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.
If Jim Phillips had a New Year’s resolution to get NanoMech’s financial house in order during 2019, that aspiration didn’t survive the first day.
The Springdale company, which describes itself online as “the world leader in Surface Engineering and Material Science Manufacturing of lubricants,” missed a $100,000 payment due on Jan. 1. That triggered a second default on a 2018 funding agreement and a creditor’s Feb. 4 lawsuit to collect.
Michaelson Capital Partners of New York, which arranged the $7 million financial package, has deftly implied it wants Phillips gone as chairman and CEO of NanoMech. Michaelson’s frustration with Phillips after nine months is resonating with NanoMech investors who have grown dissatisfied with him during his eight years as CEO.
“The wheels had to come off at some point,” said a NanoMech investor in northwest Arkansas, who agreed to talk on the condition of anonymity. “The executive management and governance are awful. It’s a bad situation.”
Phillips, who couldn’t be reached for comment, is pushing back, though.
At his direction, the company has sent letters threatening legal action against disgruntled investors and others who are voicing their displeasure with him more freely, emboldened by Michaelson’s legal action to collect $8.9 million.
The dispute with Michaelson marks the third time as a CEO that Phillips has worn out his welcome with investors.
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.
Since 2011, Phillips has helped the company raise more than $35 million. But by last year, NanoMech was in a cash crunch that even the Michaelson Capital funding couldn’t help resolve. Essentially, the Michaelson financial package was divided into a four-year loan of $5 million and a one-year bridge loan of $2 million mixed in with stock options.
The terms indicate Michaelson Capital agreed to provide the funding in exchange for moving to the front of the line among NanoMech creditors.
The $5 million loan was earmarked to repay in full unspecified debts to Koch Minerals LLC of Wichita, Kansas, and the Springdale Public Facilities Board.
It also reduced the outstanding debt owed to the Arkansas Economic Development Commission to $500,000. The state agency agreed to subordinate its debt to Michaelson if NanoMech didn’t repay the debt in full as part of the deal.
“When you’re borrowing money to pay debt, you’re not getting ahead,” said a NanoMech investor.
The January default occurred less than two months after Michaelson worked out a forbearance agreement with Phillips on NanoMech’s default on the original April funding agreement. In addition to missing the $100,000 payment on Jan. 1, Michaelson said other defaults include NanoMech:
- Failing to give Michaelson board observation rights;
- Failing to complete an equity offering of no less than $4 million by Sept. 30;
- Failing to convert all of Michaelson’s outstanding convertible promissory notes into series C preferred stock by Sept. 30;
- Breaching monthly financial covenants from April through November; and
- Incurring $3.5 million of additional debt without Michaelson’s consent.
After NanoMech’s first default last year, Michaelson exercised its right to sweep the company’s Arvest Bank account, which netted $585,343.27.
The forbearance agreement bought NanoMech five more months of grace to fulfill its obligations and meet the April 19 deadline to repay the $2 million bridge loan.
Under the agreement, Michaelson returned $362,343.27 to NanoMech’s Arvest bank account. Michaelson kept the balance, which was applied to $200,000 worth of accrued and unpaid principal and interest on the $5 million loan and $23,000 in costs, expenses and legal fees.
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Phillips entered the NanoMech story as an investor before he stepped into corporate governance. He was appointed chairman of the board in 2008 and named CEO effective Jan. 1, 2011.
His ascendancy followed the December 2011 dismissal of Keith Blakely, who was hired as CEO with glowing expectations only 10 months earlier.
Since March 2016, five directors have come and gone as the board membership shrank from seven to three.
The constants during that three-year span are Phillips and Deborah Wince-Smith, president and CEO of the Council on Competitiveness, a nonprofit based in Washington, D.C.
At the time of the Nov. 20 forbearance agreement with Michaelson Capital, the board consisted of Phillips, Wince-Smith and Arpana Verma, chief science officer at NanoMech and co-inventor of the patented technology for the company’s nGlide lubricant.
Phillips’ domineering personality is a big reason for the board turnover, according to some investors.
“He wears people out,” one said. “He’s kept tight control and limited access to the company financials. He is not transparent with shareholders. It’s hard to tell what’s really going on.”
Michaelson’s lawsuit, filed in New York, provides a rare glimpse inside the promising 16-year-old enterprise striving to achieve escape velocity from its startup, venture capital-backed orbit.
“We look forward to working with NanoMech’s shareholders and investors, including the Arkansas Economic Development Commission, and, above all, its outstanding employees, to rebuild this company,” John Michaelson, chief investment officer at Michaelson Capital, said in a prepared statement.
NanoMech Highlights During 2012-19
NanoMech’s global campus in SpringdaleDec. 29, 2012
NanoMech raises $7.1 million through series A venture capital funding.
Ajay Malshe, chief technology officer and founder of NanoMech, with Jim Phillips, chairman and CEO, at the 2014 Edison Awards.Jan. 15, 2014
NanoMech announces the purchase of its global campus at 2447 Technology Way in Springdale and construction of a 20,000-SF building. The $1.1 million deal encompasses its existing 10,250-SF building and nearly 8.8 acres.
April 18, 2014
NanoMech’s TuffTek named as 2014 Edison Award winner. The product is touted as extreme wear-resistant coating product line that extends the cutting life of machine tools.
June 20, 2014
Jim Phillips with Saudi Prince Saud bin Khalid Al-Faisal and Gov. Mike Beebe. A $10 million venture capital investment in NanoMech followed in 2016.Prince Saud bin Khalid Al-Faisal, deputy governor for investment affairs at the Saudi Arabian General Investment Authority, visits NanoMech.
Sept. 24, 2014
NanoMech raises $12 million through series B venture capital funding. Investors include Advantage Capital, New Orleans; Spring Creek Investment Management, Philadelphia; Hendricks Investment Holdings, Silver Spring, Maryland; and Meadow Lane Investments, Reynoldsburg, Ohio.
April 13, 2016
NanoMech raises $10 million through series C venture capital funding with Saudi Aramco Energy Ventures, Dhahran, Saudi Arabia, the corporate venturing subsidiary of Saudi Aramco.
April 20, 2016
NanoMech’s Guardx named as 2016 Edison Award winner. The coating
product line is touted as providing protection from corrosion, wear, abrasion, thermal excursion, cyclic thermal stress, friction and environmental degradation.
April 19, 2017
NanoMech’s nGlide Superflo named as 2017 Edison Award winner. The product is touted as lubrication additive that provides protection from mechanical friction.
April 25, 2018
NanoMech borrows $7 million from Michaelson Capital of New York to repay debt and fund operations.
Jan. 31, 2019
AtomOil and AtomLube named as 2019 Edison Award winners. The products are touted as ultra-performance lubricating oils along with greases, sealants, and pastes specially designed for various application sectors such as petroleum, automotive, heavy-duty trucking, agriculture, construction, marine, racing, sports, industrial, space, military and more.
Feb. 4, 2019
Michaelson Capital sues NanoMech for defaulting on its loan agreement and subsequent forbearance agreement after the company misses a $100,000 payment in January.
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