DEPARTMENT: Economic Development
DEPARTMENT HEAD: Rene Dominguez
COUNCIL DISTRICTS IMPACTED: City-Wide
SUBJECT:
Economic Development Grant Agreement with the San Antonio Economic Development Corporation (SAEDC) for Covalor Medical, LLC.
SUMMARY:
This Ordinance approves a Chapter 380 Economic Development Grant Agreement in the amount of $1,750,000 with the San Antonio Economic Development Corporation (SAEDC) to help fund the formation and establishment of a new medical device development and manufacturing company, Covalor Medical, LLC. ("Covalor"), in San Antonio. This Ordinance also authorizes the SAEDC to enter into an Economic Development Agreement with Covalor pursuant to which the SAEDC will invest the grant funds received from the City in Covalor over three fiscal years in exchange for a company membership interest in Covalor.
BACKGROUND INFORMATION:
Entrepreneur, Ben Tranchina of San Antonio, and entrepreneur Dr. Dan Burnett, CEO of TheraNova, LLC. (a successful San Francisco based medical device incubator), are seeking funding through an Agreement with the SAEDC to invest in a new San Antonio based Texas limited liability company named Covalor, which was formed on October 15, 2014. Mr. Tranchina serves as the Covalor President and CEO, and Dr. Burnett serves as the Board Chairman. Through this proposed Agreement, the SAEDC will secure a percentage membership interest in the company and share proportionately in annual profits and investment returns from Covalor's business activities.
Dr. Burnett has been engaged in collaborative research efforts with the U.S. Army Institute of Surgical Research at Fort Sam Houston which led to the creation of two successful TheraNova spinout companies - Consano Medical and Potrero Medical. These companies are developing medical devices that monitor urine output and sepsis in patients placed in intensive care units. Local San Antonio investors provided funding for these two companies, which are currently located in San Francisco, but may use Covalor facilities in San Antonio to manufacture products for pivotal clinical trials. Covalor also plans to continue leveraging the trauma/wound healing research opportunities at Fort Sam Houston and to pursue other opportunities in the areas of San Antonio's medical sector strength such as diabetes, regenerative medicine, cancer, and infectious diseases.
The ownership, intellectual property and related assets of Ardent Biomedical, a San Antonio-based medical device company founded by Mr. Tranchina, will be transferred to Covalor and located in San Antonio. In addition, TheraNova will relocate three of its San Francisco-based startup companies to San Antonio to be organized as Texas entities and transfer the ownership and intellectual property of these companies to Covalor. This will give Covalor significant immediate valuation and provide instant economic benefits to the community. The company will also invest in medical device development capability and manufacturing facilities/equipment to provide outsourcing services to other early-stage companies, particularly companies being created by entrepreneurs at local universities and research institutions. This type of medical device manufacturing is very limited in San Antonio and is critically needed.
Covalor is seeking a $1,750,000 economic development grant and investment from the SAEDC and additional funding of $3,250,000 from private investors (mostly local) to form the company and begin business activities by June 30, 2015. The SAEDC will pay out the grant over three fiscal years with an initial payment in FY 2015 of $750,000 upon commencement of business activities. Subsequent payments of $500,000 each will occur no earlier than October 31, 2015 and October 31, 2016, based on the company meeting and maintaining specific milestones and requirements (see attached term sheet). At the end of five years or at any time in the case of default by Covalor, the SAEDC will have the option to require Covalor to buy out the membership interest of the SAEDC at a price equal to the higher of (1) the value of SAEDC's membership interest in Covalor based on the company's then current valuation or (2) the value of SAEDC's investment in Covalor plus interest at 5% per annum.
As a part of its due diligence analysis, the SAEDC requested a third party consultant evaluation by Dr. Randy Goldsmith of The Texas Technology Development Center. Dr. Goldsmith evaluated the company's leadership team, intellectual property, potential market, projected financials and probable profitability. Based on this evaluation, Dr. Goldsmith has recommended the SAEDC and the City consider investing in this economic development project.
As a partner in Covalor, the SAEDC will receive a proportionate return on its investment from Covalor's business activities and new company startups. The City will receive the annual economic benefits derived from the company locating in San Antonio, creating new companies, growing local entrepreneurs and adding medical device development and manufacturing capabilities. The company is expected to create at least 15 high-paying bioscience jobs in two years with about half being engineering and technical positions paying on average at least $50,000 annually.
Staff has conducted its own due diligence on the company and its principals, and found no concerns. EDD staff, therefore, recommends City Council appropriate $1,750,000 from the Economic Development Incentive Fund (EDIF) for the purpose of granting such funds to the SAEDC for the Covalor economic development project. Staff also recommends City Council authorize the SAEDC to carry out this project by investing these funds and entering into related Agreements with Covalor.
On November 13, 2014, the SAEDC Board will consider approval of the Covalor economic development project and authorizing the SAEDC Executive Director to enter into an Economic Development Agreement in the amount of $1,750,000 and a Company Agreement with Covalor.
ISSUE:
Chapter 380 of the Local Government Code authorizes the City to provide economic development grants and loans for the purposes of promoting economic development provided the City has established a program for such purposes. City Council has approved such a program in April 2005.
On May 13, 2010, City Council established the SAEDC and appointed a 7-member Board, including the Mayor, the Council Chairs of the Infrastructure and Growth Committee and the Economic and Community Development Committee, the City Manager, and three at-large citizens. The Bylaws authorize the SAEDC to invest in economic development projects, such as Covalor, to receive a return on such investment, and distribute any compensation back to the City. Funds earned by the SAEDC could also be retained to create a self-sustaining economic development incentive fund for the community to invest in future projects. City Council approval is required for any project proposed by the SAEDC, as well as for the distribution of any proceeds from investment opportunities.
ALTERNATIVES:
Council could choose not to approve this Ordinance and funding for the Covalor project. Staff does not recommend this alternative, as this project presents an important opportunity for the City to demonstrate its continuing commitment to invest in local, life science (SA2020 targeted industry) startup companies and to leverage this investment for a potential financial return to help fund other economic development projects. Furthermore, this project includes significant local investment and will help continue promoting the development of local entrepreneurs at local universities, as well as providing critically needed medical device manufacturing capacity.
FISCAL IMPACT:
Funding is available in the Economic Development Incentive Fund to provide this grant of $1,750,000 to the SAEDC for this economic development project to include $500,000 previously approved by City Council in FY 2014 for an SAEDC Investment Fund.
RECOMMENDATION:
Staff recommends approval of this Ordinance authorizing: (1) the City to enter into a Chapter 380 Economic Development Program Grant Agreement with the San Antonio Economic Development Corporation (SAEDC) in the amount of $1,750,000; (2) the appropriation of $1,750,000 in funding to the SAEDC for the Covalor project; and (3) the SAEDC to enter into an Economic Development Agreement and Company Agreement with Covalor.