Last week we covered how KiOR, the Khosla-backed startup that went public in 2011 with the promise of turning biowaste into biocrude, is struggling with missed production targets and faltering financials.
Now come the lawsuits. On Wednesday, the law firm of Pomerantz Grossman Hufford Dahlstrom & Gross LLP announced it has filed a class-action lawsuit against the Pasadena, Texas-based company, along with certain company officers.
The suit, filed in U.S. District Court in the Southern District of Texas, alleges that the company made “false and/or misleading statements, as well as failed to disclose material adverse facts about the Company's business, operations, and prospects” having to do with its Columbus, Miss. flagship plant.
Specifically, the lawsuit alleges that KiOR misled investors on the following points:
“(1) the Company was not on track to produce commercially meaningful quantities of biofuel at the Columbus facility in the amounts projected by management; (2) the Company lacked adequate internal and financial controls over its calculation and forecasting of production levels at the Columbus facility; and (3) as a result of the foregoing, the Company's statements were materially false and misleading at all relevant times.”
The law firm is seeking investors who bought KiOR stock between August 14, 2012 and August 7, 2013 to join in the class action suit. KiOR shares traded on the Nasdaq exchange at a value between $9.30 and $4.17 during that time, and stood at $4.76 as of August 7. But after the company’s August 8 second-quarter earnings report, KiOR’s share price plummeted by 44 percent, or $2.12 per share, and stood at $2.55 as of late afternoon trading Wednesday.
That earnings report was when KiOR revealed that its second-quarter production of biofuel, at 75,000 gallons, fell far below previous projections of 300,000 to 500,000 gallons for the quarter. KiOR’s 10-Q filing with the U.S. Securities and Exchange Commission also noted that the company “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,” and that without new funding, the company had “substantial doubt about our ability to continue as a going concern.”
Below is our story from last week on KiOR's troubles.
Big problems are emerging at KiOR, the Khosla Ventures-backed company that went public two years ago with the promise of turning biological waste into bio-crude oil and fuels in hours, rather than over millions of years.
Last week, the Pasadena, Texas-based company announced second-quarter 2013 results that contained a lot of bad news. First off, it managed to ship only 75,000 gallons of biofuel from its Columbus, Miss.-based bio-refinery in the quarter -- far below the range of 300,000 to 500,000 gallons that CEO Fred Cannon had forecast only months ago during the company’s first-quarter earnings call.
Secondly, 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-K filing with the Securities and Exchange Commission. But its current lack of committed sources of funding, beyond what it can tap from lending agreements from an affiliate of Vinod Khosla and two Canadian corporations owned by pension fund clients of Alberta Investment Management Corporation (AIMCo), “raises substantial doubt about our ability to continue as a going concern.
Last week’s news has led to a flurry of lawsuits being threatened by law firms representing shareholders of KiOR, which saw its share price fall from more than $4 per share to less than $3 per share in the past few days of trading. It’s a steep and deep decline from a high of $23.85 per share reached in the months after its June 2011 IPO.
The Promise, Versus the Reality to Date
KiOR, which counts former Secretary of State Condoleezza Rice as a board member, has seen some intense scrutiny of its “Biomass Fluid Catalytic Cracking” (BFCC) 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.
UPDATE: KiOR 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 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 last week 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.
Certainly KiOR’s financials indicate that it faces an uphill climb turning a profit on its business of converting wood waste into bio-crude, and from there into liquid fuels like 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.
The Known, and Unknown, Reasons for Not Meeting Targets
Why has KiOR failed to meet its promised production targets? During last week’s conference call, CEO Fred Cannon said that 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 told us, 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, Kate Perez, KiOR's director of corporate communications and public relations, 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."