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Looking at the press releases issued by Corel Corporation, you'd never know they were in deep trouble.

Not mentioned is the screaming headline in the April 21, 2000 National Post - Corel Running Short of Cash!

The story tells us that Corel "could run out of money in the next 90 days if its increasingly controversial merger with Inprise Corp. is not completed and if it is unable to improve its overall financial health", this from documents filed with the SEC the day before. (Corel also trades on the NYSE as CORL).

It expects that the next two quarters will be similar to the most recent quarter - a $12.4 million loss - unless sales of its software improve or it slashes costs. Corel has had to sell off some of its assets in recent months just to keep afloat. The Inprise merger, which is facing increasing resistance from Inprise shareholders, is significant because Inprise has a $250 million cash position.

An unfortunate situation like Corel's is called being cash flow negative. The company is "burning cash". Only it doesn't have money to burn.

Corel isn't the only company with cash flow problems. In fact, it's a big problem with many Internet companies. USA Today recently reported that at least three of the companies making up the 14 member e-tail microindex of its Internet 100 will run out of cash within a year if they continue to spend as they have been and profits remain elusive. Another five will be broke in less than two years.

The Burn Rate

A company's burn rate is the rate at which it spends its cash reserves. It is the difference between expenditures and revenues.

Companies raise cash in several ways. They can issue stock, borrow money, or make a profit. In the start-up phase, a company often subsists on venture capital raised or money borrowed. But in the long run, a company must make a profit to survive and prosper.

But many Internet start-ups are not generating significant revenues. And there's the rub. Some such companies had huge run-ups in stock price on expectations of success. Dr. Koop, for example, hit a high of $45 1/2 after its IPO. But as it started to run out of cash, the stock dropped to $2 3/32 on April 25th. It then renegotiated a few portal deals to slow the burn rate and the stock has since climbed marginally to $2 3/4, still a far cry from its peak.

ValueAmerica is the company most in trouble. It will run out of cash in May. EMusic.com and Egghead.com will run out within a year.

Even the biggest companies, such as Amazon.com, are burning through cash - Amazon at $25 million a month. But it has enough to last five years.

The companies slated to run out soon must re-finance if they are to survive. Peapod recently did just that with a $73 million investment from Dutch-based grocer Royal Ahold. But after the recent market turmoil in tech stocks, expect investors to get more and more leery about pouring good money after bad. Some of the Internet start-ups of the last two years are bound to go belly up.

When the automobile was a revolutionary new invention, over 450 car companies sprang up. How many remain today?

There's a message in there and the message is: unless you have money to burn, don't get burnt by the burn rate! Investing in company's without solid revenues and growth is playing with fire!

Other Links of Interest

E-tailers Run Low on Fuel - April 27, 2000 article in USA Today

Cash Clock is Ticking - a table of various stocks on the USA Today Internet 100 and their burn rates and expected burnout life expectancy

Internet Burns Cash - About.com Stocks Guide Mike Griffis wrote about the burn rate in this article from Aug. 11, 1999

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