OCZ: It's Dead And Done

May.16.13 | About: OCZ Technology (OCZ)

We are in a massive secular bull market, where money seems to be falling from the sky each and every day. Whenever a company beats by an ever-so-small margin, it undergoes a massive short squeeze even if the company isn't particularly shorted. There is a lot of money out there that needs to be deployed, and investors are looking to buy quality names wherever and whenever they can. OCZ Technology Group (NASDAQ:OCZ) is the last company that you want to own in this market, and I believe with the failure yet again to file on 5/15, the company is toast, and it's only a matter of time before the stock makes new all-time lows.

We've Seen This Before

Newsflash! Did you know that OCZ Technology was actually listed on the AIM exchange in London before it was over here on the Nasdaq (NASDAQ:QQQ)? See, back then, OCZ was a memory module maker, and they tried to run this high top line growth business while racking up losses. The shares, of course, eventually lost ~96% of their value before the company removed itself from that exchange and sought a Nasdaq listing.

OCZ took in plenty of fresh investor capital while on the Nasdaq, raising well over $200M in cash from the IPO and various secondary offerings, and burning through absolutely every dollar of it. Well, the stock price is now so low that any cash raise at this point would be an exercise in futility (and not possible yet since the company hasn't filed its financials) as it would take a massive dilution in order to raise any sort of sizable amount.

That's why OCZ had to agree to loanshark-like terms to score a hit of working capital from Hercules Technology Growth Capital (NASDAQ:HTGC). Further, thanks to strong due diligence from Seeking Alpha's resident OCZ expert, Austin Craig, we know that Hercules can't actually lose since the company put itself up as collateral for the $30M loan. If OCZ pays back the loan, great - the interest rate is north of 15%. If OCZ packs it in, then Hercules gets the entire company for $30M, and could probably sell the IP for at least that, probably more given that SSD controller technology is still valuable in this day and age.

Get Out Of This Stock

The current market price suggests a market capitalization of ~$90M, or 3x what Hercules gets the company for in case of a bankruptcy. Guess what? With a 15%+ interest rate loan, negative cash flow, and products that are unnecessary in today's world of Ultrabooks and convertible tablets (OCZ doesn't play here), OCZ will not likely be able to generate positive cash, and will end up defaulting on its loan to Hercules.

If you're lucky, this stock is worth about $0.40 - $0.50 per share, but who knows how much of that value evaporates once OCZ defaults on its loan and throws in the towel? Of course, the executives have no problem continuing to drain the company with lavish base pay in light of a business that still hasn't made a dime. If these guys weren't here for the money and actually believed in this company's turnaround, they would accept a base pay of $1 and get paid the rest entirely in stock options. But no, what you have is one of the key guys from the Board of Directors who let all of this happen under his watch try to run the company without any real incentive to succeed. Best case is that he tries to sell the company, but it is probably too late at this point. With Seagate (NASDAQ:STX) and Western Digital (NYSE:WDC) all buddy-buddy with relevant, large NAND players, there's just no need for OCZ in the big leagues.

Get out of this stock before it's too late. This management team is not to be trusted, this business model not to be invested in, and this company to be avoided at all costs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.