Total
                
                
                % of
                  RevenueBattery
      and systems sales
                
                $
                4,630
                
                
                
                98
                %
                
                $
                10,886
                
                
                
                99
                %Licensing
      and royalty revenue
                
                
                87
                
                
                
                2
                %
                
                
                104
                
                
                
                1
                %Total
      revenues
                
                
                4,717
                
                
                
                100
                %
                
                
                10,990
                
                
                
                100
                %Gross
      margin profit (loss)
                
                
                807
                
                
                
                17
                %
                
                
                (26
                )
                
                
                0
                %Operating
      expenses
                
                
                5,769
                
                
                
                122
                %
                
                
                4,621
                
                
                
                42
                %Operating
      loss
                
                
                (4,962
                )
                
                
                (105
                )%
                
                
                (4,647
                )
                
                
                (42
                )%Net
      loss
                
                
                (6,154
                )
                
                
                (130
                )%
                
                
                (5,523
                )
                
                
                (50
                )%
 
 Revenues
and Gross Margin
  Battery and System
Sales. Battery and systems
sales totaled $4.6 million for the three months ended June 30, 2009, as compared
to $10.9 million for the three months ended June 30, 2008. The decrease in
revenues was primarily due to reduced sales to The Tanfield Group, PLC, and
Segway, offset by increases to Tianjin Lishen Battery Joint-Stock Co., Ltd.
(“Lishen”), Brammo Motorsports, and ISE Corporation.  Revenue
recognized from Lishen represents sales of our P1a Cathode material for use in
their cell production for other customers.  Tanfield sales accounted
for 0% and 38% of our product sales for the first fiscal quarter in 2010 and
2009, respectively.  Lishen sales accounted for 19%, Brammo Motorsports
sales accounted for 15%, and ISE Corporation sales accounted for 13% of our
product sales for the first fiscal quarter in 2010, compared to 0% in fiscal
2009.   Segway sales accounted for 34% and 38% of our total
product sales for the first fiscal quarter in 2010 and 2009, respectively. We
expect sales of the large-format battery system to remain relatively flat during
the upcoming quarter.We had $398,000 and $355,000 in
deferred revenue on our balance sheet at June 30, 2009 and March 31, 2009,
respectively, primarily related to sales shipping in the end of the
quarter.
  Licensing and Royalty
Revenue. Licensing and royalty revenues relate to revenue from licensing
agreements for our battery construction technology. Fiscal first quarter 2010
licensing and royalty revenue was $87,000 compared with $104,000 for the same
quarter in fiscal 2009. Licensing and royalty revenue was substantially from our
license agreement with Amperex Technology Limited, which makes on-going royalty
payments as sales are made using our technology. We expect to continue to pursue
a licensing strategy as our lithium phosphate technology receives greater market
acceptance.
  Gross Margin. Gross margin as
a percentage of revenue was 17% for the three months ended June 30, 2009, as
compared to 0% in the three months ending June 30, 2008. The increase in gross
margin for the three months ended June 30, 2009, as compared to the three months
ended June 30, 2008, both as dollar amount of $0.8 million, and as a percentage
of revenue, of 17% of revenue, is related to P1a cathode material sales in the
three months ended June 30, 2009, which have a higher margin than large format
battery system sales, and the inventory impairments that were booked in the
three months ended June 30, 2008 which did not recur in the current
quarter.  In addition, we experienced a  decrease in the
liability that is carried related to warranty reserves. This reduction in
warranty reserves had a positive impact on gross margin in the three months
ended June 30, 2009 of approximately $0.3 million.
  16
 Table of Contents
  Operating
Expenses
  The
following table summarizes operating expenses for the three months ended
June 30, 2009 and June 30, 2008 (dollars in thousands):
  Three Months Ended June 30,Increase/2009
                
                
                2008
                
                
                (Decrease)
                
                
                % ChangeResearch
      and product development
                
                $
                1,220
                
                
                $
                1,183
                
                
                
                37
                
                
                
                3
                %Marketing
                
                
                722
                
                
                
                810
                
                
                
                (88
                )
                
                
                (11
                )%General
      and administrative
                
                
                3,827
                
                
                
                2,634
                
                
                
                1,194
                
                
                
                45
                %Loss
      on disposal of assets
                
                
                —
                
                
                
                (6
                )
                
                
                6
                
                
                
                (100
                )%Total
      operating expenses
                
                $
                5,769
                
                
                $
                4,621
                
                
                $
                1,149
                
                
                
                25
                %Percentage
      of revenues
                
                
                122
                %
                
                
                42
                %
  During
the three months ended June 30, 2009, total operating expenses were 122% of
revenue compared to 42% of revenue during the same quarter last year.  The
dollar increase is primarily due to expenses associated with the granting of
director stock options, increased costs and consulting expenses for the three
months ended June 30, 2009.
  Research and Product
Development. Research and product development expenses consist primarily
of personnel, equipment and materials to support our efforts to develop battery
chemistry and products, as well as to improve our manufacturing processes.
Research and product development expenses remained relatively flat for the three
months ended June 30, 2008, as compared to the three months ended
June 30, 2008. Research and development expenses were $1.2 million for the
three months ended June 30, 2009, as well as for the three months ended June 30,
2008. During the three months ended June 30, 2009, approximately
$68,000 of share based compensation was allocated to research and development
expenses as compared to $58,000 in the three months ended June 30,
2008. Although research
and development expenses were relatively flat on a year to year comparison, we
expect research and development expenses to increase as we create and develop
new products.
  Marketing. Marketing expenses
consist primarily of costs related to sales and marketing personnel, public
relations and promotional materials. Marketing expenses of $722,000 in the three
months ended June 30, 2009, were $88,000, or 11%, lower than the $810,000
for the three months ended June 30, 2008. During the three months ended
June 30, 2009, approximately $77,000 of share based compensation was
allocated to marketing expenses, as compared to $122,000 in the three months
ended June 30, 2008, a decrease of $45,000. We expect marketing
expenses to increase slightly as we focus on building a stronger market presence
and continue to reach new customers.
  General and Administrative.
General and administrative expenses consist primarily of salaries, share based
compensation and other related costs for finance, human resources, facilities,
accounting, information technology, legal, and corporate-related expenses.
General and administrative expenses totaled $3.8 million and $2.6 million for
the three months ended June 30, 2009, and 2008, respectively, a $1.2 million, or
45% increase.  Share based compensation expense increased to $658,000 in
the three months ended June 30, 2009, as compared to $385,000 in the three
months ended June 30, 2008, due to stock option and equity grant awards issued
to board members during the three months ended June 30, 2009. Litigation
expenses increased by $750,000 in the three months ended June 30, 2009, as
compared to the three months ended June 30, 2008, primarily due to expenses
related to the Hydro-Quebec litigation (see Note 8, Commitments and
Contingencies). Consulting expenses increased by $77,000 in the three
months ended June 30, 2009, as compared to the three months ended June 30, 2008,
primarily related to the Company’s applications for grants and loans under new
Department of Energy programs established to develop U.S. based manufacturing of
lithium-ion batteries, the Advanced Technology Vehicles Manufacturing Initiative
and the Electric Drive Vehicle Battery and Component Manufacturing
Initiative.
  Liquidity
and Capital Resources
  Liquidity
  At June
30, 2009, our principal source of liquidity was cash and cash equivalents of
$1.7 million. We do not expect our cash and cash equivalents will be sufficient
to fund our operating and capital needs for the next twelve months following
June 30, 2009, nor do we anticipate product sales during the remainder of fiscal
2010 will be sufficient to cover our operating expenses. Historically, we have
relied upon management’s ability to periodically arrange for additional equity
or debt financing to meet our liquidity requirements. Unless our product sales
are greater than management currently forecasts or there are other changes to
our business plan, we will need to arrange for additional financing to fund
operating and capital needs. This financing could take the form of debt or
equity. Given our historical operating results and the amount of our existing
debt, as well as the other factors, we may not be able to arrange for debt or
equity financing on favorable terms or at all.
  17
 Table of Contents
  Our cash requirements may vary
materially from those now planned because of changes in our operations including
the failure to achieve expected revenues, greater than expected expenses,
changes in OEM relationships, market conditions, the failure to timely realize
our product development goals, and other adverse developments. These events
could have a negative impact on our available liquidity sources during the
remaining fiscal year.
  The
following table summarizes our statement of cash flows for the three months
ended June 30, 2009
and 2008 (in thousands):
  Three Months Ended June 30,2009
                  
                  
                  2008Net
      cash flows provided by (used in):Operating
      activities
                  
                  $
                  (5,602
                  )
                  
                  $
                  (5,682
                  )Investing
      activities
                  
                  
                  (34
                  )
                  
                  
                  (770
                  )Financing
      activities
                  
                  
                  3,278
                  
                  
                  
                  6,300Effect
      of foreign exchange rates
                  
                  
                  6
                  
                  
                  
                  39Net
      (decrease) increase in cash and cash equivalents
                  
                  $
                  (2,352
                  )
                  
                  $
                  (113
                  )
  Our use
of cash from operations the first three months of fiscal 2010 and fiscal 2009
was $5.6 million and $5.7 million, respectively. The cash used for operating
activities during the first three months of our fiscal 2009 was primarily for
operating losses and working capital.
  In the
first three months of fiscal 2010, we had a net decrease in cash used in
investing activities of $736,000, as compared to the first three months of
fiscal 2009. Investing activities in the three months ended June 30, 2009, were
less than the three months ended June 30, 2008, primarily because of the
purchases of manufacturing equipment in the three months ended June 30, 2008,
related to the expansion of our powder production line in China.
  We
obtained cash from financing activities in the amounts of $3.3 million and $6.3
million during the first three months of fiscal 2010 and 2009, respectively. On
June 11, 2009, Berg & Berg purchased 1,256,281 shares of our
common stock for cash at a price per share of $1.99 for an aggregate purchase
price of $2,500,000. During the first three months of fiscal 2010, we sold
333,048 shares with proceeds net of commissions of $0.6 million under the At
Market Issuance Sales Agreement discussed in more detail below. During the first
three months of fiscal 2009, we sold 393,500 shares with proceeds net of
commissions of $1.5 million under the At Market Issuance Sales Agreement.
Proceeds from the issuance of stock options were $0.1 million during the first
quarter of fiscal 2010, as compared to $0.6 million during the first quarter of
fiscal 2009. In the three months ended June 30, 2009, Berg & Berg
Enterprises provided the company with a short term loan of $2.5 million, as
described in Note 11, Related Party Transactions.
  We filed
a Form S-3 Registration Statement with the SEC utilizing a “shelf” registration
process, declared effective on January 22, 2008, under which we may sell debt or
equity securities described in the accompanying prospectus in one or more
offerings up to a total public offering price of $50.0 million.  We
believe that this shelf registration statement provides us additional
flexibility with regard to potential financings that we may undertake when
market conditions permit or our financial condition may require.
  On July
2, 2009, we entered into Amendment No. 1 to At Market Issuance Sales Agreement
with Wm. Smith & Co., as sales agent (the “Sales Agent”), which amended that
certain At Market Issuance Sales Agreement, dated February 22, 2008, between us
and the Sales Agent, to increase the number of shares we may issue and sell
thereunder from 5.0 million to 10.0 million in a series of transactions over
time as we may direct through the Sales Agent.  Sales of shares may be made
in privately negotiated transactions and/or any other method permitted by law,
including sales deemed to be an “at the market” offering as defined in
Rule 415 under the Securities Act of 1933, which includes sales made
directly on the NASDAQ Capital Market, the existing trading market for our
common stock, or sales made to or through a market maker other than on an
exchange.  The Sales Agent will make all sales on a best efforts basis
using commercially reasonable efforts consistent with its normal trading and
sales practices, on mutually agreed terms between the Sales Agent and us. Unless
we and the Sales Agent agree to a lesser amount with respect to certain persons
or classes of persons, the compensation to the Sales Agent for sales of common
stock sold pursuant to the Agreement will be 6.0% of the gross proceeds of the
sales price per share.
  .Subsequent Event
  As set forth more fully above under
“Liquidity and Capital Resources” and subsequent to the end of the first fiscal
quarter of 2010, we entered into Amendment No. 1 to At Market Issuance Sales
Agreement with the Sales Agent on July 2, 2009.  Amendment No. 1 to At
Market Issuance Sales Agreement increased the number of shares which may be sold
thereunder from 5.0 million to 10.0 million.
  18
 Table of Contents
  Capital
Commitments and Debt
  At June
30, 2009, we had no significant commitments for capital expenditures for the
next 12 months.
  Our cash
obligations for short-term, long-term debt and interest, gross of unaccreted
discount, consisted of the following (in thousands):
  June 30,
                      20091998
      long-term debt to Berg & Berg
                    
                    $
                    14,9502001
      long-term debt to Berg & Berg
                    
                    
                    20,0002005
      long-term debt to third-party
                    
                    
                    20,000Long
      term portion of interest payable on debt
                    
                    
                    25,155Current
      portion of interest payable on debt
                    
                    
                    76Total
                    
                    $
                    80,181
  Repayment
obligations of long-term debt principal as of June 30, 2009 are (in
thousands):
  Fiscal year2010
                      
                      2011
                      
                      2012
                      
                      2013
                      
                      2014
      and
                        thereafter
                      
                      TotalPrincipal
      repayment
                      
                      $
                      —
                      
                      $
                      54,950
                      
                      $
                      —
                      
                      $
                      —
                      
                      $
                      —
                      
                      $
                      54,950
  The terms
of the certificates of designation for the Series C-1 Convertible Preferred
Stock and the Series C-2 Convertible Preferred Stock initially provided
that the deadline for redemption was December 15, 2005.  Pursuant to
assignment agreements entered into between the Company and Berg & Berg,
Berg & Berg waived the requirement that the Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock be redeemed on
this date.  There currently are no redemption deadlines.  As set forth
above, although dividends are not due, they are continuing to accrue
(approximately $646,000 as of June 30, 2009). The total below for redemption of
convertible preferred stock includes accrued dividends.
  If cash
flow from operations is not adequate to meet debt obligations, additional debt
or equity financing will be required. There can be no assurance that we could
obtain the additional financing.
  If cash
flow from operations is not adequate to meet debt obligations, additional debt
or equity financing will be required. There can be no assurance that we could
obtain the additional financing.
  Inflation
  Historically,
our operations have not been materially affected by inflation. However, our
operations may be affected by inflation in the future.
  Tabular
Disclosure of Contractual Obligations
  The
following table sets forth, as of June 30, 2009 our scheduled principal,
interest and other contractual annual cash obligations due for each of the
periods indicated below (in thousands):
  Payment Due by PeriodLess than
                
                
                
                
                
                
                
                
                More thanTotal
                
                
                One Year
                
                
                1-2 Years
                
                
                3-5 Years
                
                
                5 YearsContractual obligations:Long-term
      debt obligations
                
                
                80,181
                
                
                
                76
                
                
                
                80,105
                
                
                
                —
                
                
                
                —Operating
      lease obligations
                
                
                1,784
                
                
                
                655
                
                
                
                647
                
                
                
                283
                
                
                
                199Purchase
      obligations
                
                
                6,475
                
                
                
                6,475
                
                
                
                —
                
                
                
                —
                
                
                
                —Redemption
      of convertible preferred stock
                
                
                9,256
                
                
                
                9,256
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                97,772
                
                
                $
                16,538
                
                
                $
                80,752
                
                
                $
                283
                
                
                $
                199
  19
 Table of Contents
  The terms
of the certificates of designation for the Series C-1 Convertible Preferred
Stock and the Series C-2 Convertible Preferred Stock initially
provided that the deadline for redemption was December 15, 2005. Pursuant
to assignment agreements entered into between us and Berg & Berg,
Berg & Berg waived the requirement that the Series C-1 Convertible
Preferred Stock and Series C-2 Convertible Preferred Stock be redeemed on
this date. There currently are no redemption deadlines, but the preferred shares
are subject to redemption or conversion at the holder’s discretion. As set forth
above, although dividends are not due, they are continuing to accrue (currently
$646,000 as of June 30, 2009). The total above for Redemption of Convertible
Preferred Stock includes accrued dividends.
  ITEM3.QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
  We
considered the provisions of Financial Reporting Release No. 48,
“Disclosures of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments.” On July 13, 2005, in connection with a $20.0 million loan
agreement with a third party finance company with an adjustable interest rate
equal to the greater of 6.75%, or the sum of the LIBOR rate plus 4.0% (2.75% at
June 30, 2009), we entered into a rate cap agreement which caps the LIBOR rate
at 5.5%. This agreement terminated effective August 10, 2008. In addition, we
are exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates.
  We are
exposed to financial market risks, including changes in foreign currency
exchange rates and interest rates. The following table presents the principal
cash flows by year of maturity for our total debt obligations held at June 30,
2009 (in thousands):
  Expected Maturity Date2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014
                
                
                Thereafter
                
                
                TotalFixed
      rate debt
                
                $
                —
                
                
                $
                20,000
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                20,000Variable
      rate debt
                
                $
                —
                
                
                $
                34,950
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                34,950
  Based on
borrowing rates currently available to use for loans with similar terms, the
carrying value of our debt obligations approximates fair value.
  ITEM4.CONTROLS AND
PROCEDURES
  The term
“disclosure controls and procedures” refers to the controls and other procedures
of a company that are designed to ensure that information required to be
disclosed by the company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported, within required time periods.
Disclosure controls and procedures, include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the
reports the Company files or submits under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
  Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of our
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-15(b) as of the end of the period covered by this
Report.  Based on this evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of June 30, 2009, our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic reports with the SEC. 
There have been no significant changes in our internal controls or in other
factors that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  20
 Table of Contents
 
 PARTII -
OTHER INFORMATION
 ITEM1.LEGAL PROCEEDINGS
 On
January 31, 2007, Valence filed a claim against Phostech Lithium Inc. in
the Federal Court in Canada (Valence Technology, Inc. v. Phostech Lithium
Inc. Court File No. T-219-07) alleging infringement of Valence Canadian
Patent 2,395,115. Subsequently, on April 2, 2007, Valence filed an amended
claim alleging infringement of its recently granted Canadian Patents 2,483,918
and 2,466,366. The action is in the discovery stage. The Company is seeking
monetary damages and injunctive relief for the acts of Phostech in
manufacturing, using and selling phosphate cathode material that infringes the
asserted Valence Canadian Patents.
  On
February 14, 2006, Hydro-Quebec filed an action against the Company in the
United States District Court for the Western District of Texas (Hydro-Quebec v.
Valence Technology, Civil Action No. A06CA111). In its amended complaint
filed April 13, 2006, Hydro-Quebec alleges that Saphion ® I Technology, the
technology utilized in all of the Company’s commercial products, infringes U.S.
Patent Nos. 5,910,382 and 6,514,640 exclusively licensed to Hydro-Quebec.
Hydro-Quebec’s complaint seeks injunctive relief and monetary damages. The
action is in the initial pleading state and the Company has filed a response
denying the allegations in the amended complaint. The action had been stayed by
the Court pending a final determination of the two reexaminations by the USPTO
wherein the two patents were amended.
  We are
subject, from time to time, to various claims and litigation in the normal
course of business. In our opinion, all pending legal matters will not have a
material adverse impact on our consolidated financial statements.
  ITEM1A.RISK FACTORS
  We
disclose risk factors in Item 1A of our Annual Report on Form 10-K for the
fiscal year ended March 31, 2009, filed with the SEC on June 5,
2009.  We do not believe there have been any changes which would
constitute material changes from the risk factors so previously
disclosed
  ITEM2.UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
  None.
  ITEM3.DEFAULTS UPON SENIOR
SECURITIES
  None.
  ITEM4.SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
  None.
  ITEM5.OTHER INFORMATION
  None.
  21
 Table of Contents
  ITEM6.EXHIBITS
  The
following exhibits are included as part of this filing and incorporated herein
by this reference:
  Number
                
                Description
      of Exhibit
                
                Method
      of Filing3.1
                
                Second
      Restated Certificate of Incorporation of the Company
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed
      with the Securities and Exchange Commission on March 27,
      1992.3.2
                
                Amendment
      to the Second Restated Certificate of Incorporation of the
      Company
                
                Incorporated
      by reference to the exhibit so described in the Company’s Schedule 14A
      filed with the Securities and Exchange Commission on January 28,
      2000.3.3
                
                Certificate
      of Designations, Preferences and Rights of Series C-1 Convertible
      Preferred Stock
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated November 30, 2004, filed with the Securities
      and Exchange Commission on December 1, 2004.3.4
                
                Certificate
      of Designations, Preferences and Rights of Series C-2 Convertible
      Preferred Stock
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated November 30, 2004, filed with the Securities
      and Exchange Commission on December 1, 2004.3.5
                
                Fourth
      Amended and Restated Bylaws of the Company
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated January 18, 2008, filed with the Securities
      and Exchange Commission on January 22, 2008.4.1
                
                Warrant
      dated January 4, 2002 to Berg & Berg Enterprises, LLC
                
                Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, filed with
      the Securities and Exchange Commission on February 19,
    2002.4.2
                
                Warrant
      to Purchase Common Stock, issued June 2, 2003 to Riverview Group
      LLC
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated June 2, 2003, and filed with the Securities and Exchange
      Commission on June 3, 2003.4.3
                
                Loan
      Agreement between the Company and Baccarat Electronics, Inc., dated July
      17, 1990
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.4
                
                Amendment
      No. 1 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.5
                
                Amendment
      No. 2 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.6
                
                Amendment
      No. 3 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.7
                
                Amendment
      No. 4 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Annual Report on
      Form 10-K for the fiscal year ended March 31, 2003, filed with the
      Securities and Exchange Commission on June 30,
  2003.  22
 Table of Contents
  Number
                
                Description
      of Exhibit
                
                Method
      of Filing4.8
                
                Amendment
      No. 5 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated July 27, 1998, and filed with the Securities and
      Exchange Commission on August 4, 1998.4.9
                
                Amendment
      No. 6 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg
      Enterprises LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Annual Report on
      Form 10-K for the fiscal year ended March 31, 2003, filed with the
      Securities and Exchange Commission on June 30, 2003.4.10
                
                Second
      Amended Promissory Note dated November 27, 2000 issued by the Company to
      Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated December 11, 1998, and filed with the Securities and
      Exchange Commission on December 21, 1998.4.11
                
                Amendment
      No. 7 to Original Loan Agreement between the Company and Berg & Berg
      Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated
      October 10, 2001
                
                Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.12
                
                Amendment
      No. 8 to Original Loan Agreement and Amendment to Second Amended
      Promissory Note between the Company and Berg & Berg Enterprises, LLC
      (previously with Baccarat Electronics, Inc.), dated February 11,
      2002
                
                Incorporated
      by reference to the exhibit so described in the Company’s Annual Report on
      Form 10-K for the fiscal year ended March 31, 2002, filed with the
      Securities and Exchange Commission on July 1, 2002.4.13
                
                Loan
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
                
                Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.14
                
                Security
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
                
                Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.15
                
                Promissory
      Note dated October 5, 2001 issued by the Company to Berg & Berg
      Enterprises, LLC
                
                Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.16
                
                Amendment
      to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment
      No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990
      Baccarat Loan Agreement)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended September 30, 2002, filed with
      the Securities and Exchange Commission on November 14,
    2002.4.17
                
                Amendment
      to Loan Agreements with Berg & Berg dated October 21, 2004 (Amendment
      No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990
      Baccarat Loan Agreement)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated November 3, 2004, filed with the Securities and
      Exchange Commission on November 5, 2004.4.18
                
                Warrant
      to Purchase Common Stock, issued July 13, 2005 (SFT I,
    Inc.)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.  23
 Table of Contents
  Number
                
                Description
      of Exhibit
                
                Method
      of Filing4.19
                
                Warrant
      to Purchase Common Stock, issued July 13, 2005 (Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.20
                
                Option
      Agreement, dated as of July 8, 2005, by and between Valence Technology,
      Inc. and James R. Akridge
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 15, 2005, filed with the Securities and Exchange
      Commission on July 18, 2005.4.21
                
                Amendment
      No. 11 and Amendment No. 3 to Loan Agreements, dated as of July 1,
      2005
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 1, 2005, filed with the Securities and Exchange
      Commission on July 6, 2005.4.22
                
                Amendment
      No. 12 and Amendment No. 4 to Loan Agreements, dated as of July 13,
      2005
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.23
                
                Amendment
      No. 13 and Amendment No. 5 to Loan Agreements, dated as of June 12,
      2008
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated June 12, 2008, filed with the Securities and Exchange
      Commission on June 16, 2008.10.1
                
                Valence
      Technology, Inc. 2009 Equity Incentive Plan
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated May 6, 2009, filed with the Securities and Exchange
      Commission on May 6, 2009.10.2
                
                Amendment
      No. 1 to At Market Issuance Sales Agreement, dated July 2, 2009, by and
      between Valence Technology, Inc. and Wm Smith & Co.
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 6, 2009, filed with the Securities and Exchange
      Commission on July 6, 2009.31.1
                
                Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
                
                Filed
      herewith.31.2
                
                Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
                
                Filed
      herewith.32.1
                
                Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
                
                Filed
      herewith.32.2
                
                Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
                
                Filed
      herewith.
  24
 Table of Contents
  SIGNATURE
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereto
duly authorized.
  VALENCE
      TECHNOLOGY, INC.Date:
      August 7, 2009
                  By:
                  /s/ Robert L. KanodeRobert L. Kanode
                    Chief
      Executive Officer
  25
 Table of Contents
  EXHIBIT
INDEX
  The
following exhibits are included as part of this filing and incorporated herein
by this reference:
  Number
                
                Description
      of Exhibit
                
                Method
      of Filing3.1
                
                Second
      Restated Certificate of Incorporation of the Company
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed
      with the Securities and Exchange Commission on March 27,
      1992.3.2
                
                Amendment
      to the Second Restated Certificate of Incorporation of the
      Company
                
                Incorporated
      by reference to the exhibit so described in the Company’s Schedule 14A
      filed with the Securities and Exchange Commission on January 28,
      2000.3.3
                
                Certificate
      of Designations, Preferences and Rights of Series C-1 Convertible
      Preferred Stock
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated November 30, 2004, filed with the Securities
      and Exchange Commission on December 1, 2004.3.4
                
                Certificate
      of Designations, Preferences and Rights of Series C-2 Convertible
      Preferred Stock
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated November 30, 2004, filed with the Securities
      and Exchange Commission on December 1, 2004.3.5
                
                Fourth
      Amended and Restated Bylaws of the Company
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated January 18, 2008, filed with the Securities
      and Exchange Commission on January 22, 2008.4.1
                
                Warrant
      dated January 4, 2002 to Berg & Berg Enterprises, LLC
                
                Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, filed with
      the Securities and Exchange Commission on February 19,
    2002.4.2
                
                Warrant
      to Purchase Common Stock, issued June 2, 2003 to Riverview Group
      LLC
                
                Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated June 2, 2003, and filed with the Securities and Exchange
      Commission on June 3, 2003.4.3
                
                Loan
      Agreement between the Company and Baccarat Electronics, Inc., dated July
      17, 1990
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.4
                
                Amendment
      No. 1 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 15, 1991 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.5
                
                Amendment
      No. 2 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated March 24, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.6
                
                Amendment
      No. 3 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated August 17, 1992 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Registration
      Statement on Form S-1 (File No. 33-46765), as amended, filed with the
      Securities and Exchange Commission on March 27, 1992.4.7
                
                Amendment
      No. 4 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated September 1, 1997 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                
                Incorporated
      by reference to the exhibit so described in the Company’s Annual Report on
      Form 10-K for the fiscal year ended March 31, 2003, filed with the
      Securities and Exchange Commission on June 30,
  2003.  26
 Table of Contents
   Number
                                                        
                                                        Description
      of Exhibit
                                                        
                                                        Method
      of Filing4.8
                                                        
                                                        Amendment
      No. 5 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated July 17, 1998 (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated July 27, 1998, and filed with the Securities and
      Exchange Commission on August 4, 1998.4.9
                                                        
                                                        Amendment
      No. 6 to Loan Agreement between the Company and Baccarat Electronics,
      Inc., dated November 27, 2000 (subsequently transferred to Berg & Berg
      Enterprises LLC)
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Annual Report on
      Form 10-K for the fiscal year ended March 31, 2003, filed with the
      Securities and Exchange Commission on June 30, 2003.4.10
                                                        
                                                        Second
      Amended Promissory Note dated November 27, 2000 issued by the Company to
      Baccarat Electronics, Inc. (subsequently transferred to Berg & Berg
      Enterprises, LLC)
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K dated December 11, 1998, and filed with the Securities and
      Exchange Commission on December 21, 1998.4.11
                                                        
                                                        Amendment
      No. 7 to Original Loan Agreement between the Company and Berg & Berg
      Enterprises, LLC (previously with Baccarat Electronics, Inc.), dated
      October 10, 2001
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.12
                                                        
                                                        Amendment
      No. 8 to Original Loan Agreement and Amendment to Second Amended
      Promissory Note between the Company and Berg & Berg Enterprises, LLC
      (previously with Baccarat Electronics, Inc.), dated February 11,
      2002
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Annual Report on
      Form 10-K for the fiscal year ended March 31, 2002, filed with the
      Securities and Exchange Commission on July 1, 2002.4.13
                                                        
                                                        Loan
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.14
                                                        
                                                        Security
      Agreement dated October 5, 2001 between the Company and Berg & Berg
      Enterprises, LLC
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.15
                                                        
                                                        Promissory
      Note dated October 5, 2001 issued by the Company to Berg & Berg
      Enterprises, LLC
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended December 31, 2001, and filed
      with the Securities and Exchange Commission on February 19,
      2002.4.16
                                                        
                                                        Amendment
      to Loan Agreements with Berg & Berg dated November 8, 2002 (Amendment
      No. 1 to October 5, 2001 Loan Agreement and Amendment No. 9 to 1990
      Baccarat Loan Agreement)
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Quarterly Report
      on Form 10-Q for the fiscal quarter ended September 30, 2002, filed with
      the Securities and Exchange Commission on November 14,
    2002.4.17
                                                        
                                                        Amendment
      to Loan Agreements with Berg & Berg dated October 21, 2004 (Amendment
      No. 2 to October 5, 2001 Loan Agreement and Amendment No. 10 to 1990
      Baccarat Loan Agreement)
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated November 3, 2004, filed with the Securities and
      Exchange Commission on November 5, 2004.4.18
                                                        
                                                        Warrant
      to Purchase Common Stock, issued July 13, 2005 (SFT I,
    Inc.)
                                                        
                                                        Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15,
2005.
  27
 Table of Contents
  Number
                                                              
                                                              Description
      of Exhibit
                                                              
                                                              Method
      of Filing4.19
                                                              
                                                              Warrant
      to Purchase Common Stock, issued July 13, 2005 (Berg & Berg
      Enterprises, LLC)
                                                              
                                                              Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.20
                                                              
                                                              Option
      Agreement, dated as of July 8, 2005, by and between Valence Technology,
      Inc. and James R. Akridge
                                                              
                                                              Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 15, 2005, filed with the Securities and Exchange
      Commission on July 18, 2005.4.21
                                                              
                                                              Amendment
      No. 11 and Amendment No. 3 to Loan Agreements, dated as of July 1,
      2005
                                                              
                                                              Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 1, 2005, filed with the Securities and Exchange
      Commission on July 6, 2005.4.22
                                                              
                                                              Amendment
      No. 12 and Amendment No. 4 to Loan Agreements, dated as of July 13,
      2005
                                                              
                                                              Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 13, 2005, filed with the Securities and Exchange
      Commission on July 15, 2005.4.23
                                                              
                                                              Amendment
      No. 13 and Amendment No. 5 to Loan Agreements, dated as of June 12,
      2008
                                                              
                                                              Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated June 12, 2008, filed with the Securities and Exchange
      Commission on June 16, 2008.10.1
                                                              
                                                              Valence
      Technology, Inc. 2009 Equity Incentive Plan
                                                              
                                                              Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated May 6, 2009, filed with the Securities and Exchange
      Commission on May 6, 2009.10.2
                                                              
                                                              Amendment
      No. 1 to At Market Issuance Sales Agreement, dated July 2, 2009, by and
      between Valence Technology, Inc. and Wm Smith & Co.
                                                              
                                                              Incorporated
      by reference to the exhibit so described in the Company’s Current Report
      on Form 8-K, dated July 6, 2009, filed with the Securities and Exchange
      Commission on July 6, 2009.31.1
                                                              
                                                              Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
                                                              
                                                              Filed
      herewith.31.2
                                                              
                                                              Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to Rule 13a-14
      and 15d-14 of the Securities Exchange Act of 1934
                                                              
                                                              Filed
      herewith.32.1
                                                              
                                                              Certification
      of Robert L. Kanode, Principal Executive Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
                                                              
                                                              Filed
      herewith.32.2
                                                              
                                                              Certification
      of Ross A. Goolsby, Principal Financial Officer, pursuant to 18 U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002
                                                              
                                                              Filed
      herewith.
   
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