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

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 2014.

LETTER OF RESIGNATION

Hoevelaken, August 31st 2014

From: Paul O’Connor

To: The board of directors of KiOR Inc.

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 technology.

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 respond…

Concluding:

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