Kior Inc

The obligations of the Company under the Protective Advance Agreement may be accelerated upon the occurrence of an event of default under the Protective Advance Agreement, which includes customary events of default including, without limitation, payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to judgments, cross-defaults, defaults relating to litigation and a change of control default. In addition, the Company will be in default if it (i) fails to modify its loan agreement with the Mississippi Development Authority where such failure could reasonably be expected to adversely affect the Company’s ability to secure additional financing or investment, (ii) makes payments not in accordance with a budget provided in advance to the Lenders, (iii) fails to meet milestones relating to a company sale/refinancing set forth in the Protective Advance Agreement or (iv) has a member of its executive management team resign. In addition, the Company will be in default of the Protective Advance Agreement if its Forbearance Agreement with the Mississippi Development Authority expires or terminates for any reason or is modified without the consent of the Lenders, if its engagement of Guggenheim Securities, LLC as the Company’s investment banker and financial advisor terminates, if it fails to meet its R&D program benchmarks or if any other event occurs that the Agent determines could be expected to have a material adverse effect on the Company. In the event of a default under the Protective Advance Agreement, all Secured Obligations will bear interest at a rate equal to 10% per annum.

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.

In July 2014 we entered into a Protective Advance Loan and Security Agreement, or the Protective Advance Agreement, with KFT Trust, Vinod Khosla, Trustee, who we refer to as Khosla or the Lender, and, together with other lenders who may become party to the agreement from time to time, the Lenders, and Khosla in its capacity as agent, or the Agent, for the Lenders. Pursuant to the Protective Advance Agreement, the Lenders have agreed to make protective advance loans, each of which we refer to as a Protective Advance, and, collectively, as Protective Advances, to us in an aggregate principal amount of up to $15,000,000 until the Maturity Date (as defined below). The Protective Advances will be used to (i) preserve, protect and prepare for the sale or disposition of our collateral under the Protective Advance Agreement or any portion thereof, and (ii) enhance the likelihood and maximize the amount of repayment of our Existing Secured Obligations (as defined below) and the obligations, which we refer to as the Secured Obligations, secured under the Protective Advance Agreement. Future Protective Advances require that payments are made in accordance with a budget approved by the Lenders. In addition, our representations and warranties to the Lenders must be true and correct in all material respects and no default or event of default may have occurred or be continuing at the time of a Protective Advance. We have drawn down approximately $6.9 million under the Protective Advance Agreement as of July 31, 2014.

To continue as a going concern, we must secure additional capital or otherwise pursue a strategic restructuring, refinancing or other transaction to provide us with additional liquidity. The urgency of our liquidity constraints may require us to pursue such a transaction at an inopportune time. If we are unsuccessful in raising additional capital we will not have adequate liquidity to fund our operations and meet our obligations (including our debt payment obligations). We could be forced to seek relief under the U.S. Bankruptcy Code (or an involuntary petition for bankruptcy may be filed against us). A bankruptcy filing by or against us would subject our business and operations to various risks, including but not limited to, the following: adverse effects on our business prospects, including our ability to continue to obtain and maintain the contracts necessary to operate our business; an event of default under our outstanding debt; our inability to retain and motivate key executives and employees through the process of reorganization; and difficulty attracting new employees. There can be no assurance as to our ability to maintain or obtain sufficient financing sources for operations or to fund any reorganization plan and meet future obligations or that we will be able to successfully develop, prosecute, confirm and consummate one or more plans of reorganization that are acceptable to the bankruptcy court and our creditors, equity holders and other parties in interest. The value of our common stock could be reduced to zero as a result of a bankruptcy filing. If we are unable to continue as a going concern, we would experience additional losses from the write-down of assets.

We have no experience producing cellulosic gasoline and diesel at the scale needed for the development of our business or in building the facilities necessary for such production, and we will not succeed if we cannot effectively scale our proprietary technology platform and process design.

We must demonstrate our ability to apply our proprietary technology platform and process design at commercial scale to convert biomass into cellulosic gasoline and diesel on an economically viable basis. We have had only limited sales of our cellulosic diesel and gasoline in 2013 at our Columbus facility and have not yet reached steady-state operations. As discussed above, we have encountered several significant problems to date at our Columbus facility, particularly with respect to throughput, yield and overall process efficiency and reliability. We have elected to idle our Columbus facility and focus on research and development milestones. Subject to our achievement of these research and development milestones and our ability to raise additional capital, we will attempt to complete a series of optimization projects and upgrades that are intended to achieve operational targets based on the design of the facility. There is no assurance that these projects will be successful. Also, we have not constructed a standard commercial production facility. Our technology may not perform as expected when applied at the scale that we plan or we may encounter operational challenges for which we are unable to devise a workable solution. In particular, our Columbus facility is a first-of-kind project, and it has not yet processed biomass at designed levels or produced our cellulosic gasoline and diesel at acceptable yields, and we may be unable to improve its performance. As a result of these risks, we may be unable to achieve commercial-scale production in a timely manner, or at all. If these risks materialize, our business and ability to commercialize our cellulosic gasoline and diesel would be materially and adversely affected. 

Loss of key personnel, including key management personnel and key technical personnel, or failure to attract and retain additional personnel could delay our product development programs and harm our research and development efforts and our ability to meet our business objectives and could result in a default under our Protective Advance Agreement. 

Our business requires a management team and employee workforce that is knowledgeable in the technological and commercial areas in which we operate. The loss of any key member of our management or key technical and operational employees, or the failure to attract or retain such employees could prevent us from developing and commercializing our products and executing our business strategy. The problems we have encountered to date at our Columbus facility, the drop in our stock price and our current liquidity needs may make it difficult to attract or retain key personnel. We may also be unable to attract or retain qualified employees in the future due to the intense competition for qualified personnel among catalyst, refining, alternative and renewable fuel businesses, or due to the unavailability of personnel with the qualifications or experience necessary for our business. In particular, our process development program depends on our ability to attract and retain highly skilled technical and operational personnel with particular experience and backgrounds. Competition for such personnel from numerous companies and academic and other research institutions may limit our ability to hire individuals with the necessary experience and skills on acceptable terms. In addition, we expect that the execution of our strategy of constructing multiple commercial production facilities to bring our products to market will require the expertise of individuals experienced and skilled in managing complex, first-of-kind capital development projects.