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 “liquid gold omega-3” oil.
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.
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.
The matter the NELHA board was considering was whether to give up on Cellana – cancel its sublease and give the debt over to a collection agency – or allow it more time to make a go of its ever-evolving business plan.
Martin Sabarsky, Cellana’s CEO, addressed the board via a phone link from his office in San Diego.
“Over the previous 18 months we’ve had no revenue to speak of to supplement equity and [pay down] debt,” he acknowledged. “We’re trying to bring on larger funding.” Sales of algae to an ink manufacturer had been soaring, he said, as, back in the conference room, Cellana’s on-site representative showed off the phial of oil and the shoebox printed with what was described as algae-based ink.
Sabarsky went on to say that Cellana had received “money for a commercial development at NELHA, ideally located on county land just to the south of NELHA.”
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.
Continuing to address the matter of moneys owed to NELHA, Sabarsky proposed issuing NELHA warrants “as partial compensation and a thank you as we work through our current cash crunch.” The warrants would give NELHA an equity stake in the company and presumably pay off when – or if – Cellana stock eventually soars.
After Sabarsky concluded, NELHA executive director Greg Barbour shared with the board his own thoughts on the subject. NELHA, he said, “is an economic development agency. We try to give every chance to tenants. … We’ve had ups and downs with Cellana over the years. They brought their arrears down to under $100,000 at one point.”
“Now,” he continued, “Martin [Sabarsky] is trying to monetize his assets. I’m 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.”
Board chairman William Mielcke proposed giving Cellana 90 days. “If no significant progress” by that time, he said, “then termination.”
Barbour replied that the board did not need to take a vote on the matter. The discussion, he said, was “just an update.”
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.
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’s 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.
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.
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’s own website.
The grants kept coming. Cellana reports that it was a “team member in a $44 million” grant from the Department of Energy’s 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.
That same year, HR BioPetroleum acquired Shell’s interest in the project – and at the same time changed its name to Cellana.
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’s office said Cellana’s research efforts “have 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. … The Cellana project also helps the Energy Department meet its goal of reducing the cost of algal biofuel to a competitive level by 2022.”
“To date, over $100 million has been invested in developing Cellana’s algae strains, patented and proprietary production technologies, and its Kona Demonstration Facility,” the company boasts on its website.
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 he hoped “we can partially pay them next year.”
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.
“It was surprising that we haven’t got grants,” he said. “We expected to be competitive for additional grant programs.” 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.
“It was a big blow to get zero grants,” 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.
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.
As to Sabarsky’s statement that the company was eyeing a production facility on county-owned land, he clarified that funding for this was not in hand. “We do not have the money for doing the development work … for the plot of land I was told might be available. I understood it was about 300 acres.”
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.)
If that site is not available, he said, there’s 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.
For now, Cellana’s six-acre lot at NELHA is quiet – or, as Sabarsky put it, “we’re between product runs.”
“We’re taking a pause right now,” he continued. The pilot facility “has accomplished its mission. We are taking a furlough. There’s no need for people at the facility,” he said.
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.
A review of the sublease file shows that Cellana has not been current on its rent payments for the last six years.
But the rental deficits are not the only area of non-compliance with sublease terms.
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.
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’s 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.
A staffer at the Wastewater Branch said no reports had been filed since 2011.
On June 27, 2013, what was described as less than 10 gallons of diesel fuel leaked from the generator room at Cellana’s 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’s Hazard Evaluation and Emergency Response office, the “time that the person in charge … obtained knowledge of the release [was] April 2, 2014.” The form itself was dated April 16, 2014. Cellana informed the DOH that, as of April 17, 2014, it was “currently working with ERM (Honolulu) to remediate the contaminated soil.”
Whatever hopes Sabarsky might have for Cellana’s operations at NELHA, the facility itself – including buildings, raceways for growing out algae, and equipment – is shut down for all intents and purposes. The only Kona employee stopped work last month.
And on June 12, Cellana was sued in 1st Circuit Court for failure to pay a service provider $10,534 by a due date of April 13.
NELHA might be willing to let arrearages accrue to the six figures. ProService Hawai`i? Not so much.
— Patricia Tummons