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

Big News from DOE

But in management circles, there wasn’t a corresponding sense of gloom. In fact, there was a celebration going. KiOR had received a Loan Guarantee term sheet for a $1 Billion project, from the US Department of Energy, on January 3rd.

In the complex world of loan guarantees, a term sheet is a first step. Ultimately loans are made by banks, and guarantees are applied to them. And they never guarantee the entire loan, only a portion of it, typically around 60 percent. This is the government’s way of ensuring fiscal discipline. They need the bank to have skin in the game to avoid funding improbable loans. So, KiOR would likely have to persuade a bank, and equity partners, to should up to $400 million in risk on a loan for a first-of-kind technology. The company, for that reason, was a long ways from a financing event.

And, there was a bomb hidden in the news.

The project, as described in a note to staff written by CEO Fred Cannon, was expected to produce more than 11 million gallons of fuel per year.

Why was that a problem?

What was worrying at the Columbus plant was less the amount of fuel coming out as much as the amount of feedstock going in. The plant had a nameplate capacity of 500 tons of dry biomass per day.

Staff could do quick calculations and realize that, assuming an optimistic 85% up-time for the plant, the bio-oil yields would have to be 73 gallons per ton of biomass.

With that, staff realized for the first time that the company was representing yields to the Department of Energy that were materially above what the technology was achieving.

In his note to staff, Cannon thanked the team and singled out one individual for the loan guarantee milestone.

It was Andre Ditsch, author of what KiOR colleagues said were grossly inflated yields.

Changing the yields

In its lawsuit against KiOR, the state of Mississippi alleges that Andre Ditsch’s work on what might be termed “synthetic yield improvement” was not complete.

“On January 31, 2011, three weeks after [a] strategy session with Vinod Khosla was conducted,” the state alleges, “Andre Ditsch notified Yuan Wang, a KiOR employee under Ditsch’s direction, that the current yield in the Company’s financial model had changed…Ditsch made this change in the financial model in order that KiOR would appear to potential investors to be commercially viable without RIN and tax credits.” The state added that “Ditsch did so at Khosla’s direction,” the first indication, if true, that Vinod Khosla may himself have become entangled in the faking of yields.