A Star-Advertiser story this past week reported the bankruptcy filing by Hoana Medical, Inc. (“Hoana Medical looks to future even as it files for bankruptcy“).
It caught my eye because Hoana Medical has been one of the stars of Hawaii’s tech start-up world. The company was spun off from Oceanit, one of Hawaii’s largest engineering and technology firms, in 2002. It has been marketing its LifeBed™ system, a hospital bed filled with sensors to read vital signs, since 2006. According to Oceanit’s website, Hoana “has raised approximately $45 million in private equity from U.S. and Asian venture firms in four rounds of venture financing.”
Hoana has also been one of the companies that have taken advantage of Hawaii’s high tech investment tax credits, according to published reports.
The Star-Advertiser article was light on details of the bankruptcy, citing “financial setbacks stemming from the market crash of 2008” and specifically mentioning $30 million in financing that reportedly failed to materialize. The article mainly reported the comments by the company’s president and CEO about the bankruptcy.
So I decided to check the bankruptcy filing itself which, as it often turns out, tells much more of the story than was reported by the Star-Advertiser.
The bankruptcy filing was done in order to block two investors from collecting an arbitration award, according to court records. Attorneys representing the investors were due in state court to confirm the arbitration award on December 9. Hoana filed for bankruptcy on December 8.
According to the petition:
The filing of the bankruptcy petition was precipitated by an arbitration award in favor of CMT Investments, LLC and Richard Erickson and against the Debtor, issued by the American Arbitration Association, Commercial Arbitration Tribunal, Case No.: 01-14-0001-8610, dated October 16, 2015. On November 18, 2015, CMT Investments, LLC and Richard Erickson filed Petitioners’ Motion to Confirm Arbitration Award in the Circuit Court of the First Circuit State of Hawaii, S.P. No. 15-1-0488 GWBC the hearing is scheduled for December 9, 2015…
The confirmation and the recordation of the judgment confirming the arbitration award could result in collection actions by the judgment creditor which could disrupt and/or permanently affect the Debtor’s medical device business, or the Debtor’s licensing contracts.
According to Hoana’s list of outstanding debts, the Chicago-based CMT Investments and Erickson, a California resident, are each owed $763,590, making them the company’s largest creditors.
Both Erickson and CMT had purchased stakes in Hoana in 2005 and 2006, respectively.
Then in 2009, Pat Sullivan, then CEO and president of Hoana, approached them for a short-term loan “in order to satisfy the company’s near-term cash flow needs until addition, then pending equity investments were finalized,” according to court documents in a lawsuit brought by the two investors.
CMT and Erickson each purchased $500,000 Hoana “convertible debentures” in mid-2009, and after balking at the original terms, were provided letters by the company providing them the right to demand full repayment of the original investment plus company shares valued at $500,000 after one year.
On the one year anniversary, they notified the company that they were demanding the payment and stock distribution.
Hoana failed to deliver, despite their repeated efforts to collect.
Ericsson and TMT sued Hoana in 2011, but the case was dismissed when Hoana produced the investment contracts, which provided for mandatory arbitration in the event of a dispute.
It is the outcome of that arbitration that triggered the bankruptcy filing.
Hoana’s reference to a $30 million investment that has so far failed to materialize could refer to its licensing of sensor technology to auto parts supplier Faurecia, which reportedly has obtained exclusive rights to use Hoana’s sensors in its new “Active Wellness” car seat.
The bankruptcy filing hints that the arbitration award to CMT and Erickson could disrupt this licensing deal.
Others who made loans to the company by buying convertible notes, and are now on the list of large creditors, include Norman Gentry ($437,517), Michigan-based Seamless Accelerator ($100,000), Yukimura’s Inc in Lihue ($137,651), and Makiko Bunn, Akiko Yazawa, and Kiyotake Albert Yazawa ($14,548 each).
The Research Corporation of the University of Hawaii is also among the remaining creditors. It is owed $54,470.
Sanmina-SCI, a San Jose-based electronics manufacturer, is listed as being owed $550,000, but the amount is in dispute.
Other major creditors listed by Hoana include the Mcconiston Miller Mukal MacKinnon law firm ($86,754), Collins & Co. of Arlington, VA ($43,000), Los Angeles intellectual property law firm Fulwider Patton ($327,066), and Carroll Takahashi ($132,082 in deferred wages).
On June 15, 2015, Patrick K. Sullivan, who controls Oceanit and had been CEO of Hoana since it was formed, stepped down from those positions and was replaced by Edward Chen, according to state business registration records. Sullivan remains as Secretary/Treasurer, and will continue to serve as a director. At the same time, investor Barry Weinman was removed as a director of the company.
Hoana Medical says it currently has five full or part-time employees.