Accusations of corporate mismanagement against the former CEO of NanoMech, Jim Phillips, have intensified into allegations of self-dealing and securities fraud.
The Springdale firm’s investor-backed caretakers are convinced there is substantial evidence that Phillips committed “various financial wrongdoings” that ultimately led to NanoMech being forced to file for bankruptcy on April 15.
An early estimate of these alleged wrongdoings indicates that Phillips spent more than $750,000 on personal expenses paid for with company assets, according to NanoMech filings in bankruptcy court.
The company retained the services of Treliant LLC of Washington, D.C., to conduct a forensic audit to examine its fiscal records to learn more about Phillips’ eight-year reign as CEO.
“The initial investigation has shown that Phillips spent corporate funds in excess of the allowances contained in his employment contract, used corporate funds for speculative business purposes and for his and his family’s personal benefit and co-mingled the company’s resources with his own resources to his benefit,” according to bankruptcy court filings.
In addition to a serious dose of corporate introspection, the financial train wreck left by Phillips has attracted outside inquiries from the FBI. So far, no criminal charges have emerged from allegations leveled in bankruptcy court and elsewhere.
Michaelson Capital Partners and other 2018 investors wooed by Phillips allege that material misrepresentations were made to secure funding for NanoMech.
The New York growth financier of technology companies claims it was given false and misleading information concerning the financial condition of the company to induce its $7 million investment.
Michaelson Capital, which provided a stock option-backed financial package to NanoMech 14 months ago, also accuses Phillips of diverting company funds for his personal benefit.
Phillips, through his Fayetteville lawyer, Todd Lewis, vigorously denies the allegations of wrongdoing. The allegations against him are linked with a wrongful acts claim on NanoMech’s directors and officers’ liability insurance coverage.
Also named in Michaelson’s D&O claim are two former board members, Michael Easterly of Atlanta and Arpana Verma of Cypress, Texas; and an executive and a board member still with NanoMech, Wyatt Watkins, senior vice president of finance and operations; and Deborah Wince Smith of McLean, Virginia, a director.
The company has two D&O policies through Scottsdale Indemnity Co., a subsidiary of Nationwide Mutual Insurance Co. in Columbus, Ohio; and Argo Group US of San Antonio.
The planned June auction of NanoMech was postponed to wrangle out details of the proposed sale along with other bankruptcy court disputes.
Nanomech attorneys are seeking a court order to force Phillips to submit to questioning and produce documents in a Rule 2004 exam as part of the company’s Chapter 11 reorganization.
Among the items of interest are company-paid trips to South America, Hong Kong, Paris, Dallas and Indianapolis for Phillips and his wife, and renovations to their million-dollar home in Rogers.
With the company on the brink of bankruptcy, Phillips “retired” from NanoMech in March, one step ahead of an investor-led revolt to oust him.
According to NanoMech bankruptcy court filings, Phillips gave himself a compensation package valued at more than $500,000 when he orchestrated his exit from the company. This move left the cash-starved company without any funds to operate.
“His decision to give himself such a large compensation package shows that Phillips was running the company how he saw fit, without meeting his fiduciary duties to the stakeholders,” according to NanoMech court filings.
Benjamin Waisbren, troubleshooting CEO of the company, declined to comment on the mismanagement claims against his predecessor.
NanoMech was billed as “the world leader in surface engineering and material science manufacturing of lubricants” under Phillips.
Bankruptcy court filings report that NanoMech generated $7.6 million in revenue during 2018. The disclosure marks the first time company sales have seen the light of day.
NanoMech financials were guarded like a trade secret by Phillips and hidden even from stockholders, according to investors in northwest Arkansas.
Waisbren said NanoMech is on track to achieve $11 million in revenue this year, which would mark its best year ever.
After he was brought aboard, Waisbren stabilized operations by cutting the company staff by half to 21, closing two money-draining offices in Texas and restoring NanoMech’s supply chain and reaffirming its customer base.
“We’re on target with our agreed budget as part of our debtor-in-possession financing,” Waisbren said. “In addition, it is important to note that in terms of its continuing business, the company is operating at record levels of revenue.
“That does not mean the job is finished. In order for the business to grow beyond its existing base, further investment will be required.”
The bankruptcy move allowed NanoMech to shed expensive leases for office space in Houston and Dallas.
According to the company’s allegations of mismanagement and self-dealing against Phillips, the former NanoMech CEO committed the financially struggling company to a 2015 office lease in Dallas and furnished the space with expensive furniture and extravagant artwork, some of which is now missing.
Estimated cost of the lease obligation and furnishings to house two employees: nearly $1 million.
Before moving to northwest Arkansas a decade ago, Phillips was pushed out of two Tennessee companies amid criticism of his corporate spending habits and his compensation relative to fiscal performance. His previous tenures as CEO at Ipix Corp. of Oak Ridge spanned 1997-2001 and at Luminetx Inc. of Memphis from 2004-07.
Like NanoMech, Ipix and Luminetx were startup enterprises founded on interesting technology and funded with venture capital. Ipix even made the leap to a public company with Phillips at the helm but floundered financially under his operational leadership.
Those career stops underscore his skills as a promoter and his ability to raise and spend millions of dollars. And it’s his penchant for spending and his shortcomings as a manager that are once again on the firing line at NanoMech.