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Summary

  • KIOR is on life support, just surviving off Khosla's $5 million investment per month.
  • KiOR needs $51.5 million more cash to survive this year, much more than Khosla's $20 million commitment.
  • Khosla isn't buying KIOR stock, he's buying secured senior bonds.
  • One can argue that KiOR is effectively going through bankruptcy right now, and Khosla is buying up the distressed assets with the secured bond buying.

KiOR (NASDAQ:KIOR) stock ripped up a whopping 20% on Friday after news came out that billionaire investor Vinod Khosla decided to continue with another $5 million investment tranche in the company. It went as high as $0.60 per share, but has already given most of that back. Stock investors need to realize - Khosla ain't buying stock! He's buying secured senior bonds. Secured means that they are backed up with the hard assets of the company. Therefore, one can make the argument that KiOR is effectively going through bankruptcy right now! Khosla is prematurely buying the assets through secured bonds before the official bankruptcy proceedings begin.

Khosla Is Backing Biofuel, Not KIOR Shareholders

No one can doubt that Khosla still likes the biofuel industry and is trying to make it work. As aedius commented in my last article:

It should be clear to all investors that Khosla is committed to advancing the biofuel industry.

But what Khosla is NOT committed to, is KIOR's shareholders. Khosla is just an investor, he has nothing to do with the decisions KiOR makes, or if it succeeds or not. All Khosla has the power to do is cover his own ass and buy the secured senior bonds. If shareholders want to own some KiOR and the biofuel industry, then they should be buying secured senior bonds like Khosla is doing. They shouldn't be the suckers buying the stock.

Khosla's Remaining $20 million Commitment Doesn't Cover KiOR's $51.5 Million Need

As I pointed out in my last article, from KiOR's recent 10-Q it says:

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.

That totals future expenses of $54.8 million for the twelve months after April 30th, 2014. In the 10-Q, the company reported that it had $3.3 million in cash on April 30th. That was after it had received the first $5 million tranche from Khosla. So Khosla is only committing $20 million more. That makes a shortfall of: $54.8M-$3.3M-$20M = $30.1M. Where is KIOR going to get that extra $30.1M to continue operations?

Khosla will finish investing his $25 million total investment by August. KiOR is flat broke and is just living off of Khosla's $5 million every month. I calculated in my last article that KiOR burned $5.9M in April, so they are going to have to penny pinch to make the $5M per month last. Once August comes around, if Khosla stops investing, which he probably will, KiOR will have literally no money left to continue doing anything other than filing for bankruptcy.

Khosla Is KIOR's Only Investor Now

Right now, Khosla is the only investor interested in having anything to do with KiOR. The Gates Foundation is completely done. From KiOR's recent 10-K:

"Gates Stock Purchase Agreement

On October 18, 2013, the Company entered into the Stock Purchase Agreement with Gates to purchase the Gates Shares.

The Stock Purchase Agreement contemplates the purchase of Gates Shares from the Company in two tranches. In the first tranche, which closed on October 21, 2013, Gates purchased shares of Class A Common Stock worth $7.5 million at a price per share equal to $2.3176, which is the average daily volume weighted average price of the Company's Class A Common Stock for the 20 trading days ending on October 17, 2013.

The second tranche will close if, during the period beginning on October 18, 2013 and ending on July 1, 2014, the Company receives the Project Financing Amount (which amount will include binding commitments to invest sums in the future, provided that (NYSE:I) such commitments are not subject to any conditions in the control of the committing party and (ii) such commitments are not in excess of $35 million). The Company does not expect to satisfy the necessary contingencies for this commitment by its June 30, 2014 expiration date in order to receive that financing."

The second tranche requires an investment of $400M in the company. That's an impossible number for the company to raise and so the Company says it doesn't expect to satisfy this contingency by the June 30th expiration.

When To Be Bullish On KiOR?

I would only rethink my KiOR short position if a big investor actually buys shares of the company. Buying senior secured bonds isn't showing much faith that the company will avoid bankruptcy because it's secured by the assets. The only long investors are pretty much retail investors. Stuart Peterson of Artis Capital management, a former major KIOR shareholder, had dumped the majority of his investment earlier this year.

As it is, there is very low volume for the stock, which trades at around $0.50. However, the market cap of over $50M is still very high for a stock that is clearly worth zero in my opinion. When retail investors come to their senses, which my articles help them to, the stock should drift down to below $0.30 per share pretty quickly. That is why I think it is still a compelling short today, despite the high borrow fees.

Source: Khosla Is Going To Rip The Rug Underneath KIOR Shareholders When It Files For Bankruptcy