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Marshall Hargrave
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Former registered investment adviser rep and current entrepreneur. CFA Level 2 Candidate. Started with out NMFN before venturing out on my own. Now running an equity research company.
My company:
Bridgewater Investments
My blog:
stockpucker
  • Should Investors Cut Their Losses On KiOR? 0 comments
    Apr 29, 2014 1:32 PM | about stocks: KIOR

    Shares of KiOR, Inc. (NASDAQ:KIOR) jumped over 50% last week on news that it's received funding from Vinod Khosla, the venture capitalist.

    In early March, KiOR, the producer of biofuels, said that its financial position was weak. And if it did not resolve its funding problems by April 1st, it would be able to continue operating as a going concern. With its capital infusion, shares surged and trading volume spiked to levels that were five times the three-month daily average.

    The company reported that it had finalized a senior promissory note for up to $25 million in debt financing. The first tranche of $5 million will be purchased by KFT Trust owned by Khosla. KFT will also receive a 2014 warrant to buy 872,000 shares of common stock at a price of 57.3 cents per share. Before Khosla came to the rescue, the stock had lost 80% of its value over the last 12 months.

    The warning signs

    The company is no stranger to missing earnings guidance. It's done that often, and usually by a substantial margin. For example, the guidance for the second quarter was production in the range of 300,000 and 500,000 gallons. Actual sales for the quarter were only 75,000 gallons. It has missed practically every guidance since then too.

    People at the most senior levels of management have been leaving. There have been two sudden departures of late. First, CFO John Karnes left after giving only two days notice with a replacement nowhere in sight. There was no convincing explanation for his departure. A little later, Condoleezza Rice quit the board of directors without apparently giving notice.

    One reason for her departure could be the SEC subpoena on Jan. 28 for a formal investigation, seeking documents about its Columbus facility and the projected production levels. SEC normally conducts informal investigations before taking a step like this, so it is possible that the probe had been going on for a while. As a public figure, it is likely that Rice wanted to distance herself from any possible SEC action.

    Another red flag was raised when the company cancelled the announcement of its results for the fourth quarter and the full year. However, though the company did not issue a press release, we can gain some insight into the reason from the Annual Report filing with the SEC. The reason appears to be its reluctance to inform investors that it is losing money and finding it difficult to organize new funding for improvements in both technology and operations.

    Annual Report disclosures

    The first commercial facility in Columbus, Mississippi had to stop production at the end of 2013, and the company plans to keep the facility inoperative until productivity improvements are carried out. Even when this facility was producing, it was operating well below rated capacity. This facility, based on results from pilot plants and demonstration plants, is the only source from which substantial revenues can be generated. Khosla has likely demanded tough production milestones in return for his support, but the company's record is uninspiring.

    Bottom line

    Analysts are still bullish about the prospects of the company and, against the present price of $0.66, the price target expectations range from a mean of $2.06 to a high of $4.50. But the only thing standing between the company and extinction is the presence of Vinod Khosla. Investors should use caution when investing in KiOR.

    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. I have no business relationship with any company whose stock is mentioned in this article.

    Themes: short-ideas Stocks: KIOR
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