Electric Cars Are Cleaner Today and Will Only Get Cleaner Tomorrow




Jim Lane

Delayed 2013 results
includes going concern statement. Future Khosla financing
contingent on milestones. Default looms as soon as April.
Financing after August unclear.

In Texas, KiOR (KIOR)
announced a $347.5M net loss for 2013, and issued a “going
concern” statement that focused on its ability to raise future
capital to sustain operations and build its next plant.

In a 10-K filing with the SEC made today, the company said that
“Currently, we have ceased work on a series of optimization
projects and upgrades at the Columbus facility and are bringing
the facility to an idle state,” and warned:

“If we are unsuccessful in finalizing definitive documentation
with Mr. Khosla on or before April 1, 2014, we will not have
adequate liquidity …This will likely cause us to default under our
existing debt and we could be forced to seek relief under the U.S.
Bankruptcy Code.”

Excerpts from the KiOR 10-K are provided below. The complete
statement is available here.

Excerpts from the KiOR statement

We have substantial doubts about our
ability to continue as a going concern. To continue as a going
concern, we must secure additional capital to provide us with
additional liquidity. Other than the Commitment from Mr. Khosla to
invest in us a cash amount of up to an aggregate of $25,000,000 in
available funds in a number of monthly borrowings of no more than
$5,000,000 per month, we have no other near-term sources of
financing.

Because the Commitment is subject to
the negotiation and execution of definitive financing documents
and the achievement of performance milestones, we cannot be
certain as to the ultimate timing or terms of this investment.

If we are unsuccessful in finalizing
definitive documentation with Mr. Khosla on or before April 1,
2014, we will not have adequate liquidity to fund our operations
and meet our obligations (including our debt payment obligations)
and we do not expect other sources of financing to be available to
us. This will likely cause us to default under our existing debt
and we could be forced to seek relief under the U.S. Bankruptcy
Code (or an involuntary petition for bankruptcy may be filed
against us). In addition, any new financing will require the
consent of our existing debt holders and may require the
restructuring of our existing debt.

If we successfully achieve our
performance milestones that allow us to receive the full
Commitment in the near term, we expect to be able to fund our
operations and meet our obligations until August 31, 2014, but
will need to raise additional funds to continue our operations
beyond that date.

During the first quarter of 2014, we
commenced a series of optimization projects and upgrades at our
Columbus facility. The optimization projects and upgrades are
targeted at improving throughput, yield and overall process
efficiency and reliability. In terms of throughput, we have
experienced issues with structural design bottlenecks and
reliability that have limited the amount of wood that we can
introduce to our BFCC system. 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 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. While we have completed some of
these projects and upgrades, we have elected to suspend further
optimization work and bring the Columbus facility to a safe, idle
state, which we believe will enable us to restart the facility
upon the achievement of additional research and development
milestones, financing and completion of the optimization work. We
do not expect to complete these optimization projects until we
achieve additional research and development milestones and receive
additional financing.

Subject to our ability to achieve
these additional research and development milestones, our ability
to raise capital, our ability to successfully complete our
optimization projects and upgrades and the success of these
projects and upgrades in improving operations at our Columbus
facility, we intend to begin construction of our next commercial
production facility, which we do not expect to occur before the
second half of 2015 at the earliest. We will also need to raise
additional capital to continue our operations, build our next
commercial production facility and subsequent facilities, continue
the development of our technology and products, commercialize any
products resulting from our research and development efforts, and
satisfy our debt service obligations.

Currently, we have ceased work on a
series of optimization projects and upgrades at the Columbus
facility and are bringing the facility to an idle state. These
projects were targeted at improving throughput, yield and overall
process efficiency and reliability and to address problems we have
had to date in the Columbus facility with structural design
bottlenecks and reliability issues, operations below nameplate
capacity, unfavorable product mix and higher costs due to overall
process inefficiencies.

As a result of this cessation of
operations, we are unable to estimate 2014 production levels.

Subject to our ability to achieve
these additional research and development milestones, our ability
to raise capital, our ability to successfully complete our
optimization projects and upgrades and the success of these
projects and upgrades in improving operations at our Columbus
facility, we intend to begin construction of our next commercial
production facility, which we do not expect to occur before the
second half of 2015 at the earliest. We will also need to raise
additional capital to continue our operations, build our next
commercial production facility and subsequent facilities, continue
the development of our technology and products, commercialize any
products resulting from our research and development efforts, and
satisfy our debt obligations.

We have generated net losses of
$347.5 million, $96.4 million and $64.1 million for the years
ended December 31, 2013, 2012 and 2011, respectively, as well as
total of $525.5 million of operating losses and an accumulated
deficit of $574.3 million from our inception through December 31,
2013. We expect to continue to incur operating losses until we
construct our first standard commercial production facility and it
is operational.

As discussed above, we have
substantial doubts about our ability to continue as a going
concern and we must raise capital in one or more external equity
and/or debt financings to fund the cash requirements of our
ongoing operations. Other than the Commitment from Mr. Khosla, all
of our other committed sources of financing are contingent upon,
among other things, our raising $400 million from one or more
offerings, private placements or other financing transactions,
which we do not expect to occur prior to the completion of the
optimization projects and upgrades at our Columbus facility.

Analyst reaction

Piper Jaffray’s Mike Ritzenthaler writes:

“We are downgrading shares of KIOR to Neutral (from Overweight)
and lowering our price target to $1 (from $3) following the
company’s 10-K filing yesterday…additional liquidity in the form
of $42.5 million of convertible debt was raised in 4Q13. In our
opinion, it no longer seems reasonable that a substantial
liquidity infusion outside of expensive ‘just in time’ insider
debt is likely over the next 12 months.

“We believe that the pace of the commercial scale-up in 2014 will
be too methodical to keep investors interested in the company’s
progress. Additionally, rising levels of expensive insider debt
will likely be the only material source of funds to compensate for
quarterly cash burn, and we see no reason to believe that covenant
issues will abate over the coming 12 months (indeed, they will
likely intensify as the ‘cash loop’ gets larger). Ultimately, we
believe that investor patience will be worn too thin before
Columbus is capable of operating at nameplate capacity, absorb all
the fixed production costs, and turn a gross profit — allowing the
company’s auditors to remove the going concern language from its
filings and finally enabling the company to pursue a healthier
balance sheet.”

Cowen & Co’s Rob Stone and James Medvedeff write:

“Q4:13 included a $196MM write-down of Columbus and Natchez
engineering work; Columbus is expected to remain idle until
R&D on improvements is completed (likely six months). A $25MM
commitment from Khosla could fund operations through August, but
more funding will be needed. We are suspending our rating and
price target due to lack of visibility on continued operations and
funding sources.”

Raymond James’ Pavel Molchanov writes:

“While we are still fans of the technology platform, we have slim
confidence in positive catalysts over the next six to 12 months,
and the prospect of equity dilution is also concerning.

“With $25 million of cash at year-end, given the commitment from
the company’s largest shareholder, KiOR also needs to raise
capital for near-term funding needs. We don’t doubt the company’s
ability to raise the funds, but there is no escaping further
near-term dilution – which is especially painful given the current
market cap. As such, the “going concern” statement included in the
10-K should not come as a major surprise – the auditors required
the statement because the company does not have committed
financing to cover a full 12 months of costs.

“The good news is that Vinod Khosla, one of Silicon Valley’s
wealthiest venture capitalists and the primary shareholder who
owns a controlling position in the stock, remains committed to the
story. The company has received a $25 million commitment in
interim funding from Khosla until additional long-term financing
can be secured. This commitment, together with cash on hand,
covers expected costs through August.”

Jim Lane is editor and
publisher  of 
Biofuels Digest where this

article

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