KiOR: The Inside True Story of a Company Gone Wrong. Part 5, The Collapse 

A footnote: The SEC charges KiOR’s successor unit and former CEO with securities violations

In September 2016, the US Securities and Exchange Commission reported:

SEC Charges Alternative Fuels Company and Former Executive for Key Omissions Regarding Technology

On September 26, 2016, the Securities and Exchange Commission charged Texas-based Mard, Inc., formerly known as KiOR, Inc., (“KiOR”), and its former CEO and President Fred Cannon for failing to disclose important assumptions about the yield that KiOR had claimed to have achieved through the company’s proprietary process of converting wood and other biomass into crude oil – a key metric that was critical to KiOR’s viability.

According to the SEC’s complaint filed in Houston federal court, beginning in April 2011 with the filing of KiOR’s registration statement for its initial public offering, KiOR and Cannon claimed that the company had “achieved” a yield of 67 gallons of fuel per ton of biomass. But they did not disclose that this yield was based on significant assumptions about technologies that remained under development. Absent these assumptions, internal KiOR documents reflected test results with yields of approximately 18-30 percent less than the disclosed yield. Cannon signed and approved the registration statement and subsequent filings that continued to tout the 67 gallon yield figure without disclosing the underlying assumptions. KiOR and Cannon knew or should have known that disclosure of these assumptions was necessary to provide complete and accurate information to KiOR investors about the actual yield. In November 2014, KiOR declared Chapter 11 bankruptcy, emerging as a privately-owned entity in June 2015.

Without admitting or denying the SEC’s charges, KiOR and Cannon agreed to settle the claims against them. Both have agreed to the entry of a final judgment permanently enjoining them from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and Cannon has agreed to pay a civil penalty of $100,000. The settlement is pending final approval by the court.

Management or board?

If O’Connor’s thesis is correct and KiOR’s troubles are the result of a management failure, the board’s failure to properly supervise its executive officers stands out as a hallmark of what KiOR ultimately became.

The board’s powers to structure a company to the faking of data is absolute and requires no specific mandate. It is the purpose for which boards are established: to ensure transparency and protection for the shareholders who have elected the board. The directors may well escape the trident and net of the courts — as they often do — but whether they escape the judgement of public opinion: that is up to the public.

But was it all simply board inattention? Some point fingers at the payday which KiOR represented to employees — paychecks, bonuses, fees, stock options. Of course, one of the most ironic features of KiOR’s demise were the occasions on which KiOR obtained silence in return for shares — the ultimately worthless shares of the company.

Was simple greed the key factor which kept doubt from turning into active revolt — which kept whistle-blowing activity to a minimum until by 2013-14 and the company was unable to meet its bills?

As Dennis Stamires outlined:

Paul O’Connor comes in 2012 comes to Kior sent by the board to see how things are going along with the technology. The KiOR guys, Chris Artzer and John Hacskaylo, they had it pretty well-organized what they were going to tell Paul. I was not invited to be present but I found out later that what they presented to him was very limited, and was highly censored by Chris [Artzer], Hacskaylo and Fred [Cannon]. He gets only partial and maybe some misleading information and he’s supposed to go back and write a report for the board. Paul comes to me, and said, Dennis, I’m here representing the Board. I said, wonderful. You’re representing the Board? I’m going to open my heart to you.”

Here I am, givcing this information to Paul, everything, and he said, well this is what’s really happening? I gave him all the details because said I am was representing the Board. Meantime, I want to get to the Board, because Gary [Whitlock] had not called me and I wanted to get to the Board. Great opportunity.  So I did that. And he was going to go to the Board. Except what I did not like when the IPO came out, Paul knew exactly what’s going on. He knew the story. He knew what was going on at KiOR. He knew that KiOR was going to go down. He dumped his shares and made $12 million.”

It’s an allegation, not a fact — whether O’Connor had enough information in 2012 to decide that “KiOR was going to go down” is open to interpretation. Even Stamires, who makes the allegation, didn’t exit the company for another year, all the while making desperate attempts to bring the faked data and real yields to the Board. So, there must have been some hope for KiOR even at the late stage that new technology could be deployed, and that KiOR’s technological failures did not ensure a company failure, until the very end when the cash ran out when the actual results of biocrude production at the Columbus plant could not be hidden.

It may well come down to this: a belief that scale-up itself could be changed through innovation. KiOR was not just about innovative technology, but about an innovative path to commercial success. As this presentation slide demonstrated, the KiOR ethos focused on “don’t listen to the naysayers” principles: the company was about breaking free from the shackles of ossified thinking about how to go about things. To an extent, reality may well have been dismissed as “naysaying”, and dissenters branded as “old school”.

For KiOR, the model companies were not Chevron or AkzoNobel, but Google, eBay and Amazon.com. All which belonged in the digital economy, rather than the physical economy. An attempt to port concepts from one sector to another may well have been at the heart of KiOR’s troubles.