KiOR board member criticizes management in resignation letter

By Erin Voegele | September 11, 2014

Documents recently filed with the U.S. Securities and Exchange Commission may help shed some light on the events that resulted in KiOR Inc.’s recent operational and financial challenges.

On Sept. 5, an 8-K form was filed with the SEC announcing the Aug. 31 resignation of Paul O’Connor from the company’s board of directors. According to the filing, O’Connor delivered the resignation letter following a discussion with two board members. Prior to his resignation, the company asked outside counsel to review his conduct. The document goes on to note that the review pertained to an instance win which O’Connor withheld a third-party technology report, which was paid for by the company, from the board and management. The review is also described as being connected to unauthorized communications with persons during the course of the outside council review and the possibility that he failed to comply with the company’s inside trading policy.

The filing includes a copy of O’Connor’s resignation letter, which identifies him as one of the principal investors of the technology deployed by KiOR. The technology was originated with a Dutch company named BIOeCON. According to the letter, KiOR was formed by BIOeCON and Khosla Ventures in late 2007.  The following year KiOR hired Fred Cannon as CEO. O’Connor describes technical disagreements with Cannon that date back to 2008-2009 and states that Cannon “unfortunately 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.” While O’Connor served as chief technology officer of KiOR in 2008 and 2009, he said his two-year contract was not renewed in October 2009. He, however, remained on the KiOR board until May 2011.

During this period, O’Connor said his access to technical information was restricted and limited due to uneasiness regarding his cooperation with Petrobras. While O’Connor said he was initially not too concerned about the further development of KiOR technology, as figures presented to the board in February 2011 indicated good progress with yields. Towards the end of 2011, however, he said he received additional data and “was shocked to see that yields were lower than reported in February…and that hardly any progress had been made since the end of 2009.” O’Connor said he immediately informed Cannon and Samir Kaul, the director for Khosla Venture, as BIOeCON’s partner and main shareholder of KiOR, about his concerns.

O’Connor said he was then given the opportunity to conduct a very restricted and limited technology review. He concluded that it would be possible to reach certain yield goals, but only if a drastically different approach was taken than the one that was being pursued under the company’s research and development activities. O’Connor said last attended a board meeting in the spring of 2012, when the research and development director of KiOR admitted the company should not expect to reach certain targeted yields at the Columbus, Mississippi, facility, but could possibly reach those yields at the next commercial plant, which would include further reactor modifications.

“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,” O’Connor said in the letter. “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.”

Around November 2014, O’Connor said the KiOR board approached him to help the company as a technical expert. He said he observed that yields and on-stream times at the Columbus were in line with results achieved at the company’s demonstration plant in Houston, meaning the issues are structural rather than just operational.  “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…in technology strategy as well as leadership style…is essential to solve the issues. I reported this to Will Roach and the board in early February,” O’Connor continued.”

In March, O’Connor said he was asked to join the board and assist as a technical advisor, including empowering him to lead a taskforce to address technology issues. O’Connor said he began forming the task force in April but those efforts stalled due to disagreements with company management. In concluding the letter, O’Connor said he believes that KiOR’s management has not performed effectively in evolving the company’s technology to a commercial success, and has not provide the board with adequate, right and relevant information to do their jobs.

In its filing KiOR said that none of the issues raised by O’Connor in the resignation letter were part of the basis for asking him to resign. The filing also stresses that “company management disagrees with the claims made by Mr. O’Connor in the resignation letter and Mr. O’Connor’s characterizations of certain facts and his general conclusions. 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.”

A representative of KiOR could not be reached for further comment.

In August, KIOR filed its second quarter financial report with the SEC. Within that document, the KiOR said it will likely be forced to seek bankruptcy protection if it is unable to secure additional funds by Sept. 30. The company also recently engaged Guggenheim Securities LLC as its financial advisor and investment banker to provide financial advisory and investment banking services to assist in reviewing and evaluating various financing, transactional and strategic alternatives, including a possible merger, restructuring or sale of the company.

A full copy of all of KiOR’s SEC filings, including the resignation letter, can be downloaded from the SEC’s website