KiOR: The Inside True Story of a Company Gone Wrong. Part 5, The Collapse

November 25, 2016

Print This Article Share it With Friends

by Jim Lane (Biofuels Digest) 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”.

...

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.

...

In February 2013, the Columbus facility came online, and the State of Mississippi and KiOR insiders agreed: the yields were worse than hoped. Far worse.

...

On March 27, 2013, (Paul) 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:

...

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.

...

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.”

...

In May 2013, the company reported relatively rosy news to the public.

...

In July 2013, (Mark) 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.”

...

... Ross persevered. According to the State of Mississippi in its lawsuit, his “persistent warnings earned him the nickname, Dr. Doom, within the company’s Pasadena, Texas headquarters.”

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

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

...

Why was (Vinod) 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.

...

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

...

The cost would be high.

...

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

...

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.

...

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.

...

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.

...

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.

... SEC launched a securities fraud investigation

...

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.

...

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.

...

So, there must have been some hope for KiOR even at the late stage that new technology could be deployed, and that KiOR’s technological failures did not ensure a company failure, until the very end when the cash ran out when the actual results of biocrude production at the Columbus plant could not be hidden.

...

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

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

...

Had 67 gallons per ton been achieved, could $1.80 been achieved?

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

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

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

What about catalyst loss? “You might lose up to 1% in a normal operation,” Stamires told The Digest. “But KiOR was losing over 10%. READ MORE

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

Texas company KiOR hoodwinked Mississippi for $75M, documents show (The Clarion-Ledger)