Writing Hits Wall at NanoMech


Writing Hits Wall at NanoMech
NanoMech CEO Jim Phillips, NanoMech founder Ajay Malshe and UA Chancellor David Gearhart unveil a plaque recognizing the company’s R&D 100 award in 2013. (Russell Cothren, University of Arkansas)

NanoMech Inc. attracted about $11 million in financial support from the Arkansas Economic Development Commission between 2008 and 2014. But after that mix of tax credits, grants tied to job creation, loans and direct investment, the public well dried up for the Springdale maker of industrial lubricants.

Documents filed as part of NanoMech’s bankruptcy this year indicate that frustrated private investors were talking with state officials and warning that all was not well with the locally grown enterprise.

Email exchanges in 2015 among directors, investors and the company lawyers capture the internal conflict that boiled beyond the corporate boardroom. It marked the start of large venture capital investors pressing for more transparency and accountability. Their growing distrust of Jim Phillips as chairman, president and CEO served as a harbinger of his forced exodus of this year.

Fourteen months after participating in a $12 million capital raise in 2014, Spring Creek Partners visited NanoMech. The disturbing findings prompted a Nov. 5, 2015, email to Phillips and NanoMech founder Ajay Malshe from John Anderson, founder of Spring Creek Partners of Rockford, Illinois.

“We were shocked to learn that the company would run out of cash in a few weeks,” Anderson wrote. “We had no idea. As you know, we have not received financial information since our investment even though we have requested it. What we now know, and based on the projections we were given in August 2014, performance has been miserable compared to the projections we were given. Specifically:

  • NanoMech will miss its projected 2015 revenue by 85%.
  • The company has revised its projected revenue for 2016 downward by 63%.
  • The 2015 selling, general and administrative expenses are expected to exceed projection by 42%.
  • Cash from operations that was projected to be positive in Q1 of 2015 is now projected to become positive in Q2 of 2017.

Anderson offered several suggestions for consideration, which included placing a priority on providing transparent communications with the company’s stakeholders.

Despite spending upwards of $60 million, NanoMech never managed to find stability before its August bankruptcy sale for $8 million to P&S Holdings, a subsidiary of Vinmar International Ltd. of Houston, Texas.


Direct Nanomech Support from the Arkansas Economic Development Commission

 

2008–2010

► $2.82 million Equity Investment Tax Credits awarded to Nanomech


2011

► $2.5 million Quick Action Closing Fund Grant

► Tied to the creation of 25 jobs and secured by a first lien on equipment purchased with grant funds


Dec. 19, 2013

► $1.5 million QACF Grant, $150,000 was repaid for underperformance

► Tied to the creation of 20 new jobs and secured by a first lien on equipment purchased with grant funds

► $1.5 million QACF Loan, balance owed $500,000

► Secured by a first lien on 7 undeveloped acres adjoining Nanomech’s Springdale facility and a junior lien on the facility

► The original maturity date was extended to Dec. 19, 2019, with interest-only payments beginning Jan. 19, 2017.

► $1 million QACF Grant, $500,000 was repaid for underperformance

► Tied to the creation of 10 new jobs

► A balance of $250,000 remains to be repaid with new jobs.


2014

► $1.6 million QACF Grant

► Funds the venture capital investment in NanoMech by the Arkansas Development Finance Authority

Source: Arkansas Economic Development Commission