Dual Use Hawaii’s Innovation Industry February 26, 2007 Joint Information Briefing Economic Development & Business Concerns Rep. Kyle T. Yamashita , Chair Rep. Glenn Wakai , Vice-Chair Rep. Lyla B. Berg Rep. Tom Brower Rep. Jerry L. Chang Rep. Faye P. Hanohano Rep. Robert N. Herkes Rep. Joey Manahan Rep. Clift Tsuji Rep. Ryan I. Yamane Rep. Corinne W.L. Ching Rep. Barbara C. Marumoto Economic Development & Taxation Senator Carol Fukunaga, Chair Senator Will Espero, Vice-Chair Senator J. Kalani English Senator David Y. Ige Senator Sam Slom

Economic Development & Business Concerns

Rep. Kyle T. Yamashita , Chair

Rep. Glenn Wakai , Vice-Chair

Rep. Lyla B. Berg

Rep. Tom Brower

Rep. Jerry L. Chang

Rep. Faye P. Hanohano

Rep. Robert N. Herkes

Rep. Joey Manahan

Rep. Clift Tsuji

Rep. Ryan I. Yamane

Rep. Corinne W.L. Ching

Rep. Barbara C. Marumoto

Panelists Jennifer Goto-Sabas, Chief of Staff, Senator Daniel K. Inouye Jeanne Unemori-Skog, President & CEO, Maui Economic Development Board Tom Cooper, Chair, Kauai Economic Development Board Jan Sullivan, COO, Oceanit Keith Matsumoto, Technical Director, HTDV Ed Young, Program Manager HTDV, Enterprise Honolulu Dr. Pat Sullivan, Founder & CEO, Hoana Medical Larry Lieberman, Communications Director, Referentia Systems Monte Littlefield, Founder & CEO, Pipeline Communications Dr. Rob Yonover, Founder & CEO, See Rescue Technologies Tareq Hoque, Founder & CEO, Concentris Systems Ian Kitajima, Dual Use Network

Jennifer Goto-Sabas, Chief of Staff, Senator Daniel K. Inouye

Jeanne Unemori-Skog, President & CEO, Maui Economic Development Board

Tom Cooper, Chair, Kauai Economic Development Board

Jan Sullivan, COO, Oceanit

Keith Matsumoto, Technical Director, HTDV

Ed Young, Program Manager HTDV, Enterprise Honolulu

Dr. Pat Sullivan, Founder & CEO, Hoana Medical

Larry Lieberman, Communications Director, Referentia Systems

Monte Littlefield, Founder & CEO, Pipeline Communications

Dr. Rob Yonover, Founder & CEO, See Rescue Technologies

Tareq Hoque, Founder & CEO, Concentris Systems

Ian Kitajima, Dual Use Network

Agenda Introductions What's Dual Use? Why should you care about Dual Use? What’s needed to create an innovation economy? What’s missing? Q&A

Introductions

What's Dual Use?

Why should you care about Dual Use?

What’s needed to create an innovation economy?

What’s missing?

Q&A

What’s Dual Use? Dual Use – Refers to technology which has more than one use. Hawaii’s dual use companies have used Federal grant funding to develop state-of-the-art technologies. Dual Use is Hawaii’s Innovation Industry Innovation industries are driven by ideas , people , Capital, & companies Ian PEOPLE CAPITAL IDEAS COMPANIES

Dual Use – Refers to technology which has more than one use. Hawaii’s dual use companies have used Federal grant funding to develop state-of-the-art technologies.

Dual Use is Hawaii’s Innovation Industry

Innovation industries are driven by ideas , people , Capital, & companies

Why Should You Care? $4B in the last 10 years in support to Hawaii’s economy Fast growing segment of tech 739% growth in contracts 73% growth in grants Rank 24 th in SBIR grant funding, from last, with minimum State $s Over 100 companies and growing Average salary $54K vs. $42K median income Ian Sources: HIPA 2005 Policy Review; University of Hawaii OTTED, U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Commerce, Census Bureau; National Science Foundation/Science Resources Study Division; U.S. Bureau of Labor Statistics; Milken Institute; National Venture Capital Association; U.S. Patent & Trademark Of.ce; U.S. Of.ce of Management & Budget; U.S. Small Business Administration.

$4B in the last 10 years in support to Hawaii’s economy

Fast growing segment of tech

739% growth in contracts

73% growth in grants

Rank 24 th in SBIR grant funding, from last, with minimum State $s

Over 100 companies and growing

Average salary $54K vs. $42K median income

Ingredients for an Innovation Economy Jennifer PEOPLE CAPITAL IDEAS COMPANIES

Federal Investment in Hawaii’s Ideas $323.5M 63 RDT&E Projects in 2005 Source: Enterprise Honolulu Defense & Dual Use Strategic Plan Jennifer

$323.5M

63 RDT&E Projects

in 2005

Federal Funding from HTDV in Ideas Hawaii Technology Development Venture 3 years 45 projects $13M Keith/Ed

Ideas to Commercialization Technological Risk Ed/Keith Valley of Death Capital Requirements Product Development Hawaii Technology Development Venture State Tech Grants SBIR II / STTR Angels-Act215 Venture Capital Commercialization Institutional Investors-ERS Oahu Technology & Innovation Center KEDB & MEDB State Innovation Fund Self Funds Angels-Act215 Incubation SBIR I HTDC Incubators MIC & MRTC Government Support Private Sector Support

Ingredients for an Innovation Economy Jeanne PEOPLE CAPITAL IDEAS COMPANIES

People – Workforce Development Maui Economic Development Board Kauai Economic Development Board Hawaii Economic Development Board Enterprise Honolulu Jeanne/Tom

Maui Economic Development Board

Kauai Economic Development Board

Hawaii Economic Development Board

Enterprise Honolulu

Ingredients for an Innovation Economy Patrick PEOPLE CAPITAL IDEAS COMPANIES

What’s Missing? Turning ideas Into Products and Companies Patrick IDEAS via Federal Funding PRODUCTS >SB1688< Valley of Death COMPANIES via Act 215 Venture Capital

Ingredients for an Innovation Economy Ian PEOPLE CAPITAL IDEAS COMPANIES

Company Stories Established Referentia Systems Oceanit See Rescue Startups Pipeline Communication & Technology Concentris Systems Hoana Medical

Established

Referentia Systems

Oceanit

See Rescue

Startups

Pipeline Communication & Technology

Concentris Systems

Hoana Medical

Supported Concepts Matching grants 3 rd Party Validation. Projects are vetted Leverages federal $$$s SB1688/HB1666 (Technology Grants) Incentives like Act 215 that allows direct investments by investors into companies (bypass Venture Capital gatekeepers), and transparency for the public Allows companies and investors to deal direct. No middlemen. No single person or organization should control the investment flow. No politics. SB898: Annual DoTax report on QHTBs and effectiveness of tax credits. Keep Act 215 alive, and intact! Ian

Matching grants

3 rd Party Validation. Projects are vetted

Leverages federal $$$s

SB1688/HB1666 (Technology Grants)

Incentives like Act 215 that allows direct investments by investors into companies (bypass Venture Capital gatekeepers), and transparency for the public

Allows companies and investors to deal direct. No middlemen. No single person or organization should control the investment flow. No politics.

SB898: Annual DoTax report on QHTBs and effectiveness of tax credits.

Keep Act 215 alive, and intact!

Data Slides

Example of Defense / Dual Use Co’s Kauai: Trex Enterprises Corporation Oceanit SAIC Advance Fusion Maui: Ambient Micro Trex Enterprises Corporation Akimeka, LLC Lockheed Martin SAIC Peletex, Inc. Big Island: Kona Labs Hawaii Oceanic Technologies Carpin-Force Microelectronics Oahu: Pipeline Communications BAE Systems SAIC Oceanit Referentia Systems Pacific Marine/Navatek Trex Omega Oceantronics Williams Aerospace See Rescue Technologies Cellular Bioengineering 21 st Century Software Pukoa Progeny Applied Marine

Kauai:

Trex Enterprises Corporation

Oceanit

SAIC

Advance Fusion

Maui:

Ambient Micro

Trex Enterprises Corporation

Akimeka, LLC

Lockheed Martin

SAIC

Peletex, Inc.

Big Island:

Kona Labs

Hawaii Oceanic Technologies

Carpin-Force Microelectronics

Oahu:

Pipeline Communications

BAE Systems

SAIC

Oceanit

Referentia Systems

Pacific Marine/Navatek

Trex

Omega

Oceantronics

Williams Aerospace

See Rescue Technologies

Cellular Bioengineering

21 st Century Software

Pukoa

Progeny

Applied Marine

Federal Investment in Hawaii’s Ideas $4B RDT&E* 10 yrs *Research, Development, Test & Evaluation Source: Enterprise Honolulu Defense & Dual Use Strategic Plan

$4B

RDT&E* 10 yrs

*Research, Development, Test & Evaluation

Defense/Dual Use in Hawaii Sources: HIPA 2005 Policy Review; University of Hawaii OTTED, U.S. Department of Commerce, Bureau of Economic Analysis; U.S. Department of Commerce, Census Bureau; National Science Foundation/Science Resources Study Division; U.S. Bureau of Labor Statistics; Milken Institute; National Venture Capital Association; U.S. Patent & Trademark Of.ce; U.S. Of.ce of Management & Budget; U.S. Small Business Administration.  49th 75 / yr Patent Activity  47th 1? Businesses created from UH R&D (2000-2002)  24th $3.5M / yr SBIR grant funding  15th 65 / yr Scientists & Engineers % of WF  ~ 80+ No. of Defense D/U Companies Trend Rank 2003

QHTB salaries ($112,683,520) 327% more than credits claimed during last 4 years (p. 30, Table 2) QHTB expenditures ($263,286,379) 764% more than credits claimed during last 4 years (p. 30, Table 2) QHTB gross revenue generated ($51,625,758, ’03 only ) 149% more than credits claimed in 2003 (p. 31, Table 4) Effects of Act 215 (’02, ’03)

QHTB salaries ($112,683,520)

327% more than credits claimed during last 4 years (p. 30, Table 2)

QHTB expenditures ($263,286,379)

764% more than credits claimed during last 4 years (p. 30, Table 2)

QHTB gross revenue generated ($51,625,758, ’03 only )

149% more than credits claimed in 2003 (p. 31, Table 4)

Job Creation of Act 215 $44K 1 vs. $83K 2 investment creates 1 innovation job in Hawaii compared to Silicon Valley 1 $60.32M credits claimed from 2000-’03 divided by 1,378 high tech jobs in existence at the end of 2003. Figures less performing arts investment & jobs. 2 $60.5B in venture capital invested from 2000-’03 in Silicon Valley divided by 725,400 tech jobs in existence at the end of 2003. Source: PWC Moneytree Report

$44K 1 vs. $83K 2

investment creates 1 innovation job in Hawaii compared to Silicon Valley

1 $60.32M credits claimed from 2000-’03 divided by 1,378 high tech jobs in existence at the end of 2003. Figures less performing arts investment & jobs.

2 $60.5B in venture capital invested from 2000-’03 in Silicon Valley divided by 725,400 tech jobs in existence at the end of 2003. Source: PWC Moneytree Report

But Hawaii Startups Under-funded $900K 1 vs. $12M 2 investment per startup in Hawaii compared to Silicon Valley 1 $60.32M credits claimed from 2000-’03 divided by 67 QHTBs in existence at the end of 2003. Figures less performing arts investment & jobs. 2 $60.5B in venture capital invested from 2000-’03 in Silicon Valley divided by 4884 tech startups during the same time period. Source: PWC Moneytree Report

$900K 1 vs. $12M 2

investment per startup in Hawaii compared to Silicon Valley

1 $60.32M credits claimed from 2000-’03 divided by 67 QHTBs in existence at the end of 2003. Figures less performing arts investment & jobs.

2 $60.5B in venture capital invested from 2000-’03 in Silicon Valley divided by 4884 tech startups during the same time period. Source: PWC Moneytree Report

2005 Venture Investment Per Deal $0.9M $6.6M $7.35M $5.4M $6.6M $10M HI ‘03 Ireland Germany UK Israel U.S.

How Act 215 Auto-Corrects If I move my QHTB out of state, can I still claim the R&D tax credit, and can my investors still claim the investment tax credit? Answer is NO to both questions. The majority of the R&D must be performed in Hawaii Can I can avoid spending my investors’ investment, and my investors can still claim their investment tax credit? NO …the company will lose its QHTB status, and thus investors will lose their investment tax credit, and be subject to recapture I heard there is no risk to investors when they are getting a 100% tax credit? NO ….because an investor does NOT get his entire investment tax credit in the first year – the credit is spread over five years, during which the company could go bankrupt, and thus the investor would lose the credits for the remain years.

If I move my QHTB out of state, can I still claim the R&D tax credit, and can my investors still claim the investment tax credit?

Answer is NO to both questions. The majority of the R&D must be performed in Hawaii

Can I can avoid spending my investors’ investment, and my investors can still claim their investment tax credit?

NO …the company will lose its QHTB status, and thus investors will lose their investment tax credit, and be subject to recapture

I heard there is no risk to investors when they are getting a 100% tax credit?

NO ….because an investor does NOT get his entire investment tax credit in the first year – the credit is spread over five years, during which the company could go bankrupt, and thus the investor would lose the credits for the remain years.