Aquasearch in In a deal with creditors, the chairman and chief executive of Kona biotech firm Aquasearch Inc. is stepping down and the company is voluntarily entering Chapter 11 reorganization bankruptcy.
exec shakeup
Chief Executive Mark Huntley will
become chief technology officer as
the biotech firm heads into
bankruptcy reorganizationBy Tim Ruel
truel@starbulletin.comMark E. Huntley, a scientist who co-founded Aquasearch in 1988, will remain on the Aquasearch board of directors and assume the title of chief technology officer, said Jerrold K. Guben, Aquasearch's attorney. Huntley is also relinquishing the title of president. Guben revealed the deal yesterday at a hearing before U.S. Bankruptcy Judge Lloyd King.
Aquasearch struck the deal with a group of creditors who sued on Oct. 30 to force the company into Chapter 11 bankruptcy. The creditors had wanted to oust Huntley and Earl Fusato, Aquasearch's chief financial officer, saying that the two mismanaged the firm. The creditors had sought the appointment of Honolulu attorney John Paul Moon to run Aquasearch as a bankruptcy trustee.
Huntley has opposed the creditors, saying that the move was a thinly-disguised attempt to use the bankruptcy system to take over Aquasearch.
Two weeks ago, Aquasearch formally opposed the appointment of a trustee with an inch-thick bankruptcy court filing that said two of the creditors, Honolulu broker-dealer Gregory Kowal and VeriFone executive Lance Nakamura, were part of a group that waged and lost a proxy war in August for control of Aquasearch.
Kowal and Nakamura together own about 16 percent of Aquasearch's shares. In March, Kowal wrote Fusato to offer $625,000 in financing to Aquasearch. As a condition of the funding, Aquasearch hired Nakamura's friend Edward Sun to serve as director of global sales and marketing, according to Aquasearch's filing. Sun, who later left Aquasearch and joined the lawsuit to force the company into bankruptcy, was rebuked by Huntley in a July 28 letter for disclosing inside information to Kowal and Nakamura.
Kowal, owner of Honolulu broker-deal First Honolulu Securities Inc., has been censured and fined repeatedly by the Securities & Exchange Commission and the National Association of Securities Dealers for violations of securities regulations. Huntley submitted Kowal's file as an exhibit in Aquasearch's response to the creditors.
The new deal with the creditors, approved on Saturday at a special meeting of the Aquasearch board of directors, effectively ends the dispute and places Aquasearch into voluntary corporate bankruptcy. A hearing that was scheduled for Friday on the creditors' move to appoint a trustee has been canceled.
Steve Teves, a Honolulu attorney who represents some of the creditors, said the agreement basically accomplishes what the creditors had wanted: a reorganization of Aquasearch and new financing.
Huntley could not be reached for comment yesterday. By becoming chief of technology, Huntley can continue to serve Aquasearch in keeping with his love for science and research, said Marty Plotnick, an Aquasearch consultant.
Under the agreement, Fusato will keep his post as CFO and remain on the Aquasearch board of directors. David Tarnas, a former state representative who has served on the Aquasearch board since February 1999, has become chairman.
Harry "Doc" Dougherty, an Aquasearch marketing consultant, will step in as interim president and chief executive. Richard L. Sherman, a longtime biotech industry attorney who joined the Aquasearch board of directors in April, will handle legal coordination.
Judge King also approved an immediate plan for Aquasearch to receive up to $300,000 in new financing from San Diego-based lender Chardan Ventures at an annual interest rate of 12 percent. As of Nov. 9, Aquasearch had only $23,000 left in its account. The firm will immediately draw $150,000 from Chardan, plus another $150,000 during the next two months. In turn, Chardan will receive a priority interest as an Aquasearch creditor.
Aquasearch needs the financing to pay its employees and the state of Hawaii, which is owed $22,730 in rent for a lease at Aquasearch's home base at the Natural Energy Laboratory of Hawaii Authority on the Big Island.
Aquasearch has been negotiating for a new 30-year lease with the state, but the deal is hung up on the state's desire to take a portion of tenant revenues.
Aquasearch employees will get some money, but not everything that they are owed in back wages. Under bankruptcy rules, Aquasearch can only pay wages that were incurred during the month between the creditors' initial petition and the agreement that was reached on Saturday. Around the time of the petition, Aquasearch put half of its 30 employees on temporary leave. Any employees that were owed money from before the petition will have to wait for payment, like other creditors.
It is not yet clear how much Aquasearch's creditors will receive for their claims. The firm had total debts of $5 million, largely unsecured, and assets of $4.5 million as of July 31.
During the next four months, Aquasearch will have the exclusive right to submit a blueprint for its reorganization. The company expects to deliver the plan much sooner than that, said Guben, who declined to discuss details of a potential reorganization. Competing reorganization plans would be accepted after the four-month period ends. The company develops and markets a nutritional supplement, The AstaFactor, made from microalgae.
The Aquasearch board of directors will continue to run the company, but the board will be audited by a new bankruptcy committee composed of Kowal, Sherman and Richard Propper, a principal of Chardan Ventures and a biotechnology venture capitalist. The committee answers to the bankruptcy court.
A new slate of directors would be appointed if Aquasearch successfully emerges from bankruptcy.
Aquasearch's stock has been falling since the beginning of October, from 23 cents to yesterday's closing price of 6.5 cents. But it jumped 38.4 percent today, rising 2.5 cents to close at 9 cents.