If KiOR (KIOR), a failed biofuel producer, isn't a clear zero, I don't know what is. Any day now, the company can file for bankruptcy, as there is evidence that it is flat broke. This is especially true if the only party keeping the company alive, billionaire investor Vinod Khosla, has cut off its funding. It appears that Khosla didn't fund the $5 million KiOR expected in May. If it turns out that Khosla has given up on KiOR, the stock should quickly fall below its 52-week low, $0.33 per share, since Khosla is the company's only hope to delay bankruptcy.
Did Khosla Miss An Investment Tranche?
The whole reason why KiOR has any market cap at all is because investors are counting on Vinod Khosla to keep it afloat. They believe that since he has already invested hundreds of millions of dollars in the company over the years, he won't let it die. Khosla had recently invested $100M in October, 2013 to expand production at the Colombus plant, before the plant had to be shut down. KiOR stock soared on March 31st, when it filed that Khosla agreed to provide $25M in financing.
The agreement was for Khosla to purchase $5 million worth of convertible notes every month up to a maximum $25M investment. It's at Khosla's discretion whether to continue buying the notes, as long as certain milestones are met. From the 10-Q, these milestones are:
The performance milestones require ((i)) the Company to demonstrate that it has made material progress in implementing its business, financial, operational and technology plans, (ii) the Company to demonstrate that there is a likelihood of eventual commercial success of the Company's business plan when considered in light of both internal and external factors, including without limitation, market conditions, costs, competitive developments and an ability to secure financing for the Company and ((iii)) Khosla to believe that the purchase of additional notes is appropriate for the Company to continue its operations.
It appears that the company did not complete those milestones. When Khosla purchased $5 million worth of notes in the beginning of April, KiOR filed it here. However, it did not file in the recent 10-Q that Khosla purchased notes in May. There has been no news or indication that Khosla has decided to follow through with the next $5 million tranche in May.
In KiOR's latest 10-Q, the company reported many updates. Most of it bad news. It would have been logical to report that it received an additional $5M from Khosla, if it did. The company needs all the good news it can get. There is no reason why it wouldn't update that Khosla invested the next tranche, unless he didn't.
Is KiOR Flat Broke Right Now?
On March 31, 2014, KiOR reported cash and equivalents of $4.2M. As of April 30, 2014, it had cash and equivalents of $3.3M. Since the company received $5M from Khosla in April, that's a cash burn of $4.2M+$5M-$3.3M = $5.9M in the month of April. At this burn rate, the company is very likely flat broke right now.
Here is an article from Biomass magazine that came out on May 14th that also discusses the 10-Q and the company's dire situation.
KiOR reported for the quarter ended March 31, 2014, interest expense net of amounts capitalized of $7.1M, and total debt of around $230M, up about $5M from last quarter.
KiOR's Only Revenue Hope Is To Restart Its Columbus Facility
In the 10-Q, it says:
The Company expects to have little to no revenue in 2014, unless and until it restarts the Columbus facility.
The Company has stated it, so now that we know that getting the Columbus facility is KiOR's only hope of generating revenue, what investors should do is figure out the odds that it will get it up and running.
From the 10-Q:
While the Company has completed some of these projects and upgrades, it has elected to suspend all optimization work and bring the Columbus facility to a safe, idle state, which the Company believes will enable it to restart the facility upon the achievement of additional research and development milestones and if it is able to raise additional working capital.
From the bold print above, KiOR needs to do two things in order to restart the Columbus facility. These are 1. The achievement of additional research and development milestones, and 2. Raise additional working capital.
Let's analyze what these requirements mean:
1. The achievement of additional research and development milestones
The company needs to conduct R&D to get the Columbus facility running. This is regressing to the level of working in a lab. This means that even in KiOR's distressed state, it still has scientific issues with starting up the facility, and so, must conduct experiments to find the answer. Even if the scientists and engineers find an "answer" to their problems with the facility, it's still only a hypothetical answer and could be wrong.
From the 10-Q:
Funding the Company's research and development and overhead costs, which it expects to be approximately $35 million.
What kind of investor, including Khosla, would put money into KiOR to fund its R&D facility? If KiOR skimps on the funding of its R&D, then it's less likely it will find the right answer. And even if the scientists do find an answer, and even if it's right, the facility will still probably run inefficiently and continue to be unprofitable.
2. Raise additional working capital
From the 10-Q:
The Company's material liquidity needs over the next twelve months from April 30, 2014 consist of the following:
Funding the Company's research and development and overhead costs, which it expects to be approximately $35 million. The Company does not expect to generate sufficient revenue from the sale of its cellulosic fuel to allow it to fund these costs from internally generated cash from operations until the Company constructs its first standard commercial production facility and it is operational.
Funding the Company's debt service costs, which it expects to be approximately $3.8 million, assuming it continues to elect to pay-in-kind interest due under the Loan and Security Agreement (as defined below).
Funding the current operating costs to maintain the Columbus facility in near ready startup mode, which the Company expects to be approximately $16 million. The Company expects to have a little to no revenue from its Columbus facility over the next 12 months, unless and until it restarts the facility.
The above funding is what the company says it requires to survive over the next 12 months starting April 30th. It totals $54.8M. Where will it get the money? Khosla is only committing $25M, and might even stop at the $5M he invested last month.
The Gates Foundation, which has an investment in KiOR, won't provide any more funds to KiOR. From the 10-Q:
The Company's private placements with Khosla and Gates involve two tranches. The commitment by Gates to close a second tranche will terminate on June 30, 2014 and the Company does not expect to be able to satisfy the closing conditions for that tranche in time to meet the deadline. Any funds from the second tranche of the Khosla private placement is unlikely to come in the near term because in order to close the second tranche the Company must, among other things, raise $400 million from one or more offerings, private placements or other financing transactions.
Since it's impossible for the company to raise $400M, then the Gates Foundation is finished investing in the company. This leaves Khosla as the only saving grace for KiOR. If and when he is done, the company is done.
The Problems Stated In The 10-Q Are New
The issues outlined in the 10-Q are much worse than previously reported in the 10-K issued in March. I was surprised that the stock didn't sell-off more when the 10-Q came out.
From the 10-K:
These issues have caused the Columbus facility to run significantly below its nameplate capacity for biomass of 500 bone dry tons per day and limited our ability to produce cellulosic gasoline and diesel. We have identified and intend to implement changes to the BFCC, hydrotreater and wood yard that we believe will alleviate these issues. In terms of yield, we have identified additional enhancements that we believe will improve the overall yield of transportation fuels from each ton of biomass from the Columbus facility, which has been lower than expected due to a delay introducing our new generation of catalyst to the facility and mechanical failures impeding desired chemical reactions in the BFCC reactor. In terms of overall process efficiency and reliability, we have previously generated products with an unfavorable mix that includes higher percentages of fuel oil and off specification product. Products with higher percentages of fuel oil result in lower product and RIN (as defined below) revenue and higher overall costs. We have identified and intend to implement changes that we believe will further optimize our processes and increase reliability and on-stream percentage throughout our Columbus facility. We are also aiming to make reductions to our cost structure by, among other things, decreasing natural gas consumption by the facility. We do not expect to complete these optimization projects until we achieve additional research and development milestones and receive additional financing.
The above quote from the 10-K suggests that the company realizes what the problems are with the facility, and knows how to solve it. It mentions that research and development milestones will need to be met, however, there is no mention that the R&D costs will be $35M. And additionally, it didn't mention the $16M needed to keep the Columbus facility in an idle state. Both were only mentioned in the recent 10-Q. $51M is a good chunk of money for any institution, even Khosla, to risk.
Disclosure: I am short KiOR. 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.