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KIOR > SEC Filings for KIOR > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for KIOR INC


9-Aug-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements as of December 31, 2012, the notes accompanying those financial statements and management's discussion and analysis as contained in our Annual Report on Form 10-K, or Annual Report, filed with the SEC on March 18, 2013 and in conjunction with the unaudited condensed consolidated financial statements and notes in Item 1 of Part I of this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various important factors, including those discussed below and in the section entitled "Risk Factors" included in Item 1A of Part II below and in Item 1A of Part I of our Annual Report. Due to the fact that we have generated only limited revenue to date, we believe that the financial information contained in this report is not indicative of, or comparable to, the financial profile that we expect to have if and when we begin to generate significant revenues. We undertake no obligation to update publicly any forward-looking statements, even if new information becomes available or other events occur in the future, except to the extent required by law.

Overview

We are a next-generation renewable fuels company. We have developed a proprietary catalytic process that allows us to produce cellulosic gasoline and diesel from abundant, lignocellulosic biomass. Our cellulosic gasoline and diesel are true hydrocarbon fuels which are similar to their traditional petroleum-based counterparts and yet we estimate they will result in over 60% less life cycle greenhouse gas emissions. While other renewable fuels are derived from soft starches, such as corn starch or cane sugar, for ethanol, or from soy and other vegetable oils for biodiesel, cellulosic fuel is derived from lignocellulose found in wood, grasses and the non-edible portions of plants. Our biomass-to-cellulosic fuel technology platform combines our proprietary catalyst systems with fluid catalytic cracking, or FCC, processes that have been used in crude oil refineries to produce gasoline for over 60 years.

In April 2012, we mechanically completed our initial-scale commercial production facility in Columbus, Mississippi. This first facility is designed to produce up to 13 million gallons of cellulosic diesel and gasoline per year. During the fourth quarter of 2012, we successfully commissioned our proprietary biomass fluid catalytic cracking, or BFCC, operation at the Columbus facility, and produced our first "on spec" cellulosic intermediate oil in limited quantities. In the first quarter of 2013, we successfully commissioned the Columbus plant's hydrotreater and fractionation units, and began our first cellulosic diesel and gasoline shipments in March 2013 and June 2013, respectively. We have had limited continuous production at our Columbus facility and have not yet reached "steady state" production.

We currently intend to begin construction of our next commercial production facility during the first quarter of 2014, which we expect will be either an expansion of our production capabilities in Columbus, Mississippi through the construction of a second initial scale commercial production facility or the construction of a standard commercial production facility in Natchez, Mississippi, subject to our ability to raise capital. If we build our next commercial production facility adjacent to our current initial scale commercial facility in Columbus, Mississippi, we believe it will be able to produce up to 13 million gallons of cellulosic diesel and gasoline per year, approximately the same amount of our current Columbus facility. If we build our next commercial production facility in Natchez, Mississippi, we believe it will be able to produce up to 40 million gallons of cellulosic diesel and gasoline per year, approximately three times the amount of our current Columbus facility. We believe the standard scale commercial facility will be the model for our standard commercial facilities in order to take advantage of economies of scale. Our business plan contemplates that we will need to raise additional funds to build our next commercial production facilities and subsequent facilities, continue the development of our technology and products and commercialize any products resulting from our research and development efforts.

We were incorporated and commenced operations in July 2007. Since our inception, we have operated as a development stage company, performing extensive research and development to develop, enhance, refine and commercialize our biomass-to-cellulosic fuel technology platform. Until recently, we have focused our efforts on research and development and the construction of our Columbus facility. As a result, we have generated $265.4 million of operating losses and an accumulated deficit of $296.6 million from our inception through June 30, 2013. We expect to continue to incur operating losses through at least 2015 as we continue into the commercialization stage of our business. We 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. The lack of any committed sources of financing other than the remaining availability under our Loan and Security Agreement with 1538731 Alberta Ltd. as agent and lender, 1538716 Alberta Ltd. as lender, who we refer to collectively as the Alberta Lenders, and KFT Trust, Vinod Khosla, Trustee, as lender, who we refer to as Khosla, raises substantial doubt about our ability to continue as a going concern.


Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses and related disclosures. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies are the most critical to a full understanding and evaluation of our reported financial results and reflect the more significant judgments and estimates that we use in the preparation of our consolidated financial statements.

Inventories

Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of cost or net realizable market value. Inventories, which consist of cellulosic gasoline, diesel and fuel oil, renewable crude oil, renewable cellulosic biomass (primarily pine logs and wood chips), and catalyst, are categorized as finished goods, work-in-process or raw material inventories. Inventory costs include transportation, chipping and overhead costs incurred during production.

Impairment of Long-Lived Assets and Intangible Assets

We assess impairment of long-lived assets, including intangible assets, on at least an annual basis and test long-lived assets for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to, significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; a forecast of continuing losses associated with the use of the asset; or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

Recoverability is assessed by using undiscounted future net cash flows of assets grouped at the lowest level for which there are identifiable cash flows independent of the cash flows of other groups of assets. If the undiscounted future net cash flows are less than the carrying amount of the asset, the asset is deemed impaired. The amount of the impairment is measured as the difference between carrying value and the fair value of the asset.

The majority of our long-lived assets, other than intangible assets, consist of our initial-scale commercial production facility, demonstration unit, and pilot unit. The demonstration and pilot units are variations of common refinery equipment used in technology development and scale-up of processes that have been scaled and modified for our research and development purposes. Our intangible assets consist of purchased biomass conversion technology and technology licenses. Given our history of operating losses, we evaluated the recoverability of the book value of our property, plant and intangible assets by performing an undiscounted forecasted cash flow analysis. Based on our analysis, the sum of the undiscounted cash flows is in excess of the book value of the property, plant and equipment and intangible assets. Accordingly, no impairment charges have been recorded during the period from July 23, 2007 (date of inception) through June 30, 2013.


Our undiscounted cash flow analysis involves significant estimates and judgments. Although our cash flow forecasts are based on assumptions that are consistent with our plans, there is significant exercise of judgment involved in determining the cash flow attributable to a long-lived asset over its estimated remaining useful life. Our estimates of anticipated cash flows could be reduced significantly in the future. As a result, the carrying amounts of our long-lived assets could be reduced through impairment charges in the future. Changes in estimated future cash flows could also result in a shortening of the estimated useful life of long-lived assets, including intangibles, for depreciation and amortization purposes.

Stock-Based Compensation

Compensation cost for grants of all share-based payments is based on the estimated grant date fair value. We attribute the value of share-based compensation to expense using the straight-line method. We estimate the fair value of our share-based payment awards using the Black-Scholes option-pricing model, which we refer to as the Black-Scholes model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of certain assumptions, including assumptions relating to the risk-free interest rate, the expected term and expected volatility which materially affect the fair value estimates. The risk-free interest rate was based on the market yield currently available on United States Treasury securities with maturities approximately equal to the option's expected term. Expected term represents the period that our stock-based awards are expected to be outstanding. The simplified method was used to calculate the expected term. Historical share option exercise experience does not provide a reasonable basis upon which to estimate expected term, as we are a development stage company and fair market value of shares granted changed from our historical grants as a result of our initial public offering in June 2011. The expected volatility was based on the historical stock volatilities of several comparable publicly-traded companies over a period equal to the expected terms of the options, as we do not have a long trading history to use to estimate the volatility of our own common stock. Our expected dividend yield was assumed to be zero as we have not paid, and do not anticipate paying, cash dividends on our shares of common stock.

We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Quarterly changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense, as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements.

We will continue to use judgment in evaluating the expected volatility, lives, forfeiture and dividend rate related to our stock-based compensation on a prospective basis and incorporating these factors into our option-pricing model.

Each of these inputs is subjective and generally requires significant management and director judgment to determine. If, in the future, we determine that another method for calculating the fair value of our stock options is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate expected volatility or expected term, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected terms generally result in an increase to stock-based compensation expense determined at the date of grant.

Income Taxes

We are subject to income taxes in the United States. We use the liability method of accounting for income taxes, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.

We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expenses for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.


Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. We recognize a valuation allowance against our net deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. At June 30, 2013, we had a full valuation allowance against all of our deferred tax assets, including our net operating loss carryforwards.

We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Any adjustment to the deferred tax asset valuation allowance would be recorded in the income statement for the periods in which the adjustment is determined to be required.

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available. We believe that it is more likely than not that our income tax positions and deductions will be sustained following an audit. Therefore, we have not recorded any liabilities in any of the periods presented in the consolidated financial statements resulting from uncertain tax positions taken or expected to be taken in our tax returns.

Common Stock Warrants

We estimate the fair value of our common stock warrants using the Black-Scholes model. The risk-free interest rate was based on the market yield currently available on United States Treasury securities with maturities approximately equal to the warrant's expected term. Expected term represents the period that our common stock warrants are expected to be outstanding. In the case of our common stock warrants issued under the Loan and Security Agreement the warrants generally have a term of seven years. The expected volatility was based on the historical stock volatilities of several comparable publicly-traded companies over a period equal to the expected terms of the warrants, as we do not have a long trading history to use to estimate the volatility of our own common stock. Our expected dividend yield was assumed to be zero as we have not paid, and do not anticipate paying, cash dividends on our shares of common stock.

We will continue to use judgment in evaluating the expected volatility, lives, and dividend rate related to our common stock warrants on a prospective basis and incorporating these factors into our warrant-valuation model.

Results of Operations

Three Months Ended June 30, 2013 compared to the Three Months Ended June 30, 2012

Revenues



                                                 Three Months Ended June 30,                 Change
                                                  2013                    2012              $         %
                                                                 (Dollars in thousands)
Revenues:
Product revenue                            $           189         $             -           189       N/A
Renewable identification number revenue                 50                       -            50       N/A

Total revenues                             $           239         $             -     $     239


Product revenue. Our product revenue was $189,000 for the three months ended June 30, 2013 compared to zero for the same period in 2012. Product revenue was generated by our cellulosic gasoline, diesel, and fuel oil production and shipments from our initial scale commercial production facility in Columbus.

Renewable identification number revenue. Our renewable identification number revenue was $50,000 for the three months ended June 30, 2013 compared to zero for the same period in 2012. We generated cellulosic gasoline and diesel RINs in connection with our cellulosic gasoline and diesel shipments from our initial scale commercial production facility in Columbus, and we sold the RINs to the purchaser of the shipment.

We expect that our revenues from sales of cellulosic gasoline, diesel, fuel oil and RINs will be limited and unpredictable, at least in the near term, as we continue bringing our initial-scale commercial production facility to steady state operations. We also expect that our revenues will be subject to price fluctuations, including the prices we obtain from different customers for our cellulosic gasoline, diesel and fuel oil and RINs under our off-take agreements or spot sale arrangements. All revenues in the three months ended June 30, 2013 are attributable to customers in the United States.

Operating Expenses



                                            Three Months Ended June 30,                  Change
                                             2013                 2012                             %
                                                             (Dollars in thousands)
Operating expenses:
Cost of product revenue                 $       15,088       $            -     $   15,088            N/A
Research and development expenses                8,572                9,280           (708 )          (8% )
General and administrative expenses              7,865               13,694         (5,829 )         (43% )

Total operating expenses                $       31,525       $       22,974     $    8,551

Cost of product revenue. Our cost of product revenue was $15.1 million for the three months ended June 30, 2013 as compared to zero for the same period in 2012. Although the Columbus facility has not yet achieved steady state production, because in March 2013 we produced finished products and had our first cellulosic diesel shipment from the facility, we placed it into service. 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. Startup costs for 2012 continue to be included in general and administrative expenses, as they were incurred prior to placing the plant into service. Cost of product revenue, including incremental costs incurred in connection with our efforts to achieve steady state operations, primarily consists of: $3.8 million of repair and maintenance; $2.2 million relating to depreciation of the facility; $1.9 million of inventory charges; $1.7 million of utility usage such as natural gas, electricity, and water; $1.6 million for payroll and related expenses; $1.2 million for leased equipment to operate the facility; $0.6 million for consultants; $0.6 million for disposal fees; and the remaining operating costs relate to items such as production chemicals, supplies, property taxes, property insurance, and freight costs incurred in operations.

Research and Development Expenses. Our research and development expenses decreased by $708,000, or 8%, for the three months ended June 30, 2013 as compared to the same period in 2012. The decrease was primarily due to a decrease of $452,000 in laboratory expenses and supplies in connection with biomass quality testing efforts. The decrease to research and development expense was also due to a decrease of $257,000 in operating costs associated with our research and development facilities, which include repairs, maintenance, utilities, feedstock and disposal costs.

General and Administrative Expenses. Our general and administrative expenses decreased by $5.8 million, or 43%, for the three months ended June 30, 2013 as compared to the same period in 2012. This decrease was primarily the result of $6.0 million of start-up costs incurred at our initial-scale commercial production facility in Columbus, Mississippi during the three months ended June 30, 2012. As noted in cost of product revenue above, during the three months ended June 30, 2013, costs previously recorded to general and administrative as start-up costs are now included in cost of product revenue. Our general and administrative expenses that are not related to our initial-scale commercial production facility remained consistent for the three months ended June 30, 2013 compared to the same period in 2012.


Other Income (Expense), Net



                                           Three Months Ended June 30,                 Change
                                            2013                 2012                            %
                                                            (Dollars in thousands)
Other income (expense), net:
Interest income                         $          -         $          7     $       (7 )          100 %
Interest expense, net of amounts
capitalized                                   (7,208 )                  -          7,208            N/A

Other income (expense), net             $     (7,208 )       $          7     $    7,215

Interest Income. Interest income decreased by $7,000 for the three months ended June 30, 2013 as compared to the same period in 2012. The decrease is primarily due to less cash on hand invested in money market accounts.

Interest Expense, Net of Amounts Capitalized. Interest expense increased by approximately $7.2 million for the three months ended June 30, 2013 compared to the same period in 2012. In March 2013, we placed our initial-scale commercial production facility in Columbus, Mississippi into service, which significantly reduced interest expense capitalized after the in-service date. Until we incur significant capital expenditures at our next commercial production facility, we expect that majority of our interest expense will not be capitalized.

Six Months Ended June 30, 2013 compared to the Six Months Ended June 30, 2012

Revenues



                                             Six Months Ended June 30,           Change
                                               2013                  2012               %
                                                       (Dollars in thousands)
Revenues:
Product revenue                           $           257           $    -       257   N/A
Renewable identification number revenue                53                -        53   N/A

Total revenues                            $           310           $    -     $ 310

Product revenue. Our product revenue was $257,000 for the six months ended June 30, 2013 compared to zero for the same period in 2012. Product revenue of approximately $205,000 was generated by our cellulosic gasoline, diesel, and fuel oil production and shipments from our initial scale commercial production facility in Columbus. The remaining product revenue of approximately $52,000 was generated from a contract whereby we agreed to sell our cellulosic diesel produced from our research and development facilities to an obligated third-party to blend with diesel. We then purchased the blended diesel from the obligated third-party for sale to one of our offtake customers for fleet testing. Revenue consisted of our fuel price plus incremental fees incurred to purchase diesel and costs to blend it with our cellulosic diesel.

Renewable identification number revenue. Our renewable identification number revenue was $53,000 for the six months ended June 30, 2013 compared to zero for the same period in 2012. We generated cellulosic gasoline and diesel RINs along with our cellulosic gasoline and diesel shipments from our initial scale commercial production facility in Columbus, and we sold the RINs to the purchaser of the shipment.

We expect that our revenues from sales of cellulosic gasoline, diesel, and fuel oil and RINs will be limited and unpredictable, at least in the near term, as we continue bringing our initial-scale commercial production facility to steady state operations. We also expect that our revenues will be subject to price fluctuations, including the prices we obtain from different customers for our cellulosic gasoline, diesel and fuel oil and RINs under our off-take agreements or spot sale arrangements. All revenues in the six months ended June 30, 2013 . . .

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