KIOR — The April 21 2012 O’Connor technology assessment

In today’s Digest, we are publishing a series of six documents that were filed in the past week with the SEC, relating to KiOR, and a growing dispute between the company’s Board — and an individual director, Paul O’Connor. It is important to note KiOR’s response:  “The Company intends to continue to vigorously respond to allegations by Mr. O’Connor that it considers to be false, misleading or inappropriate and is currently considering all of its options, including the possibility of legal action against Mr. O’Connor.”  As KiOR’s response becomes public, The Digest will publish it.

At the same time, it would be unfair to dismiss O’Connor’s assessment without a fair hearing, either. As O’Connor notes on his Board resignation letter:

“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.

“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.”

STRICTLY CONFIDENTIAL

KiOR Technology R&D: Assessment & Recommendations

By Paul O’Connor – April 21st 2012

As one of the few directors of KiOR with a technical background I feel I have a special responsibility to critically review the progress being made at KiOR in the fields of Technology and Research & Development.

Overall the information we have been receiving in the area of Technology and R&D as directors of the board has been very limited and very superficial.

In December last I expressed concerns about the limited improvements made in R&D related to the overall process yields. My concerns were based on scarce and conflicting data received during the board meeting in December. At the invitation of Fred Cannon (CEO) I visited KiOR early March to discuss these concerns, while after the BOD meeting of March 23 rd the R&D Manager gave a very limited R&D overview to the directors present, which confirmed my opinion that the metrics presently being used to monitor R&D progress are inadequate.

The following assessment is based on limited information received during the meeting and presentations at KiOR on March 8th, and the presentation of the R&D Manager on March 23 rd and is constrained by the following limitations:

1) I did not receive the “raw” actual BCC and BCC HT oil hydro-treater pilot plant and demo plant yields.

2) I was not given the opportunity for private one-to-one interviews with key technical personnel.

3) I did not receive answers to several critical follow-up questions asked during and after my visit.

4) I was not allowed assistance from an expert consultant, to analyze and validate the BCC and BCC HT process performance in depth.

5) I was not given any information on the bio-oil/water separation.

6) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw BCC bio-oil to be hydro-treated for upgrading into saleable products.

Therefore this review and assessment is very preliminary and should definitely not be considered as a full in depth technology audit.

Notwithstanding these limitations is still possible for me to report some key observations and recommendations.

Observations

1) KiOR management team has made excellent progress in building the organization and scaling up the BCC process from the Pilot to the Demo phase and now also to the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.

2) KiOR management feels confident that they can start up the Columbus plant in 2012 and produce good quality saleable products (Gasoline, Diesel, Low S Heavy Fuel Oil).

3) As can be expected, the major effort of R&D has been and still is in the scaling-up of the process and the catalyst and hence only limited effort has been spent on searching for the next breakthroughs. In fact the catalyst and reactor concepts presently being developed were already conceived in 2009.

4) The way in which overall product yields are being reported by R&D management is incomplete, inadequate and misleading and does not correspond with the actual business goal of improving the overall yield of saleable liquid products.

5) The present overall yield of saleable liquid products, roughly estimated from the information received falls short of the targets set for 2012 [**] and has not improved significantly over the last two years.

6) It is possible to reach the target of [**] and possibly even also the long term target of [**], but this will require a drastically different approach, than presently being pursued by R&D.

Recommendations to the CEO

1. Appoint a strong and knowledgeable CTO to effectively lead the important development efforts still required by R&D and Technology.

2. Review and adapt the performance metrics being used by R&D to correspond with the actual business goal of improving the overall yield of saleable liquid products

3. Replace the existing R&D Director . His lack of relevant knowledge is exemplified by his poor reporting of inadequate and even misleading metrics. He has demonstrated not to have the right competences and skills to ensure R&D progress over the last 1-2 years.

4. Establish a separate Discovery Team with dedicated resources, staffed with scientists and engineers with experience in the field and managed by an established, well respected expert reporting directly to the CEO and/or CTO.

To the Board of Directors (BOD)

1. Appoint a knowledgeable independent team reporting to the BOD to perform a true in-depth technology review , without the limitations that constrained my present assessment.

2. Establish a Board Technology Committee (similar to the existing Audit committee) to review the technological progress on a regular basis.

3. Establish a Technical Advisory Board (TAB) consisting of world recognized experts and specialists to advise and assist the CEO, CTO and Board Technology Committee with its tasks (e.g. technology auditing)

[**]

More documents in this set

The March 15 2012 O’Connor email memo
The March 22 2012 O’Connor technology assessment
The April 30 2012 O’Connor memo
The Spring 2013 O’Connor note
The August 31 2014 O’Connor resignation letter