by Jim Lane
Note. This is Part 3 of our series on the inside true story of KiOR.
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 scientist.
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 navigated.
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 still succeed.”
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 front.
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 KIOR.
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 from CPERI.
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 first.”
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 Mike Brady.
“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 financing event.
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 gall
ons 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 yields.
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 was reporting.
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 Demo.
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 of circumstances.
“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 Cuneo’s request.”
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, activated catalyst.
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 Mississippi:
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 catalysts.
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 contribution.”
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 patent.
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 assigned.
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 fuel supply.
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 the MOU.)
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 did.
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 Gene
ral 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 issues.”
“You’ve cooked the books”
On June 6th, Bill Coates arrived, as KiOR’s new Chief Operating Officer.
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 outside.
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.”
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 later.
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, a
nd 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 investors.”
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 several discrepancies.
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 inconsistent.
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 Khosla.
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 “fraudulent.”
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 darkness.
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.