Biofuel maker KiOR faces questions over funding

Freshly minted as a public company, biofuel producer KiOR reported Thursday that it brought in no revenues and widened its losses for the second quarter. Given that no one expected the young company to make much money yet, the burning questions for the company executives during its earnings call on Thursday involved how KiOR plans to line up investors and raise money for a proposed processing plant, especially in light of the struggling economy.

During the call, financial analysts pressed for information about KiOR’s fundraising plan for a plant in Newton, Miss., which the Texas company previously said would start construction in the second half of 2012. If that is still the plan, then the company will likely have to ink supply agreements with customers over the next six months and maybe even convince some of them to become co-owners of the plant, analysts pointed out. Having supply agreements in place will help the company persuade banks to loan it money for building the plant.

KiOR, which held an initial public offering in June, has planned to use some of the IPO proceeds for the engineering and equipment purchases for the Newton plant, according to its filings with the U.S. Securities and Exchange Commission before the IPO. But it will need to raise more because KiOR has estimated that the construction and plant startup cost will be $350 million.

The company was hoping to raise more money from the IPO but ended up pricing the shares below its expected range when it debuted on the Nasdaq. Overall, the IPO generated $148.7 million in net proceeds, the company said Thursday.

The company’s CEO, Fred Cannon, agreed that KiOR will have to line up key customers fairly soon. But he said it’s too early to say whether the seeming instability in the economy, which has been marked by big swings in the stock market and worries about the rising national debt, will have a marked impact on KiOR’s efforts to find money for Newton. Cannon said the company is about a year away from having to nail down financing.

“I think it’s too early to tell, in terms of our funding needs. We’ve got plenty of time,” Cannon said. “People are still open for business, and we are still moving ahead.”

Wait and see

He did concede that customers, who also could be investors in KiOR’s processing plants, aren’t willing to commit money right now because there is still a little bit of wait and see with the major oil companies. The federal government has set mandates for increasing the nation’s supply of biofuels, but those requirements haven’t been met because many biofuel companies have struggled to complete technology development and line up money to build processing plants. That delay also has provided a break for oil companies that would’ve had to spend money to comply with the mandates and blend more biofuels into the gasoline they sell at the pumps.

The U.S. Departments of Energy and Agriculture have been offering loan guarantees in the past two years to biofuel technology developers to help them build that all important first commercial plant. In February this year, KiOR announced that it had received a term sheet for a loan guarantee and pointed to that as one of a variety of reasons for setting the value of its common stock for the IPO. The company then, shortly before the IPO, quietly asked the DOE to put its application on hold until 2012.

Newton will be KiOR’s second plant. The company began building the first plant, located in Columbus, Miss., earlier this year. It had lined up the necessary money for the Columbus plant before the IPO. The initial estimated cost for the plant is $193 million, but it’ll be more than that because the company decided to modify the plant’s design, Cannon said. The new design, which comes with changes that will allow the company to use a greater variety of feedstocks, will be “within eight to 10 percent of our original budget,” he added.

KiOR’s technology allows it to convert wood chips into a substitute for crude oil. The company was planning to use wood chips from Southern Yellow Pine only at Columbus but now wants the flexibility to use those as well as the less expensive barks and logging wastes.

Photo courtesy of KiOR