Former NanoMech CEO Jim Phillips objects to company’s plan to sell assets (UPDATED)

EDITOR’S NOTE: This story has been updated to include a federal judge’s decision Friday afternoon.

Jim Phillips, former chairman and CEO of Springdale-based nanotechnology company NanoMech, had objected to the company’s sale in its bankruptcy case, but the judge overruled the objection hours after the objection was filed Friday (May 10).

Judge Christopher Sontchi also overruled an objection by Daniel Carroll of Michigan in a hearing Friday in U.S. Bankruptcy Court for the District of Delaware and set a sale hearing in the case for June 24. Fayetteville-chartered Arvest Bank also had an objection in the case, but it was resolved before the hearing Friday.

“The reality is the objector was at the helm as the company was plummeting toward bankruptcy,” Sontchi said. “I’m not going to be overly critical of current management and their path forward visive a complaint from former management, frankly.”

In his objection, Phillips didn’t believe NanoMech should be allowed to sell as assets its up to $7 million in insurance for directors and officers. Phillips is covered under the policy and is also a creditor and shareholder of the company, according to the filing. Phillips also said in the filing the sale doesn’t serve to maximize the value NanoMech might receive for its assets, and its primary value is in its patent rights, which are “not a wasting asset.” Phillips noted the company’s assets were not marketed before it filed for bankruptcy April 15 in the Delaware court, that neither NanoMech’s financial adviser Speyside Advisors LLC nor its chief restructuring officer Ben Waisbren have experience with its assets and the company looking to purchase the assets has no corporate operations experience.

Phillips, who retired from the company March 1, claimed the insurance policy was not transferrable, and its sale could nullify Phillips’ coverage and would be “punitive” to Phillips, court documents show.

In the hearing, Michael Busenkell, attorney for NanoMech, didn’t believe Phillips had a claim in the case, and said on March 3, Phillips had set up a $1 million loan for NanoMech. And half of that went to Phillips as severance pay.

Bill Sullivan, attorney for Phillips, said Phillips wasn’t interested in stepping down from the company, but if he didn’t agree to step down, NanoMech wouldn’t have received the $500,000 it already has. Sullivan also argued the company looks to have enough income to cover expenses, netting $8,000, and NanoMech’s lender will be paying it attorneys’ fees.

Jonathan Helfat, attorney for Michaelson Capital Partners, said the lender expects to lend $850,000 to NanoMech before the sale, and Michaelson Capital also expects to take ownership of the contested insurance policy if it were to purchase NanoMech because it would be paying for it to continue but wouldn’t take a lien on the proceeds of the policy. Michaelson Capital is the New York-based technology financing company that initially sued NanoMech for not making payments on $7 million in loans, and it looks to purchase the company’s assets.

On April 23, NanoMech filed documents looking to sell the assets of the company in an auction to Michaelson Capital. If approved, NanoMech would sell its assets for $9 million, according to the filing.

“The proposed transaction, if approved, will generate significant value for the debtor’s estate, and among other things, satisfy a significant portion of the prepetition claims against the debtor and pave the way for the best outcome to this case,” the filing shows.

NanoMech and Michaelson Capital came to an agreement April 20, and the amount is nearly the same as the amount for which Michaelson Capital had sued NanoMech.

When Phillips became CEO in 2011, the company had no patents or products being sold in the market, but by 2019, it had revenues that exceeded $10 million annually, his filing shows. Phillips noted that the company has raised several rounds of funding, but those investors had received consent rights to future funding and would not consent to its most recent round of financing, which Phillips looked to secure.

“This situation created significant interference and disruption to closing the Series D preferred financing and the operation of the business,” according to the filing. “Ultimately, Mr. Phillips agreed to step down and retire on March 1 as part of a brokered resolution that would result what he understood would be a course of action that would allow the company to move forward with adequate funding.”

At NanoMech’s request, Phillips agreed to provide part-time services to the company for an additional 12 months in order to use his customer and investor contacts, the filing shows. But within a week of stepping down, Phillips was told his services were no longer needed. NanoMech hired Waisbren on March 7, according to the filing.

Phillips had served as chairman and CEO since 2011 after joining the company as chairman more than 10 years ago. Ajay Malshe, a mechanical engineering professor at the University of Arkansas, founded the company in 2002. Malshe left NanoMech at the end of 2017 to focus on being a professor. He’s taught at the UA since 1995.

Phillips is being represented by Sullivan and William Hazeltine, both of Sullivan Hazeltine Allinson LLC of Wilmington, Del., and Timothy Trump and Todd Lewis, both of Conner & Winters LLP in Tulsa.

OTHER OBJECTIONS
Arvest Bank and Carroll recently filed objections to financing plans submitted in NanoMech’s bankruptcy case. Arvest and Carroll were listed as creditors in the bankruptcy case, and Carroll previously sued NanoMech for more than $1 million.

In its objection filed May 3, Arvest cited an April 18 order to allow NanoMech to take on more debt and take priority over the debt owed to Arvest. The order shows NanoMech can receive up to $250,000 in loans. “By seeking to authorize liens that take priority over (Arvest’s) secured claim, (NanoMech) is exposing (Arvest) to additional risk that its secured claim will not be repaid,” Arvest noted in the objection. “This risk would not otherwise exist.”

Also, Arvest and Carroll noted in their objections that the financing plan filing was unclear. Terms used throughout the filing were “ill-defined and used in an inconsistent manner,” according to Arvest’s objection. The financing plan was filed April 15, the same day NanoMech filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware. Chapter 11 bankruptcy allows for a reorganization of the company’s debt.

NanoMech filed for bankruptcy a week after filing documents to settle a nearly $9 million lawsuit alleging the company has not made payments on its loans. The company owes between $10 million and $50 million to between 100 and 199 creditors, the filing shows. Some of the creditors listed in the filing include those who previously sued NanoMech, including Michaelson Capital and Carroll.

Other creditors include Arvest Bank, with unsecured claims totaling $1.56 million; the Arkansas Economic Development Commission, with unsecured claims totaling $1 million; and Waring & Carmen Partridge Foundation of Kingsville, Texas, with unsecured claims totaling $2 million. Unsecured claims for Michaelson Capital and Carroll were, $8.91 million and $1 million, respectively. Judge Christopher Sontchi was assigned to the case.

PREVIOUS LAWSUITS
On Feb. 4, Michaelson Capital sued NanoMech in the Supreme Court of New York, alleging NanoMech has not made payments on $7 million in loans. Michaelson Capital sued NanoMech for not paying on the loans provided to the company in April 2018 and asked for an $8.91 million judgment.

On April 3, attorneys for Michaelson Capital and NanoMech filed a proposed judgment that would require NanoMech to pay Michaelson Capital $8.91 million at an annual interest rate of 9%. The companies would be responsible for their own attorneys’ fees, expenses and costs, the proposed judgment shows. John Bougiamas, attorney for Michaelson Capital, and Carrie Hardman, attorney for NanoMech, signed the proposed judgment. Justice Andrew Borrok, who’s assigned to the case, has yet to sign off on the proposed judgment.

Carroll filed a complaint March 25 in the U.S. District Court, Western District of Arkansas, in Fayetteville against NanoMech and claims the company has not made payments on a $1 million loan issued June 28, 2018. Carroll on Feb. 21 demanded payment of $1.06 million after NanoMech failed to pay on $7 million in loans in regards to the previous lawsuit. The company has yet to respond to Carroll’s lawsuit.

Carroll is being represented by Fayetteville attorney Stephen Parker, Jr. and was president of NanoMech’s automotive and industrial group in Detroit before his position was terminated March 18. NanoMech recently closed its offices in Dallas and Detroit and laid off a portion of its workforce.

LEADERSHIP CHANGES
The company’s board of directors retained Waisbren as chief restructuring officer for NanoMech and global law firm Winston & Strawn LLP to represent the company. Busenkell, Ronald Gellert, Sarah Ennis and Evan Rassman, all of Gellert Scali Busenkell & Brown LLC of Wilmington, Del., are representing NanoMech in the bankruptcy case.

John Michaelson, chief investment officer of Michaelson Capital Partners, has 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.

Michaelson Capital has a nearly 5% equity position in NanoMech, said Robbie Wills, a Conway attorney representing Michaelson Capital. 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
The Arkansas Economic Development Commission provided $10.88 million in loans, grants and tax credits to NanoMech, all before 2015. The incentives 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 previously. “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 initial 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 had between 20 and 25 employees at offices in Houston and Springdale. About 75% of the company’s business comes from the oil and gas industry. Since it was established in 2002, NanoMech has received between $45 million and $50 million in investments.