The Collapse of KiOR

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The Inside True Story of a Company Gone Wrong, Part 5

by Jim Lane

In 2011, KiOR raised $150 million in its June IPO, claiming that it was generating yields of 67 gallons per ton in its Demo unit operations. But it was miles short of that.

In our previous installments, we have charted how KiOR moved from a promising early-stage technology to a public company with serious technological flaws that could have been fixed, but were ignored in what a senior team member speaking for the record, Dennis Stamires, characterized as a “reckless rush to commercial”.

By 2012, numerous KiOR staffers of the time believed that the company had a management problem more than a technology problem. No matter how dire the technological challenges seemed. As Paul O’Connor observed, “no one [in power] analyzed the pilot plant data. Andre [Ditsch] would say ‘oh, go out and hire MIT PhDs.’ But they are not the ones who are going to scale up a process. Fred let Andre go his way, and they hired too many people from Albemarle across the street. Catalysts are important; you need a few people. But you need a lot of process people, and that balance went wrong.” The right people? “KiOR forced them out or fired them or they left because of the poor professional working environment,” said one team member of the time.

The balance was precarious, as 2012 dawned. Everything was riding on the performance in the first commercial plant.

If 2012 was another year of private failure and public bravado, a year of living disingenuously, 2013 would be the year in which the multiple streams of fiction and non-fiction would merge into a river of raw data that would make the truth clear. The company had reached scale, but was still in the slow process of commissioning, so there was still room for doubt, or hope.

Skeptics, promoters, innovators who would be proven right?

Read the previous Parts in this Series

KiOR: The inside true story of a company gone wrong, Part 1

KiOR: the inside true story of a company gone wrong, Part 2

KiOR: The inside true story of a company gone wrong. Part 3, “You’ve Cooked the Books”

KiOR: The inside true story of a company gone wrong. Part 4, “The Year Of Living Disingenuously”

On March 27, 2013, O’Connor emailed Samir Kaul and Vinod Khosla a message he titled, Present & Future of KiOR. According to the state of Mississippi,O’Connor explained that he remained fearful that KiOR’s stock price would sink further.”

He followed up on May 1st, once again addressing the problem of the yields. He wrote:

After the mechanical completion of the Columbus plant it took quite a long time, before the plant actually started producing products. Of course I was concerned and in preparation of the Annual shareholders meeting in May 2013, I sent a letter to Fred Cannon asking some important questions ( Attachment D ). At the annual meeting I had a separate meeting with Fred and Samir Kaul. Fred’s response was that I was too negative: “ We (= KiOR) have made tremendous progress in the last 18 months in R&D.”

This concern of mine is not new, and I have expressed it already for a while, also during my tenure as director on the KiOR board and an official memo to the board and management: “KiOR Technology R&D: Assessment & Recommendations ” of April 21st 2012, one year ago. As far as I know these recommendations have not been followed up, while they remain at least just as relevant today as they were a year ago.

While I already for some time, no longer have any official function at KiOR and I do not have any non-public information of KiOR, I am regularly being approached by shareholders from BIOeCON heritage, but also by other institutional investors and the press, asking me critical questions, amongst others why I am not actively helping the KiOR team to solve their problems?

Keep in mind that the success or failure of KiOR is for me not only a financial issue, but also as main inventor one of honor. Although KiOR never properly acknowledges the origin and heritage of the technology: BIOeCON and myself as primary inventor, most informed outsiders are smart enough to figure that out.

I cannot just stand back and watch; As I see it now, the only thing I can really do is to ask critical questions at the annual shareholder meeting on the 30th of May next in Houston with the hope to get the ball moving in the direction of the corrective actions needed to speed up the transition towards a profitable and prosperous business.

I understand that US securities laws requires that any answers must be released to the public via press release, so I am sending the questions for KiOR management and/or board of directors before the quarterly report of May 9th , so that management and/or the board of directors has the option to include answers in the press release(s) of May 9th and/or in a second press release before or on the 30th of May.

Attached the questions, which I intend to raise at the shareholders meeting.

Separate to that, I would like the opportunity to present and discuss my thoughts on how to tackle the issues raised by these questions with CEO Fred Cannon and Samir Kaul as key representative of Khosla Ventures (the controlling shareholder) in the board of directors.

QUESTIONS for KiOR management at the shareholders meeting:

1) KiOR has disclosed that the expected yield…mentioned at the IPO will be achieved in the Natchez plant. How sure is KiOR about that? What are the overall product yields achieved at present in the R&D pilot plant(s) the demo plant and at Columbus? and how and when does KiOR expect to reach the more ambitious target?

2) Two of KiOR’s previous operations managers (Coates and Lyle) have stepped down, leaving KiOR without a COO or VP Operations. The delay in starting up and getting Columbus on stream could be related to this lack of operational leadership. Does KiOR have sufficient high-level staff with sufficient operational hands-on experience in the FCC and HPC processes to start up and run Columbus and a second plant in Natchez.

3) Does KiOR have a Scientific and/or Technological Advisory Board in place? How does KiOR ensure an independent technical audit of their R&D and Operations to ensure quality and progress in development?

4) When does KiOR expect to have the financing of the Natchez plant finalized?

Khosla responded to O’Connor on May 5, 2013, and after the annual shareholder meeting, Fred Cannon advised O’Connor that advances had been made in research and development over the course of the previous eighteen months.

But the State of Mississippi concluded that “O’Connor’s attempt to steer KiOR toward an honest assessment of its technology was once again un
successful” and stated that Cannon’s characterization of R&D advances was “a gross misrepresentation.”

Good news for public consumption

In May 2013, the company reported relatively rosy news to the public. As KiOR disclosed in its quarterly SEC 10-Q filing:

In 2012, the Company completed construction of its first, initial-scale commercial production facility in Columbus, Mississippi. This facility is designed to produce up to 13 million gallons of cellulosic diesel and gasoline per year. During the fourth quarter of 2012, the Company successfully commissioned its proprietary biomass fluid catalytic cracking, or BFCC, operation, and produced its first “on spec” cellulosic intermediate oil in limited quantities. During the first quarter of 2013, the Company successfully commissioned the plant’s hydrotreater and fractionation units, and began the Company’s first cellulosic diesel shipments in March 2013. The Company has had limited continuous production at its Columbus facility and has not yet reached “steady state” production.

No mention of the massive shortfall in yields. And to date, the costs had been high. Again, from the SEC Q2 report:

The Company has incurred substantial net losses since its inception, generating cumulative operating net losses of $234.1 million and an accumulated deficit of $258.1 million as of March 31, 2013. The Company expects to continue to incur operating losses through at least 2015 as it moves into the commercialization stage of its business.

“You are not lying, but stating a future number that is possible.”

On June 5, 2013, Mark Ross joined KiOR, appointed as Senior Biomass Fluid Catalytic Cracking Engineer. Ross was based in the Pasadena, Texas facility. During his first week of employment, Ross received an email warning him “to be careful about the politics at KiOR” because “the management at KiOR does not want to hear the truth about what is actually going on with the process.”

The troubled KiOR facility in Columbus, Mississippi

The troubled KiOR facility in Columbus, Mississippi

Nevertheless, Ross undertook a candid assessment of the Columbus plant’s operations, and in late June he emailed Mitch Loescher regarding the actual state of KiOR’s yields.

The State of Mississippi alleges that “Ross walked into Loescher’s office to discuss his concerns “about the yields that I observed at the plant versus the fraudulent numbers quoted to the public by Fred Cannon the CEO … Mitch’s reply was something like this (although I don’t remember the exact words), ‘Assume you just started a new restaurant and you were being interviewed about your restaurant. The interviewer asks you how many people you are serving every night. You answer 200 although you are only actually serving 20. You are not lying because you designed the restaurant to handle 200 a night even though you only have 20 a night currently. Eventually you will be serving 200 a night so you are not lying but stating a future number that is possible. You are just not telling the whole truth.’”

In July 2013, Ross approached KiOR’s Chief Fellow Scientist, Dennis Stamires, looking for more confirmation of what he termed his “quick back of the envelope calculation” that “the Columbus facility was only producing 22 gallons of oil per ton.”

As Ross explained in a sworn statement:

“I wanted to check the numbers to make sure I was calculating the yields correctly. Dennis was noticeably concerned about what I was telling him because he only knew what Fred was telling him which was the fraudulent 72 gallons per ton of dry wood. I told Dennis I would look into this in more detail and get back with him. I ran the calculations several more times and kept coming up with the same numbers, about 22 gallons of oil per ton of dry wood. I was still alarmed so I sought out Neil Wang and Gil Ceballos, who share an office. Neil was a Senior Process Engineer and Gil a Technologist and both were responsible for the material balances around the Demo Plant and the Columbus unit… Neil and Gil both confirmed that indeed the numbers I calculated were the same they had calculated and they too had raised concerns in the past but it fell on deaf ears. Gil had told me that to the best of his knowledge “the management at KiOR was not interested in hearing about the actual yields.”

Shortly afterwards, Ross explained in his sworn statement that he also sought the advice of KiOR’s Process Engineering Manager, Chris Cargill.

Cargill explained to Ross “that if it was possible to extract all of the potential hydrocarbons from the water and gas produced in the process we could improve the yields slightly but not 72 gallons per dry ton of wood. I asked Chris if any computer simulations were performed to simulate the recovery of the hydrocarbons from the water and gas and he suggested I speak to Senior Process Engineer, Agnes Dydak.”

Yep, 22 gallons per ton, and that’s it.

Ross next approached Dydak. According to Ross, she said that “that the simulation could only recover about 22 gallons per ton of dry wood which is what I was calculating.”

That same week, Dydak quit KiOR.

Despite the warning given to him by a colleague about not speaking up, Ross persevered. According to the State of Mississippi in its lawsuit, his “persistent warnings earned him the nickname, Dr. Doom, within the company’s Pasadena, Texas headquarters.”

Yet as of August 2013, the State of Mississippi alleged in a lawsuit that:

KiOR had in fact been unable to prove that its biocrude could be successfully refined without having routine and persistent shut downs that would drive up costs, drive down production and render the process commercially unviable. These and the reasons for them were the exact concerns that CLE had expressed to KiOR in May 2010, well before the MDA ever loaned a single dollar to the Company. KiOR had not only failed to prove that its biocrude could be successfully refined by an oil company in its existing infrastructure; KiOR had been unable to successfully refine its biocrude in extended runs in its own refining equipment.

The ring closes in around KiOR

By the summer of 2013, with the public disclosures required of the company as a public company, and with sufficient alarms raised not only by senior staff but by figures such as Paul O’Connor with direct access to the board, the management team came under more and more direct pressure regarding KiOR’s yields.

KiOR-graphic

And, money was drying up. On July 26, 2013, the company reported to the SEC:

As previously disclosed, on March 17, 2013, KiOR, Inc. entered into an amendment to the Loan and Security Agreement, dated as of January 26, 2012 with the Company and KiOR Columbus as borrowers, 1538731 Alberta Ltd. as agent and lender, and 1538716 Alberta Ltd., as lender, and KFT Trust, Vinod Khosla, Trustee.

Pursuant to the original Loan and Security Agreement, the Alberta Lenders had made a term loan to the Borrowers in the principal amount of $50 million and Khosla had made a term loan to the Borrowers in the principal amount $25 million, for a total of $75 million in principal amount. The Amendment, among other things, increased the amount available under the facility by $50 million, which the Borrowers may borrow from Khosla, based on the Borrowers’s capital needs, before March 31, 2014.

The rest of the SEC filing told the tale of consistent borrowing from Khosla:

On July 26, 2013, the Company borrowed $10 million from Khosla…on April 30, 2013, the Company borrowed $10 million from Khosla on April 24, 2013…on May 23, 2013, the Company borrowed $10 million from Khosla on May 17, 2013…on June 19, 2013, the Company borrowed $10 million from Khosla on June 17, 2013.

Why was Khosla making loans, rather than injecting equity into KiOR? No one has said for sure but it would be worth pointing out that by establishing itself as a significant lender and senior debt-holder, Khosla and his allied entities would have stronger rights in a bankruptcy than as equity investors.

Meanwhile, more bad news came via further confirmation on poor yields from engineer Charlie Zhang, working at the Columbus plant, who supplied actual yield data from Columbus to Dennis Stamires that confirmed at Ross’ figures were correct. Ross had previously indicated that the yields were in the 22 per gallon range, a frightful shortfall from the 67 gallons per ton yields indicated in the company’s IPO documentation.

screen-shot-2016-11-24-at-12-39-17-pm

A crisis was looming.

On July 11, 2013, sources indicated to The Digest that Vinod Khosla, Samir Kaul and Fred Cannon held a dinner meeting in which the situation with the yields at Columbus was reviewed. At the dinner, Cannon received a directive that Paul O’Connor be permitted to review KiOR’s state of technology and progress.

A strike at Stamires

At the same time as Khosla and Saul were initiating an investigation from the top down, by September, Stamires had determined to have another showdown with KiOR’s top management and according to Stamires and the state of Mississippi, he:

called a meeting with Fred Cannon and Chris Artzer to discuss the disparity between the target yield of 72 gallons per BDT and the actual yields being achieved in Columbus. Stamires notified Cannon and Artzer that he had seen the actual yield data and was going to report the real yields being achieved to the Board of Directors.

According to the State of Mississippi, “Cannon and Artzer attempted to bribe Stamires.” The offer was straightforward. “If Stamires would avoid revealing the yield data to the Board of Directors, they would ensure that KiOR paid him the approximately $60,000 in outstanding travel expenses he was owed at the time and they would further ensure that he was paid additional shares of KiOR stock over the course of the next five years.”

Stamires rejected the offer, his contract with KiOR was not renewed, and Mark Ross stated that “he was told by Mitch Loescher to stop talking to Dennis Stamires.” Ross recalled:

“Dennis was causing a problem. I complied with Mitch’s request and later that week I noticed that Dennis’ office was cleaned out. I never saw Dennis again at KiOR.”

KiOR admits a problem with establishing steady-state operations and considers a re-design

On September 26, 2013, KiOR reported to the SEC:

In 2012, the Company completed construction of its first, initial-scale commercial production facility in Columbus, Mississippi…The Company has had limited continuous production at its Columbus facility and has not yet reached “steady state” production. The Company is currently considering two options for its next commercial-scale facility.

One option is to design, engineer and construct a second initial scale commercial facility adjacent to its current initial scale commercial facility in Columbus, Mississippi, which would have a capacity of 500 bone dry tons, or BDT, per day. The Company is considering this option because it believes that a second initial scale commercial facility in Columbus may allow it to (i) accelerate its ability to achieve overall positive cash from operations with less need for capital from external sources and risk of financing, (ii) reduce design, engineering and construction costs due to its ability to leverage its experience from the construction of the current Columbus facility, (iii) incorporate the most recent improvements to its technology into both the existing facility and the planned facility in Columbus, (iv) achieve operational synergies as a result of shared personnel, infrastructure and operational knowledge with the existing Columbus facility, and (v) leverage existing feedstock relationships while introducing other types of lower cost feedstocks such as hardwood, energy crops, and waste products such as railroad ties.

screen-shot-2016-11-24-at-12-39-28-pm

The cost would be high. As KiOR disclosed:

The Company currently estimates on a preliminary basis that the total cost of this second initial scale commercial facility Columbus, Mississippi would be approximately $175 million to $225 million, based upon expected design and engineering savings combined with its recent experience of designing, engineering and constructing the current Columbus facility for approximately $213 million.

Gasoline costs rising fast

Meanwhile, KiOR in this SEC filing backed away from the $1.80 per gallon target discussed in its IPO.

The Company estimates on a preliminary basis that the combined Columbus facilities will be able to produce cellulosic gasoline and diesel at a per-unit, unsubsidized cost between $2.60 and $2.80 per gallon at its current proven yields of 72 gallons per BDT, excluding costs of financing and facility depreciation, which would decrease to between $2.15 and $2.35 per gallon if it is able to achieve its short-term yield target of 92 gallons per BDT.

Yet, even this revised production cost target could be described as ridiculous, given that the company had not achieved anywhere near the 72 gallons per ton yields.

And, the company, even at this late stage, is clinging not only to a yield target of 92 gallons per ton, it is describing its 72 gallon per ton figure as “current proven yields”. There is no evidence available that KiOR had data to support such a submission to the Securities & Exchange Commission.

screen-shot-2016-11-24-at-12-39-36-pm

Costs soar again, this time the capex

By November, KiOR again reported to the SEC on its plans for Columbus II, but costs had skyrocketed. KiOR reported:

The Company currently estimates on a preliminary basis that the total cost of this second initial scale commercial facility in Columbus, Mississippi would be approximately $216 million to $232 million.

And, the company continued to stand behind its 72 gallon per ton yield claim, which was wholly unfounded in the scientific data according to every insider the Digest has spoken with. In November, KiOR claimed:

The Company estimates on a preliminary basis that the combined Columbus facilities will be able to produce cellulosic gasoline and diesel at a per-unit, unsubsidized cost between $2.60 and $2.80 per gallon at its current proven yields at its research and development facilities of 72 gallons per BDT, excluding costs of financing and facility depreciation, which would decrease to between $2.15 and $2.35 per gallon if it is able to achieve its yield target of 92 gallons per BDT.

CFO Karnes resigns

The bleeding of
personnel turned briefly to a hemorrhage when, on December 1 2013, John Karnes resigned as Chief Financial Officer. Although the true reasons were not made public at the time a simple statement of fact was released to the public Karnes had become convinced that KiOR’s technological claims were “unreasonable,” as one source put it. Before leaving, Karnes authored a devastating review of KiOR’s progress from Q2 2012 through Q4, and recalled several attempts he had made over the years to bring KiOR’s technological distress to board attention.

Stamires whistle-blows directly to a KiOR board member

In late December 2013, Stamires’ contract had not been renewed and he began e-mailing board member Will Roach with allegations regarding the true state of KiOR’s yields and alleging that Cannon and Artzer has attempted to “to purchase his silence” as one source put it. Stamires detailed in his email that KiOR’s executive team had been fully advised of technical problems and the true state of yields but had “refused since 2010 to undertake adequate efforts to increase oil yields”.

Following his submission of emails to Will Roach, the state of Mississippi reports that little immediately came of his efforts:

Stamires attended a meeting that was also attended by Roach and two attorneys, Peter Buckland and Paul Coggins. Buckland had served as counsel for KiOR for several years, whereas Coggins had been hired by the outside directors of the Board of Directors to conduct an internal investigation of KiOR. Stamires recounted in the meeting the circumstances and complaints he had been making since 2010. Stamires thereafter provided copies of his file materials to Coggins in conjunction with Coggins’ securities fraud investigation of KiOR.”

But the company did not make a public correction of its yield claims at this time.

Columbus shuts down

In early spring 2014, KiOR reported again on its progress to the SEC. This time, there was not much sugar-coating on the state of operations at Columbus II:

Until recently, we have focused our efforts on research and development and the construction and operation of our initial-scale commercial production facility in Columbus, Mississippi, or our Columbus facility. We did not reach “steady state” operations at our Columbus facility nor were we able to achieve the throughput and yield targets for the facility because of structural bottlenecks, reliability and mechanical issues, and catalyst performance.

The problems were legion. According toi KiOR, there were issues with process and with the catalyst. In catalytic pyrolysis, that’s essentially the whole she-bang.

KiOR stated:

In January 2014, we elected to temporarily discontinue operations at our Columbus facility in order to attempt to complete a series of optimization projects and upgrades that are intended to help achieve operational targets that we believe are attainable based on the design of the facility. While we have completed some of these projects and upgrades, we have elected to suspend further optimization work and bring the Columbus facility to a safe, idle state, which we believe will enable us to restart the facility upon the achievement of additional research and development milestones, consisting of process improvements and catalyst design, financing and completion of the optimization work.

But the blame was shifted to the front-end of the process, where biomass was delivered into the reactor rather than to the catalyst performance and reactor design identified by its scientific team as the primary issue.

Rather, KiOR claimed:

In terms of throughput, we have experienced issues with structural design bottlenecks and reliability that have limited the amount of wood that we can introduce to our BFCC system. These issues have caused the Columbus facility to run significantly below its nameplate capacity for biomass of 500 bone dry tons per day and limited our ability to produce cellulosic gasoline and diesel. We have identified and intend to implement changes to the BFCC, hydrotreater and wood yard that we believe will alleviate these issues.

The company blamed the slow delivery of a new catalyst, and “mechanical problems”.

In terms of yield, we have identified additional enhancements that we believe will improve the overall yield of transportation fuels from each ton of biomass from the Columbus facility, which has been lower than expected due to a delay introducing our new generation of catalyst to the facility and mechanical failures impeding desired chemical reactions in the BFCC reactor. In terms of overall process efficiency and reliability, we have previously generated products with an unfavorable mix that includes higher percentages of fuel oil and off specification product.

The fixes were in hand, said KiOR, but money had run out? The company stated: “We do not expect to complete these optimization projects until we achieve additional research and development milestones and receive additional financing.”

Raising the question, of course, as to why the company could not raise money just when all the fixes had been identified to make a $600 million project perform as designed. As KiOR stated:

Since inception, the Company has generated significant losses. As of March 31, 2014, the Company had an accumulated deficit of $604.9 million, and it expects to continue to incur operating losses until it has constructed its first standard commercial production facility and it is operational.

With that kind of capital invested in the project, there would be equity investors at significant risk should the company collapse. Why the troubles raising cash, if the fixes were really fixes.

Were the fixes really fixes? Had investors lost confidence in the executive team’s claims?

KiOR looks at a merger, restructuring or sale

In July 2014, the Company announced that it had engaged Guggenheim Securities, LLC as the Company’s financial advisor and investment banker to provide financial advisory and investment banking services and to assist the Company in reviewing and evaluating various financing, transactional and strategic alternatives, including a possible merger, restructuring or sale of the Company.

By then, the losses had mounted to $629.3 milion, the plant was not operating, there was no capital to implement “fixes” that would allow re-start, and there was no revenue coming in the door and even when fuels had been produced, the production levels had been catastrophically below forecasts.

O’Connor resigns

In late August 2014, Paul O’Connor resigned from the company. His letter of resignation is a poignant summary of all that went wrong with the company as it failed to advance what had been a promising technology, and of the actions undertaken during the first half of 2014.

LETTER OF RESIGNATION

Hoevelaken, August 31st 2014

From: Paul O’Connor

To: The board of directors of KiOR Inc.

Dear fellow directors

As you know the KiOR technology to convert waste biomass into fuels and chemicals via catalytic pyrolysis (or cracking) originated from a Dutch company called BIOeCON, which invented and explored this concept in 2006 and 2007. I am one of the principal inventors of this technology. Other key inventors are Prof’s Avelino Corma, Jacob Moulijn, Dr. Dennis Stamires, Dr. Igor Babich and Sjoerd Daamen B.Sc. all working and cooperating with BIOeCON since early 2006.

At the end of 2007 BIOeCON and Khosla Ventures (KV) formed KiOR Inc., whereby BIOeCON
contributed the technological ideas and the IP, and KV the funding. In 2008 at my suggestion KiOR hired Fred Cannon as their CEO. Fred Cannon had been my boss earlier at Akzo Nobel and Albemarle and I valued Fred for his excellent people skills. During the Akzo years I worked very close with Fred, whereby I lead the technology development together with 2 other colleagues (One of them Dr. Hans Heinerman, who also worked for KiOR in 2008-2009). Fred was always able to get the financial support from the Akzo Nobel board for the funding so we could execute our innovative projects, which greatly enhanced the profitability and value of the Akzo Nobel Catalyst group.

During the first two years of KiOR 2008-2009, I worked as CTO with Fred in building up the organization, proving the concept in a modified FCC pilot plant and leading the research into improved catalysts. Already then we had some technical disagreements about the road forward and managerial issues about the experience and quality of the people being hired. Unfortunately Fred broke off the links to the BIOeCON origin of the technology and so KiOR lost some very valuable experience and insights from the strong European experts connected with BIOeCON. My two-year contract, as CTO was not renewed in October 2009. I did stay on the board of KiOR, until May of 2011. During this period on the board my access to technical information was restricted and limited as the MT and Khosla Ventures were uneasy about my known other activities in the area of biomass conversion in cooperation with PETROBRAS. This cooperation by the way is outside of the KiOR scope as was agreed with Khosla Ventures during the formation of KiOR.

Initially I was not too concerned about the further development of KiOR technology as one of the few figures presented to the board of directors in February of 2011 (See Attachment A) indicated some good progress in increasing the yields in gallons per ton. At the end of 2011 however, I received some additional data (See attachment B) and I was shocked to see that the yields were lower than reported in February…and that hardly any progress had been made since the end of 2009. I immediately informed KiOR’s CEO, Fred Cannon and Samir Kaul (Director for Khosla Venture, as BIOeCON’s partner and main shareholder of KiOR) about my concerns regarding the limited improvements achieved. After several e-mail and phone discussions with Fred Cannon and Samir Kaul, I received the opportunity to visit KiOR for a technology review. Unfortunately the review was very restricted and limited. Still with the limited data made available to me during my review I could conclude that part of the problem of the lower yields…My main conclusions were:

The present overall yield of saleable liquid products, roughly estimated from the information received falls short of [claims] and has not improved significantly over the last two years.

At the last board meeting where I was present (April/May 2012) the R&D director after a Technology Update, under questioning by myself admitted that we should not expect to reach the [projected yields] at Columbus, but possibly at the next commercial plant including further reactor modifications. I estimated that based on the R&D data given to me at that time, that the real yields for Columbus would be closer to [much lower figures]. Unfortunately none of my recommendations was followed up.

It is obvious for all of us today that KiOR is going through some difficult times, and may even not survive as a company. The reason for this, in my opinion, is not because of the failure of the technology itself, but because of several wrong choices made during the development and commercialization of the technology. Over the years there have been several warning signals (internal & external), one of which as I mentioned in the foregoing has been my own technology audit report in March/April of 2011. Notwithstanding these warnings KiOR’s MT continued on their set course. In mean time everyone else hoped for the best.

After the mechanical completion of the Columbus plant it took quite a long time, before the plant actually started producing products. Of course I was concerned and in preparation of the Annual shareholders meeting in May 2013, I sent a letter to Fred Cannon asking some important questions. At the annual meeting I had a separate meeting with Fred and Samir Kaul. Fred’s response was that I was too negative: “ We (= KiOR) have made tremendous progress in the last 18 months in R&D ”

The real proof-of-the-pudding however would be a successful start-up and operation of Columbus in 2013. Unfortunately this did not work out the way, which everyone had hoped for and several problems were encountered leading to production rates [at much lower percentages compared to] the actual design case. The first impression was that this was related to “normal” start-up issues. After an audit requested by the KiOR board and Khosla Ventures in November of 2013 it became clear however that the product yields were in fact much lower than projected…while the on-stream times were also way too low…I have stressed to the board that in my opinion a clear change (Plan B/Re-set) in technology strategy as well as leadership style (Openness & Transparency) is essential to solve the issues. I reported this to Will Roach and the board in early February…Near the end of March you as KiOR board asked me to join the board and to assist as a technical advisor, while I would be empowered to lead a taskforce of KiOR’s R&D and technology to address and solve the existing issues in KiOR’s technology.

I started forming this taskforce in April, with apparent approval of the MT, after making some difficult compromises with the MT, as the MT still had very different views on how to improve the technology. These different views resulted in strong differences of opinions with regards to the priorities to be given, the organization, people decisions etc. I persisted with my task and returned to Houston after a short stay in Europe in May. I was then requested by the board to postpone my visits to KiOR, because of my critical attitude towards the MT (sic). This meant that my efforts to lead the taskforce and make the necessary changes at KiOR stopped: In my opinion KiOR hereby lost some crucial months and also some good people. I tried to meet with the MT to reestablish a mode of working together, but the MT did not respond…

Concluding:

I am of the opinion that KiOR’s MT professionally has not performed in evolving the KiOR technology to a commercial success; furthermore the MT in my opinion has not provided the board of directors of KiOR with the adequate, right and relevant information to do their job. I therefore am of the opinion that the MT needs to resign and to be replaced in order to improve the chances of success of KiOR and/or any other potential new ventures based on KiOR technology in the future.

In the mean time, as I do not have the opportunity to help KiOR as originally intended, I have resigned from the board as of August 31st 2014. Although I am no longer on the board, I remain a strong supporter of KiOR technology and the company and hope you as board will wisely decide on the future of KiOR.

Very best regards

/s/ Paul O’Connor

31 Aug 2014

Paul O’Connor

KiOR files for bankruptcy

On November 9th 2014, as the state of Mississippi noted, “the KiOR house of cards had fully collapsed,” and KiOR filed
for Chapter 11 bankruptcy protection. Mississippi also noted that “Vinod Khosla and those individuals and entities affiliated with him are seeking to be released from any derivative liability they may have to KiOR.”

The Mississippi Development Authority contested Khosla’s bid “to whitewash his fault” and attempted to convert the Chapter 11 proceeding into a Chapter 7 proceeding. Ultimately, the KiOR Columbus facility assets were sold at auction for pennies on the dollar, and the KiOR technology and its pilot plant and offices in Pasadena , Texas were re-organized as Anaeris Technologies, and the company continues to pursue its technology today.

As Mississippi stated in its lawsuit, the SEC launched a securities fraud investigation:

KiOR and certain of its officers and directors were named defendants in a securities fraud class action and a shareholders’ derivative lawsuit that were consolidated in federal court in Houston, Texas. Mark Ross has filed a whistleblower action against KiOR in which he alleges that he was wrongfully terminated for continually bringing the disparities between the company’s financial modeling and actual performance to light.

Finally, the Attorney General of the State of Mississippi sued the individuals and entities he held responsible for “the commission and cover-up of one of the largest frauds ever perpetrated on the State of Mississippi.” Among the targets were Vinod Khosla and Samir Kaul. As “the deep pockets” in any judgment or settlement, it was vital to Mississippi’s recovery of money to link Khosla and Kaul to a conspiracy. Otherwise, they might be treated as victims themselves investors who had also suffered financial damage. Leaving Mississippi without a bundle of cash to chase in recompense.

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Mississippi alleged:

Kaul was on the KiOR Board of Directors from the outset of the company and was actively involved in monitoring the Company’s progress, including the development of the Company’s technology and the Company’s short and long

term financial projections. Khosla and Kaul received regular, detailed updates on the status of the Company’s technology and financial projections from the founding of the Company through the present day. In fact, Khosla exercised such control over KiOR and was so involved its management that the Company’s lead director, Gary Whitlock, has testified that KiOR belonged to Vinod Khosla prior to the Company’s initial public offering of stock and Khosla was free to do with the Company as he pleased.

Khosla interviewed and approved most or all of KiOR’s senior management and members of the Board before they were hired or appointed. Vinod Khosla has at all times had the ability to terminate or demand the termination or resignation of KiOR’s senior executives and, upon information and belief, has threaten to exercise and/or has exercised such ability in order to control KiOR.

Samir Kaul and Vinod Khosla directed and controlled the representations made by Khosla Ventures’ agent, Dennis Cuneo, while Cuneo was acting within the course and scope of his agency. Kaul and Khosla were aware of Cuneo’s misrepresentations and undertook no efforts to amend or correct them, precisely because Cuneo’s misrepresentations were consistent with Kaul’s and Khosla’s directives.

Mississippi recounted the specific failures of the company’s technology and the cover-up that ensued.

1. KiOR’s total process yields were not high enough to render the Company profitable.

2. KiOR’s catalyst costs, catalyst replacement rate and capacity creep all contributed to render the Company unprofitable.

3. KiOR did not make a high quality crude oil, but instead made a biocrude that was high in oxygen and acids which made the biocrude difficult to refine within the standard equipment of major oil companies.

4. KiOR had been informed by [Catchlight Energy] and other major oil companies that they were unable and unwilling to refine the Company’s biocrude in quantities that the parties found acceptable.

5. Due to its inability to convince a major oil company to refine its biocrude, KiOR was forced to construct and operate its own refinery in Columbus. These additional costs had not been included in the Company’s financial modeling and projections.

The End of an Era

And so, with the November 2014 bankruptcy filing at KiOR, the era of development and deployment gave way to an era of restructuring and recrimination. The company had once been hailed as one of titanic promise, but had been revealed as one of titanic promises which were not matched by performance.

At the heart of the failure? The 22 gallon per ton yields at Columbus, following on from the 30+ per gallon yields at the demonstration plant, and the 40+ gallons per ton yields at the pilot plant. KiOR has banked on steady improvement of yields, but instead there was a steady decline as the company moved towards scale.

As Paul O’Connor observed in August 2014:

Around that time the KiOR board (via Will Roach and Samir Kaul) approached me to help KiOR as a technical expert in reviewing the situation at KiOR and in January of 2014 I signed an NDA and started reviewing the data from Columbus and R&D. My observation was that the low yields and on-stream times at Columbus were reasonably in line with the results and experience in the DEMO plant in Houston.

This means that the main problems at Columbus are already discernible in the DEMO operations and are therefore structural and not “just” operational issues. My belief then and still now is, that these problems can be solved, but that this will require a different approach in catalyst selection and operation strategy.

But these are technical issues, and virtually every new technology is replete with stories of ideas that did not work out, clashes between technologists with differing opinion as to how improvement is to be made.

What distinguished KiOR, almost alone among a class of technologies the Digest has covered for a decade, are the management responses to issues. Even at the end, KiOR management was trying the same failed strategy of rosy projections that could not be achieved by its technology at the time. Even in the final months before filing bankruptcy, when cash flow was critical and new investment or even sale of the company was urgently under consideration, O’Connor observed:

In the mean time KiOR has started a marketing process (via Guggenheim) to explore investment and/or sale opportunities for the company. This is a good initiative, as it may help to salvage this interesting and promising technology. However, it is also my conviction that in order to maximize the value and “survivability” of KiOR, KiOR should use the time and funds still available, to focus on the alternative approaches that I have proposed, which I believe will be able to prove on the DEMO scale that the yields and on-stream times of KiOR technology can be substantially improved.

Unfortunately the MT is still not receptive to this and has distributed, what I believe are poorly substantiated projections for Guggenheim to pitch KiOR to potential investors and/or buyers. These projections do not include the crucial learning’s from the DEMO and Columbus. Keep in mind that the MT also convinced the board at the time to build and start-up Columbus based on proj
ections, which have not been substantiated in the DEMO, while we now know that the DEMO predicted reasonably well the poor yields and on-stream times at Columbus. As already communicated to you earlier I cannot support this approach.

The KiOR reorganization that wasn’t

On November 9, 2014, KiOR reported that it had filed Chapter 11, and would continue to operate its businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

Interestingly, KiOR Columbus LLC KiOR’s wholly-owned subsidiary, was “not a party to the Chapter 11 Case”. Clearly it was the troubles at Columbus that led to the bankruptcy event. Clearly the company had for some time indicated that a goal in restructuring the company was to “restart its Columbus facility, build its next commercial production facility and subsequent facilities, continue the development of its technology and products, commercialize any products resulting from its research and development efforts, and satisfy its debt service obligations.”

Even more interesting, KiOR wasn’t headed for a reorganization. Rather, the filing stated the preferred outcome right up front:

KiOR currently intends to seek approval from the Bankruptcy Court for an auction and sale of its assets under Section 363 of the Bankruptcy Code.

Keep in mind these are not the Columbus assets the plant itself. Rather, these were the KiOR technology assets. These would eventually re-emerge as Anaeris and, perhaps not surprisingly remained under the ownership of Khosla’s investment interests.

A footnote: Slap on the wrist for management

In September 2016, the US Securities and Exchange Commission reported:

SEC Charges Alternative Fuels Company and Former Executive for Key Omissions Regarding Technology

On September 26, 2016, the Securities and Exchange Commission charged Texas-based Mard, Inc., formerly known as KiOR, Inc., (“KiOR”), and its former CEO and President Fred Cannon for failing to disclose important assumptions about the yield that KiOR had claimed to have achieved through the company’s proprietary process of converting wood and other biomass into crude oil – a key metric that was critical to KiOR’s viability.

According to the SEC’s complaint filed in Houston federal court, beginning in April 2011 with the filing of KiOR’s registration statement for its initial public offering, KiOR and Cannon claimed that the company had “achieved” a yield of 67 gallons of fuel per ton of biomass. But they did not disclose that this yield was based on significant assumptions about technologies that remained under development. Absent these assumptions, internal KiOR documents reflected test results with yields of approximately 18-30 percent less than the disclosed yield. Cannon signed and approved the registration statement and subsequent filings that continued to tout the 67 gallon yield figure without disclosing the underlying assumptions. KiOR and Cannon knew or should have known that disclosure of these assumptions was necessary to provide complete and accurate information to KiOR investors about the actual yield. In November 2014, KiOR declared Chapter 11 bankruptcy, emerging as a privately-owned entity in June 2015.

Without admitting or denying the SEC’s charges, KiOR and Cannon agreed to settle the claims against them. Both have agreed to the entry of a final judgment permanently enjoining them from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and Cannon has agreed to pay a civil penalty of $100,000. The settlement is pending final approval by the court.

Management or board?

If O’Connor’s thesis is correct and KiOR’s troubles are the result of a management failure, the board’s failure to properly supervise its executive officers stands out as a hallmark of what KiOR ultimately became.

The board’s powers to structure a company to the faking of data is absolute and requires no specific mandate. It is the purpose for which boards are established: to ensure transparency and protection for the shareholders who have elected the board. The directors may well escape the trident and net of the courts as they often do but whether they escape the judgement of public opinion: that is up to the public.

But was it all simply board inattention? Some point fingers at the payday which KiOR represented to employees paychecks, bonuses, fees, stock options. Of course, one of the most ironic features of KiOR’s demise were the occasions on which KiOR obtained silence in return for shares the ultimately worthless shares of the company.

Was simple greed the key factor which kept doubt from turning into active revolt which kept whistle-blowing activity to a minimum until by 2013-14 and the company was unable to meet its bills?

As Dennis Stamires outlined:

Paul O’Connor comes in 2012 comes to Kior sent by the board to see how things are going along with the technology. The KiOR guys, Chris Artzer and John Hacskaylo, they had it pretty well-organized what they were going to tell Paul. I was not invited to be present but I found out later that what they presented to him was very limited, and was highly censored by Chris [Artzer], Hacskaylo and Fred [Cannon]. He gets only partial and maybe some misleading information and he’s supposed to go back and write a report for the board. Paul comes to me, and said, Dennis, I’m here representing the Board. I said, wonderful. You’re representing the Board? I’m going to open my heart to you.”

Here I am, givcing this information to Paul, everything, and he said, well this is what’s really happening? I gave him all the details because said I am was representing the Board. Meantime, I want to get to the Board, because Gary [Whitlock] had not called me and I wanted to get to the Board. Great opportunity. So I did that. And he was going to go to the Board. Except what I did not like when the IPO came out, Paul knew exactly what’s going on. He knew the story. He knew what was going on at KiOR. He knew that KiOR was going to go down. He dumped his shares and made $12 million.”

It’s an allegation, not a fact whether O’Connor had enough information in 2012 to decide that “KiOR was going to go down” is open to interpretation. Even Stamires, who makes the allegation, didn’t exit the company for another year, all the while making desperate attempts to bring the faked data and real yields to the Board. So, there must have been some hope for KiOR even at the late stage that new technology could be deployed, and that KiOR’s technological failures did not ensure a company failure, until the very end when the cash ran out when the actual results of biocrude production at the Columbus plant could not be hidden.

It may well come down to this: a belief that scale-up itself could be changed through innovation. KiOR was not just about innovative technology, but about an innovative path to commercial success. As this presentation slide demonstrated, the KiOR ethos focused on “don’t listen to the naysayers” principles: the company was about breaking free from the shackles of ossified thinking about how to go about things. To an extent, reality may well have been dismissed as “naysaying”, and dissenters branded as “old school”.

For KiOR, the model companies were not Chevron or AkzoNobel, but Google, eBay and Amazon.com. All which belonged in the digital economy, rather than the physical economy. An attempt to port concepts from one sector to another may well have been at the heart of KiOR’s troubles.

Never, never land

The bottom line? For K
iOR, there were the three nevers.

The first never. The 67 gallon per ton claim in the IPO. We asked Denis Stamires, point-blank: was there any result, ever, using KiOR technology, with refinery-compatible oxygen levels in the 67 gallon per ton range, or even in the 50s?

Stamires was emphatic. “No. Never.”

Was it a complete fabrication? “It is. It has to be.” Stamires said. “I was the top scientist, and I had no idea that the [S-1] had even been written for the SEC.”

The second never. We asked Stamires. Did you ever have a chance to review the yield claims prior to the IPO?

“Never. And they even put my name on it. How did I found out? After it had gone out into the public, my son who is a business executive, found it from his Wall Street friends. I got a copy from Wall Street, and I was at KiOR. It blows your mind. When I saw the 67, I said ‘where the hell does this come from’? But what killed me was the $1.80 per gallon. We’re talking about a few dollars, but not $1.80.”

The third never. Had 67 gallons per ton been achieved, could $1.80 been achieved?

“Absolutely not. Not even close,” said Stamires. The problem there?

“The cost of the catalyst. It wasn’t lasting long. But you are using a catalyst that costs between $5 and $10 a pound. You’re not making pharmaceuticals, you’re making bio-oil.”

The catalyst design was fatal to the technology’s cost objective? “Absolutely. High use of a catalyst at a high price? You don’t have anything.”

What about catalyst loss? “You might lose up to 1% in a normal operation,” Stamires told The Digest. “But KiOR was losing over 10%. The whole thing was becoming academic. The process had a lot of metals, and was severe, and the biomass contains metals, and the process, the velocities and the contact time. It was the process time. It deactivated pretty fast. You get plugged pores. But it was the metals in the biomass. We were not removing them, we were adding them, in pre-treatment with salts.”

Never, never, never. That’s the story of KiOR.

For the public and investors, the focus may better be placed on “never again”.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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