OPIS Biofuels Headlines

September 8, 2014
Former KiOR Exec Outlines Start-Up Problems; Urges Management to Resign

A member of renewable fuels company KiOR’s board of directors--and former executive---has resigned after long-standing disagreements with the direction of the company and unheeded warnings of low yield problems in both the demonstration and commercial-scale plants. The former executive believes management “needs to resign and…be replaced in order to improve the chances of success of KiOR.”

On Aug. 31, Paul O’Connor resigned from KiOR’s board of directors, the company disclosed in a Sept. 5 filing with the Securities and Exchange Commission (SEC).

The resignation comes as KiOR has previously warned that it will not have adequate liquidity to fund its operations if additional funds are not raised by Sept. 30. Meanwhile, the company recently reduced staff for a second time at its 13-million gal/yr renewable crude plant in Columbus, Miss., which has been idle since January of this year. The company has since hired a financial advisor to help the company review various possibilities, including a possible sale of the company.

“Prior to Mr. O’Connor’s resignation, the board asked the company’s outside counsel to review Mr. O’Connor’s conduct,” the SEC filing explained. “The matters reviewed by counsel in connection with the outside counsel review included (i) an instance in which Mr. O’Connor withheld a third party technology report, paid for by the company, from the board and management, (ii) an instance of unauthorized communications with persons during the course of the outside counsel review and (iii) the possibility that Mr. O’Connor failed to comply with the company’s insider trading policy. The Board (other than Mr. O’Connor) met to discuss the results of the outside counsel review and, pursuant to that discussion, unanimously agreed to ask Mr. O’Connor to resign from the board,” the filing noted.

O’Connor explained his actions in a lengthy Aug. 31 resignation letter, also included in the SEC filing. “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,” he wrote.

“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,” O’Connor continued.

“During the first two years of KiOR 2008-2009, I worked as CTO [chief technology officer] with Fred in building up the organization, proving the concept in a modified FCC pilot plant [at the company’s headquarters in Pasadena, Texas] 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,” O’Connor wrote.

Pilot Plant Yields Lower Than Reported

“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 [management] and Khosla Ventures were uneasy about my known other activities in the area of biomass conversion….” O Connor explained. “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 indicated some good progress in increasing the yields in gallons per ton. At the end of 2011 however, I received some additional data 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,” he wrote.

“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,” he wrote.

The SEC filing included email correspondence between O’Connor and KiOR executives, as well as technology review details, however confidential information was deleted and replaced by asterisks.

“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 [**] 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 [**]. Unfortunately none of my recommendations was followed up,” O’Connor continued.

“It is obvious for all of us today that KiOR is going through some difficult times, and may even not survive as a company,” he continued. “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,” he wrote.

Commercial Plant Yields Lower Than Projected

“After the mechanical completion of the Columbus plant, it took quite a long time before the plant actually started producing products….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 of about only [**]% of the actual design case,” O’Connor wrote.

“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 [**]. Around that time the KiOR board…approached me to help KiOR as a technical expert in reviewing the situation at KiOR and in January of 2014, I signed an NDA [non-disclosure agreement] 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 discernable 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. I have stressed to the board that in my opinion a clear change in technology strategy as well as leadership style is essential to solve the issues,” he wrote.

O’Connor rejoined KiOR’s board in March of this year and led a taskforce to address and solve existing technology problems, the SEC filing noted.

“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....I was then requested by the board to postpone my visits to KiOR because of my critical attitude towards the MT. 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 respond,” O’Connor continued.

“In the meantime, 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 improved,” O’Connor wrote.

“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,” he wrote.

“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,” O’Connor wrote. “In the meantime, as I do not have the opportunity to help KiOR as originally intended, I have resigned from the board as of Aug. 31, 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,” he concluded.

In its SEC filing, KiOR wrote that its management “disagrees with the claims made by Mr. O’Connor in the resignation letter and Mr. O’Connor’s characterizations of certain facts and his general conclusions…. [and the company] is currently considering all of its options, including the possibility of legal action against Mr. O’Connor.”


--Rachel Gantz, rgantz@opisnet.com

 

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