MINUTES
Kansas Bioscience Authority
Executive Committee of the
Board of Directors
Wednesday June 9, 2010
1:30 p.m. – 2:00 p.m.
Kansas Bioscience Authority
Olathe, Kansas
Call to Order: A quorum being present, a meeting of the Executive Committee Board of Directors of the Kansas Bioscience Authority was called to order by Chairman John Carlin at 1:30 p.m. on June 9, 2010. Additional members of the Committee in attendance were Dr. Ray Smilor and Bill Sanford. KBA staff members in attendance were Tom Thornton, Cary Nourie, David Vranicar and Marsh LoScalzo. Catherine P. Logan, Lathrop & Gage, was present representing legal counsel.
Chairman Carlin noted that the only item on the agenda is an Investment Recommendation regarding Megastarter, LLC.
Mr. Nourie reported that the KBA staff recommends that KBA maintain its original commitment of $300,000, and additionally provide a no interest loan of $500,000 to finance a portion of the Company’s estimated $750,000 - $950,000 total cost to build out a Wamego, Kansas facility. This loan is recommended to have a balloon principal payment due at the end of a five year term. Additionally, this loan is subject to being forgiven if two significant milestones are successfully met at the end of year five: 50 employees at the end of year five, if this milestone is met 50% of the $500,000 loan will be forgiven; $20 million in total revenue the end of year five, if this milestone is met 50% of the $500,000 loan will be forgiven. KBA loan financing would be conditioned on the Company committing to move the business to Wamego, Kansas and certification of the Company’s purchase of the proposed land and existing building in Wamego, Kansas to which improvements will be made. Additionally, the Company is encouraged to pursue with Kansas State University such research and/or development collaborations as may be necessary to develop or enhance its existing products, or commercialize new products.
Mr. Sanford asked for more information about the $950,000. Mr. Nourie reported that this amount is the estimated cost to upgrade the new facility.
Mr. Sanford asked about the timing of the $300,000 and $500,000 payments by KBA. Mr. Thornton explained that for the $500,000 payment, the Company must certify to KBA that it has purchased the land and building, and for the $300,000 payment, the trigger is six employees.
Mr. Sanford asked if the KBA would pay the $500,000 in a lump sum or in increments. Mr. Nourie reported that the Company requires the money at the front end in a lump sum. He also reported that the Company will be moving equipment from Switzerland to this facility. Mr. Sanford asked if the cost of the equipment is outside of the $950,000 and Mr. Nourie confirmed that it is.
Mr. Sanford asked if the $950,000 includes the purchase price of the building. Mr. Nourie and Mr. Thornton clarified that the building purchase is $300,000 and the estimated cost of build out is $450,000 to $600,000.
Given the clarification, Mr. Sanford noted that some of the $500,000 could be used for other than build out, which staff confirmed.
Mr. Sanford asked how KBA will collect if the Company fails to meet milestones and defaults on the loan, and whether KBA will have security such as a lien on the building. Mr. Thornton suggested that KBA could perhaps obtain a security interest in equipment being purchased and perhaps on real estate as well.
Ms. Logan explained that KBA can require the company to give security in the form of a first mortgage lien against the real estate and/or equipment. KBA needs to determine if there will be other security interests in those assets. Mr. Nourie reported that the Company is not borrowing the funds to acquire the real estate. Ms. Logan explained that in such case, the Company should be able to give KBA a first lien security interest in the real estate and such a lien could be a condition of loan approval.
Dr. Smilor asked about the proposed milestones, if partially achieved will the forgiveness be prorated, or is it all or nothing.
Mr. Thornton indicated that the milestones can be prorated.
Mr. Sanford asked if the $20 million revenue milestone is cumulative or revenue for the fifth year. Mr. Thornton confirmed that it is the projected revenue in the fifth year and is based on the Company’s business plan. Mr. Sanford stated that he is in favor of an all or nothing trigger, and suggested that the milestones be set with a cushion, and suggested that the fifth year revenue milestone be reduced to $15 million and the employee milestone be reduced to 40.
Dr. Smilor expressed agreement with the approach suggested by Mr. Sanford, and noted that it be made clear to the Company that these are all or nothing goals. The milestone is not achieved if the employees are 35 rather than 40. Mr. Sanford stated that it should be emphasized to the Company that the milestones based on its business plan were reduced because KBA wants to be a good partner and recognizes things may happen along the way.
Motion. A motion was made by Bill Sanford, seconded by Ray Smilor, to approve the following actions of KBA:
(1) KBA confirms its existing commitment of a $300,000 grant to Megastarter under the expansion and attraction program.
(2) Additionally, KBA will provide a no interest forgivable loan to Megastarter in the principal amount of $500,000 to finance a portion of the cost for the company to improve a facility in Wamego, KS to which the company will relocate from Colorado. The loan will be secured by a first lien against the real estate and improvements. The principal amount of the loan will balloon in five years, subject to being forgiven only upon the full achievement of the following milestones:
a. $250,000 of the loan will be forgiven if the company has at least 40 employees at the end of the fifth year of the loan term.
b. $250,000 of the loan will be forgiven if the company has at least $15 million in annual net revenue at the end of the fifth year of the loan term.
The loan is conditioned upon a commitment from Megastarter to relocate its existing business from Colorado to Wamego, Kansas, and the company’s acquisition of an existing building in Wamego.
Additionally, Megastarter is encouraged to pursue with Kansas State University such research and/or development collaborations as may be necessary to develop or enhance its existing products, or to commercialize new products.
The motion was unanimously approved.
Adjournment: There being no further business to come before the meeting, the meeting was adjourned at 1:50 p.m.