Facing Friction: Lawsuit alleges NanoMech missed loan payments

Jim Phillips, chairman and CEO of Springdale-based nanotechnology company NanoMech, looks to guide the company through a lawsuit that alleges his firm missed payments on $7 million in loans.

New York-based technology financing company Michaelson Capital Partners has sued NanoMech for not paying on the loans provided to the company in April 2018. Michaelson Capital filed suit Feb. 4 in the Supreme Court of New York and has asked for an $8.91 million judgement against the company.

Phillips has led NanoMech as chairman and CEO since 2011 after joining the company as chairman more than 10 years ago. He has overseen the development of more than 100 new products over the past decade, including lubricants, coatings and sealants — many of which are used to create a nearly frictionless environment for equipment to operate in and to improve operations in the energy sector. Nanotechnology refers to technology development at the subatomic level, typically less than 100 nanometers. A nanometer is one billionth of a meter, and a human hair is 75,000 nanometers in diameter.

As an executive officer at Motorola, Phillips helped launch the cable modem, leading to the rise of high-speed internet. He was president of pager company SkyTel, a pioneer to instant messaging. In 2004, he was founding chairman and executive director of the FedEx Institute of Technology, establishing a research park at the University of Memphis. He was CEO of iPIX, developing an internet imaging platform and technology to provide virtual tours on websites for several industries, including real estate, hotel, security and entertainment. He also oversaw the production of the image submission process used by eBay users.

In a statement, Phillips said NanoMech has been involved in a dispute with a lender, which has filed suit rather than resolving the issues through discussion. “NanoMech will officially respond to this lawsuit with court filings at the appropriate time,” Phillips said. “However, we are excited about the future of our business and continue to work every day to ensure continued success in the coming years.” Rogers-based law firm Eldridge Brooks is working the case for NanoMech.

John Michaelson, chief investment officer of Michaelson Capital Partners, said he wants to work with NanoMech’s equity shareholders and investors, including the Arkansas Economic Development Commission, to save the company and keep the technology and jobs in Arkansas. “Unfortunately, as our filings state, the current executive leadership of the company has repeatedly failed to meet its obligations and is in breach of its agreements,” Michaelson said in a statement. “This action is a last resort to save a great Arkansas company.”

Michaelson Capital has a nearly 5% equity position in NanoMech, said Robbie Wills, a Conway attorney representing Michaelson Capital. “Our company has been disappointed in the current executive leadership of NanoMech, and we look forward to working with the shareholders in the future to address that,” he said. Wills also noted NanoMech took on more debt after it received the loans from Michaelson Capital, and this violated a condition of the loans.

When asked if the lawsuit was an attempt by Michaelson Capital to take control of NanoMech, Wills said “Michaelson Capital is a lender and is primarily concerned with getting its loan proceeds repaid. It is a de minimis stockholder, holding a small percentage of the stock of the company. It hopes that the company, with the right management and focus, can grow and be a strong Arkansas company.”

ECONOMIC INCENTIVES 
Arkansas Economic Development Commission provided $10.88 million in loans, grants and tax credits to NanoMech, all before 2015. All the incentives that NanoMech received have specific requirements that must be met, and these are being reviewed, said Mike Preston, executive director of the Arkansas Economic Development Commission. NanoMech has faced “claw backs” and “penalties,” but because of the lawsuit, the commission declined to provide more details.

“The specialty lubrications manufactured by NanoMech use macromolecular technology developed at the University of Arkansas to improve functionality and have the potential to radically change the energy industry, as well as aerospace, transportation and automotive,” Preston said. “It is our desire to see the company become an industry leader, keeping their dedicated employees and stakeholders in Arkansas while competing in the national and international arena.”

NanoMech has paid more than $1 million to the UA, Phillips said in an exclusive interview with the Northwest Arkansas Business Journal the day before the lawsuit was made public. It pays licensing fees to the UA to use its technology to produce the products. “The university has licensing agreements with companies that commercialize and use intellectual property — new technology — developed and owned by the university,” said Amy Schlesing, executive director of strategic communications for the UA.

NanoMech has about 60 employees and nearly 150,000 square feet of nanotechnology manufacturing and office space across four locations in Dallas, Detroit, Houston and Springdale. About 75% of the company’s business comes from the oil and gas industry, Phillips said. He declined to release revenue but said it’s risen annually. Also, the company could triple its revenue in 2019, from 2018, but he couldn’t discuss the details. Since it was established in 2002, NanoMech has received between $45 million and $50 million in investments.

$10 MILLION ENERGY INVESTMENT
One of the largest investments came in 2016 from Saudi Arabia-based Saudi Aramco, the largest oil company in the world. When asked about the oil company’s $10 million investment into NanoMech, he said it’s expected to lead to multiple things he cannot discuss.

“They have the ability to move with us on a global scale,” Phillips said. “They are very interested in some of our product lines. They’re incredibly interested in our science.”

Greg Schwartz, president of the company’s energy segment, said the oil and gas industry uses its lubricants in equipment to improve their longevity and efficiency. Schwartz, who’s based at the company’s Dallas office, explained a fracking site might have $30 million of equipment, and if such equipment were to fail, the vendor responsible would receive a bill for its downtime.

Arpana Verma, chief technology officer and chief science officer for NanoMech, said the company’s top-selling fracking lubricant has allowed companies to complete 120 to 140 stages of fracking, up from 30 to 40 stages, without having to bring their equipment from the hole to the surface. Companies can operate for up to five days instead of one day before having to do this, said Verma, who is based at the company’s Houston office. Other products for the industry include assembly oil, rust inhibitors, corrosion protective coatings and paints.

“The energy sector is going to boom, and NanoMech would have a huge contribution in making it happen because they depend on us to make sure that operations and their efficiency, production and performance is really, really competitive because it is very price sensitive for them,” Verma said.

“And everything has to be done to make sure that they are not just producing oil, but they are producing it in the most cost-competitive manner and environment-friendly. We give them that double edge to make their operations run smooth.”

TRANSPORTATION SECTOR GROWTH
The trucking industry accounts for the second largest portion of NanoMech’s business, and Lowell-based carrier J.B. Hunt Transport Services was the first customer in the segment, Phillips said. The company has seen 138% growth in trucking and transportation, said Bryan Peoples, who leads the business segment. And with 1.3 million transportation companies in the United States, the company has scratched the surface in the business, Peoples said.

The company also is working on military clothing with chemical coatings allowing it to be flame retardant, water repellant and mosquito resistant. Parash Kalita, director of product development, said if mosquitos were in an enclosed space with the clothing, the mosquitos would die. The clothing was designed to handle more than 50 commercial washes, with its coating retaining 90% of its chemicals, Kalita said.

In another project, Phillips said the company provided a lubricant to electric car maker Tesla to help reduce wear on a drive part of its vehicles. It has also developed an oil additive that could generate “hundreds of millions” in revenue, he said. The company’s

AtomOil Engine Oil Treatment is expected to increase a vehicle’s fuel economy and performance and reduce engine wear. The product was recently recognized with an Edison Awards honor, one of five the company has received.

“The good news is there’s tremendous innovation in our country, and NanoMech really represents, in the nanomaterials field, one of those champions,” said Deborah Wince-Smith, board member for NanoMech and president and CEO of the Council on Competitiveness. “NanoMech really represents the convergence of groundbreaking science and technology applied to solving the huge problems that are impacting industry and asset security. It’s really one of the foundational capabilities in advanced materials designed and manufactured at the subatomic level that are going to have profound transformation across many industry sectors.”

COMPANY FOUNDER EXITS
NanoMech founder Ajay Malshe left his position as chief technology officer at the end of 2017 to focus on being a mechanical engineering professor at the University of Arkansas.

“My original goal was to create a technology-based innovation opportunity in the cutting edge area and be a part of applying our inventions from the university with licensing, apply those to really create manufacturing jobs and provide leadership,” Malshe said. “After doing that for 15 years, as a professor, as an entrepreneur, I decided to come back to campus and teach the next generation of students.”

Malshe said he is no longer involved with the company he founded in 2002, and he declined to comment on the pending lawsuit. Malshe has taught at the UA since 1995.