Nanomech investors were on the brink of removing Jim Phillips as chairman and CEO of the Springdale venture when he decided to retire effective March 1.
According to insiders, the palace revolt was led by two of the company’s largest benefactors: Advantage Capital of New Orleans and Saudi Aramco Energy Ventures, the corporate venturing subsidiary of Saudi Aramco.
The two firms had gathered votes to fire Phillips for mismanagement of Nanomech, which describes itself online as “the world leader in Surface Engineering and Material Science Manufacturing of lubricants.” Phillips’ failings as CEO were exposed publicly by a lawsuit filed Feb. 4 by Michaelson Capital.
“The votes were very close if not there when he left,” said an investor, who spoke on condition of anonymity. “The corporate bylaws require approval by at least 60 percent of all classes of stockholders.”
The Michaelson lawsuit to collect $8.9 million from a 2018 funding agreement in default revealed Nanotech’s unstable financial condition under Phillips’ secretive regime.
“Jim ran Nanomech like his own little kingdom,” said another Nanomech investor. “He wasn’t being responsive to investors. The bigger investors got so fed up with him that some had written off their investments because it was too much trouble to deal with Jim.
“Investors didn’t think it was worth the hassle. But the situation reached the point that it was time to take action or let the company go under. That was their position.”
That groundswell of dissatisfaction with Phillips led to the dwindling of membership on the Nanomech board of directors, now down to two after his “retirement.”
Since March 2016, six directors have come and gone as the board membership shrank from seven. The deteriorating governance is among the cracks in the corporate façade that began showing but went largely unnoticed outside the company until the Michaelson Capital lawsuit.
Ajay Malshe, Nanomech co-founder and its chief technical officer, quietly left the company in 2017 to focus his energies in the academic realm as a distinguished professor of mechanical engineering at the University of Arkansas at Fayetteville.
His exodus received zero fanfare from the company he helped launch in 2002, and the change wasn’t reflected on Nanomech’s leadership roster until after Phillips departed.
Malshe declined to comment about the state of affairs at Nanomech.
“I’ve been advised by counsel not to have any comment,” he said.
Although the clouds of potential litigation remain in the air, more insiders are beginning to talk, albeit on background, and provide more details about Phillips’ eight-year reign as CEO at Nanomech.
Phillips did his share of saber-rattling in February before his sudden retirement, officially acknowledged after nearly three weeks had passed. Before he left, Phillips tried to rally investors to fend off his overthrow with his view of the call for new leadership by Advantage Capital and Saudi Aramco.
“Jim warned shareholders that a group of bad actors was trying to take over the company,” a local Nanomech investor said. “He was trying to stave off a shareholder vote to oust him. It was the first communication he had with shareholders in years.”
Another insider said Phillips tried to turn his dispute with creditors and investors into a matter of national security by threatening to report Michaelson Capital to the FBI for trying to steal Nanomech’s technology and give it to the Saudis.
Phillips didn’t respond to an interview request through his Fayetteville lawyer, Todd Lewis.
Interim Chief on Board
Unlike normal retirements, his jarring exit left Nanomech without a successor. In a role akin to an interim CEO, Benjamin Waisbren of Chicago was brought in to help restore order to the disarray left by Phillips.
“It’s premature for any comment, but I will say the company is operating and my job is to assist the company in its reorganization,” Waisbren said. “It’s a team effort.”
Waisbren’s professional background is varied and includes investment banking and distressed or special situations that include fraud investigations and litigation.
His bio notes that he recently completed an 18-month financial and industry advisory assignment on behalf of the U.S. Department of Justice in its civil forfeiture action arising out of the 1Malaysia Development Berhad fraud litigation.
While Phillips receives credit for helping raise money for Nanomech during a critical time in its development, he also receives criticism for his heavy-handed, secretive and controlling management as CEO.
“He didn’t want anyone looking at the books, even if it was only a financial position summary and not full-blown financial statements,” said one investor. “His pretext was that it was a very competitive industry, and he didn’t want that kind of information out.
“Everything was so confidential be-cause Jim Phillips was out there competing with the titans of the nano industry. In his case, there was a reason to keep things locked down.
“He didn’t want anyone to know how he was spending money and what the company’s financial condition was. Some shareholders went to the office to literally look at the books.”
It was a game of keep-away that in-vestors finally grew weary of this year. Company revenue was shrouded in mystery, a treasure protected by Phillips.
“That’s part of the issue,” said an investor. “You’re in a fog with very little information in a hostile environment. Sales were just something that wasn’t public or even provided privately to investors.
“I don’t know how he did his pitches without that information. Maybe he used pro formas to show projected revenue.
“Nanomech was perfect for Jim. It had all this secret technology he had to protect and that he could use to go out and raise money.”
Even his detractors concede that Phillips, with his promoter personality, knows how to raise money. Some credit him with helping Nanomech raise more than $35 million since 2011.
‘I Believe’
Malshe’s first meeting with Phillips was recounted in an article that appeared in the Spring 2014 issue of Arkansas, the quarterly magazine published by the University of Arkansas Alumni Association.
Accompanying Malshe was Wenping Jiang, Nanomech co-founder and now the company’s senior vice president of manufacturing.
“I still remember that day, Wenping and me, excitedly entertaining somebody who quietly listened to us,” Malshe said. “We poured out our hearts, telling him what it could become, why it was important for the University of Arkansas and our nation.
“Jim said, ‘I believe,’ invested and brought in outside investors from around the country to help advance this technology to full commercialization. Nanomech would not be here without that investment of capital, know-how, reputation and Jim’s experience.”
His serial shortcomings and ousters as a CEO include tenures at Ipix Corp. of Oak Ridge, Tennessee, (1997-2001), Luminetx Inc. of Memphis (2004-07) and now Nanomech (2011-19).
According to insiders, some of the large venture capital investors ponied up money to speed up the “retirement” of Phillips to get shed of him and begin trying to salvage Nanomech.
For now, the company’s road map into the future is still being drawn.
“It was a long path to get where they are,” said one early Nanomech investor. “Hopefully, the company will be able to move forward.”
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