After a long period of pain, Quantumsphere Inc (OTCMKTS:QSIM), which develops end-use applications for the chemical sector, seems to be finally reporting news that the market appreciates. The amount of shares that changed hands recently almost crossed the 100 million level. Additionally, in the last 10 days stock chart, we could identify a new upward trend. Have a look at it:
In September, the company released a new contract with Vivakor, Inc., under which the company agreed to sell patents and machinery besides a joint venture agreement with a third party, Casale, S.A. The news seemed to have excited the market, thus we commenced to assess it.
QSIM was founded in 2005 in Nevada. Initially, it was called Way Cool Imports, Inc., but on April 22, 2017, the company merged with QuantumSphere, Inc., a California corporation, and changed its name. The business model as explained in the last annual report is as follows:
“We have developed a process to manufacture metallic nanopowders with end-use application focused on the chemical sector. Our products are used on a stand-alone basis, in the validation of our nano-iron catalysts coated onto commercial iron catalysts used in the production of ammonia. Our major activities to date have included capital formation, research and development, marketing and commercial validation of our metallic nanopowder products.” Source
In plain words, QSIM invested more than $30 million in Research and Development to design a platform that uses nanotechnology to manufacture 99.99% pure, narrowly distributed, nanoparticles with high catalytic activity. The patents and know-how developed seem to be key for multi-billion dollar process applications in the refining, petrochemical, chemical, and pharmaceutical industries.
There is plenty of information about the know-how developed and we cannot cover all the technicalities. But, we would like to note that QSIM achieved ISO 9001:2008 certification for quality management systems related to the nanocatalyst manufacturing platform technology. Additionally, the ability to rapidly scale the manufacturing process in a highly automated and at a low capital cost is a very significant feature that should be noted. The following is a picture that shows the platform designed:
In the annual report, we could find extensive information about how the company grew the business for the last two years. Following are the most significant events:
- On May 5, 2015, the company noted that the commercial validation of its nano-iron catalyst had been achieved in a production-scale ammonia plant in China.
- On May 27, 2015, the Company entered into a multi-year Joint Development Agreement with Swiss-based Casale, S.A.
- On March 8, 2016, the Company entered into a multi-year Commercialisation Partnership Agreement with Swiss-based Casale S.A.
- On March 15, 2016, the Company announced a patent had been issued to it by the U.S. Patent and Trademark Office for a key patent related to its advanced FeNIX™ nanocatalyst accelerator technology.
Everything seemed to be working out, then what happened?
We checked the financial accounts of QSIM and saw that the sales figures did not seem to be sufficient to cover the development costs incurred. We believe that the company developed a marvelous technology, but the market did not seem to respond as expected. Maybe the company was not able to market the new technology appropriately or it was not offered at the correct time. In any case, the company decided to restructure the business in 2016; many executives had to resign and the sale of patents commenced.
Is this period interesting?
Yes, it is.
Many companies have gone through period of fire sales, wherein it is necessary to rethink the business strategy and refocus. Many of them learnt a lot from this period. In particular, if QSIM is able to sell some of its assets and patents at a good price and uses the money to finance its operations, the company will be able to continue. The share price could rebound after this period, thus we need to be alert.
What happened recently?
The market appreciated the news released on September 5, 2017. The company announced the sale of two patents relating to the manufacture and production of nanoparticles, reactors related to nanomaterials production, and the agreement with Casale, S.A. to Vivakor, Inc.
For how much?
The buyer will pay $5.0 million in Vivakor convertible Preferred Series C Shares. Additionally, QSIM will also receive royalties for ten year period and shall have five percent of gross revenues from the FeNIX orders and warrants to purchase 11 million shares of Vivakor Restricted Common Stock. Please note that the company will still own eight remaining patents.
Is the deal fair?
The fact that the market pushed up the share price after the announcement of the deals may show that the deal was beneficial for QSIM. In our opinion, the future of the company will depend on how Vivakor, Inc. is able to sell the technology acquired, because QSIM acquired equity and convertible debt of this company. We had a look at Vivakor’s stock chart and saw that its common stock price declined as a result of the deal (dilution):
Currently trading at a market capitalization of $0.26 million, QSIM seems to be exiting from several horrible years that made the share price decline sharply. With approximately $0.7 million in Property Plant and Equipment, $0.08 million in Intangible Assets and approximately $2.1 million in Short Term and Current Long Term Debt, QSIM will need to find more financing sources to keep operating. We, like the market, appreciated the last sale of assets, but we believe that more actions are necessary to keep the right direction. To sum up, be alert to assess the following news on this name.
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Image courtesy of Mikey G-Pop Artist via Flickr
Disclosure: We have no position in QSIM and have not been compensated for this article.