Best stock to invest in – The Year Of Living Disingenuously: KiOR



Best stock to invest in

The Inside True Story of a Company Gone Wrong, Part 4

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”.

But so far, the company and its celebrity investors and directors
such as former Secretary of State Condoleezza Rice and famed
venture capitalist Vinod Khosla had escaped close scrutiny.

Read the previous Parts in this Series

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”

The methods for keeping the truth bottled up were not pretty.
According to our sources for this story, dissenters had been
fired, data had been faked, and opportunities to address the
impending debacle with improved technology were ignored,
underfunded or shelved. Meanwhile, the Board was misled either
proactively or through lack of guidance on key performance
indicators. Trouble that had been looming in 2010 had boiled into
outright crisis in 2011.

Some progress had been made on technology, but not enough, Not
nearly enough. The critical success factor, the bio-oil yields,
had been increased from “the low 30s to the low 40s,” one staffer
recalled.

And, worse, the production cost was “several dollars per gallon”
according to those familiar with the state of technology
development. The progress achieved had stemmed from changing the
Technology from the original BCC reactor design and using a new
ZSM Zeolite catalyst

Fatally, the progress on yields had been made at a catastrophic
increase in the catalyst cost. One source close to the technology
at that time recalled, “it was too far away from a production cost
necessary to sustain an economically feasible business without
government subsidies.”

The Spreading Fear

The result? Fear inside the company’s management team. The funds
needed to be able to continue operations would soon be depleted.
Potential investors, said one company insider, became skeptical
about the over-glorified, profitable financial picture the
Management team was claiming and deceitfully presenting to the
public and to investors.”

Technical staff members at the time were particularly incensed
over claims that yields were increasing from 67 to 72 gallons per
ton, the projection of 90+ gallon per ton yields at the proposed
Natchez, Mississippi commercial-scale plant, and a claim that
production costs were being reduced to “close to $2 per gallon of
fuel.”

“They were scared of exposure,” former CTO and board director
Paul O’Connor recalled, “and [they made] a series of reckless
actions.” And small wonder, for story that was told to the public
was one of steadily increasing yields and progress in major
company partnerships.

As the Motley Fool observed in March 2012:

“KiOR has been successful in
steadily improving yield over the last few years from 17 gallons
per ton to 67 gallons per ton. Notably, it has backing of large
industrial companies like Chevron…The Columbus facility is on
schedule to begin production in the second half of this year
with an annual production capacity of 13 million gallons of
biocrude. We cannot overemphasize how important a positive
outcome at Columbus is.”

Yet, the yields were lower and the Chevron relationship, as
originally envisioned in the form of an offtaker of crude bio-oil,
was in tatters. Chevron would only take a finished fuel.

The Motley Fool was right on the money in one respect.
Columbus was key. But there were intense risk factors implicit in
the company’s yield targets. With the plant’s stated capacity of
500 tons per day, even with an 82% uptime, the yields would have
to reach 87 gallons per ton to reach the targeted 13 million
gallons of biocrude production.

That was more than double what the company had yet achieved in
the demo or pilot plants, according to staff familiar with the
state of technology development at the time.

A split in the management team

By the first quarter of 2012, KiOR team members pointed to a
spilt in the management team, which had previously insulated
itself from the technical staff.

“The modus operandi was “Reckless rush to
Commercial
,” recalled Dennis Stamires.

“Khosla and Kaul made the important decisions,” Stamires added,
“while Ditsch and Cannon simply executed the orders. And Ditsch,
Hacskaylo, Artzer, and Cannon set the [day-to-day] policies, and
communicated with the public and investors. The rest of the
management team were kept in the dark. It created confusion, poor
morale, fear, discord, and mismanagement. On February 20th, I
resigned from KiOR Management team, and notified the CEO, Fred
Cannon, that I would devote all my time and available resources to
developing a new, economically feasible technology capable of
meeting KiOR’s business objectives.”

Paul O’Connor agrees that there was an unhealthy organization.
“There was this tactic to silence people and [prevent them from]
revealing secrets. At BIOeCON we would ask our technical people to
tell shareholders what issues there were. Our perspective was
that, if you know what the problem is you can solve it.”

The most obvious sign of technical trouble was over work on the
company’s BFCC technology.

Despite claims of higher yields in the IPO documentation and
elsewhere, the demonstration unit, using the latest ZSM zeolite
catalysts, was still a dud. When the oxygen content was kept below
15%, the actual bio-oil yields reached into the 30s in gallons per
ton. And 15% was the technical threshold where scientists at the
time that the bio-oil could be converted into a salable fuel, by
anyone.

Think of it this way. KiOR projected it could acquire its
feedstock, Southern yellow pine, at an average cost of $66 per
ton. Even at 40 gallons per ton, that would equate to $1.65 in
cost. Before paying for the conversion technology. Or the building
of the plant. Or the operating of it. Or anything to pay the
workers. Much less pay back the investors. Or lenders like
Mississippi.

Today, on a wholesale basis, finished gasoline blendstock sells
for $1.40 per gallon. A financial debacle of immense proportions
loomed, unless something could be done.

But it got worse, not better. Members of the technical team
believed that the BFCC conversion process was not scalable to full
commercial size plants without further reducing the yields. Yet,
KiOR’s R&D management insisted on continuing work on the BFCC
Technology and optimization of the ZSM catalysts.

“They were beating a dead horse,” one technical team member
recalled.

By the end of the first quarter of 2012, KiOR team members of the
time said that the company had lost much of its original core of
expertise, as “most key technical personnel had left , or were
planning soon to leave”. They were fearful that the truth would
come out, investors would flee, KiOR would fall, and with it would
go their jobs.

The Clock Begins to Run Out

Technical staff felt that exposure would come no later than the
opening of the Columbus plant, when it would start operation and
not be able to meet the yields used in the financial models and
presented to investors.

In January 2012, Dennis Stamires requested the formation of a
task force, called “Project Team Oil Yield”, operating separately
from Hacskaylo’ R&D group and reporting directly to CEO Fred
Cannon, with the objective to introduce in the DEMO Unit and
subsequently to the Columbus plant, “a new feasible Technology
capable of meeting KiOR’ Business objectives.” At that time,
Professor Vasalos had also agreed to participate. BioeCON founder
and former KiOR board member Paul O’Connor was in support.

Stamires recalled that, at the time he explained to CEO Fred
Cannon, “it was very important to conduct a technology review and
assessment in the presence of an Independent expert. It would make
the findings and conclusions more credible. It could have
convinced the board, and Khosla to act swiftly. It could have
saved KiOR.”

Cannon stalled in making a decision. In late January, according
to Stamires, he said that “I am still considering doing that, but
not sure how to do it without getting Hacskaylo pissed-off”.

But time was beginning to run out.

Meanwhile, Professor Vasalos planned a three-day visit to KiOR on
January 25th, and prepared a brief to present to Cannon on the new
proposed technology.

But, in the end, Cannon declined to meet with Vasalos during the
entirety of his stay. And on February 22nd, Cannon contacted
Stamires to say, based on what he described as “legal
confidentiality concerns,” that Vasalos could not be included in
any review or assessment meeting.

The Vasalos decision is a puzzle.

First, Vasalos was confidentially bound by his Consulting
Agreement Contract to KiOR. Second, he had previously analyzed
KiOR’ Pilot plant and the Demo unit’s raw data. Second, after
consulting with Robert Bartek, together with Dr. Steve McGovern
had written an “Independent Review and Analysis Report of KIOR’s
Pilot Unit Data”, submitted in March 2010. Third, Vasalos had,
earlier, licensed his own Reactor design to KiOR, which KIOR had
incorporated into the design of the KBR Pilot Plant and in the
Demo Unit, resulting in a substantial increase of bio-oil yields.
They could hardly have found a more expert, independent voice more
tied down in confidentiality agreements.

It is difficult to imagine how a company could have better
conveyed an attitude of fear of independent review, as if there
was a scam in the works and a rush to transfer ownership to duped
retail investors as soon as humanly possible.

O’Connor reaches out to Khosla Ventures, and is rebuffed

According to the State of Mississippi, “on February 8, 2012,
O’Connor requested that Vinod Khosla and Samir Kaul schedule a
time to speak with him,” concerning the state of technology
development. Kaul refused to speak with O’Connor. Mississippi
alleges that Kaul’s motives were “an effort to conceal his role
and the role of his boss, Vinod Khosla, in the cover-up of the
actual yields being achieved in KiOR’s pilot and demonstration
units.” But there is no confirming evidence of this.

The Technology Review

On March 2nd, Paul O’Connor wrote to Stamires, and said, “this is
really very weird/strange”. KiOR had a draft agenda for a
Technology Review scheduled to take place on March 8th. The draft
had a list of speakers and invited staff. No Stamires. Only a
handful of subjects to be discussed.

“It was a fiasco,” said a KiOR team member who attended. “The
discussion was heavily censored and rehearsed, and it certainly
did not answer any of O’Connor’s questions regarding actual
bio-oil yields and related costs. it was rigged and staged, full
of smoke and mirrors.”

By this time, O’Connor was on a hunt for answers, in order to
report back to the Board on the actual status of the technology.
During his visit to Houston for the Review, O’Connor met privately
with Stamires and discussed extensively the proceedings of the
meeting, and discussed the prospect of both men making a visit to
Vinod Khosla in California.

Then, Stamires met with Cannon and warned him that in “dodging
O’Connor’s questions and not providing him with complete truthful
information about actual bio oil yields, the Management team had
misled O’Connor, undermined the KiOR’ Board, and fatally hurt
KiOR.”

On March 11th, Stamires provided O’Connor with a list of the most
important issues of KiOR’ Technology problems to be included in
his presentation to the Board.

O’Connor strikes

On the morning of March 15th, O’Connor wrote directly to Cannon.

Dear Fred

Further to my visit and our
telephone conversation Monday, I would like some additional
information/data to round of my feedback to the board:

1) Actual performance data from
the Demo Plant. Reactor effluent oil yields (BOE or GPBD) and
oxygen content (%) as a function of time since demo start-up (No
info on reactor or catalyst necessary).

2) Best estimate you have today on
% oil recovery to calculate the “Overall product yield” from the
reactor effluent yield.

3) Your assumptions and
calculation of the $ 1.80 / gallon product cost for a 1500
ton/day plant @ 67? GPBD yield

4) List of abandoned patents (~28)
of which I am a co-inventor

I will contact Samir to see how he
wants to discuss this at the board. I agree with you that an
Oral presentation is the best.

And on March 22nd, O’Connor reported
back to the KiOR board.

On March 8th at the invitation of
Fred Cannon (CEO) I visited KiOR to discuss my concerns about
the in my mind the limited improvements in the overall process
yields obtained over the last 2 years.

My concerns were based on the
scarce and conflicting information on product yields I received
during the board of director meetings (BOD) in the period of
2009 up to 2011 These concerns are further amplified given the
fierce, rapidly evolving and well-funded competitive
technologies in this space. One example is the JV between Ensyn
and UOP.

The following assessment is based
on limited additional information I received during the meeting
and presentations at KiOR on March 8th, and is constrained by
the following limitations:

1) I requested, but did not
receive the “raw” actual pilot plant and demo plant yields to be
able to check the validity of the data presented to me.

2) I asked, but was not given the
opportunity for private one-to-one interviews with key technical
personnel, who actually perform the work.

3) I did not receive answers to
several critical questions asked during and after my visit to
KiOR.

4) I asked, but was not allowed
assistance from the in-house expert consultant, Prof Vasalos, to
analyze and validate yield performance.

5) I was not given access to
detailed information regarding the properties, handling, and the
suitability of the raw bio-oil to be hydro-treated for
upgrading.

Observations

Notwithstanding the foregoing it
is still possible for me to make the following observations:

1) The KiOR management team has
made excellent progress in building the organization and scaling
up the BCC process from the Pilot to the Demo phase and now also
the commercial phase (Columbus plant) in a record time of less
than 5 years, considered impossible in the process industry.

2) The KiOR management and
technical personnel feel confident that they can start-up the
Columbus plant in 2012 and produce good quality salable products
(Gasoline, Diesel, Low S Heavy Fuel Oil).

3) As can be expected, the major
effort of R&D has been and still is in the scaling-up of the
process and the catalyst and hence only limited effort has been
spent on searching for the next breakthroughs. In fact the
catalyst and reactor concepts presently being developed were
already conceived in 2009.

4) The way in which product yields
are being reported (e.g. to the BOD) by R&D management is
incomplete and misleading and does not correspond with the
actual goal of improving overall yield of sale-able liquid
products.

5) The present overall yield of
sale-able liquid products, estimated from the information
received falls short of the targets set for 2012…and has not
improved considerably over the last two years .

6) In my opinion it is still
possible to reach the target…and possibly even also the long
term target…but this will require a drastically different
approach, than presently being pursued by R&D.

On March 21st, O’Connor sent back to Stamires his first draft of
a report to be presented to the Board during its March 23rd
meeting,“Technology Assessment-March 2012”, asking for his
further comments. , which Stamires reviewed. Ultimately, O’COnnor
would address emails to Cannon on March 23rd, April 21st, and
April 23rd asking for response on these items.

No Eeyores at KiOR

Yet, by April 2012, management still expressed a stubborn belief
that the Natchez commercial-scale plant would produce 80 gallon
per ton yields. That month, CEO Fred Cannon wrote to staff
announcing promotion of Ed Smith’, acknowledging of his
accomplishments in building the pilot plants and the Columbus
commercial plant on time and under budget.

In the memo, he could have not spelled out the proposed yields
more clearly.

“Smith will oversee the construction of KiOR’ next commercial
plan of 1,500 ton/120,000 gallon/day facility planned for
Natchez.“ 120,000 gallons from 1500 tons of biomass: that’s an 80
gallon per ton yield. Yet yields in the Demo plant were no higher
than the mid-30s, and technical staff feared that they would sink
even lower in the commercial-scale plant at Columbus.

“It was the oil recovery,” O’Connor told The Digest. “The whole
problem was there. Although some may speculate that the KiOR team
were including water content in calculating oil yields, there’s no
firm evidence for that. But some oil is so emulsified, that you
can’t recover it, it goes out with the water when you separate. I
believe that’s why the yields were low in actuality compared to
what was being reported, They reported the oil content, not the
oil they were capable of recovering. You only have to look at the
trouble KiOR was getting into for the water that was being
discharged by the plant. It was so full of oil that regulators
were complaining.”

But, here, there is an ongoing disagreement between O’Connor and
other members of the staff research team who spoke with The
Digest, They contended that the real issue was that the bio-oil
yields observed in the Pilot Plant and DEMO Unit, where the oil
separation from water was very good, were about half of the
required amount to be an economical and feasible process.

New technical reports confirm the low yields and are suppressed

In March 2012, Dr. Peter Loezos and Liang Chen wrote a report
describing the operations and analyzing the results of the Demo
unit’s test results, including bio-oil yields. Loezos was a
chemical engineer formerly working for ExxonMobil, and was at this
time the Technical supervisor of the Demo unit. He reported to
John Hacskaylo. And Loezos and Chen wrote another report in June
2012. Both confirmed that the yields were far lower than the 67
gallons per ton claimed in public documents.

According to a team member familiar with the reports, “they were
not allowed by Hacskaylo to publish or discuss their reports and
conclusions, even within their own R&D group and their
colleagues.”

O’Connor’s Second Strike

On April 21st, Paul O’Connor wrote an update for the Board. His
concerns about not receiving raw data were not new, but were
revived. But he levels charges at management of preventing him, as
a board member, the assistance of an independent expert to review
the state of technology advancement. But for the first time, he
refers to misleading statements by R&D management. And he
called for the hiring of a strong CTO — a position he had himself
filled in the distant past.

Most importantly, there is a clear theme in his note of calling
for experts and Board actions independent of management. Although
he did not directly attack the overall management of KiOR, or
Cannon himself, there is a clear sense of wariness in his missive.

He wrote:

As one of the few directors of
KiOR with a technical background I feel I have a special
responsibility to critically review the progress being made at
KiOR in the fields of Technology and Research & Development.
Overall the information we have been receiving in the area of
Technology and R&D as directors of the board has been very
limited and very superficial.

In December last I expressed
concerns about the limited improvements made in R&D related
to the overall process yields. My concerns were based on scarce
and conflicting data received during the board meeting in
December. At the invitation of Fred Cannon (CEO) I visited KiOR
early March to discuss these concerns, while after the BOD
meeting of March 23rd the R&D Manager gave a very limited
R&D overview to the directors present, which confirmed my
opinion that the metrics presently being used to monitor R&D
progress are inadequate.

The following assessment is based
on limited information received during the meeting and
presentations at KiOR on March 8th, and the presentation of the
R&D Manager on March 23rd and is constrained by the
following limitations:

1) I did not receive the “raw”
actual BCC and BCC HT oil hydro-treater pilot plant and demo
plant yields.

2) I was not given the opportunity
for private one-to-one interviews with key technical personnel.

3) I did not receive answers to
several critical follow-up questions asked during and after my
visit.

4) I was not allowed assistance
from an expert consultant, to analyze and validate the BCC and
BCC HT process performance in depth.

5) I was not given any information
on the bio-oil/water separation.

6) I was not given access to
detailed information regarding the properties, handling, and the
suitability of the raw BCC bio-oil to be hydro-treated for
upgrading into saleable products.

Therefore this review and
assessment is very preliminary and should definitely not be
considered as a full in depth technology audit. Notwithstanding
these limitations is still possible for me to report some key
observations and recommendations.

Observations

1) KiOR management team has made
excellent progress in building the organization and scaling up
the BCC process from the Pilot to the Demo phase and now also to
the commercial phase (Columbus plant) in a record time of less
than 5 years, considered impossible in the process industry.

2) KiOR management feels confident
that they can start up the Columbus plant in 2012 and produce
good quality saleable products (Gasoline, Diesel, Low S Heavy
Fuel Oil).

3) As can be expected, the major
effort of R&D has been and still is in the scaling-up of the
process and the catalyst and hence only limited effort has been
spent on searching for the next breakthroughs. In fact the
catalyst and reactor concepts presently being developed were
already conceived in 2009.

4) The way in which overall
product yields are being reported by R&D management is
incomplete, inadequate and misleading and does not correspond
with the actual business goal of improving the overall yield of
saleable liquid products.

5) The present overall yield of
saleable liquid products, roughly estimated from the information
received falls short of the targets set for 2012…and has not
improved significantly over the last two years.

6) It is possible to reach the
target of and possibly even also the long term target…but this
will require a drastically different approach, than presently
being pursued by R&D.

Recommendations to the CEO

1. Appoint a strong and
knowledgeable CTO to effectively lead the important development
efforts still required by R&D and Technology.

2. Review and adapt the
performance metrics being used by R&D to correspond with the
actual business goal of improving the overall yield of saleable
liquid products

3. Replace the existing R&D
Director . His lack of relevant knowledge is exemplified by his
poor reporting of inadequate and even misleading metrics. He has
demonstrated not to have the right competences and skills to
ensure R&D progress over the last 1-2 years.

4. Establish a separate Discovery
Team with dedicated resources, staffed with scientists and
engineers with experience in the field and managed by an
established, well respected expert reporting directly to the CEO
and/or CTO.

To the Board of Directors (BOD)

1. Appoint a knowledgeable
independent team reporting to the BOD to perform a true in-depth
technology review , without the limitations that constrained my
present assessment.

2. Establish a Board Technology
Committee (similar to the existing Audit committee) to review
the technological progress on a regular basis.

3. Establish a Technical Advisory
Board (TAB) consisting of world recognized experts and
specialists to advise and assist the CEO, CTO and Board
Technology Committee with its tasks (e.g. technology auditing)

Cannon admits a problem

On the afternoon May 18th, Stamires met with Cannon at his
office, and recalled that “Cannon admitted that there were indeed
certain serious problems and he was thinking to hire a new senior
person with management experience reporting directly to him, to
help him specifically address the problems.”

“By this time, KIOR practically had no funds left to keep its
doors open,” Stamires told The Digest, “and after four years of
intensive R&D work, KiOR did not have a scalable and
economically feasible technology. Knowing the real test results,
management should have stopped lying to the public and investors,
changed the technology and re-designed the Columbus plant.”

By July, three groups had access to the Demo data and analyzed
it. Loezos and Chen, Charlie Zhang and Dennis Stamires, and
Professor Vasalos from CPERI. All three teams came to the same
conclusion: the yields were far below the 67 gallons per ton that
management was claiming in the IPO documentation.

Zhang and Dydak delve into the yield crisis

Agnes Dydak and Charlie Zhang were KiOR chemical Engineers who
had worked at the Demo Unit and also at the Columbus Plant. Zhang
did the original development work of Bio oil Upgrading /
Hydrotreating for producing the Diesel and Gasoline fuels at the
PARK Lab in Pittsburg, and worked on the development of processes
to separate more efficiently the oil from the water phase coming
out from the Reactor. Zhang also had for a period been night shift
process supervisor at the Columbus Plant’ production of Bio oil.

Dydak was a Senior Process Engineer analyzing the DEMO Plant’
data. Using a process simulation modeling program, she was
forecasting what will be the bio-oil yield at the Columbus
Commercial plant when in operation. This was critical since the
reactor was 50 times larger at Columbus.

Her forecasts were devastating.

The model predicted that the production would drop from an
average yield of 37 gallons per ton at the Demo plant to a range
of 17-21 gallons per ton at Columbus. She reported her finding to
her supervisors. A team member familiar with the response said
that Hacskaylo and Loescher directed her not to publish the
results of her Computer process simulation and yield prediction
results of the Columbus plant, and not discuss them with anybody
else.

Dydak became ‘extremely concerned’ about KiOR’s future and her
job security. Also, her daughter was working at KiOR as an IT
specialist. She agreed to meet confidentially with Stamires and,
outside of normal working hours, contribute towards the
development of an alternative technology, to replace the BFCC
process which was used at the Demo unit and also planned for use
at Columbus.

Further, the frustrations and concerns of Agnes became much more
exasperated when she informed her Management Superiors about the
results of the computer process simulation study, indicating that
the bio oil yield at the Columbus Plant will be much smaller than
the actual yield measured at the Demo Plant, and that her
superiors told her not to publish her report or discuss the
results with anybody else.

O’Connor’s Third Strike at the Board level

Meanwhile, on April 30th, Paul O’Connor reported again to the
Board, in a memo entitled “Towards a prosperous future for KiOR.”
For the first time, the fast-dropping KiOR stock price was
invoked.

But there was more. Catalyst costs were far above predictions,
trashing the expected profit margins. Problems in bringing the
Columbus plant on-line were noted. The tone of O’Connor’s note
moved from deep concerns in some areas, to a general sense of
alarm about a connected series of shortfalls that could have a
ruinous impact, if unchecked.

O’Connor wrote:

I would like to repeat myself by
starting to congratulate Fred Cannon and the KiOR team, in
particular Ed Smith for the timely and on budget completion of
the first cellulosic biomass conversion plant in Columbus.

During my time at Akzo Nobel Fred
and Ed delivered similar achievements in construction and
commissioning of chemical plants, amongst other in Houston with
the completion of the “CRUSADE” (Cost Reduction USA Damn
Exciting) project, which saved Akzo’s FCC catalyst business in
the USA. So once again: Congratulations!

Up to the completion of Columbus
KiOR has been on time and budget with the delivery of her
milestones, however unfortunately since then the success ratio
has not been so dramatic, resulting in the following delays and
shifts in performance targets:

A. The Columbus plant is not yet
on-stream, and the suggestion is that it may take up to
nine-months before the plant is completely on-stream and ramped
up to its capacity…and product yields.

B. The product yields are not at
the Gallons per bone dry wood [level] as estimated at the IPO,
and in fact the suggestion is that the GPBD will only be reached
in the larger (and modified?) Natchez plant.

C. The catalyst being used at
Columbus is based on large quantities of an
expensive…(apparently public knowledge!) and the rumor is that
no substantial costs reductions are to be expected.

E. Based on A, B and C the overall
economics and cash flow of KiOR will be substantially less
positive than estimated at the IPO etc. While KiOR management is
holding the info on A, B and C confidential, the overall
financial result is and will become more clearly visible.

D. Because of A, financing of
Natchez plant has been delayed and so also start-up of Natchez
has been shifted at least one quarter from 4Q 2014 to 1Q 2015.

The result of the foregoing has
been a dramatic drop in the KiOR share value, hurting the
interests of all it’s shareholders.

While I still fully believe in the
benefits and the potentials of further development of KiOR’s
technology, I am very concerned about the way the technology is
being implemented. My strong impression is that KiOR’s
management although very competent and successful in the
construction and commissioning phase, lacks the people with
experience, vision and leadership to move forward with necessary
improvements of the technology (yield improvement and catalyst
cost reduction) and operations (capacity, ramp-up and time on
stream). This is hurting KiOR now and could in worst case even
turn a potential success into a failure if no appropriate
corrective action is taken.

Suppressing a discovery

According to a KiOR team member, at this time R&D manager
John Hacskaylo concealed invention disclosures that showed promise
in improving bio-oil yields, lowering production costs and
replacing the BFCC Technology.

His motive? It is alleged that “such an event would in the eyes
of the public and investors indicate that the BCC/BFCC Technology
was not really working, and that past claims of 67 gallon yields,
projected 80+ gallon yields, and $1.80 per gallon costs were false
claims.

Ditsch departs

In April, a signature event occurred for those who had theorized
that a “troika” was running every aspect of KiOR, when one of the
troika, Andre Ditsch, resigned. A bitter KiOR staffer recalled,
“The head-fraudster…made his millions by badly screwing KiOR.”

Meanwhile, a stealthy effort, described as “outside regular
office hours , weekends and vacations,” principally involving
Zhang, Dydak and Stamires but also with the unpaid support of
Vasalos and Lappas, was underway to develop an alternative
technology, as the summer unfolded.

The stock in free-fall

The stock had hit $20.74 in September 2011, and then drifted
downwards to $10.18 by December 30th. The stock recovered to a
2012 high of $13.37 by March 30th, and then went into abject
free-fall. By June 8th, the stock was selling for $6.82, more than
50% off the IPO price of a year before.

Investors were worried. And the stock would rise and fall in fits
and starts but would close out the year at less than $7 per share.

O’Connor bails on the stock

Following the failure of his numerous strikes at salvaging KiOR’s
technology, frustrated with what the State of Mississippi alleged
to be “obstacles to his technology audit, ”co-founder and director
Paul O’Connor started to bail. He resigned as a director in May
2012, and started to unload shares. Fast.

Although other directors and officers were selling shares in
2012, no single KiOR insider besides directors Ralph Alexander or
O’Connor sold more than 20,000 shares during the year. Alexander
unloaded more than 50,000 shares, hauling in more than $400,000.
O’Connor, who held 12 million shares with a market cap of more
than $100 million at the beginning of the year, started to sell in
large chunks. Nothing before he attempted to rouse the KiOR
management and board on three occasions. But he unloaded more than
834,554 shares at $8.84 on May 23rd, and 430,000 more shares
before the end of the year, at least, in a $5.92 to $7.08 range.

He may have sold far more. In
a May 23rd filing
he reported holding more than 12 million
shares, but in his October 31 filing, he reported holding 1.958
million. There’s no direct report of a further sale.

“Recklessness and misleading conclusions”

In August 2012, the state of Mississippi alleged recklessness in
the financial modeling. The state said, in its lawsuit against
KiOR:

“Max Kricorian emailed the
corporate financial model to the Company’s executive leadership
team and asked that they sign off on the [assumptions] within
it. The recipients included John Kasbaum, John Hacskaylo, Ed
Smith, John Karnes, Chris Artzer and Fred Cannon. The entire
executive leadership team signed off on the key assumptions,
despite the recklessness and misleading conclusions to which
they led.”

The Sunny Q2 earnings statement

On August 14th, Kior announced a $23 million net loss for the
quarter, but Cannon stated:

“We are proceeding on schedule
with the commissioning of our Columbus facility and are on track
to start the facility up next month. With startup in September,
we anticipate that the Columbus facility will be providing
America’s first truly sustainable cellulosic gasoline and diesel
for American vehicles in the fourth quarter. Also, we expect
that the final construction costs for the Columbus facility will
be about four percent under our latest cost estimate.”

“In addition to the progress at
the Columbus facility, our research and development efforts have
generated major advances to our proprietary biomass-to-fuels
technology. Once implemented, we believe that these improvements
should allow us to increase our nameplate capacity up to 20
percent and significantly decrease the capital intensity of our
facilities.”

“Don’t Sell Shares”

In August 2012, O’Connor and Stamires were notified by Samir Kaul
not to sell KiOR shares. The rationale? Despite the healthy IPO in
2011, KIOR would soon running out of funds to keep operating, and
was in the process of talking to different potential investors.
According to Dennis Stamires, Kaul warned that sales of shares,
especially by O’Connor and Stamires as co-founders of BIOeCON,
would raise strong negative warning signals to the stock market
and to the potential investors, adversely affecting KiOR’s future
funding negotiations.

Stamires did not sell shares, and O’Connor suspended selling
activity until October 31st.

Smith, the Hero of Columbus, loses confidence

Earlier in the year, Vice President of Engineering and
Construction Ed Smith has been commended by management for his
work in bringing in the construction of the demo unit and the
first commercial plant at Columbus on time and under budget.
Praise also had been offered by O’Connor.

But the State of Mississippi alleges that, by no later than
October 7th, Smith had lost confidence in KiOR, as well. The
proximate cause? A series of runs conducted in its Pasadena, Texas
pilot plant, according to Mississippi, which based its allegation
on an email Smith penned to KiOR employee Arnold Korenek.

The Stealth Team Reports

The Stealth team within KiOR, working nights, weekends and
vacations, had not given up. On October 25th, Dennis Stamires
delivered to Cannon a detailed Technical Report entitled: “Proposal
for Commercial Use of an Efficient, Cost-effective Integrated
Process for the Conversion of Biomass to Liquid Fuels.”

Cannon’s Public Response, and Private Non-Response

While the Stealth team awaited a response from Cannon, the CEO
went on a PR offensive regarding the company’s bullish prospects.
In the Q3 2012 earnings call on November 8th, Cannon stated:

“Based on our experience at our
pilot plant and demonstration scale facilities here in Houston ,
we expect that our technology on implementing the unit at our
full-scale commercial plant, in Natchez, would achieve a yield
of 72 gallons per bone dry ton of biomass. We believe that the
progress generated by R&D investments to date, reflect a
steady march to our target yield of 92 gallons per bone dry
ton.”

It was the alternative technology which the Stealth Team had been
pursuing and which a consensus of technical team members said KiOR
needed to close the gap between public projections and actual
results.

Cannon thanked Stamires for the Proposal and told him that he
will study it and would come back to him.

The report did not directly credit Dydak and Zhang, who were
afraid of retribution from Hacskaylo and Loescher. However,
Stamires was able to indicate to Cannon only that the Report also
represented the work of others, but with names withheld.

In many ways it was a sign of KiOR’s progress from a
collaborative group of technologists to a group on fearful
employees working in silos.

In the report, Stamires stated the fact that KiOR’s yield gains
were essentially stalled at not much more than half of the yields
communicated to shareholders. And that only the Pilot Plant was
showing even these results, and all of this involved a cost of
“several dollars per gallon.”

The concern at the time, was not just about shareholder backlash,
but competition. The report contended in its opening that “KiOR
was not able to compete with Ensyn/UOP, who were said to producing
Bio oil with yields of 80+ gallons per dry ton of Biomass, at a
cost of less than $2 per gallon.” In short, the very yields that
KiOR hoped to achieve.

The New Technology

The new technology was described as “entirely novel and should be
patentable.” There was other good news, specifically that the
catalysts and heat carriers, to be used in the new technology
would replace the ruinously expensive ZSM Zeolite catalyst. They
had been already made by former KiOR staffer Mike Brady and tested
by Robert Bartek at the pilot plant in 2009. Their chemical
compositions, the proposal outlined, could be further optimized,
as well.

At the heart of the technology? A new family of materials
exhibiting “Dual-Functionalities”, proprietary to KiOR. They were
described as “Metal-Doped Clay-based Spinels”. The proposed new
Biomass overall Conversion process, contained certain key
individual process steps which had been tested and commercially
evaluated, as published in prior art, led Stamires to report that
it “ensured that the overall process was scalable up to large
commercial size Plants, and Bio oil yields of 80+ gallons per dry
ton of Biomass with acceptable quality, and low production cost,
will be obtainable.”

Curiously, the IP became somewhat mangled, according to Stamires.
“It turned out that some of the new materials and catalysts,
invented and developed by Brady and Bartek, had been patented by
Paul O’Connor, on Dec. 28th, 2011 and assigned to BIOeCON.”

KiOR hires a fixer

Despite the rosy chat with shareholders and the world, towards
the end of 2012, Cannon hired Bill Parker who had worked under
Cannon at AkzoNobel as a production and start-up manager, and also
at Albemarle, where he was a project manager. Albemarle was
located just across the street from KiOR. He came to KiOR having
earned a reputation as “a decent, very professional guy, and a
person with high integrity,” according to one KiOR staffer. Hopes
were high that he would help the company recognize the troubles
with its current technology.

A Mystery Next-Gen Catalyst

In a press release released November 8th, concurrently with the
earnings call, Cannon went into further detail regarding the state
of KiOR’s technology.

“I am pleased to announce that we
have commenced operations at the Columbus facility and have
produced a high quality oil that is in line with our
specifications for upgrading into cellulosic gasoline and
diesel. More importantly, we believe the high quality of the oil
from the Columbus facility validates KiOR’s proprietary biomass
fluid catalytic cracking, or BFCC, technology at commercial
scale. The facility’s performance to date not only meets our
expectations based on our experience at our pilot and
demonstration scale facilities, but also gives me confidence
that we remain on track to upgrade our oil in order to ship
America’s first truly sustainable cellulosic gasoline and diesel
for American vehicles.”

The statement is more than a little disingenuous. Cannon is
specifically limiting himself to noting that the oil that was
being produced was upgradable into cellulosic gasoline and diesel,
without referencing the cost of same.

To be perfectly frank, so long as oil is being produced with less
than 15% oxygen content, virtually any pyrolysis oil can be
upgraded successfully to cellulosic gasoline and diesel, so long
as an appropriate technology is used, so long as cost is not a
consideration. The statement by Cannon astutely avoids any
discussion of catalyst cost, regeneration, coking and poisoning —
factors which routinely frustrated efforts to upgrade bio-oil at
an affordable cost, as the Pacific Northwest National Lab noted
here
.

Was the catalyst being regenerated while retaining activity? Was
the process able to run for significant lengths of time on a
single catalyst charge? Was the water/oil problem solved so that
significant amounts of oil were not leaving the plant via the
effluent stream? The Cannon statement sidesteps the issues with a
bland statement of confidence that KiOR could produce an in-spec
fuel. Something that has been done for decades, successfully.
KiOR’s technology wasn’t about making cellulosic fuels. It was
about making them cost-effectively.

Cannon looked ahead when he looked at yields. In the press
release, he added:

“Furthermore, our research and
development efforts continue to make progress increasing our
yields and reducing our capital intensity. Our work continues on
our next generation catalyst platform, which we believe can
produce a yield of 72 gallons per bone dry ton of biomass when
implemented at our full scale commercial facility in Natchez.
Moreover, we believe that this catalyst platform will reduce the
amount of coke made in our process by up to 25 percent, which
would enhance the capital efficiency of our commercial
facilities by giving us the ability to process up to 25 percent
more feedstock without significant additional capital.”

Cannon did not indicate where the next generation catalyst was
coming from. Or when it would be ready. Since Cannon had not
responded to the Stealth Team, we can presume it wasn’t coming
from them. Yet, no KiOR staff member of the era we communicated
with on or off the record had any other firm recollection of any
catalyst under development at the time which would create yields
in this rage, reduce the coking by the suggested amount, and allow
the company to “process up to 25 percent more feedstock without
significant additional capital.”

But it was more than that. Processing more feedstock didn’t
improve the low yields, or the high variable costs associated, for
example, with ruinous catalyst costs. Rather, these fixes
addressed capital costs — the process technology remained as
damaged as ever.

Was there another stealth technology? One supposes in a company
as wrapped in mystery as KiOR, perhaps there’s another
breakthrough technology in the wings that would deliver on the
promised results for Columbus and Natchez.

The Year of Living Disingenuously

Former GE CEO Jack Welch once said, “an organization’s ability to
learn, and translate that learning into action rapidly, is the
ultimate competitive advantage.” He added that “The essence of
competitiveness is liberated when we make people believe that what
they think and do is important – and then get out of their way
while they do it.”

Would KiOR pass the Welch test? For sure, numerous KiOR staffers
of the time believed that the company had a management problem
more than a technology problem. No matter how dire the
technological challenges seemed.

As Paul O’Connor observed, “no one [in power] analyzed the pilot
plant data. Andre [Ditsch] would say ‘oh, go out and hire MIT
PhDs.’ But they are not the ones who are going to scale up a
process. Fred let Andre go his way, and they hired too many people
from Albemarle across the street. Catalysts are important; you
need a few people. But you need a lot of process people, and that
balance went wrong.”

Other staffers point to a highly competent technical team that
had been assembled. “KiOR forced them out or fired them or they
left because of the poor professional working environment,” said
one team member of the time.

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

In our next installment, we’ll see how that
next-gen catalyst platform, and KiOR’s attempt to make Columbus
produce 67 gallons per ton worked out. The promoters said that it
was not only possible, it was being done at the Demo unit. The
skeptics said that the Demo unit was producing 60% as much as was
claimed. That Columbus would produce around half that, again. And
then there was the Stealth Team, proposing a radical new
technology capable, they believed, of reaching something like 80
gallons per ton. And then there was the “next-gen catalyst”
platform that Cannon was referring to and “a steady march to our
target yield of 92 gallons per bone dry ton.”

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

Skeptics, promoters, innovators — who would be proven right? We
continue the story in the next part of our series.

Jim Lane is editor and
publisher  of 
Biofuels Digest where this

article

was originally published.
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