Aquasearch reorganization
plan heads for approval

The Kona biotech company
would get a California owner

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By Tim Ruel
truel@starbulletin.com

A U.S. bankruptcy judge has given preliminary approval for a Southern California firm to purchase majority ownership of bankrupt biotech firm Aquasearch Inc. as part of a reorganization.

U.S. Bankruptcy Judge Robert Faris yesterday adopted a disclosure statement filed by Aquasearch that gives a blueprint for the company's plan for reorganization.

A confirmation hearing for the actual plan has been scheduled for June 17, Aquasearch attorney Jerrold K. Guben said yesterday.

Aquasearch, a 14-year-old public company that makes nutritional supplements out of microalgae grown in Kona, entered Chapter 11 bankruptcy late last year after a group of creditors sued to force the company into reorganization.

Under a recently amended reorganization plan, a California company run by venture capitalist Richard Propper and other investors would acquire 385 million shares in Aquasearch, a 75 percent stake.

Current shareholders of Aquasearch would get one share in the new company for each share they owned in the old company, for a total of 125.5 million shares, or a roughly 25 percent stake.

To make the deal possible, Aquasearch would be allowed to increase its number of outstanding shares more than threefold, to more than 500 million shares from the current 150 million, a major dilution.

Unsecured creditors, owed an estimated $4 million, would be paid 17.5 percent of their claims in cash, or a total of about $700,000. Several claims are disputed by Aquasearch, Guben noted.

The deal is likely to pass a required vote of creditors because the bulk of outstanding claims have recently been purchased by a company that is affiliated with Propper's firm, Guben said. Aqua Reorganization Co. bought $3.9 million of the total $4.5 million in claims, which is more than the required two-thirds margin needed for the plan to pass a vote, Guben said. In addition, the number of claims purchased by Aqua Reorganization Co. is more than half the number of total claims, another key margin.

The plan would be subject to a vote of current shareholders, though final approval would rest with Judge Faris.

Chardan Ventures, another California company affiliated with Propper, has helped Aquasearch stay afloat during bankruptcy by providing $500,000 in financing. With interest at 12 percent, Chardan is currently owed $590,000 and will receive full payment, Guben said.

Upon confirmation of the plan, Aquasearch will seek a permanent president and chief executive to replace Mark E. Huntley, who stepped down last year to become the firm's chief technical officer. Harry "Doc" Dougherty has been serving as interim president and CEO of Aquasearch.