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OCZ Technology (NASDAQ:OCZ) began the 1st steps in tightening its tourniquet with its aim to stop its hemorrhaging of cash. By reducing its global work force (among other drastic measures), OCZ hopes to buy time to reshape itself into an Fusion-io (NYSE:FIO) like enterprise outfit and at the same time high-end consumer SSD company.

The recent announcement begs the question -- are the cuts deep enough?

Announcements

Today OCZ announced they have:

1. "Discontinued approximately 150 product variations."

An excellent initial move as OCZ's line of products was far too many, confusing, and offered only small differences. Cutting down to just a few products will help the company regain focus while reducing expenses. R&D and marketing can concentrate on a few key lines and avoid being spread thin.

2. "Reduced the value category by approximately 80 percent."

Most likely this is the agility and petrol line of products. As we have stated before, OCZ has to exit the low- and middle-end of the market. The NAND producers such as Micron (NASDAQ:MU) or Toshiba will always have a cost advantage in that market. This action will help gross margins and R&D efficiency but reduce revenue sharply.

3. Began an inventory fire sale via "monetizing" the inventory.

While painful, it's best to squeeze what you can out of a product that is just sitting on the books and taking up warehouse space. Sell it now for a massive discount or risk never being able to sell it. This is probably going to cover any of the generations of products before Vertex 4 / Agility 4.

4. "Reduced the work force by 28% and its production crew by 32%."

Excluding production personnel, the Company has reduced its global workforce by approximately 28 percent. Total personnel at the Taiwan production facility, including outside contractors, has been reduced by approximately 32 percent.

Additional layoffs are in order and will move in stages. Too aggressive and all the employees jump ship. You have to allow them some hope so they will stay at the company. OCZ will need time to see how operations run on a reduced staff before making a 2nd cut. If the cuts are not aggressive enough, OCZ risks burning through its small pile of money. We expect to see more cuts in staff to reduce expenses.

5. OCZ took a restructuring charge of 1.5 million via severance pay to the employees. This comes out on average to a little over 7k per employee. Employees can take heart though that the new CEO will not be going hungry anytime soon.

The board of directors agreed to give board member-turned-CEO Schmitt 700k just for taking the role of CEO. Never mind the fact that the board was effectively sleeping on the job while the leadership was embracing its strategy of "market share at any cost." Never mind the fact the company is in a cash crunch (covered below).

Mr. Schmitt will be paid a one-time cash payment of $700,000 in recognition of a portion of the compensation he has forfeited by leaving his previous employer, which will be paid after November 30, 2012.

Mr. Schmitt will also be granted Restricted Stock Units (RSUs) equivalent to $700,000 based on the closing FMV on his date of hire. The RSUs will vest 100% on December 1, 2012

6. Announced inventory write-offs (aka disposal costs) occurring on what cannot be sold off. From the statement below this may not be confined to just the 3rd quarter.

Other disposal and restructuring costs expected largely in the third quarter of fiscal 2013 include cash and non-cash charges which the Company is currently unable to make a determination of the total amount or range of amounts expected to be incurred.

Are the Cuts Deep Enough?

OCZ had 760 employees but that figure stands at roughly 548 after a 28% cut. It simply will not be enough. We assess that the company is in the 1st round of layoffs. Cuts will take place as assessments of divisions are monitored. They will cut more fat and muscle out via a 2nd round. We would link to the 760 employee figure but OCZ has removed all employee count figures off its website.

OCZ has also stopped all hiring of new employees per its jobs web site. Given the mismanagement of the company, it is interesting to note the CFO job is no longer listed. Recently the CFO announced his intent to retire but was going to stay on until a replacement was found.

Given the capital structure (see below) of OCZ they simply cannot afford to keep 548 employees on the books unless they raise additional capital.

Financials

We really cannot trust any of the numbers we are looking at since the company is involved in various shareholder lawsuits and OCZ is investigating past quarters for accounting "issues."

Concerning the restatement of earnings, Mr. Schmitt said:

Then in regards to your last question (which is in regards to restatement), we currently are still under review process and so far have not had any indication that there will be a restatement.

That aside, we can assume the company did have 43.23 million in cash minus the 1.5 million in employee severance from today. Cash currently stands at 41.73 million minus the 700k due to the new CEO this November. We can effectively peg current known cash at 41.03 million minus what ever the company has lost in Q3/Q4.

Per the CEO

Our cash position has also declined and we've accessed our credit facility.

Credit Facility

It's safe to assume the credit facility is frozen per the below:

First and foremost, on the credit facility, we're still discussing the potential impact of these financial results and that's in regards to our bank agreement.

The company is looking to see if the losses will affect the credit facility and if they can keep it or if they will lose it. On page 47 of the Credit Agreement, it lists the terms that OCZ must meet in order to maintain the Agreement: They have to have an EBITDA of $600k for the period ending August 31st. Given the past quarters are being looked at for "issues" this may well be a problem.

If OCZ were smart they would have tapped the Wells Fargo credit line for all they could in order to preserve company capital and also to tie the bankers into the company. The more OCZ borrows, the less the bankers are inclined to give up on the company. In fact, Wells Fargo might be inclined to keep the line of credit open under new terms - rather than risk OCZ going under and taking all the money that they have borrowed with them.

It is interesting to note how long it is taking OCZ to figure out the numbers. Per the above quote, OCZ is looking at past quarters but it should take some time as no accounting firm is about to slap its name on the final report without doing a deep scrubbing of the books. No accounting firm wants to be dragged into the various lawsuits OCZ is facing.

Black Friday

OCZ obviously has deals in place for black Friday left over from the prior CEO and his sales team. Retail businesses have already spent money on print ads and creating online advertising. OCZ will have to honor the deals put in place or risk destroying relationships that are crucial for OCZ's very survival. These deals will come with sales incentives and rebates -- the very things which helped get the company in this mess.

Going Forward

OCZ was going to present at the Piper Jaffray Technology, Media, and Telecommunications Conference on November 7th. A phone call to Le Marker Meridien Hotel confirms that the conference has been canceled due to a destroyed crane and possible traffic issues associated with it. We hoped to get an update on the status of OCZ's newest SSD controller chip Barefoot 3, any NAND supply deals, and the status of OCZs newest SSD called Vector. We would really like to hear about the company's future licensing plans of any of its controller chips.

Conclusion

We are taking a wait-and-see approach to OCZ. Until the Q3 numbers are released, the company will not be in compliance with NASDAQ rules. This will bar the company from issuing more stock via a secondary. Once the company announces numbers they should be able to dilute and raise money in order to survive. While dilution is no fun, it's best to raise capital at any price rather than go under or operate in a cash crunch. Of course it's possible Wells Fargo comes to the rescue if management can convince them that the company can thrive. The company might also sell off its power supply division as it is not growing, does not fit with the company's core competency, and it is facing a very competitive landscape.

We fully expect to see more layoffs in order to realign the company to its sales.

OCZ has potential via its controller chips and possible licensing. It has potential to retool itself into an enterprise company while keeping the company alive via high-end consumer sales. Competition is fierce in the enterprise sector though as Fusion-io, STEC (NASDAQ:STEC), Violin Memory have quite a following. Even IBM (NYSE:IBM) and EMC Corporation (NYSE:EMC) are involved with solid state drives.

OCZ is only for speculators and gamblers until we know exactly how much the damage is in Quarter 3. The damage will extend into Q4 as well via Black Friday sales incentives. Due to the uncertainty of the company's future, some companies will be hesitant to place sales. We expect sales to be down for Quarter 4.

For the speculator, OCZ might be a good roll of the dice. We might revisit the company after Q3 numbers are released and more light is shed on the situation. Until then the risk is far too great for the investor.

Source: OCZ Technology: Tightening The Tourniquet Via Layoffs, But Is It Enough?

Additional disclosure: I own some OCZ Leaps.