The Inside True Story of a Company Gone Wrong, Part 4by 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”.
But so far, the company and its celebrity investors and directors such as former Secretary of State Condoleezza Rice and famed venture capitalist Vinod Khosla had escaped close scrutiny.
Read the previous Parts in this Series
The methods for keeping the truth bottled up were not pretty. According to our sources for this story, dissenters had been fired, data had been faked, and opportunities to address the impending debacle with improved technology were ignored, underfunded or shelved. Meanwhile, the Board was misled either proactively or through lack of guidance on key performance indicators. Trouble that had been looming in 2010 had boiled into outright crisis in 2011.
Some progress had been made on technology, but not enough, Not nearly enough. The critical success factor, the bio-oil yields, had been increased from “the low 30s to the low 40s,” one staffer recalled.
And, worse, the production cost was “several dollars per gallon” according to those familiar with the state of technology development. The progress achieved had stemmed from changing the Technology from the original BCC reactor design and using a new ZSM Zeolite catalyst
Fatally, the progress on yields had been made at a catastrophic increase in the catalyst cost. One source close to the technology at that time recalled, “it was too far away from a production cost necessary to sustain an economically feasible business without government subsidies.”
The Spreading Fear
The result? Fear inside the company’s management team. The funds needed to be able to continue operations would soon be depleted. Potential investors, said one company insider, became skeptical about the over-glorified, profitable financial picture the Management team was claiming and deceitfully presenting to the public and to investors.”
Technical staff members at the time were particularly incensed over claims that yields were increasing from 67 to 72 gallons per ton, the projection of 90+ gallon per ton yields at the proposed Natchez, Mississippi commercial-scale plant, and a claim that production costs were being reduced to “close to $2 per gallon of fuel.”
“They were scared of exposure,” former CTO and board director Paul O’Connor recalled, “and [they made] a series of reckless actions.” And small wonder, for story that was told to the public was one of steadily increasing yields and progress in major company partnerships.
As the Motley Fool observed in March 2012:
“KiOR has been successful in steadily improving yield over the last few years from 17 gallons per ton to 67 gallons per ton. Notably, it has backing of large industrial companies like Chevron…The Columbus facility is on schedule to begin production in the second half of this year with an annual production capacity of 13 million gallons of biocrude. We cannot overemphasize how important a positive outcome at Columbus is.”
Yet, the yields were lower and the Chevron relationship, as originally envisioned in the form of an offtaker of crude bio-oil, was in tatters. Chevron would only take a finished fuel.
The Motley Fool was right on the money in one respect. Columbus was key. But there were intense risk factors implicit in the company’s yield targets. With the plant’s stated capacity of 500 tons per day, even with an 82% uptime, the yields would have to reach 87 gallons per ton to reach the targeted 13 million gallons of biocrude production.
That was more than double what the company had yet achieved in the demo or pilot plants, according to staff familiar with the state of technology development at the time.
A split in the management team
By the first quarter of 2012, KiOR team members pointed to a spilt in the management team, which had previously insulated itself from the technical staff.
“The modus operandi was “Reckless rush to Commercial,” recalled Dennis Stamires.
“Khosla and Kaul made the important decisions,” Stamires added, “while Ditsch and Cannon simply executed the orders. And Ditsch, Hacskaylo, Artzer, and Cannon set the [day-to-day] policies, and communicated with the public and investors. The rest of the management team were kept in the dark. It created confusion, poor morale, fear, discord, and mismanagement. On February 20th, I resigned from KiOR Management team, and notified the CEO, Fred Cannon, that I would devote all my time and available resources to developing a new, economically feasible technology capable of meeting KiOR’s business objectives.”
Paul O’Connor agrees that there was an unhealthy organization. “There was this tactic to silence people and [prevent them from] revealing secrets. At BIOeCON we would ask our technical people to tell shareholders what issues there were. Our perspective was that, if you know what the problem is you can solve it.”
The most obvious sign of technical trouble was over work on the company’s BFCC technology.
Despite claims of higher yields in the IPO documentation and elsewhere, the demonstration unit, using the latest ZSM zeolite catalysts, was still a dud. When the oxygen content was kept below 15%, the actual bio-oil yields reached into the 30s in gallons per ton. And 15% was the technical threshold where scientists at the time that the bio-oil could be converted into a salable fuel, by anyone.
Think of it this way. KiOR projected it could acquire its feedstock, Southern yellow pine, at an average cost of $66 per ton. Even at 40 gallons per ton, that would equate to $1.65 in cost. Before paying for the conversion technology. Or the building of the plant. Or the operating of it. Or anything to pay the workers. Much less pay back the investors. Or lenders like Mississippi.
Today, on a wholesale basis, finished gasoline blendstock sells for $1.40 per gallon. A financial debacle of immense proportions loomed, unless something could be done.
But it got worse, not better. Members of the technical team believed that the BFCC conversion process was not scalable to full commercial size plants without further reducing the yields. Yet, KiOR’s R&D management insisted on continuing work on the BFCC Technology and optimization of the ZSM catalysts.
“They were beating a dead horse,” one technical team member recalled.
By the end of the first quarter of 2012, KiOR team members of the time said that the company had lost much of its original core of expertise, as “most key technical personnel had left , or were planning soon to leave”. They were fearful that the truth would come out, investors would flee, KiOR would fall, and with it would go their jobs.
The Clock Begins to Run Out
Technical staff felt that exposure would come no later than the opening of the Columbus plant, when it would start operation and not be able to meet the yields used in the financial models and presented to investors.
In January 2012, Dennis Stamires requested the formation of a task force, called “Project Team Oil Yield”, operating separately from Hacskaylo’ R&D group and reporting directly to CEO Fred Cannon, with the objective to introduce in the DEMO Unit and subsequently to the Columbus plant, “a new feasible Technology capable of meeting KiOR’ Business objectives.” At that time, Professor Vasalos had also agreed to participate. BioeCON founder and former KiOR board member Paul O’Connor was in support.
Stamires recalled that, at the time he explained to CEO Fred Cannon, “it was very important to conduct a technology review and assessment in the presence of an Independent expert. It would make the findings and conclusions more credible. It could have convinced the board, and Khosla to act swiftly. It could have saved KiOR.”
Cannon stalled in making a decision. In late January, according to Stamires, he said that “I am still considering doing that, but not sure how to do it without getting Hacskaylo pissed-off”.
But time was beginning to run out.
Meanwhile, Professor Vasalos planned a three-day visit to KiOR on January 25th, and prepared a brief to present to Cannon on the new proposed technology.
But, in the end, Cannon declined to meet with Vasalos during the entirety of his stay. And on February 22nd, Cannon contacted Stamires to say, based on what he described as “legal confidentiality concerns,” that Vasalos could not be included in any review or assessment meeting.
The Vasalos decision is a puzzle.
First, Vasalos was confidentially bound by his Consulting Agreement Contract to KiOR. Second, he had previously analyzed KiOR’ Pilot plant and the Demo unit’s raw data. Second, after consulting with Robert Bartek, together with Dr. Steve McGovern had written an “Independent Review and Analysis Report of KIOR’s Pilot Unit Data”, submitted in March 2010. Third, Vasalos had, earlier, licensed his own Reactor design to KiOR, which KIOR had incorporated into the design of the KBR Pilot Plant and in the Demo Unit, resulting in a substantial increase of bio-oil yields. They could hardly have found a more expert, independent voice more tied down in confidentiality agreements.
It is difficult to imagine how a company could have better conveyed an attitude of fear of independent review, as if there was a scam in the works and a rush to transfer ownership to duped retail investors as soon as humanly possible.
O’Connor reaches out to Khosla Ventures, and is rebuffed
According to the State of Mississippi, “on February 8, 2012, O’Connor requested that Vinod Khosla and Samir Kaul schedule a time to speak with him,” concerning the state of technology development. Kaul refused to speak with O’Connor. Mississippi alleges that Kaul’s motives were “an effort to conceal his role and the role of his boss, Vinod Khosla, in the cover-up of the actual yields being achieved in KiOR’s pilot and demonstration units.” But there is no confirming evidence of this.
The Technology Review
On March 2nd, Paul O’Connor wrote to Stamires, and said, “this is really very weird/strange”. KiOR had a draft agenda for a Technology Review scheduled to take place on March 8th. The draft had a list of speakers and invited staff. No Stamires. Only a handful of subjects to be discussed.
“It was a fiasco,” said a KiOR team member who attended. “The discussion was heavily censored and rehearsed, and it certainly did not answer any of O’Connor’s questions regarding actual bio-oil yields and related costs. it was rigged and staged, full of smoke and mirrors.”
By this time, O’Connor was on a hunt for answers, in order to report back to the Board on the actual status of the technology. During his visit to Houston for the Review, O’Connor met privately with Stamires and discussed extensively the proceedings of the meeting, and discussed the prospect of both men making a visit to Vinod Khosla in California.
Then, Stamires met with Cannon and warned him that in “dodging O’Connor’s questions and not providing him with complete truthful information about actual bio oil yields, the Management team had misled O’Connor, undermined the KiOR’ Board, and fatally hurt KiOR.”
On March 11th, Stamires provided O’Connor with a list of the most important issues of KiOR’ Technology problems to be included in his presentation to the Board.
On the morning of March 15th, O’Connor wrote directly to Cannon.
Further to my visit and our telephone conversation Monday, I would like some additional information/data to round of my feedback to the board:
1) Actual performance data from the Demo Plant. Reactor effluent oil yields (BOE or GPBD) and oxygen content (%) as a function of time since demo start-up (No info on reactor or catalyst necessary).
2) Best estimate you have today on % oil recovery to calculate the “Overall product yield” from the reactor effluent yield.
3) Your assumptions and calculation of the $ 1.80 / gallon product cost for a 1500 ton/day plant @ 67? GPBD yield
4) List of abandoned patents (~28) of which I am a co-inventor
I will contact Samir to see how he wants to discuss this at the board. I agree with you that an Oral presentation is the best.
And on March 22nd, O’Connor reported back to the KiOR board.
On March 8th at the invitation of Fred Cannon (CEO) I visited KiOR to discuss my concerns about the in my mind the limited improvements in the overall process yields obtained over the last 2 years.
My concerns were based on the scarce and conflicting information on product yields I received during the board of director meetings (BOD) in the period of 2009 up to 2011 These concerns are further amplified given the fierce, rapidly evolving and well-funded competitive technologies in this space. One example is the JV between Ensyn and UOP.
The following assessment is based on limited additional information I received during the meeting and presentations at KiOR on March 8th, and is constrained by the following limitations:
1) I requested, but did not receive the “raw” actual pilot plant and demo plant yields to be able to check the validity of the data presented to me.
2) I asked, but was not given the opportunity for private one-to-one interviews with key technical personnel, who actually perform the work.
3) I did not receive answers to several critical questions asked during and after my visit to KiOR.
4) I asked, but was not allowed assistance from the in-house expert consultant, Prof Vasalos, to analyze and validate yield performance.
5) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw bio-oil to be hydro-treated for upgrading.
Notwithstanding the foregoing it is still possible for me to make the following observations:
1) The KiOR management team has made excellent progress in building the organization and scaling up the BCC process from the Pilot to the Demo phase and now also the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.
2) The KiOR management and technical personnel feel confident that they can start-up the Columbus plant in 2012 and produce good quality salable products (Gasoline, Diesel, Low S Heavy Fuel Oil).
3) As can be expected, the major effort of R&D has been and still is in the scaling-up of the process and the catalyst and hence only limited effort has been spent on searching for the next breakthroughs. In fact the catalyst and reactor concepts presently being developed were already conceived in 2009.
4) The way in which product yields are being reported (e.g. to the BOD) by R&D management is incomplete and misleading and does not correspond with the actual goal of improving overall yield of sale-able liquid products.
5) The present overall yield of sale-able liquid products, estimated from the information received falls short of the targets set for 2012…and has not improved considerably over the last two years .
6) In my opinion it is still possible to reach the target…and possibly even also the long term target…but this will require a drastically different approach, than presently being pursued by R&D.
On March 21st, O’Connor sent back to Stamires his first draft of a report to be presented to the Board during its March 23rd meeting,“Technology Assessment-March 2012”, asking for his further comments. , which Stamires reviewed. Ultimately, O’COnnor would address emails to Cannon on March 23rd, April 21st, and April 23rd asking for response on these items.
No Eeyores at KiOR
Yet, by April 2012, management still expressed a stubborn belief that the Natchez commercial-scale plant would produce 80 gallon per ton yields. That month, CEO Fred Cannon wrote to staff announcing promotion of Ed Smith’, acknowledging of his accomplishments in building the pilot plants and the Columbus commercial plant on time and under budget.
In the memo, he could have not spelled out the proposed yields more clearly.
“Smith will oversee the construction of KiOR’ next commercial plan of 1,500 ton/120,000 gallon/day facility planned for Natchez.“ 120,000 gallons from 1500 tons of biomass: that’s an 80 gallon per ton yield. Yet yields in the Demo plant were no higher than the mid-30s, and technical staff feared that they would sink even lower in the commercial-scale plant at Columbus.
“It was the oil recovery,” O’Connor told The Digest. “The whole problem was there. Although some may speculate that the KiOR team were including water content in calculating oil yields, there’s no firm evidence for that. But some oil is so emulsified, that you can’t recover it, it goes out with the water when you separate. I believe that’s why the yields were low in actuality compared to what was being reported, They reported the oil content, not the oil they were capable of recovering. You only have to look at the trouble KiOR was getting into for the water that was being discharged by the plant. It was so full of oil that regulators were complaining.”
But, here, there is an ongoing disagreement between O’Connor and other members of the staff research team who spoke with The Digest, They contended that the real issue was that the bio-oil yields observed in the Pilot Plant and DEMO Unit, where the oil separation from water was very good, were about half of the required amount to be an economical and feasible process.
New technical reports confirm the low yields and are suppressed
In March 2012, Dr. Peter Loezos and Liang Chen wrote a report describing the operations and analyzing the results of the Demo unit’s test results, including bio-oil yields. Loezos was a chemical engineer formerly working for ExxonMobil, and was at this time the Technical supervisor of the Demo unit. He reported to John Hacskaylo. And Loezos and Chen wrote another report in June 2012. Both confirmed that the yields were far lower than the 67 gallons per ton claimed in public documents.
According to a team member familiar with the reports, “they were not allowed by Hacskaylo to publish or discuss their reports and conclusions, even within their own R&D group and their colleagues.”
O’Connor’s Second Strike
On April 21st, Paul O’Connor wrote an update for the Board. His concerns about not receiving raw data were not new, but were revived. But he levels charges at management of preventing him, as a board member, the assistance of an independent expert to review the state of technology advancement. But for the first time, he refers to misleading statements by R&D management. And he called for the hiring of a strong CTO — a position he had himself filled in the distant past.
Most importantly, there is a clear theme in his note of calling for experts and Board actions independent of management. Although he did not directly attack the overall management of KiOR, or Cannon himself, there is a clear sense of wariness in his missive.
As one of the few directors of KiOR with a technical background I feel I have a special responsibility to critically review the progress being made at KiOR in the fields of Technology and Research & Development. Overall the information we have been receiving in the area of Technology and R&D as directors of the board has been very limited and very superficial.
In December last I expressed concerns about the limited improvements made in R&D related to the overall process yields. My concerns were based on scarce and conflicting data received during the board meeting in December. At the invitation of Fred Cannon (CEO) I visited KiOR early March to discuss these concerns, while after the BOD meeting of March 23rd the R&D Manager gave a very limited R&D overview to the directors present, which confirmed my opinion that the metrics presently being used to monitor R&D progress are inadequate.
The following assessment is based on limited information received during the meeting and presentations at KiOR on March 8th, and the presentation of the R&D Manager on March 23rd and is constrained by the following limitations:
1) I did not receive the “raw” actual BCC and BCC HT oil hydro-treater pilot plant and demo plant yields.
2) I was not given the opportunity for private one-to-one interviews with key technical personnel.
3) I did not receive answers to several critical follow-up questions asked during and after my visit.
4) I was not allowed assistance from an expert consultant, to analyze and validate the BCC and BCC HT process performance in depth.
5) I was not given any information on the bio-oil/water separation.
6) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw BCC bio-oil to be hydro-treated for upgrading into saleable products.
Therefore this review and assessment is very preliminary and should definitely not be considered as a full in depth technology audit. Notwithstanding these limitations is still possible for me to report some key observations and recommendations.
1) KiOR management team has made excellent progress in building the organization and scaling up the BCC process from the Pilot to the Demo phase and now also to the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.
2) KiOR management feels confident that they can start up the Columbus plant in 2012 and produce good quality saleable products (Gasoline, Diesel, Low S Heavy Fuel Oil).
3) As can be expected, the major effort of R&D has been and still is in the scaling-up of the process and the catalyst and hence only limited effort has been spent on searching for the next breakthroughs. In fact the catalyst and reactor concepts presently being developed were already conceived in 2009.
4) The way in which overall product yields are being reported by R&D management is incomplete, inadequate and misleading and does not correspond with the actual business goal of improving the overall yield of saleable liquid products.
5) The present overall yield of saleable liquid products, roughly estimated from the information received falls short of the targets set for 2012…and has not improved significantly over the last two years.
6) It is possible to reach the target of and possibly even also the long term target…but this will require a drastically different approach, than presently being pursued by R&D.
Recommendations to the CEO
1. Appoint a strong and knowledgeable CTO to effectively lead the important development efforts still required by R&D and Technology.
2. Review and adapt the performance metrics being used by R&D to correspond with the actual business goal of improving the overall yield of saleable liquid products
3. Replace the existing R&D Director . His lack of relevant knowledge is exemplified by his poor reporting of inadequate and even misleading metrics. He has demonstrated not to have the right competences and skills to ensure R&D progress over the last 1-2 years.
4. Establish a separate Discovery Team with dedicated resources, staffed with scientists and engineers with experience in the field and managed by an established, well respected expert reporting directly to the CEO and/or CTO.
To the Board of Directors (BOD)
1. Appoint a knowledgeable independent team reporting to the BOD to perform a true in-depth technology review , without the limitations that constrained my present assessment.
2. Establish a Board Technology Committee (similar to the existing Audit committee) to review the technological progress on a regular basis.
3. Establish a Technical Advisory Board (TAB) consisting of world recognized experts and specialists to advise and assist the CEO, CTO and Board Technology Committee with its tasks (e.g. technology auditing)
Cannon admits a problem
On the afternoon May 18th, Stamires met with Cannon at his office, and recalled that “Cannon admitted that there were indeed certain serious problems and he was thinking to hire a new senior person with management experience reporting directly to him, to help him specifically address the problems.”
“By this time, KIOR practically had no funds left to keep its doors open,” Stamires told The Digest, “and after four years of intensive R&D work, KiOR did not have a scalable and economically feasible technology. Knowing the real test results, management should have stopped lying to the public and investors, changed the technology and re-designed the Columbus plant.”
By July, three groups had access to the Demo data and analyzed it. Loezos and Chen, Charlie Zhang and Dennis Stamires, and Professor Vasalos from CPERI. All three teams came to the same conclusion: the yields were far below the 67 gallons per ton that management was claiming in the IPO documentation.
Zhang and Dydak delve into the yield crisis
Agnes Dydak and Charlie Zhang were KiOR chemical Engineers who had worked at the Demo Unit and also at the Columbus Plant. Zhang did the original development work of Bio oil Upgrading / Hydrotreating for producing the Diesel and Gasoline fuels at the PARK Lab in Pittsburg, and worked on the development of processes to separate more efficiently the oil from the water phase coming out from the Reactor. Zhang also had for a period been night shift process supervisor at the Columbus Plant’ production of Bio oil.
Dydak was a Senior Process Engineer analyzing the DEMO Plant’ data. Using a process simulation modeling program, she was forecasting what will be the bio-oil yield at the Columbus Commercial plant when in operation. This was critical since the reactor was 50 times larger at Columbus.
Her forecasts were devastating.
The model predicted that the production would drop from an average yield of 37 gallons per ton at the Demo plant to a range of 17-21 gallons per ton at Columbus. She reported her finding to her supervisors. A team member familiar with the response said that Hacskaylo and Loescher directed her not to publish the results of her Computer process simulation and yield prediction results of the Columbus plant, and not discuss them with anybody else.
Dydak became ‘extremely concerned’ about KiOR’s future and her job security. Also, her daughter was working at KiOR as an IT specialist. She agreed to meet confidentially with Stamires and, outside of normal working hours, contribute towards the development of an alternative technology, to replace the BFCC process which was used at the Demo unit and also planned for use at Columbus.
Further, the frustrations and concerns of Agnes became much more exasperated when she informed her Management Superiors about the results of the computer process simulation study, indicating that the bio oil yield at the Columbus Plant will be much smaller than the actual yield measured at the Demo Plant, and that her superiors told her not to publish her report or discuss the results with anybody else.
O’Connor’s Third Strike at the Board level
Meanwhile, on April 30th, Paul O’Connor reported again to the Board, in a memo entitled “Towards a prosperous future for KiOR.” For the first time, the fast-dropping KiOR stock price was invoked.
But there was more. Catalyst costs were far above predictions, trashing the expected profit margins. Problems in bringing the Columbus plant on-line were noted. The tone of O’Connor’s note moved from deep concerns in some areas, to a general sense of alarm about a connected series of shortfalls that could have a ruinous impact, if unchecked.
I would like to repeat myself by starting to congratulate Fred Cannon and the KiOR team, in particular Ed Smith for the timely and on budget completion of the first cellulosic biomass conversion plant in Columbus.
During my time at Akzo Nobel Fred and Ed delivered similar achievements in construction and commissioning of chemical plants, amongst other in Houston with the completion of the “CRUSADE” (Cost Reduction USA Damn Exciting) project, which saved Akzo’s FCC catalyst business in the USA. So once again: Congratulations!
Up to the completion of Columbus KiOR has been on time and budget with the delivery of her milestones, however unfortunately since then the success ratio has not been so dramatic, resulting in the following delays and shifts in performance targets:
A. The Columbus plant is not yet on-stream, and the suggestion is that it may take up to nine-months before the plant is completely on-stream and ramped up to its capacity…and product yields.
B. The product yields are not at the Gallons per bone dry wood [level] as estimated at the IPO, and in fact the suggestion is that the GPBD will only be reached in the larger (and modified?) Natchez plant.
C. The catalyst being used at Columbus is based on large quantities of an expensive…(apparently public knowledge!) and the rumor is that no substantial costs reductions are to be expected.
E. Based on A, B and C the overall economics and cash flow of KiOR will be substantially less positive than estimated at the IPO etc. While KiOR management is holding the info on A, B and C confidential, the overall financial result is and will become more clearly visible.
D. Because of A, financing of Natchez plant has been delayed and so also start-up of Natchez has been shifted at least one quarter from 4Q 2014 to 1Q 2015.
The result of the foregoing has been a dramatic drop in the KiOR share value, hurting the interests of all it’s shareholders.
While I still fully believe in the benefits and the potentials of further development of KiOR’s technology, I am very concerned about the way the technology is being implemented. My strong impression is that KiOR’s management although very competent and successful in the construction and commissioning phase, lacks the people with experience, vision and leadership to move forward with necessary improvements of the technology (yield improvement and catalyst cost reduction) and operations (capacity, ramp-up and time on stream). This is hurting KiOR now and could in worst case even turn a potential success into a failure if no appropriate corrective action is taken.
Suppressing a discovery
According to a KiOR team member, at this time R&D manager John Hacskaylo concealed invention disclosures that showed promise in improving bio-oil yields, lowering production costs and replacing the BFCC Technology.
His motive? It is alleged that “such an event would in the eyes of the public and investors indicate that the BCC/BFCC Technology was not really working, and that past claims of 67 gallon yields, projected 80+ gallon yields, and $1.80 per gallon costs were false claims.
In April, a signature event occurred for those who had theorized that a “troika” was running every aspect of KiOR, when one of the troika, Andre Ditsch, resigned. A bitter KiOR staffer recalled, “The head-fraudster…made his millions by badly screwing KiOR.”
Meanwhile, a stealthy effort, described as “outside regular office hours , weekends and vacations,” principally involving Zhang, Dydak and Stamires but also with the unpaid support of Vasalos and Lappas, was underway to develop an alternative technology, as the summer unfolded.
The stock in free-fall
The stock had hit $20.74 in September 2011, and then drifted downwards to $10.18 by December 30th. The stock recovered to a 2012 high of $13.37 by March 30th, and then went into abject free-fall. By June 8th, the stock was selling for $6.82, more than 50% off the IPO price of a year before.
Investors were worried. And the stock would rise and fall in fits and starts but would close out the year at less than $7 per share.
O’Connor bails on the stock
Following the failure of his numerous strikes at salvaging KiOR’s technology, frustrated with what the State of Mississippi alleged to be “obstacles to his technology audit, ”co-founder and director Paul O’Connor started to bail. He resigned as a director in May 2012, and started to unload shares. Fast.
Although other directors and officers were selling shares in 2012, no single KiOR insider besides directors Ralph Alexander or O’Connor sold more than 20,000 shares during the year. Alexander unloaded more than 50,000 shares, hauling in more than $400,000. O’Connor, who held 12 million shares with a market cap of more than $100 million at the beginning of the year, started to sell in large chunks. Nothing before he attempted to rouse the KiOR management and board on three occasions. But he unloaded more than 834,554 shares at $8.84 on May 23rd, and 430,000 more shares before the end of the year, at least, in a $5.92 to $7.08 range.
He may have sold far more. In a May 23rd filing he reported holding more than 12 million shares, but in his October 31 filing, he reported holding 1.958 million. There’s no direct report of a further sale.
“Recklessness and misleading conclusions”
In August 2012, the state of Mississippi alleged recklessness in the financial modeling. The state said, in its lawsuit against KiOR:
“Max Kricorian emailed the corporate financial model to the Company’s executive leadership team and asked that they sign off on the [assumptions] within it. The recipients included John Kasbaum, John Hacskaylo, Ed Smith, John Karnes, Chris Artzer and Fred Cannon. The entire executive leadership team signed off on the key assumptions, despite the recklessness and misleading conclusions to which they led.”
The Sunny Q2 earnings statement
On August 14th, Kior announced a $23 million net loss for the quarter, but Cannon stated:
“We are proceeding on schedule with the commissioning of our Columbus facility and are on track to start the facility up next month. With startup in September, we anticipate that the Columbus facility will be providing America’s first truly sustainable cellulosic gasoline and diesel for American vehicles in the fourth quarter. Also, we expect that the final construction costs for the Columbus facility will be about four percent under our latest cost estimate.”
“In addition to the progress at the Columbus facility, our research and development efforts have generated major advances to our proprietary biomass-to-fuels technology. Once implemented, we believe that these improvements should allow us to increase our nameplate capacity up to 20 percent and significantly decrease the capital intensity of our facilities.”
“Don’t Sell Shares”
In August 2012, O’Connor and Stamires were notified by Samir Kaul not to sell KiOR shares. The rationale? Despite the healthy IPO in 2011, KIOR would soon running out of funds to keep operating, and was in the process of talking to different potential investors. According to Dennis Stamires, Kaul warned that sales of shares, especially by O’Connor and Stamires as co-founders of BIOeCON, would raise strong negative warning signals to the stock market and to the potential investors, adversely affecting KiOR’s future funding negotiations.
Stamires did not sell shares, and O’Connor suspended selling activity until October 31st.
Smith, the Hero of Columbus, loses confidence
Earlier in the year, Vice President of Engineering and Construction Ed Smith has been commended by management for his work in bringing in the construction of the demo unit and the first commercial plant at Columbus on time and under budget. Praise also had been offered by O’Connor.
But the State of Mississippi alleges that, by no later than October 7th, Smith had lost confidence in KiOR, as well. The proximate cause? A series of runs conducted in its Pasadena, Texas pilot plant, according to Mississippi, which based its allegation on an email Smith penned to KiOR employee Arnold Korenek.
The Stealth Team Reports
The Stealth team within KiOR, working nights, weekends and vacations, had not given up. On October 25th, Dennis Stamires delivered to Cannon a detailed Technical Report entitled: “Proposal for Commercial Use of an Efficient, Cost-effective Integrated Process for the Conversion of Biomass to Liquid Fuels.”
Cannon’s Public Response, and Private Non-Response
While the Stealth team awaited a response from Cannon, the CEO went on a PR offensive regarding the company’s bullish prospects. In the Q3 2012 earnings call on November 8th, Cannon stated:
“Based on our experience at our pilot plant and demonstration scale facilities here in Houston , we expect that our technology on implementing the unit at our full-scale commercial plant, in Natchez, would achieve a yield of 72 gallons per bone dry ton of biomass. We believe that the progress generated by R&D investments to date, reflect a steady march to our target yield of 92 gallons per bone dry ton.”
It was the alternative technology which the Stealth Team had been pursuing and which a consensus of technical team members said KiOR needed to close the gap between public projections and actual results.
Cannon thanked Stamires for the Proposal and told him that he will study it and would come back to him.
The report did not directly credit Dydak and Zhang, who were afraid of retribution from Hacskaylo and Loescher. However, Stamires was able to indicate to Cannon only that the Report also represented the work of others, but with names withheld.
In many ways it was a sign of KiOR’s progress from a collaborative group of technologists to a group on fearful employees working in silos.
In the report, Stamires stated the fact that KiOR’s yield gains were essentially stalled at not much more than half of the yields communicated to shareholders. And that only the Pilot Plant was showing even these results, and all of this involved a cost of “several dollars per gallon.”
The concern at the time, was not just about shareholder backlash, but competition. The report contended in its opening that “KiOR was not able to compete with Ensyn/UOP, who were said to producing Bio oil with yields of 80+ gallons per dry ton of Biomass, at a cost of less than $2 per gallon.” In short, the very yields that KiOR hoped to achieve.
The New Technology
The new technology was described as “entirely novel and should be patentable.” There was other good news, specifically that the catalysts and heat carriers, to be used in the new technology would replace the ruinously expensive ZSM Zeolite catalyst. They had been already made by former KiOR staffer Mike Brady and tested by Robert Bartek at the pilot plant in 2009. Their chemical compositions, the proposal outlined, could be further optimized, as well.
At the heart of the technology? A new family of materials exhibiting “Dual-Functionalities”, proprietary to KiOR. They were described as “Metal-Doped Clay-based Spinels”. The proposed new Biomass overall Conversion process, contained certain key individual process steps which had been tested and commercially evaluated, as published in prior art, led Stamires to report that it “ensured that the overall process was scalable up to large commercial size Plants, and Bio oil yields of 80+ gallons per dry ton of Biomass with acceptable quality, and low production cost, will be obtainable.”
Curiously, the IP became somewhat mangled, according to Stamires. “It turned out that some of the new materials and catalysts, invented and developed by Brady and Bartek, had been patented by Paul O’Connor, on Dec. 28th, 2011 and assigned to BIOeCON.”
KiOR hires a fixer
Despite the rosy chat with shareholders and the world, towards the end of 2012, Cannon hired Bill Parker who had worked under Cannon at AkzoNobel as a production and start-up manager, and also at Albemarle, where he was a project manager. Albemarle was located just across the street from KiOR. He came to KiOR having earned a reputation as “a decent, very professional guy, and a person with high integrity,” according to one KiOR staffer. Hopes were high that he would help the company recognize the troubles with its current technology.
A Mystery Next-Gen Catalyst
In a press release released November 8th, concurrently with the earnings call, Cannon went into further detail regarding the state of KiOR’s technology.
“I am pleased to announce that we have commenced operations at the Columbus facility and have produced a high quality oil that is in line with our specifications for upgrading into cellulosic gasoline and diesel. More importantly, we believe the high quality of the oil from the Columbus facility validates KiOR’s proprietary biomass fluid catalytic cracking, or BFCC, technology at commercial scale. The facility’s performance to date not only meets our expectations based on our experience at our pilot and demonstration scale facilities, but also gives me confidence that we remain on track to upgrade our oil in order to ship America’s first truly sustainable cellulosic gasoline and diesel for American vehicles.”
The statement is more than a little disingenuous. Cannon is specifically limiting himself to noting that the oil that was being produced was upgradable into cellulosic gasoline and diesel, without referencing the cost of same.
To be perfectly frank, so long as oil is being produced with less than 15% oxygen content, virtually any pyrolysis oil can be upgraded successfully to cellulosic gasoline and diesel, so long as an appropriate technology is used, so long as cost is not a consideration. The statement by Cannon astutely avoids any discussion of catalyst cost, regeneration, coking and poisoning — factors which routinely frustrated efforts to upgrade bio-oil at an affordable cost, as the Pacific Northwest National Lab noted here.
Was the catalyst being regenerated while retaining activity? Was the process able to run for significant lengths of time on a single catalyst charge? Was the water/oil problem solved so that significant amounts of oil were not leaving the plant via the effluent stream? The Cannon statement sidesteps the issues with a bland statement of confidence that KiOR could produce an in-spec fuel. Something that has been done for decades, successfully. KiOR’s technology wasn’t about making cellulosic fuels. It was about making them cost-effectively.
Cannon looked ahead when he looked at yields. In the press release, he added:
“Furthermore, our research and development efforts continue to make progress increasing our yields and reducing our capital intensity. Our work continues on our next generation catalyst platform, which we believe can produce a yield of 72 gallons per bone dry ton of biomass when implemented at our full scale commercial facility in Natchez. Moreover, we believe that this catalyst platform will reduce the amount of coke made in our process by up to 25 percent, which would enhance the capital efficiency of our commercial facilities by giving us the ability to process up to 25 percent more feedstock without significant additional capital.”
Cannon did not indicate where the next generation catalyst was coming from. Or when it would be ready. Since Cannon had not responded to the Stealth Team, we can presume it wasn’t coming from them. Yet, no KiOR staff member of the era we communicated with on or off the record had any other firm recollection of any catalyst under development at the time which would create yields in this rage, reduce the coking by the suggested amount, and allow the company to “process up to 25 percent more feedstock without significant additional capital.”
But it was more than that. Processing more feedstock didn’t improve the low yields, or the high variable costs associated, for example, with ruinous catalyst costs. Rather, these fixes addressed capital costs — the process technology remained as damaged as ever.
Was there another stealth technology? One supposes in a company as wrapped in mystery as KiOR, perhaps there’s another breakthrough technology in the wings that would deliver on the promised results for Columbus and Natchez.
The Year of Living Disingenuously
Former GE CEO Jack Welch once said, “an organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” He added that “The essence of competitiveness is liberated when we make people believe that what they think and do is important – and then get out of their way while they do it.”
Would KiOR pass the Welch test? For sure, 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.”
Other staffers point to a highly competent technical team that had been assembled. “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.
In our next installment, we’ll see how that next-gen catalyst platform, and KiOR’s attempt to make Columbus produce 67 gallons per ton worked out. The promoters said that it was not only possible, it was being done at the Demo unit. The skeptics said that the Demo unit was producing 60% as much as was claimed. That Columbus would produce around half that, again. And then there was the Stealth Team, proposing a radical new technology capable, they believed, of reaching something like 80 gallons per ton. And then there was the “next-gen catalyst” platform that Cannon was referring to and “a steady march to our target yield of 92 gallons per bone dry ton.”
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? We continue the story in the next part of our series.