Nanophase’s heavy reliance on BASF
In late 2003, George Bush signed into law the 21st Century Nanotechnology Research and Development Act which brought the potential of nanotechnology into the sights of investors. However, a small number of investors saw the opportunities in nanotechnology well before 2003. Harris and Harris Group (NASDAQ:TINY) states their firm to be the first venture capital firm to focus on nanotechnology. In past articles, we’ve highlighted their investments in companies such as Cambrios, Adesto, Bridgelux, and Nanosys, however, their very first nanotechnology investment was in 1994 when they acquired a 5.1% interest in Nanophase Technologies.
Illinois based Nanophase Technologies (OTCMKTS:NANX) was formed as far back as 1989 utilizing technology licensed from Argonne National Laboratory to produce nanoparticles. The original equity investors for Nanophase were Arch Venture partners along with TINY and others who participated in the D round of funding in 1994. In 1997 the company offered an IPO of $8 per share which peaked during the nanotechnology hype of 2003 at $13.60 per share. Prior to that, TINY liquidated their position in Nanophase expressing concerns about the company’s management performance. In March 2012 the company delisted from Nasdaq to the over-the-counter (OTC) market after receiving a warning for the share price trading under $1 for 30 consecutive days. Today the share price trades around .50 cents per share with a market cap of 14.5 million.
While the company website lists 11 different markets that the company is targeting, the financials show much less diversified revenue streams. 67% of 2012 revenues were solely attributed to their biggest customer, BASF with which the Company has a long-term exclusive relationship with to primarily provide their zinc oxide-based products to be used in personal care with sunscreens and daily wear products being the dominant applications. 81% of 2012 revenues were from only three customers. Over the past five years revenues have remained stable as seen below:
While the company has a current deficit of around 88 million, they have been consistently reducing their operating losses over the past 5 years.
Perhaps the biggest risk for the company is that 67% of 2012 revenues are coming from only one customer, however, there are some other notable risks mentioned in the 2012 10-K:
- The Company’s IP portfolio of 15 US and 33 foreign patents and patent applications will start to see the oldest issued patents begin to expire in 2013. As of February 1, 2008, the company owned or licensed 18 US and 49 foreign patents and patent applications which seems to imply their IP portfolio is not growing but shrinking.
- The cost of rare earth materials, particularly cerium oxide used in polishing applications, is subject to price manipulation by China. While the company has been able to pass these increased costs on to the customer thus far, this still remains a risk.
- The supply agreement with BASF, the Company’s largest customer, contains provisions which state that if cash falls below $1,000,000, or upon the acceleration of any debt maturity having a principal amount of more than $10,000,000, the Company is required to sell to BASF production equipment sufficient to meet BASF’s production needs.
In a June 6th 2013 article by Medill Reports titled “Nanophase Technologies thinks big about tiny particles”, the below statement was made by the Company’s CFO about the future prospects of the company:
CFO Cesario predicts that if the two new energy saving products are successful, the company can grow its revenues to $25 million in the coming years. While the specifics of each product have not yet been released, Cesario said one is a storage energy application and one is essentially a light-control application. “We think they have the potential to make us a very different company,” said Cesario. “Knowing that we went public way too early, now is the time to grow into a large company.”
While revenue growth would be ideal, if the company can at least continue making progress towards achieving positive operating income then they will be able to mitigate the risk of triggering the terms of their BASF agreement without having to raise additional capital.
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