{"id":10529,"date":"2018-08-01T02:29:21","date_gmt":"2018-08-01T02:29:21","guid":{"rendered":"http:\/\/www.environment-hawaii.org\/?p=10529"},"modified":"2019-03-13T21:08:08","modified_gmt":"2019-03-13T21:08:08","slug":"nelha-tenant-receives-millions-in-grants-but-still-cant-pay-its-rent","status":"publish","type":"post","link":"https:\/\/environment-hawaii.org\/?p=10529","title":{"rendered":"NELHA Tenant Receives Millions In Grants, But Still Can\u2019t Pay Its Rent"},"content":{"rendered":"
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Cellana’s facility at Keahole.<\/figcaption><\/figure>\n

 <\/p>\n

Half an hour into the May meeting of the state Natural Energy Laboratory of Hawai`i Authority, the dozen or so board members in attendance passed around a shoebox designed to hold a pair of Bedrock sandals and a tiny glass bottle of what was described as \u201cliquid gold omega-3\u201d oil.<\/p>\n

Small beer indeed from Cellana, Inc., a NELHA tenant that more than a decade ago had promised a yield of thousands of gallons a year of biodiesel wrung from the cells of marine algae. That same promise had resulted in Cellana receiving grants totaling in the millions from the federal departments of Energy and Agriculture.<\/p>\n

Now, though, Cellana was more than $211,000 in arrears on its rent to NELHA for the six acres it occupies on a narrow slice of lava-paved land lying between the runway of the Kona airport and the blue waters of the Pacific Ocean.<\/p>\n

The matter the NELHA board was considering was whether to give up on Cellana \u2013 cancel its sublease and give the debt over to a collection agency \u2013 or allow it more time to make a go of its ever-evolving business plan.<\/p>\n

Martin Sabarsky, Cellana\u2019s CEO, addressed the board via a phone link from his office in San Diego.<\/p>\n

\u201cOver the previous 18 months we\u2019ve had no revenue to speak of to supplement equity and [pay down] debt,\u201d he acknowledged. \u201cWe\u2019re trying to bring on larger funding.\u201d Sales of algae to an ink manufacturer had been soaring, he said, as, back in the conference room, Cellana\u2019s on-site representative showed off the phial of oil and the shoebox printed with what was described as algae-based ink.<\/p>\n

Sabarsky went on to say that Cellana had received \u201cmoney for a commercial development at NELHA, ideally located on county land just to the south of NELHA.\u201d<\/p>\n

No one pressed him on that comment, but the only county land south of NELHA is a popular surfing and camping spot known as Pine Trees (Kohanaiki Beach Park). The chance that it could be the site of an industrial-scale algae production facility is not great.<\/p>\n

Continuing to address the matter of moneys owed to NELHA, Sabarsky proposed issuing NELHA warrants \u201cas partial compensation and a thank you as we work through our current cash crunch.\u201d The warrants would give NELHA an equity stake in the company and presumably pay off when \u2013 or if \u2013 Cellana stock eventually soars.<\/p>\n

After Sabarsky concluded, NELHA executive director Greg Barbour shared with the board his own thoughts on the subject. NELHA, he said, \u201cis an economic development agency. We try to give every chance to tenants. \u2026 We\u2019ve had ups and downs with Cellana over the years. They brought their arrears down to under $100,000 at one point.\u201d<\/p>\n

\u201cNow,\u201d he continued, \u201cMartin [Sabarsky] is trying to monetize his assets. I\u2019m comfortable giving them another 90 days and [to] see how they can begin reducing their arrears. If we do terminate the lease, we would have significant equity in the property [and] the buildings there. Our risk level is low and the potential upside of having another successful company at NELHA is something we can go with for another 90 days.\u201d<\/p>\n

Board chairman William Mielcke proposed giving Cellana 90 days. \u201cIf no significant progress\u201d by that time, he said, \u201cthen termination.\u201d<\/p>\n

Barbour replied that the board did not need to take a vote on the matter. The discussion, he said, was \u201cjust an update.\u201d<\/p>\n

As of mid-July, when the NELHA board met again, Cellana was still in arrears, with the mid-August deadline to begin reducing the debt just a month away.<\/p>\n

Grand Plans<\/i><\/b><\/p>\n

Cellana traces its roots back to 2004, when it was founded as HR BioPetroleum by C. Barry Raleigh, dean of the University of Hawai`i\u2019s School of Ocean and Earth Science and Technology (SOEST) from 1989 to 2003, and Mark Huntley, a SOEST faculty member. (Huntley is no longer associated with the firm.) Providing much of the initial capital for its pilot facility at NELHA was a $700,000 grant from the Defense Advanced Research Projects Agency (DARPA), channeled through CEROS (Center of Excellence in Research for Ocean Science), which was itself based at NELHA.<\/p>\n

Back then, HR Biopetroleum held out the promise that the algae grown in its photobioreactors and raceway ponds just makai of the Kona airport would be the source of thousands of gallons of microalgae oil per year, with a per-acre yield of up to five times that of oil-palm crops.<\/p>\n

Soon after its founding, the company formed a partnership with Royal Dutch Shell. Funding of that joint venture amounted to $80 million, according to information on Cellana\u2019s own website.<\/p>\n

The grants kept coming. Cellana reports that it was a \u201cteam member in a $44 million\u201d grant from the Department of Energy\u2019s program to develop biofuels and that it was leader in a DOE grant for $9 million in 2010. In 2011, it was awarded $5,521,173 in a grant jointly funded by the DOE and the U.S. Department of Agriculture, intended (at least in part) to explore the use of algae as the base for animal feed.<\/p>\n

That same year, HR BioPetroleum acquired Shell\u2019s interest in the project \u2013 and at the same time changed its name to Cellana.<\/p>\n

And more grants: In 2014, the DOE awarded $3.5 million to Cellana to develop algae-based feedstocks. In announcing the grant, a press release from U.S. Sen. Brian Schatz\u2019s office said Cellana\u2019s research efforts \u201chave created a successful business model using algae to produce various products including low-cost animal feed, high-quality nutritional oils, and a new form of renewable biofuel. \u2026 The Cellana project also helps the Energy Department meet its goal of reducing the cost of algal biofuel to a competitive level by 2022.\u201d<\/p>\n

\u201cTo date, over $100 million has been invested in developing Cellana\u2019s algae strains, patented and proprietary production technologies, and its Kona Demonstration Facility,\u201d the company boasts on its website.<\/p>\n

And yet Cellana has rarely been current in its lease payments to the state. As to when the arrearage might be satisfied, CEO Sabarsky told Environment Hawai`i<\/i> he hoped \u201cwe can partially pay them next year.\u201d<\/p>\n

Grant Plans<\/i><\/b><\/p>\n

In a phone interview, Sabarsky said one of the chief reasons that Cellana could not pay the state what it was owed was the fact that the grant pipeline it had relied on for years had apparently dried up.<\/p>\n

\u201cIt was surprising that we haven\u2019t got grants,\u201d he said. \u201cWe expected to be competitive for additional grant programs.\u201d The company, he said, had proved itself a leader in this technology and had planned on getting a share of the $30 million or so that the Department of Energy has received each year to support development of biodiesel fuels.<\/p>\n

\u201cIt was a big blow to get zero grants,\u201d he said, and to see less qualified firms be awarded funds. Now, he said, the company is no longer even applying for federal grants and is instead turning to private-sector sources.<\/p>\n

In 2012, the Delaware-registered company filed with the Securities and Exchange Commission an offering of up to $3.6 million in equity, at $9.64 a share. After five months, Cellana reported raising just $429,000 from 13 investors. There have been no SEC filings by Cellana since then.<\/p>\n

As to Sabarsky\u2019s statement that the company was eyeing a production facility on county-owned land, he clarified that funding for this was not in hand. \u201cWe do not have the money for doing the development work \u2026 for the plot of land I was told might be available. I understood it was about 300 acres.\u201d<\/p>\n

<\/i> Former Hawai`i County mayor Billy Kenoi had approached him with the idea that Cellana might use the site, he said. He added that he was unaware it was the site of a beach park, but suggested the parcel was large enough so that the surfers and campers would not be inconvenienced by the presence of a biodiesel facility. (The county-owned parcel consists of 217 acres and lies in the Conservation District.)<\/p>\n

If that site is not available, he said, there\u2019s another site of 80 acres on NELHA-leased land where Cellana could build a 50-acre production-scaled facility. Cellana, Sabarsky said, had already signed a term sheet for occupancy of this land, setting forth the basic outlines of the terms and conditions of a final sublease.<\/p>\n

For now, Cellana\u2019s six-acre lot at NELHA is quiet \u2013 or, as Sabarsky put it, \u201cwe\u2019re between product runs.\u201d<\/p>\n

\u201cWe\u2019re taking a pause right now,\u201d he continued. The pilot facility \u201chas accomplished its mission. We are taking a furlough. There\u2019s no need for people at the facility,\u201d he said.<\/p>\n

Compliance Issues<\/i><\/b><\/p>\n

Under terms of the sublease Cellana has with NELHA, it is to pay $11,188.80 a month for the 6.216 acres it occupies (a standard rate of $1,800 per acre per month). In addition, it is to pay for the seawater, fresh water, and electricity it uses. If rent is not current, a late fee of $50 a month is added to the balance owed, and NELHA also charges interest at a rate of 1 percent per month.<\/p>\n

A review of the sublease file shows that Cellana has not been current on its rent payments for the last six years.<\/p>\n

But the rental deficits are not the only area of non-compliance with sublease terms.<\/p>\n

As with most other NELHA tenants, the company is required to submit annual reports of gross sales for each calendar year, with the reports due on March 31 of the following year. Cellana has failed to submit the reports for at least the last two years. Required liability insurance has at times been missing for more than a year; its most recent policy expired on April 30.<\/p>\n

Then there is the matter of monitoring the discharge of its wastewater, which is emptied into a trench that leads directly to the sea. A monitoring report is required to be kept by Cellana. If levels of total suspended solids or biochemical oxygen demand exceed prescribed levels (45 mg\/liter and 30 mg\/liter, respectively), the company is to notify the Department of Health\u2019s Wastewater Branch within five days of the date the exceedances occurred. In addition, the disposal trench is to be inspected once a year by a qualified independent professional, and the results are to be submitted to the wastewater branch within 45 days of the test being conducted.<\/p>\n

A staffer at the Wastewater Branch said no reports had been filed since 2011.<\/p>\n

On June 27, 2013, what was described as less than 10 gallons of diesel fuel leaked from the generator room at Cellana\u2019s facility. Approximately 80 percent was reported to have been contained inside the room, but some did leak to the soil outside. According to a form submitted to the Department of Health\u2019s Hazard Evaluation and Emergency Response office, the \u201ctime that the person in charge \u2026 obtained knowledge of the release [was] April 2, 2014.\u201d The form itself was dated April 16, 2014. Cellana informed the DOH that, as of April 17, 2014, it was \u201ccurrently working with ERM (Honolulu) to remediate the contaminated soil.\u201d<\/p>\n

Winding Down<\/i><\/b><\/p>\n

Whatever hopes Sabarsky might have for Cellana\u2019s operations at NELHA, the facility itself \u2013 including buildings, raceways for growing out algae, and equipment \u2013 is shut down for all intents and purposes. The only Kona employee stopped work last month.<\/p>\n

And on June 12, Cellana was sued in 1st<\/sup> Circuit Court for failure to pay a service provider $10,534 by a due date of April 13.<\/p>\n

NELHA might be willing to let arrearages accrue to the six figures. ProService Hawai`i?  Not so much.<\/p>\n

— Patricia Tummons<\/i><\/b><\/p>\n","protected":false},"excerpt":{"rendered":"

  Half an hour into the May meeting of the state Natural Energy Laboratory of Hawai`i Authority, the dozen or so board members in attendance passed around a shoebox designed to hold a pair of Bedrock sandals and a tiny … Continued<\/a><\/p>\n","protected":false},"author":1,"featured_media":10513,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[439],"tags":[7],"class_list":["post-10529","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-august-2018","tag-patricia-tummons"],"_links":{"self":[{"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=\/wp\/v2\/posts\/10529","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=10529"}],"version-history":[{"count":0,"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=\/wp\/v2\/posts\/10529\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=\/wp\/v2\/media\/10513"}],"wp:attachment":[{"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=10529"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=10529"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/environment-hawaii.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=10529"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}