SC Launch Grant to MUSC Dean’s Company Raises Questions

You’ve likely never heard the name, but if things work out for startup NextRay Inc., the individuals behind the company and its investors could do quite well for themselves.

NextRay is touted as having helped develop a next-generation technology called diffraction-enhanced imaging (DEI) that creates highly detailed x-ray images. DEI makes use of extremely bright beams of x-rays to create images of not only bone, but also of soft tissue, which is beyond the scope of standard x-rays.

In addition, DEI exposes patients to less than 1 percent of the radiation of conventional x-rays.

NextRay founder Dr. Etta Pisano, who is also dean of the Medical University of South Carolina’s College of Medicine, has written that DEI is beneficial to patients who are more sensitive to the effects of radiation, such as babies, children, teenagers and young adults; and for women undergoing breast cancer screening.

This is significant to South Carolina taxpayers not only as a potential advance in the medical field, but also because earlier this year NextRay received $25,000 from SC Launch. SC Launch is an affiliate of the S.C. Research Authority, the state-created and state-controlled technology and real estate development and management company created by the General Assembly in 1983.

Sounds great, right? An exciting new technology that can both help people and possibly reap benefits for the state through its investment.

Perhaps not, as there appears to be potential issues with NextRay’s funding from SC Launch. Not only is there a question as to whether NextRay fulfilled the residency requirement necessary to receive funding from SC Launch, but it’s not clear if NextRay was up front in its application about all of its “principals, founders and partners.”

Also perplexing is why NextRay and SC Launch would apparently contravene protocol regarding disbursement of $25,000 in state funds, an amount which is, in the world of angel investing, a relatively small amount. By comparison, NextRay raised more than $500,000 alone through securities issued in 2010, according to information filed with the U.S. Securities and Exchange Commission.

Pisano, NextRay Chief Executive Matt Czajkowski and SC Launch Executive Director Dave McNamara did not return phone calls from The Nerve. Bill Mahoney, the chief executive of the S.C. Research Authority, which oversees SC Launch, declined to respond when reached by The Nerve.

As such, it’s impossible to determine what purported benefits South Carolina taxpayers could get in return for SC Launch’s investment in NextRay. It’s also not possible to determine why South Carolina apparently financed a North Carolina start-up company, given that North Carolina is almost certainly the one that will benefit, according to a University of North Carolina official, if NextRay hits it big.

This is not the first time criticism has been leveled at SC Launch or SCRA. Earlier this year, outgoing SCRA Chairman Bill Masters raised a number of red flags regarding both entities in his resignation letter to Gov. Nikki Haley.

Masters’ letter stated SCRA is “run mostly for the benefit of its top management for monetary benefits and for exerting control and power;” is “exceptional at manipulating government contracts and data to pass audits;” and management “does not fully comply with the constitution of South Carolina in arm’s-length handling of monies of affiliate SC Launch.”

While Masters didn’t come out and explicitly accuse SCRA trustees or executives of criminal activity, he wrote that it appears some actions violated the spirit of good corporate governance.

Among those, Masters alleged that SCRA’s executive committee and top management controls 100 percent of the money given through the Industry Partners Act, $6 million annually, rather than the contributions being controlled, as many believe, by SC Launch.

Donations to the Industry Partners Fund, set up under the Industry Partners Act to provide working-capital seed grants to new technology companies, are good for a 100 percent, dollar-for-dollar credit against state taxes.

Since 2006, approximately $30 million has been diverted to SC Launch through the Industry Partners Fund, money that otherwise would have gone to the state’s General Fund to provide funding for such core services as education and law enforcement. A good portion of that money has gone to SC Launch during one of the worst economic downturns in South Carolina’s history.

Masters stated in his letter to Haley that less than 50 percent of funds contributed to the program actually finance the SC Launch entrepreneurial equity initiatives; the rest goes to SCRA overhead, the universities (the University of South Carolina, Clemson or MUSC) or in some cases, other alliances.

Among Masters’ reform recommendations was removing SC Launch from SCRA and placing it either under the S.C. Department of Commerce or making it a stand-alone agency, in order to allow it to more efficiently invest in South Carolina entrepreneurs.

SC Launch Funding

SC Launch was created in 2006 “to facilitate applied research, product development and commercialization programs, and to strengthen South Carolina’s Knowledge Economy by creating high wage-earning jobs,” according to its website.

The entity provides up to $200,000 to help companies bridge the gap between start-up and the point where venture capitalists are willing to invest in companies. More than 180 entities have received funding, according to SC Launch’s website, although it doesn’t list how much taxpayer-funded money has been doled out.

NextRay received $25,000 under SC Launch’s University Start-up Assistance program. It filled out its initial application on May 1, 2010; and company and SCRA officials signed the grant agreement on Dec. 22, 2010, records show.

However, according to information found on SC Launch’s website, criteria for inclusion in the SC Launch program includes that a business be a South Carolina-based entity, meaning the company be based in the state, established and registered with the S.C. secretary of state, and at least 51 percent of its payroll is or will be located in South Carolina.

All indications are that NextRay is based not in the Palmetto State, but north of the border in North Carolina. Consider: 

• NextRay, founded in 2007, was developed at the University of North Carolina at Chapel Hill by Pisano and four other individuals, with the help of student teams from several UNC entrepreneurship programs as well as alumni and partner organizations in the region, according to information published by the Kenan Institute at the University of North Carolina’s Kenan-Flagler Business School;
• NextRay is licensed exclusively by the Office of Technology Development at the University of North Carolina at Chapel Hill, according to UNC;
• NextRay listed its street address as 105 Majestic Court in Chapel Hill – believed to be property owned by Pisano and her husband – on its SC Launch funding application, dated May 1, 2010, despite the fact that the top of the application states, “To be considered for the SC Launch Program, the applicant must be domiciled in South Carolina or registered to do business therein.” Pisano did not take over her position at MUSC until July 1, 2010, and NextRay did not register with the S.C. secretary of state until Aug. 10, 2010;
• Even as late as Dec. 31, 2010, NextRay was listed as being domiciled at 105 Majestic Court in Chapel Hill, according to an annual filing with the N.C. Secretary of State’s Office for the 2010 calendar year, signed on March 11, 2011. The form was signed by NextRay’s Chief Financial Officer, Beatrice Stryker, who is Pisano’s sister; and
• On Jan. 26, 2011, nearly nine months after NextRay filled out its application with SC Launch, Chief Executive Czajkowski listed NextRay Inc. as his employer and 1289 Fordham Blvd., Suite 229, Chapel Hill, as NextRay’s address in a disclosure form filed in North Carolina.

What is also known is that on the SC Launch application NextRay filled out in May 2010, officials failed to disclose that the University of North Carolina at Chapel Hill had an interest in the company.

Given that NextRay was developed at UNC by university faculty, using university space and equipment, and is licensed exclusively by UNC’s Office of Technology Development, it’s almost certain that the University of North Carolina has a financial interest in NextRay.

“It’s almost always the case with companies started here that we take a percentage of sales and get a small percentage, say 1 percent, if there’s a liquidating event, such as a sale of the company,” said Henry Nowak, assistant director of technology development at the University of North Carolina at Chapel Hill.

“And we do that because if Dr. Pisano invented her technology here, she likely used the labs and equipment here on campus and had graduate students helping her,” Nowak said. “It’s a way for us to recoup some of our costs.”

‘Pre-Company Imitative?’

According to SC Launch, the organization’s University Start-Up Assistance program supports “university-based pre-company initiatives” and “early-stage start-ups” from only Clemson University, the University of South Carolina or MUSC.

“These grants are intended to allow SC entrepreneurs to fulfill their specific early-stage company needs in preparation for further company development and potential future funding,” according to SC Launch.

But NextRay had little if any connection to South Carolina until Pisano moved to MUSC last year, records show. Even now, it’s not clear if NextRay itself has any direct ties to the Palmetto State beyond the fact that one of its founders – Pisano – lives and works in South Carolina.

On the SC Launch application, the following NextRay principals, founders and partners are listed: Pisano; Dr. Christopher Parham, a former graduate and medical student at the University of North Carolina; Zhong Zhong and Dean Connor at Brookhaven National Laboratories in Upton, N.Y.; Dean Chapman at the University of Saskatchewan; Menahem “Meno” Nassi, the then-CEO of NextRay; and Triple Ring Technologies, Inc., a research and development company based in California’s Silicon Valley.

The name of the University of North Carolina at Chapel Hill is nowhere to be found in that section, even though records show that it’s virtual certain the school has a stake in NextRay.

In the final question on the SC Launch application, which asks for applicants to provide historical financial information, NextRay stated that it had received support for its prototype from UNC and a business development grant from NC IDEA, a not-for-profit organization that assists North Carolina tech firms.

While Mahoney, SCRA’s chief executive, did not respond to interview requests, he did include the following explanation as to why SC Launch provided funding to NextRay when he responded to a Freedom of Information Act request from The Nerve earlier this summer:

“… SCRA was mandated by both the SC Innovation Centers Act of 2005 and the SC Industry Partners Act of 2006 to support commercialization in SC of intellectual property arising from research universities, located both in SC and elsewhere,” Mahoney wrote last month. “Additionally, included in those mandates are provisions for support of ‘landing parties’, i.e. startup companies bringing intellectual property created outside the state into SC for commercialization.

“Within the context of these SCRA mandates and SC Launch programs, NextRay is a landing party in SC, is developing a prototype, and is affiliated with SC-based university research,” he added. “Accordingly, the support provided to NextRay, and its application process for that support, conform with standard program practice, and with our lawful state mandates.”

But at present, it would appear that of NextRay’s top three listed executives, only Pisano lives in South Carolina, records show.

Czajkowski, NextRay’s chief executive, not only lives in Chapel Hill but has served on the Chapel Hill Town Council since 2007 and ran for mayor of the North Carolina community in 2009.

Stryker, NextRay’s CFO and Pisano’s sister, is a registered certified public accountant in Lynchburg, Va., according to the Virginia Board of Accountancy.

Nassi, the company’s previous chief executive, is listed as living in Santa Clara, Calif. Nassi is listed as a point of contact for NextRay on the SC Launch application, along with Pisano.

The address listed for the “principal office” of NextRay on the annual report filed with the N.C. Secretary of State’s Office at the end of 2010 is 1289 Fordham Blvd., Suite 229, Chapel Hill. That is the same address Czajkowski listed as the address for NextRay in his 2010 disclosure filing with the Orange County Board of Elections.

Nowhere on the form is there a South Carolina address or South Carolina phone number for NextRay.

NextRay’s $25,000 grant from SC Launch is relatively small potatoes compared to some of the funding the firm has received:

•  Through 2009, NextRay’s technology development had been supported by more than $2 million in financing from other public sources, including grants from the National Institutes of Health and the Department of Defense, according to the application filed with SC Launch;
• NextRay raised more than $500,000 though two types of securities, according to the January 2010 filing with the SEC: “debt” and “option, warrant or other right to acquire another security”;
• The company has also received nearly $245,000 in Qualifying Therapeutic Discovery Project grants, according to an Internal Revenue Service listing of grants. The IRS lists the company as being based in North Carolina; and
• In 2009, a NextRay student team won second place and more than $142,000 in a Rice University business plan competition, the largest graduate-level business plan competition in the world.

But while NextRay might be able to reap financial benefits from its technology, it’s difficult to say how South Carolina would profit from SC Launch’s investment in the company.

Among the basic objectives behind the creation of the S.C. Research Authority, using state tax dollars to support the commercialization of another state’s intellectual property, such as NextRay’s, is not listed.

One of SCRA’s key objectives includes, “Developing the human, economic, and productive resources of South Carolina.” According to NextRay’s SC Launch application, contract research and development work was being handled in California.

“Product development will be done in collaboration with a contract research, development, and engineering firm located near Silicon Valley, Triple Ring Technologies,” NextRay’s application notes.

Another SCRA objective is to promote and encourage the expansion of the state’s research and development sector, with emphasis on capital formation and investments in research and development within South Carolina. Because NextRay is a UNC startup company, profits will likely flow back to NextRay stockholders and the state of North Carolina, not the state of South Carolina, records show.

According to the University of North Carolina’s patent and invention policy, UNC shall own all right, title and interest in any invention made by any employee, non-employee who uses university facilities, equipment, material or resources, or anyone who receives funding from the university, unless the university states otherwise.

An Impressive Background

Pisano’s resume lists impressive credentials. A graduate of Dartmouth College and the University of Duke School of Medicine, she went on to serve as a radiology resident at Harvard’s prestigious Beth Israel Medical Center.

According to an article for the alumni publication of Mount Saint Joseph Academy, an all-girl Catholic prep school located in Pennsylvania, Pisano has been the investigator or co-investigator on more than 40 studies involving millions of dollars.

The 2010 article, written by Stryker, Pisano’s sister and NextRay’s CFO, goes on to report that Pisano has made more than 400 presentations at conferences and symposiums, and written more than 170 articles, along with two books, one of which has become the definitive textbook on digital mammography. In addition, she is on the review board for six medical journals and with her colleagues has obtained three patents.

At the time Pisano was named dean of MUSC’s medical school, she was vice dean for academic affairs of the University of North Carolina School of Medicine, director of the UNC’s N.C. Translational and Clinical Sciences Institute, director of UNC Biomedical Research Imaging Center, and the Kenan Professor of Radiology and Biomedical Engineering, according to the Mount Saint Joseph Academy article. 

However, Pisano’s actions have already been scrutinized by officials since arriving in the Palmetto State a little more than a year ago.

Shortly after taking over at MUSC, Pisano was alleged to have used her position to influence MUSC to hire her husband and three members of her former staff at UNC, according to a complaint filed with the state Ethics Commission.

While the State Ethics Commission found that discussions concerning the hiring of Pisano’s husband and staff were indeed a condition of her employment by MUSC, they also found that said discussion took place before Pisano began work at the school in July 2010.

As a result, the State Ethics Commission dismissed the charges against Pisano in November 2010.

It should be noted that MUSC President Ray Greenberg sits on the board of the S.C. Research Authority.

Czajkowski, NextRay’s CEO, has had some of his past activities scrutinized, as well.

Czajkowski has a long history in corporate America, working for such well-known entities as Goldman Sachs and Bankers Trust Co. In 1997, he joined Pozen Inc., a Chapel Hill drug development company, and within a year helped take the company public.

Czajkowski resigned as CFO of Pozen Inc. in early 2004, just as the Chapel Hill drug development company was trying to get its first product, an experimental migraine treatment, approved by regulators.

Czajkowski, who had been with Pozen since March 1997, resigned for personal and family reasons, the company said.

Shareholders sued Czajkowski and other Pozen executives in June 2004, claiming they artificially inflated the stock price, but a judge dismissed the suit because the plaintiffs had not directly demanded any remedy from Pozen’s board of directors as required by law in Delaware, where Pozen is incorporated, the News & Observer of Raleigh reported.

Later that year, Czajkowski took a job with AAIPharma, a publicly traded pharmaceutical company in North Carolina. By May 2005, AAIPharma had declared Chapter 11 bankruptcy and four former AAIPharma  executives were later named in a shareholder lawsuit, though Czajkowski was not among them.

Shortly after emerging from Chapter 11 protection in March 2006,  AAIPharma announced that Czajkowski had been replaced as executive vice president and chief financial officer.

An AAIPharma spokesman at the time declined to comment to the Triangle Business Journal about whether Czajkowski was fired, and denied that the executive change had anything to do with the company’s financial woes.

In June 2007, Aldagen Inc. brought on Czajkowski as its chief financial officer, but his employment with the Durham, N.C., biotech company was terminated in January 2008, according to information filed with the SEC.

In his disclosure report filed with Orange County, N.C., for his 2009 campaign for Chapel Hill Town Council, Czajkowski listed himself as retired. It’s not clear exactly when he became chief executive of NextRay.

While the $25,000 NextRay received from SC Launch isn’t a huge sum in the overall scheme of South Carolina state government, the apparent improprieties in how the money was disbursed to NextRay calls into question whether other recipients of SC Launch money have followed funding criteria.

And given that SC Launch has doled out millions of dollars over the past few years to more than 180 companies, the NextRay case also casts doubt as to who is monitoring SC Launch and its funds, to ensure that they’re being meted out according to state guidelines.

Reach Dietrich at (803) 779-5022 ext. 110, or kevin@thenerve.org.