Can KiOR continue as a going concern?

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.”

http://www.altenergystocks.com/archives/2014/03/_can_kior_continue_as_a_going_concern.html