Best stock to invest in – KiOR: The Inside Story Of A Company Gone Wrong, Part 2



Best stock to invest in

by Jim Lane

Note. This is Part 2 of our series on the inside true
story of KiOR.

In part

1 of our series, here, we explored: the formation of BIOeCON
and KiOR, the problem of too much oxygen and coke, the entry of
Khosla Ventures, and the loss of a CEO. Also, “a recipe for
technical failure”, disastrous pilot scale results, culture
clashes, catalyst development, reactor design trouble and the
departure of a key scientist.

Two KiOR scientific wings emerge

No one was more emphatic about the pilot plant results than
scientist Robert Bartek, who sent an email ‘More Math on BCC’ on
December 7th, stating:

“We are in a period of denial. We
must forget that our original conceptions of BCC are not right
and must do something radically different to save the Project”.


By the end of 2008, it is clear from discussions with multiple
KiOR sources that the KiOR scientific staff had divided into two
groups. One group believed that the BCC Technology had been
sufficiently tested, was not working, had no value to KiOR’s
business and should be immediately stopped.

The other group, which was headed by O’Connor, focused on
improving the BCC Technology, and on support of the three European
Labs doing so. The controversy over the R&D Plan for 2009/2010
— to the extent that it exacerbated a growing rift between
O’Connor and Ditsch — would have far-reaching consequences as 2009
unfolded.

Paul O’Connor confirmed that cultural problems were rife at KiOR
at this point.

“Part of this was my problem because I wasn’t there full time in
Houston,” O’Connor told The Digest. “Basically I was the CTO, and
André [Ditsch] had no experience in FCC biomass or hydrotreating,
but he had it in his head that he was second in command to Fred.
When I was away he would push it in another direction. Because
people considered him Samir’s boy [Samir Kaul, a partner in Khosla
Ventures], and no one dared to criticize him much. I did, and that
became a problems.

“Partly, that was the Houston culture. In The Netherlands as in
places like San Francisco and New York, everyone tells you exactly
what they think of you even in the management meeting, we fight
like crazy but we resolve issues and make up. In Houston, people
don’t often want to talk about the problem. It’s a case of
everything is fine, everything is great, and Fred was very good at
that.

“But there were problems to be solved, and there would be all
these in-fights between myself and Ditsch, and with so many new
people. Everyone wants to invent their own process and thinks they
have the right ideas. Fred never really took a stand, he always
stayed out of it.”

No team, no stable technology

“One problem that hurt KiOR,” O’Connor recalls, “was we just had
too many people from Albemarle. Catalysis is important, but what
we needed also were process engineers, and people with experience
in hydrotreating and operations. The balance went wrong.

“And then there was this entirely different idea, coming I
suppose from the Khosla approach to business, and André himself in
some ways represented this approach, which was to go out and hire
a whole bunch of MIT PhDs. But you need time to train them and
they are not the ones who are going to scale up a process.

“And so it became a struggle to unite all these people into one
team, and in that struggle I began to struggle with Fred, and it
became a case of Fred and André on one side, and although I stayed
around until the end of 2009 my influence was minimized.”

By all accounts, at the beginning of 2009, as one source familiar
with the state of technology development described it, “KiOR had
no Technology that was sustainable, competitive, cost-effective,
and economically/technologically feasible, and the operating funds
were practically depleted.”

By all accounts, at the beginning of 2009, as one source familiar
with the state of technology development described it, “KiOR had
no Technology that was sustainable, competitive, cost-effective,
and economically/technologically feasible, and the operating funds
were practically depleted.”

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The fateful Columbus first
commercial-scale plant

A Stealth Team forms

Amongst the loosely-associated group of staff that felt the BCC
technology as designed was hopeless, a “save the company” effort
launched on a stealth basis.

Their goal? Reliable, data showing increased bio-oil yields of
reasonable quality using less costly catalysts and processes. The
new data, demonstrating a feasible technology, could be used by
KIOR in business development, and to convince new investors in
funding efforts.

The timing? Those who were aware or active in this effort took
the view that time was critical, not only because KiOR, as a
company in development, was shortly going to be starved for funds
if results were not forthcoming; they were also concerned that the
plans and design of the demonstration-scale Unit (a 10 ton/day
biomass processing capacity) needed to be formulated, firmed and
contracted out for fabrication. And any new technology would need
to be developed before that.

Out of a wider group, catalyst expert Mike Brady, FCC unit expert
Robert Bartek, solid state chemistry expert Dennis Stamires, and
Drs. Vasalos and Lappas of CPERI in Greece would be the most
visible. Their concern was not only the development of a
technology that could save KiOR from disaster, but doing so in a
way and in a time frame that would not cost them their own jobs.

In February 2009, Stamires wrote to a scientific team composed of
Bartek, Yanik, Loezos, Cordle, and Brady, proposing that, at the
KiOR Pilot Plant, test runs to duplicate published test data
obtained from other similar Pilots using the same biomass feed and
sand as a heat transferring medium. This was the baselining
project which had been specifically ruled out for the KBR pilot.

Paramount the need to ascertain why the CPERI FCC Pilot Plant
produced higher bio-oil yields than the KiOR pilot. The Stealth
Team decided to conduct a “Round-Robin” testing program where both
Pilot Plants would use the same biomass feed, sand/catalyst and
process conditions.

The idea?

Stamires reasoned that, if Prof. Vasalos and Dr. Lappas at CPERI
, who had a similar FCC Pilot plant in operation, could pyrolyze
the same kind of biomass with sand, under the same process
conditions, the team could confirm that new KiOR pilot was working
correctly. If the CPERI FCC Reactor design was responsible for the
higher Bio-oil yields, then the design could be introduced into
the KiOR Pilot.

On the same day, Bartek replied: “I agree! I am hoping we can do
significant alterations to the process to assure some chance at
victory in the next two months, so we do not purchase the wrong
DEMO“.

After baselining the pilot plant, the expectation was that new
catalysts could be tested aimed at improving bio-oil yields.
Specifically, Bartek speculated that it was “Time for some Z?”

Meaning “ZSM-5 catalyst”. A commercial grade, high-priced
catalyst, well established in the market place, being used by most
oil refineries worldwide, containing the ZSM type of Zeolite.
Papers had been published by Dr. Paul Williams at Leeds University
in 1995 indicating that zeolite catalysts would not produce a high
bio oil yield, but could produce, as one observer put it, “a
reasonable amount with a substantially improved quality containing
a lesser amount of oxygen, easier and less costly to be upgraded
to gasoline and diesel fuels.”

Whose technology is this, anyways?

The other team? In a March 5th memo to the KiOR community, a
R&D review of the BCC Technology, specified the continuation
of the R&D work on BCC Technology in all four Labs.

As O’Connor confirmed to The Digest, “one of my biggest
frustrations was that the technology that was moving forward was
never actually the BIOeCON technology. What we were doing in
Valencia was not what we did later in Houston. If you look at the
first patents and so on, you see that the basic trick was to have
an interaction between the biomass and the catalyst before it
enters into the reactor. We called it mechano-chemistry. When I
compared the data between Houston and Greece, Greece was better,
and that was because in Houston, they never pre-treated the
biomass.

“That created more conflict with Ditsch. He had a ‘make it
simpler, don’t do that’ attitude towards it. And you could sort of
get away with it in the pilot plant because you could mill the
biomass very fine. But when you get to demo scale, much less
commercial, you can’t mill the biomass like that. For one, it can
get sticky. It can even catch fire in the plant, which happened.

“But if you are feeding [larger] wood particles of 1-3 MM instead
of this finer sort, it takes quite a long time before the
particles heat up, and the outside can get charred while nothing
happens to the inside.”

So you coke up and lose yield.

Cannon sidelined by heart problems, and “who’s in charge?” chaos
ensues

But the week of March 8th would prove even more fateful for KiOR,
as CEO Fred Cannon was hospitalized with a heart problem and was
sidelined for some weeks, in hospital or at home, while
recuperating.

And so, a leadership crisis erupted.

By March 19th, O’Connor emailed the staff, “In the absence of
Fred, I have assumed his responsibilities to assure a smooth
continuation of our business.” Most staff at the time took that to
mean that, as soon as Cannon returned to the office, O’Connor
would assume his former duties.

But more than that was going on.

Cannon had received a memo from O’Connor, expressing concern
about the leadership of KiOR, the direction KiOR was taking, and a
lack of team effort and communications between groups. O’Connor
expressed the view that, if matters continued as they were, key
personnel would leave the company.

Some discussions took place over a potential revision of
management duties and structure, which failed, not the least
because as Cannon explained, even if he really wanted to re-divide
CEO responsibilities and authority, he could not do that without a
resolution and approval by the KiOR Board.

A degree of chaos ensued, and morale dropped. In Cannon’s
absence, VP for Strategy Andre Ditsch also stepped forward to
assume more commercial responsibility, and it became at times
unclear to staff who was in charge.

One observer recalls, “[Ditsch and O’Connor] were calling their
own regular staff meetings at the same time, and starting to
re-organize and re-assigning responsibilities and projects to the
staff.”

The controversy over the research program boiled over. Those
familiar with this period at KIOR said that Ditsch “accused
O’Connor of grabbing for Cannon’s job”, and having failed to
develop a feasible technology, despite two years of investment in
R&D.

The battle reached the KiOR board in March 2009. The board
confirmed Cannon as President and CEO of KiOR, Ditsch remained VP
for Strategy; in May 2009 O’Connor was re-assigned from the CTO
role, although he continued to work for KiOR until November 2009
when his contract expired.

Observers of KiOR during this period stress that, although Cannon
returned to the office by the end of March, Andre Ditsch assumed
some extra managerial functions and, according to one observer,
“was communicating frequently directly with Samir Kaul (a KiOR
Board member, representing Khosla).”

Dead Man Walking

While the management crisis was unfolding, the Stealth Team had
outlined new catalysts and had made the request to test these, and
to calibrate the KiOR pilot plant with sand. The request
ultimately would have to be made to Ron Cordle, the Pilot Plant
supervisor, as a confidential, weekend test. The backup plan was
to have CPERI run the tests in their pilot in Greece.

“It was like the blind leading the blind,” Stamires recalled.
“The KiOR pilot plant reactor was deficient and underperforming
and not capable of producing optimum bio-oil yields. Adding to
this structural Reactor problem, and [later] the additional
problem of the data manipulation of John Hacskaylo. The
combination of these problems resulted in a general situation
where nobody knew what we were actually doing, what oil yield
numbers to believe.”

As Robert Bartek would express in a March 28th memo:

“You had already been hounding me
to get sand in the Unit. At that time the three of us started on
this, I had already accepted the fact that I was a “Dead Man
Walking” in Fred’s organization and my time at KiOR would be
short. So why not one final act of defiance? If you are going to
be let go, let’s do it for a noble project reason rather than
politics. May be we could rescue this thing and snatch victory
out of defeat we [are] heading into.”

Ultimately, the sand test was carried out, using sand obtained
from CPERI, and confirmed that higher oil yield was produced at
the Pilot Plant at CPERI in Greece. That finding prompted Bartek
and Stamires with further discussions with Lappas and Vasalos, to
arrange a meeting with Cannon and Vasalos in Houston. And an
agreement was made with Cannon that CPERI would license the design
of their Reactor to KIOR

With this, the Reactor at KiOR’s Pilot was replaced with a new
Reactor constructed according to the design of the CPERI Pilot
Plant. With some process variables optimizations, the KiOR Pilot
Plant was able to produce higher Bio Oil yields.

Work on catalysts also continued. The Stealth Team was convinced
by that time that the BCC Catalyst (the synthetic clay) was a very
poor heat conductor, and incapable of transferring a sufficient
amount of heat to the Biomass fast enough. They thought that a new
material with high bulk density, low porosity microspheres, with a
low catalytic activity, would be much more suitable.

By March 9th, the Stealth Team had obtained, via “a friend at
BASF”, 5 gallons of high temperature calcined clay microspheres,
which were tested secretly at the KiOR Pilot Plant. In a memo on
March 27th, Bartek reported to O’Connor, Yanik and Stamires an
overall substantially improved performance over the BCC Technology
and its Catalyst. Oil yields were higher, there was less coke, and
a reasonably low oxygen content in the oil. The Stealth Team began
to make arrangements to purchase a Spray Drier and a Calciner to
be able to make calcined clay microspheres.

Meanwhile, a March 13th 2009 report from Peter Loezos entitled Mass

Balance Data “validated again that BCC technology was not
working for KiOR,” an observer reported. Dennis Stamires added,
“It was mainly due to the very low bio-oil yields.”

Stamires also pointed The Digest to an independent
validation of the performance of the HTC catalyst (i.e. the
Hydrotalcite, HTC), published in 2013 in the Defect and
Diffusion Forum
by F. L. Mendes, A.R. Pinho, and M.A.G
Figueiredo. That report concluded:

“The use of either the FCC
catalyst or hydrotalcite are not suitable for intermediate
pyrolysis reactors, generating a product with high water content
and low content of organic compounds in bio-oil and produce more
coke. None of the materials tested produced bio-oils with
considerable hydrocarbons yields and presented high amounts of
phenolic compounds. In general, silica had the best results in
terms of yield and quality of bio-oil.”

Both Mendes and Pinho were working for Petrobras in Brazil, and
during this period it has been asserted to The Digest that

KiOR was involved in negotiations with Petrobras, regarding
forming a joint venture, or licensing KiOR’s BCC Technology.
Suggesting though not proving that the journal results reported
were related to KiOR story.

The Tipping Point

By April 2009, Cannon had returned to his desk at KiOR, but
according to an observer, for some time after Cannon returned, “In
reality, it was Ditsch and [Kaul] who were managing KiOR, and
Cannon seemed to be a bystander, and sometimes their spokesman.”

One notable change in the company’s management style? “Most of
the important and crucial issues were only discussed in the new
mini-Management Team of Ditsch and Cannon, in communication with
Samir,” one team member recalled. “Not in the weekly general
management team meetings as was done before.”

The problems facing KiOR at the time were substantial, but not
unheard of for a young company in the advanced bioeconomy. They
were summed up internally at this time as:

*Finding new investors to provide
further funding as KiOR was soon running out of monies.

*Having not yet developed and
demonstrated a feasible, sustainable and profitable technology,
it was difficult to convince new investors to provide funds for
KiOR’ operation.

*Soon running out of monies, will
be difficult to keep the R&D function going on, which was
needed to develop new sustainable technology.”

*The large processing capacity
Demonstration Pilot Plant Unit (DEMO Unit ) was being designed
and will require several millions of dollars to be constructed
and installed at the Houston KiOR site.

*Negotiations were going on with
Chevron / Weyerhaeuser/Catchlight Energy, involving the
formation of a joint venture, in which KiOR will provide the
technology to convert waste wood to liquid fuels. However at
that time, KiOR did not have technology that was sustainable and
commercially feasible and profitable.

*KiOR was in a great need to have
a feasible demonstrated technology which can be commercialized
and be economically sustainable and profitable, for use in the
discussions and application to the DOE for getting a loan
guarantee of a $1 billion, for use in building commercial
Plants.

*KiOR was in need to have, at
pilot plant / DEMO Unit scale, its Technology demonstrated and
validated that was feasible, economically sustainable and
profitable, while discussing with the Mississippi Development
Authority a $75 million loan.

*Morale of KiOR’s employees was
very poor with a fragmented Management leading in different
directions, while key technical personnel, either had left or
were looking for new jobs outside KiOR.”

*KiOR’s competitors Ensyn and
Dynamotive were fast developing and improving their
technologies, and preparing for commercialization.”

65 gallons per ton, but not really

It was this latter point — the progress of Dynamotive, that
perhaps formed a tipping point in the story of KiOR.

For, coincidentally or otherwise, we see the first appearance of
60+ gallons per ton yields, a level of yield that would eventually
feature prominently in KiOR’s 2011 IPO, in an analysis written by
Andre Ditch — not of KiOR’s results, but of Dynamotive’s.

Ditsch was juggling — at haste — data from Dynamotive and results
from a UOP/PNNL project as reported in the September 2008 issue of
Hydrocarbon Processing, written by a team led by Jennifer Holmgren
(nowadays, CEO of LanzaTech), then GM of UOP’s Renewables unit,
entitled “Consider Upgrading Pyrolysis Oils into Renewable Fuels”.
He notes that he is “running out of daylight for report, but a few
comments”.

Later, he comments “IF (big if) we assume the UBA oil and our
Kaolin oil are similar (without more data, a stretch)…”. Later
still, he added that “all this is written in great haste, so feel
free to add and pressure test numbers.” All indicative of a memo
written in back-of-envelope calculations.

Overall, Ditsch projected a break-even for KiOR at a yield of 65
gallons per ton of biomass, or a 22.5% yield of bio-oil from the
biomass.

From this point forward until the end of 2013, it will be
impossible to find a commercial projection or communication based
on less than 60 gallon per ton yields, or a scientific set of data
from any KiOR pilot, demonstration or commercial unit that has a
yield of 50 gallons per ton or higher (even at an oxygen content
of 17% that would be very difficult to upgrade).

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Exotic yields get mentioned like
“business as usual” scenario baselines in this KiOR slide
presentation.

“We need 2X”

By June 2009, the Stealth Team, working with zeolite catalysts in
the Pilot Plant, were showing enhanced yields and bio-oil quality.
At the same time, literature searches turned up projects from the
1980s and 1990s demonstrating that the same type of Zeolite (ZSM)
had been used before in Catalytic Pyrolysis.

But with the improvement, KiOR yields approached a maximum of 40
gallons per ton with reasonable quality. “Higher yields would have
been simply contained more oxygen, that would have needed to be
removed to convert the bio-oil to transportation fuel,” Stamires
told The Digest.

A progress update was held on June 3rd with Khosla, Samir,
Cannon, Ditsch, O’Connor and others, Bartek reported the figures.

Khosla’s response was to request of the R&D team that they
double the yields over the next 6-8 months. The improvements were
not from outer space. They were the kind of yields that would have
made the overall process economically sustainable and profitable,
without government subsidy, in commercial-scale plants. A
participant in the meeting reported to The Digest that
certain milestones for monthly incremental increases were
established to reach the target.

Possible? Yes. With the existing BCC technology. In the view of
one wing of KiOR’s staff, no. Given management’s reluctance to
change the R&D plan, add a reactor to the process, hire
scientists who could accomplish these goals, numerous members of
the scientific team were pessimistic both in terms of the target
and the timeline.

Concerns were high, as commercial discussions with Chevron and
Weyerhaeuser (as the JV Catchlight Energy) were well underway. As
one team member put it, “if Chevron finds out, they will run away
from KiOR and essentially seal KiOR’s fate from any future
partnerships with Big Oil, and Khosla would pull his funding.”

The race for 2X gets underway

The search for catalysts was underway at a rapid pace.

Cannon approved the request of Brady, Bartek and Stamires to
start making KiOR’s own calcined clay microspheres using the spray
dryer. The main objective of this work was to develop clay-based
microspheres which exhibited acted both as efficient heat
carriers, and catalysts with controlled selective activity.

Having then optimized the Physical properties of the calcined
microspheres with respect to Bio-oil yield and quality, Brady,
Bartek and Stamires proceeded to optimize the chemical/catalytic
properties of the calcined microspheres. Then Brady proceeded to
prepare clay microspheres with different amounts of catalytically
active metal salts — magnesium, calcium, potassium, sodium, and
aluminum among others.

In addition, Professor Iaocovos Vasalos re-appeared as a
consultant by September 2009. Subsequently, Prof. Vasalos
confirmed to Cannon that in order to achieve reproducible Bio oil
Yields close to Khosla’s 2X target, with a reasonable quality,
certain “radical changes must be made in the design of the pilot
plant and to the process.”

The urgency was not only the usual pace of s start-up hungry for
milestones that would encourage investments, there was Catchlight
Energy relationship looming. In an email from Dan Strope, VP
Technology, sent Aug. 11 2009 to the staff, it was revealed that
Andre Ditsch was officially heading the negotiations with Chevron,
and Ditsch was asking for technology data to prepare an economic
forecast for a commercial size plant.

Yields improve, but trouble looms

In an email to Fred Cannon and Andre Ditsch on September 23rd,
Bartek reported pilot plant data confirming that the ZSM catalysts
produced much higher hydrocarbon yields, as the BCC Catalyst (HTC
) was converting them to gas and coke. The oxygen was in the range
of 10 to 15%, but the yields were still stuck in the low 40s. With
these results, the decision was taken in late 2009 to suspend work
on the BCC technology at the three European Labs as well at KiOR’
Lab in Houston.

Paul O’Connor, still on the KiOR board at this time, blasted the
decision to use ZSM-5 catalyst.

“It was the worst decision ever made, ZSM-5. We all knew that to
make this process economic we needed a cheap catalyst. ZSM-5 is
one of the most expensive around. Plus, you are dealing with a
biomass with calcium and many other things in it, and with ZSM 5
you kill the catalyst. It’s so strange they went in that
direction.”

But yields at least were up. A 20-30% jump in yields, but
catalyst performance, the science team concluded, would not
improve anywhere as fast as the 2X target required. In a memo
dated Sept. 6, 2009, Stamires proposed a radically different
Biomass Conversion system, comprising two Reactors in series or in
parallel, with a new catalyst.

The approach? The Biomass in the first Reactor would be thermally
Liquefied in a fluidized bed using a high-efficiency heat
transferring medium which has a high heat capacity (such as sand
). The Bio oil vapors generated in the first Reactor would then be
reacted with a medium activity catalyst in the Second Rector. The
invention was subsequently patented by KiOR .

Meanwhile, Ditsch was pressing hard. In emails of Sept. 16 and
17, 2009, he was asking for information to be used in his
presentation and “KiOR Update” to Khosla on the 17th .

From that update, Khosla agreed to relax the timeline for process
improvement, but not sacrifice the yield target, which would have
been in the 80s and into the 90 gallons per ton range. The 2X
milestone target was set for Q4 2010. But the scientific team — at
least one wing — didn’t believe that anything like those yields
could be achieved with anything like the technology that KiOR was
readying for commercial-scale.

Stuck in the 40s Doldrums

New catalyst materials were tested in KiOR’s Pilot KCR plant in
October and November 2009 Bartek and reported by Patrick Steed in
a January 7, 2010 email confirmed the improvement in catalytic
activity, while retaining their good heat-transferring properties.

But, the good results came with a ceiling. In their own way, they
confirmed to members of the science team, as sources told The
Digest
, that KiOR was likely to become stuck in a range
which would never get much out of the 40s, expressed in gallons
per ton.

2010 dawns, with a design input issue

In January 2010, though, focus was on a potential 20% bio-oil
yield improvement possible by employing CPERI’s reactor design,
compared to the yields obtained by the present design of the KCR
Pilot plant (a FCC type).

The Pilot Plant was remodeled with the CPERI design, but to the
surprise of the team, the Demonstration Unit design was not
changed. According to those familiar with the timelines, the Demo
Reactor was already fabricated and was soon to be delivered to
KiOR for installation, based on the old, obsolete original KiOR
Pilot Plant Reactor design.

Eventually, the large Reactor of the Demo Unit, with a 10 ton per
day capacity, would have to be dismantled and be replaced by the
new Frustum Reactor licensed from CPERI. Resolution of the problem
would lead to sensational additional costs and delays in the
operation of the Demo Unit.

How could this have happened? As it turns out, Robert Bartek,
described by one team member as “the expert who had supervised the
Pilot plant testing work at the KBR Pilot Plant after De Deken had
left, who had managed the design and operation of KiOR’ KCR Pilot
Plant and who had worked closely with Prof. Vasalos and Dr. Lappas
in transferring their Reactor design to KiOR,” was left almost
completely out of the loop.

According to KiOR team members of the time, Bartek “was
intentionally kept in the dark and out of the design work of the
Demo Unit until almost to the end of the project.”

Why? Perhaps because Bartek was openly and clearly criticizing
the BCC Technology and its Catalyst for being “a failure and
useless to KiOR”.

“Suggestions and disagreements were considered to be politically
incorrect, and rather blasphemies against the party-line
prevailing in 2009, supporting and promoting exclusively the BCC
Technology and its Catalyst,” remarked Dennis Stamires, when asked
about the crisis. More than one KiOR team member contended that
the decision to exclude Bartek from the Demo design process, among
other consequences, convinced Bartek to resign.

About NASA syndrome

There are some classic management set-ups that lead to failure,
one of which is NASA syndrome. The type of management failures
that were prominently on display in the Challenger and Columbia
disasters. As the Columbia Accident investigation Board
reported:

The organizational causes of this
accident are rooted in the space shuttle programs history and
culture, including the original compromises that were required
to gain approval for the shuttle, subsequent years of resource
constraints, fluctuating priorities, schedule pressures,
mischaracterization of the shuttle as operational rather than
developmental, and lack of an agreed national vision for human
space flight. Cultural traits and organizational practices
detrimental to safety were allowed to develop, including:
reliance on past success as a substitute for sound engineering
practices (such as testing to understand why systems were not
performing in accordance with requirements); organizational
barriers that prevented effective communication of critical
safety information and stifled professional differences of
opinion; lack of integrated management across program elements;
and the evolution of an informal chain of command and
decision-making processes that operated outside the
organizations rules.

Finally, the Board noted:

The pressure of maintaining the
flight schedule created a management atmosphere that
increasingly accepted less-than-specification performance of
various components and systems, on the grounds that such
deviations had not interfered with the success of previous
flights.

The NASA cautionary tale is instructive; there are correlations
between KiOR and Columbia.

Specifically, reluctance to test to understand why systems were
not performing in accordance with requirements, organizational
barriers that prevented effective communication of critical
information and stifled professional differences of opinion; lack
of integrated management across program elements; and the
evolution of an informal chain of command and decision-making
processes that operated outside the organization’s rules.

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KiOR was on a fast-paced
commercialization track, as it highlighted in this company slide
presentation.

Never commercially viable?

The technology’s progress was under close scrutiny by February
2010, when it was decided to form a Diligence Team consisting of
Prof. Vasalos and Dr. Stephen McGovern, a hydroprocessing expert.
The review included data and related information derived from
KiOR’s R&D work, as well from literature including patents,
and data from the CPERI Pilot plant.

By this time, concerns about the data stream from the pilot also
became an issue within the company. Stamires himself recalls six
such meetings with CEO Fred Cannon, on February 10, March 13,
March 26, April 28, May 7, and May 12. What was Stamires bothered
about? Specifically, “manipulation and inflation of the pilot
plant Bio oil yield data.”

The results of this comprehensive and in-depth Technology
Assessment Review Study by Vasalos and McGovern were published in
April 2010. Flat out, the report contained the most dismal news
possible. The assessment concluded that the maximum yield, based
on the pilot plant, was in the low 40s with 15% oxygen content,
using ZSM catalysts.

Recommendations were made for improvement. According to one
familiar with the report, by and large, these recommendations
“were ignored by the Management Team, and not implemented.”

The Impending Public Statement on the Technology

Meanwhile, there was pressure on the company to make disclosures
regarding the company’s progress towards scale, and the yields it
was achieving, Specifically, there was pressure on regarding a
statement describing KiOR’s technology that could be placed at the
KiOR Website and also to be given to the public and potential
investors.

Dennis Stamires confirmed that there was a controversy. He
himself sent an April 5th memo to CEO Fred Cannon and VP
Technology Dan Strope, calling for only “Credible” information
only to be released. “The message in the event of being Legally
challenged, it should be defendable.” He did not receive a
response, he said.

On April 10th, a draft Technology Statement to be posted on the
KiOR Website, prepared by Matt Hargarten of Dig Communications,
was circulated by Andre Ditsch. It would not reach some members of
the scientific team until as late as May 11th.

An uproar ensued regarding the draft statement. Bottom line,
there were heavy complaints about false claims, misleading
information and fake terms like “KiOR’s Proprietary Magic
Catalyst“. CFO Kevin Denicola indicated to team members that he
too had serious concerns about the truthfulness of the proposed
Technology Statement.

Inflated Numbers: The July 2010 Report

In May 2010, John Hacskaylo joined KiOR as VP R&D. With
Cannon and Ditsch, they formed what was described to The
Digest
as “The Troika, [which] manages all the important
issues and business items of KIOR”.

The issues? These would grow to include:

The negotiations with the Mississippi Authority regarding a loan
of $75 million; negotiations with Chevron / Catchlight regarding
the formation of a joint venture; the Technology Review/
Assessment by R.W. Beck; the Application to DOE for a $1 billion
Loan guarantee; the preparation of the KiOR S-1 Prospectus for a
NASDAQ IPO; negotiations with potential investors, and updates on
KiOR’ s technological progress.

One team member wrote of this time:

The formation of “The Troika”
caused a deep division and disputes among KiOR’s managers, which
later on dripped down to lower levels of operations, and
prevented normal working business communications among
employees. Hacskaylo created and highly promoted this culture.
R&D personnel were told to whom they can talk and to whom
should not talk about their work. Co-operation, trust and
willingness to communicate fast disappeared, and a spirit of
fear of being punished and fired prevailed in the organization.”

In a July 2010 Report, entitled “Yield Improvement Efforts”,
according to those familiar with the report, Hacskaylo replotted

the previous Pilot plant data to show a steady substantial oil
yield increase in the period of 2009 – 2010, claiming that the
Pilot was 50% ahead of the Vasalos report’s findings, in gallons
per dried ton of Biomass feed and projecting an 80% increase in
yield from the upcoming Demo Plant, or 72 gallons per ton.

The yields, according to key members of the science team, were
simply not true, and incredibly inflated. The results were
inflated from the latest pilot data. Further, the Demo plant as
designed at this time did not incorporate improvements that KiOR
had deployed at the pilot.

As one observer noted, “Hacskaylo’s new, much greater inflated
oil yields, generously met and even exceeded the milestones which
earlier Ditsch, Kaul, and Khosla had set forth to be accomplished
quarterly for the year 2010, by the R&D group. Hacskaylo
managed to accomplish (on paper only) the [required] milestones of
increased Bio-oil yields”, without the bother of actually
improving the process, so went the theory.

It is not known whether financial motives, data confusion, or
honest mistakes went into the July report or into the criticism
thereof. It can be noted that executives of KiOR were rewarded
with stock options for meeting milestones and accomplishing goals,
but there’s no direct evidence that data was changed for monetary
gain. It is clear however that the new data was not supported by
those familiar with the raw data coming from the pilot plant. The

Digest has obtained and carefully reviewed original data
from the pilot from this period and the July 2010 report, and can
confirm that the raw data and the July 2010 report do not agree.

Another report was made to Khosla in November 2010, and again
team members say that the data was “corrected” and the yields
“improved” from actual KiOR data. We are all left to guess exactly
why.

At this stage, Denicola is reported to have attempted
“professionally…to correct this problem and give the public and
investors a truthful and representative account of the actual
status of KiOR’s technology at that time,” according to one team
member familiar with his efforts, but he was unsuccessful.
Denicola subsequently resigned.

Bleak refinery upgrading report and a “see ya later” from
Catchlight

In May 2010, samples that had been provided from the KiOR Pilot
were the subject of a report from Catchlight Energy, the Chevron
/Weyerhaeuser Joint Venture. Catchlight reported on two samples,
one containing 11% oxygen content and one containing 17%. Their
conclusion: they couldn’t effectively process either sample.
O’Connor told The Digest that Exxon also reported trouble.

They did indicate that they believed that, with time, a process
could be found that would tolerate the 11% oxygen content sample,
though it would require alternative equipment that Catchlight was
not in a position to finance. They further indicated that the 17%
oxygen content bio-oil could not be processed by any existing
refinery plant hydroprocessing equipment, and that new technology
would have to be developed from the ground up, for that.

Either way, the idea of delivering a bio-oil to Catchlight was
out. Catchlight indicated that, going forward, they would only be
interested in handling a finished fuel blendstock that had been
hydroprocessed by KiOR. Whether that meant using standard or
modified equipment, or developing a new technology, would be up to
KiOR and at KiOR’s expense.

best-stock-to-invest-in

KiOR does not disclose Catchlight
Energy’s deep reservations in this slide deck overview given in
2013.

Selling it to Mississippi

“By mid-June 2010,” as the state of Mississippi recounts in its
lawsuit, “Khosla Ventures had retained Dennis Cuneo to assist KiOR
in obtaining a favorable state economic development package. Cuneo
is a former Toyota executive who enjoyed valuable relationships
with Governors of southern states. Cuneo quickly arranged meetings
for KiOR and Khosla with the governors of Arkansas, Louisiana and
Mississippi. The first executive level meeting between the State
of Mississippi and KiOR occurred on July 1, 2010 at the office of
Governor Haley Barbour. Three entities were present at the
meeting: KiOR, Khosla Ventures and the State. KiOR was represented
by Fred Cannon, Mike McCollum (KiOR’s Vice President of Supply)
and Andre Ditsch. Khosla Ventures was represented by Vinod Khosla,
Samir Kaul and David Mann. Also present for Khosla Ventures was
Dennis Cuneo. The State was represented by Governor Barbour and
two MDA officials, Adam Murray (MDA Project Manager) and Justyn
Dixon.”

Among the documents providing support for the meeting’s agenda
was “An Overview of KiOR in Mississippi” white paper,
provided to the Mississippi Development Authority, which made the
following claims:

1. “Existing refining
infrastructure can easily upgrade the oil into transportation
fuels, making KiOR’s oil a direct substitute for imported crude
oil without changing the refining to automobiles supply chain
and infrastructure.”

2. “Our product is a high quality
crude oil that can be converted into on-spec gasoline, diesel
and jet fuel with standard equipment in operation in every US
refinery.”

3. “Our process is already
competitive with oil at $50/barrel with existing subsidies, and
will be competitive with $50/barrel oil without tax credits in
2-3 years with catalyst tuning and process development, allowing
economical access to nearly all available feedstock.”

The state of Mississippi alleges that the financial information
provided to the state “did not account for the construction and
operation of a hydrotreater and hydrogen plant at the Columbus
facility.”

At the time, KiOR may have well held out hopes that a hydrogen
plant could be built in partnership with a vendor, who would pay
for construction and operation and charge a hydrogen delivery fee
to the project. However, given the July 2010 date of the initial
Mississippi meeting, there is no doubt on the Catchlight score. At
best, KiOR may have believed that other refiners would be able to
process its bio-oil.

Did KIOR include water in its bio-oil yield claims?

KiOR’s assertion that the technology “is already competitive with
oil at $50/barrel with existing subsidies” seems remarkably
similar to the speculative analysis completed by Andre Ditsch at
the time of the UOP/PNNL paper, based on 65 gallon per ton yields.
There is no documentation that The Digest has been able to
uncover, nor any scientist we have interviewed familiar with the
actual data out of the pilot plant, that supports KIOR yields at
breakeven points.

A KiOR staffer relates a tale about André Ditsch. “Suppose you
had a restaurant that seated 200 people,” Ditsch is reported to
have told a KIOR team member, when questioned about the reporting
of the KiOR numbers. “And, you only seated 10 today, but you were
going to seat all 200 in the future. If you say that you are at
100% occupancy, that’s not misleading, because you are going to be
at 100% eventually.”

The truth may well be that the KiOR yield claims were based
around liquids, rather than bio-oil, coming out of the process.

The state of Mississippi alleges just that. Specifically, that:

“Ditsch’s failure to accurately
adjust for losses to water and other waste products also
rendered the representations to Mississippi officials false.
When the BCC reactor was operated at high oxygen levels (greater
than 10%), a substantial percentage – more than 30% – of the
biocrude produced by the BCC reactor was lost to water.

“Ditsch’s failure to make an
appropriate reduction for losses to water served to
substantially inflate his yield estimate; and, as a consequence,
the Company’s financial projections misleadingly made the
Company appear commercially viable. Neither KiOR nor Khosla nor
Cuneo notified Mississippi officials that the Company’s
financial projections were grossly inflated to overstated
yields.”

Paul O’Connor, as a member of the KiOR board, has a similar
theory.

“Hacskaylo, what a disaster area. The 67 gallon figure, that is
where I became suspicious. The board hardly saw technical
information, as you can imagine people like Condoleezza Rice were
not going to be very familiar with technical detail. They were
showing us graphs with yields of 68-72 gallons per ton out of the
pilot, and they aid that the demo plant was even better. Now my
initial reaction was — you’ve got 100 people working in R&D,
you’ve got all the best equipment in the world, you’ve figured it
out, that’s great.

“But one day I noticed the R&D director, John Hacskaylo
fiddling around with the axis, and in his comments to us, he was
talking about top of the reactor yield.

“Top of the reactor? That’s the yield coming out of the pyrolysis
unit, but that is not the yield coming out of the plant. You have
to condense, and you have to recover oil from water, and you lose
in the hydrotreater, because for one thing you have to take out
oxygen. It’s not a real yield coming out of the plant.

Top of the reactor yields, in the context of transportation
fuels, is like counting scotch and water as pure scotch whiskey.
Or including the weight of the orange peel in a projection of
orange juice yields.

“If you’re saying 68 at the top of the reactor, at best you are
making 55 in the plant. At best. So that’s when I insisted on a
technology audit,” O’Connor told The Digest. “It was
definitely not at 68-72. There were some points where you could
get above 60 but only momentarily, under ideal conditions, for
instance with very fresh catalyst. And only in the pilot.”
O’Connor confirmed that the demo plant was generating yields in
the 30s or low 40s at most.

“Who did the analysis? Were they just stupid or crooks?” O’Connor
asked. “It’s not for me to say.”

A company on the brink

The company was speeding towards a 2011 IPO. But the fuel yields
were low; the fuel was not usable by their initial chosen
downstream partner; the catalyst they were using to get even down
to this unsatisfactory product, ZSM zeolite, was in the $7,000 per
ton range. Catalyst stability would be challenged, everyone knew,
with the water that is contained in wood chips. Steam can be
highly problematic for zeolite.

More than that, the company was facing a potential problem with
the metal content in the biomass feed that accelerated the
deactivation rate of the catalyst, which resulted in excessive
amount of daily catalyst replacement, according to one KiOR
scientist.

There were reactor design issues. The pilot reactor that was
working wasn’t used for the demo unit.

There was a rush to commercial-scale of the NASA type. Management
issues, communications issues can be seen. Disclosure issues,
“truth in data” issues. And, a series of statements to the state
of Mississippi that would be impossible to live up to without
major improvement in yield. Capital needs were going to be
tremendous, and beyond an IPO there was a loan guarantee process
and the state of Mississippi loan application to be successfully
navigated.

Why the rush to scale? All venture-backed companies rush. But was
there a special rush on with Khosla-backed companies, and did that
rush apply successfully to industrial technology? The State of
Mississippi quoted this passage from the Harvard Business School
case study, Khosla Ventures: Biofuels Gain Liquidity:

“Khosla played an active role in
helping his portfolio companies determine appropriate milestones
in the process of moving from a pilot to a commercial operation.
He encouraged his companies to focus on 15-month or 15-day or
15-hour innovation cycles, unlike the 15-year cycles of
innovation in the nuclear business, in order to “test, modify,
allow lots of mistakes and still succeed.”

The goal was to test ideas in 10% of the time that it would
take a large company. Once that was achieved he often challenged
the team to reach another 10x reduction in cycle time. month or
15-day or 15-hour innovation cycles, unlike the 15-year cycles
of innovation in the nuclear business, in order to “test,
modify, allow lots of mistakes and still succeed.”

Everyone was counting on everything to improve in the demo unit,
and in 2011. As sometimes happens. And, with design corrections,
fingers crossed this could be translated to a commercial-scale
unit. It’s been known to happen, yields improving as scale
increases and design improves. Not always, not often, but
sometimes. Could KiOR pull it off?

Maybe, just maybe.

KiOR was hanging by a thread as the summer of 2010 commenced. In
a few days, the first recorded visitors to Pasadena demo unit,
representatives of the Mississippi Development Authority, were
expecting to see the demonstration unit in action.

We’ll see how all those concerns worked out in the next part of
our series, as KiOR launched its demonstration unit, geared up for
more financing and an IPO, and hurtled towards commercial-scale.

Further reading.

The

O’Connor resignation letter
The

March 15 2012 O’Connor email memo
The

March 22 2012 O’Connor technology assessment
The

April 21 2012 O’Connor technology assessment
The

April 30 2012 O’Connor memo
The

Spring 2013 O’Connor note

Jim Lane is editor and
publisher  of 
Biofuels Digest where this

article

was originally published.
Biofuels Digest is the most widely read  Biofuels daily
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