Why vaunted MicroGreen Polymers of Arlington failed

ARLINGTON — By all appearances, MicroGreen Polymers looked like a company poised to blow up.

Its 8-ounce InCycle coffee cup promised to change the food packaging industry. The cups would be cheaper, more durable and more eco-friendly than traditional foam or coated paper cups.

Investors put about $80 million into the company. Major airlines were serving coffee in the cups. And MicroGreen had won a pile of prestigious industry honors.

But behind the scenes, the Arlington-based company was running out of time — and money — to turn a profit. A convoluted investment structure discouraged new investors, which put existing backers on the hook to keep writing checks.

Ultimately, one investor, the Confederated Tribes of Grand Ronde, Oregon, kept the company running the past year.

But the tribes also reportedly blocked efforts to clean up the investment structure, which would have made it easier to bring in new investors.

In January, the tribes pushed out MicroGreen’s longtime chief executive officer, Tom Malone.

In the following weeks, a once-promising company came undone, leaving 163 employees looking for work. The Grand Ronde Tribes foreclosed on the assets, which they plan to sell off.

MicroGreen never shied from news coverage during its rise, but since it closed April 3, the leadership and the tribes have been largely silent.

Meanwhile, many former employees have not been fully paid, or reimbursed for outstanding expenses, according to several sources.

And the man most associated with the startup, co-founder Krishna Nadella, has even started a new business, Aiooa — at least on paper. It was registered with the state 10 days after he told MicroGreen workers the company was closing.

Nadella has declined multiple interview requests.

UW technology

MicroGreen started with Nadella’s vision of a greener coffee cup.

While working on a doctorate at the University of Washington, he was introduced to technology developed there in the 1990s to make stronger, more durable plastic. Most disposable coffee cups are either foam or plastic-coated paper, and are not easily recycled.

But with UW’s technology, Nadella saw a way to make all-plastic coffee cups and other food packaging, which could be easily recycled. That, in turn, would drastically reduce the amount of non-biodegradable garbage and the amount of new plastic produced.

One of his teachers, Vipin Kumar, an associate professor of mechanical engineering, was on the team that developed the technology.

“Krishna was a special student,” Kumar said in an email to The Daily Herald. “What made him unique was that he was not only good technically, but also was an entrepreneur, as he proved it in the real world.”

In 2002, Nadella and another student, Greg Branch, started MicroGreen Polymers, with Branch as president and sole board member.

The first few years, the company’s address was Branch’s home in Stanwood. But most of the work developing the manufacturing process was done in Kumar’s lab. It was funded with prize money from business competitions at UW and other universities, cash from a handful of small investors and about $250,000 in research grants, according to news reports and records filed with the U.S. Securities and Exchange Commission.

Branch left the company in 2006, and Tom Malone was brought in as president.

Malone had real-world experience with startup companies and had just sold his own — San Diego-based Cargo Technology — to Coldpack, a maker of shipping materials.

For the next several years, MicroGreen attracted several million dollars from investors, which paid for research and development needed to move the technology from a science lab to a production line.

Money pours in

In 2010, around the time MicroGreen set up its first production line in Arlington, it brought in $6.9 million from investors including Waste Management, one of the country’s biggest recycling and trash disposal companies. Other investors were Washington Resource Foundation Capital and Northwest Energy Angels.

By 2012, MicroGreen was making plastic cold-beverage cups, containers for frozen and microwavable foods, and plastic sheets for signs and other printed materials. Amazon was selling the cups online, and Costco started offering them at four stores in the San Francisco Bay Area. MicroGreen was getting headlines and industry awards and had about 50 workers.

Several former employees said they were drawn to the company’s mission of using recycled plastic material to make products that can then easily be recycled.

Despite having a seemingly game-changing product, MicroGreen struggled to raise the tens of millions of dollars needed to ramp up production quickly enough to meet demand and cover overhead, company insiders said.

Instead, the money trickled in over several years, forcing the company to start and stop efforts to refine production and take other cost-control measures, Malone told The Daily Herald in an interview. And having to repeatedly find new investment money “was a real time burn,” he said.

MicroGreen’s executives, board members and investors “thought we couldn’t achieve profitability without scaling up” production, said one private investor, who asked not to be identified.

So the company launched a big investment round, enlisting Key Bank to find venture capital. That deal ended in a still-pending lawsuit against MicroGreen, with each side accusing the other of misrepresentation and breach of contract.

Then MicroGreen got a call from the Stillaguamish Tribe near Arlington, which invested $5 million in January 2013. The tribe touted the investment as a way to help the environment, create jobs and diversify its financial portfolio.

Stillaguamish leaders connected company officials with what would become MicroGreen’s biggest financial backer and, ultimately, its executioner — the Confederated Tribes of Grand Ronde .

Starting with $5 million in August 2013, the Grand Ronde tribes put at least $31 million into MicroGreen. Most of it was direct investment, but there also were loans. The Grand Ronde tribes won’t say exactly how much they invested in all.

By the time the Grand Ronde tribes got involved, MicroGreen had focused on making 8-ounce coffee cups for airlines. The company landed its first major contract, supplying insulated InCycle cups to Seattle-based Alaska Airlines, in 2013.

By the end of that year, it also had contracts with Allegiant Air, Virgin America and United Airlines.

Complicated ownership

MicroGreen needed more money to further expand production.

The company’s ownership structure had become so complicated from repeated small-scale investment rounds that new potential investors were discouraged, several sources said. Would-be investors couldn’t easily figure out how much of the company their investment would buy.

By late 2013, the only investor willing to put in more money was the Grand Ronde tribes, according to several sources.

This time the Grand Ronde tribes didn’t want more equity, they wanted to loan MicroGreen the money. In December 2013, they gave MicroGreen an $8 million secured loan, meaning that if MicroGreen didn’t pay it back, the tribes could take assets to cover the debt.

As the startup’s biggest backer, the Grand Ronde tribes didn’t want to walk away from the investment. But they also didn’t expect to be MicroGreen’s sole supporter, said Titu Asghar, investment director for the Confederated Tribes of Grand Ronde.

“We had expected other investors to come in, as well, after us,” he said.

However, when Malone pushed the board to clean up MicroGreen’s ownership structure, the Grand Ronde tribes pushed back, according to a source familiar with the discussion.

Reforming the structure would mean investors would have to take a hit to some degree, but it would clear the way for new money.

Asghar, who represented the Grand Ronde tribes on MicroGreen’s board, seemed unwilling to give up the dividend attached to Grand Ronde shares, the source said.

In the last three months of 2014, “I brought $11 million worth of investors to the company,” Malone said.

They all backed out because of the ownership structure, he said.

By January, MicroGreen needed another cash infusion. The Grand Ronde tribes agreed to loan another $5.5 million, even though the company by then was only paying interest, and not paying down the principal, of the previous loan.

Malone said there was one stipulation: He had to resign.

So he did.

Co-founder steps in

Malone was replaced, as president by another board member, Joanna Lohkamp.

Lohkamp didn’t know the day-to-day details of the business and had to spend much of her brief tenure getting up to speed, said a former manager.

Lohkamp could not be reached for comment.

The company started cutting costs wherever it could. Most employees were put on mandatory furlough in early January. And the pace of layoffs, which had quietly started in the fall, increased. MicroGreen consolidated from three buildings in Arlington to two.

While the company was internally in turmoil, in public MicroGreen executives were still talking about growth.

Shortly after Malone’s exit, Gov. Jay Inslee toured the plant. There was no talk of the company’s financial tailspin. Instead, company executives talked about how Highway 531 needed improvements to handle additional shipments.

Lohkamp stepped down in late March.

Nadella, who was serving as chief technology officer and was MicroGreen’s heart since its inception, took the helm. He was like a captain going down with the ship, a former manager said.

With time and money running out, Nadella reportedly went to a Grand Ronde Tribal Council meeting in late March to ask for enough money to keep the doors open a little longer.

The company was manufacturing more cups with fewer people and was focused on increasing efficiency. Cash flow was quickly improving.

The council approved a $2.5 million loan on March 27 through the tribes’ investment vehicle, Ilihi.

But Asghar, on behalf of Ilihi, saw it differently and told Nadella the next day that Ilihi wouldn’t make the loan.

“The company wasn’t able to operate at a sustainable level,” Asghar said, and MicroGreen hadn’t made principal payments on the $8 million loan “for a while.”

“The technology works, we know that,” Asghar said. “They were able to make sales, but not a profit.”

Without the loan, the company would run out of cash in a few days, and the Grand Ronde tribes would take control of its assets.

Sudden closure

On April 3, the roughly 55 remaining employees crowded into the lunch room. Nadella told them MicroGreen was closing.

Managers collected keys and handed out paperwork and paychecks.

But the end came so quickly, said some employees, that their paychecks were short or bounced. The company still owes former workers more than $20,000 in expense reimbursements, according to people who say they are owed money.

The Grand Ronde tribes did not respond to requests for comment about outstanding financial obligations. They are trying to sell off the company’s assets to cover their investment.

Nadella’s newly created company, Aiooa, was registered with the state 10 days after MicroGreen closed. The company appears to exist only on paper, though, and it’s unclear what its purpose will be.

However, people on the professional networking website LinkedIn who say they are associated with Aiooa appear to be those who would be critical to getting MicroGreen up and running again.

Dan Catchpole: 425-339-3454; dcatchpole@heraldnet.com; Twitter: @dcatchpole.

MicroGreen Polymers

2002: MicroGreen Polymers is founded by Krishna Nadella and Greg Branch.

2006: Tom Malone is hired as president.

2010: MicroGreen sets up its first production line in Arlington.

2013: MicroGreen starts supplying cups to Alaska Airlines, United Airlines, Allegiant Air and Virgin America.

2013: The Confederated Tribes of Grand Ronde make their first investment — $5 million.

2014: Malone pushes the board to clean up the ownership structure, clearing the way for new investors. The Grand Ronde tribes block the effort.

January 2015: The Grand Ronde tribes push Malone out. Board member Joanna Lohkamp takes over as CEO.

March 2015: Lohkamp resigns. Nadella takes over as CEO.

April 1, 2015: The Grand Ronde tribes’ investment director decides against loaning MicroGreen $2.5 million, forcing the company into insolvency.

April 3, 2015: Nadella tells employees that the company is closing.