August 25, 2013 11:31:21 AM
Editor's note: Greentech Media, an online publication devoted to covering emerging green and clean technologies, published a slightly different version of this article at greentechmedia.com.
Problems are emerging for KiOR, the Texas-based alternative fuel company that began converting wood chips to fuel at its Columbus biorefinery earlier this year.
Three weeks ago, during a conference call to announce this year's second quarter financial results, the company said it shipped 75,000 gallons of biofuel in the quarter. That is far below the range of 300,000 to 500,000 gallons that Fred Cannon, the company's president and CEO, forecasted during the company's first-quarter earnings call.
Also, KiOR noted that it "must raise capital in one or more external equity and/or debt financings by the end of September 2013 to fund the cash requirements of our ongoing operations," according to its 10-Q filing with the Securities and Exchange Commission.
But its current lack of committed sources of funding, beyond what it can tap from existing lending agreements, "raises substantial doubt about our ability to continue as a going concern," the company said.
On Tuesday, a federal class-action lawsuit was filed against KiOR in the U.S. District Court. The suit, filed in the Southern District of Texas, names KiOR, Cannon and John Karnes, the company's chief financial officer, as defendants.
The suit alleges that the defendants mislead potential shareholders and did not disclose "adverse facts about the company's business, operations and prospects" and asks for damages and interest on invested monies.
"We believe that we have strong defenses to these claims, and we intend to defend them vigorously," Kate Perez, KiOR's director of corporate communications and public relations, said in a statement to the Dispatch on Wednesday. "We have notified our insurance carrier of the claims."
The company saw its share price fall from more than $4 per share to less than $3 per share two weeks ago. It's a steep and deep decline from a high of $23.85 per share reached in the months after its June 2011 IPO.
KiOR has seen some intense scrutiny of its "Biomass Fluid Catalytic Cracking" process, the proposed technological solution to do what nature takes millions of years to do: use heat, plus a proprietary catalyst, to convert biological material into an analog of crude oil.
The company raised about $141 million in venture financing prior to its IPO, which raised $148.7 million. It also received a $75 million loan from the state of Mississippi to support the construction of the Columbus plant -- which currently employees about 100 people -- and plan to build others in the state, and received a $75 million loan in 2012 from the Khosla and Alberta-affiliated groups.
In the meantime, KiOR reported that it has accumulated $265.4 million of operating losses and an accumulated deficit of $296.6 million from its 2007 founding through June 30 of this year, and expected to continue losing money through at least 2015.
The company's financials indicate it faces an uphill climb turning a profit on its business of converting wood waste into bio-crude, and from there into diesel and gasoline. The company reported revenues of $189,000 for fuel product sales in the second quarter, but the cost of that product revenue in the same quarter ballooned to a staggering $15.1 million.
That's because, "As a result of placing the plant into service, depreciation and operating and manufacturing costs relating to the plant are now presented as cost of product revenue," the company stated.
It's important to recall that the nameplate capacity of the Columbus facility is 13 million gallons per year, or about 3.25 million gallons per quarter. That means that KiOR is faced with radically increasing the amount of fuel it's producing from its plant to offset those production costs.
Cannon said the company is now considering building a second 500-ton per day facility beside the current facility at the Island. The move would "allow us to be cash-flow positive more quickly," Cannon said.
It is only an option at this point and KiOR still plans on building a 1,500-ton per day facility in Natchez, Cannon said. The question is whether to build a second Columbus plant before the Natchez plant.
Adams County received $3.9 million in grants from the state earlier this year to fund work at the future site of the KiOR facility, according to the Natchez Democrat.
Why has KiOR failed to meet its promised production targets? During the latest conference call, Cannon said the plant had operated just under 40 days in the second quarter, but that it had been running continuously since the end of the quarter on June 30, and that KiOR hoped to produce a total of 1 million to 2 million gallons of product for the full year.
While he cited several reasons for why the plant stopped producing for periods of time in those previous three months, "Nothing about the KiOR technology prevented this run from going even longer," he said. "These are the types of start-up issues we're experiencing. And while they can be certainty be frustrating, they're all relatively small in nature."
At the same time, Greentech Media has learned from a person familiar with KiOR's technology that there may be an alternative explanation for its difficulties in meeting production targets. According to this person, the company may be having a hard time adapting the proprietary catalyst that forms the heart of its process for use with "dirty" feedstocks like wood chips, plant waste and other materials.
KiOR's catalyst derives from a precursor company called BIOeCON, and is designed to aid the process of pyrolysis, or super-heating organic matter in the absence of oxygen to break it down into a substitute for crude oil. That makes it a critical part of the process, as well as a presumably expensive part of its bill of materials.
The problem, our source said, is that these bio-materials produce a certain amount of ash and other byproducts as part of the process. This leftover material may degrade the performance of the catalyst, require it to be injected into the process more frequently than planned, and also leave residues or contaminants that must be cleaned from the bioreactor chambers more frequently than anticipated.
In response to these questions, Perez stated: "We have said on several occasions that we have had shutdowns to address issues that are not related to our proprietary technology. As we start up Columbus, we have taken the plant down and made adjustments which is typical when lining out a new refining facility, and these have not been indicative of a design issue or issue with our proprietary technology. We are continuing to line out the Columbus facility, and the technology works consistent with, or better than our expectations. This is an ongoing process and we are happy with the progress that Columbus is making."
This article includes reporting by Dispatch news editor William Browning.