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

Busy in the Big Dark

But the KiOR could hardly spare a moment to think about the consequences of bad news from Exxon. During the first quarter of 2011, the company was a beehive of activity on multiple fronts.

As one KiOR insider told The Digest, “there were several main projects going on, including the negotiations with DOE for the loan guarantee  preparation for the S1 and filing, fuel registration, road show preparation, continuing discussions with Chevron/Catchlight for some kind of offtake agreement and preparations for the opening ceremonies in April for the first Commercial Bio Fuels Plant in Columbus.

As March came to a close, attention shifted sharply to the DOE loan guarantee. It was a substantial sum – $1 billion, that’s billion with a “b”. And there was a big problem.

The catalyst was rapidly and severely de-activating. The company’s forecasts were based on the performance of a fresh, activated catalyst.

On March 28, 2011, the state of Mississippi claimed that “Andre Ditsch sent an email to KiOR’s Vice-President of Research and Development, John Hacskaylo, and others that discussed the Company’s dealings with Shaw Consultants International, Inc. an engineering firm the DOE had retained to conduct technological due diligence in conjunction with KiOR’s $1 billion loan application for Project Alpha.”

The fear was that Shaw’s engineers would turn up the problem, and scuttle a loan guarantee until KiOR came up with a new catalyst. But that would take time and there was no guarantee that a new catalyst could be developed — or that it would perform as well as projected in the forecast.

Matters came to a head on April 8th. According to the state of Mississippi:

Instead of revealing these facts to Shaw and/or the DOE, Cannon and Ditsch concealed these matters and doubled down on their hope that their new catalyst, KC2, would achieve commercial scale yields and economics while used in steady state operations.

Shaw’s engineers reported to DOE, according to the State of Mississippi, that they could not support a 67 gallon per ton yield based on the performance of the demonstration unit. And Shaw’s figures, which were derived from reports and not from direct independent measurement, The Digest learned, did not take into account the catalyst de-activation problem, and did not subtract water content from the overall yield.

When all else fails, IPO

With catastrophe on the horizon relating to the catalyst performance and the yields at Columbus, on April 11, 2011 KiOR filed for an IPO with the SEC, and claimed in the prospectus:

Our proprietary catalyst systems, reactor design and refining processes have achieved yields of renewable fuel products of approximately 67 gallons per bone dry ton of biomass, or BDT, in our demonstration unit that we believe would allow us to produce gasoline and diesel blendstocks today at a per unit unsubsidized production cost below $1.80 per gallon, if produced in a standard commercial production facility with a feedstock processing capacity of 1,500 BDT per day. 

The state of Mississippi vehemently disagreed. They alleged that, in addition to the failure of the KC1 catalyst:

KC2 never generated commercially viable yields and neither did any of KiOR’s later generations of catalysts.

It was the first appearance of the inflated yields in a document that would be relied upon by the retail investor.

A KiOR staff member at the time recalled: “Contrary to the findings of the three above mentioned workers, Hacskaylo’s grossly inflated data showed almost double the Bio oil Yields, compared to actual, measurable/recoverable and reproducible Bio oil Yields listed in the spread sheets of the raw DEMO data  produced at the same period. However, Hacskaylo’s Bio-Oil Yields were consisted with the Yield numbers used by Ditsch and others in the S1.”