KIOR — The August 31 2014 O’Connor resignation letter

In today’s Digest, we publish 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.”

[Note to readers: on account of length, we are publishing each of the documents separately and sequentially. We have added appropriate illustrations in the form of plant photos and logos — but none of these were a part of the original documents. Where you see a (**) symbol, this represents information withheld from the public and filed separately with the SEC.]

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:

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

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.
UNQUOTE

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.

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 ( Attachment D ). 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 of about only [**]% of 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 [**].

Around that time the KiOR board (via Will Roach and Samir Kaul) approached me to help KiOR as a technical expert in reviewing the situation at KiOR and in January of 2014 I signed an NDA 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 (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.

In the mean time 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.

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.

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

More documents in this set

The March 15 2012 O’Connor email memo
The March 22 2012 O’Connor technology assessment
The April 21 2012 O’Connor technology assessment
The April 30 2012 O’Connor memo
The Spring 2013 O’Connor note