Best stock to invest in – The Collapse of KiOR | Alternative Energy Stocks

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

by Jim Lane

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

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

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

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

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

Skeptics, promoters, innovators — who would be proven right?

Read the previous Parts in this Series

KiOR: The

inside true story of a company gone wrong, Part 1

KiOR: the

inside true story of a company gone wrong, Part 2

KiOR: The

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

KiOR: The

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

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

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

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

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

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

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

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

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

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

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

QUESTIONS for KiOR management
at the shareholders meeting:

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

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

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

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

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

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

Good news for public consumption

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

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

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

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

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

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


The troubled KiOR facility in Columbus,

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

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

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

As Ross explained in a sworn statement:

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

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

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

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

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

That same week, Dydak quit KiOR.

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

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

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

The ring closes in around KiOR

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


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

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

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

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

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

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

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


A crisis was looming.

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

A strike at Stamires

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

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

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

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

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

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

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

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

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


The cost would be high. As KiOR disclosed:

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

Gasoline costs rising fast

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

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

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

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


Costs soar again, this time the capex

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

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

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

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

CFO Karnes resigns

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

Stamires whistle-blows directly to a KiOR board member

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

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

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

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

Columbus shuts down

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

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

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

KiOR stated:

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

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

Rather, KiOR claimed:

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

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

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

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

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

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

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

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

KiOR looks at a merger, restructuring or sale

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

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

O’Connor resigns

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


Hoevelaken, August 31st 2014

From: Paul O’Connor

To: The board of directors of KiOR

Dear fellow directors

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

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

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

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

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

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

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

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

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

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


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

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

Very best regards

/s/ Paul O’Connor

31 Aug 2014

Paul O’Connor

KiOR files for bankruptcy

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

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

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

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

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


Mississippi alleged:

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

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

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

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

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

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

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

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

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

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

The End of an Era

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

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

As Paul O’Connor observed in August 2014:

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

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

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

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

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

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

The KiOR reorganization that wasn’t

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

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

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

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

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

A footnote: Slap on the wrist for management

In September 2016, the US Securities and Exchange Commission

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

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

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

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

Management or board?

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

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

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

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

As Dennis Stamires outlined:

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

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

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

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

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

Never, never land

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

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

Stamires was emphatic. “No. Never.”

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

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

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

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

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

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

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

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

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

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

Jim Lane is editor and
publisher  of 
Biofuels Digest where this

was originally published.
Biofuels Digest is the most widely read  Biofuels daily
read by 14,000+ organizations.


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