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

“You’ve cooked the books”

On June 6th, Bill Coates arrived, as KiOR’s new Chief Operating Officer.

A KiOR staffer recalls: “I thought he was a highly intelligent person with extensive operational experience in high level management positions in the Oil Industry. I was very impressed with his knowledge and his plans to make KiOR move forward. I though he was the right person and had a chance to save KiOR.”

Coates had a quick and rough indoctrination.

On June 24th, KiOR filed an amended Form S-1/A and Form 424(b)(4) in conjunction with KiOR’s 10 million share IPO. The IPO priced that day at $15 per share, raising $150 million in gross proceeds.

In a meeting with Dennis Stamires in June, he was advised that the biocrude yields in reality were much lower than the 67 gallons per ton, as stated in the IPO filing .

The State of Mississippi alleges:

Coates immediately began investigating the accuracy of the yield data and cost estimates. On June 27, 2011, Coates received a slide presentation for KiOR’s Vice President of R&D, John Hacskaylo, which outlined several basic differences between the Company’s financial model and actual operations…The Company’s financial model assumed a catalyst cost of $3000 per ton when the Company actually believed it would pay as little as $6000 per ton and had received a quote for as high as $30,000 per ton. Moreover, whereas the Company’s financial model assumed a catalyst addition rate of 0.83% per day based on the total weight of Catalyst inventory in the Unit, whereas  the actual catalyst addition rate was nearly 9% per day.

Subsequently, Coates also reviewed the operations and results with raw data of the Pilot plant and the Demo unit, the report by Vasalos and McGovern on maximum yields. He also looked at the technology of Dynamotive, based on the public information. He brought in Max Kricorian, KiOR’s Finance Director, who discussed KiOR’s  business and financial Model, and financial projections and forecasts which KiOR’ Management was disclosing to the public.”

Kricorian reviewed the business models based on input from the science team, and concluded that the actual costs were much higher than $2 per gallon of fuel, and substantially different from the costs the management team had projected.

According to KiOR staffers from this period, Coates concluded that there were large, unjustifiable discrepancies in the yields claimed and those achieved.

He would write on July 15th to a KiOR scientific staffer: “We have a difficult but not an  impossible mountain to climb. Let me think about this for a few hours, as I have been thinking along the same lines, lets discuss further tomorrow morning at 10 at my office.” Coates also set a meeting for July 18th to arrange the testing of the new materials in the demonstration unit.

In fact, Coates had determined to form a Task Force aimed at to changing the technology to a new one that could meet the Technical performance, in particular the bio-oil Yield and related production costs as disclosed in the S-1. He directed that the Task Force be composed from experts coming from KiOR and from outside.

An internal technical proposal was his guide. In it was proposed a new technology capable of  increasing  substantially the Bio oil Yields, scalable to commercial size Plants, and dramatically reducing the production costs. It involved the use of a new family of catalysts/heat carriers with dual functionalities discovered by Brady, Bartek and Stamires in 2009 and pending patent application. These were based on low cost clay, metal doped Spinel’s. These would have reduced catalyst cost by an order of magnitude.

Meanwhile, Coates met with Fred Cannon, CFO John Karnes and Chris Artzer on July 15th. According to a staffer who spoke with Coates, “He confronted them with the problems involving the inflated yields, under valued production costs and bogus financial projections. They rejected his claims. The State of Mississippi, which placed the meeting in August, stated:

During the course of this meeting, the State of Mississippi alleges that Coates told Cannon and Karnes that they had “cooked the books” and informed them that he was not “going to be a part of this scam.”

The meeting set for the 18th never happened. According to Stamires, Cannon and Artzer met with Coates in his office prior to 10 o’clock and fired him.

But there was still a hope that his work had not been in vain. Prior to being fired, Coates also, according to the state of Mississippi, “reported the results of his investigation to the Chairman of the Audit Committee of the Board of Directors, Gary Whitlock.”

Whitlock undertook a review, interviewing Fred Cannon, Andre Ditsch, John Hacskaylo and Chris Artzer, declined to hire third party experts, and concluded his investigation on July 22nd without further action.

As the state of Mississippi observed:

No member of the Audit Committee or the Board of Directors requested that outside counsel and/or independent technologists be consulted to examine the substance of Coates’ concerns. In contrast, when the SEC notified KiOR in 2014 that it was the subject of a formal securities fraud investigation, KiOR hired Special Investigative Counsel and an independent engineering firm to investigate the veracity of matters at issue. The matters brought to light by Coates were identical to those investigated by the SEC over three years later.