6. Long-Term Debt

Long-term debt consists of the following:


	September 30,			December 31,
	2011			2010
	(Amounts in thousands)

Long-term debt:
Equipment loans	$	3,366		$	3,710
Business loan		6,311			6,327
Mississippi Development Authority Loan		39,391			—
Less: unamortized debt discounts		(17,369	)		(520	)

Total debt, net of discount		31,699			9,517
Less: current portion		(2,617	)		(4,480	)

Long-term debt, net of discount	$	29,082		$	5,037

Mississippi Development Authority Loan

In March 2011, KiOR Columbus entered into a loan agreement with the Mississippi Development Authority, or MDA, pursuant to which the MDA has agreed to make disbursements to KiOR Columbus from time to time, in a principal amount not to exceed $75 million, to reimburse costs incurred by KiOR Columbus to purchase land, construct buildings and to purchase and install equipment for use in the manufacturing of the Company’s renewable crude oil and transportation fuels from Mississippi-grown biomass. Principal payments on the loan are due semiannually on June 30 and December 31 of each year, commencing on the earlier of (a) December 31, 2012 or (b) the next scheduled payment date that is at least six months after the Company commences commercial production of renewable crude oil from Mississippi-grown biomass at its initial-scale commercial production facility for sale to customers in the ordinary course of business. On each such payment date, the Company is required to pay an amount equal to the lesser of an amount sufficient to repay the total loan within (a) a period of time determined by the weighted-average life of the equipment being purchased with the proceeds thereof or (b) 20 years. Under the loan agreement, the Company committed to employing at least 30 employees, with aggregate salaries of at least $1.0 million, once the Company’s initial-scale commercial production facility is fully operational. In addition, the Company is required to pay the entire outstanding principal amount of the loan, together with all other applicable costs, charges and expenses no later than the date 20 years from the date of its first payment on the loan. The loan is non-interest bearing.

The loan agreement contains no financial covenants, and events of default include a failure by KiOR Columbus to make specified investments within Mississippi by December 31, 2015, including an aggregate $500.0 million investment in property, plant and equipment located in Mississippi and expenditures for wages and direct local purchases totaling $85.0 million. If an event of default occurs and is continuing, the MDA may accelerate amounts due under the loan agreement. The loan is secured by certain equipment, land and buildings of KiOR Columbus.

As of September 30, 2011, the Company had received $39.4 million of the Mississippi Development Authority Loan to reimburse the Company for expenses incurred on the construction of its initial-scale commercial production facility located in Columbus, Mississippi.

The non-interest bearing component of the Mississippi Development Authority Loan was intended to incentivize the Company to design, construct and operate its initial-scale commercial production facility in Columbus, Mississippi. The Company imputed interest on the Mississippi Development Authority Loan and determined the loan discount to be the difference between the face value of the loan and the discounted present value of the loan using an estimated market rate of 5.5%, with such rate based on interest bearing loans of a similar nature and terms. Of the $39.4 million in loan proceeds received through September 30, 2011, the Company estimated approximately $17.2 million was attributable to the non-interesting bearing component of the loan. Consequently, the Company recorded a discount on the Mississippi Development Authority Loan of $17.2 million and a reduction of the capitalized cost of the related assets for which the Company was reimbursed in the same amount. The loan discount is recognized as interest expense, subject to interest capitalization during the construction phase, using the effective interest method. As of September 30, 2011, $479,000 of the loan discount had been recognized as interest expense.

Equipment Loans

Equipment Loan #1 — On December 30, 2008, the Company entered into its first equipment loan agreement with Lighthouse Capital Partners VI, L.P. The loan agreement provides for advances at $100,000 minimum increments up to $5.0 million in the aggregate for purchases of equipment. All advances must have been funded no later than September 30, 2009. Each advance represents a separate loan tranche that is payable monthly over a three-year period from the date of issuance of the advance at an annual interest rate of 7.5%. In addition, at loan maturity, the Company is required to make a payment equal to 7.5% of the total principal on the loan, which is amortized over the life of the loan and included in interest expense on the Condensed Consolidated Statements of Operations. The loans were originally to mature at dates from March 2012 to October 2012, which dates were extended to January 2014 by the amendment described below.

During 2009, the Company borrowed all $5.0 million available under the loan. The loan tranches are collateralized by certain of the Company’s production pilot unit, lab equipment and office equipment valued at approximately $5.0 million.

Equipment Loan #2 — On March 17, 2010, the Company entered into a second equipment loan agreement with Silicon Valley Bank with total availability of $1.0 million, limited to two advances of at least $500,000 each. The full amount of the availability under the loan agreement was drawn down in a single advance of $1 million. The loan is payable monthly over a three-year period at an annual interest rate of 10%. The loan is collateralized by the equipment purchased with the advances at a cost of approximately $1.3 million.

Business Loan

On January 27, 2010, the Company entered into its first business loan agreement with Lighthouse Capital Partners VI, L.P. and Leader Lending, LLC for an amount of up to $7.0 million. Advances are payable monthly over a three-year period at an annual interest rate of 12% commencing on the date of the advance. In addition, at loan maturity, the Company is required to make a payment equal to 7.5% of the total amount drawn on the loan, which is amortized over the life of the loan and included in interest expense, net of amounts capitalized, on the Consolidated Statements of Operations.

During 2010, the Company borrowed the full $7.0 million under the loan agreement. The loan is collateralized by the Company’s assets not previously pledged as collateral on the equipment loans described above.

Amendments of Equipment and Business Loans

In February 2011 and April 2011, the Company amended Equipment Loan #1 and its Business Loan to waive certain covenant restrictions to allow the Company to enter into the Mississippi Development Authority Loan described above. In addition, the amendments provided for a deferral of principal payment for one year, included prepayment penalties and extended the maturities of the loans to January 2014. All other terms were unchanged. Interest during the principal deferral period is paid at 1% to 2.5% over the original stated interest rate and reverts to the original interest rate upon expiration of the deferral period. In connection with the amendments, the Company paid aggregate fees of $60,000 upon execution of the amendments and agreed to pay $240,000 upon maturity. In addition, the Company agreed to issue warrants to purchase $300,000 of securities issued in a next-round equity financing, if such equity financing of at least $35 million was completed prior to May 15, 2011. If such financing was not completed prior to May 15, 2011, the Company agreed to issue warrants to purchase 61,200 shares of Series B Preferred Stock at an exercise price of $4.902 per share. The Series C convertible preferred stock issued in April 2011 in the aggregate amount of $55.0 million met the next-round equity financing requirement and, as a result, warrants to purchase 61,200 shares of Series C convertible preferred stock at an exercise price of $4.902 per share were issued in connection with the equipment and business loan amendments. The Company recorded a liability of $300,000 in connection with the warrants that were required to be issued. The warrants to purchase shares of Series C convertible preferred stock automatically converted into warrants to purchase 25,000 shares of Class A common stock upon the close of the Company’s initial public offering on June 29, 2011 using a conversion price of 80% of the IPO price (see Note 10 — Convertible Preferred Stock Warrants) and the warrant liability was reclassified to additional paid-in capital.

Convertible Promissory Note to Stockholder

On August 5, 2009, the Company entered into a non-interest bearing convertible promissory note agreement for $15.0 million (the “Note”), which included a beneficial conversion feature, with one of its stockholders, Khosla Ventures. The Note was a general unsecured obligation of the Company and was payable in full on August 4, 2011. Principal payments were not required prior to the maturity date. The Note was convertible into shares of the Company’s convertible preferred stock upon the occurrence of certain events. On April 16, 2010, the Note was converted into 5.2 million shares of Series B convertible preferred stock.

One of the triggering events enabling conversion of the Note into shares of the Company’s convertible preferred stock was met in April 2010. The triggering event was: if on or before the maturity date of the Note, the Company consummates a sale, or series of related sales, of its convertible preferred stock, pursuant to which the Company receives gross proceeds of at least $10.0 million, excluding any amounts as a result of conversion of the Note (a “Qualified Financing”), then simultaneously with the Qualified Financing, the principal balance then outstanding under the Note shall convert into the same class and series of convertible preferred stock sold in the Qualified Financing at a conversion price per share equal to 60% of the price per share paid by the investors in the Qualified Financing. The Company’s Series B convertible preferred stock issuance in April 2010 (see Note 9 — Convertible Preferred Stock) triggered this conversion option and the note holder subsequently exercised the right to convert.

In accordance with FASB ASC 470-20, Debt with Conversion and Other Options, the Company recorded a $10.0 million expense to beneficial conversion feature expense on the Consolidated Statement of Operations connected with the conversion of the Note into Series B convertible preferred stock. The $10.0 million reflects the value assigned to the beneficial conversion feature. The value of the beneficial conversion feature was not readily determinable upon issuance of the Note because the conversion feature was contingent upon the occurrence of a Qualified Financing transaction. Neither the timing nor value of such transaction could be estimated at the time the Note was issued. Therefore, the Company recorded the entire amount of the beneficial conversion feature to the condensed Consolidated Statements of Operations at the time the conversion occurred and value for the beneficial conversion feature could be determined.