by Jim Lane
Note. This is Part 3 of our series on the inside true
story of KiOR.
1 of our series here, and part
Our story so far
KiOR was hanging by a thread as the summer of 2010 commenced. In
a few days, the first recorded visitors to Pasadena demo unit,
representatives of the Mississippi Development Authority, were
expecting to see the demonstration unit in action.
The company was beginning to hurtle towards an IPO. But the fuel
yields were low; the fuel was not usable by their initial chosen
downstream partner; the catalyst they were using to get even down
to this unsatisfactory product, ZSM zeolite, was in the $7,000 per
ton range. Catalyst stability would be challenged, everyone knew,
with the water that is contained in wood chips. Steam can be
highly problematic for zeolite.
More than that, the company was facing a potential problem with
the metal content in the biomass feed that accelerated the
deactivation rate of the catalyst, which resulted in excessive
amount of daily catalyst replacement, according to one KiOR
There were reactor design issues. The pilot reactor that was
working wasn’t used for the demo unit.
There was a rush to commercial-scale of the NASA type. Management
issues, communications issues can be seen. Disclosure issues,
“truth in data” issues. And, a series of statements to the state
of Mississippi that would be impossible to live up to without
major improvement in yield. Capital needs were going to be
tremendous, and beyond an IPO there was a loan guarantee process
and the state of Mississippi loan application to be successfully
Why the rush to scale? All venture-backed companies rush. But was
there a special rush on with Khosla-backed companies, and did that
rush apply successfully to industrial technology? The State of
Mississippi quoted this passage from the Harvard Business School
case study, Khosla Ventures: Biofuels Gain Liquidity:
Khosla played an active role in helping his portfolio
companies determine appropriate milestones in the process of
moving from a pilot to a commercial operation. He encouraged his
companies to focus on 15-month or 15-day or 15-hour innovation
cycles, unlike the 15-year cycles of innovation in the nuclear
business, in order to “test, modify, allow lots of mistakes and
The goal was to test ideas in 10% of the time that it would
take a large company. Once that was achieved he often challenged
the team to reach another 10x reduction in cycle time. month or
15-day or 15-hour innovation cycles, unlike the 15-year cycles
of innovation in the nuclear business, in order to “test,
modify, allow lots of mistakes and still succeed.”
Everyone was counting on everything to improve in the demo unit,
and in 2011. As sometimes happens. And, with design corrections,
fingers crossed this could be translated to a commercial scale
unit. It’s been known to happen, yields improving as scale
increases and design improves. Not always, not often, but
sometimes. Could KiOR pull it off?
Maybe, just maybe.
We’ll see how all those concerns worked out in the next part of
our series, as KiOR launched its demonstration unit, geared up for
more financing and an IPO, and hurtled towards commercial-scale.
Back to square one
2011 started with bad news. Robert Bartek resigned. He had been
described by a member of KiOR’s staff as “the most knowledgeable
chemical process engineer expert in pilot plant design and
operation. Also, Bartek was “one of the main contributors to the
development of a new improved technology that had replaced the
failed BCC Technology and catalyst,” as one observer put it.
It widely regarded as a huge loss to KiOR.
A former KiOR staffer recalled. “He was unfairly punished because
he did not agree and participate in the manipulation of pilot
plant data, and because of his statements that the BCC Technology
was useless to KiOR, and urging the Management to change it.”
“Hacskaylo and Ditsch were concocting false information about
Bio-oil yields and related costs, and feeding them to the KiOR
Board, to Khosla and to the public. Bartek [had been] isolated
from the team. He was kept in the dark.”
Meanwhile, there was good news and bad news on the technology
The Good News? By replacing the BCC Technology and its HTC
Catalyst with zeolite catalysts , the Bio oil yields were more
than doubled, with a less coke and char, and with less than 15%
oxygen in the oil.
However, these improved oil yields still needed to be doubled
again to reach the level of 80-90 gallons per ton yields that
would be required to support a commercially viable KiOR.
But it was more than the loss of a technical leader. It was a
cautionary tale for many of the staff.
The Wrong Design
Bartek’s isolation from the R&D team while working on the
design of the demonstration unit, caused additional damages to
The delivered and installed Biomass Convertor/Reactor had the
original Pilot plant design, which was inefficient, and produced
much lower bio oil yields. Bartek had replaced it with a higher
efficiency Convertor/reactor based on a design KiOR had licensed
The damages included, costs of disconnecting/reconnecting, and
modifying the already installed inefficient Reactor, plus months
of delay in starting the operation of the demonstration unit .
“Management’s policies and actions were to promote deception to
the public and investors and punish correctness,” commented Dennis
Stamires. “It led to a loss of trust and caused a serious
demoralizing effect on most employees, and so, as is the usual
case under such circumstances, the most qualified and experienced
Scientists and Engineers have more job opportunities and leave
And on technical grounds, the company was still at what Stamires,
in a burst of frustration, expressed as “back at square one” in a
January 31st note to Dr. Angelos Lappas, Professor Vasalos and
“As you have heard thousand times,” he wrote, “we are still
looking for a suitable catalyst, hopefully without containing ZSM,
or at least a small portion. You can see how frustrated I am ,
after two or three years and all the work we have done, millions
of dollars spent , we are now stuck in a Hole with the ZSM.”
Big News from DOE
But in management circles, there wasn’t a corresponding sense of
gloom. In fact, there was a celebration going. KiOR had received a
Loan Guarantee term sheet for a $1 Billion project, from the US
Department of Energy, on January 3rd.
In the complex world of loan guarantees, a term sheet is a first
step. Ultimately loans are made by banks, and guarantees are
applied to them. And they never guarantee the entire loan, only a
portion of it, typically around 60 percent. This is the
government’s way of ensuring fiscal discipline. They need the bank
to have skin in the game to avoid funding improbable loans. So,
KiOR would likely have to persuade a bank, and equity partners, to
should up to $400 million in risk on a loan for a first-of-kind
technology. The company, for that reason, was a long ways from a
And, there was a bomb hidden in the news.
The project, as described in a note to staff written by CEO Fred
Cannon, was expected to produce more than 11 million gallons of
fuel per year.
Why was that a problem?
What was worrying at the Columbus plant was less the amount of
fuel coming out as much as the amount of feedstock going in. The
plant had a nameplate capacity of 500 tons of dry biomass per day.
Staff could do quick calculations and realize that, assuming an
optimistic 85% up-time for the plant, the bio-oil yields would
have to be 73 gallons per ton of biomass.
With that, staff realized for the first time that the company was
representing yields to the Department of Energy that were
materially above what the technology was achieving.
In his note to staff, Cannon thanked the team and singled out one
individual for the loan guarantee milestone.
It was Andre Ditsch, author of what KiOR colleagues said were
grossly inflated yields.
Changing the yields
In its lawsuit against KiOR, the state of Mississippi alleges
that Andre Ditsch’s work on what might be termed “synthetic yield
improvement” was not complete.
“On January 31, 2011, three weeks after [a] strategy session with
Vinod Khosla was conducted,” the state alleges, “Andre Ditsch
notified Yuan Wang, a KiOR employee under Ditsch’s direction, that
the current yield in the Company’s financial model had
changed…Ditsch made this change in the financial model in order
that KiOR would appear to potential investors to be commercially
viable without RIN and tax credits.” The state added that “Ditsch
did so at Khosla’s direction,” the first indication, if true, that
Vinod Khosla may himself have become entangled in the faking of
Cherry-picking the data
In February 2011, John Hacskaylo published an internal R&D
Update Report at KiOR, which now can be revealed. In it, he showed
dramatic improvement in bio-oil yields produced at the
Demonstration Unit. Allowing for a responsible level of oxygen
content, sufficiently low for the product to be upgraded to a
finished fuel, the data showed a 67 per gallon output. Hacskaylo
extrapolated to 84 gallons per ton as a target for the future.
But there was a problem.
According to KiOR staff members of that time, the data was
cherry-picked; the most optimistic data was being used. Favorable
bursts based on a handful of moments in time.
In fact, when the Demo plant was lined up and operating in
steady-state condition at least for a few days, what were
described by KiOR staffers familiar with the data as the actual
“measurable, recoverable and reproducible bio-oil yields with
oxygen content of less than 15%” (the maximum for a refinery to
handle), were in the range of 34-38 gallons per ton.
Substantially much lower that the bio-oil yields that Hacskaylo
But it was worse than that. The yields were lower than the
Bio oil yields produced with same catalyst and process conditions
at KiOR Pilot plant.
It was a dagger in KiOR’s path to commercial viability — because
yields were supposed to go up, in the demonstration, which was
intended to be an improved design based on pilot plant data. Not
down. Not with the same process conditions and catalyst. Something
was very wrong with the demo design. Something that was concerning
Stamires and Charlie Zhang who were monitoring and analyzing the
raw DEMO data and comparing them to those obtained from the KCR
Pilot plant . But no one on the commercial management team would
know about it for quite some time.
Worse, if this trend-line was valid, and could be extrapolated to
larger size plants, then it was possible that Bio oil yields at
the commercial-scale Columbus plant, when operational and using
the same catalyst and process variables would be even smaller than
The drag from pilot yields to demo yields was around 25%, so it
was possible that commercial-scale yields would drop into the 20s.
Well below financial viability under any foreseeable combination
“No one would take our stuff”
In February John Karnes joined KiOR as the new CFO replacing
Kevin Denicola who had resigned. It was a critical moment. As an
early-stage company, KiOR was cash-hungry. One of the most
important sources for funds to build out the company’s projects
was the loan from the Mississippi Development Authority.
KiOR hired Dennis Cuneo, a business executive with established
ties to Mississippi state officials, as its representative.
As the state of Mississippi alleges:
“Faced with the realization that no oil company would agree to
offtake and refine the Company’s oil, Khosla explained KiOR’s
situation to Dennis Cuneo and asked him to present the
blendstock agreement to the MDA as having satisfied the terms of
the MOU. On or about February 20, 2011, Cuneo notified Governor
Barbour that KiOR had entered into an offtake agreement with
Hunt. Cuneo requested that Governor Barbour direct the MDA to
release funds. Governor Barbour called the MDA’s CFO, Kathy
Gelston, after communicating with Cuneo. Governor Barbour
notified Gelston that she would soon receive a communication
from Cuneo in which Cuneo would request a release of funds.
Governor Barbour instructed Gelston to release funds upon
The problem? The offtake agreement with Hunt did not supply them
with a bio-oil for Hunt to upgrade using refinery-based
hydrotreating technology. Rather, Hunt agreed to offtake finished
blendstock, upgraded by KiOR.
“It was the alkali content, said former KiOR staffer Larry Bauer.
“we had found quickly that no one could take our stuff.”
Meanwhile, ExxonMobil was having problems of its own. It wasn’t a
question of being able to upgrade the fuel.
On February 28, according to the state of Mississippi:
ExxonMobil Corporation Vice-President of Corporate Strategic
Planning, William M. Colton, notified Cannon and Khosla of
problems Exxon was having making KiOR’s numbers work.
Busy in the Big Dark
But the KiOR could hardly spare a moment to think about the
consequences of bad news from Exxon. During the first quarter of
2011, the company was a beehive of activity on multiple fronts.
As one KiOR insider told The Digest, “there were several main
projects going on, including the negotiations with DOE for the
loan guarantee preparation for the S1 and filing, fuel
registration, road show preparation, continuing discussions with
Chevron/Catchlight for some kind of offtake agreement and
preparations for the opening ceremonies in April for the first
Commercial Bio Fuels Plant in Columbus.
As March came to a close, attention shifted sharply to the DOE
loan guarantee. It was a substantial sum – $1 billion, that’s
billion with a “b”. And there was a big problem.
The catalyst was rapidly and severely de-activating. The
company’s forecasts were based on the performance of a fresh,
On March 28, 2011, the state of Mississippi claimed that “Andre
Ditsch sent an email to KiOR’s Vice-President of Research and
Development, John Hacskaylo, and others that discussed the
Company’s dealings with Shaw Consultants International, Inc. an
engineering firm the DOE had retained to conduct technological due
diligence in conjunction with KiOR’s $1 billion loan application
for Project Alpha.”
The fear was that Shaw’s engineers would turn up the problem, and
scuttle a loan guarantee until KiOR came up with a new catalyst.
But that would take time and there was no guarantee that a new
catalyst could be developed — or that it would perform as well as
projected in the forecast.
Matters came to a head on April 8th. According to the state of
Instead of revealing these facts
to Shaw and/or the DOE, Cannon and Ditsch concealed these
matters and doubled down on their hope that their new catalyst,
KC2, would achieve commercial scale yields and economics while
used in steady state operations.
Shaw’s engineers reported to DOE, according to the State of
Mississippi, that they could not support a 67 gallon per ton yield
based on the performance of the demonstration unit. And Shaw’s
figures, which were derived from reports and not from direct
independent measurement, The Digest learned, did not take into
account the catalyst de-activation problem, and did not subtract
water content from the overall yield.
When all else fails, IPO
With catastrophe on the horizon relating to the catalyst
performance and the yields at Columbus, on April 11, 2011 KiOR
filed for an IPO with the SEC, and claimed in the prospectus:
Our proprietary catalyst systems,
reactor design and refining processes have achieved yields of
renewable fuel products of approximately 67 gallons per bone dry
ton of biomass, or BDT, in our demonstration unit that we
believe would allow us to produce gasoline and diesel
blendstocks today at a per unit unsubsidized production cost
below $1.80 per gallon, if produced in a standard commercial
production facility with a feedstock processing capacity of
1,500 BDT per day.
The state of Mississippi vehemently disagreed. They alleged that,
in addition to the failure of the KC1 catalyst:
KC2 never generated commercially
viable yields and neither did any of KiOR’s later generations of
It was the first appearance of the inflated yields in a document
that would be relied upon by the retail investor.
A KiOR staff member at the time recalled: “Contrary to the
findings of the three above mentioned workers, Hacskaylo’s grossly
inflated data showed almost double the Bio oil Yields, compared to
actual, measurable/recoverable and reproducible Bio oil Yields
listed in the spread sheets of the raw DEMO data produced at the
same period. However, Hacskaylo’s Bio-Oil Yields were consisted
with the Yield numbers used by Ditsch and others in the S1.”
Problems erupt with KiOR’s intellectual property portfolio
By May, the troubles at KiOR expanded to include the handling of
processing of patent applications and the securing of the
company’s intellectual property.
On May 15th, Dennis Stamires fired off a letter to CEO Cannon,
notifying him that he would handle certain high value patent
Applications directly with Jennifer Camacho, separately and
outside Hacskaylo’s IP team.
One issue? As Stamires recalled for The Digest,
“Hacskaylo’s name appeared, as a co-inventor, on patent
applications on which he had not made any intellectual
From the point of view of the KiOR shareholder, this represented
a potential disaster of the first magnitude. The inclusion of a
co-inventor on a patent, who has made no intellectual contribution
to the invention, is serious business in the world of patents. The
practice represents grounds, in and of itself, to invalidate a
Putting some of KiOR’s intellectual property, potentially, right
into the public domain. Damaging to the other co-inventors — and
ultimately for the company to whom the patent rights are routinely
The Loan Guarantee withdrawal
Meanwhile, the company’s efforts to obtain a loan guarantee were
failing, as became clear to financier Vinod Khosla after a
telephone discussion on May 6th with Jonathan Silver, Executive
Director of the DOE’s loan guarantee program.
The primary issue? Data to support the assertion that the
company’s yields were commercially feasible.
The State of Mississippi stated:
Ditsch’s concerns about KiOR’s
ability to prove the commercial viability of its technology to
the DOE loomed large over the Company’s decision to press
forward with its loan guarantee program application. KiOR’s
executive leadership team and Khosla chose to withdraw the
Company’s application, but not before Khosla considered
pressuring Ray Mabus to call Jonathan Silver and/or the United
States Secretary of Energy, Steven Chu.
The biocrude offtake agreement that wasn’t
Meanwhile, the company was scrambling to obtain an offtake
agreement that would satisfy the requirements of the company’s
loan from Mississippi.
In the first half of May, according to the state of Mississippi,
Dennis Cuneo notified Governor Barbour that “Kior will announce on
Tuesday that it has an offtake agreement with the
Chevron/Weyerhaeuser joint venture – Catchlight.”
A biocrude offtake agreement is what had originally been intended
by KiOR. But this wasn’t a biocrude offtake agreement at all.
Rather, it was a gasoline and diesel offtake deal. KiOR’s Columbus
plant would ship upgraded gasoline and diesel blendstocks to
Chevron’s Pascagoula refinery, where it would be blended into the
It’s a significant switch. The original plan had been to ship
biocrude and let Chevron and others hydrotreat the biocrude to
remove excess oxygen, and then blend the upgraded fuel. But
Catchlight, as we reported, had not been able to make the biocrude
work in Chevron’s refinery. So, KiOR would have to build a
hydrotreating unit at Columbus, and a hydrogen plant.
At Columbus alone, it would add $90 million to the project cost.
The state of Mississippi alleges that KiOR concealed the true
reason for the switch.
After a question from the
governor, Cuneo explained the Catchlight deal: Kior decided to
integrate forward into diesel and gasoline to take advantage of
the renewable fuel credits (which otherwise would have gone to
Chevron.) As a result of the forward integration – the
investment in Columbus is larger than originally anticipated.
Cuneo’s explanation prompted
Governor Barbour to ask, “Will Hunt refine biocrude from Kior or
also take gasoline and diesel?” Cuneo responded as follows: The
Hunt deal is also for gasoline and diesel. Kior can make a nice
additional margin by making gas and diesel – plus they get to
keep the renewable fuel credits – which are gravy. That’s why
they decided to upgrade their facilities beyond the crude oil
stage. This means the investment at Columbus, which was
originally targeted at $100 million is now $190 million. Their
large scale facilities will be in the $200 to $250 million range
for each facility – which means that the total investment in
Mississippi will easily exceed $600 million (vs. $500 million in
What Mississippi described as a “bait and switch” — the failure
to secure an offtake agreement for biocrude, presented as an
“opportunity to sell gasoline and diesel” would become a key point
in the state’s lawsuit against KiOR.
Courts will rule on this point eventually, but it is difficult to
imagine that, so long as KiOR was able to supply fuel to
Catchlight that was suitable for blending — no matter what
equipment was used on site to produce the blendstock — that KiOR
owed a duty to disclose changes in technology it was utilizing to
produce a fuel. So long as KiOR disclosed that its financials had
materially changed with any particular change in process, which it
What’s a blendstock, anyway?
There are as many as 100 different molecules that might show up
in a gallon of gasoline — gasoline is a fuel specification rather
than a single molecule — and ultimately all “raw feeds” into
gasoline refining are “blendstocks”, because refiners are blending
different feeds to make the highest margin they can while
remaining in spec. So, whether KiOR was supplying product from a
reactor that was dewatered into biocrude, or biocrude that was
further processed through hydrotreating into a “gasoline
blendstock”, they are both blendstocks, although they would have
different paths in a petroleum refinery to the ultimate gasoline
or diesel stream.
A scientist approaches KiOR’s General Counsel
In June, Dennis Stamires met with KiOR’s General Counsel Chris
Artzer. He told The Digest:
“I showed him the actual raw (unmassaged) demo plant oil yield
data and also the raw actual Oil Yields produced by the KCR Pilot
Plant. I pointed out in detail the large discrepancies between the
low yields KiOR was producing and the much larger inflated ones
which KiOR was disclosing to the public. Also, I provided him with
pertinent documents on Hacskaylo’s mishandling of the IP and
certain patent applications. I gave him copies of the data, and he
promised to study them.”
Stamires told The Digest, “I kept going back to Artzer’s office
to discuss those issues, several times in 2011. I tried hard to
convince him that he must take action. Artzer told me he was still
studying his documents. I never heard back from him on these
“You’ve cooked the books”
On June 6th, Bill Coates arrived, as KiOR’s new Chief Operating
A KiOR staffer recalls: “I thought he was a highly intelligent
person with extensive operational experience in high level
management positions in the Oil Industry. I was very impressed
with his knowledge and his plans to make KiOR move forward. I
though he was the right person and had a chance to save KiOR.”
Coates had a quick and rough indoctrination.
On June 24th, KiOR filed an amended Form S-1/A and Form 424(b)(4)
in conjunction with KiOR’s 10 million share IPO. In a meeting with
Dennis Stamires in June, he was advised that the biocrude yields
in reality were much lower than the 67 gallons per ton, as stated
in the IPO filing .
The State of Mississippi alleges:
Coates immediately began
investigating the accuracy of the yield data and cost estimates.
On June 27, 2011, Coates received a slide presentation for
KiOR’s Vice President of R&D, John Hacskaylo, which outlined
several basic differences between the Company’s financial model
and actual operations…The Company’s financial model assumed a
catalyst cost of $3000 per ton when the Company actually
believed it would pay as little as $6000 per ton and had
received a quote for as high as $30,000 per ton. Moreover,
whereas the Company’s financial model assumed a catalyst
addition rate of 0.83% per day based on the total weight of
Catalyst inventory in the Unit, whereas the actual catalyst
addition rate was nearly 9% per day.
Subsequently, Coates also reviewed the operations and results
with raw data of the Pilot plant and the Demo unit, the report by
Vasalos and McGovern on maximum yields. He also looked at the
technology of Dynamotive, based on the public information. He
brought in Max Kricorian, KiOR’s Finance Director, who discussed
KiOR’s business and financial Model, and financial projections and
forecasts which KiOR’ Management was disclosing to the public.”
Kricorian reviewed the business models based on input from the
science team, and concluded that the actual costs were much higher
than $2 per gallon of fuel, and substantially different from the
costs the management team had projected.
According to KiOR staffers from this period, Coates concluded
that there were large, unjustifiable discrepancies in the yields
claimed and those achieved.
He would write on July 15th to a KiOR scientific staffer: “We
have a difficult but not an impossible mountain to climb. Let me
think about this for a few hours, as I have been thinking along
the same lines, lets discuss further tomorrow morning at 10 at my
office.” Coates also set a meeting for July 18th to arrange the
testing of the new materials in the demonstration unit.
In fact, Coates had determined to form a Task Force aimed at to
changing the technology to a new one that could meet the Technical
performance, in particular the bio-oil Yield and related
production costs as disclosed in the S-1. He directed that the
Task Force be composed from experts coming from KiOR and from
An internal technical proposal was his guide. In it was proposed
a new technology capable of increasing substantially the Bio oil
Yields, scalable to commercial size Plants, and dramatically
reducing the production costs. It involved the use of a new family
of catalysts/heat carriers with dual functionalities discovered by
Brady, Bartek and Stamires in 2009 and pending patent application.
These were based on low cost clay, metal doped Spinel’s. These
would have reduced catalyst cost by an order of magnitude.
Meanwhile, Coates met with Fred Cannon, CFO John Karnes and Chris
Artzer on July 15th. According to a staffer who spoke with Coates,
“He confronted them with the problems involving the inflated
yields, under valued production costs and bogus financial
projections. They rejected his claims. The State of Mississippi,
which placed the meeting in August, stated:
During the course of this meeting, the State of Mississippi
alleges that Coates told Cannon and Karnes that they had “cooked
the books” and informed them that he was not “going to be a part
of this scam.”
The meeting set for the 18th never happened. According to
Stamires, Cannon and Artzer met with Coates in his office prior to
10 o’clock and fired him.
But there was still a hope that his work had not been in vain.
Prior to being fired, Coates also, according to the state of
Mississippi, “reported the results of his investigation to the
Chairman of the Audit Committee of the Board of Directors, Gary
Whitlock undertook a review, interviewing Fred Cannon, Andre
Ditsch, John Hacskaylo and Chris Artzer, declined to hire third
party experts, and concluded his investigation on July 22nd
without further action.
As the state of Mississippi observed:
No member of the Audit Committee
or the Board of Directors requested that outside counsel and/or
independent technologists be consulted to examine the substance
of Coates’ concerns. In contrast, when the SEC notified KiOR in
2014 that it was the subject of a formal securities fraud
investigation, KiOR hired Special Investigative Counsel and an
independent engineering firm to investigate the veracity of
matters at issue. The matters brought to light by Coates were
identical to those investigated by the SEC over three years
The reach-out to the CFO
By the end of July, members of the science team had become aware
of the Whitlock investigation, and its closure.
Dennis Stamires recalled: “I reached out to John Karnes, the CFO,
and I met with him on August 3rd and 4th, I showed him the data
and asked Karnes to convince Cannon to stop disclosing false
information to the public and to work with a Task Force to change
the technology. Karnes promised me that he would do his best. I
thought he Karnes was in a better position, as CFO, to convince
Cannon to do something about it. I had presented him with
information, but all I got was the same lip-service.”
For the science team, the urgency was not just an impending IPO,
but a loss of morale and personnel. Jacques De Deken, Kevin
Denicola, Robert Bartek and now Bill Coates had left. Catalyst
expert Mike Brady was excluded from participating in the R&D
meeting and from receiving technical information and resigned that
month. Dr. Conrad Zhang, an expert on Biomass and bio-oil
chemistry was re-assigned to teaching chemistry to some university
students, and he later resigned.
One investor looks deeper
On September 17th, Samir Kaul of Khosla Ventures became the first
investor to request supporting data. According to the state of
Mississippi, “Kaul requested that Cannon provide him with the
supporting data of the yields set forth in the graphs. He also
asked that Cannon arrange a conference call for Cannon, Kaul and
Ditsch to discuss the information.”
Outreach again to the CEO
Internally, nothing came of the outreach to Karnes, and Stamires
attempted again in mid-September, this time meeting with CEO Fred
Cannon. The meeting took place on September 20th, and Cannon was
warned specifically that:
1. The R&D group under the
leadership of Hacskaylo were “working in the wrong area of
research, not capable of producing yields close to 84 gallons per
dried ton of Biomass with reasonable quality, and production costs
close to $2 per gallon of fuel.”
2. To date only minor improvements
had been made on the zeolite catalyst, and it was able to reach
actual and reproducible Bio oil yields no higher than 46-50
gallons per ton 15% or less oxygen content, at the KiOR’ Pilot
plant with new more efficient Reactor licensed from CPERI.
3. The yields were far less from the
those needed to sustain a profitable business, and substantially
less than the 67 gallons per ton stated in the S-1 for the IPO.
Cannon received a follow-up email on October 10th repeating the
same points. And on October 30th, Cannon received another email on
this subject, urging him to form “a Task Force“ called “Project
Team Oil Yield”, reporting directly to Cannon, composed of experts
in the Field, to solve the present problems with the very low Bio
oil yields and extreme high costs for producing the fuels.
Cannon did not reply.
Another investor gets nervous
On October 5th, John Schneider of Artis Capital Management, L.P.
(a principal investor in KiOR) notified Cannon that Artis, as the
state of Mississippi alleged in its lawsuit, “suspected that KiOR
had not been honest in its public filings.”
A Climate of Fear
A KiOR insider from this period described it as a “fearful
working atmosphere” by the end of 2011. For employees to “to
survive and keep their jobs , and not being isolate or fired, they
had to remain silent and accept the “party-line” involving the
fraudulent and deceiving information fed to the public and
Paul O’Connor resurfaces
On November 29th, Paul O’Connor called Dennis Stamires and told
him straight out that he had concerns about the authenticity of
the data on yields and related costs which Hacskaylo has been
reporting to the Board. In particular, O’Connor analyzed and
compared the data the Board was receiving from Hacskaylo and noted
The state of Mississippi in its lawsuit stated:
John Hacskaylo made a power point
presentation to the Board of Directors in December 2011 that
included a graph that plotted projected yields of 63 [gallons
of] biocrude per bone-dry ton. Paul O’Connor compared the graph
in the [latest] presentation to one that had been presented in
February 2011 and concluded that the presentations were
Stamires and O’Connor agreed to work together to convince the
board to launch an independent technology audit, but not to reveal
their misgivings to the public just yet. Rather, they decided to
focus on the Board or, alternatively, a direct approach to Vinod
O’Connor recalls: “I was trying to be careful, because I had seen
the tactic from some of the people, to silence people from
revealing secrets. But I felt if you know what the problem is, you
can solve it.”
The two also agreed to try to engage Professor Vasalos in the
Audit . He was an expert on biomass conversion to fuels and had
reviewed KiOR’s technology and data from the pilot and demo units.
Also, he had spoken to Cannon about changing the KiOR’s technology
to improve yield. They agreed he was in an excellent position to
conduct an unbiased diligent assessment of the status of KiOR’
technology, and O’Connor agreed to meet with Vasalos in Amsterdam.
The state of Mississippi said:
O’Connor emailed Samir Kaul on
December 14, 2011 to notify him…having received no response,
O’Connor sent another email to Kaul on December 17, 2011 that
further elaborated his concerns.
Meanwhile, Stamires reached out to Jennifer Camacho, an Attorney
from Greenberg Traurig in Boston, who did patent and freedom to
operate work for KiOR. Stamires knew that Camacho had a long good
relationship with Samir Kaul, having worked together at another
company before KiOR, and he knew that Camacho had frequent
discussions with Kaul regarding KiOR’s activities.
Stamires recalls: “By now I had a real sense of urgency, and I
asked Jennifer to brief Samir about Hacskaylo’s manipulation and
falsification of the data, and the highly inflated yields. I told
her that incorrect data may not only adversely affect the
financials of KiOR’s business, but also may compromise the legal
validity of patents based on false data.”
On December 12th, Camacho replied to Stamires, writing: “Thanks
for your note. I will reach out to Samir tomorrow.
A company falling into the abyss
By the end of 2011, the company had filed for its IPO, and what
have been described as “false data”, “overstated yields” and
“unrealistic financial projections” are in the public domain. The
COO came and went. Top science people had resigned. Investors were
showing signs of nervousness. The first commercial’s project cost
had ballooned $90 million. Representations to the state of
Mississippi would be later characterized by the state as
The root cause: the low yields and oxygen-replete product. Which
go back to ineffective catalyst; the only ones working much at all
are said to be ruinously expensive.Pleas to revise the technology
‘before it is too late’ were going unheard.
Truly, KiOR is beginning to slip over the precipice and down into
the abyss. But some remain hopeful that KiOR can be saved, that a
better science result will save the company. Differing voices
express differing ideas on how to achieve that.
Could the catalyst finally work? Would it work in the design for
the first commercial, which is well on the way to being finalized.
KiOR may be failing as 2011 gave way to 2012, but perhaps the
staff could catch a branch and stabilize before tumbling into the
Maybe, just maybe…
We’ll see how all those hopes worked out in the next part of our
series, as KiOR readied for its commercial unit and sailed towards
a date with NASDAQ and its IPO.
Jim Lane is editor and
publisher of Biofuels Digest where this
was originally published.
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