KIOR — The March 22 2012 O’Connor technology assessment

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: In today’s Digest, 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.]

KiOR Technology Assessment – March 2012

CONFIDENTIAL
By Paul O’Connor, March 22nd 2012.

Background

On March 8th at the invitation of Fred Cannon (CEO) I visited KiOR to discuss my concerns about the in my mind the limited improvements in the overall process yields obtained over the last 2 years.

My concerns were based on the scarce and conflicting information on product yields I received during the board of director meetings (BOD) in the period of 2009 up to 2011 These concerns are further amplified given the fierce, rapidly evolving and well-funded competitive technologies in this space. One example is the JV between Ensyn and UOP.

The following assessment is based on limited additional information I received during the meeting and presentations at KiOR on March 8th, and is constrained by the following limitations:

1) I requested, but did not receive the “raw” actual pilot plant and demo plant yields to be able to check the validity of the data presented to me.
2) I asked, but was not given the opportunity for private one-to-one interviews with key technical personnel, who actually perform the work.
3) I did not receive answers to several critical questions asked during and after my visit to KiOR [See Appendix 2]
4) I asked, but was not allowed assistance from the in-house expert consultant, Prof Vasalos, to analyze and validate yield performance.
5) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw bio-oil to be hydro-treated for upgrading.

Observations

Notwithstanding the foregoing it is still possible for me to make the following observations:

1) The 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 the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.

2) The KiOR management and technical personnel feel 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 product yields are being reported (e.g. to the BOD) by R&D management is incomplete and misleading and does not correspond with the actual goal of improving overall yield of saleable liquid products.

5) The present overall yield of saleable liquid products, estimated from the information received [See Table 1] falls short of the targets set for 2012 [**] and has not improved considerably over the last two years .

6) In my opinion it is still 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 [See recommendations]
[**]

Recommendations

To achieve these very challenging goals, KiOR needs two separate and individual teams as follows::
[**].

It is of essence that the two teams are separately managed, with separate resources and facilities, and that the teams will report separately and directly to the CEO and BOD.

[**]

Furthermore to assist, advise and monitor the two teams, my recommendation is to form a Technical Advisory Board (TAB) consisting of world recognized specialists. Monthly separate progress meetings of the TAB with both teams will be required. The TAB will report directly to the CEO and BOD.

Appendix 1

R&D Presentations
Confidential Materials omitted and filed separately with the Securities and Exchange Commission. One page omitted. [**]

Appendix 2 Follow up questions

Further to my visit and our telephone conversation on Monday, I would like additional information/data to continue with my analysis and assessment to the BoD:

1) Actual performance data from the Demo Plant.
Reactor effluent oil yields (BOE or GPBD) and oxygen content (%) as a function of time since demo start up, including % oil in water and % of light gases. (No info on reactor or catalyst necessary).

2) Best estimate you have today on % oil recovery to calculate the “Overall product yield” from the reactor effluent yield (without including the amount of oil in the water and also without including the light gases)

At present I am guessing about [**]%?

3) Provide detailed information on assumptions and calculations of the $ 1.80 / gallon product cost for a 1500 ton/day plant @ 67? GPBD yield

4) List of abandoned patents (~28) of which I am a co-inventor

More documents in this set

The March 15 2012 O’Connor email memo
The April 21 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