Complete 2012 forensic audit documents - Kansas Bioscience ...

KBA Forensic Audit Summary Page 2 of 30
Issues related to KBA investments and investment processes
Audit location Issue/Question Summary
(continued from previous page) “Based on the information available for review, the investment
process appeared to be sufficiently diligent to prevent the improper approval of a grant or equity
investment” (pp. 66 and 67). “The investment documentation process appears to be adequately
followed. … Beginning in 2008, the grant agreements and documentation became more robust
and standardized” (p. 67). “Emails and documents in [the KBA’s database] suggest that KBA staff
made efforts to ensure that milestones are met, appropriately documented, and approved” (p.
67).
On page 66
Beginning on
page 67
BKD reviewed the investment process and
documentation for potential conflicts of interest.
In October 2008, the KBA made a $300,000 grant
to Anoxa Corp. to assist the company in moving
its operations from New York to Kansas. Beginning
in August 2009, KBA began having difficulty
contacting the company, and BKD reports “by
January 2010 the company’s business registration
in Kansas had been forfeited due to failure to file
an annual report” (p. 68). “On Aug. 3, 2011, KBA
notified the company that it was in breach of its
grant agreement … [and] requested the
immediate repayment of grant funds” (p. 68).
The review “identified many associations among client companies, between client companies and
KBA, and between KBA and its partnering organizations. However, given the investment process
utilized, no obviously inappropriate grants or investments to client companies were identified
which were in violation of KBA’s conflict of interest policy or the conflict of interest requirements
of KEGA” (p. 67). “BKD specifically asked Mr. Thornton if he held any personal investment in any
company that received funding or services from KBA. Thornton indicated that he did not” (p. 67).
BKD reports that “Anoxa has since filed the required reports, and the Kansas Secretary of State
website indicates that Anoxa is a company in good standing as of Aug. 22, 2011. … [However] BKD
questioned the presence of Anoxa’s operations in Kansas given that an address could not be
publicly located and there appears to be only one employee, who is a resident of New York. KBA’s
general counsel … indicated KBA is in the process of investigating the presence of Anoxa’s
operations in Kansas. If it is determined that Anoxa does not have operations in Kansas, KBA will
consider its right to enforce the claw back provision of the grant agreement” (p. 68).
Beginning on
page 68
In May 2010, KBA made a $73,000 proof‐ofconcept
grant to Aero Innovative Research, Inc.,
to fund the salary for a new president and CEO for
six months to help the company strengthen its
management team, raise capital, and build
distribution capabilities. Aero hired as CEO a
candidate that the KBA had helped to identify.
BKD reports that KBA indicates that “unbeknownst to [KBA], the company owed back taxes to the
IRS. Therefore, much of the KBA funds that were to go for the CEO’s salary were garnished. In
addition, once the company sought … assistance to put together a valid financial model, it became
apparent that they could not produce their product profitably. Therefore, investors lost interest
and the CEO left the company within a few months. At this point, the company has closed down
its operations” (p. 66).