Former NanoMech CEO responds to allegations of financial wrongdoing

Jim Phillips, former chairman and CEO of Springdale-based nanotechnology manufacturer NanoMech, has filed a response to the claims of financial wrongdoing while in his role with the company.

Phillips, in the Tuesday (July 16) filing, highlighted several claims that have come to light in court documents related to NanoMech’s ongoing bankruptcy case in U.S. Bankruptcy Court for the District of Delaware. Some of the claims include he spent more than $750,000 of the company’s money on personal expenses and took trips to Paris and to automobile races in Indianapolis and Dallas.

Phillips said the trips were work-related and noted claims of trips to South America and Hong Kong and that those were listed in an initial filing but not in the amended filing.

“These were not pleasure trips for Mr. Phillips and his wife,” according to the filing. “Rather, they were high profile business development trips, and the costs expensed to NanoMech for those trips were more than justified as business development expenses.”

Phillips was the keynote speaker at the Brazilian National Confederation of Industry in May 2015, and the event had about 3,000 attendees — most of whom were senior entrepreneurial leaders and governmental authorities, national labs and research and development institutes’ presidents, startups and technology companies, court documents show. Phillips, according to the filing, saw the event as an opportunity to promote NanoMech’s brand, and the trip took him about 36 hours.

In June 2015, Phillips and his wife attended the Paris Air Show with Arkansas Gov. Asa Hutchinson and his wife, and Phillips was invited to the show by the Arkansas Economic Development Commission. NanoMech was one of two Arkansas businesses to attend the show and demonstrated its products and technology at the commission’s booth.

With regard to the races, Phillips, his wife and NanoMech’s chief technology officer were invited by the chief technology officer of NanoMech’s largest customer, Schlumberger, to Indy car races in Indianapolis and Dallas. Phillips was introduced to racing teams, CEOs and engineers, including members of the Andretti team. This led to business for the company in the transportation sector. Also, Penske, which was using NanoMech’s lubricants, invited the NanoMech team to meetings and business events, where Phillips met with Roger Penske and his drivers and engineers. NanoMech lubricants were used in the winning Penske car at the Indianapolis 500 in 2015, and Penske’s chief technology officer invited Phillips and NanoMech’s chief technology officer to join them in the winner’s circle, court documents show. This led to invitations to Penske’s headquarters in Detroit and the Charlotte engineering facilities and more business for NanoMech.

Other claims included NanoMech’s Dallas office space was filled with expensive art and furnishings, but Phillips said the 4,600-square-foot office included free furniture in nearly every office, lobby and conference room. The artwork was “inexpensive prints purchased at heavy discounts and items purchased from consignment stores,” according to court documents. “This office was far from anything that could be considered ‘lavish.’ The décor also included pictures of NanoMech success stories and presentation shelves of NanoMech’s products.”

Phillips also noted that he had deferred his salary of $452,000 and loaned money to NanoMech to improve the company’s cash flow. He also declined bonuses and a golf membership at a country club.

The company struggled to receive a D investment round as a result of investors that wouldn’t sign off on the D round, according to court documents. The investors were American Capital Partners (ACP), Meadow Lane Investments and Saudi Aramco Energy Ventures, and Phillips said they disagreed with his vision for NanoMech and were attempting to take over the company.

In summer 2018, NanoMech hired Alfonso Alejo of Austerlitz Capital at the recommendation of New York-based technology financing company Michaelson Capital Partners, which in February sued NanoMech for not paying on $7 million in loans. Alejo was supposed to help find investors for the D investment round, but in fall 2018, while he told NanoMech management he was looking for investors, he led a campaign to remove Phillips from NanoMech as CEO, the filing shows.

“In December 2018, Mr. Alejo met with Scott Murphy of ACP and Jim Sledzik of Saudi Aramco to develop a game plan for ‘eliminating’ Mr. Phillips. On Dec. 5, 2018, Mr. Alejo summarized the meeting in an email to Rick Barrows, a shareholder who Mr. Alejo was attempting to solicit to join the campaign.” Barrows sent the emails to NanoNech.

“Both Advantage and Aramco are hard committed to eliminating Phillips,” Alejo wrote in the email to Barrows. “At this point, it isn’t about money, it’s about principle. Scott feels that Jim is a very high functioning sociopath. The devil incarnate.”

The email also shows that Aramco was planning to nominate Jim Lachance as CEO.

Phillips agreed to retire as CEO on March 1 through an agreement with ACP, which was supposed to provide NanoMech with a $1 million loan. Half of the loan was to pay a portion of the amounts owed to Phillips, and the other half was to go to NanoMech, according to court documents. Phillips received $500,000 provided by ACP, with the remainder owed to Phillips to be paid monthly over two years. However, Phillips only received a portion of one of the monthly payments, and ACP didn’t provide the $500,000 to NanoMech, the filing shows. Phillips said this is what led NanoMech to file for bankruptcy.

A hearing in the bankruptcy case has been set for Wednesday (July 17).